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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,
    2003                                                
|  
|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

Indicated by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes þ          No 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, 2003) was approximately
$13,282,607.

As of May 31, 2003, there were 22,166,440
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 (as to Beneficial Ownership) 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 2003 Annual Meeting of Stockholders to be
held on September 2, 2003.



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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                                                 
|              | Item 14. Controls and Procedures                                                                        
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|SIGNATURES   
|CERTIFICATION
|EXHIBIT INDEX
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 99.1 
|EXHIBIT 99.2 



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TVIA, INC. AND SUBSIDIARY

TABLE OF CONTENTS

2003 FORM 10-K

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 2  | 
|Item 2.        |  | Properties                                                                                         |    |      | 9  | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 10 | 
|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                                                               |    |      | 12 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 13 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosure about
    Market Risk                                      |    |      | 31 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |    |      | 32 | 
|Item 9.        |  | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure           |    |      | 55 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |    |      | 55 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 55 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 55 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |    |      | 56 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 57 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |    |      | 57 | 
|Signatures     |  |                                                                                                    | 60 |     
|Certifications |  |                                                                                                    | 61 |     
|Exhibit Index  |  |                                                                                                    | 63 |     

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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, sources of revenues, expenses, the features,
performance, advantages and anticipated benefits of our
products, 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, our ability to protect our
intellectual property, our backlog as an indicator of strategy
as to our future revenues, the status of our relations with our
employees, the benefits of our operations in Hefei, 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, 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; the end of a key customer contract, 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; 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.

We currently offer 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.
Finally, we sell our products to a number of

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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.


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 2003 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 2003, sales to Siemens Communications
Ltd., Kanematsu Devices Corporation and Micro Network Korea Co.,
Ltd. represented 24%, 17% and 10% of revenues, respectively. In
fiscal 2002, sales to Prediwave Corporation and Motorola
Broadband accounted for 62% and 14% of revenues, respectively.
In fiscal 2001, sales to Prediwave Corporation, Kanematsu
Devices Corporation and Weikeng Industrial Co., Ltd. accounted
for 12%, 12% and 10 % of revenues, respectively.

In fiscal 2003, sales to customers in Europe,
Taiwan, Japan, the United States and Korea comprised of 35%,
25%, 16%, 14% and 10% 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.

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, 2003, we employed a sales
and marketing force of 14 people. We believe these personnel
have the technical expertise and industry knowledge necessary to
support a lengthy and complex sales process. We also employed
four 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 three
direct sales offices are located in Santa Clara, California;
Taipei, Taiwan; and Hefei, Peoples Republic of China. All
of our sales offices provide hardware and software applications
support. Information about geographic areas and operating
segments is included in Note 10 to the Consolidated
Financial Statements in Item 8.

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, 2003, our research and development staff
consisted of 216 employees, (25 of whom were located in the
United States and 191 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 2003, 2002 and 2001 were $9.0 million,
$12.7 million, and $6.8 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 CyperPro 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 two 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 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.

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 in
Delaware. Tvia operates in one principal industry segment.

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Our subsidiary in Hefei, Peoples Republic
of China, had 237 employees as of March 31, 2003, including
191 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 supports
for 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 may continue to be,
characterized by diminished product demand, excess manufacturing
capacity and subsequent erosion of average selling prices.

Employees

As of March 31, 2003, we had 277 full time
employees including 216 engaged in research and development, 14
engaged in sales and marketing, 32 engaged in operations and 15
engaged in general management and administration activities. Of
these employees, 37 work in our Santa Clara facility, 3 work in
our Taiwan office and 237 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.

Available Information

Our internet address is www.tvia.com. We
make available free of charge through a hyperlink on its website
our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Forms 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a)
of the Exchange Act as soon as reasonably practicable after the
material is furnished to the SEC. Our website and the
information contained therein or connected thereto is not
intended to be incorporated into this Annual Report on From 10-K.




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 one building
of approximately 16,500 square feet under a lease that expires
in July 2004. We also lease a sales, marketing and customer
support office in Taipei, Taiwan of approximately 1,500 square
feet under a month-to-month lease 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 have any
legal proceedings pending against the Company or, to the best of
its knowledge, threatened against it.

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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, 49, 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, 57, has
served as our Chief Executive Officer since November 2001and as
President since February 2002. Mr. Porat has served 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.

Arthur Nguyen, 51,
has served as our Chief Financial Officer since March 2003. He
joined us as Corporate Controller in October 2000, serving in
that position until February 2003. Prior to joining us, he
served as Director of Accounting at marchFIRST, an internet
consulting company from November 1999 to September 2000. From
July 1996 to October 1999, Mr. Nguyen was Chief Financial
Officer of Hayward Quartz Technology, Inc., a semiconductor
component manufacturer. Mr. Nguyen received a Master in
Business Administration with a concentration in Accounting from
the California State University, San Bernardino and a B.S. in
Business Administration from California State University,
Sacramento. Mr. Nguyen is a Certified Public Accountant.

Jhi-Chung Kuo, 50, a
cofounder of the Company, has served as our Vice President of
Engineering since April 2002. From July 2000 to March 2002, he
served as our Chief Technology Officer. 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 Sales and Marketing since October
2002. He joined us in June 1997 as Senior Director of Business
Development, and served from November 1999 to February 2002 as
Vice President of Business Development, and Vice President of
Worldwide Marketing from March 2002 to September 2002. 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.

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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,
until December 4, 2002, when it began to trade on the
Nasdaq SmallCap Market under the same ticker symbol. The
following table sets forth, for the periods indicated, the range
of high and low sales prices for the Common Stock on the Nasdaq
National Market and SmallCap Market, as applicable.

|                    |              |      |   |      |  |  |   |      | 
|------------------- | ------------ | ---- | - | ---- |  |  | - | ---- | 
|                    |              | High |   | Low 
|                    |              |      |   |     
|2001 Quarter Ended: |              |      |   |      |  |  |   |     
|                    | June 30      |      | $ | 3.00 |  |  | $ | 1.44 | 
|                    | September 30 |      |   | 2.50 |  |  |   | 1.21 | 
|                    | December 31  |      |   | 2.11 |  |  |   | 0.87 | 
|2002 Quarter Ended: |              |      |   |      |  |  |   |     
|                    | March 31     |      |   | 2.15 |  |  |   | 1.45 | 
|                    | June 30      |      |   | 1.90 |  |  |   | 0.88 | 
|                    | September 30 |      |   | 0.99 |  |  |   | 0.45 | 
|                    | December 31  |      |   | 0.77 |  |  |   | 0.47 | 
|2003 Quarter Ended: |              |      |   |      |  |  |   |     
|                    | March 31     |      |   | 0.70 |  |  |   | 0.51 | 

As of May 31, 2003, the Common Stock was
held by 299 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.

Securities Authorized for Issuance Under
Compensation Plans

Information regarding securities authorized for
issuance under our equity compensation plans can be found under
Item 12 of this Annual Report on Form 10-K.

11



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|        |                                         
|------- | ----------------------------------------
|Item 6. | 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, 2003, 2002
and 2001, and with respect to our consolidated balance sheets at
March 31, 2003 and 2002, 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, 2000 and 1999
and our consolidated balance sheet data at March 31, 2001,
2000 and 1999 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,                 
|                                                                                                                                 |                                               |                                      
|                                                                                                                                 |                                               | 2003                                  |                        | 2002                     |         | 2001  |         | 2000   |         | 1999  
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |       
|                                                                                                                                 |                                               |                                      
|                                                                                                                                 |                                               | (In thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                                                                  |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Revenues:                                                                                                                        |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 | Product sales                                 |                                       | $                      | 1,771                    |         |       | $       | 11,342 |         |        | $      | 12,743 |        |        | $      | 6,528 |        |       | $      | 1,432 |       
|                                                                                                                                 | Development contracts and other               |                                       |                        | 461                      |         |       |         | 498    |         |        |        | 701    |        |        |        | 529   |        |       |        | 90    |       
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 |                                               |                                       | Total revenues         |                          |         | 2,232 |         |        |         | 11,840 |        |        |        | 13,444 |        |       |        | 7,057 |        |       |        | 1,522 |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Cost of revenues:                                                                                                                |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 | Product sales                                 |                                       |                        | 1,460                    |         |       |         | 8,522  |         |        |        | 7,650  |        |        |        | 3,622 |        |       |        | 1,257 |       
|                                                                                                                                 | Development contracts and other               |                                       |                        | 83                       |         |       |         | 109    |         |        |        | 68     |        |        |        | 185   |        |       |        | 51    |       
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 |                                               |                                       | Total cost of revenues |                          |         | 1,543 |         |        |         | 8,631  |        |        |        | 7,718  |        |       |        | 3,807 |        |       |        | 1,308 |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Gross profit                                                                                                                     |                                               |                                       | 689                    |                          |         |       | 3,209   |        |         |        | 5,726  |        |        |        | 3250   |       |        |       | 214    |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Operating expenses:                                                                                                              |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 | Research and development                      |                                       |                        | 8,983                    |         |       |         | 12,664 |         |        |        | 6,774  |        |        |        | 3,390 |        |       |        | 3,357 |       
|                                                                                                                                 | Sales, general and administrative             |                                       |                        | 3,545                    |         |       |         | 5,056  |         |        |        | 5,695  |        |        |        | 3,370 |        |       |        | 2,062 |       
|                                                                                                                                 | Amortization of deferred stock compensation   |                                       |                        | 595                      |         |       |         | 1,572  |         |        |        | 2,701  |        |        |        | 1,499 |        |       |        | 2     |       
|                                                                                                                                 | Restructuring costs                           |                                       |                        | 950                      |         |       |         |       |         |        |        |       |        |        |        |      |        |       |        |      |       
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 |                                               |                                       |                        | Total operating expenses |         |       | 14,073  |        |         |        | 19,292 |        |        |        | 15,170 |       |        |       | 8,259  |       |        |       | 5,421 | 
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 |                                               | Operating loss                        |                        |                          | (13,384 | )     |         |        | (16,083 | )      |        |        | (9,444 | )      |        |       | (5,009 | )     |        |       | (5,207 | )    
|Other expense (income), net                                                                                                      |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 | Interest income                               |                                       |                        | (703                     | )       |       |         | (1,818 | )       |        |        | (2,105 | )      |        |        | (49   | )      |       |        | (7    | )     
|                                                                                                                                 | Interest expense                              |                                       |                        | 14                       |         |       |         |       |         |        |        | 132    |        |        |        | 328   |        |       |        | 173   |       
|                                                                                                                                 | Amortization of debt guarantee debt and other |                                       |                        |                         |         |       |         |       |         |        |        | 327    |        |        |        | 753   |        |       |        | 298   |       
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|                                                                                                                                 |                                               | Other expense (income), net           |                        |                          | (689    | )     |         |        | (1,818  | )      |        |        | (1,646 | )      |        |       | 1,032  |       |        |       | 464    |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Net loss before extraordinary item                                                                                               |                                               |                                       | (12,695                | )                        |         |       | (14,265 | )      |         |        | (7,798 | )      |        |        | (6,041 | )     |        |       | (5,671 | )    
|Extraordinary item, net of income taxes                                                                                          |                                               |                                       |                       |                          |         |       |        |        |         |        | 672    |        |        |        |       |       |        |       |       |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Net loss                                                                                                                         |                                               |                                       | (12,695                | )                        |         |       | (14,265 | )      |         |        | (8,470 | )      |        |        | (6,041 | )     |        |       | (5,671 | )    
|Dividend related to convertible preferred stock                                                                                  |                                               |                                       |                       |                          |         |       |        |        |         |        | 671    |        |        |        | 2,161  |       |        |       |       |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Net loss attributable to common stockholders                                                                                     |                                               | $                                     | (12,695                | )                        |         | $     | (14,265 | )      |         | $      | (9,141 | )      |        | $      | (8,202 | )     |        | $     | (5,671 | )    
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Basic and diluted net loss attributable to common
    stockholders before extraordinary item                                     |                                               | $                                     | (0.58                  | )                        |         | $     | (0.66   | )      |         | $      | (0.56  | )      |        | $      | (2.63  | )     |        | $     | (2.56  | )    
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Extraordinary item, net of income taxes                                                                                          |                                               | $                                     |                       |                          |         | $     |        |        |         | $      | 0.05   |        |        | $      |       |       |        | $     |       |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Basic and diluted net loss attributable to common
    stockholders                                                               |                                               | $                                     | (0.58                  | )                        |         | $     | (0.66   | )      |         | $      | (0.61  | )      |        | $      | (2.63  | )     |        | $     | (2.56  | )    
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      
|Shares used in computing basic and diluted net
    loss per share to common stockholders before and after
    extraordinary item |                                               |                                       | 21,952                 |                          |         |       | 21,631  |        |         |        | 15,052 |        |        |        | 3,118  |       |        |       | 2,219  |      
|                                                                                                                                 |                                               |                                       |                        |                          |         |       |         |        |         |        |        |        |        |        |        |       |        |       |        |      

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|                                                                          |  |                                       |        |      |  |      |        |      |  |      |        |  |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | - |  | - | ------- | -
|                                                                          |  |                                      
|                                                                          |  | Year Ended March 31,                 
|                                                                          |  |                                      
|                                                                          |  | 2003                                  |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                          |  |                                       |        |      |  |      |        |      |  |     
|                                                                          |  |                                      
|                                                                          |  | (In thousands, except per share data)
|Consolidated Balance Sheet Data:                                          |  |                                       |        |      |  |      |        |      |  |      |        |  |  |   |         |   |  |   |         |  
|Cash and cash equivalents, restricted cash and
    short-term investments |  | $                                     | 24,417 |      |  | $    | 35,505 |      |  | $    | 46,682 |  |  | $ | 6,864   |   |  | $ |        |  
|Working capital (deficit)                                                 |  |                                       | 24,273 |      |  |      | 35,979 |      |  |      | 50,305 |  |  |   | 5,915   |   |  |   | (3,476  | )
|Total assets                                                              |  |                                       | 31,193 |      |  |      | 43,387 |      |  |      | 57,435 |  |  |   | 11,368  |   |  |   | 730     |  
|Long term liabilities                                                     |  |                                       | 486    |      |  |      |       |      |  |      |       |  |  |   | 2,959   |   |  |   |        |  
|Redeemable convertible preferred stock                                    |  |                                       |       |      |  |      |       |      |  |      |       |  |  |   | 16,594  |   |  |   | 9,704   |  
|Stockholders equity (deficit)                                            |  | $                                     | 28,766 |      |  | $    | 40,925 |      |  | $    | 53,422 |  |  | $ | (14,266 | ) |  | $ | (12,978 | )






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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, level of future 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, future
profitability, the reasonableness of our accounting assumptions
and estimates, expected expenditures and the level of
expenditures, the effect of certain accounting principles on our
consolidated financial statements, future sales to key
customers, 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, 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; a further decrease in
revenues, inability to timely reduce expenses; 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; or key customer
contract 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.

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 86%, 32% and 67% of our total
revenues for the fiscal years ended March 31, 2003, 2002
and 2001, 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 three
customers accounted for 24%, 17% and 10% of total revenues in
the fiscal year ended March 31, 2003, respectively. Our top
two customers accounted for 62% and 14% of total revenues in the
fiscal year ended March 31, 2002, respectively. Our top
three customers accounted for 12%, 12% and 10% of total revenues
for the fiscal year ended March 31, 2001, respectively.

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, 2003, we had
an accumulated deficit of approximately $63.0 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 periods
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, 2003 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 and it was
fully amortized through March 31, 2003.

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

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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, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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.

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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,       
|                                                |                                             |                            
|                                                |                                             | 2003                        |      | 2002 |     | 2001
|                                                |                                             |                             |      |      |     |     
|Consolidated Statement of Operations Data:      |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Revenues:                                       |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                | Product sales                               |                             |      | 79   | %   |      |      | 96  | %   |   |     | 95  | %  
|                                                | Development contracts and other             |                             |      | 21   |     |      |      | 4   |     |   |     | 5   |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                |                                             | Total revenues              |      |      | 100 |      |      |     | 100 |   |     |     | 100 |  
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Cost of revenues:                               |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                | Product sales                               |                             |      | 65   |     |      |      | 72  |     |   |     | 57  |    
|                                                | Development contracts and other             |                             |      | 4    |     |      |      | 1   |     |   |     |    |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                |                                             | Total cost of revenues      |      |      | 69  |      |      |     | 73  |   |     |     | 57  |  
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Gross profit                                    |                                             |                             | 31   |      |     |      | 27   |     |     |   | 43  |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Operating expenses:                             |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                | Research and development                    |                             |      | 402  |     |      |      | 107 |     |   |     | 51  |    
|                                                | Sales, general and administrative           |                             |      | 159  |     |      |      | 43  |     |   |     | 42  |    
|                                                | Amortization of deferred stock compensation |                             |      | 27   |     |      |      | 13  |     |   |     | 20  |    
|                                                | Restructuring expenses                      |                             |      | 43   |     |      |      |    |     |   |     |    |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                |                                             | Total operating expenses    |      |      | 631 |      |      |     | 163 |   |     |     | 113 |  
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Operating loss                                  |                                             |                             | (600 | )    |     |      | (136 | )   |     |   | (70 | )  
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Other expense (income), net                     |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                | Interest income                             |                             |      | (31  | )   |      |      | (15 | )   |   |     | (16 | )  
|                                                | Interest expense                            |                             |      |     |     |      |      |    |     |   |     | 1   |    
|                                                | Amortization of debt guarantee and other    |                             |      |     |     |      |      |    |     |   |     | 3   |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|                                                |                                             | Other expense (income), net |      |      | (31 | )    |      |     | (15 | ) |     |     | (12 | )
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Net loss before extraordinary item              |                                             |                             | (569 | )    |     |      | (121 | )   |     |   | (58 | )  
|Extraordinary item, net of income taxes         |                                             |                             |     |      |     |      |     |     |     |   | 5   |    
|Net loss                                        |                                             |                             | (569 | )    |     |      | (121 | )   |     |   | (63 | )  
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Dividend related to convertible preferred stock |                                             |                             |     |      |     |      |     |     |     |   | 5   |    
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    
|Net loss attributable to common stockholders    |                                             |                             | (569 | )%   |     |      | (121 | )%  |     |   | (68 | )% 
|                                                |                                             |                             |      |      |     |      |      |     |     |   |     |    

Results of Operations for the Fiscal Years
Ended March 31, 2003, 2002 and 2001

Revenues.Revenues
were $2.2 million, $11.8 million and
$13.4 million for the fiscal years ended March 31,
2003, 2002 and 2001, respectively. Revenues decreased by
$9.6 million from fiscal year 2002 to fiscal year 2003 and
$1.6 million from fiscal year 2001 to fiscal year 2002.
These decreases were primarily due to a slower than anticipated
emergence of the interactive television market and general
economic conditions in fiscal years 2003 and 2002. Most of our
revenues are 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, sales representatives
and distributors in Asia, represented 86%, 32% and 67% of total
revenues in fiscal years 2003,

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2002 and 2001, respectively. All export revenues
are denominated in United States dollars. We believe export
sales will represent a majority of our revenues in the
foreseeable future.


Gross margin.Gross
margin was 31%, 27% and 43% for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively. Gross margin
increased to 31% in fiscal 2003 from 27% in fiscal 2002
resulting from higher margin from non-product revenues. 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.

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
$9.0 million, $12.7 million and $6.8 million for
the fiscal years ended March 31, 2003, 2002 and 2001,
respectively. As a percentage of revenues, research and
development expenses represented 402%, 107% and 51% for the
fiscal years ended March 31, 2003, 2002 and 2001,
respectively. The decrease in research and development expenses
in absolute dollars from fiscal year 2002 to fiscal year 2003
resulted primarily from a reduction of our research and
development operations in Santa Clara, California. The increase
in research and development expenses in absolute dollars and as
a percentage of revenues from fiscal year 2001 to fiscal year
2002 was 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 $0.5 million write-down of
licensed technology. We now employ 216 employees in research and
development, of which 25 are located in the United States and
191 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. In the foreseeable future, we expect
research and development expenses in absolute dollars to
continue to slightly decline.

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 $3.5 million,
$5.1 million and $5.7 million for the fiscal years
ended March 31, 2003, 2002 and 2001, respectively. As a
percentage of revenues, sales, general and administrative
expenses were 159%, 43% and 42% for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively. The decrease
in sales, general and administrative expenses from fiscal year
2002 to fiscal year 2003 resulted from a reduction in workforce
and other cost cutting measures. The decrease in sales, general
and administrative expenses in absolute dollars from fiscal year
2001 to fiscal year 2002 was primarily due to approximately
$0.4 million of higher tradeshow marketing expenses
incurred in fiscal 2001. In the foreseeable future, we expect
sales, general and administrative expenses in absolute dollars
to continue to slightly decline.

Amortization of deferred stock
compensation.We grant stock options
to hire, motivate and retain employees. We incurred stock
compensation expense of $0.6 million, $1.6 million and
$2.7 million for the fiscal years ended March 31,
2003, 2002 and 2001, respectively.

Restructuring Charges.During fiscal 2003, the Company
recorded a restructuring charge of $950,000 relating to a
headcount reduction and an operating lease for an abandoned
building. The restructuring was recorded to align the cost
structure with changing market conditions. The plan resulted in
headcount reduction of approximately 49 employees, which was
made up of 55% of research and development staff, 23% of
operations staff, 16% of general and administrative staff and 6%
of sales and marketing staff.

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The following table summarizes the activity
associated with the restructuring liabilities (in thousands):

|                          |  |            |     |            |  |                |      |       |  |   |      |   |  |   |      |  
|------------------------- |  | ---------- | --- | ---------- |  | -------------- | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                          |  | License    |     | Leased     |  | Severances and |      |      
|                          |  | Technology |     | Facilities |  | Benefits       |      | Total
|                          |  |            |     |            |  |                |      |      
|Balance at March 31, 2002 |  | $          |    |            |  | $              |     |       |  | $ |     |   |  | $ |     |  
|Additions                 |  |            | 69  |            |  |                | 162  |       |  |   | 719  |   |  |   | 950  |  
|Write-off                 |  |            | (69 | )          |  |                |     |       |  |   |     |   |  |   | (69  | )
|Cash charges              |  |            |    |            |  |                | (139 | )     |  |   | (719 | ) |  |   | (858 | )
|                          |  |            |     |            |  |                |      |       |  |   |      |   |  |   |      |  
|Balance at March 31, 2003 |  | $          |    |            |  | $              | 23   |       |  | $ |     |   |  | $ | 23   |  
|                          |  |            |     |            |  |                |      |       |  |   |      |   |  |   |      |  

The Company anticipates that the remaining
restructuring provision balance of $23,000 will be paid out by
the end of the first quarter of fiscal 2004.

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
$0.7 million, $1.8 million and $1.6 million for
fiscal years 2003, 2002 and 2001, respectively. Other income,
net, generated in the fiscal years ended March 31, 2003,
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 years 2003 and 2002 by a lower return on our
investments and declining levels of amount of cash and
investments.

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, 2003, 2002 and 2001, and therefore made no
provision for income tax in these fiscal years. As of
March 31, 2003, we had federal and state net cumulative
operating losses of approximately $46.0 million and
$9.0 million, respectively, which are available to offset
future taxable income. If not used, these federal and state net
operating losses will expire through 2023 and 2013, 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 year ended
March 31, 2001, we recorded a preferred stock dividend of
$0.7 million, 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, 2003,
net cash used in operating activities was $10.2 million,
primarily due to net loss of $12.7 million, a decrease in
accrued expenses of $0.6 million and an increase in
accounts receivable of $0.2 million, partially offset by
non-cash expenses of $2.0 million and decreases of
$0.8 million and $0.5 million in prepaid expenses and
other current assets, and inventories, respectively. 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 expenses 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 prepaid
expenses and current assets of $1.3 million, partially
offset by non-cash expenses of $4.3 million.

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Purchases of property and equipment were
$0.8 million, $2.1 million and $2.2 million for
the fiscal years ended March 31, 2003, 2002 and 2001,
respectively. As of March 31, 2003, we did not have any
significant capital purchase commitments.

Net cash flows from financing activities were
$0.0 million, $0.3 million and $54.7 million for
the fiscal years ended March 31, 2003, 2002 and 2001,
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 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.

As of March 31, 2003, our principal source
of liquidity consisted of cash and cash equivalents and
short-term investments. Working capital at March 31, 2003
was $24.3 million.

The following represent our more significant
working capital commitments which information is included in
Note 11 to the Consolidated Financial Statements in
Item 8:

The Company leases its facilities under
non-cancelable operating leases expiring at various dates
through June 2005. The Company purchased certain software
under capital leases. Future minimum lease payments under all
capital and operating leases, and other purchase commitments as
of March 31, 2003 were as follows (in thousands):

|       |  |        |       | 
|------ |  | ------ | ----- | 
|Fiscal |  |       
|Year   |  | Amount
|       |  |       
|2004   |  |        | 494   | 
|2005   |  |        | 568   | 
|2006   |  |        | 11    | 
|       |  |        |       | 
|       |  | $      | 1,073 | 
|       |  |        |       | 

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. As of March 31, 2003, the
Company acquired 143,700 shares on the open market that it
holds as treasury stock. At the March 31, 2003 stock price,
the proceeds to be used to acquire up to 56,300 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.

On August 20, 2002, the Board of Directors
authorized an additional stock repurchase program to acquire
outstanding common stock in the open market. Under this program,
the Board of Directors authorized the acquisition up to
5 million shares of common stock. As of March 31,
2003, we had not repurchased any shares of common stock under
this program.

The Company places purchase orders with wafer
foundries throughout its normal course of business. As of
March 31, 2003, the Company had approximately $64,000 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 $24.4 million at March 31, 2003, 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, 2003, we used $11.1 million of cash
and cash equivalents and short-term investments. 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, 2004. We may also utilize cash
to acquire or invest in complementary businesses or to obtain
the use of complementary technologies.

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The following represent our significant related
party transactions:

Stock 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.

Severance Payment

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 was a former
officer of a company which is an affiliate company of a major
customer. Sales to this customer were $31,000, $127,000 and
$43,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.

Payments to Related Parties

A member of the Board of Directors was a former
officer of companies which are affiliated to the Companys
major vendors UMC and TSMC, respectively. Purchases from UMC
amounted to $443,000 and $2,485,000 for the fiscal year ended
March 31, 2003 and 2002, respectively. Total combined
purchases from UMC and TSMC amounted to $7,062,000 for the
fiscal year ended March 31, 2001. The accounts payable
outstanding to UMC as of March 31, 2003 and 2002 were
$64,000 and $173,000, respectively. The total combined accounts
payable outstanding to UMC and TSMC as of March 31, 2001
was $312,000.

Another member of the Board of Directors received
$0, $13,000 and $10,500 in the years ended March 31, 2003,
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. The consulting agreement with this Board member
terminated on August 1, 2002.

Inflation

The impact of inflation on our business has not
been material for the fiscal years ended March 31, 2003,
2002, and 2001.

Recently Issued Accounting
Pronouncements

In June 2001, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be
realized in the period which it is incurred if a reasonable
estimate of fair value can be made. Companies are required to
adopt SFAS No. 143 for fiscal years beginning after
June 15, 2002, but early adoption is encouraged. The
Company has determined that this standard will not have a
material impact on its financial position and results of
operations.

In May 2002, the FASB issued
SFAS No. 145, Rescission of
SFAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections. Among
other things, SFAS No. 145 rescinds various
pronouncements regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only
when the provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
SFAS No. 145 provisions regarding

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early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002.
The Company believes that the adoption of this standard will
have no material impact in its financial statements.


In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted
for under EITF No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The scope of SFAS No. 146 also
includes costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract.
SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 and
early application is encouraged. We adopted
SFAS No. 146 during the first quarter of fiscal year
2003. The provisions of EITF No. 94-3 continue to
apply for an exit activity initiated under an exit plan that met
the criteria of EITF No. 94-3 prior to the adoption of
SFAS No. 146. The effect on adoption of
SFAS No. 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a
commitment date approach to when the liability is incurred

In November 2002, the Financial Accounting
Standards Board issued FASB Interpretation No. 45, or
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002. Adoption of this standard
did not have a material impact on our financial position,
results of operations or cash flows. Our products typically
carry on a one-year warranty. We have historically experienced
minimal warranty costs.

In November 2002, the Emerging Issues Task Force,
or EITF, reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company believes that the adoption
of this standard will have no material impact on its financial
statements.

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The Company has adopted the disclosure
requirements and believes that the adoption of the remaining
provisions of this standard will have no material impact on its
financial statements.

In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46, or
FIN 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective immediately for all new variable interest entities
created or acquired after

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January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The
adoption of this standard did not have a material impact on its
financial statements.


Interim Financial Information
(unaudited)

The following table presents selected unaudited
quarterly results of operations data for each of the eight
quarters in the period ended March 31, 2003. We believe
that the historical quarterly information has been prepared
substantially on the same basis as the audited financial
statements, and the necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts
below to present fairly unaudited quarterly results of operation
data (in thousands, except per share data):

|                                                                        |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                                        |  | First   |        | Second  |  | Third   |        | Fourth 
|                                                                        |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                                                        |  |         |        |         |  |         |        |        
|2003:                                                                   |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Total revenues                                                          |  | $       | 706    |         |  | $       | 587    |         |  | $ | 438    |   |  | $ | 501    |  
|Gross margin                                                            |  |         | 250    |         |  |         | 110    |         |  |   | 134    |   |  |   | 195    |  
|Net loss                                                                |  |         | (3,712 | )       |  |         | (4,109 | )       |  |   | (2,818 | ) |  |   | (2,056 | )
|Basic and diluted net loss per share                                    |  | $       | (0.17  | )       |  | $       | (0.19  | )       |  | $ | (0.13  | ) |  | $ | (0.09  | )
|Shares used in computing basic and fully diluted
    net loss per share |  |         | 21,983 |         |  |         | 21,969 |         |  |   | 21,948 |   |  |   | 22,012 |  
|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 |  

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
$63.0 million from our inception in March 1993 through
March 31, 2003. 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.

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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 a few 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
customers for a significant portion of our total revenues. Sales
to Siemens Communications Ltd., Kanematsu Devices Corporation
and Micro Network Korea Co, Ltd. represented 24%, 17% and 10% of
our total revenues for the fiscal year ended March 31,
2003, respectively. Sales to Prediwave Corporation and Motorola
Broadband 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, Kanematsu Devices Corporation and Weikeng
Industrial, Ltd. accounted for approximately 12%, 12% and 10% of
our total revenues, respectively. We may not be able to retain
our largest customers or to obtain additional key accounts. Any
reduction or delay in sales of our products to any 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, 2003, 2002 and 2001, research and development
expenses represented 402%, 107% and 51% 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.

Effective at the beginning of trading on
December 4, 2002, the listing of our common stock was
transferred to the Nasdaq SmallCap Market and if we are unable
to maintain our listing on the Nasdaq SmallCap Market, the price
and liquidity of our common stock may decline.

Beginning at the commencement of trading on
December 4, 2002, our common stock was listed on the Nasdaq
SmallCap Market. The transfer of our common stock to the Nasdaq
SmallCap Market will result in decreased liquidity of our common
stock and may further decrease the price per share of our common
stock.

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As a result of the transfer to the Nasdaq
SmallCap Market, we may become subject to certain sections of
the California Corporations Code that may affect our charter
documents. For example, we may not be able to continue to have a
classified board or continue to eliminate cumulative voting. In
addition, certain provisions of our Certificate of Incorporation
that call for supermajority voting may need to be approved by
stockholders every two years or be eliminated. Also, in the
event of a reorganization, stockholders may have certain
dissenting stockholder rights. The transfer to the Nasdaq
SmallCap Market may also require that we amend provisions of our
stock incentive plan and employee stock purchase plan.

There can be no assurance that we will be able to
satisfy all of the quantitative maintenance criteria for
continued listing on the Nasdaq SmallCap Market including a
continued minimum bid price of $1.00 per share. Although we were
unable to comply with this criteria for at least
10 consecutive trading days before January 27, 2003,
Nasdaq granted us an additional 180 days, or until
July 28, 2003, to comply with the minimum closing bid price
requirement because we met the initial listing requirements of
the Nasdaq SmallCap Market on that date. If we are unable to
comply with this criteria for 10 consecutive trading days
before July 28, 2003, or we are unable to continue to meet
any of the Nasdaq SmallCap Markets initial listing
requirements during the 180 days grace period, we may be
delisted from the Nasdaq SmallCap Market, which could further
decrease the price per share and the liquidity of our common
stock, and make it more difficult for us to raise capital in the
future.

In addition, many companies that face delisting
as a result of closing bid prices that are below the Nasdaq
SmallCap Markets continued listing standards seek to
maintain the listing of their securities by effecting reverse
stock splits. However, reverse stock splits do not always result
in a sustained closing bid price per share. We are currently
considering the merits of implementing a reverse split and plan
to submit a proposal to such effect in our proxy materials for
our 2003 annual meeting of stockholders. We will continue to
evaluate this option as well as other courses of action.

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 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

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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.                                                                                                    

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

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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.

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-

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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
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.

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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
86%, 32% and 67% of our total revenues in fiscal years 2003,
2002 and 2001. 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 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.

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The sale of our software business and software
related assets may not close or we may not meet the milestone
requirements, either of which could negatively impact our cash
flow.

On June 18, 2003, we entered into an
agreement with MediaTek, Inc. and certain of its subsidiaries to
sell our software business and software related assets for
$10.0 million. The closing of the transaction is subject to
closing conditions. If we are unable to meet the closing
conditions, then the transaction will not close and MediaTek
will not purchase our software business and software related
assets. If the transaction does not close, we will not receive
the cash expected for the sale, and we will need to reevaluate
our long-term strategy for the software business, which will
consume management time and resources. Additionally, the payment
of a portion of the purchase price is conditioned on our
achieving specified milestones. If we are unable to meet the
milestone requirements, than we will not receive a portion of
the purchase price.

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, 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 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.

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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.

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.

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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.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

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.

Foreign Currency Exchange Risk

We are an international company, selling our
products globally and, in particular, in Europe, 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                             |                                                                                                                                                                  |  | 33 |   
|                                                    | Independent Auditors Report 
    Arthur Andersen LLP                                         |                                                                                                                                                                  |  | 34 |   
|                                                    | Consolidated Balance Sheets                                                                    |                                                                                                                                                                  |  | 35 |   
|                                                    | Consolidated Statements of Operations                                                          |                                                                                                                                                                  |  | 36 |   
|                                                    | Consolidated Statements of Redeemable Convertible
    Preferred Stock and Stockholders Equity |                                                                                                                                                                  |  | 37 |   
|                                                    | Consolidated Statements of Cash Flows                                                          |                                                                                                                                                                  |  | 38 |   
|                                                    | Notes to Consolidated Financial Statements                                                     |                                                                                                                                                                  |  | 39 |   
|Financial Statement Schedule                        |                                                                                                |                                                                                                                                                                  |  |   
|                                                    |                                                                                                | All schedules are omitted because they are not
    applicable or the required information is shown in the
    Consolidated Financial Statements or Notes thereto |  |    | 54 | 

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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 sheets and the related consolidated statements of
operations, of redeemable convertible preferred stock and
stockholders equity and of cash flows present fairly, in
all material respects, the financial position of Tvia, Inc. and
its subsidiary at March 31, 2003 and 2002, and the results
of their operations and their cash flows for the years 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 audits. We conducted our
audits 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
audits provide a reasonable basis for our opinion. The
consolidated financial statements of Tvia, Inc. for the year
ended March 31, 2000 were audited by other independent
accountants who have ceased operations. These independent
accountants expressed an unqualified opinion on those
consolidated financial statements in their report dated
April  30, 2001.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

April 29, 2003, except as to Note 12,
which is as of June 18, 2003

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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


This audit report of Arthur Andersen LLP, our
former independent public accountants, is a copy of the original
report dated April 30, 2001 rendered by Arthur Andersen LLP
on our consolidated financial statements included in our
Form 10-K filed on June 29, 2001, and has not been
reissued by Arthur Andersen LLP since that date. The
consolidated balance sheets of Tvia, Inc. as of March 31,
2001 and 2000, and related consolidated statements of
operations, redeemable convertible preferred stock and
stockholders equity (deficit) and cash flows for each
of the two years in the period ended March 31, 2000
referred to in the audit report of Arthur Andersen LLP are not
included in this Annual Report on Form 10-K. We are
including this copy of the Arthur Andersen LLP audit report
pursuant to Rule 2-02(e) of Regulation S-X under the
Securities Act of 1933. See Exhibit 23.2 to this report for
further discussion.

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TVIA, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                       |                           |                                            |         |        |        |       |         |        |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | ------ | ------ | ----- | ------- | ------ | ------ | 
|                                         |                                                                                                                       |                          
|                                         |                                                                                                                       | March 31,                
|                                         |                                                                                                                       |                          
|                                         |                                                                                                                       | 2003                      |                                            | 2002   
|                                         |                                                                                                                       |                           |                                            |        
|                                         |                                                                                                                       |                          
|                                         |                                                                                                                       | (In thousands)           
|ASSETS                                  
|Current Assets:                          |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         | Cash and cash equivalents                                                                                             |                           | $                                          | 11,080  |        |        | $     | 6,445   |       
|                                         | Short term investments                                                                                                |                           |                                            | 13,337  |        |        |       | 29,060  |       
|                                         | Accounts receivable, net                                                                                              |                           |                                            | 331     |        |        |       | 164     |       
|                                         | Inventories                                                                                                           |                           |                                            | 1,055   |        |        |       | 1,510   |       
|                                         | Prepaid expenses and other current assets                                                                             |                           |                                            | 411     |        |        |       | 1,262   |       
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       | Total current assets      |                                            |         | 26,214 |        |       |         | 38,441 |       
|Property and equipment, net              |                                                                                                                       |                           | 3,209                                      |         |        |        | 2,945 |        
|Other assets                             |                                                                                                                       |                           | 1,770                                      |         |        |        | 2,001 |        
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       | Total assets              |                                            | $       | 31,193 |        |       | $       | 43,387 |       
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         | Accounts payable                                                                                                      |                           | $                                          | 632     |        |        | $     | 691     |       
|                                         | Accrued expenses                                                                                                      |                           |                                            | 1,175   |        |        |       | 1,771   |       
|                                         | Short-term portion of capital leases                                                                                  |                           |                                            | 134     |        |        |       |        |       
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       | Total current liabilities |                                            |         | 1,941  |        |       |         | 2,462  |       
|                                         | Long-term portion of capital leases                                                                                   |                           |                                            | 486     |        |        |       |        |       
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       | Total liabilities         |                                            |         | 2,427  |        |       |         | 2,462  |       
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|Commitments and contingencies (Note 11)  |                                                                                                                       |                           |                                            |         |        |        |       |        
|Stockholders Equity                     |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         | Preferred stock, $0.001 par value:
    5,000 shares authorized; none outstanding                                      |                           |                                            |        |        |        |       |        |       
|                                         | Common stock, $0.001 par value:
    125,000 shares authorized; 22,139 and 21,138 shares
    outstanding, respectively |                           |                                            | 22      |        |        |       | 22      |       
|                                         | Additional paid-in-capital                                                                                            |                           |                                            | 92,444  |        |        |       | 92,388  |       
|                                         | Deferred stock compensation                                                                                           |                           |                                            |        |        |        |       | (595    | )     
|                                         | Accumulated comprehensive income                                                                                      |                           |                                            | 6       |        |        |       | 31      |       
|                                         | Accumulated deficit                                                                                                   |                           |                                            | (62,956 | )      |        |       | (50,261 | )     
|                                         | Treasury stock                                                                                                        |                           |                                            | (750    | )      |        |       | (660    | )     
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       |                           | Total stockholders equity                 |         |        | 28,766 |       |         |        | 40,925 | 
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        
|                                         |                                                                                                                       |                           | Total liabilities and stockholders equity |         | $      | 31,193 |       |         | $      | 43,387 | 
|                                         |                                                                                                                       |                           |                                            |         |        |        |       |        

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,           
|                                                                                                                                    |                                                                                                                                          |                                
|                                                                                                                                    |                                                                                                                                          | 2003                            |         | 2002   |         | 2001
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |     
|                                                                                                                                    |                                                                                                                                          |                                
|                                                                                                                                    |                                                                                                                                          | (In thousands, except per share
|                                                                                                                                    |                                                                                                                                          | amounts)                       
|Revenues:                                                                                                                           |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Product sales                                                                                                                            |                                 | $       | 1,771  |         |      | $       | 11,342 |         |   | $      | 12,743 |       
|                                                                                                                                    | Development contracts and other                                                                                                          |                                 |         | 461    |         |      |         | 498    |         |   |        | 701    |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    |                                                                                                                                          | Total revenues                  |         |        | 2,232   |      |         |        | 11,840  |   |        |        | 13,444 |  
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Cost of revenues:                                                                                                                   |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Product sales (excluding amortization of deferred
    compensation of $9, $19 and $36, respectively)                                     |                                 |         | 1,460  |         |      |         | 8,522  |         |   |        | 7,650  |       
|                                                                                                                                    | Development contracts and other                                                                                                          |                                 |         | 83     |         |      |         | 109    |         |   |        | 68     |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    |                                                                                                                                          | Total cost of revenues          |         |        | 1,543   |      |         |        | 8,631   |   |        |        | 7,718  |  
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Gross profit                                                                                                                        |                                                                                                                                          |                                 | 689     |        |         |      | 3,209   |        |         |   | 5,726  |       
|Operating expenses:                                                                                                                 |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Research and development (excluding amortization
    of deferred stock compensation of $155, $590 and $996,
    respectively)            |                                 |         | 8,983  |         |      |         | 12,664 |         |   |        | 6,774  |       
|                                                                                                                                    | Sales, general and administrative (excluding
    amortization of deferred stock compensation of $431, $963 and
    $1,669, respectively) |                                 |         | 3,545  |         |      |         | 5,056  |         |   |        | 5,695  |       
|                                                                                                                                    | Amortization of deferred stock compensation                                                                                              |                                 |         | 595    |         |      |         | 1,572  |         |   |        | 2,701  |       
|                                                                                                                                    | Restructuring charges                                                                                                                    |                                 |         | 950    |         |      |         |       |         |   |        |       |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Total operating expenses                                                                                                                 |                                 |         | 14,073 |         |      |         | 19,292 |         |   |        | 15,170 |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    |                                                                                                                                          | Operating loss                  |         |        | (13,384 | )    |         |        | (16,083 | ) |        |        | (9,444 | )
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Other expense (income), net:                                                                                                        |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Interest income                                                                                                                          |                                 |         | (703   | )       |      |         | (1,818 | )       |   |        | (2,105 | )     
|                                                                                                                                    | Interest expense                                                                                                                         |                                 |         | 14     |         |      |         |       |         |   |        | 132    |       
|                                                                                                                                    | Amortization of debt guarantee costs and other                                                                                           |                                 |         |       |         |      |         |       |         |   |        | 327    |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    |                                                                                                                                          | Other expense (income), net     |         |        | (689    | )    |         |        | (1,818  | ) |        |        | (1,646 | )
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Net loss before extraordinary item                                                                                                  |                                                                                                                                          |                                 | (12,695 | )      |         |      | (14,265 | )      |         |   | (7,798 | )     
|Extraordinary item, net of income tax                                                                                               |                                                                                                                                          |                                 |        |        |         |      |        |        |         |   | 672    |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Net loss                                                                                                                            |                                                                                                                                          |                                 | (12,695 | )      |         |      | (14,265 | )      |         |   | (8,470 | )     
|Dividend related to convertible preferred stock                                                                                     |                                                                                                                                          |                                 |        |        |         |      |        |        |         |   | 671    |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Net loss attributable to common stockholders                                                                                        |                                                                                                                                          | $                               | (12,695 | )      |         | $    | (14,265 | )      |         | $ | (9,141 | )     
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Basic and diluted net loss per share attributable
    to common stockholders:                                                       |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Net loss attributable to common stockholders
    before extraordinary item                                                               |                                 | $       | (0.58  | )       |      | $       | (0.66  | )       |   | $      | (0.56  | )     
|                                                                                                                                    | Extraordinary item, net of income taxes                                                                                                  |                                 |         |       |         |      |         |       |         |   |        | 0.05   |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|                                                                                                                                    | Net loss attributable to common stockholders                                                                                             |                                 | $       | (0.58  | )       |      | $       | (0.66  | )       |   | $      | (0.61  | )     
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       
|Shares used in computing basic and diluted net
    loss attributable to common stockholders before and after
    extraordinary item |                                                                                                                                          |                                 | 21,952  |        |         |      | 21,631  |        |         |   | 15,052 |       
|                                                                                                                                    |                                                                                                                                          |                                 |         |        |         |      |         |        |         |   |        |       

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

36



---



##### Table of Contents



TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS
EQUITY

|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |        |            |   |  |   |        |   |  |  |            |   |  |   |    | 
|------------------------------------------------------------------------------ |  | ------------------------------------- | ---------- | --------------- |  | ------------ | ------- | ------ |  | ------ | ---- | ------ |  | ------ | ---------- | - |  | - | ------ | - |  |  | ---------- | - |  | - | -- | 
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |       
|                                                                               |  |                                       |            |                 |  | Common Stock
|                                                                               |  | Redeemable Convertible                |            | Convertible     |  |             
|                                                                               |  | Preferred Stock                       |            | Preferred Stock |  |             
|                                                                               |  |                                       |            |                 |  |              |         | Par   
|                                                                               |  | Shares                                |            | Amount          |  | Warrants     |         | Shares |  | Amount |      | Shares |  | Amount
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |       
|                                                                               |  |                                      
|                                                                               |  | (In thousands, except per share data)
|Balance at March 31, 2000                                                      |  |                                       | 5,107,385  |                 |  | $            | 16,594  |        |  | $      | 849  |        |  |        | 5,802,112  |   |  | $ | 9,242  |   |  |  | 5,233,806  |   |  | $ |   | 
|Conversion of common stock from no par to $0.001
    par value                 |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   | 5  | 
|Dividend related to redeemable convertible
    preferred stock                 |  |                                       |           |                 |  |              | 671     |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Shares issued in initial public offering, net of
    costs                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 5,675,050  |   |  |   | 6  | 
|Conversion of preferred stock to common stock                                  |  |                                       | (5,107,385 | )               |  |              | (17,265 | )      |  |        |      |        |  |        | (5,802,112 | ) |  |   | (9,242 | ) |  |  | 10,909,497 |   |  |   | 11 | 
|Conversion of preferred stock warrants to common
    stock warrants            |  |                                       |           |                 |  |              |        |        |  |        | (849 | )      |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Issuance of warrants to WindRiver                                              |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Deferred stock compensation                                                    |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Issuance of common stock for bonus                                             |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Amortization of deferred stock compensation                                    |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Sale of common stock to WindRiver                                              |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 90,909     |   |  |   |   | 
|Repurchase of common stock                                                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | (22,369    | ) |  |   |   | 
|Common stock issued under employee stock purchase
    plan                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 1,685      |   |  |   |   | 
|Exercise of options                                                            |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 1,110      |   |  |   |   | 
|Purchase of treasury stock                                                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | (60,000    | ) |  |   |   | 
|Unrealized gain on available-for-sale investments                              |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Net loss                                                                       |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |        |            |   |  |   |        |   |  |  |            |   |  |   |    | 
|Balance at March 31, 2001                                                      |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 21,829,688 |   |  |   | 22 | 
|Amortization of deferred stock compensation                                    |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Issuance of common stock under ESPP and through
    exercises of stock options |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 307,915    |   |  |   |   | 
|Unrealized loss on available-for-sale investments                              |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Net loss                                                                       |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |        |            |   |  |   |        |   |  |  |            |   |  |   |    | 
|Balance at March 31, 2002                                                      |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 22,137,603 |   |  |   | 22 | 
|Amortization of deferred stock compensation                                    |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Purchase of treasury stock                                                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | (143,700   | ) |  |   |   | 
|Repurchase of common stock                                                     |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | (93,691    | ) |  |   |   | 
|Issuance of common stock under ESPP and through
    exercises of stock options |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  | 238,865    |   |  |   |   | 
|Unrealized loss on available-for-sale investments                              |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|Net loss                                                                       |  |                                       |           |                 |  |              |        |        |  |        |     |        |  |        |           |   |  |   |       |   |  |  |           |   |  |   |   | 
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |        |            |   |  |   |        |   |  |  |            |   |  |   |    | 
|Balance at March 31, 2003                                                      |  |                                       |           |                 |  | $            |        |        |  | $      |     |        |  |        |           |   |  | $ |       |   |  |  | 22,139,077 |   |  | $ | 22 | 
|                                                                               |  |                                       |            |                 |  |              |         |        |  |        |      |        |  |        |            |   |  |   |        |   |  |  |            |   |  |   |    | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                  |  |   |         |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | ------------ |  | ------------- | ------ | ----------- |  | -------- | ---- | ---------------- |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                               |  |                                       |        |              |  | Accumulated   |        |             |  |          |      |                 
|                                                                               |  | Additional                            |        | Deferred     |  | Other         |        |             |  |          |      |                 
|                                                                               |  | Paid-in                               |        | Stock        |  | Comprehensive |        | Accumulated |  | Treasury |      | Stockholders   
|                                                                               |  | Capital                               |        | Compensation |  | Income        |        | Deficit     |  | Stock    |      | Equity (Deficit)
|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                 
|                                                                               |  |                                      
|                                                                               |  | (In thousands, except per share data)
|Balance at March 31, 2000                                                      |  | $                                     | 7,846  |              |  | $             | (4,499 | )           |  | $        |     |                  |  | $ | (26,855 | ) |  | $ |     |   |  | $ | (14,266 | )
|Conversion of common stock from no par to $0.001
    par value                 |  |                                       | (5     | )            |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   |        |  
|Dividend related to redeemable convertible
    preferred stock                 |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   | (671    | ) |  |   |     |   |  |   | (671    | )
|Shares issued in initial public offering, net of
    costs                     |  |                                       | 55,230 |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 55,236  |  
|Conversion of preferred stock to common stock                                  |  |                                       | 26,496 |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 17,265  |  
|Conversion of preferred stock warrants to common
    stock warrants            |  |                                       | 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                                              |  |                                       | 1,000  |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 1,000   |  
|Repurchase of common stock                                                     |  |                                       | (2     | )            |  |               |        |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | (2      | )
|Common stock issued under employee stock purchase
    plan                     |  |                                       | 16     |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 16      |  
|Exercise of options                                                            |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   |        |  
|Purchase of treasury stock                                                     |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   | (660 | ) |  |   | (660    | )
|Unrealized gain on available-for-sale investments                              |  |                                       |       |              |  |               |       |             |  |          | 148  |                  |  |   |        |   |  |   |     |   |  |   | 148     |  
|Net loss                                                                       |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   | (8,470  | ) |  |   |     |   |  |   | (8,470  | )
|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                  |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at March 31, 2001                                                      |  |                                       | 92,075 |              |  |               | (2,167 | )           |  |          | 148  |                  |  |   | (35,996 | ) |  |   | (660 | ) |  |   | 53,422  |  
|Amortization of deferred stock compensation                                    |  |                                       |       |              |  |               | 1,572  |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 1,572   |  
|Issuance of common stock under ESPP and through
    exercises of stock options |  |                                       | 313    |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 313     |  
|Unrealized loss on available-for-sale investments                              |  |                                       |       |              |  |               |       |             |  |          | (117 | )                |  |   |        |   |  |   |     |   |  |   | (117    | )
|Net loss                                                                       |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   | (14,265 | ) |  |   |     |   |  |   | (14,265 | )
|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                  |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at March 31, 2002                                                      |  |                                       | 92,388 |              |  |               | (595   | )           |  |          | 31   |                  |  |   | (50,261 | ) |  |   | (660 | ) |  |   | 40,925  |  
|Amortization of deferred stock compensation                                    |  |                                       |       |              |  |               | 595    |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 595     |  
|Purchase of treasury stock                                                     |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   | (90  | ) |  |   | (90     | )
|Repurchase of common stock                                                     |  |                                       | (14    | )            |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | (14     | )
|Issuance of common stock under ESPP and through
    exercises of stock options |  |                                       | 70     |              |  |               |       |             |  |          |     |                  |  |   |        |   |  |   |     |   |  |   | 70      |  
|Unrealized loss on available-for-sale investments                              |  |                                       |       |              |  |               |       |             |  |          | (25  | )                |  |   |        |   |  |   |     |   |  |   | (25     | )
|Net loss                                                                       |  |                                       |       |              |  |               |       |             |  |          |     |                  |  |   | (12,695 | ) |  |   |     |   |  |   | (12,695 | )
|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                  |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at March 31, 2003                                                      |  | $                                     | 92,444 |              |  | $             |       |             |  | $        | 6    |                  |  | $ | (62,956 | ) |  | $ | (750 | ) |  | $ | 28,766  |  
|                                                                               |  |                                       |        |              |  |               |        |             |  |          |      |                  |  |   |         |   |  |   |      |   |  |   |         |  

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

37



---



##### Table of Contents



TVIA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |         |   |       |        |         |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ----- | ------- | ------- | - | ----- | ------ | ------- | - | ----- | ------ | ------- | -
|                                                         |                                                                              |                                                                                
|                                                         |                                                                              | Year Ended March 31,                                                           
|                                                         |                                                                              |                                                                                
|                                                         |                                                                              | 2003                                                                            |                                                                        | 2002                                      |                                                         | 2001 
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |      
|                                                         |                                                                              |                                                                                
|                                                         |                                                                              | (In thousands)                                                                 
|Cash Flows from Operating Activities:                    |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         | Net loss                                                                     |                                                                                 | $                                                                      | (12,695                                   | )                                                       |       | $       | (14,265 | ) |       | $      | (8,470  | )
|                                                         |                                                                              | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                        |                                           |                                                         |       |         |         |   |       |        |         |   |      
|                                                         |                                                                              |                                                                                 | Depreciation and amortization                                          |                                           |                                                         | 1,312 |         |         |   | 1,091 |        |         |   | 437   |       
|                                                         |                                                                              |                                                                                 | Common stock and options issued for bonus and/or
    services rendered |                                           |                                                         |      |         |         |   |      |        |         |   | 28    |       
|                                                         |                                                                              |                                                                                 | Amortization of deferred stock compensation                            |                                           |                                                         | 595   |         |         |   | 1,572 |        |         |   | 2,701 |       
|                                                         |                                                                              |                                                                                 | Write-down of license technology                                       |                                           |                                                         | 69    |         |         |   | 500   |        |         |   |      |       
|                                                         |                                                                              |                                                                                 | Non-cash amortization of guarantee costs and other                     |                                           |                                                         |      |         |         |   |      |        |         |   | 1,126 |       
|                                                         |                                                                              |                                                                                 | Changes in assets and liabilities:                                     |                                           |                                                         |       |         |         |   |       |        |         |   |       |       
|                                                         |                                                                              |                                                                                 |                                                                        | Accounts receivable                       |                                                         |       | (167    | )       |   |       | 1,777  |         |   |       | (931   | )      
|                                                         |                                                                              |                                                                                 |                                                                        | Inventories                               |                                                         |       | 455     |         |   |       | 2,833  |         |   |       | (3,016 | )      
|                                                         |                                                                              |                                                                                 |                                                                        | Prepaid expenses and other current assets |                                                         |       | 851     |         |   |       | 90     |         |   |       | (1,279 | )      
|                                                         |                                                                              |                                                                                 |                                                                        | Accounts payable                          |                                                         |       | (59     | )       |   |       | (441   | )       |   |       | (630   | )      
|                                                         |                                                                              |                                                                                 |                                                                        | Accrued expenses                          |                                                         |       | (596    | )       |   |       | (1,110 | )       |   |       | 481    |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           | Net cash used in operating activities                   |       |         | (10,235 | ) |       |        | (7,953  | ) |       |        | (9,553  | )
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|Cash Flows from Investing Activities:                    |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         | Sale (purchase) of available-for-sale investments                            |                                                                                 |                                                                        | 15,698                                    |                                                         |       |         | (3,762  | ) |       |        | (25,415 | )
|                                                         | Purchase of property and equipment                                           |                                                                                 |                                                                        | (366                                      | )                                                       |       |         | (2,062  | ) |       |        | (2,190  | )
|                                                         | Purchase of intangible assets                                                |                                                                                 |                                                                        | (27                                       | )                                                       |       |         | (1,358  | ) |       |        |         |  
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           | Net cash provided by (used in) investing
    activities |       |         | 15,305  |   |       |        | (7,182  | ) |       |        | (27,605 | )
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|Cash Flows from Financing Activities:                    |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         | Repayments of capital leases                                                 |                                                                                 |                                                                        | (401                                      | )                                                       |       |         |        |   |       |        |        |  
|                                                         | Proceeds from loans payable                                                  |                                                                                 |                                                                        |                                          |                                                         |       |         |        |   |       |        | 159     |  
|                                                         | Payments on loans payable                                                    |                                                                                 |                                                                        |                                          |                                                         |       |         |        |   |       |        | (4,188  | )
|                                                         | Proceeds from issuance of common stock                                       |                                                                                 |                                                                        | 56                                        |                                                         |       |         | 313     |   |       |        | 1,014   |  
|                                                         | Treasury stock repurchase                                                    |                                                                                 |                                                                        | (90                                       | )                                                       |       |         |        |   |       |        | (660    | )
|                                                         | Proceeds from initial public offering net of IPO
    costs                   |                                                                                 |                                                                        |                                          |                                                         |       |         |        |   |       |        | 55,236  |  
|                                                         | Restricted funds from stock subscription for
    convertible preferred stock |                                                                                 |                                                                        |                                          |                                                         |       |         |        |   |       |        | 3,075   |  
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           | Net cash provided by (used in) financing
    activities |       |         | (435    | ) |       |        | 313     |   |       |        | 54,636  |  
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                              |                                                                                 | 4,635                                                                  |                                           |                                                         |       | (14,822 | )       |   |       | 17,478 |        
|Cash and cash equivalents at beginning of period         |                                                                              |                                                                                 | 6,445                                                                  |                                           |                                                         |       | 21,267  |         |   |       | 3,789  |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|Cash and cash equivalents at end of period               |                                                                              | $                                                                               | 11,080                                                                 |                                           |                                                         | $     | 6,445   |         |   | $     | 21,267 |        
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|Supplemental Cash Flow Information:                      |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         | Interest paid                                                                |                                                                                 | $                                                                      | 14                                        |                                                         |       | $       |        |   |       | $      | 132     |  
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        
|                                                         | Acquisition of property and equipment under
    capital leases               |                                                                                 | $                                                                      | 1,021                                     |                                                         |       | $       |        |   |       | $      |        |  
|                                                         |                                                                              |                                                                                 |                                                                        |                                           |                                                         |       |         |         |   |       |        |        

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 and
performs product testing and sales and marketing functions, and
a branch in Taiwan that operates as a sales office.

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 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) in the
consolidated statements of operations.

39



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | 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.



| |                       
| | ----------------------
| | 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 two 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.



| |                  
| | -----------------
| | 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.



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

The Company recognizes revenue from product sales
upon shipment to the original equipment manufacturers, or 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 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. The
maintenance portion of the arrangements is recognized over the
maintenance period on a straight-line basis.



| |                           
| | --------------------------
| | 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.

40



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for on the asset and
liability method. Under this method, deferred income taxes are
recognized based on the estimated future tax effects of
differences between the financial and tax basis of assets and
liabilities under the provisions of enacted tax laws. The
effects of deferred taxes of a change in tax rate is recognized
in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred
taxes to the amounts expected to be realized.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Statement of Financial Accounting Standard
No. 130 Reporting Comprehensive Income
establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements.
Comprehensive income or loss includes all changes in equity
during a period from transactions and events from non owner
sources. A summary of comprehensive loss is as follows (in
thousands):

|                                                             |  |                              |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                             |  |                             
|                                                             |  | For the Year Ended March 31,
|                                                             |  |                             
|                                                             |  | 2003                         |         | 2002 |  | 2001
|                                                             |  |                              |         |      |  |     
|Net loss                                                     |  | $                            | (12,695 | )    |  | $    | (14,265 | ) |  | $ | (9,141 | )
|Unrealized gain (loss) on available-for-sale
    investments |  |                              | 25      |      |  |      | (117    | ) |  |   | 148    |  
|                                                             |  |                              |         |      |  |      |         |   |  |   |        |  
|Comprehensive loss                                           |  | $                            | (12,720 | )    |  | $    | (14,382 | ) |  | $ | (8,993 | )
|                                                             |  |                              |         |      |  |      |         |   |  |   |        |  



| |                         
| | ------------------------
| | 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 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. The following
table illustrates the effect on net income and earnings per
share if the Company had applied the fair value

41



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to the
stock-based employee compensation.

|                                                                                                                                                    |             |                                       |         |       |   |      |         |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                                                                    |             |                                      
|                                                                                                                                                    |             | For the Year Ended March 31,         
|                                                                                                                                                    |             |                                      
|                                                                                                                                                    |             | 2003                                  |         | 2002  |   | 2001
|                                                                                                                                                    |             |                                       |         |       |   |     
|                                                                                                                                                    |             |                                      
|                                                                                                                                                    |             | (In thousands, except per share data)
|Net loss as reported                                                                                                                                |             | $                                     | (12,695 | )     |   | $    | (14,265 | )     |   | $ | (8,470 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                                                    |             |                                       | 595     |       |   |      | 1,572   |       |   |   | 2,701  |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |             |                                       | (2,195  | )     |   |      | (3,765  | )     |   |   | (2,805 | )    
|                                                                                                                                                    |             |                                       |         |       |   |      |         |       |   |   |        |      
|Pro forma net loss                                                                                                                                  |             | $                                     | (14,295 | )     |   | $    | (16,458 | )     |   | $ | (8,574 | )    
|                                                                                                                                                    |             |                                       |         |       |   |      |         |       |   |   |        |      
|Basic and diluted net loss per share:                                                                                                               |             |                                       |         |       |   |      |         |       |   |   |        |      
|                                                                                                                                                    | As reported |                                       | $       | (0.58 | ) |      | $       | (0.66 | ) |   | $      | (0.56 | )
|                                                                                                                                                    | Pro forma   |                                       | $       | (0.65 | ) |      | $       | (0.76 | ) |   | $      | (0.57 | )



| |            
| | -----------
| | 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

Net loss per share has been calculated in
accordance with the Statement of Financial Accounting Standards
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.



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

In June 2001, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be
realized in the period which it is incurred if a reasonable
estimate of fair value can be made. Companies are required to
adopt SFAS No. 143 for fiscal years beginning after
June 15, 2002, but early adoption is encouraged. The
Company has determined that this standard will not have a
material impact on its financial position and results of
operations.

In May 2002, the FASB issued
SFAS No. 145, Rescission of
SFAS Nos. 4, 44, and 64, Amendment of
SFAS No. 13, and Technical Corrections. Among
other things, SFAS No. 145 rescinds various
pronouncements regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only
when the provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
SFAS No. 145 provisions regarding early extinguishment
of debt are generally effective for fiscal years beginning after
May 15, 2002. The Company believes that the adoption of
this standard will have no material impact in its financial
statements.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of
costs that

42



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

are associated with exit and disposal activities,
including restructuring activities that are currently accounted
for under EITF No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The scope of SFAS No. 146 also
includes costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract.
SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 and
early application is encouraged. We adopted
SFAS No. 146 during the first quarter of fiscal year
2003. The provisions of EITF No. 94-3 continue to
apply for an exit activity initiated under an exit plan that met
the criteria of EITF No. 94-3 prior to the adoption of
SFAS No. 146. The effect on adoption of
SFAS No. 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a
commitment date approach to when the liability is incurred

In November 2002, the Financial Accounting
Standards Board issued FASB Interpretation No. 45, or
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002. Adoption of this standard
did not have a material impact on our financial position,
results of operations or cash flows. Our products typically
carry on a one-year warranty. We have historically experienced
minimal warranty costs.

In November 2002, the Emerging Issues Task Force,
or EITF, reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will
apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company believes that
the adoption of this standard will have no material impact on
its financial statements.

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The Company has adopted the disclosure
requirements and believes that the adoption of the remaining
provisions of this standard will have no material impact on its
financial statements.

In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46, or
FIN 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective immediately for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of

43



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The
adoption of this standard did not have a material impact on its
financial statements.

3.     Balance Sheet
Components (in thousands)

|                                 |                                                                |           |        |        |   |   |        |        |  
|-------------------------------- | -------------------------------------------------------------- | --------- | ------ | ------ | - | - | ------ | ------ | -
|                                 |                                                                |          
|                                 |                                                                | March 31,
|                                 |                                                                |          
|                                 |                                                                | 2003      |        | 2002  
|                                 |                                                                |           |        |       
|Accounts receivable, net:        |                                                                |           |        |        |   |   |        |       
|                                 | Accounts receivable                                            |           | $      | 381    |   |   | $      | 276    |  
|                                 | Less: Allowance for doubtful accounts                          |           |        | (50    | ) |   |        | (112   | )
|                                 |                                                                |           |        |        |   |   |        |       
|                                 |                                                                | $         | 331    |        |   | $ | 164    |       
|                                 |                                                                |           |        |        |   |   |        |       
|Allowance for doubtful accounts: |                                                                |           |        |        |   |   |        |       
|                                 | Balance at beginning of year                                   |           | $      | 112    |   |   | $      | 439    |  
|                                 | Addition                                                       |           |        | 8      |   |   |        | 100    |  
|                                 | Utilized                                                       |           |        | (70    | ) |   |        | (437   | )
|                                 |                                                                |           |        |        |   |   |        |       
|                                 | Balance at end year                                            |           | $      | 50     |   |   | $      | 112    |  
|                                 |                                                                |           |        |        |   |   |        |       
|Short-term investments:          |                                                                |           |        |        |   |   |        |       
|                                 | U.S. government and agency securities                          |           | $      | 2,810  |   |   | $      | 2,241  |  
|                                 | U.S. corporate and bank debt                                   |           |        | 10,527 |   |   |        | 26,819 |  
|                                 |                                                                |           |        |        |   |   |        |       
|                                 |                                                                | $         | 13,337 |        |   | $ | 29,060 |       
|                                 |                                                                |           |        |        |   |   |        |       
|Inventories:                     |                                                                |           |        |        |   |   |        |       
|                                 | Raw materials                                                  |           | $      | 446    |   |   | $      | 371    |  
|                                 | Work in process                                                |           |        | 3      |   |   |        | 220    |  
|                                 | Finished goods                                                 |           |        | 606    |   |   |        | 919    |  
|                                 |                                                                |           |        |        |   |   |        |       
|                                 |                                                                | $         | 1,055  |        |   | $ | 1,510  |       
|                                 |                                                                |           |        |        |   |   |        |       
|Property and equipment, net:     |                                                                |           |        |        |   |   |        |       
|                                 | Furniture and fixtures (Useful life of two years)              |           | $      | 85     |   |   | $      | 85     |  
|                                 | Machinery and equipment (Useful life of two to
    five years) |           |        | 3,158  |   |   |        | 1,973  |  
|                                 | Software (Useful life of two to five years)                    |           |        | 3,713  |   |   |        | 3,511  |  
|                                 |                                                                |           |        |        |   |   |        |       
|                                 |                                                                |           | 6,956  |        |   |   | 5,569  |       
|                                 | Less: Accumulated depreciation and amortization                |           |        | (3,747 | ) |   |        | (2,624 | )
|                                 |                                                                |           |        |        |   |   |        |       
|                                 |                                                                | $         | 3,209  |        |   | $ | 2,945  |       
|                                 |                                                                |           |        |        |   |   |        |       

Depreciation and amortization expense were
$1.3 million, $1.1 million and $0.4 million for
fiscal years 2003, 2002 and 2001, respectively.

44



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|              |                         |   |       |       |   |   |       |       | 
|------------- | ----------------------- | - | ----- | ----- | - | - | ----- | ----- | 
|Other Assets: |                         |   |       |       |   |   |       |      
|              | License technology      |   | $     | 1,969 |   |   | $     | 1,969 | 
|              | Less: Amortization      |   |       | (231  | ) |   |       |      | 
|              |                         |   |       |       |   |   |       |      
|              | License technology, net |   | $     | 1,738 |   |   | $     | 1,969 | 
|              | Deposits                |   |       | 32    |   |   |       | 32    | 
|              |                         |   |       |       |   |   |       |      
|              |                         | $ | 1,770 |       |   | $ | 2,001 |      
|              |                         |   |       |       |   |   |       |      

License technology is being amortized over
estimated useful lives of five years. Estimated future
amortization expense is as follows (in thousands):

|       |  |   |       | 
|------ |  | - | ----- | 
|Fiscal |  |  
|Year   |  |  
|       |  |  
|2004   |  | $ | 378   | 
|2005   |  |   | 378   | 
|2006   |  |   | 378   | 
|2007   |  |   | 378   | 
|2008   |  |   | 226   | 
|       |  |   |       | 
|Total  |  | $ | 1,738 | 
|       |  |   |       | 

|                  |                              |   |       |     |  |   |       |     | 
|----------------- | ---------------------------- | - | ----- | --- |  | - | ----- | --- | 
|Accrued Expenses: |                              |   |       |     |  |   |       |    
|                  | Accrued compensation costs   |   | $     | 593 |  |   | $     | 952 | 
|                  | Accrued software maintenance |   |       | 99  |  |   |       | 99  | 
|                  | Other                        |   |       | 483 |  |   |       | 720 | 
|                  |                              |   |       |     |  |   |       |    
|                  |                              | $ | 1,175 |     |  | $ | 1,771 |    
|                  |                              |   |       |     |  |   |       |    

4.     Restructuring
Charges

During fiscal 2003, the Company recorded a
restructuring charge of $950,000 relating to a headcount
reduction and an operating lease for an abandoned building. The
restructuring was recorded to align the cost structure with
changing market conditions. The plan resulted in headcount
reduction of approximately 49 employees, which was made up of
55% of research and development staff, 23% of operations staff,
16% of general and administrative staff and 6% of sales and
marketing staff.

The following table summarizes the activity
associated with the restructuring liabilities (in thousands):

|                          |  |            |     |            |  |              |      |       |  |   |      |   |  |   |      |  
|------------------------- |  | ---------- | --- | ---------- |  | ------------ | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                          |  | License    |     | Leased     |  | Severances   |      |      
|                          |  | Technology |     | Facilities |  | and Benefits |      | Total
|                          |  |            |     |            |  |              |      |      
|Balance at March 31, 2002 |  | $          |    |            |  | $            |     |       |  | $ |     |   |  | $ |     |  
|Additions                 |  |            | 69  |            |  |              | 162  |       |  |   | 719  |   |  |   | 950  |  
|Write-off                 |  |            | (69 | )          |  |              |     |       |  |   |     |   |  |   | (69  | )
|Cash charges              |  |            |    |            |  |              | (139 | )     |  |   | (719 | ) |  |   | (858 | )
|                          |  |            |     |            |  |              |      |       |  |   |      |   |  |   |      |  
|Balance at March 31, 2003 |  | $          |    |            |  | $            | 23   |       |  | $ |     |   |  | $ | 23   |  
|                          |  |            |     |            |  |              |      |       |  |   |      |   |  |   |      |  

The Company anticipates that the remaining
restructuring provision balance of $23,000 will be paid out by
the end of the first quarter of fiscal 2004.

45



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Income
Taxes

As a result of the Companys continued
losses, there was no provision for income taxes for the years
ended March 31, 2003, 2002 and 2001.

The following is a reconciliation of the
statutory federal tax rate to the Companys effective tax
rate is as follows:

|                                               |  |                    |       |      |  |  |       |  
|---------------------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                                               |  |                   
|                                               |  | Fiscal Years Ended
|                                               |  | March 31,         
|                                               |  |                   
|                                               |  | 2003               |       | 2002
|                                               |  |                    |       |     
|Statutory federal tax rate                     |  |                    | 34.0  | %    |  |  | 34.0  | %
|State income taxes, net of federal tax benefit |  |                    | 6.3   |      |  |  | 6.1   |  
|Stock-based compensation amortization          |  |                    | (1.6  | )    |  |  | (3.7  | )
|Research and development credit                |  |                    | 6.6   |      |  |  | 2.8   |  
|Valuation allowance                            |  |                    | (44.5 | )    |  |  | (35.9 | )
|Other                                          |  |                    | (0.8  | )    |  |  | (3.3  | )
|                                               |  |                    |       |      |  |  |       |  
|Effective tax rate                             |  |                    |      | %    |  |  |      | %
|                                               |  |                    |       |      |  |  |       |  

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

|                                                          |  |                |         |      |  |   |         |  
|--------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                          |  |               
|                                                          |  | March 31,     
|                                                          |  |               
|                                                          |  | 2003           |         | 2002
|                                                          |  |                |         |     
|                                                          |  |               
|                                                          |  | (In thousands)
|Net operating losses                                      |  | $              | 16,052  |      |  | $ | 12,823  |  
|Reserves and accruals not deductible for tax
    purposes |  |                | 1,208   |      |  |   | 962     |  
|Available tax credit carryforwards                        |  |                | 2,512   |      |  |   | 1,686   |  
|Other timing differences                                  |  |                | 1,775   |      |  |   | 877     |  
|                                                          |  |                |         |      |  |   |         |  
|                                                          |  |                | 21,547  |      |  |   | 16,348  |  
|Valuation allowance                                       |  |                | (21,547 | )    |  |   | (16,348 | )
|                                                          |  |                |         |      |  |   |         |  
|Net deferred tax asset                                    |  | $              |        |      |  | $ |        |  
|                                                          |  |                |         |      |  |   |         |  

At March 31, 2003, the Company had net
cumulative operating loss carryforwards for federal and state
income tax reporting purposes of approximately
$46.0 million and $9.0 million, respectively. The
federal net operating loss carryforwards expire on various dates
through 2023. The state net operating loss carryforwards expire
on various dates through 2013. As of March 31, 2003, the
Company had federal and state research and development tax
credit carryforwards of approximately $1.4 million and
$1.5 million, respectively 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 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.

46



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Earnings per
Share

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

|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |        |  
|-------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|                                                                                                                           |                                                                         |                     
|                                                                                                                           |                                                                         | Year Ended March 31,
|                                                                                                                           |                                                                         |                     
|                                                                                                                           |                                                                         | 2003                 |         | 2002   |   | 2001
|                                                                                                                           |                                                                         |                      |         |        |   |     
|Net loss attributable to common stockholders
    before extraordinary item                                                 |                                                                         | $                    | (12,695 | )      |   | $    | (14,265 | )      |   | $ | (8,469 | )     
|Extraordinary item, net of income taxes                                                                                    |                                                                         |                      |        |        |   |      |        |        |   |   | (672   | )     
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|Net loss attributable to common stockholders                                                                               |                                                                         | $                    | (12,695 | )      |   | $    | (14,265 | )      |   | $ | (9,141 | )     
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|Basic and diluted:                                                                                                         |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|                                                                                                                           | Weighted average shares of common stock
    outstanding                 |                      |         | 22,053 |   |      |         | 21,925 |   |   |        | 15,779 |  
|                                                                                                                           | Less: Weighted average shares of common stock
    subject to repurchase |                      |         | (101   | ) |      |         | (294   | ) |   |        | (727   | )
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|Weighted average shares used in computing basic
    and diluted net loss per share before and after extraordinary
    item |                                                                         |                      | 21,952  |        |   |      | 21,631  |        |   |   | 15,052 |       
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|Basic and diluted net loss per share attributable
    to common stockholders before extraordinary item                     |                                                                         | $                    | (0.58   | )      |   | $    | (0.66   | )      |   | $ | (0.56  | )     
|Extraordinary item, net of income taxes                                                                                    |                                                                         |                      |        |        |   |      |        |        |   |   | (0.05  | )     
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       
|Basic and diluted net loss attributable to common
    stockholders per share                                               |                                                                         | $                    | (0.58   | )      |   | $    | (0.66   | )      |   | $ | (0.61  | )     
|                                                                                                                           |                                                                         |                      |         |        |   |      |         |        |   |   |        |       

The following outstanding options and warrants
were excluded from the computation of diluted net loss per share
(in thousands):

|                                              |  |                      |       |      |  |      |       |  |  |  |       | 
|--------------------------------------------- |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                              |  |                     
|                                              |  | Year Ended March 31,
|                                              |  |                     
|                                              |  | 2003                 |       | 2002 |  | 2001
|                                              |  |                      |       |      |  |     
|Options and warrants to purchase common share |  |                      | 4,710 |      |  |      | 4,162 |  |  |  | 3,094 | 
|                                              |  |                      |       |      |  |      |       |  |  |  |       | 

7.     Stockholders
Equity and Employee Compensation Plans



| |                   
| | ------------------
| | 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, 2003, 2,261,441 shares
were available for grant under the 2000 Plan.

47



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 39,851, 251,289 and 1,685 shares in
fiscal 2003, 2002 and 2001, respectively. As of March 31,
2003, 623,841 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 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.

48



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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, 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 |     
|                          | Granted       |             |           | 2,233,401        |      |   |      | 0.86 | 
|                          | Exercised     |             |           | (199,014         | )    |   |      | 0.26 | 
|                          | Cancellations |             |           | (1,746,232       | )    |   |      | 2.81 | 
|                          |               |             |           |                  |      |   |      |     
|Balance at March 31, 2003 |               |             | 4,449,808 |                  |      | $ | 1.79 |     
|                          |               |             |           |                  |      |   |      |     



---



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

|                                    |           |                  |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|----------------------------------- | --------- | ---------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                                    |           |                  |  |               
|Options Outstanding and Exercisable |           |                  |  |               
|                                    |           |                  |  |               
|Number                              |           | Number           |  |               
|Outstanding at                      |           | Weighted Average |  | Weighted       |      | Exercisable at |  | Weighted      
|March 31,                           |           | Remaining        |  | Average        |      | March 31,      |  | Average       
|2003                                |           | Contractual Life |  | Exercise Price |      | 2003           |  | Exercise Price
|                                    |           |                  |  |                |      |                |  |               
|                                    | 1,290,830 |                  |  |                | 9.56 |                |  | $              | 0.50  |  |  |  |          |  |  | $ | 0.50  | 
|                                    | 220,000   |                  |  |                | 9.55 |                |  |                | 0.59  |  |  |  |          |  |  |   | 0.59  | 
|                                    | 1,000,000 |                  |  |                | 8.67 |                |  |                | 1.27  |  |  |  | 466,666   |  |  |   | 1.27  | 
|                                    | 484,574   |                  |  |                | 8.70 |                |  |                | 1.61  |  |  |  | 278,288   |  |  |   | 1.61  | 
|                                    | 475,353   |                  |  |                | 8.31 |                |  |                | 2.07  |  |  |  | 295,354   |  |  |   | 2.07  | 
|                                    | 526,804   |                  |  |                | 7.42 |                |  |                | 4.79  |  |  |  | 376,489   |  |  |   | 4.79  | 
|                                    | 101,666   |                  |  |                | 6.98 |                |  |                | 8.85  |  |  |  | 76,249    |  |  |   | 8.85  | 
|                                    | 26,665    |                  |  |                | 7.33 |                |  |                | 9.00  |  |  |  | 18,331    |  |  |   | 9.00  | 
|                                    | 39,667    |                  |  |                | 7.33 |                |  |                | 11.00 |  |  |  | 26,442    |  |  |   | 11.00 | 
|                                    | 284,249   |                  |  |                | 6.40 |                |  |                | 0.27  |  |  |  | 127,354   |  |  |   | 0.27  | 
|                                    |           |                  |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|                                    | 4,449,808 |                  |  |                | 8.58 |                |  | $              | 1.79  |  |  |  | 1,665,173 |  |  | $ | 1.79  | 
|                                    |           |                  |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 

49



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average fair values of options
granted in fiscal years 2003, 2002 and 2001 were $0.86, $1.66
and $4.92, 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,
|                                         |  |          
|                                         |  | 2003      |         | 2002 |  | 2001
|                                         |  |           |         |      |  |     
|Risk-free Interest Rate                  |  |           | 1.25    | %    |  |      | 4.12    | % |  |  | 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                |  |           | 90.0    | %    |  |      | 115.0   | % |  |  | 103.0   | %

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 2003 and 2002:

|                                         |  |           |           |      |  |  |           |  
|---------------------------------------- |  | --------- | --------- | ---- |  |  | --------- | -
|                                         |  |          
|                                         |  | March 31,
|                                         |  |          
|                                         |  | 2003      |           | 2002
|                                         |  |           |           |     
|Risk-free Interest Rate                  |  |           | 1.25      | %    |  |  | 2.71      | %
|Expected Life of Options from Grant Date |  |           | 0.5 years |      |  |  | 0.5 years |  
|Expected Dividend Yield                  |  |           | 0.0       | %    |  |  | 0.0       | %
|Expected Stock Volatility                |  |           | 90.0      | %    |  |  | 54.0      | %

The weighted average fair values of the purchase
rights granted in fiscal years 2003 and 2002 were $0.18 and
$1.59, 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 $0.0 million,
$0.0 million, and $0.4 million in the fiscal years
ended March 31, 2003, 2002 and 2001, respectively, and has
amortized deferred stock compensation of $0.6 million,
$1.6 million and $2.7 million 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, 2003, 27,459 shares were subject to
repurchase by the Company.

50



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Stock 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.



| |            
| | -----------
| | 401(k) Plan

Substantially all of the Companys employees
are eligible to participate in the Tvia 401(k) Plan. The
Company contributed $98,000, $37,000 and $9,000 to the
401(k) Plan for the fiscal years ended March 31, 2003,
2002 and 2001, respectively.

8.     Related Party
Transactions



| |                  
| | -----------------
| | Severance Payment

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 was a former
officer of a company which is an affiliate company of a major
customer. Sales to this customer were $31,000, $127,000 and
$43,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.



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

A member of the Board of Directors was a former
officer of companies which are affiliated with the
Companys major vendors UMC and TSMC, respectively.
Purchases from UMC amounted to $443,000 and $2,485,000 for the
fiscal year ended March 31, 2003 and 2002, respectively.
Total combined payments to UMC and TSMC amounted to $7,062,000
for the fiscal year ended March 31, 2001. The accounts
payable outstanding to UMC as of March 31, 2003 and 2002
was$64,000 and $173,000, respectively. The total combined
accounts payable outstanding to UMC and TSMC as of
March 31, 2001 were $312,000.

Another member of the Board of Directors received
$0, $13,000 and $10,500 in the year ended March 31, 2003,
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. The consulting agreement with this Board member
terminated on August 1, 2002.

9.     Concentration
of Certain Risks

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 and more established companies, the
impact of rapid technological changes and changes in customer
demand and requirements.

51



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Significant customers

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,
|                     |            |                
|                     |            | 2003            |  | 2002 |   | 2001
|                     |            |                 |  |      |   |     
|Accounts Receivable: |            |                 |  |      |   |      |  |    |   |  |  |   
|                     | Customer A |                 |  | 24   | % |      |  | *  |   |  |  | *  |  
|                     | Customer B |                 |  | 17   | % |      |  | *  |   |  |  | 12 | %
|                     | Customer C |                 |  | 10   | % |      |  | *  |   |  |  | *  |  
|                     | Customer D |                 |  | *    |   |      |  | 62 | % |  |  | 12 | %
|                     | Customer E |                 |  | *    |   |      |  | 14 | % |  |  | *  |  
|                     | Customer F |                 |  | *    |   |      |  | *  |   |  |  | 10 | %



---

(* = less than 10%)



| |                             
| | ----------------------------
| | 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.

As of March 31, 2003 and 2002, accounts
receivable were concentrated with customers as follows:

|                     |            |           |  |      |   |  |  |    |  
|-------------------- | ---------- | --------- |  | ---- | - |  |  | -- | -
|                     |            |          
|                     |            | March 31,
|                     |            |          
|                     |            | 2003      |  | 2002
|                     |            |           |  |     
|Accounts Receivable: |            |           |  |      |   |  |  |   
|                     | Customer A |           |  | 48   | % |  |  | *  | %
|                     | Customer B |           |  | 22   | % |  |  | *  | %
|                     | Customer C |           |  | 21   | % |  |  | *  | %
|                     | Customer D |           |  | *    | % |  |  | 71 | %



---

(* = less than 10%)

The Company recorded bad debt expense of $8,000
and $100,000 for fiscal years 2003 and 2002, 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.

52



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

10.     Segment and
Geographic Information

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.

The Company has operations in the United States,
Taiwan and China. The operating expenses of the Taiwan branch
and the China subsidiary for the years ended March 31,
2003, 2002 and 2001, 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,
|              |  |                
|              |  | 2003            |    | 2002 |  | 2001
|              |  |                 |    |      |  |     
|Europe        |  |                 | 35 | %    |  |      | *  |   |  |  | 11 | %
|Taiwan        |  |                 | 25 | %    |  |      | 22 | % |  |  | 34 | %
|Japan         |  |                 | 16 | %    |  |      | *  |   |  |  | 11 | %
|United States |  |                 | 14 | %    |  |      | 68 | % |  |  | 33 | %
|Korea         |  |                 | 10 | %    |  |      | *  |   |  |  | *  |  



---

(* Less than 10%)

11.     Commitments
and Contingencies



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

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. As of March 31, 2003, the
Company acquired 143,700 shares on the open market that it
holds as treasury stock. At the March 31, 2003 stock price,
the proceeds to be used to acquire up to 56,300 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.

On August 20, 2002, the Board of Directors
authorized an additional stock repurchase program to acquire
outstanding common stock in the open market. Under this program,
the Board of Directors authorized the acquisition up to
5 million shares of common stock. As of March 31,
2003, we had not repurchased any shares of common stock under
this program.

53



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |           
| | ----------
| | 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.



| |       
| | ------
| | 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
expenses, insurance and property taxes. Rent expense under
operating leases for the years ended March 31, 2003, 2002
and 2001, were approximately $0.6 million,
$0.6 million and $0.4 million, respectively.

The Company places purchase orders with wafer
foundries throughout its normal course of business. As of
March 31, 2003, the Company had approximately $64,000 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.

Future payments due under capital and operating
leases and other purchase commitments as of March 31, 2003
are as follows (in thousands):

|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 
|--------------------------------------- |  | ------- | ---- | --------- |  | ----------- | --- | ----- |  | - | -- |  |  | - | ----- | 
|                                        |  | Capital |      | Operating |  | Purchase    |     |      
|Fiscal Year                             |  | Leases  |      | Leases    |  | Commitments |     | Total
|                                        |  |         |      |           |  |             |     |      
|2004                                    |  | $       | 144  |           |  | $           | 296 |       |  | $ | 64 |  |  | $ | 504   | 
|2005                                    |  |         | 490  |           |  |             | 82  |       |  |   |   |  |  |   | 572   | 
|2006                                    |  |         |     |           |  |             | 11  |       |  |   |   |  |  |   | 11    | 
|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 
|Total minimum lease payments            |  |         | 634  |           |  | $           | 389 |       |  | $ | 64 |  |  | $ | 1,087 | 
|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 
|Less: Amount representing interest      |  |         | (14  | )         |  |             |     |       |  |   |    |  |  |   |       | 
|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 
|Present value of minimum lease payments |  |         | 620  |           |  |             |     |       |  |   |    |  |  |   |       | 
|Less: Current portion                   |  |         | (134 | )         |  |             |     |       |  |   |    |  |  |   |       | 
|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 
|Long-term portion                       |  | $       | 486  |           |  |             |     |       |  |   |    |  |  |   |       | 
|                                        |  |         |      |           |  |             |     |       |  |   |    |  |  |   |       | 



|    |                 
|--- | ----------------
|12. | Subsequent Event

In June 2003, the Company entered into an
agreement to sell its software business and software-related
assets to Mediatek, Inc. in exchange for $10 million in
cash, subject to milestones and closing conditions. The software
assets were developed internally to support the Companys
products, including Home IT, advanced digital video
broadcasting, MPEG 4 software, SDK software and software
drivers. Under the agreement, MediaTek will grant to the Company
a royalty-free license to continue to use those software assets
to support its existing products and fulfil its maintenance
obligations to its existing customers. The development costs
related to the software assets were expensed as incurred. The
Company expects to report the gain from this transaction in the
results of operations in the quarter ending June 30, 2003
depending on satisfaction of milestones and closing conditions.
The Company expects the Mediatek will hire approximately
90 software employees of the Company who have worked with
the software technologies.



| |                             
| | ----------------------------
| | Financial Statement Schedule

All schedules are omitted because they are
applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.

54



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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 matter
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 2003 Annual
Meeting of Stockholders to be held on September 2, 2003
(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 Director  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 contained in the Proxy Statement.

55



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##### Table of Contents



EQUITY COMPENSATION PLAN INFORMATION

Set forth in the table below is certain
information regarding the number of shares of Common Stock that
were subject to outstanding stock options or other compensation
plan grants and awards as of March 31, 2003.

|                                                               |  |                      |           |                   |  |                      |      |  |  |  |           |    
|-------------------------------------------------------------- |  | -------------------- | --------- | ----------------- |  | -------------------- | ---- |  |  |  | --------- | ---
|                                                               |  |                      |           |                   |  | Number of Securities
|                                                               |  |                      |           |                   |  | Remaining Available 
|                                                               |  |                      |           |                   |  | for Future Issuance 
|                                                               |  | Number of Securities |           | Weighted-Average  |  | Under Equity        
|                                                               |  | to be Issued Upon    |           | Exercise Price of |  | Compensation Plans  
|                                                               |  | Exercise of          |           | Outstanding       |  | (Excluding          
|                                                               |  | Outstanding Options, |           | Options, Warrants |  | Securities Reflected
|Plan Category                                                  |  | Warrants and Rights  |           | and Rights        |  | in Column (a))      
|                                                               |  |                      |           |                   |  |                     
|Equity compensation plans approved by security
    holders     |  |                      | 3,449,808 | (1)               |  | $                    | 1.94 |  |  |  | 2,885,282 |    
|Equity compensation plans not approved by
    security holders |  |                      | 1,260,451 | (2)(3)(4)(5)      |  | $                    | 2.02 |  |  |  |          |    
|                                                               |  |                      |           |                   |  |                      |      |  |  |  |           |    
|Totals                                                         |  |                      | 4,710,259 |                   |  | $                    | 1.96 |  |  |  | 2,885,282 | (6)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes shares to be issued upon exercise of
    outstanding options and warrants granted under the 1999 Plan and
    the 2000 Plan. Options or warrants to purchase shares of the
    Companys Common Stock are no longer granted under the 1999
    Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | In November 2001, the Company issued two
    out-of-plan non-qualified options. The first grant is for
    800,000 shares of Common Stock, with an exercise price of
    $1.27, the fair market value on the date of grant. The option
    vests over a four year period. The second grant is for
    200,000 shares of Common Stock, with an exercise price of
    $1.27, the fair market value on the date of grant. If certain
    performance objectives are met, the second option will vest
    ratably over 48 months beginning on the last day of the first
    month following the first anniversary of the vesting
    commencement date. If the performance objectives are not met,
    the option will vest in full on the sixth anniversary of the
    vesting commencement date.                                                                  
|   
|(3) | Includes warrants to purchase 26,666 and 166,665
    shares of Common Stock at exercise prices of $3.00 and $3.75 per
    share, respectively. The warrants were issued between
    December 1997 and January 2000 to related party
    guarantors of loans previously incurred by the Company. The
    loans were repaid. Each of the warrants has a term of five years
    and terminates between April 2004 and January 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | Includes warrants to purchase 13,333 and
    8,333 shares of Common Stock at exercise prices of $3.00
    and $3.75 per share, respectively. The warrants were issued to a
    bank in June 1999 and in December 1999 in connection
    with loans previously incurred by the Company. The loans were
    repaid. The warrants have a term of five years and terminate in
    June 2004 and December 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | Includes a warrant to purchase 45,454 shares
    of Common Stock at an exercise price of $11.00 per share. The
    warrant was issued to a company that provided marketing services
    to the Company. The warrant has a term of three years and
    expires in July 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(6) | Includes 623,841 shares reserved for
    issuance under the Companys 2000 Employee Stock Purchase
    Plan (the ESPP). The number of shares reserved for
    issuance under the ESPP increases on April 1, of every
    year, by 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.






|         |                                                   
|-------- | --------------------------------------------------
|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








|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures.We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures,
our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential future conditions.

Based on their evaluation as of a date within
90 days prior to the filing date of this Annual Report on
Form 10-K, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted
above, our disclosure controls and procedures were effective to
ensure that material information relating to us, including our
consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which
this Annual Report on Form 10-K was being prepared.

(b) Changes in internal controls.
There were no significant changes in our internal controls or,
to our knowledge, in other factors that could significantly
affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reference is made to the Index to Consolidated
    Financial Statements of Tvia, Inc., under Item 8 of
    Part II hereof. All schedules are 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 15(c) below. Each management
    contract or compensatory plan or arrangement required to be
    filed has been identified.

(b) Reports on Form 8-K.

The Company did not file any reports on
Form 8-K with the Securities and Exchange Commission during
the quarter ended March 31, 2003.

(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)).                 

57



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                
|Number  |  | Description of Document                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                
|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. (incorporated by reference to Exhibit 10.2 to
    Amendment No. 5 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                              
|10.3#   |  | Reserved.                                                                                                                                                                                                                                      
|10.4#   |  | 2000 Employee Stock Purchase Plan of Tvia, Inc.
    (incorporated by reference to Exhibit 99.1 to the
    Companys Registration Statement on Form S-8 (File
    No. 333-48572)).                                                              
|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  |  | Reserved.                                                                                                                                                                                                                                      

58



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                            
|Number  |  | Description of Document                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                            
|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. (incorporated by reference to Exhibit 10.18 to
    the Companys Annual Report on Form 10-K for the year
    ended March 31, 2002).                       
|10.19  |  | Technology License Agreement by and between the
    Company and Oak Technology, Inc. dated December 29, 2000.
    (incorporated by reference to Exhibit 10.19 to the
    Companys Annual Report on Form 10-K for the year
    ended March 31, 2002).                      
|10.20  |  | Addendum to Technology License Agreement by and
    between the Company and Oak Technology, Inc. dated
    April 25, 2001. (incorporated by reference to
    Exhibit 10.20 to the Companys Annual Report on
    Form 10-K for the year ended March 31, 2002).             
|10.21#  |  | Agreement and Release of Claims by and between
    the Company and Jack Guedj dated January 31, 2002.
    (incorporated by reference to Exhibit 10.21 to the
    Companys Annual Report on Form 10-K for the year
    ended March 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 60 of this
    Form 10-K).                                                                                                                                                                                                                     
|99.1*   |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                             
|99.2*   |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                             



---



|  |                                                                      
|- | ---------------------------------------------------------------------
|* | Filed herewith.                                                      
| 
|# | 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 15(a)(1) and (a)(2) above.

59



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##### Table of Contents






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                                
| | Chief Executive Officer and
    President

Date: June 23, 2002

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Eli Porat
and Arthur Nguyen, 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.

|                                         |  |                                                                          |  |               |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------- |  | 
|                                         |  |                                                                          |  |               |  | 
|                                         |  | Title                                                                    |  | Date         
|Name                                     |  |                                                                          |  |              
|                                         |  |                                                                          |  |              
|/s/ ELI PORATEli Porat                   |  | Chief Executive Officer and President
    (Principal Executive Officer)  |  | June 23, 2002
|                                        
|/s/ ARTHUR NGUYENArthur Nguyen           |  | Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | June 23, 2002
|                                        
|/s/ KENNY LIUKenny Liu                   |  | Chairman of the Board                                                    |  | June 23, 2002
|                                        
|/s/ STEVEN CHENGSteven Cheng             |  | Director                                                                 |  | June 23, 2002
|                                        
|/s/ JAMES BUNKERJames Bunker             |  | Director                                                                 |  | June 23, 2002
|                                        
|/s/ MARK MANGIOLAMark Mangiola           |  | Director                                                                 |  | June 23, 2002
|                                        
|/s/ R. DAVID DICIOCCIOR. David Dicioccio |  | Director                                                                 |  | June 23, 2002

60



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##### Table of Contents



TVIA, INC.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF


THE SARBANES-OXLEY ACT OF 2002





CERTIFICATION

I, Eli Porat, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Tvia, Inc.;                                                                                                                                                                                                                                                                              
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ ELI PORAT                            
| |                                          
| | Eli Porat                                
| | Chief Executive Officer and
    President

Date: June 23, 2003

61



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##### Table of Contents



CERTIFICATION

I, Arthur Nguyen, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Tvia, Inc.;                                                                                                                                                                                                                                                                              
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ ARTHUR NGUYEN      
| |                        
| | Arthur Nguyen          
| | Chief Financial Officer

Date: June 23, 2003

62



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##### Table of Contents






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. (incorporated by reference to Exhibit 10.2 to
    Amendment No. 5 to the Companys Registration
    Statement on Form S-1 (File No. 333-34024)).                  
|        | 10.3#   |                         |  | Reserved.                                                                                                                                                                                                                          
|        | 10.4#   |                         |  | 2000 Employee Stock Purchase Plan of Tvia, Inc.
    (incorporated by reference to Exhibit 99.1 to the
    Companys Registration Statement on Form S-8 (File
    No. 333-48572)).                                                  
|        | 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)).                             

63



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##### Table of Contents



|        |        |                         |  |                                                                                                                                                                                                                                                                            
|------- | ------ | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 |                         |  | Reserved.                                                                                                                                                                                                                                                                  
|        | 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. (incorporated by reference to Exhibit 10.18 to
    the Companys Annual Report on Form 10-K for the year
    ended March 31, 2002).                       
|        | 10.19 |                         |  | Technology License Agreement by and between the
    Company and Oak Technology, Inc. dated December 29, 2000.
    (incorporated by reference to Exhibit 10.19 to the
    Companys Annual Report on Form 10-K for the year
    ended March 31, 2002).                      
|        | 10.20 |                         |  | Addendum to Technology License Agreement by and
    between the Company and Oak Technology, Inc. dated
    April 25, 2001. (incorporated by reference to
    Exhibit 10.20 to the Companys Annual Report on
    Form 10-K for the year ended March 31, 2002).             
|        | 10.21# |                         |  | Agreement and Release of Claims by and between
    the Company and Jack Guedj dated January 31, 2002.
    (incorporated by reference to Exhibit 10.21 to the
    Companys Annual Report on Form 10-K for the year
    ended March 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 60 of this
    Form 10-K).                                                                                                                                                                                                                     

64



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##### Table of Contents



|        |       |                         |  |                                                                                                                               
|------- | ----- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 99.1* |                         |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002
|        | 99.2* |                         |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002



---



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

65