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

  For the fiscal year ended                            Commission File No.
  January 31, 1998                                             0-15116

                               Sigma Designs, Inc.
             (Exact name of Registrant as specified in its charter)

           California                                       94-2848099
      (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  $47,623,896  as of April 15,  1998  based on the
closing price of the Common Stock as reported on the Nasdaq  National Market for
that date.

There were 11,905,974 of the Registrant's Common Stock issued and outstanding on
April 15, 1998.


                       DOCUMENTS INCORPORATED BY REFERENCE


Certain  sections of Sigma Designs,  Inc.'s  definitive  Proxy Statement for the
1998 Annual Meeting of Shareholders to be held on June 12, 1998 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  as a result  of
certain  factors,  including  those set forth under "Certain  Factors  Affecting
Business,  Operating  Results,  and Financial  Condition"  and elsewhere in this
Annual Report on Form 10-K.

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  video   compression,   eliminated  many  of  those  problems  and
revolutionized  multimedia  on the PC platform.  For the first time,  MPEG users
could play back full-screen,  full-motion video combined with stereo audio, even
from a standard CD-ROM. A single CD-ROM using the MPEG 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 April 1997, the
Company  announced its entry into the Digital Video Disk ("DVD")  market.  A key
element  of the  DVD  specification  is the  use of  MPEG-2  for  digital  video
compression,  a technology  in which Sigma has  established  expertise.  Sigma's
REALmagic  Hollywood and Ventura  PC-based DVD  solutions are  extensions of the
Company's MPEG expertise and provide a highly-integrated solution for the PC-DVD
market.


The REALmagic MPEG Standard

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


         Partnership with PC Industry Leaders

         Sigma has  developed  strategic  partnerships  to  develop  and  market
network  streaming video products with companies such as Hughes Network Systems,
IBM,  Microsoft  Corporation,   Oracle  Corporation,   Silicon  Graphics,  Inc.,
Starlight Networks, Sun Microsystems, OptiVision, and First Virtual Corporation.

         Support from Software Developers

         Support for Sigma's  REALmagic  MPEG  standard  has grown to over 1,200
software developers. To further expand the list of developers,  Sigma has worked
directly with Microsoft on Microsoft's new streaming  standard for MPEG-2 called
DirectShow.  Sigma Designs is the first and currently the only company  shipping
drivers with DirectShow  support for streaming MPEG-2 video,  making it the only
recommended decoder for use with Microsoft's NetShow Theater video server.

Using the DirectShow  standard,  software  developers can create streaming video
applications with virtually any video  server--without any C programming at all.
This enables universities and corporations to get live video and video on demand
applications online very rapidly, which shortens the sales process.

                                        2
<PAGE>

         Support from OEMs

         In the  United  States,  Dell  Computer  Corporation,  Compaq  Computer
Corporation,   IBM,  Hughes  Network  Systems,  and  OptiVision  have  purchased
REALmagic  cards for  installation  inside their  systems for  streaming  video.
Additionally,  Philips,  Sony, and several other companies  market DVD kits that
include REALmagic  Hollywood  playback cards, and several vendors base their DVD
systems on REALmagic DVD playback cards.


         Acceptance by the Corporate Market

         REALmagic is the most  well-known  and most  recognized  brand name for
MPEG video on PCs. Sigma Designs has developed this brand name through marketing
campaigns and by building a reputation for delivering and supporting inexpensive
MPEG decoders with robust,  powerful,  and flexible software  drivers.  This has
made Sigma  Designs'  REALmagic  the de factor  standard  for  corporate  market
projects such as  corporate-wide  rollouts at Merrill Lynch,  Smith Barney,  and
Wal-Mart.


REALmagic Business Strategy

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 Corporate Market

         To  establish  REALmagic  for MPEG-2 as a 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
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  chipsets to add-on
card manufacturers that will, in turn, market to owners of 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 increase
the sale of REALmagic  chipsets  while  continuing to develop newer versions and
generations  of  REALmagic  products,  including  chipsets  for both desktop and
notebook PCs. The Company seeks to continue to offer  consumers  better-featured
and lower-priced products over time.


REALmagic Products

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

o    REALmagic  Hollywood--In  April 1997, the Company  announced its entry into
     the DVD market.  The REALmagic  Hollywood  MPEG-2  playback card turns a PC
     into a full-featured DVD player that exploits many of the digital video and
     digital surround sound capabilities of the DVD format and


                                       3
<PAGE>

     upcoming MPEG-2  interactive  titles.  The REALmagic  Hollywood  DVD/MPEG-2
     playback card displays flicker-free video at full-screen resolution, making
     video  watching  on a PC a new  experience.  Movies  can be  simultaneously
     displayed on the PC monitor and on a large-screen TV.

o    REALmagic  NetStream  2--In October 1997,  the Company  announced its entry
     into the MPEG-2  networked video market.  Products in the NetStream  family
     include  specialized  hardware  and  software  developed  specifically  for
     delivering  video to  corporate  desktops and can be used for both video on
     demand and broadcast video playback. NetStream 2 is an MPEG-2 playback card
     offering full plug and play  installation  and  compatibility  with a broad
     range of  third-party  applications,  including  video servers for video on
     demand, MPEG encoders for stored or real-time playback,  satellite delivery
     systems,  streaming  video  playback  systems,  and scores of  customizable
     interactive training titles.

o    REALmagic  EM8300--In March 1998,  the Company  announced  the introduction
     of the EM8300 REALmagic DVD/MPEG-2/MPEG-1 decoder IC. Integrating virtually
     all  functions  of a DVD  decoder on one chip,  the EM8300 is  designed  to
     provide a highly  integrated,  cost effective vehicle for high-quality DVD.
     The EM8300 feature set draws on Sigma's industry-leading  experience in the
     DVD/MPEG-2  market with earlier  designs such as the REALmagic  Ventura and
     REALmagic Hollywood decoder cards. The result is a blend of performance and
     affordability  that  can be key to  gaining  market  share  in the  rapidly
     growing DVD market.



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  Kapok  Computers,   TigerDirect,   Inc.,   Royal  Computer,   ASE
Technologies, LungHwa Electronics Co., Ltd., Zenon Computer Systems, and others.
The  Company's  international  distributors  are  strategically  located in many
countries around the world.

The Company generally acquires and maintains  products for distribution  through
corporate   markets  based  on  forecasts  rather  than  firm  purchase  orders.
Additionally,  the  Company  generally  acquires  products  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.

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


Research and Development

As of January 31, 1998,  the Company had a staff of 35 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  maintaining  compatibility with
emerging standards and multiple platforms,  making improvements to the REALmagic
architecture, and developing enhancements to the REALmagic API.


                                        4
<PAGE>

There  can be no  assurance  that  the  Company  will be able to make  any  such
advancements  in the REALmagic MPEG  technology  or, if they are made,  that the
Company will be able to market such  advancements to maintain  profitability and
its technological leadership.

During fiscal 1998,  fiscal 1997,  and fiscal 1996,  the Company's  research and
development expenses were $4,948,000, $4,688,000, and $4,499,000,  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; companies such as
C-Cube  Microsystems  have a high profile in the industry.  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 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 to  market  for new  product
introductions,  product  performance,  compatibility  with  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  REALmagic  API will be  established  as an
industry  standard or that the Company's lead time in product  introduction will
be sustained.


Licenses, Patents, and Trademarks

The Company is seeking  patent  protection  for certain  software  and  hardware
features in current and future versions of REALmagic.  The Company currently has
eleven pending patent  applications  for its REALmagic  technology.  Six 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 all of its
manufacturing needs, including chipset manufacture and board-level assembly. All
of the  chips  used  by  the  Company  to  develop  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.


                                        5
<PAGE>

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.
However, 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, 1998, the Company had 71 full-time employees,  including 35 in
research and development, 12 in marketing, sales, and support, 11 in operations,
and 13 in finance and administration.

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 or incorporated
by reference 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 of the Securities Act of 1933, as
amended, and in Section 21E of the Securities Act of 1934, as amended.  Although
any  forward-looking  statements  contained  herein or incorporated by reference
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 1995, 1996, and 1998
and had  substantial  negative  cash flow in fiscal 1995,  1996,  1997 and 1998.
Since the  introduction of the Company's  REALmagic Moving Picture Experts Group
("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 1995,
1996, and 1998 also included  significant  losses associated with products other
than those related to the REALmagic technology.  Since inception,  the Company's
total  accumulated  deficit is  $38,761,000.  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.  There can be no
assurance that the Company will achieve  return to 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."

                                        6
<PAGE>

         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.  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.  The Company has not
achieved  bundling  agreements  with numerous OEM customers to ensure success of
the REALmagic  product line.  Moreover,  even if the Company achieves new design
wins, there can be no assurance that personal computer ("PC") manufacturers will
purchase the Company's products in substantial volumes.  Sales to any particular
OEM customer are subject to significant  variability from quarter to quarter and
to  severe  price  pressures  by  competitors.  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 corporate markets.  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 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.

         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  have   technological   leadership,   the  Company  must   continue  to  make
technological  advancements and research and development investments 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 be  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.

                                        7
<PAGE>

         Competition

         The market for multimedia PC products is highly competitive,  driven by
faster  processors  provided  by Intel  Corporation  and  other  companies.  The
possibility  that other companies with more  experience and financial  resources
may  develop a  competitive  product  may  inhibit  future  growth of  REALmagic
technology.  Increased  competition may be generated from several major computer
product  manufacturers  that have developed products and technologies that could
compete directly with REALmagic  products on the PC platform.  These include SGS
Thompson  Microelectronics,  C-Cube  Microsystems,  IBM  Corporation,  Chromatic
Research, Inc., Zoran Corporation,  and LSI Logic. In addition, Intel processors
are becoming more  powerful,  so that video  decoding may  eventually be done in
software.  Most of the above 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.


         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, 1998,  sales of multimedia  products  accounted for virtually all of
net sales. A decline in market demand for multimedia  products would  materially
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.

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<PAGE>

         Manufacturing Risks

         REALmagic products and components are presently manufactured by outside
suppliers or foundries.  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. The Company obtains
certain of its components from a single source. Although delays or interruptions
have not occurred to date, any 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.

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 continued
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 six 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. Although the Company uses measures such as confidentiality
agreements to protect its intellectual property,  there can be no assurance that
these methods will be sufficient.  For example,  the Company has filed a lawsuit
against a

                                        9
<PAGE>

former employee  alleging theft of trade secrets and other Company  intellectual
property. See Item 3 - Legal Proceedings.

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.


         International Operations

         During the fiscal years ended January 31, 1998,  1997. and 1996,  sales
to international customers accounted for approximately 64%, 72%, and 63%, 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  engages in transactions in
foreign  currencies,  the  Company's  results of  operations  could be adversely
affected by exchange rate fluctuations.

The Company derives a substantial portion of its revenues from sales to the Asia
Pacific  region,  a region of the world subject to increased  levels of economic
instability.  There can be no assurance  that such  instability  will not have a
material adverse effect on the Company's results of operations.


         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.


         Potential for Dilution

         Series B Preferred  Stock.  As of April 15,  1998,  5,000 shares of the
Company's Series B Convertible  Preferred Stock (the "Series B Preferred Stock")
were  issued and  outstanding.  Each share of the  Series B  Preferred  Stock is
convertible  into such  number of shares  of Common  Stock as is  determined  by
dividing  the stated  value  ($1,000) of the share of Series B  Preferred  Stock
(under certain circumstances,  such value may be increased by a premium based on
the number of days the  Series B  Preferred  Stock is held) by the then  current
Conversion  Price (which is determined  by reference to the then current  market
price).  If converted on April 15, 1998, the Series B Preferred Stock would have
been convertible into

                                       10
<PAGE>

approximately  1,311,303 shares of Common Stock, but this number of shares could
prove to be  significantly  greater  in the event of a decrease  in the  trading
price of the Common Stock. Purchasers of Common Stock could therefore experience
substantial  dilution  of  their  investment  upon  conversion  of the  Series B
Preferred Stock. The shares of Series B Stock are not registered and may be sold
only if  registered  under  the  Securities  Act or sold in  accordance  with an
applicable exemption from registration, such as Rule 144.

As of March 9, 1998, "Warrants" to purchase 50,000 shares of Common Stock issued
to the purchasers of the Series B Preferred Stock and  exercisable  beginning on
May 1, 1998 for a period  of three  years at a price  based on a premium  to the
market  price as of April 30, 1998 (as may be  adjusted  from time to time under
certain antidilution provisions) were outstanding.

As of March 9, 1998, 5,754,398 shares of Common Stock were reserved for issuance
upon exercise of the Company's  outstanding  warrants and options (excluding the
Warrants) and an additional  3,400,000  shares of Common Stock were reserved for
issuance upon conversion of the preferred stock and exercise of the Warrants. At
April 15, 1998,  there were 11,905,974  shares of Common Stock  outstanding.  Of
these outstanding  shares,  11,884,191 were freely tradable without  restriction
under the Securities Act unless held by affiliates.

         Series A Preferred  Stock.  As of April 15, 1998,  20,000 shares of the
Company's Series A Convertible  Preferred Stock (the "Series A Preferred Stock")
were  issued and  outstanding.  Each share of the  Series A  Preferred  Stock is
convertible  into such  number of shares  of Common  Stock as is  determined  by
dividing the stated value ($100) of the share of Series A Preferred Stock by the
then  current  Conversion  Price (which is  determined  by reference to the then
current  market  price).  If converted on April 15, 1998, the Series A Preferred
Stock would have been  convertible into  approximately  670,758 shares of Common
Stock, but this number of shares could prove to be significantly  greater in the
event of a decrease  in the trading  price of the Common  Stock.  Purchasers  of
Common  Stock could  therefore  also  experience  substantial  dilution of their
investment upon conversion of the Series A Preferred Stock. The shares of Series
A  Stock  are not  registered  and may be sold  only  if  registered  under  the
Securities  Act  or  sold  in  accordance  with  an  applicable  exemption  from
registration,  such as Rule 144. A portion  of the  shares of Common  Stock into
which the  Series A  Preferred  Stock  may be  converted  have  been  previously
registered  and  the  remaining  portion  will  be  registered   pursuant  to  a
Registration Statement to be filed in the future.

As of March 9, 1998,  warrants to purchase  57,142 shares of Common Stock issued
to the purchasers of the Series A Preferred Stock and  exercisable  beginning on
April 30,  1998 for a period of three years at a price based on a premium to the
market  price as of April 30, 1998 (as may be  adjusted  from time to time under
certain  antidilution  provisions) were outstanding.  The shares of Common Stock
issuable upon exercise of these warrants have been previously registered and the
remaining portion will be registered pursuant to a Registration  Statement to be
filed in the future.


EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
The  executive  officers and directors of the Company and their ages as of April
1, 1998 are as follows:
<CAPTION>
     Name                    Age                 Position
     ----                    ---                 --------
<S>                          <C>            <C>
Thinh Q. Tran                44             Chairman of the Board, President, and Chief Executive Officer
Silvio Perich                49             Senior Vice President, Worldwide Sales
Jacques Martinella           42             Vice President, Engineering
Prem Talreja                 44             Vice President, Marketing
Kit Tsui                     48             Director of Finance, Chief Financial Officer, and Secretary
William J. Almon(1)(2)       65             Director
William Wang(1)(2)           34             Director
<FN>
---------------------------------------------------------------------------------------------------------
(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee
</FN>
</TABLE>

                                                    11
<PAGE>

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

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

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

Mr. 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,  acting  Chief  Financial
Officer and  Secretary in December  1996 and became Chief  Financial  Officer in
July 1997.

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  and  International
Marketing Services, Inc.

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.


ITEM 2.  FACILITIES

The  Company  currently  leases  a  50,000  square  foot  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.


ITEM 3.  LEGAL PROCEEDINGS

In February 1998, two putative class action  complaints were filed in the United
States District Court for the Northern District of California, Romine, et al. v.
Sigma  Designs,  Inc.,  et al., No.  C-98-0537-TEH(N.D.Cal)  and Shah, et al. v.
Sigma  Designs,  Inc.,  et al,  No.C-98-0582-MHP  (N.D.Cal.).  The federal court
complaints  allege that Sigma Designs,  inc. and certain of its officers  and/or
directors,  issued  false  or  misleading  statements  regarding  the  Company's
business prospects during the period October 24, 1995 


                                       12
<PAGE>

through  February 13, 1997.  The complaints do not specify the amount of damages
sought by the plaintiffs.  The plaintiffs have filed a motion to consolidate the
complaints  The  Company  believes  that  it  has  meritorious  defenses  to the
allegations made in the complaint and intends to conduct a vigorous defense.  

On November 21, 1997, the Company filed a Complaint against Dr. Han-Ping Chen in
the Santa Clara County  Superior Court.  The Complaint  alleges causes of action
for claim and delivery,  conversion misappropriation of trade secrets, breach of
contract,  and breach of fiduciary duty relating to the Company's proprietary 2D
and 3D graphics technology. Dr. Chen has not yet filed an Answer. The suit seeks
unspecified  compensatory damages. The Company intends to vigorously pursue such
claim.

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

Not applicable
                                       13
<PAGE>

                                                      PART II


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

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

                                              Fiscal 1998        Fiscal 1997
                                              -----------        -----------
                                             High      Low       High      Low
--------------------------------------------------------------------------------
First quarter ended April 30                 9 5/8    2 5/16    11 5/8    8 1/16
Second quarter ended July 31                 5 5/8    2 9/16    13 1/2    7 1/4
Third quarter ended October 31               9 1/4    4 9/16     9 7/8    7 1/4
Fourth quarter ended January 31              6        3         11 5/8    7 3/8

As of April 15, 1998, the Company had 260  shareholders  of record.  The Company
has not paid cash  dividends  on its common  stock and does not plan to pay cash
dividends  to its  common  shareholders  in the  near  future.  The  Company  is
obligated to pay certain dividends on its outstanding  preferred stock. In 1998,
the Company paid $572,000 in dividends on such stock.

<TABLE>
ITEM 6.  SELECTED FINANCIAL DATA
<CAPTION>
                               Selected Financial Five-Year Data

Year ended January 31
(In thousands, except per share data     1998        1997       1996        1995        1994
and number of employees)              --------------------------------------------------------
------------------------
<S>                                   <C>         <C>        <C>         <C>         <C>
Net revenues                          $ 36,982    $ 41,214   $ 26,374    $ 43,700    $ 34,989

Net income (loss)                       (5,648)      1,529    (14,708)     (8,773)    (29,546)

Diluted net income (loss) per share      (0.51)       0.14      (1.88)      (1.20)      (5.15)

Working capital                         18,960      20,164     11,461      17,446      15,117

Total assets                            38,329      37,915     24,843      33,387      26,639

Shareholders' equity                    20,312      21,017     12,581      18,721      16,499

Number of employees                         71          86         60         138         151
</TABLE>

                                               14
<PAGE>

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


Results of Operations

For the fiscal year ended  January 31, 1998,  the Company's net sales were $37.0
million,  down 10% from $41.2 million  reported in fiscal 1997. This decrease in
sales was  primarily  attributable  to the  Company's  decision to eliminate its
graphics  business  to enable  the  Company  to focus on the DVD market and slow
growth in the DVD  personal  computer  market  caused  by  delays in  developing
industry standards. Net loss for the fiscal year ended January 31, 1998 was $5.6
million as compared to net income of $1.5 million in the prior fiscal year.  The
net loss for fiscal 1998  included a charge of $3.6  million to write down older
MPEG and graphics products and associated  receivables,  and a $572,000 dividend
on the Company's preferred stock.

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


                                              Percentage of Net Sales
                                                    Year Ended
                                           1/31/98     1/31/97      1/31/96
                                      -------------------------------------
Net Sales                                  100.0%      100.0%       100.0%
Cost of Sales                               76.5%       64.4%        96.7%
                                      -------------------------------------
Gross Profit                                23.5%       35.6%         3.3%
Operating Expenses
     Research & development                 13.4%       11.4%        17.1%
     Sales & marketing                      11.8%       13.4%        30.2%
     General & administration               14.0%        7.2%        16.0%
Other income (expense)                       2.0%         .2%         4.1%
                                      -------------------------------------
Income (loss) before dividend
     on preferred stock                   (13.7%)        3.7%      (55.8%)
Dividend on preferred stock                (1.5%)          --          --
                                      -------------------------------------
Net income (loss) available to
     common shareholders                  (15.3%)        3.7%      (55.8%)

Sales

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

(In thousands)                Fiscal 1998   Fiscal 1997    Fiscal 1996
------------------------------------------------------------------------
Multimedia products:
     Boards                        $18,264        $16,295       $24,661
     Chipsets                       15,723         23,111            --
     Accessories                     2,047          1,026            --
Display systems                         --             --         1,554
CPU boards                              --             --            52
Other                                  948            782           107
                             -------------------------------------------
  TOTAL NET SALES                  $36,982        $41,214       $26,374
                             -------------------------------------------
                             
                             ===========================================
The  multimedia  products  category  includes MPEG  playback  solutions for both
desktop and notebook computers as well as high performance graphics acceleration
for PC manufacturers and add-on card
                                       15
<PAGE>

makers.  The board level  product line is targeted at OEM  customers  and system
integrators  to  address  the  computer-based  training,  kiosk,  and  corporate
video-on-demand  markets.  The chipsets are targeted at manufacturers  and large
volume OEM customers building  interactive  multimedia products for business and
consumer markets.  Multimedia accessories include CD titles, DVD ROM drives, and
video  conferencing  products.  The "other" sales category consists primarily of
sales of surplus  inventories  and  contract  revenue.  The  Company  completely
eliminated its non-multimedia business in fiscal 1997, including display systems
and CPU boards.

The  Company's  net sales  decreased  10% in fiscal  1998,  as compared to a 56%
increase in fiscal 1997.  The decrease in sales in fiscal 1998 was primarily due
to the elimination of the Company's  graphics  business during the second fiscal
quarter, and slow growth in the DVD personal computer market caused by delays in
developing industry standards.  The increase in sales in fiscal 1997 was largely
attributable to increased graphics chipset sales to OEM customers.

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

(In thousands)                   Fiscal 1998     Fiscal 1997     Fiscal 1996
----------------------------------------------------------------------------
Domestic Sales                        13,349          11,636          9,642
                              ----------------------------------------------

International Sales
     Asia                             20,833          26,708         13,274
     Europe                            2,429           2,400          3,243
     Canada                              371             470            215
                              ----------------------------------------------
       Total International            23,633          29,578         16,732
                              ----------------------------------------------

TOTAL NET SALES                       36,982          41,214         26,374
                              ==============================================

The  Company's  domestic  sales as a  percentage  of total net sales were 36% in
fiscal 1998,  28% in fiscal 1997,  and 37% in fiscal 1996.  In fiscal 1998,  the
Company's  domestic  sales  increased  15% over fiscal  1997.  The  increase was
primarily due to increased  demand in video streaming  applications in corporate
markets.

The percentages of the Company's net sales  attributable to international  sales
were 64% in fiscal  1998,  72% in fiscal 1997,  and 63% in fiscal  1996.  During
fiscal 1998 and 1997,  international  sales were made predominantly to customers
in two Asian  countries--Taiwan  and Hong Kong. In fiscal 1998,  Taiwan and Hong
Kong accounted for 40% and 9% of the Company's net sales respectively,  with one
Taiwanese customer  contributing 39% of the Company's total net sales. In fiscal
1997,  Taiwan and Hong Kong  accounted for 42% and 9% of the Company's net sales
respectively.  In fiscal 1998, the Company's  international  sales decreased 20%
over fiscal 1997. The decrease was largely  attributable to the  discontinuation
of graphics products and a slow adoption rate of DVD technology in the PC market
internationally.  While the  current  Asian  economic  downturn  has had minimal
effect  on the  Company's  sales to the Asian  region  to date,  there can be no
assurance that continued  difficulties in the Asian economies will not result in
reduced demand from customers located in such countries in the future.

Gross Margin

The Company's gross margin as a percentage of net sales was approximately 24% in
fiscal 1998,  36% in fiscal 1997,  and 3% in fiscal 1996.  The decrease in gross
margin in fiscal  1998 was largely  due to the  decrease in sales of  multimedia
chipsets,  which traditionally have higher gross margin than board products, and
a charge of $1.7 million in  connection  with the  write-down  of older MPEG and
graphics  products.  In fiscal 1998,  the gross margin of multimedia  boards and
chipsets  was recorded at 24% and 44%  respectively,  as compared to 30% and 47%
respectively in fiscal 1997. The comparatively low gross


                                       16
<PAGE>

margin  in fiscal  1996 was  primarily  the  result of  inventory  reserves  and
write-offs in connection with the Company's strategic decision to move away from
non-multimedia products. Although the Company attempts to minimize the impact of
product  transitions,  the market for the  Company's  products is  volatile  and
subject to 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.


Operating Expenses

Sales and marketing expenses decreased $1.2 million, or 21%, in fiscal 1998 over
fiscal 1997.  The decrease was  primarily  attributable  to a reduction in sales
support personnel, lower sales commissions as a result of lower net sales, and a
reduction in media and cooperative advertising programs as the Company continued
to emphasize less retail  distribution  and more OEM sales.  Sales and marketing
expenses  decreased  $2.4 million,  or 30%, in fiscal 1997 over fiscal 1996. The
reduction was primarily due to the  elimination of SDIS,  the Company's  monitor
subsidiary  in fiscal 1996 and a reduction in media  advertising  and trade show
expenses,  reflecting  a more  focused  approach to  marketing  concentrated  on
chipset and OEM sales.

Research and development expenses increased $260,000, or 6%, in fiscal 1998 over
fiscal  1997.  The  increase  was  largely  due to an  increase  in  engineering
personnel expense, reflecting the Company's continued efforts in the development
of  DVD/MPEG2-based  products.   Research  and  development  expenses  increased
$189,000, or 4%, in fiscal 1997 over fiscal 1996. The increase was primarily due
to research and development  expenses  incurred in the graphics chip business in
connection with the acquisition of Active Design Corporation.

The Company's general and administrative  expenses in fiscal 1998 increased $2.2
million, or 73%, over fiscal 1997. The increase was primarily  attributable to a
charge of $1.9 million in accounts  receivable  reserves in connection  with the
write-off of assets  associated  with the graphics  products.  The same expenses
decreased  $1.2 million,  or 29%, in fiscal 1997 over fiscal 1996. The reduction
was primarily due to the elimination of SDIS, the Company's monitor  subsidiary,
and general cost containment efforts by the Company.

Liquidity and Capital Resources

The Company had cash,  cash  equivalents,  and  short-term  investments of $16.7
million at January 31, 1998,  compared  with $18.8  million at January 31, 1997.
The  primary  sources  of cash in fiscal  1998 came  from $4.2  million  (net of
expenses) proceeds from the sale of 45,000 shares of convertible preferred stock
and $2.5 million cash borrowings under bank lines of credit. The primary uses of
cash included $8.3 million used by operations,  and  approximately  $4.2 million
used to purchase short-term investments. As of January 31, 1998, the Company had
$12 million  outstanding  under a $12 million bank revolving line of credit that
expires in October  1998 and is  collateralized  by funds on deposit in accounts
that have been  assigned to the lender.  The Company  also has a $6 million bank
line of credit  available  that expires in October  1998,  and is secured by the
Company's  accounts  receivable,   inventories,   equipment,   and  intangibles,
including  intellectual  property.  This  asset-based  line  of  credit  had  an
outstanding balance of $1.3 million as of January 31, 1998.

Inventories  increased  since the end of January 31,  1997 from $4.9  million to
$7.3 million at January 31,  1998.  The increase was largely due to the build-up
of components for the Company's DVD/MPEG2-based products.


                                       17
<PAGE>

Immediately  after the close of the 1998  fiscal  year,  in February  1998,  the
Company  raised an additional $5 million in equity  capital  through the sale of
convertible preferred stock in a private placement.  These proceeds will be used
to finance  manufacturing  capability for the Company's DVD/MPEG-2 and networked
video product offerings.


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


Factors Affecting Future Operating Results

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

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


Impact of the Year 2000 Issue

The Year 2000 Issue is the result of computer  programs  being written using two
digits rather than four to define the  applicable  year.  Any computer  programs
that have  date-sensitive  software may  recognize a date using "00" as the year
1900  rather  than the year  2000.  This  could  result in a system  failure  or
miscalculations causing disruptions of operations including, among other things,
a temporary  inability  to process  transactions,  send  invoices,  or engage in
similar normal business activities.


                                       18
<PAGE>

The  Company is in the  process of  investigating  whether  any of its  products
requires  modification  to make them Year 2000  compliant.  The Company has also
been in contact with its significant  suppliers and vendors to determine whether
the  products or services  supplied by them are Year 2000  compliant.  While the
investigation  has not yet been  completed,  based on the results  thus far, the
Company  does not believe the costs of making its products  Year 2000  compliant
will be  material.  The  Company's  estimate  of  costs  related  to  Year  2000
compliance  is  a  forward-looking  statement  that  is  subject  to  risks  and
uncertainties, including whether management's assumptions of future events prove
to be correct, that could cause actual costs to be higher.


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



                                       19
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The  information  required by this item  concerning the Company's  directors and
executive  officers is  incorporated by reference from the information set forth
in the  sections  entitled  "Election  of  Directors"  and  "Other  Information"
contained in the Company's Proxy  Statement  relating to the 1998 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  "Other
Information--Executive Compensation" contained in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable



                                       20
<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, 1998 and 1997                 F-2
Consolidated Statements of Operations for the years ended
January 31, 1998, 1997, and 1996                                            F-3
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1998, 1997, and 1996                                      F-4
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1997, and 1996                                            F-6
Notes to Consolidated Financial Statements                                  F-8

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

No reports on Form 8-K were filed during the fourth  quarter  ended  January 31,
1998.

(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.



                                       21
<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 29th day of April 1998.

                                           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.
<TABLE>
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:
<CAPTION>
         Signature                          Title                                   Date
<S>                        <C>                                              <C>
/s/ Thinh Q. Tran          Chairman of the Board, President, and            April 30, 1998
                           Chief Executive Officer (Principal
                           Executive Officer)

/s/ Kit Tsui               Director of Finance, Chief                       April 30, 1998
                           Financial Officer and Secretary (Principal
                           Financial and Accounting Officer)

/s/ William J. Almon       Director                                         April 30, 1998

/s/ William Wang           Director                                         April 30, 1998
</TABLE>


                                       22
<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,  1998  and  1997,  and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the three years in the period ended  January 31,  1998.  Our audits also
include the financial statement schedule listed in Item 14(a)2.  These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,   the  financial   position  of  Sigma  Designs,   Inc.  and
subsidiaries  at January 31, 1998 and 1997, and the results of their  operations
and their cash flows for each of the three years in the period ended January 31,
1998 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 26, 1998


                                       F-1

<PAGE>

SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
(Dollars in thousands)
<CAPTION>
------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C> 
ASSETS                                                                      1998            1997

CURRENT  ASSETS:
  Cash and equivalents                                                  $    697        $  6,945
  Short-term investments                                                  15,951          11,801
  Accounts receivable (net of allowances of $3,331 and $892)              12,395          12,477
  Inventories - net                                                        7,314           4,880
  Prepaid expenses and other assets                                          592             581
                                                                        --------        --------
           Total current assets                                           36,949          36,684

EQUIPMENT  - Net                                                           1,241           1,098

OTHER  ASSETS                                                                139             133
                                                                        --------        --------
TOTAL                                                                   $ 38,329        $ 37,915
                                                                        ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT  LIABILITIES:
  Bank line of credit                                                   $ 13,316        $ 10,831
  Accounts payable                                                         3,014           3,286
  Accrued liabilities                                                      1,324           2,066
  Accrued facilities                                                         243             302
  Current portion of capital lease                                            93              35
                                                                        --------        --------
           Total current liabilities                                      17,990          16,520
                                                                        --------        --------
ACCRUED  FACILITIES - long term                                                -             311

CAPITAL  LEASE  -  long term                                                  27              67

COMMITMENTS (Notes 9 and 10)

SHAREHOLDERS'  EQUITY:
  Preferred stock - no par value:  2,000,000 shares authorized;
    shares outstanding: 1998, 26,550; 1997, none                           2,715               -
  Common stock - no par value:  20,000,000
    shares authorized; shares outstanding:
    1998, 11,645,876; 1997, 11,091,062                                    56,419          54,311
  Accumulated deficit                                                    (38,762)        (33,114)
  Deferred stock compensation                                                  -            (100)
  Shareholder note receivable                                                (63)            (80)
  Unrealized gain on securities available for sale                             3              -
                                                                        --------        --------
           Shareholders' equity                                           20,312          21,017
                                                                        --------        --------
TOTAL                                                                   $ 38,329        $ 37,915
                                                                        ========        ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                       F-2

<PAGE>

SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED  STATEMENTS  OF OPERATIONS  YEARS ENDED JANUARY 31, 1998,  1997 and
1996 (In thousands, except per share amounts)
<CAPTION>
-------------------------------------------------------------------------------------------

                                                      1998            1997           1996
<S>                                                <C>            <C>             <C>     
NET SALES                                          $ 36,982       $ 41,214        $ 26,374

COSTS AND EXPENSES:
  Cost of sales                                      28,296         26,531          25,492
  Research and development                            4,948          4,688           4,499
  Sales and marketing                                 4,371          5,541           7,952
  General and administrative                          5,166          2,987           4,208
  Restructuring (credit)                                 -              -             (350)
                                                   --------       --------        --------
           Total costs and expenses                  42,781         39,747          41,801
                                                   --------       --------        --------
INCOME (LOSS) FROM OPERATIONS                        (5,799)         1,467         (15,427)

  Interest income                                       820            594             449
  Interest expense                                     (927)          (540)           (396)
  Gain from sale of investments                           -              -             666
  Other                                                   6              8              -
                                                   --------       --------        --------
INCOME (LOSS) BEFORE INCOME TAXES                    (5,900)         1,529         (14,708)

CREDIT (PROVISION) FOR INCOME TAXES                     824             -               -
                                                   --------       --------        --------
NET INCOME (LOSS) BEFORE DIVIDEND ON
  PREFERRED STOCK                                    (5,076)         1,529         (14,708)

DIVIDEND ON PREFERRED STOCK                             572             -               -
                                                   --------       --------        --------
NET INCOME (LOSS) AVAILABLE TO COMMON
  SHAREHOLDERS                                     $ (5,648)      $  1,529        $(14,708)
                                                   ========       ========        ========
NET INCOME (LOSS) PER COMMON SHARE:
  Basic                                            $ (0.51)       $   0.16        $  (1.88)
                                                   ========       ========        ========
  Diluted                                          $ (0.51)       $   0.14        $  (1.88)
                                                   ========       ========        ========
SHARES USED IN COMPUTATION:
  Basic                                              11,012          9,853           7,822
                                                   ========       ========        ========
  Diluted                                            11,012         11,259           7,822
                                                   ========       ========        ========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                       F-3

<PAGE>

SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
-------------------------------------------------------------------------------------------------


                                                        Preferred Stock        Common Stock       
                                                       ------------------------------------------
                                                       Shares   Amount       Shares     Amount    

<S>                                                       <C>   <C>       <C>        <C>       
Balances, February 1, 1995                                -     $   -     7,479,943  $ 38,820  

Common stock issued under stock plans                                       549,655       411  
Conversion of subordinated notes
  and issuance of warrants                                                1,134,323     6,276  
Adjustment of E-Motions, Inc. purchase price                                               74  
Deferred stock compensation                                                               164  
Issuance of stock                                                           684,000     1,830  
Unrealized gain on securities available for sale                                                  
Net loss                                               -------  -------  ----------  --------

Balances, January 31, 1996                                -         -     9,847,921    47,575  

Common stock issued under stock plans                                       827,221     3,719  
Adjustment of E-Motions, Inc. purchase price                                               21  
Exercise of warrants                                                        415,920     3,011  
Amortization of deferred stock compensation                                               (15) 
Unrealized loss on securities available for sale                                                  
Active Design, Inc. net loss for the month ended
  February 29, 1996                                                                               
Net income                                                                                        
                                                       -------  -------  ----------  --------

Balances, January 31, 1997                                -         -    11,091,062    54,311  

</TABLE>

<TABLE>
<CAPTION>
                                                                                                 Unrealized           
                                                                                                 Gain (Loss)         
                                                                        Deferred   Shareholder  on Securities        
                                                        Accumulated      Stock       Note        Available            
                                                         Deficit     Compensation  Receivable     for Sale    Total   

<S>                                                     <C>           <C>          <C>           <C>         <C>      
Balances, February 1, 1995                              $ (20,036)    $   -        $    -        $  (63)     $ 18,721 
                                                                                                                      
Common stock issued under stock plans                                                 (80)                        331 
Conversion of subordinated notes                                                                                      
  and issuance of warrants                                                                                      6,276 
Adjustment of E-Motions, Inc. purchase price                                                                       74 
Deferred stock compensation                                             (164)                                         
Issuance of stock                                             (25)                                              1,805 
Unrealized gain on securities available for sale                                                     82            82 
Net loss                                                  (14,708)                                            (14,708)
                                                        ---------     ------       ------        ------      --------
Balances, January 31, 1996                                (34,769)      (164)         (80)           19        12,581 
                                                                                                                      
Common stock issued under stock plans                                                                           3,719 
Adjustment of E-Motions, Inc. purchase price                                                                       21 
Exercise of warrants                                                                                            3,011 
Amortization of deferred stock compensation                               64                                       49 
Unrealized loss on securities available for sale                                                    (19)          (19)
Active Design, Inc. net loss for the month ended                                                                      
  February 29, 1996                                           126                                                 126 
Net income                                                  1,529                                               1,529 
                                                        ---------     ------       ------        ------      --------

Balances, January 31, 1997                                (33,114)      (100)         (80)          -          21,017    
                                                                                                                       
                                                                                                          (Continued)  
                                                                                                                       
</TABLE>


                                       F-4

<PAGE>

SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------


                                                           Preferred Stock         Common Stock       
                                                          ------------------------------------------- 
                                                          Shares   Amount       Shares     Amount     
                                                          
<S>                                                        <C>      <C>        <C>         <C>        
Balances, January 31, 1997                                   -      $   -      11,091,062  $ 54,311   
                                                          
Common stock issued under option plans                                            150,220       239   
Amortization of deferred stock compensation                                                           
Cancellation of stock options                                                                   (75)  
Issuance of Series A preferred stock (private placement)   45,000     4,500                           
Discount for Series A shares                                            500                           
Private placement expenses - Series A                                  (368)       10,000        44   
Conversion of Series A preferred stock                    (18,450)   (1,917)      445,745     1,917   
Unrealized gain (loss) on securities available for sale                                               
Series A dividends                                                                                    
Cancellation of Active Designs shares                                             (51,151)      (17)  
Net loss                                                                                              
                                                           ------   -------    ----------  --------
Balances,  January 31, 1998                                26,550   $ 2,715    11,645,876  $ 56,419   
                                                           ======   =======    ==========  ========   
                                                          
<FN>
See notes to financial statements.                                                                    
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 Unrealized               
                                                                                                 Gain (Loss)          
                                                                       Deferred     Shareholder on Securities         
                                                          Accumulated   Stock          Note      Available             
                                                             Deficit  Compensation  Receivable    for Sale     Total 
                                                                                                                       
<S>                                                       <C>           <C>           <C>        <C>         <C>       
Balances, January 31, 1997                                $ (33,114)    $ (100)       $ (80)     $    -      $ 21,017  
                                                                                                                       
Common stock issued under option plans                                                                            239  
Amortization of deferred stock compensation                                 25                                     25  
Cancellation of stock options                                               75                                      -  
Issuance of Series A preferred stock (private placement)                                                        4,500  
Discount for Series A shares                                   (500)                                                -  
Private placement expenses - Series A                                                                            (324) 
Conversion of Series A preferred stock                                                                              -  
Unrealized gain (loss) on securities available for sale                                               3             3  
Series A dividends                                              (72)                                              (72) 
Cancellation of Active Designs shares                                                    17                         -  
Net loss                                                     (5,076)                                           (5,076) 
                                                          ---------     ------        -----      ------      --------
Balances,  January 31, 1998                               $ (38,762)    $   -         $ (63)     $    3      $ 20,312  
                                                          =========     ======        =====      ======      ========  
                                                                                                                       
                                                                                                           (Concluded)
<FN>
See notes to financial statements.                                                                          
</FN>
</TABLE>


                                       F-5
                                                          
<PAGE>                                                    
                                                          
SIGMA DESIGNS, INC.                                       
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS                     
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996               
(In thousands)                                            
<CAPTION>
----------------------------------------------------------------------------------------------------------------------

                                                                                    1998          1997          1996
<S>                                                                               <C>            <C>         <C>
CASH  FLOWS  FROM  OPERATING  ACTIVITIES:
  Net income (loss)                                                               $ (5,076)      $ 1,529     $ (14,708)
  Active Design net loss for the one month ended February 28, 1997                       -           126             -
  Adjustments  to  reconcile  net income (loss) to net cash used for operating
    activities:
    Depreciation and amortization                                                      653         1,054         1,346
    Gain from sale of investment                                                         -             -          (666)
    Loss on disposal of assets                                                           -             -            22
    Amortization of deferred stock compensation                                         25            49             -
    Reduction in restructuring costs previously recorded                                 -             -          (350)
    Changes in assets and liabilities:
      Accounts receivable                                                               82        (7,688)        7,169
      Inventories                                                                   (2,434)       (2,836)        7,692
      Prepaid expenses and other                                                       (85)         (130)          (76)
      Accounts payable                                                                (272)          417        (6,464)
      Accrued liabilities                                                           (1,160)          (22)         (243)
                                                                                  --------       -------       -------
       Net cash used for operating activities                                       (8,267)       (7,501)       (6,278)
                                                                                  --------       -------       -------
CASH  FLOWS  FROM  INVESTING  ACTIVITIES:
  Purchases of short-term investments                                              (15,948)      (11,801)      (10,947)
  Maturity of short-term investments                                                11,801        10,947         7,412
  Sales of long-term investments                                                         -             -         1,560
  Equipment additions                                                                 (553)         (345)         (786)
  Title development costs                                                              (78)         (188)         (296)
  Other assets                                                                          (6)            7            (1)
                                                                                  --------       -------       -------
      Net cash used for investing activities                                        (4,784)       (1,380)       (3,058)
                                                                                  --------       -------       -------
CASH  FLOWS  FROM  FINANCING  ACTIVITIES:
  Bank line of credit borrowings, net                                                2,485         4,439         4,682
  Common stock sold                                                                    239         6,751         2,136
  Proceeds from sale of preferred stock                                              4,500             -             -
  Dividends paid                                                                       (23)            -             -
  Issuance costs                                                                      (324)            -             -
  Proceeds from issuance of convertible debt and warrants - net                          -             -         6,276
  Repayment of capital lease obligation                                                (74)          (11)           (3)
  Proceeds from shareholder advance                                                     -             -             11
                                                                                  --------       -------       -------
      Net cash provided by financing activities                                      6,803        11,179        13,102
                                                                                  --------       -------       -------
INCREASE  (DECREASE)  IN  CASH  AND  EQUIVALENTS                                    (6,248)        2,298         3,766

CASH  AND  EQUIVALENTS:
  Beginning of period                                                                6,945         4,647           881
                                                                                  --------       -------       -------
  End of period                                                                   $    697       $ 6,945       $ 4,647
                                                                                  ========       =======       =======

                                                                                                           (Continued)
</TABLE>


                                      F-6

<PAGE>

SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(In thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------

                                                                                 1998          1997          1996

<S>                                                                             <C>          <C>           <C>    
CASH PAID FOR INTEREST                                                          $  -         $   511       $   388
                                                                                =======      =======       =======
CASH PAID FOR INCOME TAXES                                                      $  -         $  -          $     3
                                                                                =======      =======       =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
  Equipment acquired under capital leases                                       $    92      $   113       $    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
                                                                                =======      =======       =======
  Series A preferred dividends                                                  $   572      $  -          $ -
                                                                                =======      =======       =======
  Conversion of Series A preferred stock into common stock                      $ 1,917      $  -          $ -
                                                                                =======      =======       =======


                                                                                                        (Concluded)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                      F-7

<PAGE>

SIGMA DESIGNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------


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,  1998,  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.
      Short-term  investments,  carried as available  for sale  securities,  are
      reported at fair market value with unrealized  gains or losses reported as
      a component of  shareholders'  equity.  Such investments are classified as
      current  assets  as  all  maturities  are  within  one  year.   Short-term
      investments consisted of the following (in thousands):


                                              January 31, 1998
                                   --------------------------------------------
                                                        Market      Unrealized
                                           Cost          Value         Gain 

      Certificates of deposit           $ 12,001       $ 12,001        $ -
      Corporate obligations                3,947          3,950          3
                                        --------       --------        ---
                                        $ 15,949       $ 15,951        $ 3
                                        ========       ========        ===


                                      F-8

<PAGE>

      Certificates of deposit at January 31, 1998 includes  $11,981,000 which is
      restricted  as to use  because  it is  security  for a bank line of credit
      (Note 8).

                                               January 31, 1997
                                   ------------------------------------------
                                                      Market      Unrealized
                                        Cost          Value          Gain 

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

      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
      $98,000  and  $172,000,  net of  accumulated  amortization  of $67,000 and
      $51,000 were  included in prepaids and other assets as of January 31, 1998
      and 1997, respectively.  Amortization expense related to title development
      costs was  $151,000,  $497,000, and $71,000 in the years ended January 31,
      1998, 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 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  Company's  cash and cash  equivalents  are on deposit
      with one financial  institution.  The Company's short-term investments are
      managed by a major  domestic  financial  institution,  in a portfolio with
      defined  investment  objectives of competitive money market returns,  high
      liquidity and safety of capital.  Its portfolio of short-term  investments
      typically  include  United  States  government  obligations  and corporate
      obligations. From time to time, the Company also makes

                                      F-9

<PAGE>

      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
      estimated potential credit losses.

      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 January 31, 1998,
      February 1, 1997 and January 27, 1996, respectively. Fiscal 1998, 1997 and
      1996 included 52, 53 and 52 weeks, respectively.

      Net Income  (Loss) per Share - During the fourth  quarter of fiscal  1998,
      the Company adopted Statement of Financial  Accounting  Standards No. 128,
      Earnings per Share ("SFAS 128"),  which replaces the  previously  reported
      primary  and fully  diluted  earnings  per share  with  basic and  diluted
      earnings per share and requires a dual  presentation  of basic and diluted
      EPS. Basic EPS excludes dilution and is computed by dividing net income by
      the weighted average of common shares outstanding for the period.  Diluted
      EPS reflects the  potential  dilution  that would occur if  securities  or
      other  contracts to issue common  stock were  exercised or converted  into
      common stock. Common share equivalents  including stock options,  warrants
      and  convertible  preferred  stock have been  excluded for fiscal 1996 and
      1998 as their effect would be antidilutive.  All per share amounts for all
      periods have been presented and, where  necessary,  restated to conform to
      the SFAS 128 requirement.

      Fair Value of Financial Instruments - 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
      cash  equivalents  and  short-term  investments  as of  January  31,  1998
      approximate fair market value.

      Recently  Issued  Accounting  Standards  - In  June  1997,  the  Financial
      Accounting  Standards  Board  issued  Statement  of  Financial  Accounting
      Standards No. 130,  "Reporting  Comprehensive  Income"  (SFAS 130),  which
      requires that an  enterprise  report by major  components  and as a single
      total,  the change in its net assets from nonowner  sources;  and No. 131,
      "Disclosures  About  Segments of an Enterprise  and Related  Information,"
      which  establishes   annual  and  interim   reporting   standards  for  an
      enterprise's business segments and related disclosures about its products,
      services,  geographic  areas,  and  major  customers.  Adoption  of  these
      statements will not impact the Company's  consolidated financial position,
      results of operations or cash flows, and any effect will be limited to the
      form and content of its  disclosures.  Both  statements  are effective for
      fiscal years beginning  after December 15, 1997, with earlier  application
      permitted.

3.    ACQUISITION  OF  ACTIVE  DESIGN  CORP.

      On May 3, 1996, the Company  acquired  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 Company's 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

                                      F-10

<PAGE>

      Design at the exchange ratio,  resulting in 229,240 options to acquire the
      Company's 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 acquisition,  the
      consolidated  statements  of operations  combine the Company's  year ended
      January 31, 1997 and  January  31,  1996 with Active  Design's  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  acquisition,  Active Design did not generate any revenues and its net
      loss was  $463,000  and  $695,000  for the period  from  February  1, 1996
      through  May 3, 1996 (the date of merger)  and for the period from May 17,
      1995 (inception) through January 31, 1996, respectively.
<TABLE>
      The following  table shows the effect on the results of operations for the
      years  presented  herein  prior to the  acquisition  discussed  above  (in
      thousands):
<CAPTION>

                                                                                               Net
                                                                                              Income
                                                                            Net Sales         (Loss)
      <S>                                                                    <C>            <C>
      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
                                                                             ========       ==========
</TABLE>

4.    RESTRUCTURING

      During  fiscal  1996,  the  Company  recorded  a  $350,000  credit  to the
      restructuring  account which was  established in fiscal 1994.  This credit
      resulted from a new sublease  agreement  with more  favorable  terms.  The
      remaining  accrual  from this  restructuring  is a  facilities  accrual of
      approximately $243,000 as of January 31, 1998 relates to the excess of the
      Company's lease commitment over the expected  sublease income for the term
      of the lease.


5.    INVENTORIES

      Inventories at January 31 consist of:

                                                         1998          1997
                                                           (In thousands)
      
      Finished goods                                    $ 3,366       $ 1,937
      Work in process                                     3,497         3,333
      Raw materials                                       4,291         2,064
      Less reserves                                      (3,841)       (2,454)
                                                        -------       -------
      Inventory - net                                   $ 7,314       $ 4,880
                                                        =======       =======
      
                                      F-11
      
<PAGE>

6.    EQUIPMENT

      Equipment at January 31 consists of:
                                                             1998          1997
                                                               (In thousands)

      Computers and equipment                             $ 2,128       $ 2,608
      Furniture and fixtures                                1,240         1,542
      Other                                                   390           403
                                                          -------       -------
      Total                                                 3,758         4,553
      Accumulated depreciation and amortization            (2,517)       (3,455)
                                                          -------       -------
      Equipment - net                                     $ 1,241       $ 1,098
                                                          =======       =======
7.    ACCRUED  LIABILITIES

      Accrued liabilities at January 31 consist of:
                                                             1998          1997
                                                               (In thousands)

      Other accrued liabilities                           $   838      $ 1,623
      Accrued salary and benefits                             485          443
                                                          -------       -------
      Total                                               $ 1,323      $ 2,066
                                                          =======       =======
8.    BANK  LINES  OF  CREDIT

      The  Company  has  $11,980,760  outstanding  at January  31,  1998 under a
      $12,000,000  bank line of credit  that  expires  in  October  1998,  bears
      interest at the bank's  index rate (4.55% at January 31,  1998) plus 2.0%,
      and is secured by funds on deposit in accounts which have been assigned to
      the lender.  The Company also has  $1,335,000  outstanding  at January 31,
      1998 under a $6,000,000  bank line of credit that expires in October 1998,
      bears  interest at the bank's  prime rate (8.5% at January 31,  1998) plus
      1.25%,  is  secured by the  Company's  accounts  receivable,  inventories,
      equipment and intangibles,  and restricts the Company's ability to declare
      or pay dividends.

                                      F-12


<PAGE>

9.    LEASES

      The Company's 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 Ending                                     Capital   Operating
        January 31,                                           Leases    Leases
      
           1999                                               $ 95      $ 1,318
           2000                                                 33           82
                                                              ----      --------
      Total minimum lease payments                             128      $ 1,400
                                                                        ========
      Amount representing interest at a rate of 10.5%            8
                                                              ----
      Present value of minimum lease payments                  120
      Current portion                                           93
                                                              ----
      Long-term portion                                       $ 27
                                                              ====


      Approximately  $243,000 of the operating  lease  commitment is included in
      accrued facilities as of January 31, 1998.

      Rent expense was $266,000, $351,000 and $316,000 for fiscal 1998, 1997 and
      1996, respectively.

10.   COMMITMENTS

      The Company pays  royalties for the right to sell certain  products  under
      various license agreements.  During the years ended January 31, 1998, 1997
      and 1996, the Company recorded  royalty expense of $425,000,  $742,000 and
      $643,000, 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.

11.   SHAREHOLDERS'  EQUITY

      Preferred Stock

      In July 1997,  the  Company  issued  45,000  shares of Series A  nonvoting
      convertible  preferred stock and warrants to purchase 64,285 shares of the
      Company's common stock for net proceeds of  approximately  $4,176,000 (net
      of issuance costs of approximately $324,000). The warrants are exercisable
      at $9.425 per share  beginning in January 1998 and expire in January 2001.
      Subsequent to January 31, 1998,  the Company issued 5,000 shares of Series
      B nonvoting  convertible preferred stock for $1,000 per share and warrants
      to purchase  50,000 shares of the  Company's  common stock for proceeds of
      approximately  $5,000,000.  The  warrants are  exercisable  at 130% of the
      average  closing  bid prices of the  Company's  common  stock for the five
      trading days ending April 30, 1998 and expire on April 30, 2001.

                                      F-13

<PAGE>


      The significant  terms of the Series A and Series B convertible  preferred
      stock are as follows:

       o  Beginning  120 days from the date of issuance,  each share of Series A
          preferred  stock is  convertible  into common  stock at a 10% discount
          from the low reported  market price of the Company's  common stock for
          the five days  preceding  the date of  conversion  (subject to certain
          limitations  as defined).  Under certain  conditions,  the Company may
          elect to  repurchase  the Series A  preferred  stock for a cash amount
          equivalent to the value of the converted  common stock that would have
          been obtained upon conversion as described above. Any shares of Series
          A  preferred  stock  outstanding  on the second  anniversary  of their
          original issuance date will  automatically  convert into shares of the
          Company's common stock at the conversion rate described above.

       o  Beginning  180 days from the date of issuance,  each share of Series B
          preferred stock is convertible  into common stock based on the average
          of the lowest six daily market  prices of the  Company's  common stock
          during the twenty-day  trading period preceding the date of conversion
          (subject to certain limitations as defined). Under certain conditions,
          the Company may elect to repurchase the Series B preferred  stock. Any
          shares of Series B  preferred  stock  outstanding  on January 30, 2000
          will  automatically  convert into shares of the Company's common stock
          at the conversion rate described above.

      o   The  holders  of Series A  preferred  stock are  entitled  to  receive
          quarterly  dividends  in cash or common stock of the Company at a rate
          of 3% per annum of the  original  issuance  price.  Series B preferred
          stock does not bear dividends.

      o   In the event of any  liquidation,  dissolution,  or  winding up of the
          Company "an Event," either voluntarily or involuntarily:

          -  The  holders of the Series A  preferred  stock shall be entitled to
             receive,  prior and in preference to any distribution of assets and
             surplus  funds of the Company to the holders of the common stock an
             amount  equal  to the  original  purchase  price  of the  Series  A
             preferred  stock,  plus an  amount  equal  to  accrued  and  unpaid
             dividends to the date of  liquidation.  After payment has been made
             to the holders of the Series A preferred  stock, the holders of the
             Company's  common stock shall be entitled to receive the  remaining
             assets of the Company.

          -  The  holders of Series B  preferred  stock  shall be entitled to an
             amount  equal  to the  original  purchase  price  of the  Series  B
             preferred  stock  plus  three  percent  per  annum of the  original
             issuance  price.  However,  in the case that there are no shares of
             Series A  preferred  stock  outstanding  at the  time of an  Event,
             Series B preferred stockholders will be entitled to an amount equal
             to 115% of the amount described in the preceding sentence.

      The 10%  discount on  conversion  of Series A preferred  stock into common
      stock as described above is considered a deemed  preferential  dividend to
      the  holders  of Series A  preferred  stock and,  accordingly,  a $500,000
      deemed dividend has been accreted which for purposes of computing earnings
      per share reduces income available to common stockholders over the minimum
      conversion period of seven months.

      During fiscal 1998,  holders of Series A preferred stock converted  18,450
      shares of preferred stock into 445,745 shares of common stock.

      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

                                      F-14

<PAGE>


      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  3,400,000  shares of common  stock at the fair market
      value  on the  date  of  grant.  Of this  amount,  1,000,000  shares  were
      authorized  for grant by the Board of  Directors  in both fiscal year 1997
      and  fiscal  year 1998.  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, 1998
      expire  six to ten years  from date of  grant).  On April  22,  1997,  the
      Company repriced  1,167,779 options to purchase common stock to $2.31, the
      market price on that date.  The  repriced  options are treated as canceled
      and regranted; however, they retain their original vesting terms.
<TABLE>
      Stock option activity and balances are summarized as follows:
<CAPTION>

                                                                                                       Weighted
                                                                                  Number            Average Exercise
                                                                                 of Shares          Price Per Share
      <S>                                                                        <C>                    <C>
      Balances, February 1, 1995 (470,514 exercisable
        at a weighted-average price of $3.86)                                     1,643,341             $ 4.28
      
      Granted (weighted-average fair value of $2.60)                              1,046,295               3.55
      Canceled                                                                     (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 $4.22)                                326,000               7.71
      Canceled                                                                     (144,509)              4.78
      Exercised                                                                    (813,536)              4.21
                                                                                  ---------             ------
      Balances, January 31, 1997 (441,362 exercisable
        at a weighted-average price of $4.17)                                     1,592,379               4.57
      
      Granted (weighted-average fair value of $1.37)                              2,235,779               2.38
      Canceled                                                                   (1,441,776)              5.01
      Exercised                                                                    (111,554)              0.98
                                                                                  ---------             ------
      Balances, January 31, 1998               
      (Includes repricing of 1,167,779 options)                                   2,274,848             $ 2.34  
                                                                                  =========             ======  
</TABLE>

                                      F-15     

<PAGE>

<TABLE>
      At January 31, 1998,  options to purchase  663,709 shares were exercisable
      and 987,580 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                  1998              Life           Price               1998             Price
      
      <S>                          <C>                  <C>           <C>                 <C>              <C>   
        $0.0875 - $0.2272            110,382            7.81          $ 0.21              15,892           $ 0.10
          $2.31 - $3.06            2,092,603            9.26            2.34             624,954             2.32
          $3.50 - $5.02               69,363            7.60            4.56              21,613             4.48
              $6.38                    2,500            7.42            6.38               1,250             6.38
        -----------------          ---------            ----          ------             -------           ------
        $0.0875 - $6.38            2,274,848            9.14          $ 2.31             663,709           $ 2.34
        =================          =========            ====          ======             =======           ======
      </TABLE>                                                               

      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, 1998 as such issuances have been at the
      fair value of the Company's 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 Company's stock option
      awards. These models also require subjective assumptions, including future
      stock price volatility and expected time to exercise, which greatly affect
      the  calculated  values.  The Company's  calculations  were made using the
      Black-Scholes  option  pricing model with the following  weighted  average
      assumptions  for the years ended January 31, 1998 and 1997,  respectively:
      expected life, 14 and 13 months following vesting;  stock volatility,  89%
      and 87%; risk free interest rates,  5.6% and 5.6%; and no dividends during
      the expected  term.  The  Company's  calculations  are based on a multiple
      option valuation approach and forfeitures are recognized as they occur. If
      the  computed  fair  values of  awards  in  fiscal  1998 and 1997 had been
      amortized to expense over the vesting period of the awards,  pro forma net
      income (loss) would have been $(7,283,000) (a loss of $0.66 per share) and
      $347,000 (income of $0.03 per share).  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,  1998  and  1997  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 100,000  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 1998, 1997 and 1996, 38,666,
      13,685 and 10,905  shares  were  purchased  at an average  price of $3.35,
      $7.63 and $5.15 per share, respectively.

                                      F-16

<PAGE>

      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 net operating loss  carryforwards  and net losses in fiscal
      1998 and 1997, respectively,  the Company recorded no income tax provision
      for any of the years presented.

      Deferred  income  taxes  reflect  the net  tax  effects  of (a)  temporary
      differences  between the carrying  amounts of assets and  liabilities  for
      financial reporting purposes and the amounts used for income tax purposes,
      and (b) operating losses and tax credit carryforwards.
<TABLE>
      The tax effects of significant  items  comprising  the Company's  deferred
      taxes are as follows:
<CAPTION>
                                                                                      January 31,
                                                                             ------------------------------
                                                                                   1998           1997
                                                                                     (In thousands)
      Deferred tax assets:
<S>                                                                             <C>             <C>     
        Net operating losses and tax credit carryforwards                       $ 18,904        $ 16,803
        Reserves not currently deductible                                          2,118           2,177
        Capitalized R&D expenditures                                                 147             195
        Other                                                                        170             338
                                                                                --------        --------
                                                                                  21,339          19,513
      Deferred tax liabilities:
        Capitalized software and title development                                    -              (69)
                                                                                --------        --------
                                                                                  21,339          19,444
      Valuation allowance                                                        (21,339)        (19,444)
                                                                                --------        --------
      Net deferred taxes                                                        $     -         $     -
                                                                                ========        ========

</TABLE>


      SFAS 109 requires that the tax benefit of net operating losses,  temporary
      differences and credit carryforwards be recorded as an asset to the extent
      that  management  assesses  that  realization  is "more  likely than not."
      Realization  of the future tax  benefits  is  dependent  on the  Company's
      ability to generate  sufficient  taxable  income  within the  carryforward
      period. Because of the Company's recent history of operating losses, risks
      associated with its new product  introduction  including the dependence on
      rapid  acceptance of new  technology,  the  dependence on  development  of
      complimentary   software  by  third  parties  and  other  risks,  such  as
      technological  change in the  industry,  short  product  life  cycles  and
      reliance on a

                                      F-17

<PAGE>


      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, 1998
      are as follows:

                                                                      Expiration
                                                    (In thousands)      Years
      
      Net operating losses, federal                      $ 44,000     2009-2012
      Net operating losses, state                          22,000     1998-2002
      Tax credits, federal                                    735     2006-2012
      Tax credits, state                                      380     2003-2012
      Net operating losses, foreign                         2,970         -
      


      <TABLE>
      The Company's  effective tax rate differs from the federal  statutory rate
      as follows:
      <CAPTION>

                                                                            1998           1997          1996
                                                                                     (In thousands)
      
      <S>                                                               <C>               <C>        <C>      
      Computed at 35%                                                   $ (2,053)         $ 535      $ (4,860)
      Valuation allowance                                                  1,895           (144)        5,014
      Other                                                                  158           (391)         (154)
      Benefit of net operating loss carryback refund                        (824)            -             -
                                                                        --------          -----      --------
      Total                                                             $   (824)         $  -       $     -
                                                                        ========          =====      ========
</TABLE>


13.   CUSTOMER  AND  GEOGRAPHIC  INFORMATION

      No domestic  customer  accounted  for more than 10% of net sales in fiscal
      1998, while one domestic customer accounted for 11% of net sales in fiscal
      1997 and 1996. In fiscal 1998, one  international  customer  accounted for
      39% of net sales. 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.  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.

                                            1998          1997           1996
                                                     (In thousands)
      Net sales:
        Domestic                          $ 13,349      $ 11,636        $ 9,642
        Export sales:
          Asia Pacific                      20,833        26,708         13,274
          Europe                             2,429         2,400          3,243
          Canada                               371           470            215
                                          --------      --------       ---------
      Total                               $ 36,982      $ 41,214       $ 26,374
                                          ========      ========       =========
      



      Taiwan accounted for 40% of net sales in fiscal 1998. Taiwan accounted for
      42% of net sales in fiscal 1997. No  international  country  accounted for
      more than 10% of net sales in fiscal 1996.

                                      F-18

<PAGE>

14.   CONTINGENCY

      In February  1998,  two class  action  complaints  were filed  against the
      Company  in  the  United  States  District  Court,  Northern  District  of
      California.  The  actions  were  filed on behalf of  putative  classes  of
      purchasers  of the  Company's  common stock during the period  October 24,
      1995 through February 13, 1997. The complaints  allege that Sigma Designs,
      Inc.  and  certain  of its  officers  and/or  directors  violated  federal
      securities laws in connection  with various public  statements made during
      the putative  class  period.  The  complaints do not specify the amount of
      damages sought by the  plaintiffs.  The plaintiffs  have filed a motion to
      consolidate  the  complaints.  The  Company  believes  it has  meritorious
      defenses to the allegations  made in the complaints and intends to conduct
      a vigorous  defense.  The Company is also 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 Company's financial
      position or results of operations.

                                    * * * * *
    
                                      F-19
<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
--------------                              ---------------------------------------------       -----------
<S>                                       <C>               <C>             <C>                  <C>
Allowance for returns and doubtful accounts,
  price  protection,  and sales returns:

Year ended January 31,
1998                                      $  892,000        $2,600,000     $  160,000            $3,332,000
1997                                         892,000           165,000        165,000               892,000
1996                                       1,101,000           134,000        343,000               892,000

Inventory reserves
Year ended January 31,
1998                                      $2,455,000        $1,753,000     $  416,000            $3,792,000
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
<FN>
(1) Amount written off, net of recoveries.
</FN>
</TABLE>

                                                         S-1
<PAGE>

<TABLE>
                                                  INDEX TO EXHIBITS

<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
<S>               <C>
2.1(10)           Agreement and Plan of Reorganization by and among the Registrant, Sigma Acquisition
                  Corporation and Active Design Corp. dated as of April 23, 1996.

3.1(1)            Restated Articles of Incorporation, as amended.

3.2(2)            Bylaws of Registrant, as amended.

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

10.4(6)           Industrial Space Lease dated February 16, 1994 by and between the Registrant and
                  Renco Bayside Investors.

10.5(6)           Sublease dated February 16, 1994 by and between the Registrant and Media
                  Vision Technology, Inc.

10.6(7)           Registrant's 1994 Stock Plan and form of Stock Option Agreement.

10.7(8)           Registrant's 1994 Director Stock Option Pan and form of Director Option Agreement.

10.8(9)           Form of Subscription Agreement, by and between the Registrant and certain purchasers.

10.9              Registrant's 1995 Business Loan Agreement with Silicon Valley Bank, as amended.

23.1              Independent Auditors' Consent of Deloitte & Touch LLP.

24.1              Power of Attorney (included on page 22).

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.

<PAGE>

(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.
</FN>
</TABLE>