##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended March 31,
    2002                                                    
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                                 

Commission File Number: 0-30539

Tvia, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                                         
|------------------------------------------------------------------ |  | --------------------------------------------------------
|Delaware                                                           |  | 77-0549628                                              
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification No.)                   
|                                                                  
|4001 Burton Drive, Santa Clara, California
    95054               |  | (408) 982-8588                                          
|(Address of principal executive
    offices)                       |  | (Registrants telephone number, including
    area code)

Securities registered to Section 12(b) of
the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $0.001 per
share


Indicate by check mark whether the registrant
(1) has filed all reports required 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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

The aggregate market value of Common Stock held
by non-affiliates (based upon the closing sale price on the
Nasdaq National Market on May 31, 2002 was approximately
$18,403,804.

As of May 31, 2002, there were 22,160,519
shares of Common Stock, $0.001 per share par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE


Items 10 (as to directors and Section 16(a)
Beneficial Ownership Reporting Compliance), 11, 12 and
13 of Part III incorporate by reference information
from the registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the
solicitation of proxies for the registrants 2002 Annual
Meeting of Stockholders to be held on August 20, 2002.



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TABLE OF CONTENTS



|              |                                                                                                          |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                        
|              | Item 2. Properties                                                                                      
|              | Item 3. Legal Proceedings                                                                               
|              | Item 4. Submission of Matters to a Vote of Security Holders                                             
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                           
|              | Item 6. Selected Consolidated Financial Data                                                            
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     
|              | Item 8. Financial Statements and Supplementary Data                                                     
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure            
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                             
|              | Item 11. Executive Compensation                                                                         
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
|              | Item 13. Certain Relationships and Related Transactions                                                 
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.2 
|EXHIBIT 10.4 
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 10.20
|EXHIBIT 10.21
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY

2002 FORM 10-K

TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 2  | 
|Item 2.  |  | Properties                                                                                         |  |      | 9  | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 9  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 10 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 11 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                               |  |      | 11 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 13 | 
|Item 7A. |  | Quantitative and Qualitative Disclosure about
    Market Risk                                      |  |      | 29 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 31 | 
|Item 9.  |  | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure           |  |      | 56 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 56 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 56 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 56 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 56 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  |      | 57 | 

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PART I




Item 1.     Business

When used in this Report, the words
expects, anticipates,
estimates, believes, plans,
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements as to the Companys anticipated
revenues, expenses, gross profit and loss; the features,
performance, advantages and anticipated benefits of our
products, including easy software upgrades and integration of
new features and technologies, the importance of customer
support, the expertise, industry knowledge and capabilities of
our sales and marketing staff, our design support, the
importance of design support, continued expenditures on research
and development, our ability to migrate to smaller process
geometries, the key competitive factors in our target markets,
our ability to compete, increasing competition in our markets,
sources of competition, our intellectual property, strategy, our
ability to protect our intellectual property, our backlog as an
indicator of future revenues, the status of our relations with
our employees, the adequacy of our existing facilities, our
dividend policy and our planned retention of our future
earnings. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as
well as risks related to slower than anticipated emergence of
the interactive television market; general economic conditions
and specific conditions in the markets we address; the timing,
rescheduling or cancellation of significant customer orders; the
loss of a key customer; our ability to specify, develop or
acquire, complete, introduce, market and transition to volume
production new products and technologies in a timely manner; the
volume of our product sales and pricing concessions on volume
sales; the qualification, availability and pricing of competing
products and technologies and the resulting effects on sales and
pricing of our products; the availability and pricing of foundry
and assembly capacity and raw materials; insufficient customer
support; fluctuations in the manufacturing yields of our third
party semiconductor foundries and other problems or delays in
the fabrication, assembly, testing or delivery of our products;
problems or delays that we may face in shifting our products to
smaller geometry process technologies and in achieving higher
levels of design integration; the effects of new and emerging
technologies; the risks and uncertainties associated with our
international operations; changes in our products or customer
mix; the risk that excess inventory may result in write-offs,
price erosion and decreased demand; the level of orders received
that can be shipped in a fiscal quarter; and the risks set forth
below under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Factors That May Affect Results.
These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or
any change in events, conditions or circumstances on which any
such statement is based.

All references to Tvia,
we, us, our or the
Company mean Tvia, Inc. and its subsidiary, except
where it is made clear that the term means only the parent
company.

We own various trademarks and trade names used
in our business. These include CyberPro, FlexiBus, Tvia and the
Tvia logo. Other trademarks referenced herein are the property
of their respective owners.

Overview

We design, develop and market multi-media display
processors for the advanced television and emerging display
markets. Our multi-media display processors accept video,
graphics and audio signals from terrestrial broadcast, narrow
band telephone lines, cable, satellite and the Ethernet and
blend them together on one or more displays for a high quality,
customized and interactive viewing experience.

Our multi-media display processors are compatible
with various microprocessors, operating systems and applications
software. Our products are programmable and customizable and we
believe our products also allow easy software upgrades. Our
processors, software and reference designs enable our original
equipment manufacturers, or OEMs, to accelerate their time to
market by reducing their systems engineering development.

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Industry Background

In recent years there has been an increase in
demand for high speed access to information and entertainment,
or rich media content, which combines audio, video, voice, text,
graphics, pictures and animation. This demand is driven by the
growth of rich media content available from the Internet and
through television broadcasts and accessible via phone lines and
via broadband transmission pipes including television antenna
(analog or digital broadcast), cable, microwave, satellite,
digital subscriber line, or DSL, and Ethernet connection. Demand
has also been stimulated by the increasing availability,
affordability and ease of use of consumer appliances and other
devices that feature integrated Internet access.

Rich media content is available through a variety
of devices including advanced television and emerging
interactive display devices. Advanced televisions are
televisions where a digital or analog signal is processed
digitally and enhanced with resolutions ranging from standard
resolution to high definition television, or HDTV. Emerging
display devices include any kind of consumer electronics device
that has expanded interaction functionality, such as set-top
boxes, mobile web access appliances, personal video recorders
and home gateway systems. Included in this category are
broadband set-top boxes which permit consumer access to
high-speed networks through broadband transmission pipes.

As rich media content becomes more pervasive,
users are demanding faster access to the Internet. In an effort
to meet demand for faster access to rich media content, the
communications industry has begun to deploy new broadband access
technologies that can deliver data at a rate of tens of megabits
per second, or up to 700 times faster than todays 56
kilobits per second, or Kbps, dial up modems. Users of dial up
analog modems over standard telephone lines with maximum
transmission rates of 56 Kbps often experience lengthy delays,
failure of transmission and limitations on the volume of data
that can be transmitted in real time. The slow speed of the
telephone modem is frustrating to mainstream consumers who are
accustomed to the immediate point and click interface of a
television remote control. These customers may find the speed of
broadband connections more satisfying.

The television is the consumer product that
people are most comfortable with using for entertainment and
information due to its sound and display qualities. Advanced
televisions and emerging interactive displays can now act as the
medium to access the Internet and traditional television
broadcasts, and combine the rich media content and services for
an interactive television experience.

Interactive television includes features such as
electronic program guides, which enable a consumer to select
both categories and specific movies and programs, such as those
on video on demand, or VOD, and subscription video on demand, or
SVOD, services. Interactive television also enables the consumer
to view trailer clips of different movies and programs offered
by such services. Interactive television enables consumers to
watch a commercial and access, at the click of a button,
additional information coming from the Internet or an
interactive program. This information, such as an e-commerce
website, could be displayed on a transparent window that would
allow the consumer to continue viewing the commercial, access
additional information and complete the purchase of advertised
merchandise. Alternatively, a consumer could be watching a
television program while chatting, emailing or instant messaging
with friends. In addition, interactive television users could
access selected additional information such as personalized
stock quotes. Consumers could also play along with a game show
and win prizes if they respond faster and more accurately than
the contestants on television, or they could compete against
other online players. This could be done by providing discrete
windows for the interactive content and the main program, or by
providing transparent windows that overlay the main program
without obstructing it. Interactive content windows could be
customized and configured, allowing the consumer to control the
viewing experience.

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Our Solution

Our multi-media display processors allow the
consumer to customize the appearance of the display and
manipulate multiple content streams to create an enriched and
interactive viewing experience. We believe our multi-media
display processors offer the following advantages:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High Performance Processing of Rich Media
    Content.Our solutions act as a
    gateway that processes multiple streams of rich media content
    that converge from different transmission pipes and format
    standards enabling a high quality, clear display. With the
    advent of digital transmission, the convergence of multiple rich
    media content streams transported by the broadband network
    requires a process to unify and match the multiple transmission
    standards. For example, some of the broadcast streams are
    formatted with different resolution and screen size dimensions
    than Internet streams, thereby resulting in a distorted picture.
    Our technology converts these varying streams into a uniform
    stream and delivers an undistorted, high quality picture. The
    streams are then merged and blended to offer visual effects such
    as picture in picture, or transparency or the overlay of
    multiple content types, all enhancing the consumers
    viewing experience. In order to support real time processing of
    multiple streams, our processor provides high bandwidth with
    some internal data rates exceeding six gigabits per second.
|
| |  | Support for Multiple Data Types, Transmission
    Pipes, Microprocessors, Operating Systems and Applications
    Software.Our multi-media display
    processors can accept any standard rich media content input
    signals through standard telephone lines and any broadband
    transmission pipes. Further, our products are designed with a
    flexible architecture that can work with most television formats
    and display types. These modules have been successfully ported
    to multiple platforms based on industry standard
    microprocessors, operating systems and content application
    software. Our focus on compatibility gives our OEM customers
    flexibility in design and allows devices using our solution to
    work with the end-users existing equipment.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Upgradeable
    Platform.Our applications software
    provides advanced television and emerging interactive display
    manufacturers with a platform that can be expanded and upgraded
    over time by the consumer with only a software change, which can
    be downloaded over a network. We believe this helps to reduce
    the risk of product obsolescence and enables the integration of
    new features and technologies as they are developed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Programmable and Customizable
    Platform.Our multi-media display
    processors are programmable and allow manufacturers to add new
    features and customize the on screen user interface of their
    products. For example, manufacturers may program their advanced
    television or emerging interactive display to allow varying
    modes of transparency, multiple independent media window
    displays, multiple or combined audio streams, multiple display
    sizes and multiple horizontal and vertical resolutions and
    screen refresh rates, which affect the quality of the image and
    the amount of flicker on the screen.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Accelerated Time to
    Market.We believe our multi-media
    display processors, software and reference designs enable our
    OEM customers to accelerate their time to market by reducing
    their systems engineering development. We have developed a
    number of platforms running with multiple microprocessors,
    operating systems and applications software which enable our
    customers to leverage these predeveloped hardware and software
    platforms to reduce their system engineering efforts. Our
    software development kits include modules that enable rapid
    customization and porting, which allow our customers to speed up
    their product development time. Our engineers work closely with
    our customers engineers to facilitate systems design.
    These benefits enable our OEM customers to bring products with
    rich features and differentiated systems to market quickly.                                                                                                                                                                                                                                                                                          

Products

Our products are based on advanced architecture
integrated circuits and system designs that provide real time,
cost effective and high quality display processing. We currently
offer three product families: the CyberPro 5202 family,
introduced in calendar year 2002; the CyberPro 5300 family,
introduced in calendar

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year 1999; and the CyberPro 5000 family,
introduced in calendar year 1998. Our semiconductor solutions
include different features, which OEMs can select for inclusion
in their products.


The CyberPro 5202 incorporates all the features
of our CyberPro 5000, 5005, 5050 and 5055 products. In addition,
a 24-bit digital interface directly supports liquid crystal
displays, or LCD, and other digital interfaces. Enhanced,
flexible alpha-blending capabilities allow overlay of different
windows with programmable levels of opacity. Two advanced
television encoders allow the user to configure the recording
picture in personal video recorder, or PVR, applications. The
processor maintains crisp text presentation, even as the opacity
of the window is varied. The CyberPro 5202 is designed for
displays to multiple devices such as traditional cathode ray
tube televisions, advanced televisions, panel displays, emerging
interactive displays and LCD products.

The CyberPro 5300 is the first product in the
CyberPro 5300 family designed for broadband set-top boxes that
require 3D animation, 3D effects or 3D graphics processing
capability.

The CyberPro 5305, 5350 and 5355 are similar to
our CyberPro 5005, 5050 and 5055 products, but also provide 3D
animation, 3D effects or 3D graphics processing capability.

The CyberPro 5000 is the first product of the
CyberPro 5000 family designed for broadband digital set-top
boxes and advanced televisions. The CyberPro 5000 has enhanced
text, graphics and video processing engines. It also includes
two video ports for two simultaneous video streams, high picture
quality of broadband video on television, hardware magnified
view of web pages on television, and a flexible transparency
algorithm for blending multiple video, text, graphics, pictures
and animation on screen.

The CyberPro 5005 is designed for broadband
set-top boxes and advanced televisions with Internet and DVD
capability. In addition to CyberPro 5000 features, the 5005
provides MacroVision encryption for copy protection.

The CyberPro 5050 is designed for broadband
set-top boxes and advanced televisions that have integrated
audio capability. Additional features include an audio digital
signal processor engine with audio synthesis, MIDI, I2S, PCM and
stereo audio.

The CyberPro 5055 combines all of the features of
our CyberPro 5000, 5005 and 5050 products. The CyberPro 5055
provides a solution for broadband set-top boxes and advanced
televisions that process multiple media streams including DVD
and full duplex audio.



| |         
| | --------
| | Software

Our software products and services are divided
into three categories: software development kits, applications
modules and custom software services. Our product strategy is
based on providing OEMs a complete hardware and software
solution, which we believe reduces both the OEMs system
engineering time and their time to market. Our multi-media
display solutions are configurable and flexible, and our
software is key in enabling our customers to take advantage of
this flexibility. Finally, our software modules enable us to
provide our OEM customers with the capability to offer systems
with differentiated features that enhance the television
experience.

Our software development kits are a set of
software modules designed to be easily and quickly ported on
multiple hardware and software platforms. These kits are
modularized in order to cater to different system requirements
while minimizing the size of the software code. These modules
have been successfully ported to multiple platforms based on
industry standard microprocessors, operating systems and content
application software.

Finally, by leveraging the comprehensive
experience of our software design team, we provide custom
software development for customers using our semiconductors.

Customers

We target customers in the advanced television
and emerging interactive display markets. We began to focus on
the emerging interactive display market in 1997, and later
expanded our focus to include the

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advanced television markets. The majority of our
sales in fiscal 2002 were to the broadband set-top box market
portion of the emerging interactive display market, primarily
for video-on-demand applications. In prior years, the majority
of our sales were to the emerging interactive display market.
Many of our customers manufacture or distribute products in more
than one of our target markets.


In fiscal 2002, sales to Prediwave Corporation
and Motorola Broadband, both OEMs, accounted for 62% and 14% of
revenues, respectively. In fiscal 2001, sales to Prediwave
Corporation, Kanematsu Semiconductor Corp. and Weikeng
Industrial Co., Ltd., two of our distributors, accounted for
12%, 12% and 10% of revenues, respectively. In fiscal 2000,
sales to Weikeng Industrial Co., Ltd., and Yao Wei, an OEM,
accounted for 16% and 12% of revenues, respectively.

In fiscal 2002, sales to customers in the United
States and Taiwan comprised 68% and 22% of revenues,
respectively. In fiscal 2001, sales to customers in Taiwan, the
United States, Japan and Europe comprised 34%, 33%, 11% and 11%
of revenues, respectively. In fiscal 2000, sales to customers in
Taiwan, the United States and Korea comprised 41%, 29% and 12%
of revenues, respectively.

Sales and Marketing

We sell and market our multi-media display
processors through our direct sales force, sales representatives
and distributors. For our software products, we also use value
added resellers and system integrators that package and use our
software products for resale as standard products or custom
software development services.

Our products are marketed primarily through
reference platforms and evaluation kits designed internally and
with industry leading microprocessors, real time operating
systems and other strategic partners directly or indirectly
through our partners channels to OEMs for evaluation and
development. These reference platforms and evaluation kits
(hardware and software) have proven to be vital to our success
in obtaining new design wins. We also promote our products
through our website, trade shows, articles, press releases and
joint promotions with our strategic partners.

Our personnel work closely with customers, sales
representatives and authorized distributors to define product
features, performance, price and market timing of new products.
We provide technical support and design assistance directly to
OEM customers, regardless of the sales channels used. We believe
that a high level of customer support is necessary to
successfully develop and maintain long-term relationships with
our customers. These relationships begin at the design in phase
and develop, as customer needs change and evolve. We provide
support through both on site customer service and remote support
from our facilities.

As of March 31, 2002, we employed a sales
and marketing force of 19 people. We believe these
personnel have the technical expertise and industry knowledge
necessary to support a lengthy and complex sales process. We
also employed seven field applications engineers that assist
customers in designing, testing and qualifying system designs
that incorporate our integrated circuits and software products.
We believe that the depth and quality of this design support are
key to improving our customers time to market and
maintaining a high level of customer satisfaction. Our four
direct sales offices are located in Santa Clara, California;
Taipei, Taiwan; Hefei, Peoples Republic of China; and
Berkshire, United Kingdom. All of our sales offices except the
United Kingdom provide hardware and software applications
support.

Research and Development

Our research and development efforts are focused
on four areas: device architecture and logic design, physical
layer design, software development and device testing. As of
March 31, 2002, our research and development staff
consisted of 276 employees, (59 of whom were located in the
United States and 217 of whom were located in the Peoples
Republic of China). Our research and development efforts have
centered on architecture design, streaming media processing
modes, high-speed digital and mixed signal design and software.

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We conduct research and development at our design
centers in Santa Clara, California and Hefei, Peoples
Republic of China. Our Peoples Republic of China facility
is located in a science park near Hefei University of
Technology, and employee costs are lower than in the San
Francisco Bay Area.

Our research and development expenses for fiscal
years 2002, 2001 and 2000 were $12.7 million,
$6.8 million and $3.4 million, respectively. Research
and development expenses consist mainly of personnel and other
costs associated with the development of product designs,
process technology, software and programming hardware. We
anticipate that we will continue to commit substantial resources
to research and development in the future.

Manufacturing

We have adopted a fabless semiconductor
manufacturing model and we outsource all of our semiconductor
manufacturing and assembly. This approach allows us to focus our
resources on the design, development, testing and marketing of
our products and significantly reduces our capital requirements.
We develop our designs to be compatible with two foundries,
United Manufacturing Corporation, or UMC, and Taiwan
Semiconductor Manufacturing Corporation, or TSMC, both of which
are located in Hsin Chu, Taiwan. This allows us to shift
production from one facility to the other in the event of a
capacity constraint at one foundry. We currently use
0.35 micron technology for production of our
CyberPro 5000 family, 0.3 micron technology for
production of our CyberPro 5300 family, and 0.18 micron
technology for production of our CyberPro 5202 family.

We internally design and optimize digital and
analog cells through our physical layer design group. We believe
this allows us to reduce the size of the semiconductor and
therefore the cost. This also gives us greater control over the
quality and reliability of our multi-media display processors.

Assembly of our devices is performed by Advance
Semiconductor Engineering, Inc. in Kaohsiung, Taiwan. We may
also use Siliconware Precision Industries Ltd., located in Hsin
Chu, Taiwan. Final testing is primarily performed by us at our
subsidiary in Hefei, Peoples Republic of China.

Competition

The semiconductor industry in general, and the
market for integrated circuits for advanced televisions and
emerging interactive displays, in particular, is highly
competitive. We believe we can compete favorably in each of the
key competitive factors in our target markets. These factors are:



| |   |                                  
| | - | ---------------------------------
| |  | functionality;                   
|
| |  | performance;                     
|
| |  | time to market;                  
|
| |  | price;                           
|
| |  | conformity to industry standards;
|
| |  | product road maps; and           
|
| |  | technical support.               

Our current and primary competitors in our target
markets are ATI Technologies, Inc., Broadcom Corporation,
Genesis Microchip, Inc. and Silicon Image, Inc. In addition to
these competitors, we expect other major semiconductor
manufacturers will enter the market as the advanced television
and emerging interactive display markets develop. A number of
companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor,
Equator Technologies, Inc., LSI Logic and Philips Electronics
N.V., have announced that they are developing or plan to
introduce competing products in the advanced television and
emerging interactive display markets which could result in
significant competition. We expect competition to intensify as
current competitors expand their product offerings and new
competitors enter the market.

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Intellectual Property

We rely on a combination of patent, copyright,
trademark and trade secret laws and contractual restrictions to
establish and protect our intellectual property and proprietary
rights that we develop and license from others.

We have filed three applications for United
States patents, one of which has been allowed, containing claims
covering various aspects of combining digital streams of video
and graphics for presentation on an output display and for
changing the size of graphic data for presentation on a
television output display. We expect to file patent applications
as we deem appropriate to protect our technology and products.
We cannot be sure that our patent applications will result in
the issuance of patents, or that any issued patents will provide
commercially significant protection to our technology.

We also license from others certain audio,
graphics and semiconductor technology that is incorporated in
our semiconductors and certain intellectual property rights.
These licenses are perpetual and survive the termination of the
agreements under which we obtained such licenses. The
protections we receive from others against infringement under
the terms of these licensing agreements are limited and we
cannot be sure that alternative technology exists.

In June 1997, we entered into an agreement with
T-Square Design, Inc., which has proprietary technology that
permits incorporation of the audio function onto graphics
controller chips. As a result of our agreement, we were granted
the right to use this audio technology for graphics/ audio
integration in our products and to manufacture, distribute and
sublicense products using the audio technology.

In March 2000, we entered into a cross license
agreement with Innovative Semiconductors, Inc.
(Innovative), which has developed proprietary
semiconductor circuit and logic designs. Pursuant to our
agreement, Innovative licensed to us the right to use their
proprietary cores to develop and market semiconductors and we
licensed to Innovative the right to use and market our cores and
test benches with their products.

In July 2000, we entered into an agreement with
Hitachi, Ltd., which has developed proprietary technology on
system-on-a-chip SH-4 microprocessors (SH-4). As a
result of our agreement, Hitachi licensed to us the right to use
this SH-4 technology for system-on-a-chip integration in our
products and to manufacture, distribute and sublicense products
using the SH-4 technology. In March 2002, the Company postponed
the product related to this technology indefinitely;
accordingly, the Company wrote off $500,000 of license
technology related to this SH-4 technology.

In December 2000, we entered into an agreement
with Oak Technology, Inc. (Oak), which has
proprietary 3D graphics technology that permits incorporation of
the 3D graphics function onto our chips. As a result of our
agreement, we were granted the right to use this 3D graphics
technology for 3D graphics integration in our products and to
manufacture, distribute and sublicense products using the 3D
graphics technology.

In April 2001, we amended the agreement with Oak,
in order to license Oaks proprietary MPEG-2 technology
that permits the incorporation of MPEG-2 decoding functions onto
our chips. As a result of our agreement, we were granted the
right to use this MPEG-2 technology for MPEG-2 integration in
our products and to manufacture, distribute and sublicense
products using the MPEG-2 decoding technology.

We attempt to avoid infringing known proprietary
rights of third parties in our product development efforts. It
is difficult to proceed with certainty in a rapidly evolving
technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed,
with regard to similar technologies. If our products violate
third party proprietary rights, we might not be able to obtain
licenses to continue offering these products without substantial
reengineering. Efforts to undertake this reengineering might not
be successful, licenses might be unavailable on commercially
reasonable terms, if at all, and litigation might not be avoided
or settled without substantial expense and damage awards.

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CyberPro is a registered trademark, and Tvia and
FlexiBus are trademarks pending registration of Tvia in the
United States. In addition, the Tvia logo is a trademark of Tvia
in the United States and other jurisdictions.

Backlog

Our sales are made primarily pursuant to standard
purchase orders for delivery of products. Due to industry
practice which allows customers to cancel or change orders with
limited advance notice prior to shipment, we believe that
backlog is not a reliable indicator of future revenue levels.

History

We were originally incorporated in California as
Integraphics Systems, Inc. in March 1993. We changed our name to
IGS Technologies in August 1997. In March 2000, we changed our
name to Tvia, Inc. In August 2000, we reincorporated into
Delaware. Tvia operates in one principal industry segment.

Our subsidiary in Hefei, Peoples Republic
of China, had 282 employees as of March 31, 2002, including
217 employees in research and development. This facility handles
our operations and testing, and performs sales and marketing, in
addition to research and development activities. Our market
focus is centered on the Asia Pacific region, including China,
Taiwan, Japan and Korea. We believe our Hefei subsidiary affords
a cost effective means for us to develop products and support
our extensive hardware and software alliances. Our subsidiary
also gives us a presence in the China market.

Seasonality

The electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its
products, and this trend may continue in the future. These
industry downturns have been, and my continue to be,
characterized by diminished product demand, excess manufacturing
capacity and subsequent erosion of average selling prices.

Employees

As of March 31, 2002, we had 382 full time
employees including 276 engaged in research and development,
19 engaged in sales and marketing, 63 engaged in
manufacturing and 24 engaged in general management and
administration activities. Of these employees, 94 work in
our Santa Clara facility, 6 work in our Taiwan office and 282
work at our facility in the Peoples Republic of China. Our
employees are not represented by any collective bargaining
agreement and we have never experienced a work stoppage. We
believe our relations with our employees are good.




Item 2.     Properties

Our headquarters, which also serves as our
principal administrative, selling, marketing, customer support,
applications engineering and product development facility, is
located in Santa Clara, California, and consists of two
buildings of approximately 19,800 square feet under leases that
expire in July 2003. We also lease a sales, marketing and
customer support office in Taipei, Taiwan of approximately 1,500
square feet under a lease that expires in February 2003 and a
building located in Hefei, Peoples Republic of China of
approximately 15,000 square feet under a lease that expires in
June 2005 for our research and development operations in China.

We believe our existing facilities are adequate
to meet our needs for the near future and that future growth can
be accomplished by leasing additional or alternative space on
commercially reasonable terms.




Item 3.     Legal
Proceedings

From time to time the Company may be involved in
litigation relating to claims arising in the ordinary course of
business. As of the date of this filing, we do not believe that
any of the legal proceedings pending

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against the Company or, to the best of its
knowledge, threatened against it, will have a significant
adverse effect on our financial position or results of
operations.





Item 4.     Submission
of Matters to a Vote of Security Holders

Not applicable.

Executive Officers

The executive officers of the Company are as
follows:

Kenny Liu,48, has
served as our Chairman of the Board since January 1995, and as
Chief Executive Officer from January 1995 to November 2001. From
January 1989 to March 1994, Mr. Liu served as Chairman and
Chief Executive Officer of OPTi Inc., a manufacturer of core
logic chip sets for the personal computer market. Mr. Liu
received a B.S. in Electrical Engineering from National
Cheng-Kung University in Taiwan, an M.S. in Computer Science
from Santa Clara University and an M.S. in Electrical
Engineering from Ohio State University.

Eli Porat,56, has
served as our Chief Executive Officer since November 2001 and as
a director of our Company since March 2001. From January 1997 to
November 2001, Mr. Porat was Chief Executive Officer of
OpenGrid, Inc., a mobile business solutions company. From 1991
to 1996, Mr. Porat was Chief Executive Officer of DSP
Group, an audio digital signal processing company. From 1972 to
1983, Mr. Porat was with Intel Corporation. Mr. Porat
earned a B.S. and M.S. degrees in Electrical Engineering and
Computer Science from the University of California, Berkeley.

Michael Hoberg,50,
has served as our Vice president of Finance and Chief Financial
Officer since February 2000. From November 1998 to January 2000,
Mr. Hoberg served as the Chief Financial Officer of U.S.
Cancer Care, Inc., a radiation oncology company. From December
1996 to June 1998, Mr. Hoberg served as Chief Financial
Officer of Faroudja, Inc., a manufacturer of video image
enhancement products for the television and broadcast markets,
and as an advisor to the Chief Executive Officer from July 1998
to November 1998. Mr. Hoberg received a B.B.A. in
Accounting from the University of Wisconsin at Madison and is a
Certified Public Accountant.

Jhi-Chung Kuo,49, a
cofounder of the Company, has served as our Chief Technology
Officer since July 2000. From March 1993 to June 2000,
Mr. Kuo served as our Vice President of Engineering.
Mr. Kuo received a B.S. in Physics from National Central
University in Taiwan and an M.S. in Electrical Engineering from
Mississippi State University.

James Tao,52, has
served as Vice President of Worldwide Marketing since March
2002. He joined us in June 1997 as Senior Director of Business
Development, and served from November 1999 to March 2002 as Vice
President of Business Development. From March 1989 to May 1997,
Mr. Tao served as Vice President of Sales and Marketing at
Focus Information Systems, a personal computer peripheral
product company. Mr. Tao received an M.B.A. in
Telecommunication Management from Golden Gate University and an
M.S. in Computer Science from the University of Hawaii.

Yee Wong,49, a
cofounder of the Company, has served as our Vice President of
Operations since January 1995. From March 1993 to December 1994,
Mr. Wong served as our President. Prior to founding the
Company, Mr. Wong served as an ASIC Design Manager for
Everex Systems, Inc. and Senior Staff Engineer with Intel
Corporation. Mr. Wong received a B.S. in Electrical
Engineering from National Cheng-Kung University in Taiwan and an
M.S. in Electrical Engineering from the University of Michigan.

The Companys key employee is as follows:

Bo Liu,48, has
served as Vice President of Software Development since November
1999. He joined us as Software Manager in June 1993, serving in
that position until June 1998. From June 1998 to November 1999,
Mr. Liu was our Director of Software Development. Prior to
joining us, Mr. Liu held software development positions at
both Micronics Computers, Inc. and Oak Technology, Inc.
Mr. Liu was a candidate for a Ph.D. in Electrical and
Computer Engineering at the University of Wisconsin at Madison
and received an M.S. in

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Electrical Engineering from Wichita State
University and a B.S. in Electrical Engineering from Hefei
University of Technology in the Peoples Republic of China.





PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

The Companys common stock, par value $0.001
(Common Stock), is traded on the Nasdaq National
Market (Nasdaq) under the symbol TVIA.
The following table sets forth, for the periods indicated, the
range of high and low sales prices for the Common Stock on
Nasdaq, since August 8, 2000, the date of the
Companys initial public offering, as reported in its
consolidated transaction reporting system.

|                    |              |      |   |       |  |  |   |      | 
|------------------- | ------------ | ---- | - | ----- |  |  | - | ---- | 
|                    |              | High |   | Low  
|                    |              |      |   |      
|2000 Quarter Ended: |              |      |   |       |  |  |   |     
|                    | September 30 |      | $ | 20.00 |  |  | $ | 8.50 | 
|                    | December 31  |      |   | 18.25 |  |  |   | 3.38 | 
|2001 Quarter Ended: |              |      |   |       |  |  |   |     
|                    | March 31     |      |   | 4.25  |  |  |   | 1.50 | 
|                    | June 30      |      |   | 3.00  |  |  |   | 1.44 | 
|                    | September 30 |      |   | 2.50  |  |  |   | 1.21 | 
|                    | December 31  |      |   | 2.11  |  |  |   | .87  | 
|2002 Quarter Ended: |              |      |   |       |  |  |   |     
|                    | March 31     |      |   | 2.15  |  |  |   | 1.45 | 

As of May 31, 2002, the Common Stock was
held by 340 stockholders of record (not including
beneficial holders of stock held in street name). The Company
has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable
future. The Company currently intends to retain future earnings
for the development of its business.




Item 6.     Selected
Consolidated Financial Data

The data set forth below should be read in
conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations included in
Item 7 of this Report and the Consolidated Financial
Statements and related Notes included in Item 8 of this
Report.

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set
forth below with respect to our consolidated statements of
operations data for the years ended March 31, 2002, 2001
and 2000, and with respect to our consolidated balance sheets at
March 31, 2002 and 2001, are derived from our Consolidated
Financial Statements and related Notes which are included in
this Form 10-K. The selected consolidated statements of
operations data for the years ended March 31, 1999 and 1998
and our consolidated balance sheet data at March 31, 2000,
1999 and 1998 are derived from our audited consolidated
financial statements not included in this Form 10-K. The
data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial
Statements and related Notes included in this Form 10-K.

|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |        |       | 
|-------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------- | ------- | ------- | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                                                                                                 |                                               |                                      
|                                                                                                                                 |                                               | Year Ended March 31,                 
|                                                                                                                                 |                                               |                                      
|                                                                                                                                 |                                               | 2002                                  |         | 2001    |        | 2000 |        | 1999   |        | 1998
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |     
|                                                                                                                                 |                                               |                                      
|                                                                                                                                 |                                               | (In thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                                                                  |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Revenues:                                                                                                                        |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 | Product sales                                 |                                       | $       | 11,342  |        |      | $      | 12,743 |        |      | $      | 6,528  |       |   | $      | 1,432  |       |   | $      | 2,597  |      
|                                                                                                                                 | Development contracts and other               |                                       |         | 498     |        |      |        | 701    |        |      |        | 529    |       |   |        | 90     |       |   |        | 861    |      
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 |                                               | Total revenues                        |         |         | 11,840 |      |        |        | 13,444 |      |        |        | 7,057 |   |        |        | 1,522 |   |        |        | 3,458 | 
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Cost of revenues:                                                                                                                |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 | Product sales                                 |                                       |         | 8,522   |        |      |        | 7,650  |        |      |        | 3,622  |       |   |        | 1,257  |       |   |        | 2,458  |      
|                                                                                                                                 | Development contracts and other               |                                       |         | 109     |        |      |        | 68     |        |      |        | 185    |       |   |        | 51     |       |   |        | 526    |      
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 |                                               | Total cost of revenues                |         |         | 8,631  |      |        |        | 7,718  |      |        |        | 3,807 |   |        |        | 1,308 |   |        |        | 2,984 | 
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Gross profit                                                                                                                     |                                               |                                       | 3,209   |         |        |      | 5,726  |        |        |      | 3,250  |        |       |   | 214    |        |       |   | 474    |       
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Operating expenses:                                                                                                              |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 | Research and development                      |                                       |         | 12,664  |        |      |        | 6,774  |        |      |        | 3,390  |       |   |        | 3,357  |       |   |        | 3,199  |      
|                                                                                                                                 | Sales, general and administrative             |                                       |         | 5,056   |        |      |        | 5,695  |        |      |        | 3,370  |       |   |        | 2,062  |       |   |        | 2,203  |      
|                                                                                                                                 | Amortization of deferred stock compensation   |                                       |         | 1,572   |        |      |        | 2,701  |        |      |        | 1,499  |       |   |        | 2      |       |   |        |       |      
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 |                                               | Total operating expenses              |         |         | 19,292 |      |        |        | 15,170 |      |        |        | 8,259 |   |        |        | 5,421 |   |        |        | 5,402 | 
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 | Operating loss                                |                                       |         | (16,083 | )      |      |        | (9,444 | )      |      |        | (5,009 | )     |   |        | (5,207 | )     |   |        | (4,928 | )    
|Other expense (income), net                                                                                                      |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 | Interest income                               |                                       |         | (1,818  | )      |      |        | (2,105 | )      |      |        | (49    | )     |   |        | (7     | )     |   |        | (29    | )    
|                                                                                                                                 | Interest expense                              |                                       |         |        |        |      |        | 132    |        |      |        | 328    |       |   |        | 173    |       |   |        | 75     |      
|                                                                                                                                 | Amortization of debt guarantee debt and other |                                       |         |        |        |      |        | 327    |        |      |        | 753    |       |   |        | 298    |       |   |        | 28     |      
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                                                 |                                               | Other expense (income), net           |         |         | (1,818 | )    |        |        | (1,646 | )    |        |        | 1,032 |   |        |        | 464   |   |        |        | 74    | 
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Net loss before extraordinary item                                                                                               |                                               |                                       | (14,265 | )       |        |      | (7,798 | )      |        |      | (6,041 | )      |       |   | (5,671 | )      |       |   | (5,002 | )     
|Extraordinary item, net of income taxes                                                                                          |                                               |                                       |        |         |        |      | 672    |        |        |      |       |        |       |   |       |        |       |   |       |       
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Net loss                                                                                                                         |                                               |                                       | (14,265 | )       |        |      | (8,470 | )      |        |      | (6,041 | )      |       |   | (5,671 | )      |       |   | (5,002 | )     
|Dividend related to convertible preferred stock                                                                                  |                                               |                                       |        |         |        |      | 671    |        |        |      | 2,161  |        |       |   |       |        |       |   |       |       
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Net loss attributable to common stockholders                                                                                     |                                               | $                                     | (14,265 | )       |        | $    | (9,141 | )      |        | $    | (8,202 | )      |       | $ | (5,671 | )      |       | $ | (5,002 | )     
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Basic and diluted net loss attributable to common
    stockholders before extraordinary item                                     |                                               | $                                     | (0.66   | )       |        | $    | (0.56  | )      |        | $    | (2.63  | )      |       | $ | (2.56  | )      |       | $ | (2.32  | )     
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Extraordinary item, net of income taxes                                                                                          |                                               | $                                     |        |         |        | $    | 0.05   |        |        | $    |       |        |       | $ |       |        |       | $ |       |       
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Basic and diluted net loss attributable to common
    stockholders                                                               |                                               | $                                     | (0.66   | )       |        | $    | (0.61  | )      |        | $    | (2.63  | )      |       | $ | (2.56  | )      |       | $ | (2.32  | )     
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       
|Shares used in computing basic and diluted net
    loss per share to common stockholders before and after
    extraordinary item |                                               |                                       | 21,631  |         |        |      | 15,052 |        |        |      | 3,118  |        |       |   | 2,219  |        |       |   | 2,156  |       
|                                                                                                                                 |                                               |                                       |         |         |        |      |        |        |        |      |        |        |       |   |        |        |       |   |        |       

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|                                                                          |  |                                       |        |      |  |      |        |      |  |      |         |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                          |  |                                      
|                                                                          |  | Year Ended March 31,                 
|                                                                          |  |                                      
|                                                                          |  | 2002                                  |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                          |  |                                       |        |      |  |      |        |      |  |     
|                                                                          |  |                                      
|                                                                          |  | (In thousands, except per share data)
|Consolidated Balance Sheet Data:                                          |  |                                       |        |      |  |      |        |      |  |      |         |   |  |   |         |   |  |   |        |  
|Cash and cash equivalents, restricted cash and
    short-term investments |  | $                                     | 35,505 |      |  | $    | 46,682 |      |  | $    | 6,864   |   |  | $ |        |   |  | $ | 8      |  
|Working capital (deficit)                                                 |  |                                       | 35,979 |      |  |      | 50,305 |      |  |      | 5,915   |   |  |   | (3,476  | ) |  |   | (2,439 | )
|Total assets                                                              |  |                                       | 43,387 |      |  |      | 57,435 |      |  |      | 11,368  |   |  |   | 730     |   |  |   | 1,795  |  
|Long term debt                                                            |  |                                       |       |      |  |      |       |      |  |      | 2,959   |   |  |   |        |   |  |   |       |  
|Redeemable convertible preferred stock                                    |  |                                       |       |      |  |      |       |      |  |      | 16,594  |   |  |   | 9,704   |   |  |   | 5,212  |  
|Stockholders equity (deficit)                                            |  |                                       | 40,925 |      |  |      | 53,422 |      |  |      | (14,266 | ) |  |   | (12,978 | ) |  |   | (7,326 | )






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of the
Companys financial condition and results of operations
should be read in conjunction with Selected Consolidated
Financial Data and the Consolidated Financial Statements
and related Notes included elsewhere in this Report.

When used in this discussion, the words
expects, anticipates,
estimates, and similar expressions are intended to
identify forward-looking statements. These statements relate to
future periods and include statements as to expected revenues
and sources of revenues, decrease in sales to our top customers,
reasons for decreased revenues, including the slowdown of the
interactive television industry, an inventory correction, delay
in customer product introductions and general economic
uncertainty, net losses, defects or bugs in our products or
software, future profitability, the reasonableness of our
accounting assumptions and estimates, factors that may affect
our gross margin, the effect of certain accounting principles on
our consolidated financial statements, future sales to key
customers, the level of export sales, the level of our research
and development expense, development of new products, research
and development in China, uses and adequacy of our current cash,
cash equivalents and short-term investments, the impact of the
adoption of accounting pronouncements, reliance on a small
number of original equipment manufacturers, future orders of our
products, our ability to compete, increasing competition in our
markets and our competitors, sales to customers outside of the
United States, effect of foreign currency exchange rates, and
changes in interest rates, are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as
well as risks relating to as slower than anticipated emergence
of the interactive television market; the effect of the
terrorist attacks in the United States and any resulting
conflicts or similar events worldwide on our customers
demand of our products; the impact of worldwide events on our
operations in China; general economic conditions and specific
conditions in the markets we address; dependence on a key
customer or OEM; the loss of a key customer; decreases in sales
to a key OEM; our ability to specify, develop or acquire,
complete, introduce, market and transition to volume production
new products and technologies in a timely manner; the volume of
our product sales and pricing concessions on volume sales; the
qualification, availability and pricing of competing products
and technologies and the resulting effects on sales and pricing
of our products; fluctuations in the manufacturing yields of our
third party semiconductor foundries and other problems or delays
in the fabrication, assembly, testing or delivery of our
products; purchases of capital assets; changes in our products
or customer mix; the risk that excess inventory may result in
write-offs, price erosion and decreased demand; the level of
orders received that can be shipped in a fiscal quarter; the
impact of foreign currency exchange rates; and the matters
discussed in Factors that May Affect Results. These
forward-looking statements speak only as of the date hereof. The
Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the
Companys expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is
based.

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Overview

We design, develop and market multi-media display
processors for the advanced television and emerging display
markets. Our multi-media display processors accept video,
graphics and audio signals from terrestrial broadcast, narrow
band telephone lines, cable, satellite and Ethernet and blend
them together on one or more displays for a high quality,
customized and interactive viewing experience. Sales to
customers in our targeted markets accounted for 100% of total
revenues in fiscal years 2002 and 2001, and 83% in fiscal 2000.

We currently have three product families: the
CyberPro 5202 family, introduced in calendar year 2002, the
CyberPro 5300 family, introduced in calendar year 1999, and the
CyberPro 5000 family, introduced in calendar year 1998. These
product families currently generate most of our revenues. We
sell our products through two channels. First, we sell our
products directly to original equipment manufacturers, or OEMs,
and recognize revenues at the time of shipment to these OEMs.
Second, we sell our products to a number of distributors. We
defer recognition of revenues for sales to our distributors
until they have sold our products to end-users. We also generate
revenues from licensing software, which we believe will continue
to constitute a small percentage of total revenues in the future.

Approximately 32%, 67% and 71% of our total
revenues for the fiscal years ended March 31, 2002, 2001
and 2000, respectively, were derived from customers located
outside the United States. All of our revenues to date have been
denominated in United States dollars. Historically, a relatively
small number of customers and distributors have accounted for a
significant portion of our product sales. Our top two customers
accounted for 62% and 14% of total revenues in the fiscal year
ended March 31, 2002, respectively; however, we anticipate
that sales to these two customers in future periods will not be
at the level experienced in fiscal 2002 and could be
significantly lower than fiscal 2002 levels. Revenues from
customers in Taiwan comprised 22% of our revenues for the fiscal
year ended March 31, 2002.

Various factors have affected and may continue to
affect our gross margin. These factors include, but are not
limited to, our product mix, the position of our products in
their respective life cycles, yields and the mix of our product
sales and development contracts and other revenues. For example,
newly introduced products generally have higher average selling
prices and generate higher gross margins. Both average selling
prices and the related gross margins typically decline over
product life cycles due to competitive pressures and volume
price agreements. Our gross margin and operating results in the
future may continue to fluctuate as a result of these and other
factors.

The sales cycle for the test and evaluation of
our products can range from three months to nine months or more,
with an additional three to nine months or more before an OEM
customer commences volume production of equipment incorporating
our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and
inventory costs and the generation of revenues from design wins.

We have sustained losses on a quarterly and
annual basis since inception. As of March 31, 2002, we had
an accumulated deficit of approximately $50.3 million.
These losses resulted from significant costs incurred in the
planning and development of our technology and services and from
significant marketing costs. We anticipate lower revenues for at
least the next several quarters as compared to the same period
in the prior fiscal year. We believe that this is due to a
slowdown in the interactive television industry caused by a
slower than anticipated emergence of the interactive television
market, a general industry inventory correction, delay in
customer product introductions in order to incorporate
additional third-party features, and general economic
uncertainty.

In connection with the grant of stock options to
employees, we have recorded stock based compensation related to
stock options granted below deemed fair market value
cumulatively through March 31, 2002 of approximately
$6.4 million. This amount represents the difference between
the exercise price of these stock option grants and the deemed
fair value of the common stock at the time of grant. Of the
total, we amortized approximately $5.8 million through
March 31, 2002. The remaining $0.6 million will be
amortized over the remaining vesting period of the options,
generally four years or less. As a result, the amortization of
stock based compensation will impact our reported results of
operations through fiscal year 2003.

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We have a subsidiary in Hefei, Peoples
Republic of China, which performs final test and research and
development, and branch offices in Taipei, Taiwan and Berkshire,
United Kingdom, which are primarily engaged in sales efforts.

Critical Accounting Policies and
Estimates

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of net revenue and expenses during the
reporting period. We regularly evaluate our estimates and
assumptions related to allowances for doubtful accounts, sales
returns and allowances, inventory reserves, purchased intangible
asset valuations, warranty reserves, and other contingencies. We
base our estimates and assumptions on historic experience and on
various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. To the extent
there are material differences between our estimates and the
actual results, our future results of operations will be
affected.

We believe the following critical accounting
policies, among others, affect the significant judgments and
estimates we use in the preparation of our consolidated
financial statements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues.We
    recognize revenues from product sales upon shipment to OEMs and
    end users provided that persuasive evidence of an arrangement
    exists, the price is fixed, title has transferred, collection of
    resulting receivables is reasonably assured, there are no
    customer acceptance requirements, and there are no remaining
    significant obligations. Reserves for sales returns and
    allowances are recorded at the time of shipment. Our sales to
    distributors are made under agreements allowing for returns or
    credits under certain circumstances. We defer recognition of
    revenue on sales to distributors until products are resold by
    the distributor to the end user.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Warranty.Our
    products typically carry a one-year warranty. We provide
    reserves for estimated product warranty costs at the time
    revenue is recognized. Although we engage in extensive product
    quality programs and processes, our warranty obligation is
    affected by product failure rates, use of materials and service
    delivery costs incurred in correcting a product failure. Should
    actual product failure rates, use of materials or service
    delivery costs differ from our estimates, additional warranty
    reserves could be required, which could reduce gross margins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Receivables.We
    maintain an allowance for doubtful accounts for estimated losses
    resulting from the inability of customers to make required
    payments. If the financial condition of our customers were to
    deteriorate, resulting in an impairment of their ability to make
    payments, additional allowances could be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Inventory.We write
    down our inventory for estimated obsolescence or unmarketable
    inventory equal to the difference between the cost of inventory
    and the estimated realizable value based upon assumptions about
    future demand and market conditions. If actual market conditions
    are less favorable than those projected by management,
    additional inventory write-downs could be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Impairment of Long-Lived Assets.We evaluate long-lived assets used in
    operations, including purchased intangible assets, when
    indicators of impairment, such as reductions in demand or
    significant economic slowdowns in the semiconductor industry,
    are present. Reviews are performed to determine whether the
    carrying value of assets is impaired based on comparison to the
    undiscounted expected future cash flows. If the comparison
    indicates that there is impairment, the impaired asset is
    written down to fair value. Impairment is based on the excess of
    the carrying amount over the fair value of those assets.
    Significant management judgment is required in the forecast of
    future operating results that is used in the preparation of
    expected discounted cash flows. It is reasonably possible that
    the estimates of anticipated future net revenue, the remaining
    estimated economic life of the products and technologies, or
    both, could differ from those used to assess the recoverability
    of these assets. In that event, additional impairment charges or
    shortened useful lives of certain long-live assets could be
    required.

15



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##### Table of Contents



Results of Operations

The following tables set forth, for the periods
indicated, certain consolidated statement of operations data
reflected as a percentage of revenues. Our results of operations
are reported as a single business segment.

|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |    |     | 
|----------------------------------------------- | ------------------------------------------- | --------------------------- | ---- | ---- | --- | ---- | --- | --- | --- | - | ---- | -- | --- | 
|                                                |                                             |                            
|                                                |                                             | Year Ended March 31,       
|                                                |                                             |                            
|                                                |                                             | 2002                        |      | 2001 |     | 2000
|                                                |                                             |                             |      |      |     |     
|Consolidated Statement of Operations Data:      |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Revenues:                                       |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                | Product sales                               |                             |      | 96   | %   |      |     | 95  | %   |   |      | 93 | %  
|                                                | Development contracts and other             |                             |      | 4    |     |      |     | 5   |     |   |      | 7  |    
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                |                                             | Total revenues              |      |      | 100 |      |     |     | 100 |   |      |    | 100 | 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Cost of revenues:                               |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                | Product sales                               |                             |      | 72   |     |      |     | 57  |     |   |      | 51 |    
|                                                | Development contracts and other             |                             |      | 1    |     |      |     |    |     |   |      | 3  |    
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                |                                             | Total cost of revenues      |      |      | 73  |      |     |     | 57  |   |      |    | 54  | 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Gross profit                                    |                                             |                             | 27   |      |     |      | 43  |     |     |   | 46   |   
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Operating expenses:                             |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                | Research and development                    |                             |      | 107  |     |      |     | 51  |     |   |      | 48 |    
|                                                | Sales, general and administrative           |                             |      | 43   |     |      |     | 42  |     |   |      | 48 |    
|                                                | Amortization of deferred stock compensation |                             |      | 13   |     |      |     | 20  |     |   |      | 21 |    
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                |                                             | Total operating expenses    |      |      | 163 |      |     |     | 113 |   |      |    | 117 | 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Operating loss                                  |                                             |                             | (136 | )    |     |      | (70 | )   |     |   | (71  | ) 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Other expense (income), net                     |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                | Interest income                             |                             |      | (15  | )   |      |     | (16 | )   |   |      | (1 | )  
|                                                | Interest expense                            |                             |      |     |     |      |     | 1   |     |   |      | 5  |    
|                                                | Amortization of debt guarantee and other    |                             |      |     |     |      |     | 3   |     |   |      | 11 |    
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|                                                |                                             | Other expense (income), net |      |      | (15 | )    |     |     | (12 | ) |      |    | 15  | 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Net loss before extraordinary item              |                                             |                             | (121 | )    |     |      | (58 | )   |     |   | (86  | ) 
|Extraordinary item, net of income taxes         |                                             |                             |     |      |     |      | 5   |     |     |   |     |   
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Net loss                                        |                                             |                             | (121 | )    |     |      | (63 | )   |     |   | (86  | ) 
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Dividend related to convertible preferred stock |                                             |                             |     |      |     |      | 5   |     |     |   | 30   |   
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   
|Net loss attributable to common stockholders    |                                             |                             | (121 | )%   |     |      | (68 | )%  |     |   | (116 | )%
|                                                |                                             |                             |      |      |     |      |     |     |     |   |      |   

Results of Operations for the Fiscal Years
Ended March 31, 2002, 2001 and 2000

Revenues.Revenues
were $11.8 million, $13.4 million and
$7.1 million for the fiscal years ended March 31,
2002, 2001 and 2000, respectively. Revenues decreased by
$1.6 million from fiscal year 2001 to fiscal year 2002, a
decrease of 12%. This decrease was primarily due to a slower
than anticipated emergence of the interactive television market
and general economic conditions in fiscal 2002. Revenues from
two customers, Prediwave Corporation and Motorola Broadband
accounted for 62% and 14% of total revenues in fiscal year 2002.
We anticipate future sales to Prediwave for the foreseeable
future will not be at the level achieved in fiscal 2002.
Revenues increased by $6.3 million from fiscal year 2000 to
fiscal year 2001, an increase of 91%. This increase in revenues
was primarily due to increased sales of our CyberPro 5000 series
of semiconductors for the broadband set-top box and emerging
interactive displays. Most of our revenues are

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from design wins with new OEMs which rely on
third-party manufacturers or distributors to provide inventory
management and purchasing functions.


Export revenues, consisting primarily of product
sales and development contracts to OEMs and distributors in
Asia, represented 32%, 67% and 71% of total revenues in fiscal
years 2002, 2001 and 2000, respectively. All export revenues are
denominated in United States dollars. While export revenues were
not a majority of our revenues in fiscal year 2002 due to sales
to Prediwave, which is headquartered in California, we believe
export sales will represent a majority of our revenues in the
foreseeable future.

Gross margin.Gross
margin was 27%, 43% and 46% for the fiscal years ended
March 31, 2002, 2001 and 2000, respectively. Gross margin
decreased from 43% in fiscal 2001 to 27% in fiscal 2002
primarily as a result of inventory charges related to slow
moving inventory impacted by the reduced revenues and product
transition within our CyberPro 5000 product family and lower
revenues over relatively fixed product cost. Gross margin
decreased from 46% in fiscal 2000 to 43% in fiscal 2001
primarily as a result of a $500,000 inventory charge related to
quantities of an older product line.

Research and
development.Research and development
expenses include personnel and other costs associated with the
development of product designs, process technology, software and
programming hardware. Our research and development expenses
reflect our continuing efforts to develop and bring to market
innovative and cost effective multi-media display processors
that process the rich media content available on the broadband
network. Research and development expenses were
$12.7 million, $6.8 million and $3.4 million for
the fiscal years ended March 31, 2002, 2001 and 2000,
respectively. As a percentage of revenues, research and
development expenses represented 107%, 51% and 48% for the
fiscal years ended March 31, 2002, 2001 and 2000,
respectively. The increase in research and development expenses
in absolute dollars and as a percentage of revenues from fiscal
year 2001 to fiscal year 2002 is primarily attributable to the
increase in the number of research and development personnel in
both the second half of fiscal year 2001 and fiscal year 2002,
higher levels of depreciation resulting from the acquisition of
computers, lab equipment, and software, and a $500,000
write-down of licensed technology. As a consequence of this
hiring, we now employ 276 employees in research and
development, of which 59 are located in the United States and
217 are located in the Peoples Republic of China. Our
research and development activities in the Peoples
Republic of China provide software and application specific
integrated circuit development support to our domestic
operations. The costs of our research and development activities
in China are substantially lower than the costs of our
activities in Santa Clara. The increase in research and
development expenses in absolute dollars and as a percentage of
revenues from fiscal year 2000 to fiscal year 2001 is primarily
attributable to the hiring of 32 additional engineers in Santa
Clara, California and the establishment of the research and
development operation in the Peoples Republic of China. In
the foreseeable future, we expect research and development
expenses in absolute dollars to remain level or decline from
fiscal year 2002.

Sales, general and
administrative.Sales, general and
administrative expenses consist primarily of personnel and other
costs associated with the management of our business and with
the sale and marketing of our products. Sales, general and
administrative expenses were $5.1 million,
$5.7 million and $3.4 million for the fiscal years
ended March 31, 2002, 2001 and 2000, respectively. As a
percentage of revenues, sales, general and administrative
expenses were 43%, 42% and 48% for the fiscal years ended
March 31, 2002, 2001 and 2000, respectively. The decrease
in sales, general and administrative expenses in absolute
dollars from fiscal year 2001 to fiscal year 2002 was primarily
due to approximately $350,000 of higher tradeshow marketing
expenses incurred in fiscal 2001. The increase in sales, general
and administrative expenses in absolute dollars from fiscal year
2000 to fiscal year 2001 was primarily due to increased
headcount, including hiring executive officers, expansion of our
domestic and international sales force, the building of our
general and administrative infrastructure and the Companys
participation at trade shows. The decrease in sales, general and
administrative expenses as a percentage of revenues from fiscal
year 2000 to fiscal year 2001 was primarily attributable to the
increase in revenues. In April 2002, the Company reduced its
sales, general and administrative expenses, including a
reduction in force of certain officers and employees.

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Amortization of deferred stock
compensation.We grant stock options
to hire, motivate and retain employees. We incurred stock
compensation expense of $1.6 million, $2.7 million and
$1.5 million for the fiscal years ended March 31,
2002, 2001 and 2000, respectively.

Other expense (income),
net.Other expense (income), net
consists primarily of interest income, interest expense and
amortization of guarantee debt costs. Other income, net was
$1.8 million and $1.6 million for fiscal years 2002
and 2001, respectively, compared to other expense, net of
$1.0 million for the fiscal year ended March 31, 2000.
Other income, net, generated in the fiscal years ended
March 31, 2002 and 2001 was primarily a result of interest
income earned from our investments which increased significantly
in fiscal year 2001 as a result of investments made using the
proceeds from our initial public offering, and to a lesser
extent, the repayment of our outstanding debt, partially offset
by amortization of debt guarantee. Other income, net was further
offset in fiscal year 2002 by a lower return on our investments
and declining levels of amount of cash and investments. Other
expense, net, in the fiscal year ended December 31, 2000
consisted mostly of the amortization of deferred interest
related to warrants and options issued to guarantors of our
debt, and interest expense on this debt.

Provision for income
taxes.We are taxed in our
jurisdictions of operations based on the extent of taxable
income generated in each jurisdiction. For income tax purposes,
revenues are attributed to the taxable jurisdiction where the
sales transactions generating the revenues were initiated. We
incurred operating losses for each of the fiscal years ended
March 31, 2002, 2001 and 2000, and therefore made no
provision for income tax in these fiscal years. As of
March 31, 2002, we had federal and state net cumulative
operating losses of approximately $42.0 million and
$25.0 million, respectively, which are available to offset
future taxable income. If not used, these net operating losses
will expire through 2022 and 2012, respectively.

Extraordinary item.In August 2000, we used a portion of
the proceeds of our initial public offering to repay
approximately $4.0 million of debt that was outstanding at
that time. As a result of this early extinguishment of debt, the
unamortized portion of the debt guarantee costs was recorded as
an extraordinary item, net of income taxes, in the amount of
$0.7 million for the fiscal year ended March 31, 2001.

Preferred stock
dividend.During the fiscal years
ended March 31, 2001 and 2000, we recorded a preferred
stock dividend of $0.7 million and $2.2 million,
respectively, representing the value of the beneficial
conversion feature on the issuance of convertible preferred
stock. The beneficial conversion feature was calculated at the
commitment date based on the difference between the conversion
price of $3.75 per share and the estimated fair value of the
common stock at that date.

Liquidity and Capital Resources

During the fiscal year ended March 31, 2002,
net cash used in operating activities was $8.0 million,
primarily due to net loss of $14.3 million, a decrease in
accrued liabilities of $1.1 million, partially offset by
non-cash expenses of $3.2 million and decreases of
$1.8 million and $2.8 million in accounts receivable
and inventories, respectively. During the fiscal year ended
March 31, 2001, net cash used in operating activities was
$9.6 million primarily due to net loss of
$8.5 million, increase in inventories of $3.0 million
and increase in other current assets and prepaid expenses of
$1.3 million, partially offset by non-cash expenses of
$4.3 million. During the fiscal year ended March 31,
2000, net cash used in operating activities were
$3.1 million primarily due to net loss of $6.0 million
and an increase in inventories of $1.0 million, partially
offset by non-cash expenses of $2.9 million and an increase
in accounts payable of $1.2 million.

Purchases of property and equipment were
$2.1 million, $2.2 million and $0.2 million for
the fiscal years ended March 31, 2002, 2001 and 2000. As of
March 31, 2002, we did not have any significant capital
expenditure commitments.

Net cash flows from financing activities were
$0.3 million, $54.7 million and $7.1 million for
the fiscal years ended March 31, 2002, 2001 and 2000,
respectively. Net cash flows from financing activities in fiscal
2002 resulted primarily from the proceeds from the sale of
common stock under our Employee Stock Purchase Plan. Net cash
flows from financing activities in fiscal 2001 resulted
primarily from the proceeds from the issuance of common stock in
our initial public offering completed in August 2000, the sale of

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409,992 shares of Series I convertible
preferred stock, and the sale of common stock to Wind River,
partially offset by the repayment of outstanding debt and the
repurchase of our common stock. Net cash provided by the sale of
preferred and common stock was $7.9 million in the fiscal
year ended March 31, 2000. Proceeds from bank lines of
credit were $3.3 million for the fiscal year ended
March 31, 2000.


As of March 31, 2002, our principal source
of liquidity consisted of cash and cash equivalents and
short-term investments. Working capital at March 31, 2002
was $36.0 million.

The following represent our more significant
working capital commitments:

The Company leases its facilities under
non-cancelable operating leases expiring at various dates
through June 2005. Under the terms of the leases, the Company is
responsible for a portion of the facilities operating
expenses, insurance and property taxes. Future minimum lease
payments under all non-cancelable facility and operating leases
as of March 31, 2002 were as follows (in thousands):

|       |  |        |     | 
|------ |  | ------ | --- | 
|Fiscal |  |       
|Year   |  | Amount
|       |  |       
|2003   |  | $      | 584 | 
|2004   |  |        | 227 | 
|2005   |  |        | 48  | 
|2006   |  |        | 11  | 
|       |  |        |     | 
|       |  | $      | 870 | 
|       |  |        |     | 

On November 10, 2001, the Board of Directors
authorized a stock repurchase program to acquire outstanding
common stock in the open market. Under this program, the Board
of Directors authorized the acquisition of up to 200,000 of the
Companys common stock. The Company did not acquire any
treasury shares during the fiscal year ended March 31,
2002. At the May 31, 2002 stock price, the proceeds to be
used to acquire up to 200,000 shares of the Companys
common stock will have a minimal impact on the Companys
current cash, cash equivalent and short-term investment balances.

The Company places purchase orders with wafer
foundries throughout its normal course of business. As of
March 31, 2002, the Company had approximately $268,000 of
outstanding purchase commitments with a supplier for the
purchase of wafers. The Company expects to receive and pay for
the wafers, within the next six months, from its existing cash
balances.

Based on our current expectations, we believe
that our cash and cash equivalents and short-term investment,
which totaled $35.5 million at March 31, 2002, will be
sufficient to meet our working capital and capital requirements
through at least the next twelve months. In the fiscal year
ended March 31, 2002, we used $14.8 million of cash
and cash equivalents. As a result of anticipated net losses and
purchases of capital assets, we anticipate that we will use a
slightly lower amount in the fiscal year ending March 31,
2003. We may also utilize cash to acquire or invest in
complementary businesses or to obtain the use of complementary
technologies.

The following represent our significant related
party transactions:



| |                                                                              
| | -----------------------------------------------------------------------------
| | Accrued Salary Converted into Preferred
    Stock or Used to Exercise Options

For the year ended March 31, 2000, the
Chairman of the Board of the Company elected to have a portion
of his accrued salary forgiven to pay the exercise price of
options upon exercise or converted into convertible preferred
stock. In the year ended March 31, 2001, the Chairman of
the Board elected to receive his compensation in cash. For the
year ended March 31, 2000, the Chairman of the Board
converted $244,000 into a subscription for 65,066 shares of
Series H redeemable convertible preferred stock at $3.75
per share and converted $96,000 upon exercise of options at
$0.12 per share.

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| |                
| | ---------------
| | Option Exchange

In September 2001, the Company implemented option
exchanges with the Chairman of the Board of Directors and the
former Vice President of Engineering. These officers were given
the opportunity to exchange options for a new grant for the same
number of shares at least six months and a day after completion
of the option exchange. On April 5, 2002, the Company
granted these officers new options to replace the eligible
options that had been cancelled.



| |                                      
| | -------------------------------------
| | Commission and Severance
    Payments

In the year ended March 31, 2000, the former
President of the Company was entitled to receive a 1.75%
commission on the amount of third party participation in the
issuance of Series I preferred stock. The commission was
paid in a combination of shares of common stock and cash of
approximately $56,000. Our former President resigned on
January 31, 2002 and received a severance package that
included additional salary equal to $94,000 and an additional
six months of vesting for his stock options.



| |                         
| | ------------------------
| | Sales to Related Parties

A member of the Board of Directors is an officer
of a company which is an affiliate company of a major customer.
Sales to this customer were $127,000, $43,000 and $292,000 for
the years ended March 31, 2002, 2001 and 2000, respectively.



| |                            
| | ---------------------------
| | Payments to Related Parties

A former member and a current member of the Board
of Directors are officers of companies which are affiliated to
the Companys major vendors UMC and TSMC, respectively.
Purchases from UMC amounted to $2,485,000 for the fiscal year
ended March 31, 2002. Total combined purchases from UMC and
TSMC amounted to $7,062,000 and $2,041,000, respectively, for
the fiscal years ended March 31, 2001 and 2000,
respectively. The accounts payable outstanding to UMC as of
March 31, 2002 was $173,000. The total combined accounts
payable outstanding to UMC and TSMC as of March 31, 2001
and 2000 was $312,000 and $781,000, respectively.

Another member of the Board of Directors received
$13,000 and $10,500 in the year ended March 31, 2002 and
2001, respectively, and an option to purchase 25,000 shares
of common stock in the year ended March 31, 2001, for
providing management consulting services.

Inflation

The impact of inflation on our business has not
been material for the fiscal years ended March 31, 2002,
2001, and 2000.

Recently Issued Accounting
Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 and SFAS
No. 142, Business Combinations and
Goodwill and Other Intangibles. SFAS No. 141
requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. Under SFAS
No. 142, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment, applying a fair-value
based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirers intent to do so.
Other intangible assets will continue to be valued and amortized
over their estimated lives; in-process research and development
will continue to be written off immediately. The Company adopted
SFAS No.s 141 and 142 as of April 1, 2002.
The adoption of SFAS No. 141 and 142 did not have a
material impact on the Companys consolidated financial
statements.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 establishes one
accounting model to be used for long-lived assets to be disposed

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of by sale, and broadens the presentation of
discontinued operations to include more disposal operations.
SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 is
effective for fiscal years beginning after December 15,
2001. The Company adopted SFAS No. 144 as of April 1,
2002. The adoption of SFAS No. 144 did not have a material
impact on the Companys consolidated financial statements.


On April 30, 2002, the FASB issued Statement
No. 145, which rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the
criteria in Opinion 30 will now be used to classify those
gains and losses. Statement 145 amends Statement 13 to
require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. The Company
has not yet determined the impact that this statement will have
on its financial position or results of operations.

FACTORS THAT MAY AFFECT RESULTS

We expect continuing losses and may not
achieve profitability which could affect our ability to expand
our business.

We have incurred significant operating losses in
each year since our inception and expect to continue to incur
net losses for the foreseeable future, primarily as a result of
expenses for research and development. Our losses increased as
we transitioned our focus away from the personal computer market
toward the advanced television and emerging interactive display
markets in 1996. We have incurred net losses of approximately
$50.3 million from our inception in March 1993 through
March 31, 2002. If we continue to incur net losses, we may
not be able to expand our business as quickly as we would like.
We do not know when or if we will become profitable and if we do
become profitable, we may not be able to sustain or increase our
profitability.

Because the emergence of the interactive
television market has been slower than anticipated, we may not
be able to sell our products or sustain our business.

Our multi-media display processors are
incorporated into products that allow interactive television.
The concept of interactive television and the market for
products that facilitate it are new and developing. As a result,
our profit potential is unproven and may never materialize.
Broad acceptance of advanced televisions and emerging
interactive displays will depend on the extent to which
consumers use devices other than personal computers to access
the Internet. To date, the market for these products has not
developed as quickly as our customers and we had previously
anticipated. Consequently, certain of our customers have
significant inventory of our semiconductors or products that
incorporate our semiconductors, thereby limiting the opportunity
to sell additional semiconductors to these customers until their
present inventories are depleted. Our success will also depend
on the ability of OEMs and service providers that work with our
OEMs to create demand for and market the products incorporating
our semiconductors. Unless a sufficiently large market for
advanced televisions and emerging interactive displays and other
products that are used for interactive television develops,
demand for products incorporating our semiconductor solutions
may not be sufficient to sustain our business.

A significant amount of our revenues comes
from two customers and any decrease in revenues from these
customers could significantly impact our financial
results.

Historically we have been, and we expect to
continue to be, dependent on a relatively small number of OEMs
for a significant portion of our total revenues. Sales to
Prediwave Corporation and Motorola Broadband, both OEMs,
accounted for approximately 62% and 14% of our total revenues
for the fiscal year ended March 31, 2002, respectively. For
fiscal year ended March 31, 2001 sales to Prediwave
Corporation accounted for approximately 12% of our total
revenues. We may not be able to retain our two largest customers
or to obtain additional key accounts. Prediwave Corporation, our
largest customer, has not placed

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an order for delivery of our products after
fiscal 2002. While we expect that Prediwave Corporation will
place orders for additional products, we anticipate that sales
to Prediwave Corporation in future periods will not be at the
level experienced in fiscal 2002 and will likely be lower. Any
reduction or delay in sales of our products to Prediwave or
another key customer or our inability to successfully develop
relationships with additional key customers could negatively
impact our financial results.


Our operating expenses may increase as we
build our business and these increased expenses may impact our
ability to become profitable.

We have made substantial expenditures on research
and development and organizational infrastructure consisting of
an executive team, finance, sales, marketing and management
information systems departments and our design center located in
the Peoples Republic of China. For the fiscal years ended
March 31, 2002, 2001 and 2000, research and development
expenses represented 107%, 51% and 48% of our revenues,
respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new
products and services, and on our research and development
activities in China. While we have implemented actions to reduce
our operating expenses at our headquarters in Santa Clara,
California, our operating expenses may increase as a percentage
of revenues if our revenues decline. If our revenues do not
increase, our business and results of operations could suffer.
We base our expense levels in part on our expectations regarding
future revenues. If our revenues for a particular quarter are
lower than we expect, we may be unable to proportionately reduce
our operating expenses for that quarter.

Customers may cancel or defer significant
purchase orders, or our distributors may return our products,
which would cause our inventory levels to increase and our
revenues to decline.

We sell our products on a purchase order basis
through our direct sales channel, sales representatives and
distributors, and our customers may cancel or defer purchase
orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when they have sold our
products to their customers. We recognize revenues on sales to
our OEM customers when we ship our products to the OEM. We
permit certain of our distributors to return products to us. If
our customers cancel or defer significant purchase orders or our
distributors return our products, our inventories would increase
and our revenues would decrease, which would materially harm our
business as increases in inventory reserves could be required.
Refusal of OEM customers to accept shipped products or delays or
difficulties in collecting accounts receivable could have an
adverse effect on our business.

Because of our long product development
process and sales cycle, we incur substantial expenses before we
generate revenues and may not recover our
expenditures.

To develop market acceptance of our products, we
must dedicate significant resources to research and development,
production and sales and marketing. We develop products based on
forecasts of demand and we 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, evaluating and designing
our products into a customers equipment can take up to
nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of
equipment incorporating our products, if ever. Because of this
lengthy development cycle, we may experience a delay between the
time we accrue expenses for research and development and sales
and marketing efforts and the time when we generate revenues, if
any.

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. 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. As a
result, our profitability from quarter to quarter and from year
to year may be materially affected by the

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number and timing of our new product
introductions in any period and the level of acceptance gained
by these products.


If we fail to successfully develop, introduce
and sell new products, we may be unable to effectively compete
in the future.

We operate in a highly competitive, quickly
changing environment marked by new and emerging products and
technologies. Our success depends on our ability to develop,
introduce and successfully market new products and enhance our
existing products in the advanced television and emerging
interactive display markets. The development of these new
products is highly complex and, from time to time, we have
experienced delays in completing their development and
introduction. Any one of the following factors could affect our
ability to develop, introduce and sell new products and could
materially harm our business:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our failure to complete new product designs in a
    timely manner;                                                                                                                                                                   
|
| |  | our inability to manufacture our new products
    according to design specifications;                                                                                                                                                 
|
| |  | our inability to deliver our products to our
    customers in a timely manner for any reason, including a lack of
    manufacturing capacity or the failure of our contracted
    foundries to meet targeted manufacturing yields; and
|
| |  | our sales forces and independent
    distributors inability to create adequate demand for our
    products.                                                                                                                         

Our future operating results are likely to
fluctuate and may fail to meet expectations which could cause
our stock price to decline.

Our operating results have varied in the past and
are likely to do so in the future as we attempt to meet consumer
demand in the markets for advanced televisions and emerging
interactive displays. Our future operating results will depend
on many factors and may fail to meet our expectations for a
number of reasons. Any failure to meet these expectations or
those of securities analysts and investors could cause our stock
price to fluctuate or decline significantly. A number of
factors, including those listed below, may cause fluctuations in
our operating results and stock price:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the general condition of the semiconductor
    industry market;                                                                                                                                                        
|
| |  | fluctuations in the volume of product sales,
    changes in product mix and pricing concessions on sales;                                                                                                              
|
| |  | the timing, rescheduling or cancellation of
    significant customer orders;                                                                                                                                           
|
| |  | the timing of investments in, and the results of,
    research and development;                                                                                                                                        
|
| |  | changes in industry standards;                                                                                                                                                                                         
|
| |  | introduction of interactive television services
    by service providers;                                                                                                                                              
|
| |  | availability of manufacturing capacity and raw
    materials, and inventory write-offs;                                                                                                                                
|
| |  | product introductions and price changes by our
    competitors;                                                                                                                                                        
|
| |  | our ability to specify, develop, introduce and
    market new products with smaller geometries, more features and
    higher levels of design integration in accordance with design
    requirements and design cycles;
|
| |  | the level of orders received that can be shipped
    in a given period;                                                                                                                                                
|
| |  | changes in earning estimates or investment
    recommendations by analysts;                                                                                                                                            
|
| |  | changes in investors perceptions; and                                                                                                                                                                                  
|
| |  | the effect of the terrorist attacks in the United
    States and any related conflicts or similar events worldwide.                                                                                                    

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Our industry is highly competitive, and we
cannot assure you that we will be able to effectively
compete.

The market for advanced televisions and emerging
interactive displays in particular, and the semiconductor
industry in general, are highly competitive. We compete with a
number of domestic and international suppliers of semiconductors
in our targeted markets. We expect competition to intensify as
current competitors expand their product offerings and new
competitors enter our targeted markets. We believe that we must
compete on the basis of a variety of factors, including:



| |   |                                  
| | - | ---------------------------------
| |  | functionality;                   
|
| |  | performance;                     
|
| |  | time to market;                  
|
| |  | price;                           
|
| |  | conformity to industry standards;
|
| |  | product road maps; and           
|
| |  | technical support.               

We currently compete with ATI Technologies, Inc.,
Broadcom Corporation, Genesis Microchip, Inc. and Silicon Image,
Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as
the broadband set-top box, advanced television and information
access device markets become more established. A number of
companies, including International Business Machines
Corporation, STMicroelectronics N.V., National
Semiconductor Corporation, Equator Technologies, Inc.,
LSI Logic and Philips Electronics N.V., have announced
that they are developing or plan to introduce competing products
in the advanced television and emerging interactive display
markets which could result in significant competition.

Some of our current and potential competitors
operate their own fabrication facilities or have a longer
operating history and significantly greater financial, sales and
marketing resources. They may also have preexisting
relationships with our customers or potential customers. As a
result, these competitors may be able to adapt more quickly to
new or emerging products, develop new technologies, or address
changes in customer requirements or devote greater resources to
the development and promotion of strategic relationships among
themselves or with existing or potential customers. It is
possible that new competitors or alliances among competitors
could emerge and rapidly acquire significant market share.
Increased competition could harm our business, results of
operations and financial condition by, for example, increasing
pressure on our profit margin or causing us to lose sales
opportunities.

We depend on two independent foundries to
manufacture our products based on our forecasts, which could
result in an oversupply or undersupply of products.

We do not own or operate our own fabrication
facility. We currently depend upon two outside foundries, United
Manufacturing Corporation, or UMC, and Taiwan Semiconductor
Manufacturing Corporation, or TSMC. We do not have long term
supply agreements with these foundries to manufacture our
semiconductor products. Both of these foundries are located in
Taiwan and each has limited manufacturing capacity.

The foundries require us to provide forecasts of
our anticipated manufacturing orders in advance of receiving
purchase orders from our customers. This may result in product
shortages or excess product inventory. Obtaining additional
supply in the face of product shortages may be costly or not
possible, especially in the short term. Our failure to
adequately forecast demand for our products would materially
harm our business. For example, in fiscal 2002 we took an
inventory charge related to slow moving inventory. The foundries
may allocate capacity to the production of other companies
products while reducing delivery to us on short notice.

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We may encounter periods of semiconductor
oversupply, resulting in pricing pressure, as well as
undersupply, resulting in a risk that we could be unable to
fulfill our customers requirements.

The semiconductor industry has historically been
characterized by wide fluctuations in the demand for, and supply
of, its products. These fluctuations have resulted in
circumstances when supply and demand for the industrys
products have been widely out of balance. Our operating results
may be materially harmed by industry wide semiconductor
oversupply, which could result in severe pricing pressure or
inventory write-downs. For example, in fiscal 2002 we took a
slow moving inventory charge, which negatively impacted our
gross margin for fiscal 2002. On the other hand, in a market
with undersupply, we would have to compete with larger companies
for limited manufacturing capacity. If material shortages occur,
we may incur additional costs to procure the scarce components
or be unable to have our products manufactured in a timely
manner or in quantities necessary to meet our requirements.
Since we outsource all of our manufacturing, we are particularly
vulnerable to supply shortages. As a result, we may be unable to
fill orders and may lose customers. Any future industry wide
oversupply or undersupply of semiconductors would materially
harm our business and have a negative impact on our earnings.

If we have to qualify new independent
foundries for any of our products and do not have sufficient
supply of our products on hand, we may lose revenues and damage
our customer relationships.

Processes used to manufacture our products are
complex, customized to our specifications and can only be
performed by a limited number of manufacturing facilities. The
foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection
with the introduction of new products and the installation and
start up of new process technologies. In addition, the foundries
we use are located in a seismically active area, and earthquakes
have caused these foundries to close for repairs, resulting in a
delay in manufacturing our products.

Although we primarily utilize two independent
foundries, most of our components are not manufactured at both
foundries at any given time. The inability of one of the
foundries to provide components could result in significant
delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered
any damage or destruction to its facilities, or in the event of
any other disruption of foundry capacity, we may not be able to
qualify alternative manufacturing sources for existing or new
products in a timely manner. For example, in September 1999,
Taiwan experienced a major earthquake. The earthquake and its
resulting aftershocks caused power outages and significant
damage to Taiwans infrastructure. Similarly, in September
2001, a typhoon hit Taiwan causing businesses in Taipei and the
financial markets to close for two days. In addition, as a
result of the rapid growth of the semiconductor industry based
in the industrial park where both foundries are located, severe
constraints have been placed on the water and electricity supply
in that region. Any shortages of water or electricity or a
natural disaster could adversely affect these foundries
ability to supply our products, which could have a material
adverse effect on our operating results.

Even our current outside foundries would need to
have manufacturing processes qualified in the event of a
disruption at the other foundry, which we may not be able to
accomplish in a timely manner sufficient to prevent an
interruption in the supply of the affected products. We cannot
assure you that any existing or new foundries would be able to
produce integrated circuits with acceptable manufacturing yields
in the future, or will continue to have sufficient capacity to
meet our needs. If our manufacturing requirements are not
satisfied, our business would be materially harmed.

Our semiconductors are complex to manufacture
and may have errors or defects which could be costly to
correct.

The manufacture of semiconductors is a complex
process. Foundries may not achieve acceptable product yields
from time to time due to the complexity of the integrated
circuit design, inadequate manufacturing processes and other
reasons. We refer to the proportion of final acceptable
integrated circuits that have been processed, assembled and
tested relative to the gross number of integrated circuits that
could have been produced from the raw materials as our product
yields. Identifying defects and determining the reason for low

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yields may be discovered after production has
begun and at various stages of the production cycle. Our failure
to discover defects early in the production cycle will result in
higher costs and may require a diversion of our technical
personnel and resources away from product development in order
to correct the defect. In addition, defective products that have
been released into the market and distributed to our customers
and end users may result in harm to our reputation, significant
warranty costs, diversion of our technical and managerial
resources and potential product liability claims that would be
costly to defend.


Our software is complex and may have bugs or
defects which could be costly to correct.

Our products depend on complex software that we
develop internally and license from others. Complex software
often contains defects, particularly when first introduced or
when new versions are released. Determining whether our software
has defects may occur after our products are released into the
market and distributed to our customers and end users, and may
result in harm to our reputation, significant warranty costs,
diversion of our technical resources and potential product
liability claims that would be costly to defend and divert
managerial resources.

We face foreign business, political and
economic risks because a majority of our sales are to customers
outside of the United States.

Sales of our products to our OEM customers and to
distributors located outside the United States accounted for
32%, 67% and 71% of our total revenues in fiscal years 2002,
2001 and 2000. We anticipate that sales to customers located
outside the United States will continue to represent a
significant portion of our total sales in future periods. In
addition, many of our domestic customers sell their products
outside of North America, thereby indirectly exposing us to
risks associated with foreign commerce. Asian economic
instability impacts the sales of products manufactured by our
customers, as does the Chinese New Year, during which time many
manufacturers and businesses close their operations. We may be
negatively impacted by the terrorist attacks on the United
States and the resulting conflicts worldwide. We could also
experience greater difficulties collecting accounts receivable
from customers outside of the United States. Accordingly, our
operations and revenues are subject to a number of risks
associated with foreign commerce.

To date, we have denominated sales of our
products in foreign countries exclusively in United States
dollars. As a result, any increase in the value of the United
States dollar relative to the local currency of a foreign
country will increase the price of our products in that country
so that our products become relatively more expensive to
customers in the local currency of that foreign country. As a
result, sales of our products in that foreign country may
decline. To the extent any of these types of risks materialize,
our business would be materially harmed.

If the industries into which we sell our
products experience recession or other cyclical effects
impacting our customers budgets, our operating results
could be negatively impacted.

The primary customers for our products are
companies in the advanced television and emerging display device
markets. Any significant downturn in these particular markets or
in general economic conditions which result in the cutback of
research and development budgets or capital expenditures would
likely result in the reduction in demand for our products and
services and could harm our business. For example, the United
States economy, including the semiconductor industry, has
experienced a recession, which has negatively impact our
business and operating results. A further decline in the United
States economy could result from further terrorist attacks in
the United States. If the economy continues to decline as a
result of the recent economic, political and social turmoil,
existing and perspective customers may continue to reduce their
design budgets or delay implementation of our products, which
could further harm our business and operating results.

In addition, the markets of semiconductor
products are cyclical. In recent years, some Asian countries
have experienced significant economic difficulties, including
devaluation and instability business failures and a depressed
business environment. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced
budgets for chip design tools. In addition, the electronics
industry has historically been subject to seasonal and cyclical
fluctuations in demand for its products, and this trend may
continue in

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the future. These industry downturns have been,
and my continue to be, characterized by diminished product
demand, excess manufacturing capacity and subsequent erosion of
average selling prices. As a result, our future operating
results may reflect substantial fluctuations from period to
period as a consequence of these industry patterns, general
economic conditions affecting the timing of orders from
customers and other factors. Any negative factors affecting the
semiconductor industry, including the downturns described here,
could significantly harm our business, financial condition and
results of operations.


The rapid growth of our business and
operations has strained and may continue to strain our
administrative, operational and financial resources, and our
failure to manage our future growth could affect our operations
and our future ability to expand.

We have in the past and may in the future
experience rapid growth and expansion in our business and
operations. Our growth has placed, and may continue to place, a
significant strain on our administrative, operational and
financial resources and increased demands on our systems and
controls. Our future growth may require the implementation of a
variety of new and upgraded operational and financial systems,
procedures and controls, including improvement of our accounting
and other internal management systems, all of which may require
substantial managerial effort. We cannot assure you that these
efforts would be accomplished successfully. Our growth has
resulted in a continuing increase in the level of responsibility
for both existing and new management personnel, and may require
that we recruit, hire and train a substantial number of new
personnel. Our failure to manage our past and future growth
could prevent us from successfully achieving market acceptance
for our products, disrupt our operations, delay our expansion
and harm our business.

We depend on key personnel, the loss of whom
would impair or inhibit the growth of our business.

Our success depends on the skills, experience and
performance of our executive officers and other key management
and technical personnel, many of whom would be difficult to
replace. We are particularly dependent on Kenny Liu, our
Chairman, and Eli Porat, our Chief Executive Officer and
President. The competition for employees with technical skills
is intense, particularly in the San Francisco Bay Area, and
we may not be able to attract and retain a sufficient number of
such qualified new personnel in the future. The loss of the
service of one or more of our key employees, or our failure to
attract, retain and motivate qualified personnel would inhibit
the growth of our business.

We rely on strategic relationships to
commercialize our products, and these relationships may require
that we expend significant resources without guarantees that our
endeavors will be profitable.

We rely on strategic relationships with some of
our customers who we believe are the market leaders in our
target markets. These relationships often involve the proposed
development by us of new products involving significant
technological challenges. Since the proposed products under
development may offer potential competitive advantages to our
customers, considerable pressure is frequently placed on us to
meet development schedules. While an essential element of our
strategy involves establishing such relationships, these
projects require substantial amounts of our limited resources,
with no guarantee of revenues to us, and could materially
detract from or delay the completion of other important
development projects. Delays in development could impair the
relationship between our customers and us and negatively impact
sales of the products under development. Moreover, our customers
may develop their own solutions for products currently supplied
by us, which could have an adverse effect on our business.

We depend on third party subcontractors for
assembly of our semiconductors which reduces our control over
the delivery, quantity, quality, or cost of our
products.

Substantially all of our products are assembled
by one of two subcontractors, both of which are located in
Taiwan. Typically, we procure services from these subcontractors
on a purchase order basis. Their availability to assemble our
products could be adversely affected if either subcontractor
experiences financial difficulties or suffers any damage or
destruction to its facilities or any other disruption of its
assembly capacity. Because we rely on third party subcontractors
for assembly of our products, we cannot directly control product
delivery

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schedules. We have experienced in the past, and
may experience in the future, product shortages or quality
assurance problems that could increase the cost of manufacturing
or testing of our products. It is time consuming and difficult
to find and qualify alternative assemblers. If we are forced to
find substitute subcontractors, shipments of our products could
be delayed. Any problems associated with the delivery, quantity
or cost of our products could harm our business.


Political instability in the Peoples
Republic of China or Taiwan could harm our manufacturing and
research and development capabilities and negatively impact our
product sales.

We operate our research and development facility
in the Peoples Republic of China. In addition, almost all
of our products are manufactured and assembled outside of the
United States at facilities operated by third parties in Taiwan.
The political and economic conditions in the region, including
the Peoples Republic of Chinas dispute with Taiwan,
may adversely impact our operations including manufacture and
assembly of our products and research and development efforts.
We cannot assure you that restrictive laws or policies on the
part of either the Peoples Republic of China or the United
States will not constrain our ability to operate in both
countries. If we are required to relocate our facilities, our
business will be disrupted and our costs associated with
research and development will increase.

If our competitors use our intellectual
property and proprietary rights, our ability to compete would be
impaired.

Our success depends in part upon our rights in
proprietary technology and processes that we develop and license
from, and to, others. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and
strategic partners in order to protect proprietary technologies
that use our products. We cannot assure you that these measures
will provide meaningful protection for our proprietary
technologies and processes, and they do not prevent independent
third party development of competitive products. In addition, it
is difficult to monitor unauthorized use of technology,
particularly in foreign countries where laws may not protect our
proprietary rights as fully as in the United States.

We currently have patent applications pending in
the United States, and we may seek additional patents in the
future. Because the content of patent applications in the United
States is not publicly disclosed until the patent is issued,
applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent
applications or any future patent applications will result in a
patent being issued with the scope of the claims we seek, if at
all, or whether any patents we have or may receive will be
challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our
competitors to offer similar products.

We may face intellectual property infringement
claims that could be costly and could result in the loss of
proprietary rights which are necessary to our
business.

Other parties may assert patent infringement
claims against us, including claims against technology that we
license from others, and our products or processes may infringe
issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in
significant expense to us. Litigation would also divert the
efforts of our technical and management personnel, whether or
not the litigation is determined in our favor. Litigation could
also require us to develop non-infringing technology or enter
into royalty or license agreements. These royalty or license
agreements may not be available on acceptable terms, including
limitations on representations and warranties regarding
infringement and indemnification in the event of infringement
claims. Our failure or inability to develop non-infringing
technology, license the proprietary rights on a timely basis or
receive appropriate protection on licensed technology would harm
our business.

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Regulation of our customers products may
slow the process of introducing new products and could impair
our ability to compete.

The Federal Communications Commission, or the
FCC, has broad jurisdiction over our target markets. Various
international entities or organizations may also regulate
aspects of our business or the business of our customers.
Although our products are not directly subject to regulation by
any agency, the transmission pipes, as well as much of the
equipment into which our products are incorporated, are subject
to direct government regulation. For example, before they can be
sold in the United States, advanced televisions and emerging
interactive displays must be tested and certified by
Underwriters Laboratories and meet FCC regulations. Accordingly,
the effects of regulation on our customers or the industries in
which our customers operate may, in turn, harm our business. FCC
regulatory policies affecting the ability of cable operators or
telephone companies to offer certain services and other terms on
which these companies conduct their business may impede sales of
our products. In addition, our business may also be adversely
affected by the imposition of tariffs, duties and other import
restrictions on systems of suppliers or by the imposition of
export restrictions on products that we sell internationally.
Changes in current laws or regulations or the imposition of new
laws or regulations in the United States or elsewhere could harm
our business.

We may not be able to maintain our listing on
the Nasdaq National Market and if we fail to do so, the price
and liquidity of our common stock may decline.

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on the Nasdaq National Market. The current requirements
affecting us include (i) having net tangible assets of at
least $4 million and (ii) maintaining a minimum bid
price per share of $1. On June 19, 2002, our stock price
closed at $0.96. Also, effective November 1, 2002, we will
also have to comply with the Nasdaq National Markets
revised quantitative maintenance criteria including a new
minimum requirement of $10 million in stockholders
equity. There can be no assurance that we will be able to comply
with the quantitative maintenance criteria or any of the Nasdaq
National Markets rules in the future. If we fail to
maintain continued listing on the Nasdaq National Market and
must move to a market with less liquidity, our financial
condition could be harmed and our stock price would likely
decline. If we are delisted, it could have a material adverse
effect on the market price of, and the liquidity of the trading
market for, our common stock.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Discussion of
Market Interest Rate Risk

Our 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, in the
future, the fair market value of our investments. We manage the
exposure to financial market risk by performing ongoing
evaluations of our investment portfolio and we presently invest
entirely in short-term investment grade government and corporate
securities. These securities are highly liquid and generally
mature within 12 months from the 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 and foreign
currency exchange 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 a sudden change in market
interest rates on our securities portfolio.

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Foreign Currency Exchange Risk

We are an international company, selling our
products globally and, in particular, in Japan, Korea, the
Peoples Republic of China and Taiwan. Although we transact
our business in United States dollars, we cannot assure you that
future fluctuations in the value of the United States dollar
will not affect the competitiveness of our products, gross
profits realized, and results of operations. Further, we incur
expenses in the Peoples Republic of China, Taiwan and
other countries that are denominated in currencies other than
United States 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 derivative financial instruments.

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Item 8.     Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                    |                                                                                                          |      |  |    | 
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                                    |                                                                                                          | Page
|                                                    |                                                                                                          |     
|Consolidated Financial Statements of Tvia,
    Inc. |                                                                                                          |      |  |   
|                                                    | Report of Independent Accountants 
    PricewaterhouseCoopers LLP                                       |      |  | 32 | 
|                                                    | Independent Auditors Report 
    Arthur Andersen LLP                                                   |      |  | 33 | 
|                                                    | Consolidated Balance Sheets                                                                              |      |  | 34 | 
|                                                    | Consolidated Statements of Operations                                                                    |      |  | 35 | 
|                                                    | Consolidated Statements of Cash Flows                                                                    |      |  | 36 | 
|                                                    | Consolidated Statements of Redeemable Convertible
    Preferred Stock and Stockholders Equity (Deficit) |      |  | 37 | 
|                                                    | Notes to Consolidated Financial Statements                                                               |      |  | 39 | 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Tvia, Inc.:

In our opinion, the accompanying consolidated
balance sheet as of March 31, 2002 and the related
consolidated statements of operations, of redeemable convertible
preferred stock and stockholders equity (deficit) and
of cash flows present fairly, in all material respects, the
financial position of Tvia, Inc. and its subsidiary at
March 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP


San Jose, California

May 7, 2002


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THIS IS A COPY OF THE LAST AUDIT REPORT
PREVIOUSLY ISSUED ON APRIL 30, 2001 BY ARTHUR ANDERSEN LLP
AND IT HAS NOT BEEN REISSUED BY

ARTHUR ANDERSEN LLP.


INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of
Tvia, Inc.:

We have audited the accompanying consolidated
balance sheets of Tvia, Inc. and subsidiary (a Delaware
corporation) as of March 31, 2001 and 2000, and the related
consolidated statements of operations, redeemable convertible
preferred stock and stockholders equity (deficit) and
cash flows for each of the three years in the period ended
March 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Tvia, Inc. and subsidiary as
of March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended March 31, 2001, in conformity with
generally accepted accounting principles in the United States.

Our audits were made for the purpose of forming
an opinion on the basic financial statements as a whole. The
schedule listed under Item 14(a) is presented for purposes
of complying with the Securities and Exchange Commissions
rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied
to our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
financial statements as a whole.



| |                        
| | -----------------------
| | /S/ ARTHUR ANDERSEN LLP

San Jose, California

April 30, 2001


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TVIA, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                   |                                            |       |         |        |  |       |         |        | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------ | 
|                                         |                                                                                                                   |                                           
|                                         |                                                                                                                   | March 31,                                 
|                                         |                                                                                                                   |                                           
|                                         |                                                                                                                   | 2002                                       |       | 2001   
|                                         |                                                                                                                   |                                            |       |        
|                                         |                                                                                                                   |                                           
|                                         |                                                                                                                   | (In thousands, except per                 
|                                         |                                                                                                                   | share data)                               
|ASSETS                                  
|Current Assets:                          |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         | Cash and cash equivalents                                                                                         |                                            | $     | 6,445   |        |  | $     | 21,267  |       
|                                         | Short term investments                                                                                            |                                            |       | 29,060  |        |  |       | 25,415  |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $112 and $439, respectively                    |                                            |       | 164     |        |  |       | 1,941   |       
|                                         | Inventories                                                                                                       |                                            |       | 1,510   |        |  |       | 4,343   |       
|                                         | Other current assets and prepaid expenses                                                                         |                                            |       | 1,262   |        |  |       | 1,352   |       
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         |                                                                                                                   | Total current assets                       |       |         | 38,441 |  |       |         | 54,318 | 
|Property and Equipment, net              |                                                                                                                   |                                            | 2,945 |         |        |  | 1,974 |        
|Other Assets                             |                                                                                                                   |                                            | 2,001 |         |        |  | 1,143 |        
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         |                                                                                                                   | Total assets                               |       | $       | 43,387 |  |       | $       | 57,435 | 
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         | Accounts payable                                                                                                  |                                            | $     | 691     |        |  | $     | 1,132   |       
|                                         | Accrued liabilities and other                                                                                     |                                            |       | 1,771   |        |  |       | 2,881   |       
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         |                                                                                                                   | Total current liabilities                  |       |         | 2,462  |  |       |         | 4,013  | 
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|Commitments and Contingencies (Note 5)   |                                                                                                                   |                                            |       |         |        |  |       |        
|Stockholders Equity                     |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         | Preferred stock, $0.001 par value: 5,000 shares
    authorized; none outstanding                                  |                                            |       |        |        |  |       |        |       
|                                         | Common stock, $0.001 par value: 125,000 shares
    authorized; 22,138 and 21,830 shares outstanding, respectively |                                            |       | 22      |        |  |       | 22      |       
|                                         | Additional paid-in-capital                                                                                        |                                            |       | 92,388  |        |  |       | 92,075  |       
|                                         | Deferred stock compensation                                                                                       |                                            |       | (595    | )      |  |       | (2,167  | )     
|                                         | Accumulated comprehensive income                                                                                  |                                            |       | 31      |        |  |       | 148     |       
|                                         | Accumulated deficit                                                                                               |                                            |       | (50,261 | )      |  |       | (35,996 | )     
|                                         | Treasury stock                                                                                                    |                                            |       | (660    | )      |  |       | (660    | )     
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         |                                                                                                                   | Total stockholders equity                 |       |         | 40,925 |  |       |         | 53,422 | 
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        
|                                         |                                                                                                                   | Total liabilities and stockholders equity |       | $       | 43,387 |  |       | $       | 57,435 | 
|                                         |                                                                                                                   |                                            |       |         |        |  |       |        

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

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TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |       |        |  
|----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------- | ------- | ------ | ------- | ---- | ------ | ------ | ------ | - | ------ | ----- | ------ | -
|                                                                                                                                    |                                                                                                                                            |                                
|                                                                                                                                    |                                                                                                                                            | Year Ended March 31,           
|                                                                                                                                    |                                                                                                                                            |                                
|                                                                                                                                    |                                                                                                                                            | 2002                            |         | 2001   |         | 2000
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |     
|                                                                                                                                    |                                                                                                                                            |                                
|                                                                                                                                    |                                                                                                                                            | (In thousands, except per share
|                                                                                                                                    |                                                                                                                                            | amounts)                       
|Revenues:                                                                                                                           |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Product sales                                                                                                                              |                                 | $       | 11,342 |         |      | $      | 12,743 |        |   | $      | 6,528 |       
|                                                                                                                                    | Development contracts and other                                                                                                            |                                 |         | 498    |         |      |        | 701    |        |   |        | 529   |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    |                                                                                                                                            | Total revenues                  |         |        | 11,840  |      |        |        | 13,444 |   |        |       | 7,057  |  
|Cost of revenues:                                                                                                                   |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Product sales (excluding amortization of deferred
    compensation of $19, $36 and $20, respectively)                                      |                                 |         | 8,522  |         |      |        | 7,650  |        |   |        | 3,622 |       
|                                                                                                                                    | Development contracts and other                                                                                                            |                                 |         | 109    |         |      |        | 68     |        |   |        | 185   |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    |                                                                                                                                            | Total cost of revenues          |         |        | 8,631   |      |        |        | 7,718  |   |        |       | 3,807  |  
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Gross profit                                                                                                                        |                                                                                                                                            |                                 | 3,209   |        |         |      | 5,726  |        |        |   | 3,250  |      
|Operating expenses:                                                                                                                 |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Research and development (excluding amortization
    of deferred stock compensation of $590, $996 and $261,
    respectively)              |                                 |         | 12,664 |         |      |        | 6,774  |        |   |        | 3,390 |       
|                                                                                                                                    | Sales, general and administrative (excluding
    amortization of deferred stock compensation of $963, $1,669 and
    $1,218, respectively) |                                 |         | 5,056  |         |      |        | 5,695  |        |   |        | 3,370 |       
|                                                                                                                                    | Amortization of deferred stock compensation                                                                                                |                                 |         | 1,572  |         |      |        | 2,701  |        |   |        | 1,499 |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Total operating expenses                                                                                                                   |                                 |         | 19,292 |         |      |        | 15,170 |        |   |        | 8,259 |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    |                                                                                                                                            | Operating loss                  |         |        | (16,083 | )    |        |        | (9,444 | ) |        |       | (5,009 | )
|Other expense (income), net:                                                                                                        |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Interest income                                                                                                                            |                                 |         | (1,818 | )       |      |        | (2,105 | )      |   |        | (49   | )     
|                                                                                                                                    | Interest expense                                                                                                                           |                                 |         |       |         |      |        | 132    |        |   |        | 328   |       
|                                                                                                                                    | Amortization of debt guarantee costs and other                                                                                             |                                 |         |       |         |      |        | 327    |        |   |        | 753   |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Other expense (income), net                                                                                                                |                                 |         | (1,818 | )       |      |        | (1,646 | )      |   |        | 1,032 |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Net loss before extraordinary item                                                                                                  |                                                                                                                                            |                                 | (14,265 | )      |         |      | (7,798 | )      |        |   | (6,041 | )    
|Extraordinary item, net of income tax                                                                                               |                                                                                                                                            |                                 |        |        |         |      | 672    |        |        |   |       |      
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Net loss                                                                                                                            |                                                                                                                                            |                                 | (14,265 | )      |         |      | (8,470 | )      |        |   | (6,041 | )    
|Dividend related to convertible preferred stock                                                                                     |                                                                                                                                            |                                 |        |        |         |      | 671    |        |        |   | 2,161  |      
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Net loss attributable to common stockholders                                                                                        |                                                                                                                                            | $                               | (14,265 | )      |         | $    | (9,141 | )      |        | $ | (8,202 | )    
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Basic and diluted net loss per share attributable
    to common stockholders:                                                       |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Net loss attributable to common stockholders
    before extraordinary item                                                                 |                                 | $       | (0.66  | )       |      | $      | (0.56  | )      |   | $      | (2.63 | )     
|                                                                                                                                    | Extraordinary item, net of income taxes                                                                                                    |                                 |         |       |         |      |        | 0.05   |        |   |        |      |       
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|                                                                                                                                    | Net loss attributable to common stockholders                                                                                               |                                 | $       | (0.66  | )       |      | $      | (0.61  | )      |   | $      | (2.63 | )     
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      
|Shares used in computing basic and diluted net
    loss attributable to common stockholders before and after
    extraordinary item |                                                                                                                                            |                                 | 21,631  |        |         |      | 15,052 |        |        |   | 3,118  |      
|                                                                                                                                    |                                                                                                                                            |                                 |         |        |         |      |        |        |        |   |        |      

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

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TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |        |       |        |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | ------ | ----- | ------ | ------ | -
|                                                         |                                                                                 |                                                                       
|                                                         |                                                                                 | Year Ended March 31,                                                  
|                                                         |                                                                                 |                                                                       
|                                                         |                                                                                 | 2002                                                                   |                                           | 2001                                      |       | 2000  
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |       
|                                                         |                                                                                 |                                                                       
|                                                         |                                                                                 | (In thousands)                                                        
|Cash Flows from Operating Activities:                    |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Net loss                                                                        |                                                                        | $                                         | (14,265                                   | )     |        | $      | (8,470  | )     |        | $       | (6,041 | )    
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                        |                                           |                                           |       |        |        |         |       |        |         |        |      
|                                                         |                                                                                 | Depreciation and amortization                                          |                                           |                                           | 1,091 |        |        |         | 437   |        |         |        | 318   |       
|                                                         |                                                                                 | Common stock and options issued for bonus and/or
    services rendered |                                           |                                           |      |        |        |         | 28    |        |         |        | 289   |       
|                                                         |                                                                                 | Amortization of deferred stock compensation                            |                                           |                                           | 1,572 |        |        |         | 2,701 |        |         |        | 1,499 |       
|                                                         |                                                                                 | Write-down of license technology                                       |                                           |                                           | 500   |        |        |         |      |        |         |        |      |       
|                                                         |                                                                                 | Non-cash amortization of guarantee costs and other                     |                                           |                                           |      |        |        |         | 1,126 |        |         |        | 753   |       
|                                                         |                                                                                 | Changes in assets and liabilities:                                     |                                           |                                           |       |        |        |         |       |        |         |        |       |       
|                                                         |                                                                                 |                                                                        | Accounts receivable                       |                                           |       | 1,777  |        |         |       | (931   | )       |        |       | (947   | )     
|                                                         |                                                                                 |                                                                        | Inventories                               |                                           |       | 2,833  |        |         |       | (3,016 | )       |        |       | (1,011 | )     
|                                                         |                                                                                 |                                                                        | Other current assets and prepaid expenses |                                           |       | 90     |        |         |       | (1,279 | )       |        |       | (106   | )     
|                                                         |                                                                                 |                                                                        | Accounts payable                          |                                           |       | (441   | )      |         |       | (630   | )       |        |       | 1,196  |       
|                                                         |                                                                                 |                                                                        | Accrued liabilities and other             |                                           |       | (1,110 | )      |         |       | 481    |         |        |       | 952    |       
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         |                                                                                 |                                                                        |                                           | Net cash used in operating activities     |       |        | (7,953 | )       |       |        | (9,553  | )      |       |        | (3,098 | )
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|Cash Flows from Investing Activities:                    |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Purchase of available-for-sale investments                                      |                                                                        |                                           | (3,762                                    | )     |        |        | (25,415 | )     |        |         |       |      
|                                                         | Purchase of property and equipment                                              |                                                                        |                                           | (2,062                                    | )     |        |        | (2,190  | )     |        |         | (225   | )    
|                                                         | Purchase of intangible assets                                                   |                                                                        |                                           | (1,358                                    | )     |        |        |        |       |        |         |       |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         |                                                                                 |                                                                        |                                           | Net cash used in investing activities     |       |        | (7,182 | )       |       |        | (27,605 | )      |       |        | (225   | )
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|Cash Flows from Financing Activities:                    |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Proceeds from loans payable                                                     |                                                                        |                                           |                                          |       |        |        | 159     |       |        |         | 3,306  |      
|                                                         | Payments on loans payable                                                       |                                                                        |                                           |                                          |       |        |        | (4,188  | )     |        |         | (991   | )    
|                                                         | Proceeds from issuance of common stock                                          |                                                                        |                                           | 313                                       |       |        |        | 1,014   |       |        |         | 312    |      
|                                                         | Proceeds from convertible and redeemable
    convertible preferred stock, net   |                                                                        |                                           |                                          |       |        |        |        |       |        |         | 7,560  |      
|                                                         | Treasury stock repurchase                                                       |                                                                        |                                           |                                          |       |        |        | (660    | )     |        |         |       |      
|                                                         | Proceeds from initial public offering net of IPO
    costs                      |                                                                        |                                           |                                          |       |        |        | 55,236  |       |        |         |       |      
|                                                         | Restricted funds from stock subscription for
    convertible preferred stock    |                                                                        |                                           |                                          |       |        |        | 3,075   |       |        |         | (3,075 | )    
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         |                                                                                 |                                                                        |                                           | Net cash provided by financing activities |       |        | 313    |         |       |        | 54,636  |        |       |        | 7,112  |  
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                                                        | (14,822                                   | )                                         |       |        | 17,478 |         |       |        | 3,789   |       
|Cash and cash equivalents at beginning of period         |                                                                                 |                                                                        | 21,267                                    |                                           |       |        | 3,789  |         |       |        |        |       
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|Cash and cash equivalents at end of period               |                                                                                 | $                                                                      | 6,445                                     |                                           |       | $      | 21,267 |         |       | $      | 3,789   |       
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|Supplemental Cash Flow Information:                      |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Interest paid                                                                   |                                                                        | $                                         |                                          |       |        | $      | 132     |       |        | $       | 126    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Conversion of accrued salary to redeemable
    convertible preferred stock      |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 244    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Fair value of warrant and options issued to
    guarantors of lines of credit   |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 738    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Conversion of accrued salary upon exercise of
    options                       |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 96     |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Conversion of debt to subscription for
    Series I shares                      |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 500    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Purchase of technology license through conversion
    of Series I shares        |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 150    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       
|                                                         | Costs incurred related to initial public offering                               |                                                                        | $                                         |                                          |       |        | $      |        |       |        | $       | 671    |      
|                                                         |                                                                                 |                                                                        |                                           |                                           |       |        |        |         |       |        |         |       

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

36



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS EQUITY
(DEFICIT)


|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |           |    |  |  |   |        |   |  |   |        |   |  |   |     |  |  |   |         |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------------------- | ---------- | --------------- |  | ------------ | ------- | ---------- |  | -------- | ---- | ------------- |  | ----------- | ---------- | -------- |  | ------------- | ------ | ------ |  | ------- | ---------- | ----- |  | --------- | -- |  |  | - | ------ | - |  | - | ------ | - |  | - | --- |  |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |       
|                                                                                 |  | Redeemable Convertible                |            | Convertible     |  |              |         |            |  |          |      | Accumulated   |  |             |            |          |  |              
|                                                                                 |  | Preferred Stock                       |            | Preferred Stock |  | Common Stock |         | Additional |  | Deferred |      | Other         |  |             |            |          |  | Stockholders
|                                                                                 |  |                                       |            |                 |  |              |         | Paid-in    |  | Stock    |      | Comprehensive |  | Accumulated |            | Treasury |  | Equity       
|                                                                                 |  | Shares                                |            | Amount          |  | Warrants     |         | Shares     |  | Amount   |      | Shares        |  | Par amount  |            | Capital  |  | Compensation  |        | Income |  | Deficit |            | Stock |  | (Deficit)
|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |          
|                                                                                 |  |                                      
|                                                                                 |  | (In thousands, except per share data)
|Balance @ March 31, 1999                                                         |  |                                       | 3,819,105  |                 |  | $            | 9,704   |            |  | $        | 111  |               |  |             | 5,305,454  |          |  | $             | 5,525  |        |  |         | 2,233,558  |       |  | $         |   |  |  | $ | 180    |   |  | $ | (30    | ) |  | $ |    |  |  | $ | (18,653 | ) |  | $ |     |   |  | $ | (12,978 | )
|Issuance of preferred warrants and options to
    guarantor of line of credit    |  |                                       |           |                 |  |              |        |            |  |          | 738  |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 1,001  |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 1,001   |  
|Issuance of Series G Redeemable Convertible
    Preferred Stock                  |  |                                       | 83,333     |                 |  |              | 250     |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   |        |  
|Issuance of Series H Redeemable Preferred
    Stock, net of issuance cost of $39 |  |                                       | 1,204,947  |                 |  |              | 4,479   |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   |        |  
|Issuance of Series I Convertible Preferred
    Stock, net of issuance cost of $8 |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             | 496,658    |          |  |               | 3,717  |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 3,717   |  
|Deferred stock compensation                                                      |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |           |    |  |  |   | 5,968  |   |  |   | (5,968 | ) |  |   |    |  |  |   |        |   |  |   |     |   |  |   |        |  
|Fair value of options for service rendered                                       |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 89     |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 89      |  
|Issuance of common stock for services rendered                                   |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 40,035     |       |  |           |   |  |  |   | 200    |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 200     |  
|Exercise of options                                                              |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 2,960,213  |       |  |           |   |  |  |   | 408    |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 408     |  
|Amortization of deferred compensation                                            |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   | 1,499  |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 1,499   |  
|Dividend related to redeemable convertible
    preferred stock                   |  |                                       |           |                 |  |              | 2,161   |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   | (2,161  | ) |  |   |     |   |  |   | (2,161  | )
|Net loss                                                                         |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   | (6,041  | ) |  |   |     |   |  |   | (6,041  | )
|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |           |    |  |  |   |        |   |  |   |        |   |  |   |     |  |  |   |         |   |  |   |      |   |  |   |         |  
|Balance @ March 31, 2000                                                         |  |                                       | 5,107,385  |                 |  |              | 16,594  |            |  |          | 849  |               |  |             | 5,802,112  |          |  |               | 9,242  |        |  |         | 5,233,806  |       |  |           |   |  |  |   | 7,846  |   |  |   | (4,499 | ) |  |   |    |  |  |   | (26,855 | ) |  |   |     |   |  |   | (14,266 | )
|Conversion of common stock from no par to $0.001
    par value                   |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           | 5  |  |  |   | (5     | ) |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   |        |  
|Dividend related to redeemable convertible
    preferred stock                   |  |                                       |           |                 |  |              | 671     |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   | (671    | ) |  |   |     |   |  |   | (671    | )
|Shares issued in initial public offering, net of
    costs                       |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 5,675,050  |       |  |           | 6  |  |  |   | 55,230 |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 55,236  |  
|Conversion of preferred stock to common stock                                    |  |                                       | (5,107,385 | )               |  |              | (17,265 | )          |  |          |      |               |  |             | (5,802,112 | )        |  |               | (9,242 | )      |  |         | 10,909,497 |       |  |           | 11 |  |  |   | 26,496 |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 17,265  |  
|Conversion of preferred stock warrants to common
    stock warrants              |  |                                       |           |                 |  |              |        |            |  |          | (849 | )             |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 849    |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 849     |  
|Issuance of warrants to WindRiver                                                |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 250    |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 250     |  
|Deferred stock compensation                                                      |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 367    |   |  |   | (369   | ) |  |   |    |  |  |   |        |   |  |   |     |   |  |   | (2      | )
|Issuance of common stock for bonus                                               |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   | 28     |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 28      |  
|Amortization of deferred stock compensation                                      |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   | 2,701  |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 2,701   |  
|Sale of common stock to WindRiver                                                |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 90,909     |       |  |           |   |  |  |   | 1,000  |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 1,000   |  
|Repurchase of common stock                                                       |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | (22,369    | )     |  |           |   |  |  |   | (2     | ) |  |   |        |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | (2      | )
|Common stock issued under employee stock purchase
    plan                       |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 1,685      |       |  |           |   |  |  |   | 16     |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   | 16      |  
|Exercise of options                                                              |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 1,110      |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   |     |   |  |   |        |  
|Purchase of treasury stock                                                       |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | (60,000    | )     |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   |        |   |  |   | (660 | ) |  |   | (660    | )
|Unrealized gain on available-for-sale investments                                |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   | 148 |  |  |   |        |   |  |   |     |   |  |   | 148     |  
|Net loss                                                                         |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         |           |       |  |           |   |  |  |   |       |   |  |   |       |   |  |   |    |  |  |   | (8,470  | ) |  |   |     |   |  |   | (8,470  | )
|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |           |    |  |  |   |        |   |  |   |        |   |  |   |     |  |  |   |         |   |  |   |      |   |  |   |         |  
|Balance @ March 31, 2001                                                         |  |                                       |           |                 |  |              |        |            |  |          |     |               |  |             |           |          |  |               |       |        |  |         | 21,829,688 |       |  |           | 22 |  |  |   | 92,075 |   |  |   | (2,167 | ) |  |   | 148 |  |  |   | (35,996 | ) |  |   | (660 | ) |  |   | 53,422  |  
|                                                                                 |  |                                       |            |                 |  |              |         |            |  |          |      |               |  |             |            |          |  |               |        |        |  |         |            |       |  |           |    |  |  |   |        |   |  |   |        |   |  |   |     |  |  |   |         |   |  |   |      |   |  |   |         |  

37



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS EQUITY (DEFICIT)
(Continued)


|                                                                               |  |                                       |   |                 |  |              |   |            |  |          |   |               |  |             |   |          |  |               |   |        |  |         |            |       |  |           |    |  |  |   |        |  |  |   |       |   |  |   |      |   |  |   |         |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------- | - | --------------- |  | ------------ | - | ---------- |  | -------- | - | ------------- |  | ----------- | - | -------- |  | ------------- | - | ------ |  | ------- | ---------- | ----- |  | --------- | -- |  |  | - | ------ |  |  | - | ----- | - |  | - | ---- | - |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                               |  |                                       |   |                 |  |              |   |            |  |          |   |               |  |             |   |          |  |               |   |       
|                                                                               |  | Redeemable Convertible                |   | Convertible     |  |              |   |            |  |          |   | Accumulated   |  |             |   |          |  |              
|                                                                               |  | Preferred Stock                       |   | Preferred Stock |  | Common Stock |   | Additional |  | Deferred |   | Other         |  |             |   |          |  | Stockholders
|                                                                               |  |                                       |   |                 |  |              |   | Paid-in    |  | Stock    |   | Comprehensive |  | Accumulated |   | Treasury |  | Equity       
|                                                                               |  | Shares                                |   | Amount          |  | Warrants     |   | Shares     |  | Amount   |   | Shares        |  | Par amount  |   | Capital  |  | Compensation  |   | Income |  | Deficit |            | Stock |  | (Deficit)
|                                                                               |  |                                       |   |                 |  |              |   |            |  |          |   |               |  |             |   |          |  |               |   |        |  |         |            |       |  |          
|                                                                               |  |                                      
|                                                                               |  | (In thousands, except per share data)
|Amortization of deferred stock compensation                                    |  |                                       |  |                 |  |              |  |            |  |          |  |               |  |             |  |          |  |               |  |        |  |         |           |       |  |           |   |  |  |   |       |  |  |   | 1,572 |   |  |   |     |   |  |   |        |   |  |   |     |   |  |   | 1,572   |  
|Issuance of common stock under ESPP and through
    exercises of stock options |  |                                       |  |                 |  |              |  |            |  |          |  |               |  |             |  |          |  |               |  |        |  |         | 307,915    |       |  |           |   |  |  |   | 313    |  |  |   |      |   |  |   |     |   |  |   |        |   |  |   |     |   |  |   | 313     |  
|Unrealized loss on available-for-sale investments                              |  |                                       |  |                 |  |              |  |            |  |          |  |               |  |             |  |          |  |               |  |        |  |         |           |       |  |           |   |  |  |   |       |  |  |   |      |   |  |   | (117 | ) |  |   |        |   |  |   |     |   |  |   | (117    | )
|Net loss                                                                       |  |                                       |  |                 |  |              |  |            |  |          |  |               |  |             |  |          |  |               |  |        |  |         |           |       |  |           |   |  |  |   |       |  |  |   |      |   |  |   |     |   |  |   | (14,265 | ) |  |   |     |   |  |   | (14,265 | )
|                                                                               |  |                                       |   |                 |  |              |   |            |  |          |   |               |  |             |   |          |  |               |   |        |  |         |            |       |  |           |    |  |  |   |        |  |  |   |       |   |  |   |      |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balance @ March 31, 2002                                                       |  |                                       |  |                 |  | $            |  |            |  | $        |  |               |  |             |  |          |  | $             |  |        |  |         | 22,137,603 |       |  | $         | 22 |  |  | $ | 92,388 |  |  | $ | (595  | ) |  | $ | 31   |   |  | $ | (50,261 | ) |  | $ | (660 | ) |  | $ | 40,925  |  
|                                                                               |  |                                       |   |                 |  |              |   |            |  |          |   |               |  |             |   |          |  |               |   |        |  |         |            |       |  |           |    |  |  |   |        |  |  |   |       |   |  |   |      |   |  |   |         |   |  |   |      |   |  |   |         |  

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

38



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Business

Tvia, Inc. (the Company or
Tvia) was incorporated in California in March 1993
and reincorporated as a Delaware corporation in August 2000.
Tvia designs, develops and markets multi-media display
processors for the advanced television and emerging interactive
display markets. The Companys products, which consist of
integrated circuits and proprietary software, process video,
graphics and audio signals from terrestrial broadcast, narrow
band telephone lines, cable, satellite and Ethernet and blend
them together on one or more displays for a high quality,
customized and interactive viewing experience. The Company sells
its multi-media display processors to manufacturers of advanced
television and emerging interactive displays. The Company has a
subsidiary in the Peoples Republic of China that supports
the Companys research and development activities, performs
product testing and sales and marketing functions, and branches
in Taiwan and the United Kingdom that operate as sales offices.
The Company is subject to the risks associated with similar
technology companies. These risks include, but are not limited
to: history of operating losses, dependence on a small number of
key individuals, customers and suppliers, competition from
larger, more established companies, the impact of rapid
technological changes and changes in customer
demand/requirements.

On August 14, 2000, the Company closed its
initial public offering in which it sold 5,000,000 shares
of its common stock at $11.00 per share, and granted the
underwriters an option to purchase up to 750,000 shares to
cover over-allotments. Upon the closing of the offering, all of
the Companys 10,909,497 shares of preferred stock
automatically converted into common stock, and warrants to
purchase 288,330 shares of preferred stock automatically
converted into warrants to purchase common stock. On
September 11, 2000, the underwriters exercised the
over-allotment option to purchase 675,050 shares of common
stock at $11.00 per share. Proceeds from the offering were
$55.2 million, net of all initial public offering costs.

A loan payable guaranteed by a related party of
$3.0 million was repaid from proceeds of the initial public
offering and, as a result of the early extinguishment of debt,
the unamortized portion of the debt guarantee cost was recorded
as an extraordinary item, net of income taxes, which totaled to
$672,000.

2.     Significant
Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
accordance with generally accepted accounting principles
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures 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 could differ from those estimates, and
such differences could be material and affect the results of
operations reported in future periods.



| |              
| | -------------
| | Consolidation

The consolidated financial statements herein
presented include the results and financial position of Tvia and
its wholly-owned subsidiary in China. The functional currency of
the Chinese subsidiary is the U.S. dollar; accordingly, all
gains and losses arising from foreign currency transactions in
currencies other than the U.S. dollar are included in the
consolidated statements of operations. All intercompany
transactions and balances have been eliminated in consolidation.



| |                                                         
| | --------------------------------------------------------
| | Cash and Cash Equivalents and Short-Term
    Investments

The Company considers all highly liquid
investment securities with original maturities of three months
or less from the date of purchase to be cash and cash
equivalents. Management determines the appropriate
classification of short-term investments at the time of purchase
and evaluates such designations as of each balance sheet date.
To date, all short-term investments have been classified as
available-for-sale and are

39



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

carried at fair value with unrealized gains and
losses, if any, included as a component of accumulated
comprehensive loss in stockholders equity, net of any
related tax effects. Interest, dividends and realized gains and
losses are included in other expense (income), net in the
consolidated statements of operations. The value of the
Companys investments by major security type is as follows:

|                                      |  |                      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|------------------------------------- |  | -------------------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | - | -- |  |  | - | -- | -
|                                      |  |                     
|                                      |  | As of March 31, 2002
|                                      |  |                     
|                                      |  | Amortized            |        | Aggregate  |  | Unrealized |        | Unrealized
|                                      |  | Cost                 |        | Fair Value |  | Gain       |        | Loss      
|                                      |  |                      |        |            |  |            |        |           
|                                      |  |                     
|                                      |  | (In thousands)      
|U.S. government and agency securities |  | $                    | 2,249  |            |  | $          | 2,241  |            |  | $ |   |  |  | $ | (8 | )
|U.S. corporate and bank debt          |  |                      | 26,780 |            |  |            | 26,819 |            |  |   | 39 |  |  |   |   |  
|                                      |  |                      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|                                      |  | $                    | 29,029 |            |  | $          | 29,060 |            |  | $ | 39 |  |  | $ | (8 | )
|                                      |  |                      |        |            |  |            |        |            |  |   |    |  |  |   |    |  

|                                      |  |                      |        |            |  |            |        |            |  |   |     |  |  |   |    |  
|------------------------------------- |  | -------------------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | - | --- |  |  | - | -- | -
|                                      |  |                     
|                                      |  | As of March 31, 2001
|                                      |  |                     
|                                      |  | Amortized            |        | Aggregate  |  | Unrealized |        | Unrealized
|                                      |  | Cost                 |        | Fair Value |  | Gain       |        | Loss      
|                                      |  |                      |        |            |  |            |        |           
|                                      |  |                     
|                                      |  | (In thousands)      
|U.S. government and agency securities |  | $                    | 2,408  |            |  | $          | 2,407  |            |  | $ |    |  |  | $ | (1 | )
|U.S. corporate and bank debt          |  |                      | 22,859 |            |  |            | 23,008 |            |  |   | 149 |  |  |   |   |  
|                                      |  |                      |        |            |  |            |        |            |  |   |     |  |  |   |    |  
|                                      |  | $                    | 25,267 |            |  | $          | 25,415 |            |  | $ | 149 |  |  | $ | (1 | )
|                                      |  |                      |        |            |  |            |        |            |  |   |     |  |  |   |    |  



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue from product sales
upon shipment to OEMs and end users provided that persuasive
evidence of an arrangement exists, the price is fixed, title has
transferred, collection of resulting receivables is reasonably
assured, there are no customer acceptance requirements, and
there are no remaining significant obligations. Reserves for
sales returns and allowances are recorded at the time of
shipment. Our sales to distributors are made under agreements
allowing for returns or credits under certain circumstances. The
Company defers recognition of revenue on sales to distributors
until products are resold by the distributor to the end user.

The Company also sells software development kits
and application modules to OEMs. The Company recognizes sales of
software development kits and application modules in accordance
with the American Institute of Certified Public Accountants
Statement of Position 97-2 Software Revenue
Recognition (SOP 97-2), as amended by
SOP 98-4 and SOP 98-9. Under SOP 97-2, software
revenues are recognized when an agreement has been executed or a
definitive purchase order has been received and the product has
been delivered, no significant obligations with regard to
implementation remain, the fee is fixed and determinable and
collectibility is probable. For the years ended March 31,
2002, 2001 and 2000, revenues from the sale of software
development kits and application modules were less than 10% of
net revenues.

Revenues to significant customers, those
representing approximately 10% or more of total revenues for the
respective periods, are summarized as follows:

|           |  |                 |    |      |  |      |    |   |  |  |    |  
|---------- |  | --------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |                
|           |  | For the Year   
|           |  | Ended March 31,
|           |  |                
|           |  | 2002            |    | 2001 |  | 2000
|           |  |                 |    |      |  |     
|Customer A |  |                 | 62 | %    |  |      | 12 | % |  |  | *  | %
|Customer B |  |                 | 14 | %    |  |      | *  |   |  |  | 12 | %
|Customer C |  |                 | *  |      |  |      | 12 | % |  |  | *  |  
|Customer D |  |                 | *  |      |  |      | 10 | % |  |  | 16 | %



---

(* = less than 10%)


40



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Software Development Costs

The Company accounts for software development
costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company has expensed all software
development costs to date as substantially all of such
development costs have been incurred prior to the Companys
products attaining technological feasibility.



| |                                      
| | -------------------------------------
| | Research and Development
    Expenses

Research and development expenses consist
primarily of salaries and related costs of employees engaged in
research, design and development activities. The Company
expenses all research and development related expenses in the
period in which such expenses are incurred.



| |                  
| | -----------------
| | Long-Lived Assets

The Company reviews long-lived assets and certain
identifiable intangibles for impairment. The Company reviews
assets to be held and used whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. The Company measures
recoverability of assets by comparing their carrying amount to
the future undiscounted cash flows that they are expected to
generate. Impairment reflects the amount by which the carrying
value of the assets exceeds their fair market value. For the
year ended March 31, 2002, the Company wrote off $500,000
of licensed technology related to a product that has been
postponed indefinitely.



| |                   
| | ------------------
| | Comprehensive Loss

The Company adopted SFAS No. 130
Reporting Comprehensive Income establishes standards
for reporting and displaying comprehensive income in a full set
of financial statements. Comprehensive income or loss includes
unrealized investment gains that have been previously excluded
from net loss and reflected instead as a component of
accumulated comprehensive income or loss in stockholders
equity. A summary of comprehensive loss is as follows (in
thousands):

|                                                             |  |                              |         |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                             |  |                             
|                                                             |  | For the Year Ended March 31,
|                                                             |  |                             
|                                                             |  | 2002                         |         | 2001 |  | 2000
|                                                             |  |                              |         |      |  |     
|Net loss                                                     |  | $                            | (14,265 | )    |  | $    | (9,141 | ) |  | $ | (8,202 | )
|Unrealized gain (loss) on available-for-sale
    investments |  |                              | (117    | )    |  |      | 148    |   |  |   |       |  
|                                                             |  |                              |         |      |  |      |        |   |  |   |        |  
|Comprehensive loss                                           |  | $                            | (14,382 | )    |  | $    | (8,993 | ) |  | $ | (8,202 | )
|                                                             |  |                              |         |      |  |      |        |   |  |   |        |  



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25) and Financial Accounting Standards Board
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation (FIN 44).
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair value of the Companys
stock at the date of grant over the stock option exercise price.
Expense associated with stock-based compensation is amortized on
an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial
Accounting Standards Board Interpretation No. 28
(FIN 28). The Company accounts for stock issued
to non-employees in accordance with the provisions of Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS
No. 123) and Emerging Issues Task Force Consensus
No. 96-18, Accounting for Equity Instruments that are
offered to other than employees for acquiring or

41



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in conjunction with selling goods or
services (EITF 96-18). Under SFAS
No. 123 and EITF 96-18, stock option awards issued to
non-employees are accounted for at their fair value, determined
using the Black-Scholes option pricing method. The fair value of
each non-employee stock option or award is remeasured at each
period end until a commitment date is reached, which is
generally the vesting date.



| |            
| | -----------
| | Stock Split

In June 2000, the Companys board of
directors approved a 1-for-3 stock split of the Companys
common and preferred stock. All references in the accompanying
consolidated financial statements to earnings per share and the
number of shares have been retroactively restated to reflect the
stock split.



| |                   
| | ------------------
| | Net Loss Per Share

Historical net loss per share has been calculated
in accordance with the Financial Accounting Standards Board
Statement No. 128, Earnings Per Share. Basic
net loss per share is computed using the weighted average number
of shares of common stock outstanding. Diluted loss per share
information is the same as basic net loss per share since common
shares issuable upon conversion of the redeemable convertible
preferred stock, convertible preferred stock, stock options and
warrants are antidilutive. The total number of shares excluded
from diluted net loss per share relating to these securities was
4,161,653, 3,094,441 and 11,073,866 for the years ended
March 31, 2002, 2001 and 2000, respectively.

The following table presents the calculation of
basic and pro forma basic net loss per share (in thousands,
except per share data):

|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |       |  
|-------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------- | ------- | ------ | - | ---- | ------ | ------ | - | - | ------ | ----- | -
|                                                                                                                           |                                                                         |                     
|                                                                                                                           |                                                                         | Year Ended March 31,
|                                                                                                                           |                                                                         |                     
|                                                                                                                           |                                                                         | 2002                 |         | 2001   |   | 2000
|                                                                                                                           |                                                                         |                      |         |        |   |     
|Net loss attributable to common stockholders
    before extraordinary item                                                 |                                                                         | $                    | (14,265 | )      |   | $    | (8,469 | )      |   | $ | (8,202 | )    
|Extraordinary item, net of income taxes                                                                                    |                                                                         |                      |        |        |   |      | (672   | )      |   |   |       |      
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|Net loss attributable to common stockholders                                                                               |                                                                         | $                    | (14,265 | )      |   | $    | (9,141 | )      |   | $ | (8,202 | )    
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|Basic and diluted:                                                                                                         |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|                                                                                                                           | Weighted average shares of common stock
    outstanding                 |                      |         | 21,925 |   |      |        | 15,779 |   |   |        | 3,199 |  
|                                                                                                                           | Less: Weighted average shares of common stock
    subject to repurchase |                      |         | (294   | ) |      |        | (727   | ) |   |        | (81   | )
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|Weighted average shares used in computing basic
    and diluted net loss per share before and after extraordinary
    item |                                                                         |                      | 21,631  |        |   |      | 15,052 |        |   |   | 3,118  |      
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|Basic and dilutive net loss per share
    attributable to common stockholders before extraordinary item                    |                                                                         | $                    | (0.66   | )      |   | $    | (0.56  | )      |   | $ | (2.63  | )    
|Extraordinary item, net of income taxes                                                                                    |                                                                         |                      |        |        |   |      | (0.05  | )      |   |   |       |      
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      
|Basic and dilutive net loss attributable to
    common stockholders per share                                              |                                                                         | $                    | (0.66   | )      |   | $    | (0.61  | )      |   | $ | (2.63  | )    
|                                                                                                                           |                                                                         |                      |         |        |   |      |        |        |   |   |        |      



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of bank deposits and accounts receivable. The Company places its
cash and cash equivalents in checking and money market accounts
in financial institutions. The Companys accounts
receivable are derived primarily from sales to OEMs and
distributors. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential doubtful
accounts.

42



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of March 31, 2002 and 2001, accounts
receivable were concentrated with customers as follows:

|                     |            |           |  |      |   |  |  |    |  
|-------------------- | ---------- | --------- |  | ---- | - |  |  | -- | -
|                     |            |          
|                     |            | March 31,
|                     |            |          
|                     |            | 2002      |  | 2001
|                     |            |           |  |     
|Accounts Receivable: |            |           |  |      |   |  |  |   
|                     | Customer A |           |  | *    |   |  |  | 74 | %
|                     | Customer B |           |  | 71   | % |  |  | *  | %



---

(* = less than 10%)


The Company recorded bad debt expense of $100,000
and $428,000 for fiscal years 2002 and 2001, respectively.



| |                     
| | --------------------
| | Vendor Concentration

The Company does not own or operate a fabrication
facility, and accordingly relies substantially on two outside
foundries, United Manufacturing Corporation (UMC)
and Taiwan Semiconductor Manufacturing Corporation
(TSMC) to supply all of the Companys
semiconductor manufacturing requirements. There are significant
risks associated with the Companys reliance on outside
foundries, including the lack of ensured wafer supply, limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs and the unavailability
of or delays in obtaining access to key process technologies.
Any inability of one of the foundries to provide the necessary
components could result in significant delays and could have a
material adverse effect on the Companys business,
financial condition and results of operations. In the event
either foundry suffers financial difficulties or suffers any
damage or destruction to its respective facilities, or in the
event of any other disruption of foundry capacity, the Company
may not be able to qualify alternative manufacturing sources for
existing or new products in a timely manner.

Substantially all of the Companys products
are assembled and tested by one of two third-party
subcontractors, Siliconware Precision Industries Ltd., and
Advance Semiconductor Engineering, Inc., both located in Taiwan.
The availability of assembly and testing services from these
subcontractors could be adversely affected in the event any
subcontractor experiences financial difficulties or suffers any
damage or destruction to its respective facilities, or in the
event of any other disruption of assembly and testing capacity.
As a result of this reliance on third-party subcontractors for
assembly and testing of its products, the Company cannot
directly control product delivery schedules, which has in the
past, and could in the future, result in product shortages or
quality assurance problems that could increase the cost of
manufacture, assembly or testing of the Companys products.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No.s 141 and
142, Business Combinations and Goodwill and
Other Intangibles. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill
is no longer subject to amortization over its estimated useful
life. Rather, goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test.
Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirers intent to do so. Other
intangible assets will continue to be valued and amortized over
their estimated lives; in-process research and development will
continue to be written off immediately. The Company adopted SFAS
No.s 141 and 142 as of April 1, 2002. The
adoption of SFAS No. 141 and 142 did not have a material
impact on the Companys consolidated financial statements.

43



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 establishes one
accounting model to be used for long-lived assets to be disposed
of by sale, and broadens the presentation of discontinued
operations to include more disposal operations. SFAS
No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 is
effective for fiscal years beginning after December 15,
2001. The Company adopted SFAS No. 144 as of April 1,
2002. The adoption of SFAS No. 144 did not have a material
impact on the Companys consolidated financial statements.

On April 30, 2002, the FASB issued Statement
No. 145, which rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the
criteria in Opinion 30 will now be used to classify those
gains and losses. Statement 145 amends Statement 13 to
require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. The Company
has not yet determined the impact that this statement will have
on its financial position or results of operations.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or market and include materials, labor and
overhead. Allowances when required are made to reduce excess
inventories to their estimated net realizable values. Due to
competitive pressures and technological innovation, it is
possible that estimates of net realizable value would change in
the near term. Inventories consist of the following:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | March 31,     
|                |  |               
|                |  | 2002           |       | 2001
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 371   |      |  | $ | 2,598 | 
|Work in process |  |                | 220   |      |  |   | 243   | 
|Finished goods  |  |                | 919   |      |  |   | 1,502 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 1,510 |      |  | $ | 4,343 | 
|                |  |                |       |      |  |   |       | 



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are carried at cost and
are depreciated using the straight-line method over the
assets estimated useful life of 24 months to five
years. Management has determined asset lives based on their
historical experience of technical obsolescence of equipment and
the short life of tooling that is specific to certain product
families. Property and equipment consist of the following:

|                                                             |  |                |        |      |  |   |        |  
|------------------------------------------------------------ |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                             |  |               
|                                                             |  | March 31,     
|                                                             |  |               
|                                                             |  | 2002           |        | 2001
|                                                             |  |                |        |     
|                                                             |  |               
|                                                             |  | (In thousands)
|Furniture and fixtures (Useful life of
    24 months)        |  | $              | 85     |      |  | $ | 69     |  
|Machinery and equipment (Useful life of 24 to
    60 months) |  |                | 1,973  |      |  |   | 1,091  |  
|Software (Useful life of 24 to 60 months)                    |  |                | 3,511  |      |  |   | 2,347  |  
|                                                             |  |                |        |      |  |   |        |  
|                                                             |  |                | 5,569  |      |  |   | 3,507  |  
|Less: Accumulated depreciation and amortization              |  |                | (2,624 | )    |  |   | (1,533 | )
|                                                             |  |                |        |      |  |   |        |  
|                                                             |  | $              | 2,945  |      |  | $ | 1,974  |  
|                                                             |  |                |        |      |  |   |        |  

44



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Depreciation and amortization expense were
$1,091,000, $437,000 and $318,000 for fiscal years 2002, 2001
and 2000, respectively.



| |                              
| | -----------------------------
| | Accrued Liabilities and Other

Accrued liabilities and other consist of the
following:

|                                  |  |                |       |      |  |   |       | 
|--------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                  |  |               
|                                  |  | March 31,     
|                                  |  |               
|                                  |  | 2002           |       | 2001
|                                  |  |                |       |     
|                                  |  |               
|                                  |  | (In thousands)
|Accrued software maintenance      |  | $              | 99    |      |  | $ | 531   | 
|Accrued expenses                  |  |                | 720   |      |  |   | 1,063 | 
|Accrued vacation                  |  |                | 444   |      |  |   | 277   | 
|Accrued bonus and commissions     |  |                | 412   |      |  |   | 575   | 
|Accrued payroll and related taxes |  |                | 96    |      |  |   | 435   | 
|                                  |  |                |       |      |  |   |       | 
|                                  |  | $              | 1,771 |      |  | $ | 2,881 | 
|                                  |  |                |       |      |  |   |       | 

3.     Income
Taxes

The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards
No. 109 (SFAS No. 109), Accounting
for Income Taxes. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recorded or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that
includes the enactment date.

As a result of the Companys continued
losses, there was no provision for income taxes for the years
ended March 31, 2002, 2001 and 2000.

The components of the net deferred income tax
asset were as follows:

|                                                          |  |                |         |      |  |   |         |  
|--------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                          |  |               
|                                                          |  | March 31,     
|                                                          |  |               
|                                                          |  | 2002           |         | 2001
|                                                          |  |                |         |     
|                                                          |  |               
|                                                          |  | (In thousands)
|Net operating losses                                      |  | $              | 12,823  |      |  | $ | 8,999   |  
|Reserves and accruals not deductible for tax
    purposes |  |                | 962     |      |  |   | 1,045   |  
|Available tax credit carryforwards                        |  |                | 1,686   |      |  |   | 1,337   |  
|Other timing differences                                  |  |                | 877     |      |  |   | 2,315   |  
|                                                          |  |                |         |      |  |   |         |  
|                                                          |  |                | 16,348  |      |  |   | 13,696  |  
|Valuation allowance                                       |  |                | (16,348 | )    |  |   | (13,696 | )
|                                                          |  |                |         |      |  |   |         |  
|Net deferred tax asset                                    |  | $              |        |      |  | $ |        |  
|                                                          |  |                |         |      |  |   |         |  

At March 31, 2002, the Company had net
cumulative operating loss carryforwards for federal and state
income tax reporting purposes of approximately
$36.0 million and $6.0 million, respectively. The
federal net operating loss carryforwards expire on various dates
through 2022. The state net operating loss carryforwards expire
on various dates through 2012. As of March 31, 2002, the
Company had federal and state research and development tax
credit carryforwards of approximately $1.6 million and
California Manufacturers Investment tax credit
carryforwards of approximately $80,000 available to offset
future taxes. Utilization of net operating losses may be subject
to annual limitations due to ownership change limitations
imposed by the Internal

45



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue Service and similar state provisions. A
valuation allowance has been recorded for the entire deferred
tax asset as a result of uncertainty regarding the realization
of the asset balance due to the net losses incurred and lack of
taxable income.

4.     Loans
Payable



| |                                                
| | -----------------------------------------------
| | Loans Payable Guaranteed by Related
    Parties

The Company entered into two separate line of
credit agreements with a bank which, in aggregate, provide for a
$3,000,000 revolving credit facility. Borrowings under the line
of credit agreements carried interest at the three-month
commercial paper rate plus 2.30%. The line of credit agreements
were terminated in August 2000. The line of credit agreements
were guaranteed by a pledge of trust assets where the Chief
Executive Officer of the Company and his wife were both the
trustor and trustee of the trust. In consideration for providing
the guarantee, an individual related to the Chief Executive
Officer of the Company received a guarantee fee based on the
maximum amount available on the line of credit agreements.

In connection with the guarantee given for the
period from December 31, 1997 to December 31, 1999,
the related party was issued a warrant to purchase
73,333 shares of Series G redeemable convertible
preferred stock for $3.00 per share in December 1997, a warrant
to acquire 26,666 shares of Series G redeemable
convertible preferred stock for $3.00 per share in July 1999 and
an option to acquire 80,000 shares of common stock at $0.12
per share in July 1999. The price per share, as defined in the
respective warrant agreements, was variable up to
December 31, 1999, at which point it became fixed.

In January 2000, the Company committed to grant
the related party an additional warrant to acquire 106,666
shares of Series H redeemable convertible preferred stock
for $3.75 per share and granted an option to purchase
106,666 shares of common stock at $0.375 per share pursuant
to an extension of the guarantee over the line of credit
agreements to April 30, 2001. The Company has calculated
the fair value of the warrants and options using the
Black-Scholes model and the following assumptions:

|                                          |  |  |           |  
|----------------------------------------- |  |  | --------- | -
|Risk-free interest rate                   |  |  | 6.00      | %
|Average computed life of warrants/options |  |  | 3-5 years |  
|Dividend yield                            |  |  | 0         | %
|Volatility of common stock                |  |  | 70        | %

The aggregate fair value of the warrants and
options issued prior to December 31, 1999 was calculated at
approximately $426,000. This amount was recognized as a deferred
debt issuance cost over the term of the guarantee. For the years
ended March 31, 2001 and 2000, interest expense included
$981,000 and $753,000, respectively, of amortized debt issuance
costs related to these warrants and options issued prior to
December 31, 1999. In addition, the Company paid $215,000
to the guarantor, in cash, related to the guarantee for fiscal
year 1999. The aggregate fair value of the warrants and option
issued in January 2000 were calculated at approximately
$922,000. This amount was recognized as a deferred debt issuance
cost and recorded over the term of the guarantee. This line of
credit was terminated in August 2000.

In April 1999, the Company entered into an
additional line of credit agreement with a different bank for a
$1.0 million credit facility. Borrowings under the line of
credit facility carry interest at a fixed rate of 7.63%, and the
line of credit has no fixed maturity date. The line of credit is
guaranteed by a venture capital firm, which is both a
shareholder in the Company and related to a former director of
the Company. In consideration for providing the guarantee, the
guarantor receives an annual guarantee fee based on the maximum
amount available on the line of credit. This line of credit was
terminated in August 2000.

In connection with the guarantee under this line
of credit for the period from April 30, 1999 to
April 30, 2000, a director was issued a warrant to acquire
33,333 shares of Series G convertible preferred stock for
$3.75 per share in April 1999. The price per share, as defined
in the warrant agreement, was variable up to

46



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 1999, at which point it became
fixed. The director was also issued an option to acquire 26,666
shares of common stock at $0.12 per share in July 1999.

In January 2000, the Company committed to grant
an additional warrant to the director to acquire 26,666 shares
of Series H redeemable convertible preferred stock for
$3.75 per share and granted an option to purchase
26,666 shares of common stock at $0.375 per share pursuant
to an extension of the guarantee over the line of credit
agreement to April 30, 2001. The Company has calculated the
fair value of the warrant and option using the Black-Scholes
model and the following assumptions:

|                                           |  |  |           |  
|------------------------------------------ |  |  | --------- | -
|Risk-free interest rate                    |  |  | 6.00      | %
|Average computed life of warrants/ options |  |  | 4-5 years |  
|Dividend yield                             |  |  | 0         | %
|Volatility of common stock                 |  |  | 70        | %

The aggregate fair value of the warrant and
option issued prior to December 31, 1999 was calculated at
approximately $162,000. Interest expense included $148,000 of
amortized debt issuance related to the warrant and option issued
prior to December 31, 1999. The aggregate fair value of the
warrant and option issued in January 2000 was calculated at
approximately $230,000. This amount was recognized as a deferred
debt issuance cost and recorded as additional interest expense
over the term of the guarantee. This line of credit was
terminated in August 2000.



| |                     
| | --------------------
| | Loan Payable to Bank

In June 1999, the Company entered into a line of
credit facility with a bank for $500,000, bearing interest at a
prime-lending rate of 8.25% plus 1.50%, and with a maturity date
of January 31, 2000. On March 30, 2000, the loan
balance was exchanged for a subscription for Series I
preferred stock (see Note 9). The credit facility was
guaranteed and secured by a pledge of the Companys assets.
In June 1999 and December 1999, the Company issued warrants to
the bank to acquire 13,333 and 8,333 shares of Series G
redeemable convertible preferred stock, respectively. The price
per share of the warrants to purchase 13,333 and 8,333 shares
was $3.00 and $3.75, respectively. The Company has calculated
the fair value of the warrants using the Black-Scholes model and
the following assumptions:

|                                  |  |  |           |  
|--------------------------------- |  |  | --------- | -
|Risk-free interest rate           |  |  | 6.00      | %
|Average computed life of warrants |  |  | 4-5 years |  
|Dividend yield                    |  |  | 0         | %
|Volatility of common stock        |  |  | 70        | %

The aggregate fair value of the warrants was
approximately $110,000. This amount was recognized as additional
interest expense over the term of the loan. This line of credit
matured on January 31, 2000.

In August 2000, the Company used some of the
proceeds from its initial public offering to repay the
outstanding balances under these three lines of credit. As a
result of this early extinguishment of debt, the unamortized
amount of debt guarantee costs was recorded an extraordinary
item, net of income taxes, in the amount of $0.7 million in
the second quarter of fiscal 2001. All warrants issued in
connection with these lines of credit were converted into
warrants to purchase common stock at the time of the initial
public offering.

5.     Commitments
and Contingencies



| |       
| | ------
| | Leases

The Company leases its facilities under
non-cancelable operating leases expiring at various dates
through June 2005. Under the terms of the leases, the Company is
responsible for a portion of the facilities operating

47



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expenses, insurance and property taxes. Future
minimum lease payments under all non-cancelable facility and
operating leases as of March 31, 2002 were as follows (in
thousands):

|       |  |        |     | 
|------ |  | ------ | --- | 
|Fiscal |  |       
|Year   |  | Amount
|       |  |       
|2003   |  | $      | 584 | 
|2004   |  |        | 227 | 
|2005   |  |        | 48  | 
|2006   |  |        | 11  | 
|       |  |        |     | 
|       |  | $      | 870 | 
|       |  |        |     | 

Rent expense under operating leases for the years
ended March 31, 2002, 2001 and 2000, were approximately
$561,000, $407,000 and $344,000, respectively.



| |           
| | ----------
| | Litigation

The Company is subject to various claims which
arise in the normal course of business. In the opinion of
management, the Company is unaware of any claims which would
have a material adverse effect on the financial position,
liquidity or results of operations of the Company.



| |                                    
| | -----------------------------------
| | Development Contract
    Commitment

In March 2000, the Company entered into a license
agreement with a vendor. Under the terms of the agreement, the
Company was required to pay a license fee of $330,000. As of
March 31, 2002, the Company satisfied the obligation by
issuing 20,000 shares of Series I preferred stock at $7.50
per share, and paying $180,000 in cash. The Company recorded the
$330,000 as license fees in Other Assets. These license fees are
being amortized over the estimated life of the products.



| |                 
| | ----------------
| | Stock Repurchase

On November 20, 2001, the Board of Directors
authorized a stock repurchase program to acquire outstanding
common stock in the open market. Under this program, the Board
of Directors authorized the acquisition of up to 200,000 of the
Companys common stock. The Company did not acquire any
treasury shares during the fiscal year ended March 31, 2002.

6.     Redeemable
Convertible Preferred Stock

In June 1999, the Company authorized the issuance
and sale of up to 4,200,000 shares of Series H Preferred
Stock (Series H). In March 2000, the Company
completed the issuance of 1,139,881 shares of Series H
redeemable convertible preferred stock at $3.75 per share for
cash and 65,066 shares of Series H upon the conversion of
$244,000 of accrued salary of the Chairman of the Board of the
Company. Shares of Series H were sold to members of the
board of directors and entities associated with members of
management under the same terms and conditions as all other
unrelated accredited investors. The Company recorded a preferred
stock dividend of $2,161,000 and $671,000 representing the value
of the beneficial conversion feature on the issuance of
convertible preferred stock in March 2000 and June 2000,
respectively. The beneficial conversion was calculated at the
commitment date based on the difference between the conversion
price of $3.75 per share and the estimated fair value of the
common stock at that date.

Upon the closing of the Companys initial
public offering, all of the Companys 5,107,385 shares of
redeemable preferred stock automatically converted into common
stock, and warrants to purchase 288,330

48



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares of convertible preferred stock
automatically converted into warrants to purchase the same
number of shares of common stock.

7.     Stockholders
Equity



| |                            
| | ---------------------------
| | Convertible Preferred Stock

On April 3, 2000, the Company authorized the
issuance and sale of up to 2,000,000 shares of Series I
convertible preferred stock (Series I). The
Company received approximately $3,075,000 in cash proceeds for
409,992 shares of Series I in March 2000, and these shares
were treated as subscribed convertible preferred stock at
March 31, 2000. In addition, in March 2000, $150,000 in
license fees acquired were exchanged for a subscription of
20,000 shares of Series I and $500,000 outstanding under a
line of credit at March 31, 2000 was converted into 66,666
shares of Series I. Shares of Series I were sold to
members of the board of directors and entities associated with
members of management under the same terms and conditions as all
other unrelated accredited investors. The Company recorded a
preferred stock dividend of $671,000 in the first quarter of
fiscal 2001 representing the value of the beneficial conversion
feature on the issuance of Series I.

Upon the closing of the Companys initial
public offering in August 2000, all of the Companys
5,802,112 shares of convertible preferred stock automatically
converted into common stock.



| |                   
| | ------------------
| | Stock Option Plans



| |                                                                    
| | -------------------------------------------------------------------
| | 2000 Stock Incentive Plan and 2000 Employee
    Stock Purchase Plan

The 2000 Stock Incentive Plan (the 2000
Plan) provides for the issuance of shares of the
Companys common stock to directors, employees and
consultants. The 2000 Plan provides for the issuance of
incentive stock options or non-qualified stock options. The 2000
Plan provides for the issuance of up to 2,333,333 shares of
common stock, plus, commencing on January 1, 2001, annual
increases equal to the lesser of 73,000 shares (amended on
August 21, 2001 to 730,000 shares), 3% of the fully diluted
outstanding common stock on January 1 of each year, or a
lesser amount determined by the Board of Directors. Pursuant to
the 2000 Plan, the exercise price for incentive stock options is
at least 100% of the fair market value on the date of grant or
for employees owning in excess of 10% of the voting power of all
classes of stock, 110% of the fair market value on the date of
grant. For non-qualified stock options, the exercise price is no
less than 85% of the fair market value on the date of grant.
Options generally expire in 10 years. Options generally
vest ratably over four years beginning the date of grant. As of
March 31, 2002, 1,996,951 options were available for grant
under the 2000 Plan.

In March 2000, the Board of Directors adopted an
Employee Stock Purchase Plan (the ESPP). A total of
333,333 shares of the Companys common stock were reserved
for issuance under the ESPP, plus, commencing on April 1,
2001, annual increases equal to the lesser of 83,333 shares, 3%
of the outstanding common stock on such date, or a lesser amount
determined by the Board of Directors. Each participant may
purchase up to 4,000 shares on any purchase date. The ESPP
permits eligible employees to contribute up to 15% of cash
compensation toward the semi-annual purchase of the
Companys common stock. The purchase price is 85% of the
fair market value on the day prior to the beginning of the
six-month period at which an eligible employee is enrolled, or
the end of each six-month offering period, whichever is lower.
Employees purchased 1,685 and 251,289 shares in fiscal 2001 and
2002, respectively. As of March 31, 2002, 80,359 shares
were available for purchase under the ESPP.



| |                          
| | -------------------------
| | 1999 Stock Incentive Plan

The Stock Incentive Plan (the 1999
Plan) provides for the issuance of up to 5,166,667 shares
of the Companys common stock to directors, employees and
consultants. The 1999 Plan provides for the issuance of
restricted stock bonuses, restricted stock purchase rights,
incentive stock options or non-qualified stock

49



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

options. Pursuant to the 1999 Plan, the exercise
price for incentive stock options is at least 100% of the fair
market value on the date of grant or for employees owning in
excess of 10% of the voting power of all classes of stock, 110%
of the fair market value on the date of grant. For non-qualified
stock options, the exercise price is no less than 85% of the
fair market value on the date of grant.

Options generally expire in 10 years.
Vesting periods are determined by the Board of Directors;
however, options generally vest ratably over four years
beginning one year after the date of grant. Options may be
exercised prior to full vesting. Any unvested shares so
exercised are subject to a repurchase right in favor of the
Company with the repurchase price to be equal to the original
purchase price of the stock. The right to repurchase at the
original price lapses at a minimum rate of 20% per year over
five years from the date the options granted. The 2000 Plan is
the successor to the 1999 Plan. Since the 2000 Plan became
effective, no further grants were made under the 1999 Plan.



| |                       
| | ----------------------
| | 1994 Stock Option Plan

The Stock Option Plan (the 1994 Plan)
provides for the issuance of options to acquire the
Companys common stock to directors, employees and
consultants. The 1994 Plan provides for the issuance of
incentive stock options or non-qualified stock options. Pursuant
to the 1994 Plan, the exercise price for incentive stock options
is at least 100% of the fair market value on the date of grant
or for employees owning in excess of 10% of the voting power of
all classes of stock, 110% of the fair market value on the date
of grant. For non-qualified stock options, the exercise price is
no less than 85% of the fair market value on the date of grant.
Options generally expire in 10 years. Options generally
vest ratably over five years beginning the date of grant. In
June 1999, all options outstanding under the 1994 Plan were
cancelled and reissued under the 1999 Plan with the same terms
and conditions as the previous options.



| |                    
| | -------------------
| | Out of Plan Options

In November 2001, the Company issued two out of
plan non-qualified options to acquire the Companys common
stock. One grant was for 800,000 shares, vesting over a
4 year period. The second grant was for 200,000 shares,
vesting over a 6 year period but with a provision for
earlier vesting one year after the grant date provided that
certain criteria are achieved. Both grants had an exercise price
of $1.27 per share, the fair market value on the date of grant,
and expire in 10 years.

50



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes activity under all
of the Companys stock option plans and out-of-plan options:

|                          |               |             |           |                  |      |   |      |      | 
|------------------------- | ------------- | ----------- | --------- | ---------------- | ---- | - | ---- | ---- | 
|                          |               | Outstanding |           | Weighted Average
|                          |               | Options     |           | Exercise Price  
|                          |               |             |           |                 
|Balance at March 31, 1999 |               |             | 2,376,368 |                  |      | $ | 0.12 |     
|                          | Granted       |             |           | 2,795,960        |      |   |      | 2.18 | 
|                          | Exercised     |             |           | (2,960,213       | )    |   |      | 0.14 | 
|                          | Cancellations |             |           | (724,351         | )    |   |      | 0.12 | 
|                          |               |             |           |                  |      |   |      |     
|Balance at March 31, 2000 |               |             | 1,487,764 |                  |      |   | 3.98 |     
|                          | Granted       |             |           | 1,448,977        |      |   |      | 5.98 | 
|                          | Exercised     |             |           | (1,110           | )    |   |      | 0.12 | 
|                          | Cancellations |             |           | (174,574         | )    |   |      | 5.06 | 
|                          |               |             |           |                  |      |   |      |     
|Balance at March 31, 2001 |               |             | 2,761,057 |                  |      |   | 4.97 |     
|                          | Granted       |             |           | 2,530,324        |      |   |      | 1.66 | 
|                          | Exercised     |             |           | (56,623          | )    |   |      | 0.26 | 
|                          | Cancellations |             |           | (1,073,105       | )(1) |   |      | 6.51 | 
|                          |               |             |           |                  |      |   |      |     
|Balance at March 31, 2002 |               |             | 4,161,653 |                  |      | $ | 2.62 |     
|                          |               |             |           |                  |      |   |      |     



---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | Includes 624,028 options cancelled pursuant to
    the Companys agreements with certain officers and
    employees.

|                                    |  |                  |      |                |  |                |       |                |  |  |           |  |  |   |       | 
|----------------------------------- |  | ---------------- | ---- | -------------- |  | -------------- | ----- | -------------- |  |  | --------- |  |  | - | ----- | 
|                                   
|Options Outstanding and Exercisable
|                                   
|                                    |  | Number           |      |               
|Number                              |  | Weighted Average |      | Weighted       |  | Exercisable at |       | Weighted      
|Outstanding at                      |  | Remaining        |      | Average        |  | March 31,      |       | Average       
|March 31, 2002                      |  | Contractual Life |      | Exercise Price |  | 2002           |       | Exercise Price
|                                    |  |                  |      |                |  |                |       |               
|593,063                             |  |                  | 7.34 |                |  | $              | 0.27  |                |  |  | 593,063   |  |  | $ | 0.27  | 
|1,000,000                           |  |                  | 9.67 |                |  |                | 1.27  |                |  |  | 1,000,000 |  |  |   | 1.27  | 
|438,386                             |  |                  | 9.36 |                |  |                | 1.46  |                |  |  | 438,386   |  |  |   | 1.46  | 
|110,000                             |  |                  | 9.60 |                |  |                | 1.77  |                |  |  | 110,000   |  |  |   | 1.77  | 
|631,590                             |  |                  | 9.32 |                |  |                | 2.10  |                |  |  | 631,590   |  |  |   | 2.10  | 
|556,304                             |  |                  | 8.78 |                |  |                | 2.52  |                |  |  | 556,304   |  |  |   | 2.52  | 
|513,478                             |  |                  | 8.26 |                |  |                | 5.62  |                |  |  | 513,478   |  |  |   | 5.62  | 
|179,998                             |  |                  | 7.97 |                |  |                | 8.85  |                |  |  | 179,998   |  |  |   | 8.75  | 
|37,164                              |  |                  | 8.33 |                |  |                | 9.00  |                |  |  | 37,164    |  |  |   | 9.00  | 
|101,670                             |  |                  | 8.33 |                |  |                | 11.00 |                |  |  | 101,670   |  |  |   | 11.00 | 
|                                    |  |                  |      |                |  |                |       |                |  |  |           |  |  |   |       | 
|4,161,653                           |  |                  | 8.84 |                |  | $              | 2.62  |                |  |  | 4,161,653 |  |  | $ | 2.62  | 
|                                    |  |                  |      |                |  |                |       |                |  |  |           |  |  |   |       | 

51



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company accounts for these Plans under APB
Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation expense has been
recognized as the grant price equaled the fair market value at
date of grant. Had compensation expense for the stock plans been
determined consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, the impact on the Companys net loss
would be as follows (in thousands, except per share data):

|                                      |             |                    |   |         |   |      |   |        |   |  |   |        |  
|------------------------------------- | ----------- | ------------------ | - | ------- | - | ---- | - | ------ | - |  | - | ------ | -
|                                      |             |                   
|                                      |             | For the Year Ended
|                                      |             | March 31,         
|                                      |             |                   
|                                      |             | 2002               |   | 2001    |   | 2000
|                                      |             |                    |   |         |   |     
|Net loss:                             |             |                    |   |         |   |      |   |        |   |  |   |       
|                                      | As reported |                    | $ | (14,265 | ) |      | $ | (8,470 | ) |  | $ | (6,041 | )
|                                      | Pro forma   |                    | $ | (16,458 | ) |      | $ | (8,574 | ) |  | $ | (9,633 | )
|Basic and diluted net loss per share: |             |                    |   |         |   |      |   |        |   |  |   |       
|                                      | As reported |                    | $ | (0.66   | ) |      | $ | (0.56  | ) |  | $ | (1.94  | )
|                                      | Pro forma   |                    | $ | (0.76   | ) |      | $ | (0.57  | ) |  | $ | (2.40  | )

The weighted average fair values of options
granted in fiscal years 2002, 2001 and 2000 were $1.66, $4.92
and $2.19, respectively. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes
option pricing model with the following assumptions:

|                                         |  |           |         |      |  |      |         |  |  |  |         | 
|---------------------------------------- |  | --------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                         |  |          
|                                         |  | March 31,
|                                         |  |          
|                                         |  | 2002      |         | 2001 |  | 2000
|                                         |  |           |         |      |  |     
|Risk-free Interest Rate                  |  |           | 4.12%   |      |  |      | 6.00%   |  |  |  | 6.00%   | 
|Expected Life of Options from Grant Date |  |           | 4 years |      |  |      | 4 years |  |  |  | 4 years | 
|Expected Dividend Yield                  |  |           | 0.0%    |      |  |      | 0.0%    |  |  |  | 0.0%    | 
|Expected Stock Volatility                |  |           | 115.0%  |      |  |      | 103.0%  |  |  |  | 0.0%    | 

Under the 2000 Employee Stock Purchase Plan, the
Company does not recognize compensation cost related to employee
purchase rights under the Stock Purchase Plan. To comply with
the pro forma reporting requirements of SFAS 123, compensation
cost is estimated for the fair value of the employees
purchase rights using the Black-Scholes option pricing model
with the following assumptions for those rights granted in
fiscal years 2002 and 2001:

|                                         |  |           |           |      |  |  |           | 
|---------------------------------------- |  | --------- | --------- | ---- |  |  | --------- | 
|                                         |  |          
|                                         |  | March 31,
|                                         |  |          
|                                         |  | 2002      |           | 2001
|                                         |  |           |           |     
|Risk-free Interest Rate                  |  |           | 2.71%     |      |  |  | 6.25%     | 
|Expected Life of Options from Grant Date |  |           | 0.5 years |      |  |  | 0.5 years | 
|Expected Dividend Yield                  |  |           | 0.0%      |      |  |  | 0.0%      | 
|Expected Stock Volatility                |  |           | 54.0%     |      |  |  | 150.0%    | 

The weighted average fair values of the purchase
rights granted in fiscal years 2002 and 2001 were $1.59 and
$18.00, respectively.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

Deferred stock compensation represents the
aggregate difference, at the grant date, between the respective
exercise price of stock options and the fair value of the
underlying stock. The deferred stock compensation expense is
amortized on an accelerated basis over the vesting period of the
individual award, generally four years. This method is in
accordance with Financial Accounting Standards Board
Interpretation No. 28. The Company had recorded unearned
stock-based compensation of approximately $0, $369,000 and

52



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$5,968,000 in the fiscal years ended
March 31, 2002, 2001 and 2000, respectively, and has
amortized deferred stock compensation of $1,572,000, $2,701,000,
and $1,499,000, in these periods, respectively.

The amount of deferred stock compensation expense
to be recorded in future periods could decrease if options for
which accrued but unvested compensation has been recorded are
forfeited.



| |                            
| | ---------------------------
| | Stock Repurchase Agreements

In connection with the exercise of options
pursuant to the 1999 Plan, employees entered into restricted
stock purchase agreements with the Company. Under the terms of
these agreements, the Company has a right to repurchase any
shares at the original exercise price of the shares upon
termination of employment. The repurchase right lapses ratably
over the vesting term of the original grant. As of
March 31, 2002, 179,595 shares were subject to repurchase
by the Company.



| |                                     
| | ------------------------------------
| | Options Granted to
    Non-employees

In fiscal year 2000, the Company granted options
to purchase 75,000 shares of common stock to consultants under
the 1999 Plan. These options had an exercise price of $0.375 per
share and were vested, exercisable and nonforfeitable upon
grant. The Company recorded deferred compensation of $459,000
based on the fair value of the option at the date of the grant
calculated using the Black-Scholes model.

In July 1999, the Company granted an option to
purchase 8,333 shares of common stock to a consultant under
the 1999 Plan. The option had an exercise price of $0.12 per
share and vested upon grant. The Company recorded research and
development expense of approximately $26,000 based on the fair
value of the option at the date of grant calculated using the
Black-Scholes model.

The following assumptions were used in the Black
Scholes model for calculating the fair value of the options
granted:

|                                         |  |  |        | 
|---------------------------------------- |  |  | ------ | 
|Risk-free Interest Rate                  |  |  | 6.00%  | 
|Expected Life of Options from Grant Date |  |  | 1 year | 
|Expected Dividend Yield                  |  |  | 0%     | 
|Expected Stock Volatility                |  |  | 70%    | 



| |                                       
| | --------------------------------------
| | Stock Issued for Services
    Rendered

For the year ended March 31, 2000, the
Company issued 40,035 shares of common stock in exchange for
services rendered. The Company recorded approximately $200,000
of operating expense, based on the fair value of the
Companys common stock on the date of issuance. There were
no options issued for services rendered in fiscal year 2002
and 2001.



| |                
| | ---------------
| | Option Exchange

In September 2001, the Company implemented option
exchanges with eight officers and employees. These individuals
were given the opportunity to exchange options for a new grant
for the same number of shares at least six months and a day
after completion of the option exchange. In September 2001, the
Company accepted for cancellation options to purchase an
aggregate of 624,028 shares of the Companys common stock
with a weighted-average exercise price of $7.48.

On April 5, 2002, in fiscal year 2003, the
Company granted new options to purchase an aggregate of 624,028
shares of common stock to replace the eligible options that had
been cancelled. The exercise price per share for the new options
was $1.67, the last reported trading price of the Companys
common stock on that date.

53



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     401(k)
Plan

Substantially all of the Companys employees
are eligible to participate in the Tvia 401(k) Plan. The
Company contributed $37,000 and $9,000 to the 401(k) Plan
for the fiscal years ended March 31, 2002 and 2001,
respectively. There were no matching contributions for the
fiscal year ended March 31, 2000.

9.     Related Party
Transactions



| |                                                                              
| | -----------------------------------------------------------------------------
| | Accrued Salary Converted into Preferred
    Stock or Used to Exercise Options

For the year ended March 31, 2000, the
Chairman of the Board of the Company elected to have a portion
of his accrued salary forgiven to pay the exercise price of
options upon exercise or converted into convertible preferred
stock. In the year ended March 31, 2001, the Chairman of
the Board elected to receive his compensation in cash. For the
year ended March 31, 2000, the Chairman of the Board
converted $244,000 into a subscription for 65,066 shares of
Series H redeemable convertible preferred stock at $3.75
per share and converted $96,000 upon exercise of options at
$0.12 per share.



| |                                      
| | -------------------------------------
| | Commission and Severance
    Payments

In the year ended March 31, 2000, the former
President of the Company was entitled to receive a 1.75%
commission on the amount of third party participation in the
issuance of Series I preferred stock. The commission was
paid in a combination of shares of common stock and cash of
approximately $56,000. Our former President resigned on
January 31, 2002 and received a severance package that
included additional salary equal to $94,000 and an additional
six months of vesting for his stock options.



| |                         
| | ------------------------
| | Sales to Related Parties

A member of the Board of Directors is an officer
of a company which is an affiliate company of a major customer.
Sales to this customer were $127,000, $43,000 and $292,000 for
the years ended March 31, 2002, 2001 and 2000, respectively.



| |                            
| | ---------------------------
| | Payments to Related Parties

A former member and a current member of the Board
of Directors are officers of companies which are affiliated with
the Companys major vendors UMC and TSMC, respectively.
Purchases from UMC amounted to $2,485,000 for the fiscal year
ended March 31, 2002. Total combined payments to UMC and
TSMC amounted to $7,062,000 and $2,041,000, respectively, for
the fiscal years ended March 31, 2001 and 2000,
respectively. The accounts payable outstanding to UMC as of
March 31, 2002 was $173,000. The total combined accounts
payable outstanding to UMC and TSMC as of March 31, 2001
and 2000 were $312,000 and $781,000, respectively.

Another member of the Board of Directors received
$13,000 and $10,500 in the year ended March 31, 2002 and
2001, respectively, and an option to purchase 25,000 shares of
common stock in the year ended March 31, 2001, for
providing management consulting services.

10.     Segment and
Geographic Information

SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information,
establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. The
Company is organized and operates in one reportable segment,
which is the development, manufacture and sale of streaming
media integrated circuits for the advanced television and
emerging interactive display markets.

54



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has operations in the United States,
Taiwan and China. The operating expenses of the Taiwan branch
and China subsidiary for the years ended March 31, 2002,
2001 and 2000, and the total assets as of the respective dates
in Taiwan and China were not material to the Companys
consolidated financial statements.

The following table summarizes revenues by
geographic area as a percentage of total revenues:

|              |  |                 |    |      |  |      |    |   |  |  |    |  
|------------- |  | --------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|              |  |                
|              |  | For the Year   
|              |  | Ended March 31,
|              |  |                
|              |  | 2002            |    | 2001 |  | 2000
|              |  |                 |    |      |  |     
|Taiwan        |  |                 | 22 | %    |  |      | 34 | % |  |  | 41 | %
|Japan         |  |                 | *  |      |  |      | 11 | % |  |  | *  |  
|United States |  |                 | 68 | %    |  |      | 33 | % |  |  | 29 | %
|Korea         |  |                 | *  |      |  |      | *  |   |  |  | 12 | %
|Europe        |  |                 | *  |      |  |      | 11 | % |  |  | *  |  




(* Less than 10%)

11.     Selected
Quarterly Financial Data (unaudited)

The following table presents selected unaudited
quarterly information for 2002 and 2001 (in thousands, except
per share data):

|                                                                                                            |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                            |  | First   |        | Second  |  | Third   |        | Fourth 
|                                                                                                            |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                                                                                            |  |         |        |         |  |         |        |        
|2002:                                                                                                       |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Total revenues                                                                                              |  | $       | 2,463  |         |  | $       | 3,515  |         |  | $ | 4,210  |   |  | $ | 1,652  |  
|Gross margin                                                                                                |  |         | (1,148 | )       |  |         | 1,598  |         |  |   | 1,928  |   |  |   | 831    |  
|Net loss                                                                                                    |  |         | (4,948 | )       |  |         | (2,854 | )       |  |   | (2,520 | ) |  |   | (3,943 | )
|Basic and diluted net loss per share                                                                        |  | $       | (0.23  | )       |  | $       | (0.13  | )       |  | $ | (0.12  | ) |  | $ | (0.18  | )
|Shares used in computing basic and fully diluted
    net loss per share                                     |  |         | 21,493 |         |  |         | 21,551 |         |  |   | 21,897 |   |  |   | 21,831 |  
|                                                                                                           
|2001:                                                                                                       |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Total revenues                                                                                              |  | $       | 3,533  |         |  | $       | 4,331  |         |  | $ | 3,254  |   |  | $ | 2,326  |  
|Gross margin                                                                                                |  |         | 1,657  |         |  |         | 2,064  |         |  |   | 1,464  |   |  |   | 541    |  
|Net loss attributable to common stockholders
    before extraordinary item                                  |  |         | (2,150 | )       |  |         | (1,261 | )       |  |   | (2,061 | ) |  |   | (2,997 | )
|Extraordinary item, net of income taxes                                                                     |  |         |       |         |  |         | (672   | )       |  |   |       |   |  |   |       |  
|Net loss attributable to common stockholders                                                                |  |         | (2,150 | )       |  |         | (1,933 | )       |  |   | (2,061 | ) |  |   | (2,997 | )
|Basic and diluted net loss per share attributable
    to common stockholders before extraordinary item      |  | $       | (0.42  | )       |  | $       | (0.09  | )       |  | $ | (0.10  | ) |  | $ | (0.14  | )
|Extraordinary item, net of income taxes                                                                     |  |         |       |         |  |         | (0.05  | )       |  |   |       |   |  |   |       |  
|Basic and diluted net loss attributable to common
    stockholders per share                                |  | $       | (0.42  | )       |  | $       | (0.14  | )       |  | $ | (0.10  | ) |  | $ | (0.14  | )
|Shares used in computing basic and fully diluted
    net loss attributable to common stockholders per share |  |         | 5,152  |         |  |         | 13,557 |         |  |   | 21,317 |   |  |   | 21,381 |  

55



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

On April 8, 2002, the Board of Directors of
the Company, upon recommendation of the Companys Audit
Committee, made a determination to no longer engage Arthur
Andersen LLP (Arthur Andersen) as the Companys
independent public accountants and engaged
PricewaterhouseCoopers LLP on April 10, 2002 to serve as
the Companys independent public accountants for the fiscal
year ended March 31, 2002.

Arthur Andersens reports on the
Companys consolidated financial statements for each of the
fiscal years ended March 31, 2001 and 2000 did not contain
an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or
accounting principles.

During the fiscal years ended March 31, 2001
and 2000 and the subsequent interim period through
April 10, 2002, there were no disagreements with Arthur
Andersen on any matter of accounting principle or practices,
financial statement disclosure, or auditing scope or procedure
which, if not resolved to Arthur Andersens satisfaction,
would have caused them to make reference to the subject mater in
connection with their report on the Companys consolidated
financial statements for such years, and there were no
reportable events as set forth in Item 304(a)(1)(v) of
Regulation S-K.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this item (with
respect to Directors) is incorporated by reference from the
information under the caption Election of Directors
contained in the Companys Proxy Statement to be filed with
the Securities and Exchange Commission in connection with the
solicitation of proxies for the Companys 2002 Annual
Meeting of Stockholders to be held on August 20, 2002 (the
Proxy Statement).

Item 405 of Regulation S-K calls for
disclosure of any known late filing or failure by an insider to
file a report required by Section 16(a) of the Exchange
Act. This disclosure is contained under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.

For information with respect to the executive
officers of the Company, see Executive Officers of the
Registrant at the end of Part I of this report.




Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference from the information under the
captions Election of Directors  Director
Compensation, Executive Compensation, and
Election of Directors  Compensation Committee
Interlocks and Insider Participation contained in the
Proxy Statement.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholders
    Matters

The information required by this item is
incorporated by reference from the information under the caption
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information contained in the Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference from the information contained under
the captions Certain Relationships and Related Party
Transactions contained in the Proxy Statement.

56



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##### Table of Contents






PART IV




Item 14.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) Documents filed as part of this
report:



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements                                                                                                                                                                                                             
|
| | Reference is made to the Index to Consolidated
    Financial Statements of Tvia, Inc., under Item 8 of Part II
    hereof.                                                                                                           
|
| | (2) Financial Statement Schedules                                                                                                                                                                                                    
|
| | The following financial statement schedule of
    Tvia, Inc. is filed as part of this Form 10-K.                                                                                                                                     
|
| | Schedule II  Valuation and
    Qualifying Accounts                                                                                                                                                                                  
|
| | All other financial statement schedules have been
    omitted because they are not applicable or not required or
    because the information is included elsewhere in the
    Consolidated Financial Statements or the Notes thereto.
|
| | (3) Exhibits                                                                                                                                                                                                                         
|
| | See Item 14(c) below. Each management
    contract or compensatory plan or arrangement required to be
    filed has been identified.                                                                                                 

(b) Reports on Form 8-K.

On April 11, 2002, the Company filed a
Current Report on Form 8-K reporting under Item 4 a
change in the Companys certifying accountant.

(c) Exhibits

|        |         |                         |  |                                                                                                                                                                                                                      
|------- | ------- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                        
|Number  |         | Description of Document
|        |         |                        
|        | 3(i).1  |                         |  | Amended and Restated Certificate of Incorporation
    (incorporated by reference to Exhibit 3.3 to Amendment
    No. 5 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                
|        | 3(ii).1 |                         |  | Amended and Restated Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.4 to Amendment
    No. 3 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                    
|        | 4.1     |                         |  | Form of Common Stock Certificate (incorporated by
    reference to Exhibit 4.1 to Amendment No. 2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                 
|        | 4.2     |                         |  | Form of Amended and Restated Registration Rights
    Agreement dated as of April 3, 2000 (incorporated by
    reference to Exhibit 4.2 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).
|        | 4.3     |                         |  | Warrant to Purchase Stock issued
    December 31, 1997 to C.Y. Lee (incorporated by
    reference to Exhibit 4.3 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                      
|        | 4.4     |                         |  | Warrant to Purchase Stock issued April 30,
    1999 to James Mah (incorporated by reference to Exhibit 4.4
    to Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                            
|        | 4.5     |                         |  | Warrant to Purchase Stock issued June 21,
    1999 to Far East National Bank (incorporated by reference to
    Exhibit 4.5 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).            
|        | 4.6     |                         |  | Warrant to Purchase Stock issued June 21,
    1999 to Far East National Bank (incorporated by reference to
    Exhibit 4.6 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).            
|        | 4.7     |                         |  | Warrant to Purchase Stock issued
    December 30, 1999 to Far East National Bank (incorporated
    by reference to Exhibit 4.7 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024))     

57



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##### Table of Contents



|        |        |                         |  |                                                                                                                                                                                                                                                                                     
|------- | ------ | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 4.8    |                         |  | Warrant to Purchase Stock issued
    January 25,2000 to C.Y. Lee (incorporated by reference
    to Exhibit 4.8 to Amendment No. 2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                                                
|        | 4.9    |                         |  | Warrant to Purchase Stock issued January 25,
    2000 to James Mah (incorporated by reference to Exhibit 4.9
    to Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                                                                  
|        | 4.10   |                         |  | Warrant to Purchase Stock issued July 27,
    2000 to Wind River Systems, Inc. (incorporated by reference to
    Exhibit 4.10 to Amendment No. 7 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024)).                                                 
|        | 10.1#  |                         |  | Amended and Restated 1999 Stock Incentive Plan of
    Tvia, Inc. (incorporated by reference to Exhibit 10.1 to
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                                                                   
|        | 10.2#  |                         |  | Amended and Restated 2000 Stock Incentive Plan of
    Tvia, Inc.                                                                                                                                                                                                                    
|        | 10.3#  |                         |  | Reserved                                                                                                                                                                                                                                                                            
|        | 10.4#  |                         |  | 2000 Employee Stock Purchase Plan of Tvia, Inc.                                                                                                                                                                                                                                     
|        | 10.5#  |                         |  | Form of Directors and Officers
    Indemnification Agreement (incorporated by reference to
    Exhibit 10.4 to Amendment No. 3 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024)).                                                                  
|        | 10.6   |                         |  | TSMC Terms and Conditions dated November 15,
    1999 (incorporated by reference to Exhibit 10.5 to
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                                                                              
|        | 10.7   |                         |  | UMC Wafer Foundry Standard Terms and Conditions
    (incorporated by reference to Exhibit 10.6 to Amendment
    No. 1 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                                                                
|        | 10.8#  |                         |  | Form of Executive Severance Agreement
    (incorporated by reference to Exhibit 10.9 to Amendment
    No. 2 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                                                                          
|        | 10.9   |                         |  | Letter Agreement dated July 27, 2000 between
    the Company and Wind River Systems, Inc. (incorporated by
    reference to Exhibit 10.10 to Amendment No. 7 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                     
|        | 10.10 |                         |  | Audio Technology Licensing Agreement dated
    June 26, 1997 between T-Square Design, Inc. and
    Integraphics Systems, Inc. (incorporated by reference to
    Exhibit 10.11 to Amendment No. 10 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).
|        | 10.11  |                         |  | Multi-Tenant Single-Building Modified-Net Lease
    dated October 27, 1995 between Koll/ Intereal Bay Area and
    Integraphics System, Inc. (incorporated by reference to
    Exhibit 10.13 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).         
|        | 10.12  |                         |  | First Amendment to Lease Agreement dated
    January 15, 1999 between Koll/ Intereal Bay Area and IGS
    Technologies, Inc. (incorporated by reference to
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).                         
|        | 10.13  |                         |  | Second Amendment to Lease Agreement dated
    May 6, 1999 between Koll/ Intereal Bay Area and
    IGS Technologies, Inc. (incorporated by reference to
    Exhibit 10.15 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).                             
|        | 10.14# |                         |  | Consulting Confidentiality Agreement dated
    January 29, 2001 between the Company and R. David
    Dicioccio (incorporated by reference to Exhibit 10.16 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended March 31, 2001).                           
|        | 10.15# |                         |  | Promissory Note entered by and between the
    Company and Jack Guedj dated April 11, 2001 (incorporated
    by reference to Exhibit 10.17 to the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2001).                                    

58



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##### Table of Contents



|        |        |                         |  |                                                                                                                                                                                                                          
|------- | ------ | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.16# |                         |  | Option Agreement between the Company and Eli
    Porat dated November 30, 2001(incorporated by reference to
    Exhibit 10.18 to the Companys Quarterly Report on
    Form 10-Q for the period ended December 31, 2001).
|        | 10.17# |                         |  | Option agreement between the Company and Eli
    Porat dated November 30, 2001(incorporated by reference to
    Exhibit 10.18 to the Companys Quarterly Report on
    Form 10-Q for the period ended December 31, 2001).
|        | 10.18# |                         |  | Consulting Confidentiality Agreement dated
    February 19, 2002 between the Company and R. David
    Dicioccio.                                                                                                         
|        | 10.19 |                         |  | Technology License Agreement by and between the
    Company and Oak Technology, Inc. dated December 29, 2000.                                                                                                            
|        | 10.20 |                         |  | Addendum to Technology License Agreement by and
    between the Company and Oak Technology, Inc. dated
    April 25, 2001.                                                                                               
|        | 10.21# |                         |  | Agreement and Release of Claims by and between
    the Company and Jack Guedj dated January 31, 2002.                                                                                                                    
|        | 21.1   |                         |  | Subsidiaries of the Company.                                                                                                                                                                                             
|        | 23.1   |                         |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                      
|        | 23.2   |                         |  | Consent of Arthur Andersen LLP, Independent
    Public Accountants.                                                                                                                                                      
|        | 24.1   |                         |  | Power of Attorney (see page 62 of this
    Form 10-K).                                                                                                                                                                   



---



|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|# | Indicates management contact or compensatory plan
    or arrangement.                                         
| 
| | Confidential treatment has been requested or
    granted with respect to certain portions of these agreements.

(d) Financial Statement Schedules.

See Item 14(a)(1) and (a)(2) above.

59



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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE

To the Board of Directors and Stockholders of
Tvia, Inc.:

Our audit of the consolidated financial
statements of Tvia, Inc. referred to in our report dated
May 7, 2002 also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP


San Jose, California

May 7, 2002


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TVIA, INC. AND SUBSIDIARY

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                                |  |                |     |            |  |            |       |          |  |   |       |  |  |   |       | 
|------------------------------- |  | -------------- | --- | ---------- |  | ---------- | ----- | -------- |  | - | ----- |  |  | - | ----- | 
|Column A                        |  | Column B       |     | Column C   |  | Column D   |       | Column E
|                                |  |                |     |            |  |            |       |         
|                                |  |                |     |            |  |            |       | Balance 
|                                |  | Balance at     |     | Charged to |  |            |       | at End  
|                                |  | Beginning      |     | Costs and  |  |            |       | of      
|Description                     |  | of Period      |     | Expenses   |  | Deductions |       | Period  
|                                |  |                |     |            |  |            |       |         
|                                |  |               
|                                |  | (In thousands)
|Year Ended March 31, 2002       |  |                |     |            |  |            |       |          |  |   |       |  |  |   |       | 
|Allowance for doubtful accounts |  | $              | 439 |            |  | $          | 100   |          |  | $ | 427   |  |  | $ | 112   | 
|Inventory reserve               |  | $              | 834 |            |  | $          | 2,100 |          |  | $ | 1,231 |  |  | $ | 1,703 | 
|Allowance for sales returns     |  | $              | 44  |            |  | $          |      |          |  | $ | 28    |  |  | $ | 16    | 
|Year Ended March 31, 2001       |  |                |     |            |  |            |       |          |  |   |       |  |  |   |       | 
|Allowance for doubtful accounts |  | $              | 55  |            |  | $          | 428   |          |  | $ | 44    |  |  | $ | 439   | 
|Inventory reserve               |  | $              | 120 |            |  | $          | 714   |          |  | $ |      |  |  | $ | 834   | 
|Allowance for sales returns     |  | $              |    |            |  | $          | 344   |          |  | $ | 300   |  |  | $ | 44    | 
|Year Ended March 31, 2000       |  |                |     |            |  |            |       |          |  |   |       |  |  |   |       | 
|Allowance for doubtful accounts |  | $              | 5   |            |  | $          | 50    |          |  | $ |      |  |  | $ | 55    | 
|Inventory reserve               |  | $              |    |            |  | $          | 120   |          |  | $ |      |  |  | $ | 120   | 
|Allowance for sales returns     |  | $              |    |            |  | $          |      |          |  | $ |      |  |  | $ |      | 

61



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |           
| | ----------
| | TVIA, INC.



| |    |              
| | -- | -------------
| | BY | /s/ ELI PORAT

| |                                          
| | -----------------------------------------
| |                                          
| | ELI PORAT                                
| | President and Chief Executive
    Officer

Date: June 25, 2002

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Eli Porat
and Michael Hoberg, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                         |  |                                                                                                        |  |               |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ------------- |  | 
|                                         |  |                                                                                                        |  |              
|Name                                     |  | Title                                                                                                  |  | Date         
|                                         |  |                                                                                                        |  |              
|                                        
|/s/ ELI PORATEli Porat                   |  | President and Chief Executive Officer (Principal
    Executive Officer)                                |  | June 25, 2002
|                                        
|/s/ MICHAEL HOBERGMichael Hoberg         |  | Vice President of Finance and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | June 25, 2002
|                                        
|/s/ KENNY LIUKenny Liu                   |  | Chairman of the Board                                                                                  |  | June 24, 2002
|                                        
|/s/ STEVEN CHENGSteven Cheng             |  | Director                                                                                               |  | June 27, 2002
|                                        
|/s/ JAMES BUNKERJames Bunker             |  | Director                                                                                               |  | June 25, 2002
|                                        
|/s/ MARK MANGIOLAMark Mangiola           |  | Director                                                                                               |  | June 24, 2002
|                                        
|/s/ R. DAVID DICIOCCIOR. David Dicioccio |  | Director                                                                                               |  | June 26, 2002

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EXHIBIT INDEX

|        |         |                         |  |                                                                                                                                                                                                                                    
|------- | ------- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                        
|Number  |         | Description of Document
|        |         |                        
|        | 3(i).1  |                         |  | Amended and Restated Certificate of Incorporation
    (incorporated by reference to Exhibit 3.3 to Amendment
    No. 5 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                              
|        | 3(ii).1 |                         |  | Amended and Restated Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.4 to Amendment
    No. 3 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                  
|        | 4.1     |                         |  | Form of Common Stock Certificate (incorporated by
    reference to Exhibit 4.1 to Amendment No. 2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                               
|        | 4.2     |                         |  | Form of Amended and Restated Registration Rights
    Agreement dated as of April 3, 2000 (incorporated by
    reference to Exhibit 4.2 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).              
|        | 4.3     |                         |  | Warrant to Purchase Stock issued
    December 31, 1997 to C.Y. Lee (incorporated by reference to
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                    
|        | 4.4     |                         |  | Warrant to Purchase Stock issued April 30,
    1999 to James Mah (incorporated by reference to Exhibit 4.4
    to Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                          
|        | 4.5     |                         |  | Warrant to Purchase Stock issued June 21,
    1999 to Far East National Bank (incorporated by reference to
    Exhibit 4.5 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                          
|        | 4.6     |                         |  | Warrant to Purchase Stock issued June 21,
    1999 to Far East National Bank (incorporated by reference to
    Exhibit 4.6 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                          
|        | 4.7     |                         |  | Warrant to Purchase Stock issued
    December 30, 1999 to Far East National Bank (incorporated
    by reference to Exhibit 4.7 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024))                   
|        | 4.8     |                         |  | Warrant to Purchase Stock issued January 25,
    2000 to C.Y. Lee (incorporated by reference to Exhibit 4.8
    to Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                  
|        | 4.9     |                         |  | Warrant to Purchase Stock issued January 25,
    2000 to James Mah (incorporated by reference to Exhibit 4.9
    to Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                 
|        | 4.10    |                         |  | Warrant to Purchase Stock issued July 27,
    2000 to Wind River Systems, Inc. (incorporated by reference to
    Exhibit 4.10 to Amendment No. 7 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024)).
|        | 10.1#   |                         |  | Amended and Restated 1999 Stock Incentive Plan of
    Tvia, Inc. (incorporated by reference to Exhibit 10.1 to
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                  
|        | 10.2#   |                         |  | Amended and Restated 2000 Stock Incentive Plan of
    Tvia, Inc.                                                                                                                                                                   
|        | 10.3#   |                         |  | Reserved                                                                                                                                                                                                                           
|        | 10.4#   |                         |  | 2000 Employee Stock Purchase Plan of Tvia, Inc.                                                                                                                                                                                    
|        | 10.5#   |                         |  | Form of Directors and Officers
    Indemnification Agreement (incorporated by reference to
    Exhibit 10.4 to Amendment No. 3 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-34024)).                 
|        | 10.6    |                         |  | TSMC Terms and Conditions dated November 15,
    1999 (incorporated by reference to Exhibit 10.5 to
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                             

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|        |        |                         |  |                                                                                                                                                                                                                                                                                     
|------- | ------ | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.7   |                         |  | UMC Wafer Foundry Standard Terms and Conditions
    (incorporated by reference to Exhibit 10.6 to Amendment
    No. 1 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                                                                
|        | 10.8#  |                         |  | Form of Executive Severance Agreement
    (incorporated by reference to Exhibit 10.9 to Amendment
    No. 2 to the Companys Registration Statement on
    Form S-1 (File No. 333-34024)).                                                                                          
|        | 10.9   |                         |  | Letter Agreement dated July 27, 2000 between
    the Company and Wind River Systems, Inc. (incorporated by
    reference to Exhibit 10.10 to Amendment No. 7 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).                                     
|        | 10.10 |                         |  | Audio Technology Licensing Agreement dated
    June 26, 1997 between T-Square Design, Inc. and
    Integraphics Systems, Inc. (incorporated by reference to
    Exhibit 10.11 to Amendment No. 10 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-34024)).
|        | 10.11  |                         |  | Multi-Tenant Single-Building Modified-Net Lease
    dated October 27, 1995 between Koll/ Intereal Bay Area and
    Integraphics System, Inc. (incorporated by reference to
    Exhibit 10.13 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).         
|        | 10.12  |                         |  | First Amendment to Lease Agreement dated
    January 15, 1999 between Koll/ Intereal Bay Area and IGS
    Technologies, Inc. (incorporated by reference to
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).                         
|        | 10.13  |                         |  | Second Amendment to Lease Agreement dated
    May 6, 1999 between Koll/ Intereal Bay Area and IGS
    Technologies, Inc. (incorporated by reference to
    Exhibit 10.15 to the Companys Registration Statement
    on Form S-1 (File No. 333-34024)).                             
|        | 10.14# |                         |  | Consulting Confidentiality Agreement dated
    January 29, 2001 between the Company and R. David
    Dicioccio (incorporated by reference to Exhibit 10.16 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended March 31, 2001).                           
|        | 10.15# |                         |  | Promissory Note entered by and between the
    Company and Jack Guedj dated April 11, 2001 (incorporated
    by reference to Exhibit 10.17 to the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2001).                                    
|        | 10.16# |                         |  | Option Agreement between the Company and Eli
    Porat dated November 30, 2001(incorporated by reference to
    Exhibit 10.18 to the Companys Quarterly Report on
    Form 10-Q for the period ended December 31, 2001).                                                           
|        | 10.17# |                         |  | Option agreement between the Company and Eli
    Porat dated November 30, 2001(incorporated by reference to
    Exhibit 10.18 to the Companys Quarterly Report on
    Form 10-Q for the period ended December 31, 2001).                                                           
|        | 10.18# |                         |  | Consulting Confidentiality Agreement dated
    February 19, 2002 between the Company and R. David
    Dicioccio.                                                                                                                                                                    
|        | 10.19 |                         |  | Technology License Agreement by and between the
    Company and Oak Technology, Inc. dated December 29, 2000.                                                                                                                                                                       
|        | 10.20 |                         |  | Addendum to Technology License Agreement by and
    between the Company and Oak Technology, Inc. dated
    April 25, 2001.                                                                                                                                                          
|        | 10.21# |                         |  | Agreement and Release of Claims by and between
    the Company and Jack Guedj dated January 31, 2002.                                                                                                                                                                               
|        | 21.1   |                         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                        
|        | 23.1   |                         |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                                                                                 
|        | 23.2   |                         |  | Consent of Arthur Andersen LLP, Independent
    Public Accountants.                                                                                                                                                                                                                 
|        | 24.1   |                         |  | Power of Attorney (see page 62 of this
    Form 10-K).                                                                                                                                                                                                                              



---



|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|# | Indicates management contact or compensatory plan
    or arrangement.                                         
| 
| | Confidential treatment has been requested or
    granted with respect to certain portions of these agreements.

64