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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from  to

Commission file number 333-83665

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SAGE, INC.(Exact name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

77-0501710(I.R.S. Employer
Identification No.)1601 McCarthy Boulevard, Milpitas, CA(Address of Principal Executive Offices)

95035(Zip Code)


(408) 383-5300(Registrant's Telephone Number, Including Area Code)

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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

As
of August 10, 2001, there were 14,047,301 shares of the Registrant's common stock, $0.01 par value per share, outstanding.

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SAGE, INC.    INDEX

PagePART I. FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2001 and March 31, 2001

3Condensed Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000

4Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2001 and 2000

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

8Item 3.

Quantitative and Qualitative Disclosures About Market Risks

15PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

27Item 2.

Changes in Securities and Use of Proceeds

27Item 6.

Exhibits and Reports on Form 8-K

27


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PART I

Item 1. Financial Statements

SAGE, INC.    CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands)  (Unaudited)

June 30,
2001

March 31,
2001ASSETSCurrent assets:Cash and cash equivalents

$
23,469

$
22,344Short-term marketable securities


15,483


19,040Accounts receivable, net


5,656


6,479Inventories, net


6,783


6,861Prepaid expenses and other assets


1,698


1,220Total current assets


53,089


55,944Property & equipment, net


4,663


4,440Lease deposits


2,047


1,906Goodwill and other intangible assets, net


9,637


10,280Total assets

$
69,436

$
72,570LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
2,123

$
3,312Accrued expenses and other liabilities


3,428


3,299Total current liabilities


5,551


6,611Stockholders' equity:Common stock, $0.01 par value; 50,000,000 shares authorized; 13,985,000 and 13,925,000 issued and outstanding


140


139Additional paid-in capital


200,915


200,844Notes receivable from stockholders


(58
)

(558
)Deferred compensation related to stock options and restricted stock


(80
)

(115
)Accumulated deficit


(137,032
)

(134,351
)Total stockholders' equity


63,885


65,959Total liabilities & stockholders' equity

$
69,436

$
72,570


The
accompanying notes are an integral part of these condensed consolidated financial statements.

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SAGE, INC    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share data)  (Unaudited)

Three months endedJune 30, 2001

June 30, 2000Revenue

$
8,094

$
6,476Cost of revenue


4,461


3,358Gross profit


3,633


3,118Operating expenses:Research and development


2,585


1,439Charge for in-process technology





7,200Selling, general and administration


3,513


2,636Amortization and write-off of intangibles


643


1,501Stock compensation


35


88Total operating expenses


6,776


12,864Loss from operations


(3,143
)

(9,746
)Interest and other income, net


462


653Net loss

$
(2,681
)
$
(9,093
)Number of weighted average outstanding common shares


13,901


10,997Basic and diluted net (loss) earnings per share

$
(0.19
)
$
(0.83
)


The
accompanying notes are an integral part of these condensed consolidated financial statements.

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SAGE, INC.    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)  (Unaudited)

Three Months Ended June 30,2001

2000Cash flows from operating activities:Net loss

$
(2,681
)
$
(9,093
)Adjustments to reconcile net loss to net cash used in operating activities:Charge for in-process technology





7,200Depreciation


418


177Amortization


643


1,564Stock compensation


35


88Changes in assets and liabilities:Accounts receivable


823


(1,072
)Inventories


78


817Prepaid expenses and other assets


(478
)

96Accounts payable


(1,189
)

1,526Accrued expenses and other liabilities


129


(1,590
)Net cash used in operating activities


(2,222
)

(287
)Cash flows from investing activities:Sale of marketable securities, net


3,557


Acquisition of property and equipment


(641
)

(259
)Acquisition of other non-current assets


(141
)

(1,162
)Net cash acquired with Faroudja





18,667Net cash provided by investing activities


2,775


17,246Cash flow from financing activities:Repayment of shareholder's note


500


17Proceeds from issuance of common stock upon exercise of stock options


72


38Net cash provided by financing activities


572


55Net increase in cash and cash equivalents


1,125


17,014Cash and cash equivalents at beginning of period


22,344


38,936Cash and cash equivalents at end of period

$
23,469

$
55,950Non-cash investing and financing activities:Issuance of common stock in connection with acquisition of Faroudja

$


$
144,883Current assets, excluding cash, acquired in connection with acquisition of Faroudja

$


$
3,519Current liabilities acquired in conection with acquisition of Faroudja

$


$
3,245


The
accompanying notes are an integral part of these condensed consolidated financial statements.

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SAGE, INC.    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

Organization and business

Sage, Inc. (Sage), a Delaware corporation, and its wholly owned subsidiaries, Sage Design Systems (India) Pvt., Ltd., and Faroudja, Inc.
(Faroudja) (and its wholly owned subsidiary Faroudja Laboratories, Inc), provide digital display and video processors, enabling superior picture quality for a variety of consumer technology and
PC-display products ranging from web appliances to TVs and flat panel monitors. Leveraging Faroudja technology from its acquisition of Faroudja in June 2000, Sage is developing
products that bring the home theater experience to the mass consumer and PC-display market through digitally enhanced television, projection displays, DVD players and internet appliances.
Sage believes that its systems-on-a-chip technology provides highly integrated mixed-signal and system functionality with higher picture quality than lower-quality
processors at a similar component cost.

Basis of presentation

The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with our financial statements and notes thereto for the
three years ended March 31, 2001 that are included in our Form 10-K Statement filed with the Securities and Exchange Commission. We believe that the accompanying financial
statements reflect all adjustments, consisting solely of normal and recurring adjustments, that are necessary for fair presentation of the results of the interim periods presented. The results of
operations presented for the period ended June 30, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Earnings per share

Basic earnings per share are computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during that
period. Diluted earnings per share have not been calculated for all periods since the result would be anti-dilutive.

Merger with Faroudja

On February 18, 2000 Sage and Faroudja agreed to merge in a transaction to be accounted for as a purchase. On June 7, 2000, shareholders of Sage
and Faroudja approved the Merger Agreement between the companies, under which shareholders of Faroudja received 0.285 shares of Sage Common Stock for every share held.

The
table below reflects the unaudited pro-forma combined results of Sage and Faroudja, as if the merger had taken place at the beginning of the three months ended
June 30, 2000. The pro-forma information contains certain adjustments including non-cash charges for amortization of intangibles amounting to $0.6 million and
$6.2 million for the three months ended June 30, 2001 and 2000, respectively, and excluding the charge of $7.2 million of in-process technology in the June 2000
quarter. The pro-forma information does not necessarily reflect the actual results that would have occurred had

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the merger taken place at the beginning of the three-month period ended June 30, 2000, nor is it necessarily indicative of future results of operations of the combined companies.

The
unaudited pro-forma combined results are as follows:

Three months ended June 30,2001

2000(In thousands, except per share data)Net sales

$
8,094

$
8,143Net loss


(2,681
)

(10,019
)Net loss per share:Basic and diluted

$
(0.19
)
$
(0.74
)Weighted average common shares outstandingBasic and diluted


13,901


13,586


Inventories

Inventories consisted of the following:

June 30, 2001

March 31, 2001(In thousands)Finished goods

$
6,428

$
6,301Work-in-process


1,404


1,569Raw materials


1,361


1,400Subtotal


9,193


9,270Inventory reserve


(2,410
)

(2,409
)Total

$
6,783

$
6,861


Segment Information

Sage manages its operations in two segments, integrated circuits (IC) and systems (home theater boxes and printed circuit boards). Sage does not report
operating expenses, depreciation and

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amortization, interest expense, capital expenditures or identifiable net assets by segment. All segment revenues are generated from external customers. Segment information is as follows:

Three Months Ended June 30,2001

2000(In thousands)Revenues:ICs

$
5,029

$
3,703Systems


3,065


2,773Total revenue

$
8,094

$
6,476Cost of revenues:ICs

$
2,956

$
1,724Systems


1,505


1,634Total cost of revenue

$
4,461

$
3,358Gross profit:ICs

$
2,073

$
1,979Systems


1,560


1,139Total gross profit

$
3,633

$
3,118


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities
Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements are subject to the safe harbors created
thereby. The forward-looking statements are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding our
business, which involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. Any of the assumptions could prove inaccurate and, therefore, there can be
no assurance that the results contemplated in forward-looking statements will be realized. In addition, our business and operations are subject to substantial risks and uncertainties that could cause
actual results to differ materially from those reflected in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

Overview

Sage designs, develops and markets high performance digital display processors used for digital displays and video processing. Flat panel displays and other
emerging digital display devices have substantial advantages over their traditional analog counterparts, and markets for these products are beginning to grow rapidly. Display signals are characterized
by several important attributes: resolution, frame refresh rate, scanning format and color depth. Combinations of these characteristics are called modes, and there are over 100 different modes used
today to display images on PCs and televisions. These modes must be recognized and processed to produce a high quality image on a display. Display manufacturers seek display processing solutions that
can function effectively with the large number of existing and emerging signal modes, ensure the compatibility of new displays with the large installed base of PCs and provide consumers with plug and
play capability. Increasingly the display industry is

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showing convergence as displays are developed supporting multiple types of signal, and the need for separate PC monitors and televisions becomes unnecessary.

We
offer state-of-the-art digital display processors that provide highly integrated signal interfaces, signal reformatting and color processing
capabilities. Our solutions are compatible with a variety of commercially available display signal modes and display types and are designed with a common architecture, configurable software and
modular components that can be easily and rapidly incorporated into digital display devices. We sell our processing solutions to leading display manufacturers, including Compal, Fujitsu, NEC, Philips,
Sanyo, Samsung, Sony and Toshiba

Since
our inception, we have focused primarily on the design and sale of high performance display processor ICs and will continue to do so as this is a high-growth volume
market serving major mass-market manufacturers of displays and televisions. However, we also have a legacy systems business supplying system solutions to other market channels, including
board level solutions to industrial customers and video processing boxes to the home theater market. As of the quarter ended June 2001, such system sales represented 38% of our total revenue.
We expect our IC business will grow rapidly, while our system business remains static or even declines over time resulting in ICs accounting for a growing majority of total revenue over the next few
years. Even though system activities are not our primary focus, we intend to continue offering products into the home theater markets for the foreseeable future. Our home theater box products, sold
under the Faroudja brand name, provide a powerful high-quality marketing umbrella which serves to shelter and promote a quality image for all
our video processing products, including video processing ICs that may be developed and offered to the mass market.

We
recognize revenue at the time we ship products to our customers who generally have a short lead-time and maintain relatively limited inventory. In the case of system
products sold through distributors who have limited return rights, we do not recognize revenue until we have received evidence that they have sold the inventory to their end customers.

Since
November 1996, we have introduced a succession of new display processor ICs, starting with the Cheetah family and now featuring the Jaguar family. Our IC product
development road map is driven by (i) introduction of latest generation manufacturing processes, reducing the die size of our earliest ICs from .6 micron in stages to .18 micron in the case of
our latest IC, thereby reducing cost and improving performance; (ii) integration of increased levels of features such as integrated analog to digital conversion and digital receiver so as to
lower total system cost to our customer while increasing our average selling price; (iii) addition of incremental features such as AutoSet which simplifies end user calibration, Active Color
Management which allows a manufacturer to ensure consistent color appearance on panels sourced from different vendors and Picture in Picture (PiP) Auto detect to locate and optimize the color and
brightness of video window and background screen, and (iv) customization of our various technology and IP cores to produce a wider range of ICs with optimized price and performance levels for
different market segments. Whereas at the beginning of fiscal year 1999 we offered only one IC, the Cheetah 2, we now offer a series of fourteen different ICs, targeted at analog, digital, or dual
interface monitors, low or high resolution screens, and monitors (PC) or consumer products (televisions, DVDs and projectors).

Initially,
we purchased packaged, assembled and tested semiconductor products for our discrete digital display processors. However, with the launch of our new range of mixed signal
ICs, we have assumed greater responsibility over this process by separately subcontracting for the production of wafers, the assembly of the completed semiconductor, and their testing. While this
transition to a new manufacturing model exposes us to greater responsibilities for semiconductor yields and the coordination of the assembly and testing process, we believe that our gross margins
should improve and that the transition should result in our having greater control over the manufacturing process.

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In November 1999, we completed an initial public offering of 3,450,000 shares of Common Stock at an initial offering price of $12.00 per share, raising $37.2 million,
net of underwriting commission and related expenses.

On
June 7, 2000 Sage and Faroudja completed a merger in a transaction that was accounted for as a purchase. Faroudja is a developer and provider of home theater systems that
incorporate their proprietary decoding, de-interlacing and video enhancement technologies. The total purchase price of
$154.7 million included the issuance of Sage Common Stock valued at $133.9 million, the assumption of Faroudja stock options and warrants valued at $16.8 million, and direct
transaction costs of approximately $4.0 million. Shareholders of Faroudja received 0.285 shares of Sage Common Stock for every share held.

During
the fourth quarter ended March 31, 2001, management performed an impairment assessment of the identifiable intangible assets, including goodwill, recorded upon the
acquisition for stock of Faroudja. The assessment was performed primarily due to two reasons. First, due to changed business conditions, including negative outlooks for rates of growth, Sage now
expects significantly lower revenues and lower profitability from the acquired operations. Second, there has been a significant decline in Sage's stock price since measurement date of the acquisition
and the recorded balance of goodwill and other intangible assets significantly exceeded Sage's market capitalization prior to the impairment charge.

As
a result of this review, management recorded a $91.5 million impairment charge to reduce goodwill for the year ended March 31, 2001. The charge was determined based
upon estimated discounted cash flows using a discount rate of 15 percent. The assumptions supporting cash flows, including the discount rate, were determined using management's best estimates.

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Results of Operations

The following tables set forth, for the periods indicated, certain condensed consolidated statement of operations data reflected as a percentage of revenues.

Three Months EndedJune 30, 2001

June 30, 2000RevenuesICs

62.1%

57.2%Systems

37.9%

42.8%Total revenue

100.0%

100.0%Cost of revenuesICs

37.8%

26.6%Systems

17.3%

25.3%Total cost of revenue

55.1%

51.9%Gross profit margin

44.9%

48.1%Operating expenses:Research and development

31.9%

22.2%Charge for in-process technology

0.0%

111.2%Selling, general and administration

41.7%

40.7%Amortization and impairment of intangibles

8.0%

23.2%Stock compensation expense

0.4%

1.4%Total operating expenses

82.0%

198.6%Loss from operations

(37.1%
)
(150.5%
)Interest income (expense), net

5.7%

10.1%Net loss

(31.4%
)
(140.4%
)


Results of Operations for the Three Months Ended June 30, 2001 and 2000

Revenue.Revenue increased 25% to $8.1 million in the quarter ended June 30, 2001 from
$6.5 million in the quarter ended June 30, 2000. The increase in net revenue is due partly to increases in design wins as well as the introduction of new products. In addition, the
increase also reflects incremental revenues of $2.1 from our acquisition of Faroudja. In the quarter ended June 30, 2001 sales increased sequentially by 21% from the preceding quarter
reflecting a resumption in orders of our discrete processor chips serving the Japanese market; the launch and initial shipments of new product offerings into the integrated digital interface market
and the integrated analog interface market; and a more than doubling in the number integrated circuit chips shipped into our emerging consumer market. Revenues from one customer, NEC, accounted for
10% of total revenue.

IC
revenue increased 35% to $5.0 million in the quarter ended June 30, 2001 from $3.7 million in the quarter ended June 30, 2000. The increase in IC
revenue is due to a 46% increase in units sold to new and existing customers offset by lower average selling prices (ASP). The decline in the ASP reflects an increasing proportion of mature discrete
products such as the Cheetah 4 and the Jaguar D IC. Sales of ICs to consumer markets accounted for $1.2 million of IC revenue. Revenues from five customers, NEC, Compal, Hynix, Fujitsu and
Scribe accounted for 16%, 14%, 14%, 12% and 10%, respectively, of total IC revenues.

System
revenues increased 10% to $3.1 million in the quarter ended June 30, 2001 from $2.8 million in the quarter ended June 30, 2000. System revenues
include revenues from box and board level products. The nominal increase in system revenues represent the net of significant decreases in

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board level sales of about $1.1 million offset by $1.4 million incremental revenue generated from the box level products acquired with the Faroudja acquisition.

Sage's
future profitability and rate of growth, if any, will be directly affected by increased price competition, a maturing IC market and increasingly higher revenue base from which
to grow. Our growth rate and revenue depend significantly on renewals of existing orders as well as expanding our
customer base. If our renewal rate or our pace of new customers slows, our net revenues and operating results would be adversely affected. While DisplaySearch, the industry analyst, reports that the
flat panel market grew from 4.2 million units to 6.6 million units in calendar year 2000, and is projected to grow further to 14.5 million units in calendar year 2001, any
shortfall in this growth would adversely affect our sales potential.

Cost of Revenue.Cost of net revenue increased 33% to $4.5 million in the quarter ended June 30, 2001
from $3.4 million in the quarter ended June 30, 2000, including $0.8 million of incremental cost of revenue from the Faroudja acquisition. The increase in cost of net revenues
from the June quarter 2000 to the June quarter 2001 was primarily due to the increase in sales volume.

Cost
of IC revenue consists of the cost of display processor ICs purchased from independent foundry suppliers. Cost of IC revenues increased 71% to $3.0 million in the quarter
ended June 30, 2001 from $1.7 million in the quarter ended June 30, 2000. The increase in IC cost of revenue from the June quarter 2000 to the June quarter 2001 was primarily due
to a 46% increase in volume of IC shipments. As a percentage of IC revenue, cost of IC revenue was 59% in the quarter ended June 30, 2001 and 49% in the quarter ended June 30, 2000. The
increase in cost of IC revenue from the June quarter 2000 to June quarter 2001 as a percentage of IC revenue is due to the erosion of ASPs for mature discrete IC products, the increase in costs
experienced as a result of higher silicon costs for ASICs purchased or committed during the foundry capacity constraints of late 2000, and product mix.

Cost
of system revenue consists principally of the cost of purchase, assembly and test of system level products from subcontractors. The cost of system revenue decreased 4% to
$1.51 million in the quarter ended June 30, 2001 from $1.57 million in the quarter ended June 30, 2000.

Gross margin.Our overall gross margin decreased 4.2% to 44.9% in the quarter ended June 2001 from 49.1% in the
quarter ended June 2000. The decrease represents decreases in gross margin for ICs as a result of higher silicon cost of certain ICs following increases in foundry prices experienced in the
last half of 2000 as a result of capacity constraints, decreases in prices charged for discrete processors used in two chip solutions which were reduced to compete directly with a competitor offering
an integrated one chip solution, and delays in introducing new integrated mixed-signal ICs which gave rise to a maturing of the product mix. These decreases are offset by increases in gross margin for
system level products due to changes in product mix. System level sales in the June 2001 quarter were principally home theater product sales, which have higher margins then board level
products. System level sales in the June 2000 quarter consisted mainly of lower margin board products since the acquisition of the Faroudja home theater business did not occur until late in the
June 2000 quarter.

Research and development.Our research and development expenses consist primarily of compensation and personnel related
expenses, engineering and design tools, and the costs for purchased materials, designs and tooling which can fluctuate significantly from period to period as a result of our product development
cycles. Our research and development expenses were $2.6 million and $1.4 million for the quarters ended June 30, 2001 and 2000, respectively. Research and development expenses
represented 31.9% and 22.2% of revenues for the quarters ended June 30, 2001 and 2000, respectively. The increase in personnel, engineering and design tools, purchased materials, designs and
tooling is attributable to
the continued development of the new range of Jaguar and FLI IC products and the Native Rate Series of systems products, which were introduced in the second half of fiscal year 2001. Sage anticipates
that research and development expenses will continue to increase

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in absolute dollars, but may fluctuate as a percentage of net revenue and when we commit to product development efforts in connection with our next generation of semiconductors.

We
believe that our ability to maintain our competitiveness and increase market share will depend largely upon our ability to enhance existing products and develop, acquire and
integrate new products. The market for ICs is characterized by rapid technological change, and is highly competitive with respect to timely product introductions. The timing and amount of research and
development expenses may vary significantly based upon the number of new products and significant upgrades under development and products acquired during a given period.

Charge for in-process technology.Sage's in-process technology charges were $0 and
$7.2 million in the quarters ended June 30, 2001 and 2000. The acquired in-process technology from Faroudja was valued at $7.2 million, which was expensed in
June 2000.

Selling, general and administration.Selling, general and administrative expenses include salaries,
in-house commissions, commissions to independent sales distributors and representatives, travel, trade shows, advertising and other promotional expenses. Selling, general and
administration expenses increased 33% to $3.5 million in the quarter ended June 2001 from $2.6 million in quarter ended June 2000. The increase in selling, general and
administration expenses was principally related to the incremental costs of Faroudja arising from the acquisition, the costs associated with the introduction of new products, including the Jaguar and
the FLI family of ICs, and the cost of promoting and developing new customers. As a percentage of revenue, selling, general and administration expenses represented 41.7% and 40.7% of revenues for the
June quarter 2001 and 2000, respectively. We anticipate that selling, general and administrative expenses will continue to increase in absolute dollars, but will decline as a percentage of net
revenue.

Amortization and impairment of intangible assets.Intangible assets consist of goodwill, technology and other
intangible assets acquired in the purchase of Faroudja. Sage amortized $0.6 million and $1.6 million of intangible assets for the quarters ended June 2001 and 2000, respectively.

Stock compensation.Sage expensed stock compensation of approximately $35,000 and $88,000 in the quarters ended
June 2001 and 2000, respectively. Stock compensation expenses relate to options granted below the perceived fair market value prior to Sage's initial public offering and represent the
difference between the deemed fair market value of our common stock on the date of grant and the exercise price of stock options on the date of grant.

Interest and other income and (expense), net.Net interest and other income amounted to $462,000 and $653,000 in the
quarters ended June 2001 and 2000, respectively. This decrease is the result of lower investment balances and decreases in interest rates and dividends earned.

Provision for income taxes.Sage incurred operating losses in fiscal years 2001 and 2000, and therefore made no
provision for income tax in these fiscal years. As of March 31, 2001, Sage had approximately $15 million in net operating losses, which are available to offset future taxable income and
will expire between 2011 and 2021.

Liquidity and Capital Resources

Since inception, we have satisfied our liquidity requirements principally through the issuance and sale of private equity securities, totaling approximately
$17.7 million, and an initial public offering in November 1999, which raised approximately $37.2 million, net of fees and expenses. We also acquired $18.7 million in
incremental cash as a result of our acquisition of Faroudja in June 2000. During the three months ended June 30, 2001, cash increased $1.1 million and our investment in
short-term marketable securities decreased $3.6 million. The net decrease in cash, cash equivalents and marketable

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securities of $2.5 million, was used to acquire property and equipment, fund increases in lease deposits and fund current operations.

As
of June 30, 2001, we had $23.5 million in cash and cash equivalents and $15.5 million in short-term marketable securities. In addition, we had a
$5.0 million credit facility under which no borrowings had been made. We believe that our existing cash resources and credit facility will be sufficient to meet our capital requirements through
the next twelve months. We may need to raise additional equity or debt financing in the future, although we are not currently negotiating for additional financing nor do we have any plans to obtain
additional financing. Our future capital requirements will depend on many factors, including the rate of revenue growth, profitability, timing and extent of spending to support research and
development programs, facilities expansion of about $750,000 in India, expansion of selling and marketing and administrative activities, timing or introductions of new products and product
enhancements and market acceptance of our products. Further, we cannot assure you that additional equity or debt financing, if required, will be available on acceptable terms, or at all. If we are
unable to obtain additional capital, we may be required to reduce the scope of our planned product development, selling and marketing activities, which could harm our business, financial condition and
results of operations. In the event that we do raise additional equity financing, existing investors could be further diluted.

From
time to time, we may evaluate acquisitions of businesses, products or technologies that complement our business. Although we have no current plans in this regard, any
transactions, if consummated, may consume a portion of our working capital or require the issuance of equity securities that may result in further dilution to existing stockholders.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133)
"Accounting for Derivative Instruments and Hedging Activities," which establishes new accounting and reporting standards for derivative instruments and hedging activities. SFAS 133, as amended
by SFAS 137 and 138, requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income, depending on the type of relationship that exists. As amended, SFAS 133 is effective for Sage's fiscal year 2002. We have
determined that due to our limited use of derivative instruments, the adoption of SFAS 133 did not have a material impact on Sage's results of operations or its financial position.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101
provides guidance for revenue recognition under certain circumstances. The adoption of SAB 101 did not have a material impact on Sage's results of operations or its financial position.

In
March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of APB Opinion
No. 25. The Interpretation is intended to clarify certain problems that have arisen in practice since the issuance of APB 25. The adoption of FASB Interpretation No. 44 did not have a
material impact on Sage's results of operations or its financial position.

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Sage did not have any business combination
transactions in the quarter ended June 30, 2001.

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," which in Sage's case is
effective for fiscal years beginning after

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December 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing goodwill and other intangibles. We are currently assessing the impact of SFAS 142 on Sage's financial position and results of
operations.

Item 3. Quantitative and Qualitative Discussion of Market Risks

Investment Risk

Sage's cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our
interest income and the fair market value of our investments. We manage the exposure to financial market risk by performing ongoing evaluations of our investment portfolio and presently invest in
certificates of deposit issued by banks and investment-grade government and corporate debt and equity securities. These securities are highly liquid and generally mature within 12 months from
our purchase date. Due to the short maturities of our investments, the carrying value should approximate the fair value. In addition, we do not use our investments for trading or other speculative
purposes. We have performed an analysis to assess the potential effect of reasonably possible near-term changes in interest rates. The effect of any change in foreign currency exchange
rates is not expected to be material to our results of operations, cash flows or financial condition. Due to the short duration of our investment portfolio, an immediate 10% change in interest rates
would not have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of
such a change.

Foreign Currency Exchange Risk

Sage is an international company, selling products globally and, in particular, in Japan, Taiwan and Korea. Although we transact our business in U.S. dollars,
we cannot assure you that future fluctuations in the value of the U.S. dollar would not affect the competitiveness of our products, gross profits realized, and results of operations. Further, we incur
expenses in India, Japan, Taiwan and other countries that are denominated in currencies other than U.S. dollars. We cannot estimate the effect that an immediate 10% change in foreign currency exchange
rates would have on our future operating results or cash flows as a direct result of changes in exchange rates. However, we do not believe that we currently have any significant direct foreign
currency exchange rate risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments.

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BUSINESS RISKS

This Quarterly Report on Form 10-Q contains numerous statements of a forward-looking nature relating to potential
future events or to our future financial performance. Our actual results may differ significantly from those forward-looking statements.

You should carefully consider the risk factors described below, and all other information contained in this report, before making an investment decision
regarding our common stock. The risks and uncertainties described below are not the only ones we face. If any of the events or circumstances described below arise, our business, financial condition or
results of operations could be seriously harmed, the value of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known
to us, or that may be currently considered by us to be immaterial, may also impair our business operations.

A significant amount of Sage's revenues arise from a few customers and any decrease in revenues from these few customers could significantly impact our total
revenues.

Sage
is dependent on a limited number of large customers. We will, for the foreseeable future, also be dependent on a limited number of large customers for a substantial portion of
our revenues. As a result of customer concentration any one of the following factors could significantly impact our total revenues:



The
manufacturing market for digital televisions, high definition televisions, liquid crystal display monitors and plasma displays is highly concentrated among relatively few large
manufacturers. We expect that our operating results will continue to depend on revenues from a relatively small number of manufacturers and their suppliers.

The reliance by Sage on a limited number of large customers reduces our ability to negotiate favorable pricing terms with our
customers.

The
markets for digital display and video image enhancement products are highly concentrated among relatively few large manufacturers of certain types of personal computers,
televisions, home theaters and consumer electronics. These manufacturers have significantly greater financial and other resources than us; therefore we may be unable to negotiate favorable pricing
terms with them. Any inability to negotiate favorable pricing terms with customers could impact our ability to generate positive earnings.

Any delay in introducing new products or enhancements to existing products could reduce customer acceptance of Sage's products and could decrease our market
share or revenues.

Our
display-manufacturing customers have regular design cycles for their next display models. Our future success will depend to a substantial degree upon our ability to develop and
introduce new products and enhancements to our existing products, and to do so on a schedule that makes our products and enhancements available at the time our customers are making purchasing
decisions.

Likewise,
we are developing consumer video products that are designed to conform to certain current video processing industry standards. However, there can be no assurance that
manufacturers will continue to follow these standards or that more desirable standards will not emerge. The acceptance of our products also depends in part upon content providers developing and
marketing content for end-user systems, such as video and audio playback systems, in a format compatible with

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our products. There can be no assurance that these or other factors beyond our control will not adversely affect the development of markets for our products.

Our
products and product enhancements must incorporate technological changes and innovations to meet evolving customer and industry standards. Our future success will depend, to a
substantial degree, upon our ability to develop and introduce new products and enhancements to our existing products that meet evolving customer and industry standards, and to do so on a schedule that
makes the products and enhancements available at the time our customers are making purchasing decisions.

Because display and video processors are complex, they may have errors or defects that are found only after the processors have been incorporated into Sage's
customers' products, which could result in warranty claims and a reduction in revenues.

Our
display processors are complex products and are designed to be incorporated into digital and high definition display devices which are themselves complex. Although the products
are, and will continue to be, thoroughly tested, design and manufacturing defects may not be discovered during the manufacturing and testing process and may only be discovered when the finished
products are connected to a signal source. Consequently, customers may discover errors or defects in hardware or software after large quantities of products have been fully incorporated into
customers' digital and video display devices. To date, however, our customers have not, to our knowledge, discovered any significant errors or defects in their products. If our customers were to
discover errors or defects that may be identified after a device is connected to a signal source, the customer might hold us responsible for:



In
addition, in the event of a significant number of product returns due to a defect or recall of our products, revenues, gross margin and our name brands could be significantly
harmed.

There are risks associated with the failure to identify new markets and applications.

The
markets in which we compete or seek to compete are subject to rapid technological change, frequent new product introductions, changing customer requirements for new products and
features,
and evolving industry standards. The introduction of new technologies and the emergence of new industry standards could render our products less desirable or obsolete. If we fail to produce
technologically competitive products in a cost-effective manner and on a timely basis or are unable to comply with industry standards in the future, our business and results of operations
could be harmed.

Substantial
portions of our revenues have been derived from sales of products that address the home theater and commercial presentation markets. Certain of our current Faroudja
branded products and future product plans address markets that are not now and may never become substantial commercial markets. Our future growth will depend, in large part, on our ability to identify
new markets for our products and to apply our products and technology to evolving markets and applications. There can be no assurance that these markets will become substantial commercial markets or
that our products will achieve market acceptance in those markets. There can be no assurance that new display technologies will be successful or that the television and personal computer markets will

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converge, that these new markets will present substantial commercial opportunities, or that our products will adequately address these markets in a timely manner.

Although
we expect to continue to make significant investments in research and development to enhance our current products and to develop products incorporating new and existing
technologies, we cannot offer any assurance that new products or product enhancements will be successfully developed. If developed, we cannot offer any assurance that any new products or product
enhancements will be developed in time to capture market opportunities or achieve a significant or sustainable level of acceptance in new and existing markets.

Sage will be exposed to distribution risks and issues surrounding the diversification of sales channels.

We
sell our products domestically and internationally through distributors, third party sales representatives and dealers and our success depends on the continued efforts of this
network. The loss of, or reduction in sales to, any of our key customers, could have a material adverse affect on our operating results. The short life cycles of our products, and the difficulty in
predicting future sales, increase the risk that new product introductions, price reductions by us or our competitors or other factors affecting the flat panel display and video imaging industry could
result in significant product returns. In addition, there can be no assurance that new product introductions by competitors or other market factors will not require us to reduce prices in a manner or
at a time which has a material adverse impact upon our business, financial condition and operating results.

An
integral element of our strategy is to enhance and diversify our distribution channels. Our ability to achieve revenue growth in the future will depend in large part on our success
in recruiting and training sufficient sales personnel, third party sales representatives, distributors and dealers, of which, a certain
number currently distribute, or may in the future distribute, the product lines of our competitors. There can be no assurance that we will be able to attract, train and retain a sufficient number of
distributors, third party sales representatives or direct sales personnel, or that they will continue to recommend, or devote sufficient resources to market and provide customer support for our
products. All of these factors could have a material adverse effect on our business, financial condition and operating results.

Intense competition may reduce the demand or prices for Sage's products, decreasing our gross margin.

The
markets in which we compete are intensely competitive. Rapid technological change, evolving industry standards, and declining average selling prices in these markets could have a
material adverse effect on our business, financial condition and results of operations. As the overall price of personal computers, televisions and other products that use our technology continues to
fall, we may be required to offer solutions to manufacturers at discounted prices due to increased price competition. At the same time, new, alternative display and video processing technologies and
industry standards may emerge that directly compete with technologies that we offer. We may be required to increase our investment in research and development at the same time that product prices are
falling. In addition, even after making this investment, we cannot be sure that our technologies will be superior to those of our competitors or that our products will achieve market acceptance,
whether for performance or price reasons. Failure to effectively respond to these trends could reduce the demand for our products.

We
compete with a range of diversified companies that offer display and video processors, some of which have substantially greater resources than we do. In particular, we compete
against Communications Specialties Inc., Leitch Incorporated, Panasonic Broadcast and Television Systems Company, DVDO, Inc., nDSP, TeraNex, Miranda Technology, Inc., RGB
Spectrum, Cinema Pro Corporation dba Runco International, Genesis Microchip, Inc., Pixelworks, Inc., Silicon Image, Inc., DWIN Electronics, Inc., Extron Electronics, NEC
Technologies, Inc. USA, Snell & Wilcox, Inc., Sony

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Corporation and Yamashita Engineering Manufacturing, Inc. We also compete in some instances against in-house processing solutions designed by large original equipment manufacturers.
In the future, our current or potential customers may also develop their own proprietary display and video processors and become our competitors. In addition, start-up companies that are
seeking to capitalize on business opportunities as a result of the shift from analog to digital technology may seek to compete in our markets. Our competitors may develop advanced technologies
enabling them to offer more cost-effective and higher quality solutions to our customers than those offered by us. Increased competition could harm our business, financial condition and
results of operations by, for example, increasing pressure on our profit margin or causing us to lose sales opportunities.

Concerns about an economic slowdown may influence Sage's customers to reduce production and inventory of display products in anticipation of a slowdown or
further slowdown of their business.

Unforeseen
reduction or expectations of a reduction in demand by our customers could reduce orders and shipments, which could result in us carrying increased inventory. Since order
cycles are brief and the backlog small, we are required to carry a certain level of inventory to service our customers. If our inventory builds up as a result of order postponement, or cutbacks of
sales forecasts by our customers, we could end up with excess inventory that is either unusable, or that has to be sold at clearance prices which will harm our gross margins.

Fluctuations in the operating results make it difficult to predict Sage's future performance and may result in volatility in the market price of our Common
Stock.

Our
quarterly operating results have fluctuated significantly in the past and we expect our results to fluctuate significantly in the future based on a number of factors. Some of
these factors arise from decisions we have made with respect to the timing and magnitude of expenditures and our ability to control our revenues. Our operating expenses, which include research and
development expenses and selling, general and administration expenses, are relatively fixed over the short-term. If our revenues are lower than we expect because we sell fewer display
processors or video image enhancement products, because we delay the release or the announcement of new products or because of other reasons, we may not be able to quickly reduce our spending in
response. In addition, our revenues could fall short of our expectations if we experience delays or cancellations of even a small number of orders.

Certain
other factors have, in the past, caused, and may in the future cause, fluctuations in our quarterly operating results. These factors are industry risks over which we have no
control, including:



There
are additional factors that could, but which have not, affected our operating results including:



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Any
one or more of these factors are difficult to forecast and could result in fluctuations in our future operating results. Any shortfall in our revenues would have a direct impact
on the combined business. In addition, fluctuations in our quarterly results could adversely affect the market price of our common stock in a manner unrelated to our long-term operating
performance. Because our operating results are volatile and difficult to predict, you should not rely on the results of one quarter as an indication of our future performance. It is likely that in
some future quarter our operating results will fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may decline significantly.
Furthermore, the average daily volumes of our Common Stock traded are frequently light and even events like the release of press information by Sage or a competitor can give rise to a significant
change in relative demand and the consequent price of our Common Stock.

Sage relies on independent foundries and manufacturing.

We currently rely on independent foundries to manufacture, assemble, package and test most of our semiconductor products. These independent foundries fabricate
products for other companies and may also manufacture products of their own design. We purchase products from all of our foundries pursuant to individually negotiated purchase orders. We do not have
long-term supply contracts with any of these foundries, and, therefore, none of them will be obligated to supply products for any specific period, in any specific quantity or at any
specified price, except as may be provided in a particular purchase order. Our reliance on independent foundries involves a number of risks, including the inability to obtain adequate capacity,
unavailability of or interruption of access to certain process technologies, reduced control over delivery schedules, quality assurance, manufacturing yields and cost, and potential misappropriation
of our intellectual property. Our ability to obtain the foundry capacity necessary to meet the demand for our products is based in part on our ability to accurately forecast demand. If we fail to
accurately forecast our future demand, we may be unable to obtain adequate supplies of integrated circuits on a timely basis. There can be no assurance that we will be able to accurately forecast the
demand for our products or obtain sufficient foundry capacity in the future.

While
we have not experienced any material disruptions in supply to date, there can be no assurance that manufacturing problems will not occur in the future. In the event that any of
our foundries are unable or unwilling to produce sufficient supplies of our products in required volumes at acceptable costs, we will be required to reallocate production among our other existing
foundries or identify and qualify acceptable alternatives. This qualification process could take six months or longer, and no assurance can be given that any additional source would become available
or that we would be in a position to satisfy our production requirements on a timely basis. The loss of any of our foundries, our inability to obtain additional production in a period of increased
demand, or our inability to obtain timely and adequate deliveries from our suppliers could reduce or delay shipments of our products. Any of these developments could damage relationships with our
current and prospective customers and could have a material adverse effect on our business, financial condition and operating results.

Our
reliance on third-party manufacturers limits our control over delivery schedules, quality assurance and product cost. Disruptions in the provision of services by our assemblers or
other circumstances that would require us to seek alternative sources of assembly could lead to supply

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constraints or delays in the delivery of our products. Further, the need for high quality assurance may increase costs paid by us to third parties for manufacturing and assembly of our products. These
constraints or delays could damage relationships with current and prospective customers and could have a material adverse effect on our business, financial condition and operating results. In
addition, third party contractors assemble our system level products.

Sage currently depends on a limited number of contract manufacturers for its semiconductor and system level products, and it must order products from them
based on forecasts from customers from which Sage does not have firm purchase orders.

We
do not own or operate a semiconductor fabrication facility and we do not have the resources to manufacture our products internally. Our display processor ICs have historically been
manufactured, assembled and tested by Kawasaki LSI, Fujitsu Microelectronics and ST Micro. The wafer of our new Jaguar series of integrated mixed signal ICs are being be manufactured by Taiwan
Semiconductor Manufacturing Company and we will be responsible for the assembly, packaging and testing. Our system level products are manufactured and tested by Topline Electronics or Eagle
Manufacturing while our box products are manufactured by Bestronics. We do not have a long-term supply contract with any of our contract manufacturers, and they are not obligated to supply
us with products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We try not to maintain substantial inventories of
products, but we must often place orders for products two to six months before they are needed and before we have firm purchase orders for those products. None of our products are currently
manufactured by more than one supplier.

There
are many risks associated with our dependence on third-party manufacturing, assembling and product testing relationships, including:



If
we are unable to obtain our products from manufacturers on schedule, revenues from the sale of those products may be delayed. If orders for our products are cancelled, revenues
will be lost.

Failure to manage Sage's expansion effectively could adversely affect our ability to increase our revenues and improve our earnings.

Our
ability to successfully offer our products in a rapidly evolving market requires effective planning and management processes. We continue to increase the scope of our operations
domestically and internationally and have increased our headcount substantially. Our past growth, and expected future growth, places a significant strain on our management systems and resources
including our financial and managerial controls, reporting systems and procedures. In addition, we will need to continue to expand, train and manage our workforce worldwide.

We depend on key personnel to manage our businesses effectively, and if Sage is unable to retain or hire additional personnel, our revenues and product
development efforts could be harmed.

Our
future success depends upon the continued services of our executive officers and other key engineering, sales, marketing and support personnel, many of whom would be difficult to
replace.

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Current and prospective employees may experience uncertainty about their future roles. This uncertainty may adversely affect our ability to retain key management, sales, marketing and technical
personnel, or to attract qualified personnel in the future.

We
expect to hire a significant number of engineering, sales and marketing and support personnel in the future, and we believe success depends, in large part, upon our ability to
attract and retain our key employees. Competition for these persons is intense, especially in the San Francisco Bay Area, and we may not be able to retain our key personnel or identify, attract and
retain other highly qualified personnel in the future. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. If we do not
succeed in hiring and retaining candidates with appropriate qualifications, our revenues and product development efforts could be harmed.

Sage's limited ability to protect our intellectual property and proprietary rights could harm our competitive position by allowing our competitors to access
our proprietary technology and to introduce similar products.

Our
ability to compete effectively with other companies will depend, in part, on our ability to maintain the proprietary nature of our technology. However, we cannot assure you that
the degree of protection
offered by our patents will be sufficient or that any of our pending patents will be issued. In addition, competitors in both the U.S. and foreign countries, many of which have substantially greater
resources, may apply for and obtain patents that will prevent, limit or interfere with our ability to make and sell our products.

Our
competitors may also be able to design around the licensed patents. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. There can be no assurance that the steps taken by
us to protect our intellectual property rights will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.

A
significant portion of the intellectual property acquired with the Faroudja acquisition is licensed to one of our wholly owned subsidiaries by Yves Faroudja. There are risks
associated with this intellectual property because our subsidiary is a licensee and not the owner of such intellectual property rights. Under the subsidiary's agreement with Mr. Faroudja, he
retains the non-exclusive right to license his patents and technologies to third parties for use outside our subsidiary's field of use. Notwithstanding the particular terms of the license
agreement with Mr. Faroudja, we face the risk that he may attempt to terminate the granted licenses and that such an attempt may be successful or that the response to such attempt may consume
substantial financial and personnel resources. In the event our resources are so consumed, such consumption could have a material adverse affect on our business, financial condition and operating
results.

We
may from time to time receive notifications or claims alleging that we may be infringing patents or intellectual property rights owned by third parties. While there is currently no
intellectual property rights litigation pending against us, litigation could result in significant expenses to us and could reduce sales of our products. Any litigation could also divert the efforts
of our technical and management personnel, whether or not the litigation is determined in our favor. In addition, we may not be able to develop, license or acquire non-infringing
technology under reasonable terms. These developments could result in an inability to compete for customers or could adversely affect our ability to increase our earnings.

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Sage has incurred net losses since inception, and Sage may not achieve or sustain annual profitability.

We
incurred net losses of $4.8 million; $4.6 million and $121.1 million for each of the respective years ended March 31, 1999, 2000 and 2001, and had an
accumulated deficit of $134.4 million as of March 31, 2001. In addition we have capitalized approximately $10 million of goodwill and intangibles in connection with the
acquisition of Faroudja and intend to amortize this over four years, resulting in
annual non-cash charges to operating expenses of over $2.4 million per year. Accordingly, we expect to continue to report additional operating losses, and even before
non-cash charges, we may continue to report operating losses for at least the next 12 months. Although we have experienced revenue growth over the last fiscal year as a whole, we
experienced a 31% reduction in our total sales in the March 2001 quarter compared to the December 2000 quarter. This growth is not necessarily indicative of future operating results, and
we cannot assure you that we will be able to sustain the growth, or recovery of growth, in our revenues. If we do achieve profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future or at all. This may in turn cause our stock price to decline. In addition, if we do not achieve or sustain profitability in the reasonable
future, we have limited cash resources and may therefore be unable to continue our operations.

Sage has a limited operating history, making it difficult for you to evaluate our business.

We
commenced operations in January 1995, but did not generate material revenues from the sale of our semiconductor products until July 1998. Thus, we have a limited
operating history upon which to evaluate our current business and prospects. Due to the limited history, it is difficult or impossible for us to predict our future results of operations with any
degree of accuracy. For example, we cannot accurately forecast expenses based on our projections of future revenues. Most of our expenses are relatively fixed in the short term, and we may not be able
to quickly reduce spending if our revenues are lower than projections. In addition, because substantially all of our present customers order on a purchase orders basis rather than
long-term purchase commitments, we have only a limited ability to project future revenues. Therefore, net losses in a given quarter may be greater than expected. Moreover, due to our
limited operating history, any evaluation of our business and prospects must be made in light of the risks and uncertainties often encountered by early stage companies in technology markets. Many of
these risks are discussed elsewhere in this section. Please see "Sage Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detailed information on our
historical results of operations.

Sage's foreign customers account for a significant portion of its revenues, and if we do not successfully address certain risks associated with our
international operations, our revenues could decrease and our business prospects could deteriorate because the majority of our customers could be lost at a substantial cost to our business prospects,
and our revenues could decline.

Sales
outside of the U.S. accounted for 57% of total sales for the year ended March 31, 2001. Substantial numbers of our customers are located in Japan, Taiwan, Korea and PRC.
We anticipate that sales outside of the U.S. could increase in future periods and may account for an increasing portion of our revenues. In addition, manufacturers who incorporate our processors into
their displays sell them outside of the U.S., thereby exposing us indirectly to foreign risks. Specifically, we will be subject to the following risks:



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To
date, sales of our products have been denominated exclusively in U.S. dollars. An increase in the value of the U.S. dollar will increase the price of our products so that they
become relatively more expensive to customers in the local currency of a particular country, potentially leading to a reduction in our revenues and profitability.

Portions of Sage's research and development efforts are performed in India, and risks related to those operations could harm its research and development
capabilities and negatively impact its product sales.

Any
risks related to the political or economic conditions in India and the surrounding region, including risks relating to India's national security situation or labor market
conditions, may adversely impact our ability to take advantage of operations in India. In addition, circumstances beyond our control at our facilities, related to operating in a developing country,
such as unreliable power supplies, may have a material adverse effect on our research and development capabilities. We cannot assure you that restrictive laws or policies on either the part of India
or the United States will not constrain our ability to effectively operate in both countries. If we are required to relocate our Indian facilities, we cannot assure you that a relocation will not
disrupt our business.

If monitors incorporating Sage's solutions are not compatible with personal computers, televisions, and other devices for which they are marketed, the market
for Sage's products will be reduced and our business prospects could be significantly limited.

Our
products are incorporated into our customers' display monitors which have different parts and specifications and utilize multiple protocols that allow them to be compatible with
specific PCs, televisions, home theaters and other devices. If our customers' products are not compatible with the
PCs and other devices for which they have been marketed and sold, consumers will return those monitors, or consumers will not purchase those monitors, and the market for our customers' products could
be significantly reduced. As a result, a portion of our market would be eliminated, and our business would be harmed.

Risks Related to the Display Processing Industry

Failure of consumer demand for flat panel displays to increase as we expect could impede Sage's growth
prospects.

Our
product development strategies anticipate that consumer demand for flat panel displays and other emerging display products will increase in the future. The success of our products
is dependent on increased demand for these products, which are at early stages of development. The potential size of these markets and the timing of their development are uncertain and will depend
upon a number of factors, including available supply capacity and retail price of flat panel monitors, all of which are beyond our control.

Because of Sage's long product development process and sales cycle, Sage may incur substantial expenses before it earns associated revenues and may not
ultimately sell as many units of its products as forecasted.

We
develop products based on forecasts of demand and incur substantial product development expenditures prior to generating associated revenues. Our customers typically perform
numerous tests and extensively evaluate our products before incorporating them into their systems. The time required for testing, evaluation and design of our products into a customer's equipment can
take up to six months or more. Because of this lengthy development cycle, we may experience a delay between the

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time we accrue expenses for research and development and sales and marketing efforts and the time when we generates revenues, if any, from such expenditures.

Furthermore,
achieving a design win with a customer does not necessarily mean that this customer will order large volumes of our products. A design win is not a binding commitment by
a customer to purchase our products. Rather, it is a decision by a customer to use our products in the design process of that customer's products. In addition, our customers can choose at any time to
discontinue using our products in that customer's designs or product development efforts. If our products are chosen to be incorporated into a customer's products, we may still not realize significant
revenues from that customer if that customer's products are not commercially successful.

If Sage does not achieve design wins with leading display manufacturers, Sage may be unable to secure additional design wins in the future and its ability to
grow would be seriously limited.

The
development of new, technologically advanced products and product enhancements is a complex and uncertain process requiring accurate anticipation of technological and market
trends, as well as skill in obtaining design wins. Any failure on our part to obtain additional design wins with leading original equipment manufacturers and to successfully design, develop and
introduce new products and product enhancements could harm our business, financial condition and results of operations. In addition, development and manufacturing schedules for our products are
difficult to predict, and we cannot assure you that we will achieve timely customer shipments of new products. The timely introduction of these products and their acceptance by customers are important
to our future success. Any delays in product development, whether due to manufacturing, product design and development, lack of market acceptance or otherwise, could reduce future customer acceptance
of our products and harm our business, financial condition and results of operations.

If we have to qualify a new contract manufacturer for any of Sage's products, we may lose revenues and damage our customer
relationships.

Our
display processors require manufacturing with state-of-the-art fabrication equipment and techniques. Because the lead time needed to establish
a strategic relationship with a new contract manufacturer is at least six months, and the estimated time for us to adapt a product's design to a particular contract manufacturer's processes is an
additional three to four months, there is no readily available alternative source of supply for any specific product. A manufacturing disruption at any of our contract manufacturers would impact the
production of our display processors for a substantial period of time, thereby reducing our revenues, and would harm our customer relationships.

Shortages of materials included in our semiconductor and circuit board products may increase Sage's costs or limit our revenues and delay our ability to ship
our products on time.

From
time to time, shortages of certain materials that are used in our semiconductor and circuit board products may occur. In particular, we may experience shortages of semiconductor
wafers. If materials shortages occur, we may incur additional costs to procure the scarce components or be unable to ship its products to its customers in a timely fashion, all of which could
negatively impact our earnings.

By subcontracting separately for the production of wafers for our mixed signal processors, Sage is assuming risks that it does not currently
face.

Historically,
we purchased packaged, assembled and tested semiconductor products from contract manufacturers. We have assumed greater responsibility for this process with our new
generation of mixed signal products by subcontracting separately for the production of wafers and for their assembly and testing and consequently we will become more responsible for losses arising
from wafer manufacturing yields and for coordination of the manufacturing, assembly and testing process. Poor

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yields, or our failure to implement this approach to manufacturing properly, would reduce our revenues and harm our gross margin and results of operations.

Interruptions of power supply in California may disrupt Sage's business.

Recently the State of California has experienced a shortage of power supplies resulting in temporary disconnection and blackouts. Such interruptions of supply
are random and unforeseeable and can lead to loss of data, test results, operational capability and other inefficiencies. The resulting outcome may range from delays and added cost to lost business,
and is substantially outside our control.

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PART II

Item 1.Legal Proceedings

As of August 14, 2001, we were not party to any legal proceeding.

Item 2.Changes in Securities and Use of Proceeds

On May 22, 2001, pursuant to a Preferred Shares Rights Agreement between the Sage and Mellon Investor Services, LLC, as Rights agent, the Board of
Directors of Sage announced that it had declared a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of Sage's Common Stock. Each Right will entitle
stockholders to buy one one-hundredth of a share of the Company's Series A Preferred Stock at an exercise price of $70.00. The Rights will become exercisable following the tenth day
after a person or group announces the acquisition of 20% or more of Sage's Common Stock or announces commencement of a tender or exchange offer, the consummation of which would result in ownership by
the person or group of 20% or more of the Common Stock of Sage. Sage will be entitled to redeem the Rights at $0.001 per Right at any time on or before the tenth day following acquisition by a person
or group of 20% or more of Sage's Common Stock. The dividend distribution was made on June 1, 2001, payable to the stockholders of record on June 8, 2001. The Rights will expire on
June 1, 2011.

Item 6.Exhibits and Reports on Form 8-K



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                      |  | SAGE, INC. Registrant
|--------------------- |  | ---------------------
|Date: August 14, 2001 |  | By:                  
|                      |  |                      

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