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Balance sheet information as of January 31, 2004 was derived from the Company's audited consolidated financial statements. All other information is unaudited, but in the opinion of management, includes all adjustments necessary to present fairly the results of the interim period. The results of operations for the quarter ended July 31, 2004 are not necessarily indicative of results to be expected for the entire year. This report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements for the year ended January 31, 2004 and notes thereto included in the Company's Annual Report on Form 10-K, as previously filed with the Securities and Exchange Commission.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are received. SFAS No. 123 also requires the disclosure of pro forma net income (loss) and net income (loss) per share had the Company adopted the fair value method for equity instruments issued to employees and non-employees as of the beginning of fiscal 1996. Under SFAS No. 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 pro forma calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:

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The Company's pro forma calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been as follows (in thousands, except per share amounts):

3. Inventories

Inventories consisted of the following (in thousands):

4. Lines of Credit

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As of July 31, 2004, the Company had no borrowings outstanding under any of its lines of credit. Under the agreement and the notes for these lines of credit, the Company is subject to certain financial covenants. As of July 31, 2004, the Company was in compliance with these covenants.

5. Net Income per Share

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The reconciliation of net income to total comprehensive income is as follows (in thousands):

7. Segment Disclosure

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 entity segments have similar economic characteristics, as defined in SFAS No. 131. Accordingly, it is the Company's opinion that it operates in one reportable segment: the development, manufacturing and marketing of multimedia computer devices and products.

8. Significant Customers

No sales to any U.S. customers accounted for more than 10% of total revenues during the second quarter of fiscal 2005 and 2004. Sales to three international customers accounted for 22% (see Note 9 below), 21%, and 12%, respectively, of the Company's total revenue during the second quarter of fiscal 2005, as compared with sales to one international customer which accounted for approximately 11% of total net revenues for the same quarter of fiscal 2004. No sales to any U.S. customers accounted for more than 10% of total revenues during the first half of fiscal 2005 and 2004. Sales to three international customers accounted for 16%, 14%, 10%, respectively, of the Company's total revenue during the first half of fiscal 2005, as compared with sales to one international customer which accounted for approximately 10% of total net revenues for the same period of fiscal 2004..

9. Related party transactions

During the third quarter of fiscal 2004 and the second quarter of fiscal 2005, the Company invested approximately $1.0 million and $1.0 million, respectively, in an original equipment manufacturer (the "OEM") headquartered in Europe. The Company's ownership interest in the OEM was less than 7% for the quarter ended July 31, 2003 and less than 10% for the quarter ended July 31, 2004 and is accounted for using the cost method. The Company had revenue from product sales to this OEM of $1.8 million in the second quarter of fiscal 2005 and $233,000 in the same period of fiscal 2004. The Company had revenue from product sales to this OEM of $2.5 million in the first half of fiscal 2005 and $0.3 million in the same period of fiscal 2004. In June 2004, the Company accepted a one-time return of certain chipset products from this OEM in exchange for similar products with an aggregate sales price of $262,000. The Company had accounts receivable of $1.7 million and $33,000 from this OEM at July 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 $3,000, and $10,000 for the second quarter of fiscal 2005 and 2004, respectively. Revenues from product sales to this manufacturer totaled $0.3 million, and $1.3 million for the first half of fiscal 2005 and 2004, respectively. The Company had accounts receivable of $0 and $10,000 from this manufacturer at July 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.

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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 year on the same terms.

10. Product Warranty

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.

Details of the change in accrued warranty for the three and six months ended July 31, 2004 and July 31, 2003 are as follows (in thousands):

11. Contingencies

In general, the Company provides its customers a one year limited warranty that the Company's products will be free from defects in materials and workmanship. The Company maintains a general warranty reserve for estimated costs at the time revenue is recognized.

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 any costs related to any claims under such indemnification provisions.

12. Recently Issued Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," and in December 2003 issued a revised interpretation of FIN 46 ("FIN 46-R"). FIN 46 requires certain variable interest entities ("VIEs") to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. The Company has not invested in any entities it believes are variable interest entities for which it is the primary beneficiary. The adoption of FIN 46-R had no impact on the financial position, results of operations or cash flows of the Company.

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In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF No. 03-01"). EITF No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments and disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under the FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities.  The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. For investments accounted for under FAS 115, the disclosures are effective in annual financial statements for fiscal years ending after December 15, 2003. The adoption of this standard did not have a material impact on the financial position, results of operations or cash flows of the Company.

13. Legal Proceeding

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Our primary market segments are the IP video application market, advanced DVD/media player market, PC add-in and other markets, and HDTV product market. The IP video application market consists primarily of a range of consumer and commercial products that perform the distribution and receiving of streaming video using IP. The advanced DVD/media player market consists primarily of a range of set-top and portable products that perform playback of local digital media stored on optical or hard disk formats. The HDTV product market consists primarily of a range of digital television sets offering high definition capability. The PC add-in and other markets consist primarily of a range of decoding solutions for PC-based DVD playback and streaming video.

Net Revenues. Net revenues for the second quarter and first half of fiscal 2005 increased 3% and 1%, respectively, as compared to the same periods last year. The increase in net revenues for the second quarter of fiscal 2005 is primarily attributable to the increase in unit sales of our MPEG chipset products and our new Windows Media Video 9 (WMV9) chipsets into the IP video application market and advanced DVD/media player market, offset by (1) the lower average selling prices of our MPEG chipset products into the IP video application market and advanced DVD/media player market, (2) decreased unit sales of chipset products to the PC add-in market, and (3) decreased engineering development fees. The increase in net revenues for the first half of fiscal 2005 is primarily attributable to the increase in unit sales of our MPEG chipset products and our new WMV9 chipsets, and project-based board products into the IP video application market, offset by (1) the lower average selling prices of MPEG chipset products into the IP video application market, (2) the decrease in unit sales, as well as the lower selling prices of our MPEG chipset products to advanced DVD/media player market, (3) decreased unit sales of chipset products to the PC add-in market, and (4) decreased engineering development fees.

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During the third quarter of fiscal 2004 and the second quarter of fiscal 2005, we invested approximately $1.0 million and $1.0 million, respectively, in an original equipment manufacturer (the "OEM") headquartered in Europe. Our ownership interest in the OEM was less than 7% for the quarter ended July 31, 2003 and less than 10% for the quarter ended July 31, 2004 and is accounted for using the cost method. We had revenue from product sales to this OEM of $1.8 million in the second quarter of fiscal 2005 and $233,000 in the same period of fiscal 2004. We had revenue from product sales to this OEM of $2.5 million in the first half of fiscal 2005 and $0.3 million in the same period of fiscal 2004. In June 2004, we accepted a one-time return of certain chipset products from this OEM in exchange for similar products with an aggregate sales price of $262,000. We had accounts receivable of $1.7 million and $33,000 from this OEM at July 31, 2004 and 2003, respectively. One of our customers is a contract manufacturer that manufactures video equipment for this OEM. Revenues from product sales to this manufacturer totaled $3,000, and $10,000 for the second quarter of fiscal 2005 and 2004, respectively. Revenues from product sales to this manufacturer totaled $0.3 million, and $1.3 million for the first half of fiscal 2005 and 2004, respectively. We had accounts receivable of $0 and $10,000 from this manufacturer at July 31, 2004 and 2003, respectively. A portion of our products sold to the contract manufacturer were installed as components in the video equipment manufactured by the contract manufacturer on behalf of the OEM.

The following table sets forth our net revenues in each product group (in thousands):

Sales of MPEG board products for the second quarter of fiscal 2005 increased 18% to $889,000 as compared to $752,000 for the corresponding period in the prior year. MPEG board product net revenues for the first half of fiscal 2005 increased 43% to $2,114,000, as compared to $1,481,000 for the corresponding period in the prior year. Sales from MPEG chipset products for the second quarter of fiscal 2005 increased 4% to $6,691,000, as compared to $6,444,000 for the same period last year. MPEG chipset net revenues for the first half of fiscal 2005 decreased 2% to $13,093,000, as compared to $13,346,000 for the same period last year. Sales of other products for the second quarter of fiscal 2005 decreased 25% to $508,000 as compared to $678,000 for the corresponding period in the prior year. Other net revenues for the first half of fiscal 2005 decreased 25% to $665,000, as compared to $882,000 for the same period last year. Sales of MPEG boards and chipsets together represented 94% and 91% of net revenues for the quarters ended July 31, 2004 and July 31, 2003, respectively. Other products represented 6% and 9% of net revenues for the quarters ended July 31, 2004 and July 31, 2003, respectively. For the six months ended July 31, 2004, MPEG boards and chipsets represented 96% of net revenues, and other products represented 4% of net revenues. For the six months ended July 31, 2003, MPEG boards and chipsets represented 94% of net revenues, and other products represented 6% of net revenues.

The increase in net revenues from MPEG-based board products for the quarter and six months ended July 31, 2004 compared to the same periods last year is mainly attributable to increased unit sales of project-based board products for IP video applications. We expect our revenues from board products to be relatively flat or decrease in future periods due to our decision to focus on the chipset products in the IP video application market and advanced DVD/media player market. The increase in net revenues from MPEG-based chipsets for the three months ended July 31, 2004 compared to the same quarter last year is largely due to the sales of our new WMV9 chipset products to the IP video application market and advanced DVD player manufacturers. The decrease in net revenues from MPEG-based chipsets for the six months ended July 31, 2004 compared to the same period of last year is largely due to decreased unit sales, and the lower average selling prices of our chipset products to advanced DVD/media player manufacturers. We expect that net revenues from chipset products will continue to fluctuate, primarily due to the changes in demand from our customers in the advanced DVD/media player market which remains in an emerging phase. The "Other" category primarily includes revenue from Netstream consoles for the IP video application market, development kits, set-top box products and accessories, engineering support services for both hardware and software, engineering development for customization of chipsets, and freight fees. The decreases in net revenues from other products for the quarter and six months ended July 31, 2004, compared to the same periods last year are primarily attributable to the reduction in engineering development projects. Development fees totaled approximately $103,000 for the three months and six months ended July 31, 2004, as compared to $502,000 and $546,000 for the same periods last year. We expect that net revenues from other products will continue to fluctuate.

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The following table sets forth our net revenues by market segment (in thousands):

For the three months ended July 31, 2004, revenues from sales of our products to the IP video application market increased 5% to $4,450,000, from $4,250,000 for the same quarter of last year. Revenues from sales of our products to the advanced DVD/media player market increased 32% to $2,991,000, from $2,262,000 for the same quarter of last year. Revenues from sales to the PC add-in and other markets decreased 54% to $619,000 from $1,339,000 for the same quarter of last year. For the six months ended July 31, 2004, revenues from sales of our products to the IP video application market increased 40% to $9,208,000, from $6,570,000 for the same period of last year. During that same period, revenues from sales of our products to the advanced DVD/media player market decreased 17% to $5,523,000, from $6,691,000 for the same period last year, and revenues from sales to the PC add-in and other markets decreased 55% to $1,081,000 from $2,425,000 for the same period last year.

The increase in revenues from sales of our products to the IP video application market in the second quarter and first half of fiscal 2005 as compared to the same periods of fiscal 2004 is mainly attributable to higher unit sales due to the increase in internet protocol television (IPTV) and digital media adapter (DMA) deployment. We expect our revenues from the IP video application market to fluctuate in future periods due to the uneven pace of IPTV service deployments.

The increase in revenues from sales of our products to the advanced DVD/media player market in the second quarter of fiscal 2005 as compared to the same quarter of fiscal 2004 is attributable to increased unit sales of our MPEG and WMV9 chipsets to advanced DVD player manufacturers, offset by the lower selling price of these products. The decrease in revenues from sales of our products to the advanced DVD/media player market in the first half of fiscal 2005 as compared to the same period of fiscal 2004 is attributable to decreased unit sales, as well as the lower selling price, of our MPEG chipsets to advanced DVD player manufacturers. We expect revenues from sales of our products to the advanced DVD/media player market will continue to fluctuate, primarily due to changes in demand from our customers. We began the shipment of HDTV applications during the second quarter of fiscal 2004, and expect revenues in the HDTV product market to increase slowly over the near term. The category "PC add-in and other markets" in the above table consists of PC add-in board and chipset products, engineering support services for both hardware and software, engineering development for customization of chipsets, and freight fees. The decreases in revenues from sales of our products to the PC add-in and other markets in the second quarter and first half of fiscal 2005 as compared to the same periods of fiscal 2004 is due the continuing decline in the demand for PC add-in products, which represents a small portion of our business at this point in time, and our decision to focus on the consumer appliance markets instead of the products in the PC add-in market and decreased engineering development fees. We expect our revenues from the PC add-in and other markets to continue to be small in future periods.

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The following table sets forth our net revenues by geographic region (in thousands):

Revenues from North America represented 13% of net revenues for the quarter and 14% for the six months ended July 31, 2004, respectively, as compared with 16% and 14% in the comparable periods of the prior year. Our international sales represented 87% of net revenues for the quarter and 86% for the six months ended July 31, 2004, respectively, as compared with 84% and 86% in the comparable periods of the prior year.

North America revenues decreased 15% to $1,061,000 for the three months ended July 31, 2004 compared to $1,242,000 for the three months ended July 31, 2003, and increased 1% to $2,211,000 for the six months ended July 31, 2004 compared to $2,179,000 for the six months ended July 31, 2003. The decrease for the three months ended July 31, 2004 is largely due to decreased unit sales of our board products into the PC add-in market. The increase for the six months ended July 31, 2004 is largely due to increased unit sales of board and chipset products in the IP video application market.

Total revenues from Asia for the three months ended July 31, 2004 decreased 2% to $4,835,000 from $4,951,000 for the three months ended July 31, 2003, and increased 2% to $10,233,000 for the six months ended July 31, 2004 compared to $10,027,000 for the six months ended July 31, 2003. The decrease from revenues from Asia for the quarter ended July 31, 2004 is largely due to the decreased sales of our chipset products to the advanced DVD/media player market. The increase from revenues from Asia for six months ended July 31, 2004 is largely due to the increased sales of our chipset products to the IP video application market. Revenues from Europe increased 31% to $2,189,000 from $1,670,000 for the three months ended July 31, 2004, and decreased 2% to $3,425,000 for the six months ended July 31, 2004 compared to $3,492,000 for the six months ended July 31, 2003. The increase in revenues from Europe for the quarter ended July 31, 2004 is primarily attributable to the increased sales of our chipset products in the advanced DVD/media player market. The decrease in revenues from Europe for the six months ended July 31, 2004 is primarily attributable to the decreased sales of our chipset products in the IP video application market.

Our Asia revenues in the second quarter and first half of fiscal 2005 were derived predominantly from customers in Korea, Taiwan, and China. Revenues generated from Korea, Taiwan, China and Hong Kong for the quarter ended July 31, 2004 accounted for 21%, 16%, 11% and 5% of our total net revenues, as compared to 14%, 17%, 14%, and 13% for the quarter ended July 31, 2003, respectively. Revenues generated from Korea, Taiwan and China for the six months ended July 31, 2004 accounted for 14%, 18%, and 18% of our total net revenues, as compared to 12%, 18% and 12% for the six months ended July 31, 2003, respectively. Our Europe revenues in the second quarter and first half of fiscal 2005 were derived predominantly from customers in Denmark. Revenues generated from Denmark for the quarter ended July 31, 2004 accounted for 22% of our total net revenues, as compared to 3% for the quarter ended July 31, 2003. Revenues generated from Denmark for the six months ended July 31, 2004 accounted for 17% of our total net revenues as compared to 10% for the six months ended July 31, 2003.

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LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2004, our principal sources of liquidity consisted of cash and cash equivalents of $17.9 million, a decrease of $1.1 million compared with $19.0 million at January 31, 2004. This decrease resulted from capital equipment expenditures of $0.3 million, an equity investment of $1.0 million in a local wireless technology company, and another $1.0 million equity investment in an OEM customer headquartered in Europe in addition to the initial $1.0 million invested during the third quarter of fiscal 2004, which was offset by $0.7 million generated from operating activities and $0.5 million from the exercise of stock options by employees.

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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 six months ended July 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," and in December 2003 issued a revised interpretation of FIN 46 ("FIN 46-R"). FIN 46 requires certain variable interest entities ("VIEs") to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. We have not invested in any entities it believes are variable interest entities for which it is the primary beneficiary. The adoption of FIN 46-R had no impact on our financial position, results of operations or cash flows.

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CERTAIN FACTORS AFFECTING BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION

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

The majority of our current revenues come from the sale of chipsets into emerging consumer applications, including IP video set-top boxes, advanced DVD/media 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 market 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. In addition, even if these consumer market segments expand, manufacturers of products in these segments may not choose to utilize our products in their products. Moreover, market acceptance of the products of manufacturers that do utilize our products may not occur as expected. In any such case, our business would likely be harmed.

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• new product introductions by us and our competitors;

• changes in our pricing models and product sales mix;

• market acceptance of the technology embodied in our products generally and our products in particular;

• the level of acceptance of our products by our OEM customers, and acceptance of our OEM customers' products by their end user customers;

• shifts in demand for the technology embodied in our products generally and our products in particular and those of our competitors;

• gains or losses of significant customers;

• the timing of, and potential unexpected delays in our customer orders and product shipments;

• reduction in average selling prices and gross margins, which could occur either gradually or precipitously;

• inventory obsolescence;

• write-downs of accounts receivable;

• an interrupted or inadequate supply of semiconductor chips or other materials included in our products, for example, our source of supply for silicon wafers was, and may in the future be affected by earthquakes in Taiwan;

• our inability to protect our intellectual property;

• loss of key personnel;

• technical problems in the development, ramp up, and manufacturing of products which could cause shipping delays;

• the effect of terrorist attacks and any related conflicts or similar events worldwide;

• availability of third-party manufacturing capacity for production of certain products;

• the impact of a recurrence of severe acute respiratory syndrome, or SARS, upon our revenues and our supply sources for our products; and

• the impact of potential economic instability in the Asia-Pacific region.

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In the second quarter of fiscal 2005, two customers based in Asia and one customer based in Europe accounted for 55% of our total revenues, as compared with one customer based in Europe which accounted for approximately 11% of total net revenues for the same quarter of fiscal 2004. In the first half of fiscal 2005, two customers based in Asia and one customer based in Europe accounted for 40% of our total revenues, as compared with one customer based in Asia which accounted for approximately 10% of total net revenues for the same period of fiscal 2004. In fiscal 2004, no customer accounted for 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, and among these customers, three U.S. customers represented 15%, 14% and 11% of our total net revenues, respectively. Our dependence on a few major customers will likely continue despite other changes in the composition of our customer base. The reduction, delay or cancellations of orders from major customers or the loss of major customers could materially and adversely affect our business, financial condition and results of operations. In addition, any difficulty in collection from key customers could harm our business.

Our international operations are subject to certain risks.

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. dollar. We do not currently engage in any hedging activities to reduce our exposure to exchange rate risks. 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.

The timing of our customer orders and product shipments can adversely affect our operating results and stock price.

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.

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Our products are subject to increasing price pressures.

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 margin s in a timely manner, we could see declines in our market share or gross margins.

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

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. In the past, we had, on occasion, been in violation of some of the covenants and in all cases, 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 July 31, 2004, we had no borrowings outstanding under any line of credit.

Our industry is highly competitive and we cannot assure you that we will be able to effectively compete. If we fail to compete effectively, our growth could be substantially affected.

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:

• Analog Devices;

• ATI Technologies;

• Broadcom;

• Cirrus Logic;

• Equator Technologies;

• ESS Technology;

• LSI Logic/C-Cube;

• Mediatek;

• Phillips;

• STMicroelectronics;

• Texas Instruments;

• Zoran Corporation.

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• Compatibility with emerging standards and multiple platforms;

• Improvements to our silicon architecture.

We cannot assure you that we will be able to make these advancements to our REALmagic technology. Even 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.

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

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:

• 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.

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

Loss of key personnel could cause our business to suffer.

Our future success depends in large part on the continued service of our key technical, marketing, sales and management personnel. Given the complexity of REALmagic technology, we are dependent on our ability to retain and motivate highly skilled engineers involved in the ongoing hardware and software development of REALmagic products. These engineers are required to refine the existing hardware system and application programming interface and to introduce enhancements in future applications. 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.

We face risks related to intellectual property rights.

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

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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:

• our announcement of the introduction of new products;

• our competitors' announcements of the introduction of new products; and

• market conditions in the technology, entertainment and emerging growth company sectors.

The stock market has experienced, and is currently experiencing, volatility that particularly affects the market prices of equity securities of many high technology 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.

OFF-BALANCE SHEET ARRANGEMENTS

As of July 31, 2004, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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 impact our operations and financial condition. We do not use derivative financial instruments for speculative purposes.

Interest Rate Sensitivity. At July 31, 2004, we did not hold any short-term investments generally consisting of the U.S. government and corporate debt securities with an average original maturity of less than one year.

At July 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 July 31, 2004, the fair value of these foreign currency amounts would decline by an immaterial amount.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

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 Quarterly Report on Form 10-Q. 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 the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we could face an increasing number of patent and other intellectual property claims as the number of products and competitors in Sigma's industry grows. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on the company's financial position or results of operations. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

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