Our primary focus is to develop and market media processor chipsets for consumer appliances, which can be segmented into three broad categories. Many of our chipset products are designed to be flexibly used in the widest range of applications.

Video delivered and distributed over Internet Protocol (IP) is emerging as an important product category for a growing number of consumer equipment makers. These solutions can be further segmented into two primary sub-segments, IPTV over DSL and digital media adapters (DMAs).

Broadband Internet connectivity, highly compressed digital media, and a fundamental demand for entertainment alternatives are paving the way for IPTV delivered over DSL. New set-top boxes, many based on advanced codecs such as MPEG-4 or WMV9 and advanced digital rights management (DRM), are being readied by telcos in Asia and Europe to tap into potential revenue streams. Many of these regional areas currently lack the cable infrastructure that exists in the U.S., thus creating pent up demand for reliable high quality video delivery. We have become a key supplier into these IPTV solutions by offering an optimized feature set with scalable performance silicon and unique streaming video software.

DMAs are a new product category which supports local distribution of video/audio content to television sets throughout the home using wired or wireless connectivity. DMAs are steadily decreasing in price and typically work in conjunction with a centralized media center or gateway to offer ubiquitous digital media within the home. We are a key vendor of chipset solutions for DMAs, taking advantage of the same feature set, and streaming video software developed for the IPTV market.

Companies such as Pinnacle, Lenovo Consume PC (formerly Legend), Vertex Link, Beijing Golden Yuxing Electronics and Technology Co., Ltd., and Shenzhen Tsinghua Tongfang are preparing and providing IP video appliances for the consumer market using our silicon solutions. In addition, the new "T-Online Vision on TV" service, based around the Fujitsu Siemens Center ACTIVY Media Center, is powered by our EM8400 MPEG decoder chips.

Connected media players represent a range of devices that include networked DVD players, portable media devices, and multi-function media centers.

Premium DVD players with advanced video codecs have been a product of choice for entertainment enth usiasts for over a year. Manufacturers have recently introduced a new range of network connected DVD players, supporting either in-home connectivity or external Internet connections for direct downloading. We pioneered this market with the first DVD decoder chips supporting playback of MPEG-4 and DivX video, and have followed up with the recent announcement of support for WMV9, an important new feature for downloading content. We are an important supplier in this segment and provides comprehensive solutions with the latest codecs (WMV9 and MPEG-4), support for networking and local hard drives, and high definition video output.

Another sub- segment of demand for our chipsets is portable media devices. With ongoing technology improvements in media compression, wireless communications, and small form-factor storage, portable media players have quickly become the media-on- the-go equivalent of the cell phone. The trend toward hand-held players has already moved to the mainstream for audio, while new advanced video compression schemes are enabling the addition of movies, personal video and photos, for use on the road and within the home. We have begun to penetrate this market by offering media processors that offer the latest codecs in a highly integrated package along with low power dissipation.

KiSS Technology, a leading European vendor of advanced DVD products, is developing the first DivX certified DVD players using our chipsets. In addition, several companies are preparing new WMV9 capable DVD players to enter the market using our new chips. Of these companies, Apex Digital, Inc., a leader in consumer electronics, demonstrated its new DVD player at the Las Vegas Consumer Electronics Show in early 2004.

HDTV sets already represent a substantial and growing product category, currently selling in the millions of units, led by the US market and moving overseas. New widescreen HDTV sets are being offered in an increasing array of forms using three primary technologies - liquid crystal display (LCD), plasma and projection - each providing unique advantages. We offer a growing line of high definition media processors, designed for the new flat panel displays, and offering advanced display processing features to recreate the essence of cinema picture quality.

Our EM8610 digital media processor has been selected for use in high-definition plasma television sets from KiSS Technology and from Jamo.

In addition to our primary market segments, we still sell legacy products into commercial VOD streaming and PC add-in markets.

To meet customer needs for a complete system solution, we have developed strong relationships with leading suppliers of chipsets, system software and video servers/encoders. Companies that provide live encoders and server systems enable OEM to deliver complete solutions for IP video streaming applications. Our set-top appliance reference designs, in some cases, depend on vendors of processors, graphics controllers, video encoders, wireless controllers, and DTV tuners, from providers such as Atheros or Toshiba. Furthermore, stand-alone consumer appliances require a substantial amount of software and middleware, from vendors such as Mediabolic, Syabas, or Microsoft, with which we also have strong working relationships.

Our objective is to provide digital media processing chipsets that offer advanced features, superior video quality, and rapid time to market for our target applications. To accomplish this goal, we focus on a continual investment in technology, as well as the promotion of our fundamental advantages.

We believe that our field-proven, patented REALmagic® Video Technology, now in our fourth generation of silicon and equivalent evolution of software, represents one of our key competitive advantages. We continue to invest and build on six primary technology foundations to provide the highest quality digital video/audio solutions possible:

• Digital video decoding including MPEG-1, -2 and -4 and proprietary formats, including WMV9;

• Advanced scene composition including advanced video scaling, adaptive deinterlacing, adaptive flicker filtering and prioritized alpha mixing;

• Software clients for VOD and IP multicast and navigation software for DVD-video, DVD-audio, SVCD, VCD, CD and HDD playback;

We offer chip-level products that enable digital media processing solutions for consumer appliances. Our line of digital media processing chips features REALmagic® Video Technology for the highest quality video possible. We complement our silicon technology with embedded software, portable to a wide range of operating environments. Featuring VOD and media navigation clients, our software is available under Windows, Linux, and WinCE operating systems. In addition, we develop and sell reference platforms designed around our silicon and software as application examples for customer development.

The following chipset products are sold primarily into the consumer appliance market:

• The original EM8300 provided MPEG-2 and -1 video decoding solutions for PC-based DVD playback and streaming video, which won wide acclaim as the top MPEG hardware for the PC, and included retail offerings by Creative Labs, Sony, and Panasonic.

• The EM8400 series provides MPEG- 4, -2 and -1 video and audio decoding for broadband interactive set-top boxes, and has achieved more than 40 design wins in its target segment, including companies such as Fujitsu-Siemens, Acer and Samsung. The EM8400 Series represents one of the first MPEG-4 silicon solutions for the set-top box market.

• The EM8610 series represents the first HDTV decoder silicon solutions to also support MPEG-4 and IP video streaming. Designed for HDTVs and advanced set-top boxes, it also offers advanced audio/video processing and progressive DVD playback. The software-compatible EM8610L series addresses the more cost- sensitive SDTV and video endpoint markets.

• The EM8620L series represents the first HD WMV9 decoder silicon solution and also supports DVD and HD MPEG-4/-2 decoding. Designed for video endpoints (such as digital media adaptors and broadband IP video set-top boxes), DVD receivers and advanced DVD players, the EM8620L series offers advanced audio/video processing and HighMAT^™ support. Sigma also continues to offer PC add-in products based on our silicon and software technology for commercial streaming and consumer DVD/DivX™ playback.

We also offer a series of PC based solutions, under the NetStream and REALmagic Xcard brand names, that are sold into the commercial streaming market and PC add-in market respectively:

• The NetStream 4000 and 2000TV are PC add-in cards featuring high performance MPEG-4 and -2 decoding, bringing streaming video to virtually any PC-based system.

• The REALmagic Xcard™ is a desktop PC add-in solution that plugs into a standard PCI slot, providing high quality DVD, MPEG-4 and DivX™ Video playback onto a standard TV or HDTV.

We currently sell most of our products through our direct sales force. We augment these sales through a select set of distributors and manufacturer representatives operating in different regions of the world. Our U.S. distributor is Ingram Micro, Inc. Our OEMs include Fujitsu-Siemens, KiSS Technology, Kreatel, LG Electronics, Lite-On and Samsung. Our international distributors are strategically located in many countries around the world.

We generally maintain products for distribution through corporate markets based on forecasts rather than firm purchase orders. Additionally, we generally acquire products for sale to our OEM customers only after receiving purchase orders from such customers, which purchase orders are typically cancelable without substantial penalty from such OEM customers. We currently place non-cancelable orders to purchase semiconductor products from our suppliers on an eight to twelve week lead-time basis. Consequently, if, as a result of inaccurate forecasts or canceled purchase orders, anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, requiring more working capital and resulting in more pressure on our operating results. International customers accounted for 86% of our total net revenues in fiscal 2004.

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

As of January 31, 2004, we had a staff of 79 research and development personnel. These research and development personnel conduct all of our product development with the assistance of a number of independent contractors and consultants. We are focusing our development efforts primarily on MPEG decoder and WMV9 products, including new and improved versions of REALmagic MPEG chipsets and cost reduction processes.

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

During fiscal 2004, 2003, and 2002, our research and development expenses were $10.0 million, $8.4 million, and $8.1 million, respectively. We plan to continue to devote substantial resources to research and development of future generations of MPEG and other multimedia products.

The market for MPEG decoder products is highly competitive. Rival companies include ESS Technology, Cirrus Logic, Mediatek, Zoran, ATI Technologies, Equator Technologies, Texas Instruments, Phillips, Analog Devices, Broadcom, STMicroelectronics, and LSI Logic. Many of these companies have a higher profile, larger financial resources base, and greater marketing resources than Sigma and may develop a competitive product that may inhibit the wide acceptance of REALmagic technology. We believe that other manufacturers which are developing MPEG products that will compete directly with our products in the near future.

We believe that the principal competitive factors in the market for MPEG decoder products include time to market for new product introductions, product performance, industry standards compatibility, price, and marketing and distribution resources. We believe that we compete most favorably with respect to time to market, product performance and industry standards compatibility, and we may not be able to compete favorably with respect to price, and marketing and distribution resources.

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

To reduce overhead expenses, along with capital and staffing requirements, we currently use third-party contract manufacturers to fulfill all of our manufacturing needs, including chipset manufacture and board-level assembly. All of the chips used by us to develop our decoding products are manufactured by outside suppliers and foundries. Each of these suppliers is our sole source of supply for the respective chips produced by such supplier and we do not have guaranteed price or quantity commitments.

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

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

As of January 31, 2004, we had 133 full-time employees, including 79 in research and development, 29 in marketing, sales and support, 8 in operations, and 17 in finance and administration.

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

We currently lease a 40,000 square foot facility in Milpitas, California that is used as our headquarters. The lease will expire in September 2007. We also lease facilities for sales offices in Hong Kong and Shenzhen China, and for research and development near Paris, France.

Not applicable.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

The following table sets forth certain information concerning our executive officers as of April 1, 2004:

The table below sets forth our net revenues by geographic region, and the percentage of total net revenues represented by each geographic region, for each of the last three fiscal years:

(Dollars in thousands)             Fiscal 2004    Fiscal 2003    Fiscal 2002
                                 -------------- -------------- ---------------
Asia............................. $19,816   65%   $6,246   34%   $3,239    24%
Europe...........................   6,502   21%    5,937   33%    2,401    18%
United States....................   4,168   14%    5,913   33%    7,750    58%
Canada...........................      22    0%       28    0%       12     0%
Other regions....................      12    0%       15    0%       35     0%
                                 ---------      ---------      ---------
  TOTAL NET REVENUES............. $30,520        $18,139        $13,437
                                 =========      =========      =========

Our Asia revenues for fiscal 2004 were derived predominantly from customers in Taiwan, Hong Kong, China and Korea. Revenues generated from Taiwan, Hong Kong, China and Korea, respectively, in fiscal 2004 accounted for 22%, 14%, 12% and 11% of our total net revenues, as compared to 4%, 5%, 8% and 4% for fiscal 2003 and 10%, 6%, 3% and 1% for fiscal 2002. Our Europe revenues in fiscal 2004 were derived predominantly from customers in Denmark. Revenues generated from Denmark in fiscal 2004 accounted for 12% of our total net revenues, as compared to 21% for fiscal 2003 and 0% for fiscal 2002. In fiscal 2004, no customer accounted more than 10% of our total net revenues; however, two customers based in Europe and four customers based in Asia accounted for 40% of our total net revenues. In fiscal 2003, one customer based in Europe, two customers based in the U.S. and two customers based in Asia accounted for 47% of our total revenues, among these customers, one customer based in Europe accounted for 19% of our total net revenues. In fiscal 2002, three customers based in the U.S. and one customer based in Europe accounted for 49% of our total net revenues, among these customers, three U.S. customers represented 15%, 14% and 11%, respectively. The continuous decreases in the U.S. revenues from fiscal 2002 through fiscal 2004 were largely attributable to the decreased sales of our board products in the corporate streaming video market and PC add-in market while the continuous increases in Asia and Europe revenues from fiscal 2002 through fiscal 2004 were primarily attributable to the increased sales of our chipset products in the advanced DVD players and IP set-top boxes and for the consumer appliance market. Our international sales have recently increased significantly, and accounted for approximately 86% of our total net revenues in fiscal 2004. We expect that international sales will continue to account for a significant portion of revenues, due in part to the significant overseas manufacturing of consumer appliances by our chipset customers.

Our gross margin as a percentage of net revenues was approximately 62% in fiscal 2004, 55% in fiscal 2003, and 41% in fiscal 2002. This improvement was due to our continuing efforts to reduce the cost of our original MPEG boards and chipsets, and the introduction and sales of our new higher-margin MPEG-4 chipset and board products and increased service and development revenues. In addition, the costs related to service revenues and development revenues were included in sales and marketing expenses, and research and development expenses respectively, while the provisions for inventory obsolescence included in cost of revenues decreased to $0.6 million in fiscal 2004 from $0.8 million in fiscal 2003 and $1.4 million in fiscal 2002. We expect our gross margins will vary from period to period due to changes in the mix of product sales, selling prices, including as affected by volume discounts, our costs, the extent of development fees, and provisions for inventory obsolescence. Because average selling prices of our products typically decline over the life of a product, if we are unable to reduce costs faster than the rate of such decline or introduce new products with higher average selling prices, our gross margins will decline.

Sales and marketing expenses increased $274,000 or 6% in fiscal 2004 compared to fiscal 2003 and $210,000 or 5% in fiscal 2003 compared to fiscal 2002. Those increases were largely due to increased headcount and expenses associated the expansion of our product marketing and sales development group. We believe that our sales and marketing expenses will increase in absolute dollar terms in future periods as we intend to increase headcount in our sales and marketing organization and to expand our product marketing and sales development.

Research and development expenses increased $1,634,000 or 20% in fiscal 2004 compared to fiscal 2003 and $243,000 or 3% in fiscal 2003 compared to fiscal 2002. The increase in fiscal 2004 compared to fiscal 2003 and in fiscal 2003 compared to fiscal 2002 was primarily attributable to the additions of engineering staff at our headquarters, our Hong Kong office and development center in France, the prototype costs of new products and licensing fees. We plan to continue our efforts in the development of our proprietary MPEG and WMV9 based products, and expect research and development expenses will likely increase by 10% to 20% in absolute dollar terms on a year- over-year basis at least for the near term.

Our general and administrative expenses decreased $467,000 or 16% in fiscal 2004 compared to fiscal 2003. The decrease was mainly attributable to a $200,000 recovery of bad debt expenses and the reduction of professional service fees. Our general and administrative expenses increased $208,000 or 8% in fiscal 2003 compared to fiscal 2002. The increase was largely due to increasing costs of insurance and various professional services. These fluctuations in general and administrative expenses in fiscal 2004 over fiscal 2003 and 2002 were largely due to the timing of expenses of various professional services. We expect our general and administrative expenses will increase in absolute dollar terms in future periods due to the continually increasing cost of insurance, professional services and other expenditures associated with our business.

As of January 31, 2004, our principal sources of liquidity consisted of cash and cash equivalents of $19.0 million, a significant increase of $18.2 million compared with $0.8 million at January 31, 2003. This increase resulted from net proceeds of $4.5 million from the issuance of 1,606,644 shares of our common stock in a private placement to certain institutional investors, corporate partners, and others in March 2003, $11.8 million from the issuance of 1,450,000 shares of our common stock in a private placement to an institutional investor in the second quarter of fiscal 2004, $2.4 million from the exercise of stock options by employees, and $1.0 million generated from operating activities, which was partially offset by the repayment of capital leases of $0.2 million and $1.3 million of equity investments including $1.0 million in an original equipment manufacturer headquartered in Europe and $0.3 million in a local MPEG-4 solution provider.

We do not have guaranteed price or quantity commitments for any of suppliers and the following table sets forth the amounts (in thousands) of payments due under specified contractual obligations, aggregated by category of contractual obligation as of January 31, 2004.

Contractual Obligations                      Total     Capital   Operating
Payments Due by Period                                 Leases     Leases
- -------------------------------            ---------  ---------  ---------
1 year or less........................... $     692  $       5  $     687
1-3 years................................     1,336         --      1,336
3-5 years................................       433         --        433
more than 5  years.......................        --         --         --
                                           ---------  ---------  ---------
Total.................................... $   2,461  $       5  $   2,456
                                           =========  =========  =========

On October 31, 2003, we entered into an amended and restated revolving line of credit, expiring in October 2004, under which we can draw down a maximum of $12.0 million that would be primarily collateralized by funds on deposit in accounts that would be assigned to the lender and would be included in our consolidated balance sheet as restricted cash. Such cash would not be available to fund operations. We also have a $3.0 million bank line of credit under which we had availability to draw down approximately $1.1 million as of January 31, 2004. That line of credit will also expire in October 2004 and is primarily collateralized by our accounts receivable. In addition, we have a second bank line of credit of $3.0 million that expires in October 2004, which line is secured by substantially all of our assets. The entire $3.0 million is available for borrowing. As of January 31, 2004, we had no borrowings outstanding under any line of credit. Under the agreement and the notes for these lines of credit, we are subject to certain financial covenants. As of January 31, 2004, we were in compliance with these covenants.

Our primary sources of funds to date have been proceeds from preferred and common stock issuances, and borrowings under bank lines of credit. In certain periods, cash generated from operations has also been a source of funds. While we generated cash from operations in the twelve months ended January 31, 2004, it is possible that our operations will consume cash in future periods. Other than the obligations under certain contractual agreements shown on the above table, we currently have no long-term debt. Based on our currently anticipated cash needs, we believe that our current reserve of cash and cash equivalents, including the proceeds from our private placements of common stock during the first half of fiscal 2004, will be sufficient to meet our primary uses of cash, which include our anticipated working capital requirements, obligations, capital expenditures, strategic investments, and other cash needs for the next twelve months. In addition, we believe that we will be able to comply with or make modifications to the current covenants under our existing asset-based banking agreements, and to renew those lines of credit upon their expiration, in order to maintain the availability of funds under these agreements.

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

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

The majority of our current revenues come from the sale of chipsets into emerging consumer applications, including IP video set-top boxes, advanced DVD players, and high definition televisions. We expect that the consumer digital home entertainment market will continue to account for a significant portion of our net revenues for the foreseeable future. Our ability to sustain and increase revenues is in large part dependent on the continued growth of these young and rapidly evolving segments, whose future is largely uncertain. Many factors could impede or interfere with the expansion of these consumer market segments, including general economic conditions, other competing consumer electronic products, delays in the deployment of telco video services and insufficient interest in new technology innovations.

We incurred significant operating losses in fiscal 1995, 1996, 1998, 2001, 2002 and 2003 and had negative cash flow in fiscal 1995, 1998, 2002 and 2003. Since our introduction of the REALmagic MPEG product line in November 1993, we have made significant investments in marketing and technological innovation for our REALmagic products. As a result of our investments, we experienced significant losses through fiscal 1996. Fiscal 1995, 1996 and 1998 also included significant losses associated with products other than those related to our REALmagic technology. Fiscal 2001, 2002 and 2003 included significant loss associated with a decline in demand for our REALmagic products. Since our inception through January 31, 2004, our total accumulated deficit is $60,963,000. We cannot assure you that we will not incur operating losses in any future fiscal quarter or fiscal year.

Our 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:

Our ability to increase sales and achieve continued profitability depends substantially on our ability to achieve a sustained high level of sales to our OEM customers. We have not executed volume purchase agreements with any of our current customers. Our customers are not under any obligation to purchase any minimum quantity of our products. Also, even if we achieve new design wins, we cannot assure you that these manufacturers will purchase our products in substantial volumes. Sales to any particular OEM customer fluctuate significantly from quarter to quarter and are subject to severe price pressures by competitors. Any reductions in those sales could seriously harm our business. Based on our experience in the industry, we expect that our actual sales to OEM customers will continue to experience significant fluctuations. Also, estimates of future sales to any particular customer or groups of customers are inherently uncertain.

Our ability to achieve continued profitability also depends on maintaining our current sales levels of streaming video products through domestic and international distributors for resale through corporate markets. Sales to such distributors are typically subject to contractual rights of inventory rotation or price protection. The failure of distributors to achieve sustained sell-through of our products could result in product returns or delayed or uncollectable receivables. For example, in the third and fourth quarters of fiscal 2001, we recorded sales returns from one of our distributors in the amount of approximately $2.7 million which we recorded as a reduction of revenues and $1.4 million which we recorded as an increase to our sales return reserve. We also provided for a bad debt allowance in the amount of approximately $2.1 million as of January 31, 2001. Any such returns and uncollectable receivables could continue to contribute to fluctuations in our results of operations. We cannot assure you that we will be successful in obtaining or maintaining significant customers for these products.

Our international operations are subject to certain risks.

During fiscal 2004, 2003, and 2002, sales to international customers accounted for approximately 86%, 67%, and 42% of our total net revenues, respectively. We anticipate that sales to international customers, including sales of REALmagic products, will continue to constitute a substantial percentage of our net revenues. Also, some of the foundries that manufacture our products and components are located in Asia.

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

We derive a substantial portion of our revenues from sales to the Asia Pacific region. This region of the world is subject to increased levels of economic instability, and this instability could seriously harm our results of operations. Further, the economic impact of a recurrence of SARS or a similar event in this region could adversely affect our revenues and our business as a whole.

Our quarterly revenues and operating results depend upon the volume and timing of customer orders received during a given quarter and the percentage of each order that we are able to ship and recognize as revenue during each quarter, each of which is extremely difficult to forecast. The majority of our orders in a given quarter historically have been shipped in the last months of that quarter. This trend is likely to continue, and any failure or delay in the closing of orders during the last part of a quarter would adversely affect our operating results, as occurred in the third quarter of fiscal 2004. Further, to the extent we receive orders late in any given quarter, we may be unable to ship products to fill those orders during the same quarter in which we received the corresponding order, which would have an adverse impact on our operating results for that quarter.

Some of our markets, especially the DVD segments, are characterized by intense price competition. The willingness of customers to design our chips in to their products depends to a significant extent, upon our ability to sell our products at competitive prices. We expect the average selling price of our existing products to decline significantly over the life of each product as the markets of our products mature, new technologies emerge, and competition increases. If we are unable to reduce our costs sufficiently to offset declines in product prices or are unable to introduce more advanced products with higher margins in a timely manner, we could see declines in our market share or gross margins.

We have three lines of credit with a bank which allow for borrowings of $12.0 million, $3.0 million and $3.0 million, respectively. Under the agreements for these lines of credit, which expire in October 2004, we are subject to certain financial covenants. Since July 1997, we have, on occasion, been in violation of some of the covenants and in all cases have obtained waivers releasing us from our obligation to meet these covenants as of previous dates. It is possible that we may need such a waiver for future non-compliance and we cannot assure you that our bank will grant these waivers. If we do not meet these covenants and cannot obtain waivers, the lender could accelerate payments of any amounts due under the lines. To the extent we had borrowed amounts under these lines and were required to repay them on an accelerated basis, it could substantially weaken our financial condition. If we do not have sufficient funds available to make full payment of the lines when required, the bank could foreclose on our accounts receivable, inventories, general intangibles, equipment and tangible assets that collateralize the notes, which would harm our business. As of January 31, 2004, we had no borrowings outstanding under any line of credit.

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

In addition, for some applications, video decoding is done in software operating on today's more powerful CPUs. Most of our competitors have substantial experience and expertise in audio, video and multimedia technology and in producing and selling consumer products through retail distribution and OEM channels. These companies also have substantially greater engineering, marketing and financial resources than we have. Our competitors could form cooperative relationships that could present formidable competition to us. We cannot assure you that our REALmagic technology will continue to 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. Also, we anticipate that our competitors will, over time, introduce features that have been unique to Sigma Designs, such as MPEG-4 decoding, which was announced by ESS Technology during our third quarter of fiscal 2004. We cannot assure you that we will not lose market share or suffer price erosion in each of our market segments, as a result of the introduction of competitive products with similar features.

Our business strategy is, and has been, to focus on our REALmagic products by investing heavily in video decoding technology and WMV9. We have made substantial investments in product development based on the latest MPEG technology, MPEG-4. Though MPEG-4 has gained some market acceptance, there is increasing competition from the ISO H.264 standard, a next generation video CODEC that forms an extension of MPEG-4. Though we intend to support new CODEC technologies as they become commercially viable, there is no guarantee that we can successfully develop these technologies in a timely manner or that competitors will not gain market share at our expense with these new technologies.

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

Our technological leadership depends on our continued technological advancements, as well as research and development investments in the area of MPEG video and audio decoding. These advancements include the following:

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

To be competitive, we must anticipate the needs of the market and successfully develop and introduce innovative new products in a timely fashion. We cannot assure you that we will be able to successfully complete the design of our new products, have these products manufactured at acceptable manufacturing yields, or obtain significant purchase orders for these products. The introduction of new products may adversely affect sales of existing products and contribute to fluctuations in operating results from quarter to quarter. Our introduction of new products also requires that we carefully manage our inventory to avoid inventory surplus and obsolescence. Our failure to do so could adversely impact our results of operations. For example, during fiscal 2004 and 2003, we wrote down our inventory in the amount of approximately $0.6 million and $0.8 million respectively, because of a continuing decline in demand for certain of our PC- related products. In addition, new products, as opposed to more mature products, typically have higher initial component costs. These higher costs could result in downward pressures on our gross margins.

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

We obtain some of our components from a single source. Other delays or interruptions have not occurred to date, but any delay or interruption in the supply of any of the components required for the production of our REALmagic silicon or our REALmagic multimedia cards currently obtained from a single source, including delays resulting from a recurrence of SARS, earthquakes or other business interruptions could have a material adverse impact on our sales of REALmagic products, and on our business.

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

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

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

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

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

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accounts receivable, and inventories. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition - We recognize revenues in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition". Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and determinable, and collectibility is probable. We derive revenues from three principal sources: product sales, product development contracts and service contracts.

Revenues from product sales to OEMs, distributors and end users are generally recognized upon shipment, as our shipping terms are FOB shipping point, except that revenues are deferred when management cannot reasonably estimate the amount of returns or where collectibility is not assured. In those situations, revenue is recognized when collection subsequently becomes probable and returns are estimable (generally upon resale by customers or "Sell-through Basis"). Allowances for sales returns, price protection and warranty costs are recorded at the time that revenues are recognized.

In fiscal 2001, we began recognizing revenue from our primary U.S. distributor on a Sell-through Basis. This practice resulted from significant sales returns, which we accepted from the distributor outside of the terms of the distribution agreement. Under terms of a distribution agreement entered into with the distributor in fiscal 2002, we granted the distributor the right of return and price protection, which allows the distributor to return any product, which is in the original packaging, for full credit up to 180 days after the earlier of the agreement expiration or early termination. The price protection provision allows the distributor to receive a credit for the difference between the original price and the reduced price of our products within their inventory. Although the returns are not frequent in nature, returns from this distributor cannot be reasonably estimated. Consequently, pursuant to the above policy, revenue from this distributor is recognized upon resale to the distributor's end-customers.

Revenues from product development agreements were recognized in fiscal 2004 and 2003 when billed, earned, and collection was assured. In fiscal 2002, such revenue was recognized on the percentage of completion method. Under the percentage-of-completion method, estimates are reviewed and revised periodically throughout the lives of the contracts. Any revisions are recorded in the accounting period in which the need for revisions becomes evident. The Company classifies all development costs related to such agreements as research and development expenses. Development revenues were $792,000, $458,000, and $406,000, for fiscal 2004, 2003 and 2002, respectively.

Revenues from service contracts consist of fees for providing engineering support services, which are recognized ratably over the contract term. Expenses related to support service revenue were included in sales and marketing expenses. Support service revenues were $269,000, $127,000 and $0, for fiscal 2004, 2003 and 2002, respectively.

Accounts Receivable - During industry downturns, certain of our customers have difficulty with their cash flows. Certain customers, typically those with whom we have long-term relationships, may delay their payments by 40-60 days beyond the original terms. We review the ability of our customers to pay the indebtedness they incur with us. We defer recognition of revenue and the related receivable when we cannot reasonably estimate whether collectibility is assured at the time products and services are delivered to our customer. We provide an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These estimated allowances are periodically reviewed, analyzing the customer's payment history and information regarding credit worthiness. In fiscal 2004, 2003 and 2002, we recorded a provision (reversal) for bad debt allowance in the total amount of $(186,000), $60,000, and $60,000 respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories - We continue to monitor our inventory levels in light of product development changes and expectations of an eventual market upturn. We may be required to take additional charges for excess and obsolete inventories if the current industry recovery falls below our expectation or we make changes in our current product development plans. We estimate inventory reserves for excess and obsolete inventories based on our assessments of future product sales giving consideration for factors such as the cyclical nature of our industry. These forecasts require us to estimate our ability to see demand for current and future products and compare those estimates with our current inventory levels. If these forecasts or estimates change adversely, or our product roadmaps change, then we would need further write down inventory.

Deferred Tax Assets - We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", which expands upon and strengthens existing accounting guidance concerning when a Company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the issuance of FIN 46, a Company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a Company if that Company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that the Company is not required to consolidate but in which it has a significant variable interest. In October 2003 the FASB elected to defer the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities until the end of the first interim or annual period ending after December 15, 2003. The adoption of FIN 46 is not expected to have an impact on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently has no financial instruments which meet these requirements.

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

At January 31, 2004, we had no borrowings outstanding under our $12.0 million, $3.0 million and $3.0 million variable interest rate bank lines of credit, respectively. If short-term interest rates were to increase 10 percent, the increased interest expense associated with these arrangements would not have a material impact on our net income (loss) and cash flows.

Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar and Euro are the financial currencies of our subsidiaries in Hong Kong and France. We do not currently enter into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in the Hong Kong dollar and Euro. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rate at January 31, 2004, the fair value of these foreign currency amounts would decline by an immaterial amount.

The financial statements required by this item, the notes related thereto, and the independent auditors' report appear on pages F-1 through F-23 and S-1 of this Annual Report on Form 10-K.

Not applicable.

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There was no change in our internal control over financial reporting that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The information required by this item concerning our directors is incorporated by reference from the information set forth in the section entitled "Proposal One-Election of Directors" contained in our Proxy Statement relating to the 2004 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement"). The information required by this item concerning our executive officers is incorporated by reference to the information set forth at the end of Part I of this Annual Report on Form 10-K.

The information regarding compliance with Section 16(a) of the Exchange Act is set forth in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference.

The information regarding our code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer is incorporated by reference from the information set forth in the section entitled "Management-Code of Ethics" contained in the Proxy Statement.

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

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

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

The information required by this item regarding principal accounting fees and services is incorporated by reference from the information set forth in the section entitled "Ratification of Independent Auditors - Principal Accounting Fees and Services" contained in the Proxy Statement.

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

1. Consolidated Financial Statements

2. Consolidated Financial Statements Schedules

(b) Reports on Form 8-K

On November 25, 2003, we filed a Current Report on Form 8-K dated November 25, 2003 with the Securities and Exchange Commission to furnish our press release reporting our results for the three months ended October 31, 2003.

(c) Exhibits

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milpitas, State of California, on the 15th day of April 2004.

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

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

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

We have audited the accompanying consolidated balance sheets of Sigma Designs, Inc. and subsidiaries as of January 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sigma Designs, Inc. and subsidiaries at January 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

San Jose, California
April 9, 2004

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

                                                        2004       2003   
                                                     ---------- ----------
      Accrued salary and benefits...................      $650       $530
      Accrued royaties..............................       344        186
      Accrued professional services.................       261        222
      Customer deposit..............................        11        252
      Other accrued liabilities.....................       572        491
                                                     ---------- ----------
      Total.........................................    $1,838     $1,681
                                                     ========== ==========

In general, the Company sells products with a one-year limited warranty that the Company's products will be free from defects in materials and workmanship. Warranty cost is estimated at the time revenue is recognized, based on historical activity. Accrued warranty cost includes both hardware and software support costs.

The Company's standard terms and conditions of sale include a patent infringement indemnification provision for claims from third parties related to the Company's intellectual property. The terms and conditions of sale generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a right to replace or modify the infringing products to make them non-infringing. Such indemnification provisions are accounted for in accordance with SFAS No. 5. To date, the Company has not incurred or accrued any costs related to any claims under such indemnification provisions.

Leases - The Company's primary facilities are leased under a noncancelable lease which expires in September 2007. In addition, the Company leases certain equipment under capital lease arrangements. Future minimum annual payments under capital and operating leases are as follows (in thousands):

      Fiscal Year Ending                              Capital   Operating
        January 31,                                    Leases     Leases
      -------------------------------                ---------- ----------
           2005.....................................$        5 $      687
           2006.....................................        --        694
           2007.....................................        --        642
           2008.....................................        --        433
                                                     ---------- ----------
      Total minimum lease payments..................         5 $    2,456
      Amount representing interest..................        --  ==========
                                                     ----------
      Present value of minimum lease payments.......         5
      Current portion...............................        (5)
                                                     ----------
      Long-term portion.............................$       --
                                                     ==========

Rent expense was $720,000, $560,000, and $504,000 for fiscal 2004, 2003 and 2002, respectively, net of sublease income of approximately $37,000, $12,000 and $0 for fiscal 2004, 2003 and 2002, respectively.

Royalties - The Company pays royalties for the right to sell certain products under various license agreements. During fiscal 2004, 2003 and 2002, the Company recorded royalty expense of $578,000, $406,000, and $85,000 respectively.

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

On October 31, 2003, the Company entered into an amended revolving line of credit, expiring in October 2004, bearing interest at a rate equal to the interest rate on the applicable Credit Support Securities plus 0.65% under which the Company can draw down a maximum of $12.0 million that would be primarily collateralized by funds drawn-down on deposit in accounts that would be assigned to the lender and would be included in the Company's consolidated balance sheet as restricted cash. Such cash would not be available to fund operations.

The Company also has a $3.0 million bank line of credit under which the Company had availability to draw down approximately $1.1 million as of January 31, 2004. The line of credit will expire in October 2004 and is primarily collateralized by the Company's accounts receivable. In addition, the Company has a second bank line of credit of $3.0 million that expires in October 2004, which is secured by substantially all the Company's assets. As of January 31, 2004, the entire $3.0 million is available for borrowing. Both $3.0 million bank lines of credit bear interest at a rate equal to the "Prime rate" plus 1.5%.

As of January 31, 2004, the Company had no borrowings outstanding under all lines of credit. Under the agreement and the notes for these lines of credit, the Company is subject to certain financial covenants.

Net income (loss) per share - basic and diluted for the periods presented is computed by dividing net income (loss) by the weighted average of common shares outstanding (excluding shares subject to repurchase). Net income (loss) per share - diluted reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common stock equivalents are excluded from the computation in loss periods, as their effect would be antidilutive.

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

                                                     Years Ended January 31,
                                                --------------------- ---------
                                                  2004       2003       2002
                                                ---------  ---------  --------- 
Numerator:
  Net income (loss) available to
    common shareholders, basic
    and diluted.............................    $   1,543  $  (6,057) $ (10,392)
                                                ---------  ---------  ---------
Denominator:
  Weighted average common shares
     outstanding............................       19,437     16,482     16,318
  Weighted average common shares
     outstanding subject to repurchase......           --         --         (1)
                                                ---------  ---------  ---------
Shares used in computation, basic...........       19,437     16,482     16,317
                                                ---------  ---------  ---------
Effect of dilutive securities:
  Stock options.............................        2,953         --         --
                                                ---------  ---------  ---------
Shares used in computation, diluted.........       22,390     16,482     16,317

Net income (loss) per share:
  Basic.....................................   $    0.08  $   (0.37) $   (0.64)
                                                =========  =========  =========
  Diluted...................................   $    0.07  $   (0.37) $   (0.64)
                                                =========  =========  =========

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

                                                     Years Ended January 31,
                                                --------------------- ---------
                                                  2004       2003       2002
                                                ---------  ---------  --------- 
Stock options...........................              65      4,606      4,108

During fiscal 2004, the Company adopted the 2003 Director Stock Option Plan (the "2003 Director Plan") to replace the predecessor 1994 Director Stock Option Plan (the "1994 Director Plan"). A total of 200,000 shares of common stock are currently reserved for issuance under the 2003 Director Plan, in addition to the shares previously authorized under the 1994 Director Plan which remain available for grant and any additional shares that are available upon termination of options presently outstanding under the 1994 Director Plan.

During fiscal 2002, the Company adopted the 2001 employee stock option plan and reserved 500,000 shares of the Company's common stock for issuance under the plan, with automatic annual increases on the first day of the Company's fiscal year equal to the lesser of (i) 1,000,000 shares, (ii) 4% of the Company's outstanding common stock on such date or (iii) a lesser number of shares as determined by the Board of Directors, commencing February 1, 2002. The Company's 1994 stock option plan provides for the granting of options to purchase up to 4,400,000 shares of common stock. Generally, the 1994 and 2001 plans provide for the granting of options to purchase shares of common stock at the fair market value on the date of grant. Options granted under the 1994 and 2001 plans 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, 2004 expire ten years from date of grant).

Stock option activity and balances are summarized as follow:

                                                                     Weighted
                                                                     Average
                                                                     Exercise
                                                          Number      Price
                                                            of         Per
                                                          Shares      Share
                                                        ----------- ----------
      Balances, February 1, 2001 (1,733,336
        exercisable at a weighted-average price
        of $2.48).....................................   3,421,181      $2.83

      Granted (weighted-average fair value of $0.93)..     837,500       1.28
      Canceled........................................    (148,887)      2.97
      Exercised.......................................      (1,825)      1.00
                                                        -----------
      Balances, January 31, 2002 (2,342,038
        exercisable at a weighted-average price
        of $2.60).....................................   4,107,969       2.51

      Granted (weighted-average fair value of $1.35)..     748,000       1.84
      Canceled........................................    (115,023)      2.43
      Exercised.......................................    (135,265)      1.33
                                                        -----------
      Balances, January 31, 2003 (2,824,354
        exercisable at a weighted-average price
        of $2.62).....................................   4,605,681       2.43

      Granted (weighted-average fair value of $3.51)..     588,500       4.77
      Canceled........................................     (62,792)      2.72
      Exercised.......................................    (869,453)      2.35
                                                        -----------
      Balances, January 31, 2004......................   4,261,936      $2.77
                                                        ===========

At January 31, 2004, options to purchase 389,632 shares were available for future grant. Effective February 1, 2004, an additional 825,519 shares resulting from the automatic annual increase of 4% of the Company's outstanding common stock were added to the shares available for issuance under the 2001 plan.

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

                       Number                             Number
                     Outstanding  Weighted    Weighted  Exercisable  Weighted
                         at        Average    Average       at       Average
 Range of Exercise   January 31,  Remaining   Exercise  January 31,  Exercise
       Prices           2004        Life       Price       2004       Price
- -------------------- ----------- ----------- ---------- ----------- ----------
   $1.00 - $1.25        745,199        6.70      $1.19     359,539      $1.13
   $1.63 - $2.44      1,804,057        5.20      $2.12   1,256,914      $2.26
   $2.53 - $3.50      1,068,238        6.35      $3.25     635,240      $3.13
   $4.25 - $5.19        190,875        5.94      $4.31     141,632      $4.32
   $5.75 - $8.46        433,567        7.77      $6.03     158,340      $5.77
       $9.57             20,000        9.38      $9.57          --         --
- -------------------- -----------                        -----------
   $1.00 - $9.57      4,261,936        6.06      $2.77   2,551,665      $2.65
==================== ===========                        ===========

During fiscal 2002, the Company adopted the 2001 Employee Stock Purchase Plan and reserved 100,000 shares of the Company's common stock for issuance under the plan, with an automatic annual increase on the first day of the Company's fiscal year equal to the lesser of (i) 500,000 shares, (ii) 2% of the Company's outstanding common stock on such date or (iii) a lesser number of shares as determined by the Board of Directors. Under this plan, 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 2004, 2003 and 2002, 69,327, 129,264 and 68,034 shares were purchased at an average price of $4.51, $1.78 and $1.45 per share, respectively. At January 31, 2004, 310,936 shares under 2001 Purchase Plan remain available for future purchase. Effective February 1, 2004, Board of Directors resolved that an additional 50,000 shares be added to the shares available for issuance under the 2001 purchase plan.

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

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

                                                                January 31,
                                                            -------------------
                                                              2004      2003
                                                            --------- --------- 
      Deferred tax assets:
        Net operating losses and tax credit carryforwards..  $28,989   $26,642
        Reserves not currently deductible..................    3,692     3,273
        Capitalized research and development expenditures..    1,282     1,232
        Other..............................................      127       300
                                                            --------- ---------
                                                              34,090    31,447
      Valuation allowance..................................  (34,090)  (31,447)
                                                            --------- ---------
      Net deferred taxes...................................   $  --     $  --
                                                            ========= =========

SFAS No. 109 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, risks associated with its new product introduction including the dependence on rapid acceptance of new technology, the dependence on development of complimentary software by third parties and other risks, such as technological change in the industry, short product life cycles and reliance on a limited number of suppliers and manufacturing contractors, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance.

Net operating losses and tax credit carryforwards as of January 31, 2004 are as follows (in thousands):

                                                           Expiration
                                            Amount           Years
                                           ---------  --------- ----------
      Net operating losses, federal....   $  62,641       2009  -2024
      Net operating losses, state......       2,718       2005  -2015
      Tax credits, federal.............       4,082       2006  -2024
      Tax credits, state...............       3,137       2005  -Indefinite
      Net operating losses, foreign....       4,468             -

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

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

                                             2004       2003       2002
                                           ---------  ---------  ---------

      Computed at 35%...................  $     543  $  (2,060) $  (3,636)
      State taxes, expiration of net
        operating loss carryforwards....          2          2          2
      Valuation allowance...............      2,021      2,212      3,781
      Other.............................     (2,557)      (188)      (143)
                                           ---------  ---------  ---------
      Total.............................  $       9  $     (34) $       4
                                           =========  =========  =========

No domestic customer accounted for more than 10% of net revenues in fiscal 2004 and 2003. Three domestic customers accounted for 15%, 14% and 11% of net revenues in fiscal 2002, respectively. No international customer accounted for more than 10% of net revenues in fiscal 2004 and 2002. One international customer accounted for 19% of net revenues in fiscal 2003.

No domestic customers accounted for more than 10% of accounts receivable in fiscal 2004 and 2003. One international customer accounted for 15% of accounts receivable in fiscal 2004, while another international customer accounted for 58% of accounts receivable in fiscal 2003.

During the third quarter of fiscal 2004, the Company invested approximately $1.0 million in an original equipment manufacturer (the "OEM") headquartered in Europe. The Company's ownership interest in the OEM is less than 7% and is accounted for using the cost method. The Company had revenue from product sales to this OEM of $1.4 million, $0.3 million, and $0 in fiscal 2004, 2003, and 2002, respectively. The Company had an accounts receivable of $0.8 million and $0 from this OEM at January 31, 2004 and 2003, respectively. One of the Company's customers is a contract manufacturer that manufactures video equipment for this OEM. Revenues from product sales to this manufacturer totaled $2.3 million, $3.4 million, and $0.006 million for fiscal 2004, 2003, and 2002, respectively. The Company had an accounts receivable of $0.4 million and $2.9 million from this manufacture at January 31, 2004 and 2003, respectively. A portion of the Company's products sold to the contract manufacturer were installed as components in the video equipment manufactured by the contract manufacturer on behalf of the OEM.

During the third quarter of fiscal 2003, the Company executed an agreement to sublease approximately 2,600 square feet of its headquarters' facility to a start-up company founded by a member of the Company's board of directors. The term of the sublease is one year at the same market rate as the Company's operating lease arrangement for the facility. The agreement was amended during the fourth quarter of fiscal 2004 for an additional one year on the same terms.

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

For fiscal 2004, 2003 and 2002, the Company recorded sales to customers throughout the United States and Canada, Denmark, Japan, China, Taiwan, Hong Kong, and Korea; Germany, Belgium, Finland, The Netherlands, Norway, Sweden, the United Kingdom, France, Italy, Spain, Hungary, Portugal, Scotland, and Norway (collectively referred to as "Rest of Europe"); Singapore, Thailand, New Zealand, Turkey, Israel, Australia, South American and South Africa (collectively "Rest of Asia/New Zealand/Other Region").

The following table summaries total net revenues attributed to each product group as of and for the fiscal years ended January 31 (in thousands):

                                             2004       2003       2002
                                           ---------  ---------  ---------
  Boards..................................$   3,231  $   6,215  $   6,961
  Chipsets.................................  25,880     10,742      3,858
  Other....................................   1,409      1,182      2,618
                                           ---------  ---------  ---------
Total net revenues........................$  30,520  $  18,139  $  13,437
                                           =========  =========  =========

The following table summaries total net revenues attributed to each market segment as of and for the fiscal years ended January 31 (in thousands):

                                             2004       2003       2002
                                           ---------  ---------  ---------
  Commercial streaming video market.......$   1,806  $   3,751  $   6,944
  Consumer appliance market................  26,448     11,015      3,921
  PC add-in market.........................   1,179      2,630      2,166
  Other market.............................   1,087        743        406
                                           ---------  ---------  ---------
Total net revenues........................$  30,520  $  18,139  $  13,437
                                           =========  =========  =========

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

                                             2004       2003       2002
                                           ---------  ---------  ---------
Net revenues:
  Taiwan................................   $   6,741  $     759  $   1,298
  Hong Kong.............................       4,404        975        811
  United States.........................       4,168      5,913      7,750
  Denmark...............................       3,785      3,780         47
  China.................................       3,566      1,388        442
  Korea.................................       3,375        791        172
  Rest of Europe........................       2,717      2,157      2,354
  Japan.................................         889      1,988        191
  Rest of Asia/New Zealand/Other Region.         853        360        360
  Canada................................          22         28         12
                                           ---------  ---------  ---------
Total net revenues*.....................   $  30,520  $  18,139  $  13,437
                                           =========  =========  =========

Long-lived assets:
  United States.........................   $     907  $   1,307
  Hong Kong.............................           8         12
  France................................         113         12
                                           ---------  ---------
Total long-lived assets.................   $   1,028  $   1,331
                                           =========  =========

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

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

                                         First     Second    Third     Fourth
                                         Quarter   Quarter   Quarter   Quarter
                                         --------  --------  --------  --------
Year ended January 31, 2004:

Net revenues........................... $  7,835  $  7,874  $  7,470  $  7,341
Income from operations.................      473       668       134       239
Net income available to common
  shareholders.........................      426       671       149       297
Net income per share available
  to common shareholders:
  Basic................................ $   0.02  $   0.04  $   0.01  $   0.01
  Diluted.............................. $   0.02  $   0.03  $   0.01  $   0.01

Year ended January 31, 2003:

Net revenues........................... $  3,454  $  3,256  $  4,720  $  6,709
Loss from operations...................   (2,261)   (2,407)     (884)     (295)
Net loss attributable to common
  shareholders.........................   (2,307)   (2,552)     (871)     (327)
Net loss per share attributable
  to common shareholders:
  Basic................................ $  (0.14) $  (0.16) $  (0.05) $  (0.02)
  Diluted.............................. $  (0.14) $  (0.16) $  (0.05) $  (0.02)

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                Balance      Additions:   Deductions:   Balance
                                   at      Provision for  Write Offs      at
                               Beginning   (Reversal of) (Recoveries)   End of
       Classification           of Year      Bad Debts   of Accounts     Year
- ----------------------------- ----------- -------------- ------------ -----------
                                           (in thousands)
Allowance for returns and
 doubtful accounts, price
 protection, and sales
 returns:
  Year ended January 31,
  2004......................    $     922    $   (186)    $   (199)   $    935
  2003......................        1,664          60          802         922
  2002......................        2,124          60          520       1,664