**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

x                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended June 30, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                     to                     .**

**Commissionfile number: 000-50730**

**VIEWSONIC CORPORATION**

**(**Exactname of Registrant as Specified in Its Charter**)**

| **Delaware**                                                                                                                                  | **95-4120606**                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                                                                              | (I.R.S. Employer  Identification No.) |
| **381 Brea Canyon Road  Walnut, California  91789  (909) 869-7976**                                                                 |
| (Address,  including Zip Code, of Registrant’s Principal Executive Offices  and Registrant’s Telephone Number, including Area Code) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes o  No x

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o  No x

Thenumber of shares of the registrant’s common stock outstanding as of June 30,2004 was 353,919,677 shares.

 

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**VIEWSONICCORPORATIONFORM 10-QTABLE OF CONTENTS**
|            | ** **                                                                                                       | ** ** | **Page** | ** ** |
|------------|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ** ** | **PART I: FINANCIAL  INFORMATION**                                                                          |       |     |       |
| Item 1.    | Consolidated Condensed  Financial Statements (unaudited)                                                         |       | 3        |       |
|       | Consolidated Condensed  Balance Sheets as of June 30, 2004 and December 31, 2003                       |       | 3        |       |
|       | Consolidated  Condensed Statements of Operations for the three and six months ended  June 30, 2004 and 2003 |       | 4        |       |
|       | Consolidated Condensed  Statements of Cash Flows for the six-months ended June 30, 2004 and 2003            |       | 5        |       |
|       | Notes to Consolidated Condensed  Financial Statements                                                            |       | 6        |       |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |       | 12       |       |
| Item  3.   | Quantitative and Qualitative  Disclosures About Market Risk                                                      |       | 20       |       |
| Item 4.    | Controls and  Procedures                                                                                         |       | 26       |       |
| ** ** | **PART II: OTHER  INFORMATION**                                                                             |       |     |       |
| Item  1.   | Legal Proceedings                                                                                                |       | 27       |       |
| Item 2.    | Changes in Securities, Use  of Proceeds and Issuer Purchasers of Equity Securities                               |       | 27       |       |
| Item  3.   | Defaults  Upon Senior Securities                                                                                 |       | 27       |       |
| Item 4.    | Submission  of Matters to a Vote of Securities Holders                                                           |       | 27       |       |
| Item 5.    | Other Information                                                                                                |       | 28       |       |
| Item 6.    | Exhibits  and Reports on Form 8-K                                                                           |       | 28       |       |
|       | Signature                                                                                                        |       | 29       |       |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.**   CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS 

**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETSJUNE 30, 2004 AND DECEMBER 31, 2003(In thousands, except for share data and par value)(Unaudited)**
| ** **                                                                                                                                                                                                                               | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                               | ** ** |                    | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| CURRENT ASSETS:                                                                                                                                                                                                                          |       |                    |       | ** **                  |       |   |   | ** ** |   |
| Cash and cash equivalents                                                                                                                                                                                                                |       |                    | $          | 84,809                      | ** ** |   |   | $ | 87,760 | ** ** |   |
| Short-term investments                                                                                                                                                                                                                   |       |                    | 4,529      | ** **                  |       |   | 3,687 | ** ** |   |
| Trade receivables—net                                                                                                                                                                                                               |       |                    | 120,055    | ** **                  |       |   | 131,805 | ** ** |   |
| Other receivables                                                                                                                                                                                                                        |       |                    | 6,925      | ** **                  |       |   | 5,765 | ** ** |   |
| Inventories                                                                                                                                                                                                                              |       |                    | 176,095    | ** **                  |       |   | 128,803 | ** ** |   |
| Deferred income taxes                                                                                                                                                                                                                    |       |                    | 12,689     | ** **                  |       |   | 11,592 | ** ** |   |
| Prepaids and other current assets                                                                                                                                                                                                        |       |                    | 5,590      | ** **                  |       |   | 4,980 | ** ** |   |
| Income taxes receivable                                                                                                                                                                                                                  |       |                    | 7          | ** **                  |       |   | 123 | ** ** |   |
| Net assets of business held for sale                                                                                                                                                                                                     |       |                    | 4,161      | ** **                  |       |   | 4,013 | ** ** |   |
| Total current assets                                                                                                                                                                                                                     |       |                    | 414,860    | ** **                  |       |   | 378,528 | ** ** |   |
| PROPERTY, PLANT AND EQUIPMENT—Net                                                                                                                                                                                                   |       |                    | 16,017     | ** **                  |       |   | 15,909 | ** ** |   |
| LONG-TERM INVESTMENTS                                                                                                                                                                                                                    |       |                    | 11,889     | ** **                  |       |   | 13,704 | ** ** |   |
| GOODWILL                                                                                                                                                                                                                                 |       |                    | 2,123      | ** **                  |       |   | 2,123 | ** ** |   |
| OTHER ASSETS—Net                                                                                                                                                                                                                    |       |                    | 1,526      | ** **                  |       |   | 2,869 | ** ** |   |
| TOTAL                                                                                                                                                                                                                                    |       |                    | $          | 446,415                     | ** ** |   |   | $ | 413,133 | ** ** |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |                    |       | ** **                  |       |   |   | ** ** |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                    |       |                    |       | ** **                  |       |   |   | ** ** |   |
| Bank borrowings                                                                                                                                                                                                                          |       |                    | $          | 1,117                       | ** ** |   |   | $ | 6,342 | ** ** |   |
| Accounts payable                                                                                                                                                                                                                         |       |                    | 267,058    | ** **                  |       |   | 237,269 | ** ** |   |
| Accrued promotional expenses                                                                                                                                                                                                             |       |                    | 16,989     | ** **                  |       |   | 15,779 | ** ** |   |
| Accrued warranty expense                                                                                                                                                                                                                 |       |                    | 15,145     | ** **                  |       |   | 14,706 | ** ** |   |
| Other accrued expenses                                                                                                                                                                                                                   |       |                    | 19,693     | ** **                  |       |   | 18,684 | ** ** |   |
| Total current liabilities                                                                                                                                                                                                                |       |                    | 320,002    | ** **                  |       |   | 292,780 | ** ** |   |
| SUBORDINATED NOTES PAYABLE—Related party                                                                                                                                                                                            |       |                    | 43,000     | ** **                  |       |   | 43,000 | ** ** |   |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                    |       |                    | —     | ** **                  |       |   | 590 | ** ** |   |
| CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED STOCK                                                                                                                                                                                       |       |                    | 12,720     | ** **                  |       |   | 12,056 | ** ** |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                                                              |       |                    |       | ** **                  |       |   |   | ** ** |   |
| Common stock, $.01 par value:  Authorized—600,000,000  shares at June 30, 2004 and December 31, 2003 Outstanding—353,919,677  and 353,897,749 shares at June 30, 2004 and December 31, 2003,  respectively |       |                    | 3,539      | ** **                  |       |   | 3,539 | ** ** |   |
| Additional paid-in capital                                                                                                                                                                                                               |       |                    | 92,143     | ** **                  |       |   | 92,105 | ** ** |   |
| Accumulated deficit                                                                                                                                                                                                                      |       |                    | (21,431    | **)**                       |       |   | (28,125 | ) |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                     |       |                    | (3,558     | **)**                       |       |   | (2,812 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                          |       |                    | 70,693     | ** **                  |       |   | 64,707 | ** ** |   |
| TOTAL                                                                                                                                                                                                                                    |       |                    | $          | 446,415                     | ** ** |   |   | $ | 413,133 | ** ** |   |

 

See accompanying notes to consolidated condensed financial statements.

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**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSJUNE 30, 2004 AND 2003(In thousands, except per share data)(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| NET SALES                                                        |       | $                                               | 265,039    |                                          | $          | 240,054 |   | $ | 558,932 |   | $ | 506,601 |   |
| COST OF SALES                                                    |       | 232,997                                         |       | 208,918                                       |       | 481,982 |   | 434,109 |   |
| GROSS PROFIT                                                     |       | 32,042                                          |       | 31,136                                        |       | 76,950 |   | 72,492 |   |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                     |       | 32,791                                          |       | 30,476                                        |       | 65,188 |   | 63,624 |   |
| (LOSS) INCOME FROM OPERATIONS                                    |       | (749                                            | )          | 660                                           |       | 11,762 |   | 8,868 |   |
| OTHER INCOME (EXPENSE), Net:                                     |       | (1,233                                          | )          | 351                                           |       | (439 | ) | 1,799 |   |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME  TAXES           |       | (1,982                                          | )          | 1,011                                         |       | 11,323 |   | 10,667 |   |
| PROVISION FOR INCOME TAXES                                       |       | (92                                             | )          | 378                                           |       | 3,277 |   | 2,196 |   |
| (LOSS) INCOME FROM CONTINUING OPERATIONS                         |       | (1,890                                          | )          | 633                                           |       | 8,046 |   | 8,471 |   |
| (LOSS) INCOME FROM DISCONTINUED OPERATIONS (Note 10)             |       | (397                                            | )          | 56                                            |       | (688 | ) | (110 | ) |
| NET (LOSS) INCOME                                                |       | (2,287                                          | )          | 689                                           |       | 7,358 |   | 8,361 |   |
| PREFERRED STOCK ACCRETION                                        |       | (337                                            | )          | (304                                          | )          | (664 | ) | (593 | ) |
| NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS               |       | $                                               | (2,624     | )                                             | $          | 385 |   | $ | 6,694 |   | $ | 7,768 |   |
| BASIC (LOSS) EARNINGS PER SHARE—CONTINUING  OPERATIONS      |       | $                                               | (0.01      | )                                             | $          | 0.00 |   | $ | 0.02 |   | $ | 0.02 |   |
| BASIC (LOSS) EARNINGS PER SHARE—DISCONTINUED  OPERATIONS    |       | $                                               | 0.00       |                                          | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| DILUTED (LOSS) EARNINGS PER SHARE—CONTINUING  OPERATIONS    |       | $                                               | (0.01      | )                                             | $          | 0.00 |   | $ | 0.02 |   | $ | 0.02 |   |
| DILUTED (LOSS)  EARNINGS PER SHARE—DISCONTINUED  OPERATIONS |       | $                                               | 0.00       |                                          | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |

 

See accompanying notes to consolidated condensed financial statements

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**VIEWSONICCORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSJUNE 30, 2004 AND 2003(In thousands)(Unaudited)**
| ** **                                                                                                          | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                               |       |                                          |       |   |   |
| Income from continuing  operations                                                                                  |       | $                                             | 8,046      |   | $ | 8,471 |   |
| Adjustments to reconcile income from continuing  operations to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                                                      |       | 2,091                                         |       | 1,950 |   |
| Minority interest in net  loss of subsidiaries                                                                      |       | —                                        |       | (374 | ) |
| Loss on disposal of  property, plant and equipment                                                                  |       | 156                                           |       | 55 |   |
| Provision for doubtful  accounts                                                                                    |       | 164                                           |       | 151 |   |
| (Gain) loss on sale of  long-term investments                                                                       |       | (861                                          | )          | 576 |   |
| Deferred income taxes                                                                                               |       | (1,097                                        | )          | 1,505 |   |
| Other                                                                                                               |       | 30                                            |       | 31 |   |
| Changes in operating assets and liabilities:                                                                        |       |                                          |       |   |   |
| Trade receivables—net                                                                                          |       | 11,585                                        |       | 881 |   |
| Other receivables                                                                                                   |       | (1,160                                        | )          | 3,583 |   |
| Inventories                                                                                                         |       | (47,292                                       | )          | (26,828 | ) |
| Prepaids and other  current assets                                                                                  |       | 749                                           |       | (93 | ) |
| Accounts payable                                                                                                    |       | 29,789                                        |       | (24,814 | ) |
| Accrued promotional and  other expenses                                                                             |       | 413                                           |       | (2,334 | ) |
| Accrued warranty expense                                                                                            |       | 439                                           |       | 1,698 |   |
| Income taxes  payable/receivable                                                                                    |       | 1,341                                         |       | 1,860 |   |
| Net cash provided by  (used in) operating activities                                                                |       | 4,393                                         |       | (33,682 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                               |       |                                          |       |   |   |
| Net purchase of  property, plant and equipment                                                                      |       | (2,245                                        | )          | (1,954 | ) |
| Proceeds on sale of  long-term investments                                                                          |       | 1,308                                         |       | 4,050 |   |
| Purchases of short-term  investments                                                                                |       | (842                                          | )          | — |   |
| Discontinued operations                                                                                             |       | (284                                          | )          | (302 | ) |
| Net cash (used in)  provided by investing activities                                                                |       | (2,063                                        | )          | 1,794 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                               |       |                                          |       |   |   |
| Proceeds from bank  borrowings                                                                                      |       | 9,406                                         |       | 22,189 |   |
| Payments on bank  borrowings                                                                                        |       | (14,631                                       | )          | (14,224 | ) |
| Proceeds from issuance  of common stock                                                                             |       | 38                                            |       | 8 |   |
| Net cash (used in)  provided by financing activities                                                                |       | (5,187                                        | )          | 7,973 |   |
| NET DECREASE IN CASH AND  CASH EQUIVALENTS                                                                          |       | (2,857                                        | )          | (23,915 | ) |
| CASH AND CASH  EQUIVALENTS—Beginning  of period                                                                |       | 87,760                                        |       | 66,088 |   |
| EFFECT OF EXCHANGE RATE  CHANGES ON CASH AND CASH EQUIVALENTS                                                       |       | (94                                           | )          | (117 | ) |
| CASH AND CASH EQUIVALENTS—End of period                                                                        |       | $                                             | 84,809     |   | $ | 42,056 |   |

 

See accompanying notes to consolidated condensed financial statements

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**VIEWSONICCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unaudited)**

**Note 1.   Summaryof Significant Accounting Policies**

*Basis ofPresentation*

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States for interim consolidated condensedfinancial information and with the instructions for Form 10-Q and Article 10of Regulation S-X.

In the opinion of management, the accompanying unauditedconsolidated condensed financial statements for ViewSonic Corporation and ourconsolidated subsidiaries contain all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly our financial position as ofJune 30, 2004, our results of operations for the three and six monthsended June 30, 2004 and 2003, and cash flows for the six months ended June 30,2004 and 2003. The consolidated condensed balance sheet as of December 31,2003 is derived from the December 31, 2003 audited financial statements.

The results of operations for the three and six monthsended June 30, 2004 are not necessarily indicative of the results to beexpected for the full year. The information included in this Quarterly Reporton Form 10-Q should be read in conjunction with the audited consolidated financialstatements for the year ended December 31, 2003 and notes thereto includedin our Form 10/A filed with the Securities and Exchange Commission onJune 25, 2004.

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

**Note 2.   Stock-BasedCompensation**

We account for employee stock options in accordancewith Accounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.Under APB Opinion No. 25, we do not recognize compensation expense relatedto employee stock options, since the options are granted at the fair marketvalue on the date of grant as determined by our Board of Directors.

Statement of Financial Accounting Standards, or SFAS, No. 123,*Accounting for Stock-BasedCompensation*, encourages, but does not require, the recognition ofcompensation expense for employee stock-based compensation arrangementsusing the fair value method of accounting. We have elected the “disclosure only”alternative and have disclosed the pro forma net income (loss) per shareamounts using the fair value method.

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Ifcompensation expense for our stock options had been recognized based on thefair value on the grant date under the methodology prescribed by SFAS No. 123,our net income (loss) would have been impacted as shown in the following tablefor the periods indicated (in thousands):
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **   2004   **    | ** ** | **   2003   **  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income:                  |       |                                            |       |                                          |       |   |   |   |   |   |   |
| As reported                         |       | $                                               | (2,287     | )                                             |       | $ | 689 |   |   | $ | 7,358 |   | $ | 8,361 |   |
| Pro forma                           |       | $                                               | (2,331     | )                                             |       | $ | 623 |   |   | $ | 7,249 |   | $ | 8,242 |   |
| Basic (loss) earnings  per share:   |       |                                            |       |                                          |       |   |   |   |   |   |   |
| As reported                         |       | $                                               | (0.01      | )                                             |       | $ | 0.00 |   |   | $ | 0.02 |   | $ | 0.02 |   |
| Pro forma                           |       | $                                               | (0.01      | )                                             |       | $ | 0.00 |   |   | $ | 0.02 |   | $ | 0.02 |   |
| Diluted (loss) earnings  per share: |       |                                            |       |                                          |       |   |   |   |   |   |   |
| As reported                         |       | $                                               | (0.01      | )                                             |       | $ | 0.00 |   |   | $ | 0.02 |   | $ | 0.02 |   |
| Pro forma                           |       | $                                               | (0.01      | )                                             |       | $ | 0.00 |   |   | $ | 0.02 |   | $ | 0.02 |   |

 

Please see the assumptionsused to value stock options as reported in our registration statement on Form 10/Afor the year ended December 31, 2003 filed with the Securities and ExchangeCommission on June 25, 2004.

**Note 3.   Comprehensive (loss)Income**

Comprehensiveincome includes foreign currency translation gains and losses and unrealizedgains and losses on marketable securities available for sale that are reflectedin stockholders’ equity instead of net income. The following table sets forththe calculation of comprehensive (loss) income for the periods indicated (inthousands):
| ** **                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,**            | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **   2004   **    | ** ** | **    2003    ** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income                                                                    |       | $                                               | (2,287     | )                                                        |       | $ | 689 |   |   | $ | 7,358 |   | $ | 8,361 |   |
| Foreign currency  translation                                                        |       | (415                                            | )          |                                                     | 103        |   |   | 167 |   | 96 |   |
| Unrealized  holding gains/(losses) on marketable securities—less realized gains |       | (1,646                                          | )          |                                                     | (593       | ) |   | (913 | ) | (1,412 | ) |
| Total comprehensive  (loss) income                                                   |       | $                                               | (4,348     | )                                                        |       | $ | 199 |   |   | $ | 6,612 |   | $ | 7,045 |   |

 

**Note 4.   IncomeTaxes**

The provision for incometaxes has been recorded based upon the current estimate of our annual effectivetax rate. This rate differs from the federal statutory rate primarily due tothe provision for state income taxes and the effects of our foreign operations.Our effective tax rate on income/(loss) from continuing operations wasapproximately (4.6)% and 37.4% for the three months ended June 30, 2004and 2003, respectively, and 28.9% and 20.6% for the six months ended June 30,2004 and 2003, respectively.

**Note 5.   Commitmentsand Contingencies**

***Litigation***—Weare involved in various legal matters in the normal course of our business.Management believes that the ultimate outcome of such matters will not have amaterial adverse effect on the accompanying consolidated condensed financialstatements.

***Services Agreements***—In1999, we entered into a services agreement with a logistics supplier. Theagreement provides for warehousing, shipping and freight services. The amountto be paid is based on the 

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level of services providedas defined in the agreement. The expense totaled $881,000 and $977,000 for thethree months ended June 30, 2004 and 2003, and $1,793,000 and $1,807,000for the six months ended June 30, 2004 and 2003, respectively.

During 2000, we entered into a services agreement witha repair service provider. The amount to be paid is based on the level ofservices provided as defined in the agreement. The expense totaled $382,000 and$364,000 for the three months ended June 30, 2004 and 2003, and $612,000and $894,000 for the six months ended June 30, 2004 and 2003,respectively.

***PurchaseCommitments***—We have purchase commitments formaterials and supplies as part of the normal course of business. The totaloutstanding commitment under an agreement to supply production of componentparts is $678,000 as of June 30, 2004. Seperately, commitments to purchaseinventory at above-market prices have been reserved. The total amountreserved under these commitments is currently $0 as of June 30, 2004 butwas $3,364,000 as of December 31, 2003, before we purchased the inventory,and is included as part of other accrued expenses for that period.

***Other Agreements***—We havea licensing agreement for embedded software with a U.S.-based high-techcompany. The total amount reserved under this licensing agreement is $1,738,000and $1,051,000 as of June 30, 2004 and December 31, 2003,respectively. This agreement expires on June 30, 2005.

**Note 6.   BusinessSegments**

In accordance with SFAS No. 131, “*Disclosures about Segments of an Enterprise andRelated Information*,” we have three reportable segments: Americas,Europe and Asia Pacific. We sell similar products in each market, including CRTdisplays, LCD displays, projectors, plasma displays, HDTV technology andwireless mobile display products.

Thetypes and class of customers, primarily distributors and retailers, are alsosimilar across the product lines. We have two major products—visual displays(CRT and LCD computer monitors) and other products. Both products are sold toall of our markets. The following segmentfinancial information is for the periods indicated (in thousands):
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **   2004   **    | ** ** | **   2003   **  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Sales                       |       |                                            |       |                                          |       |   |   |   |   |
| Americas                        |       | $                                               | 153,615    |                                          | $          | 156,222 |   | $ | 313,284 |   | $ | 327,125 |   |
| Europe                          |       | 42,804                                          |       | 33,826                                        |       | 109,578 |   | 78,093 |   |
| Asia Pacific                    |       | 68,620                                          |       | 50,006                                        |       | 136,070 |   | 101,383 |   |
| Total                           |       | $                                               | 265,039    |                                          | $          | 240,054 |   | $ | 558,932 |   | $ | 506,601 |   |
| (Loss) income  from operations: |       |                                            |       |                                          |       |   |   |   |   |
| Americas                        |       | $                                               | 1,550      |                                          | $          | 1,174 |   | $ | 7,491 |   | $ | 6,131 |   |
| Europe                          |       | (588                                            | )          | 652                                           |       | 5,183 |   | 3,440 |   |
| Asia Pacific                    |       | (1,711                                          | )          | (1,166                                        | )          | (912 | ) | (703 | ) |
| Total                           |       | $                                               | (749       | )                                             | $          | 660 |   | $ | 11,762 |   | $ | 8,868 |   |

 

**Note 7.   Warranty**

Weprovide product warranty programs on a worldwide basis that vary in term from12 to 36 months. The length of the warranty period and the specificwarranty coverage are based on the type of product. We accrue for estimatedwarranty costs at the time the product is sold, and such amounts are based uponhistorical experience. The historical data that determines the warranty accrualand the overall estimate of the warranty reserve includes the following keyfactors: period of warranty, net cost of repair (repair costs 

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less reimbursements from suppliers), defective ratesand total number of products under warranty. The following table summarizes ouractivity in the warranty reserve for the periods indicated (in thousands):
| **Three Months Ended** | ** ** | ** ** | ** ** | **Beginning  Accrued  Warranty  Reserve** | ** ** | **Payments  for Units  Returned** | ** ** | **Additional  Warranty  Expense  for Units  Sold** | ** ** | **Warranty  Reserve  Adjustment** | ** ** | **Ending  Accrued   Warranty   Reserve** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------|------------|
| June 30, 2003               |       | $          | 14,253     |                                      | $          | (4,772                                 | )          |                                                    | $          | 5,054                             |       |                                               |       | $ | 1,416 |   |   |   | $ | 15,951 |   |   |
| June 30,  2004              |       | $          | 14,706     |                                      | $          | (6,189                                 | )          |                                                    | $          | 6,628                             |       |                                               |       | $ | — |   |   |   | $ | 15,145 |   |   |

 

**Note 8.   Earnings Per Share**

We present both basic and diluted earnings per share,or EPS, amounts. Basic EPS is calculated by dividing net income by the weighted-averagenumber of common shares outstanding during the year. Diluted EPS amounts arebased upon the weighted-average number of common and potential commonshares, including warrants outstanding during the year.

Potential commonshares are excluded from the calculation in periods in which they have ananti-dilutive effect.  We use thetreasury stock method to calculate the impact of outstanding stock options andwarrants.  Due to the loss incurred forthe three months ended June 30, 2004, options for 6,659,000 shares and3,270,000 shares issuable upon exercise of warrants were excluded from thediluted earnings per share calculation for such period.  In addition, stock options for which theexercise price exceeds the average market price over the periods have ananti-dilutive effect on EPS and, accordingly, are excluded from thecalculation.  For the six months endedJune 30, 2004, options for 4,650,000 shares were excluded from the dilutedearnings per share calculation for such period because they wereanti-dilutive.  For the three months and sixmonths ended June 30, 2003, options for 2,748,000 shares were excluded from thediluted earnings per share calculation for such period because they wereanti-dilutive.  Amounts are for theperiods indicated (amounts in thousand, except share and per shareinformation).

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| ** **                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                | ** ** | **   2004   **    | ** ** | **   2003   **  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic EPS:                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Numerator—Income  (loss) from continuing operations available to common stockholders |       | $                                               | (2,227     | )                                             | $          | 329 |   | $ | 7,382 |   | $ | 7,878 |   |
| Numerator—Income  (loss) discontinued operations available to common stockholders    |       | $                                               | (397       | )                                             | $          | 56 |   | $ | (688 | ) | $ | (110 | ) |
| Denominator—weighted-average  shares outstanding                                     |       | 353,921                                         |       | 353,888                                       |       | 353,913 |   | 353,887 |   |
| Basic EPS                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Conintuing  operations                                                                    |       | $                                               | (0.01      | )                                             | $          | 0.00 |   | $ | 0.02 |   | $ | 0.02 |   |
| Discontinued  operations                                                                  |       | $                                               | 0.00       |                                          | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Diluted EPS:                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Numerator:                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  from continuing operations available to common stockholders                |       | $                                               | (2,227     | )                                             | $          | 329 |   | $ | 7,382 |   | $ | 7,878 |   |
| Income (loss)  from continuing operations available to common stockholders                |       | $                                               | (397       | )                                             | $          | 56 |   | $ | (688 | ) | $ | (110 | ) |
| Denominator:                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Weighted-average  shares outstanding                                                      |       | 353,921                                         |       | 353,888                                       |       | 353,913 |   | 353,887 |   |
| Stock options(1)                                                                          |       | —                                          |       | 1,431                                         |       | 2,009 |   | 1,431 |   |
| Interest warrants(1)                                                                      |       | —                                          |       | 3,270                                         |       | 3,270 |   | 3,270 |   |
| Total shares                                                                              |       | 353,921                                         |       | 358,589                                       |       | 359,192 |   | 358,588 |   |
| Diluted EPS                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Conintuing  operations                                                                    |       | $                                               | (0.01      | )                                             | $          | 0.00 |   | $ | 0.02 |   | $ | 0.02 |   |
| Discontinued operations                                                                   |       | $                                               | 0.00       |                                          | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |

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(1)   Forthe three months ended June 30, 2004, options for 6,659,000 shares and3,270,000 shares issuable upon exercise of warrants were excluded from thediluted earnings per share calculation. For the six months ended June 30,2004, options for 4,650,000 shares were excluded from the diluted earnings pershare calculation.  For the three monthsand six months ended June 30, 2003, options for 2,748,000 shares wereexcluded from the diluted earnings per share calculation.

**Note 9.**   RescissionShares

Recipients of the certainoptions as well as purchasers of the shares for which registration orqualification may have been required may have the right under the SecuritiesAct or state securities laws to rescind their grant of options and purchases ofshares. We concluded a rescission offer, as permitted under California statelaw, to the holders of these options and shares on June 24, 2004. Holdersof options subject to the rescission were offered an amount equal to 10% of thestrike price plus 7% per annum interest from the date of grant. Holders ofstock subject to rescission were offered 100% of the exercise price plus 7% perannum interest from the date of exercise. As a result, approximately 469,000options and 15,000 common stock shares were tendered back to and accepted byViewSonic and an expense of $79,000 was recorded for the rescission of thesesecurities.

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**Note 10.   DiscontinuedOperations**

Duringthe second quarter of 2004, we entered into negotiations to sell ADO, one of ourmajority owned subsidiaries. We closed the sale and recorded a $4,400,000 gainin the third quarter of 2004. The purchase price and the cost basis of the salewere $8,800,000 and $4,100,000 less expenses of $307,000. As of June 30,2004, the net assets of ADO were classified as held for sale. Ten percent ofthe gross proceeds payable to us, as well as ten percent from the otherprincipal shareholders of ADO, shall remain in an escrow for one year tofacilitate recourse by the buyer in the event of a breach of representationsand warranties. In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, the results ofoperations of this business are reported as discontinued operations for theperiods indicated (in thousands):
| ** **                                  | ** ** | **Three Months Ended  June 30,**    | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **   2004    ** | ** ** | **   2003   **  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Sales                                   |       |                                               |       |                                          |       |   |   |   |   |   |   |   |   |
| ADO                                         |       |                                               | $          | 502                                           |       |   |   | $ | 731 |   |   | $ | 844 |   | $ | 1,099 |   |
| (Loss) Income  from discontinued operations |       |                                               |       |                                          |       |   |   |   |   |   |   |   |   |
| ADO                                         |       |                                               | $          | (397                                          | )          |   |   | $ | 56 |   |   | $ | (688 | ) | $ | (110 | ) |

 

**ADO’sBalance Sheet**
| ** **                            | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2004**          | ** ** | **2003**          | ** ** |
| Current assets                        |       | $                 | 640        |              | $          | 362 |   |
| Other assets                          |       | $                 | 5,412      |              | $          | 5,447 |   |
| Total assets                          |       | $                 | 6,052      |              | $          | 5,809 |   |
| Accounts payable and accrued expenses |       | $                 | 765        |              | $          | 355 |   |
| Minority interest                     |       | $                 | 1,126      |              | $          | 1,441 |   |
| Net assets of business  held for sale |       | $                 | 4,161      |              | $          | 4,013 |   |

 

 

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**ITEM 2.**   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, which are subjectto the “safe harbor” created by those sections. These forward-lookingstatements include but are not limited to: statements related to industrytrends and future growth in the markets for visual display technology products;our product development efforts; the timing of our introduction of newproducts; industry and consumer acceptance of our products; and futureprofitability. These forward-looking statements involve risks and uncertaintiesthat could cause our actual results to differ materially from those in theforward-looking statements. We undertake no obligation to publicly release anyrevisions to the forward-looking statements or reflect events or circumstancesafter the date of this document. The “Quantitative and Qualitative DisclosureAbout Market Risk” section, among other things, should be considered inevaluating our prospects and future financial performance.*

**Overview**

***Our Company***

ViewSonic Corporation is a leading global provider ofvisual display technology products. We develop, market and support a broadrange of display technology products including liquid crystal displays, or LCD,monitors, cathode ray tube, or CRT, monitors, projectors, LCD TVs, plasmadisplays and our wireless mobile display products.

Our ViewSonic brandedproducts are sold through distributors, retailers and other resellers tocommercial businesses, including Fortune 1000 companies, small and medium sizedbusinesses, and consumer electronics markets. We sell our products globally andare managed geographically in three regions: the Americas, Europe and AsiaPacific.

***Recent Trends in Our Business***

For most of 2003 and for a significant part of thefirst half of 2004, the industry experienced a supply shortage of key LCD productsdue to LCD panel shortages and the manufacturing capacity constraints of ourcontract manufacturers. These capacity constraints were due to contractmanufacturers allocating more of their production capacity to higher margin LCDtelevisions (LCD TVs) and computer notebooks, product categories where demandwas expected to grow at a high rate in the future. During this shortagetimeframe, our LCD panel costs experienced a rapid increase, resulting in anincrease in the average selling price of our LCD monitors.

However, in the latterpart of the second quarter of 2004, the LCD panel availability situationchanged significantly. The LCD TV segment did not grow as quickly asanticipated. The LCD market experienced negative growth trends in notebookcomputer sales, and a softening of demand for certain LCD monitor products. Allof these trends impacted our sales in the second half of the second quarter inthe Europe and Americas market. Additionally, our contract manufacturersshifted their production capacity to LCD monitors from LCD TVs and computernotebooks. This shift resulted in increased availability LCD monitors andrapidly declining prices for LCD panels in recent weeks. Therefore, we arecurrently experiencing a transition from a shortage of LCD products to one ofpotential oversupply, which we expect to continue in the coming months. Duringthis type of transition, we typically experience periods of higher levels ofinventory.

***Future Objectives and Challenges***

As a result of the increase in the supply of LCDproducts, we expect the average selling prices of our LCD products to declinein the future. Our challenge in a declining price market will be to aggressively

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minimizeour inventory levels, maintain a product mix that will satisfy our customers’demand and maximize our gross profit opportunities.

**Results of Operations**

Thefollowing table sets forth, for the periods indicated, our consolidatedcondensed statements of operations expressed as a percentage of net sales.
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **   2004   **    | ** ** | **   2003   **  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                                     |       |                                            | 100.0      | %                                             |       |   | 100.0 | % |   | 100.0 | % | 100.0 | % |
| Cost of sales                                                 |       |                                            | 87.9       | %                                             |       |   | 87.0 | % |   | 86.2 | % | 85.7 | % |
| Gross profit                                                  |       |                                            | 12.1       | %                                             |       |   | 13.0 | % |   | 13.8 | % | 14.3 | % |
| Selling, general and administrative expenses                  |       |                                            | 12.4       | %                                             |       |   | 12.7 | % |   | 11.7 | % | 12.6 | % |
| Income (loss) from  operations                                |       |                                            | (0.3       | )%                                            |       |   | 0.3 | % |   | 2.1 | % | 1.8 | % |
| Other income (expense), net:                                  |       |                                            | (0.5       | )%                                            |       |   | 0.1 | % |   | (0.1 | )% | 0.4 | % |
| (Loss) income  from continuing operations before income taxes |       |                                            | (0.7       | )%                                            |       |   | 0.4 | % |   | 2.0 | % | 2.1 | % |
| Provision for  income taxes                                   |       |                                            | 0.0        | %                                             |       |   | 0.2 | % |   | 0.6 | % | 0.4 | % |
| (Loss) income from continuing operations                      |       |                                            | (0.7       | )%                                            |       |   | 0.3 | % |   | 1.4 | % | 1.7 | % |
| (Loss) income from discontinued operations                    |       |                                            | (0.1       | )%                                            |       |   | 0.0 | % |   | (0.1 | )% | 0.0 | % |
| Net (loss) income                                             |       |                                            | (0.9       | )%                                            |       |   | 0.3 | % |   | 1.3 | % | 1.7 | % |
| Preferred stock accretion                                     |       |                                            | (0.1       | )%                                            |       |   | (0.1 | )% |   | (0.1 | )% | (0.1 | )% |
| Net income  available to common stockholders                  |       |                                            | (1.0       | )%                                            |       |   | 0.2 | % |   | 1.2 | % | 1.5 | % |

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                            | ** ** | **Percentage  Increases/  (Decreases)**           | ** ** | **2003** | ** ** | **2004** | ** ** | **Percentage  Increases/  (Decreases)** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                             | ** ** |
| **Net sales**                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Americas                                      |       | $                                                   | 153,615    |                                              |       | (1.7 | )% |   | $ | 156,222 |   | $ | 313,284 |   |   | (4.2 | )% |   | $ | 327,125 |   |
| Europe                                        |       | 42,804                                              |       |                                              | 26.5       | % |   | 33,826 |   | 109,578 |   |   | 40.3 | % |   | 78,093 |   |
| Asia Pacific                                  |       | 68,620                                              |       |                                              | 37.2       | % |   | 50,006 |   | 136,070 |   |   | 34.2 | % |   | 101,383 |   |
| Total                                         |       | $                                                   | 265,039    |                                              |       | 10.4 | % |   | $ | 240,054 |   | $ | 558,932 |   |   | 10.3 | % |   | $ | 506,601 |   |
| **Income (loss) from continuing operations:** |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Americas                                      |       | $                                                   | 1,550      |                                              |       | 32.0 | % |   | $ | 1,174 |   | $ | 7,491 |   |   | 22.2 | % |   | $ | 6,131 |   |
| Europe                                        |       | (588                                                | )          |                                              | (190.2     | )% |   | 652 |   | 5,183 |   |   | 50.7 | % |   | 3,440 |   |
| Asia Pacific                                  |       | (1,711                                              | )          |                                              | (46.7      | )% |   | (1,166 | ) | (912 | ) |   | (29.7 | )% |   | (703 | ) |
| Total                                         |       | $                                                   | (749       | )                                                 |       | (213.5 | )% |   | $ | 660 |   | $ | 11,762 |   |   | 32.6 | % |   | $ | 8,868 |   |

 

**ConsolidatedResults of Operations—Three Months and Six Months Ended June 30, 2004 and June 30,2003**

*Net Sales*

Our consolidatednet sales increased $25.0 million, or 10.4%, to $265.0 million for thethree months ended June 30, 2004 compared to $240.1 million for the threemonths ended June 30, 2003. Consolidated net sales increased $52.3million, or 10.3%, to $558.9 million for the six months ended June 30,2004 

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compared to $506.6 millionfor the six months ended June 30, 2003. Netsales outside of the Americas region accounted for 42.0% and 34.9% of total netsales for the three months ended June 30, 2004 and 2003, and 43.9% and35.4% of total net sales for the six months ended June 30, 2004 and 2003,respectively. The growth in net sales outside of the Americas was predominantlydriven by higher net sales in Russia, the United Kingdom and China. The increase in unit volume was offset by a declinein the average selling price per unit of 2.7% and 2.2% for the three and sixmonths ended June 30, 2004 compared to the three and six months ended June 30,2003 due to product mix. Additionally, due to the LCD product shortageduring the first part of 2004, we reduced the number of sales allowanceprograms offered worldwide, which resulted in a reduction of sales allowancesin the second quarter of 2004 as compared to the second quarter of 2003.Returns and sales incentive allowances charged against gross sales were $25.0million and $27.5 million for the three months ended June 30, 2004 and2003, and $46.2 million and $56.5 million for the six months ended June 30,2004 and 2003, respectively.

We sold approximately 1.0 million display products forthe three months ended June 30, 2004 compared to approximately 900,000 displayproducts for the three months ended June 30, 2003. Of the total productunits sold for the three months ended June 30, 2004, CRT monitorsaccounted for 52.2%, LCD monitors accounted for 34.7%, and other productsaccounted for 13.1% as compared to 49.2%, 42.8%, and 8.0%, respectively, forthe three months ended June 30, 2003. The increase in units sold wasprimarily due to continued expansion in China as well as stronger unit sales inEurope.

We sold approximately 2.1 million display products forthe six months ended June 30, 2004 compared to approximately 1.9 milliondisplay products for the six months ended June 30, 2003. Of the displayproduct units sold for the six months ended June 30, 2004, CRT monitorsaccounted for 51.8%, LCD monitors accounted for 36.2%, and other productsaccounted for 12.1% as compared to 49.0%, 42.0%, and 9.0%, respectively, forthe six months ended June 30, 2003. The increase in units sold wasprimarily due to continued expansion in China as well as stronger unit sales inEurope.

*Americas**—*In our Americas region, net sales decreased $2.6 million,or 1.7%, to $153.6 million for the three months ended June 30, 2004 comparedto $156.2 million for the three months ended June 30, 2003. Net salesdecreased $13.8 million, or 4.2%, to $313.3 million for the six months ended June 30,2004 compared to $327.1 million for the six months ended June 30, 2003.The decrease in net sales was primarily due to lower unit sales of LCD displaysas a result of the LCD panel shortage during the first five months of 2004partially offset by an increase in CRT sales. The decrease in net sales waspartially offset by lower sales allowances during the three and six monthsended June 30, 2004 as compared to the three and six months ended June 30,2003.

*Europe**—*In our Europe region, net sales increased $9.0 million, or26.5%, to $42.8 million for the three months ended June 30, 2004 comparedto $33.8 million for the three months ended June 30, 2003. Net sales increased$31.5 million, or 40.3%, to $109.6 million for the six months ended June 30,2004 compared to $78.1 million for the six months ended June 30, 2003. Theincrease in net sales was primarily due to the region’s continued expansion inRussia, France, and the United Kingdom. Net sales also increased due to theshift in the ratio of sales from CRT to LCD products. In addition, the increasein net sales was aided by lower sales allowances during the three and sixmonths ended June 30, 2004 as compared to the three and six months ended June 30,2003.

*Asia Pacific**—*In our Asia Pacific region, net sales increased $18.6million, or 37.2%, to $68.6 million for the three months ended June 30,2004 compared to $50.0 million for the three months ended June 30,2003. Net sales increased $34.7 million, or 34.2%, to $136.1 million for thesix months ended June 30, 2004 compared to $101.4 million for the sixmonths ended June 30, 2003. The primary reason for the increase in netsales was due to our continued growth in the China market, largely as a resultof increased unit shipments of CRT products. In addition, net sales alsoincreased due to higher unit sales in existing markets such as Australia, NewZealand and Southeast Asia as a result of expanding our customer base.

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*Cost of Sales*

Our consolidated cost of sales increased $24.1million, or 11.5%, to $233.0 million for the three months ended June 30,2004 compared to $208.9 million for the three months ended June 30, 2003. Consolidatedcost of sales increased $47.9 million, or 11.0%, to $482.0 million for thesix months ended June 30, 2004 compared to $434.1 million for the sixmonths ended June 30, 2003. As apercentage of net sales, cost of sales increased to 87.9% for the three monthsended June 30, 2004 from 87.0% for the three months ended June 30,2003. For the six months ended June 30, 2004 cost of sales increased to86.2% as a percentage of net sales from 85.7% for the six months ended June 30,2003. The primary reasons for the increase in cost of sales were the increasein net sales as well as higher LCD product costs, which increased by 13.8% and11.6% for the three and six months ended June 30, 2004 as compared to thethree and six months ended June 30, 2003. The increase was also due tohigher inventory write-downs of $2.0 million and $2.1 million for the three andsix months ended June 30, 2004 compared to the three and six months ended June 30,2003. Overall, gross margin declined to 12.1% for the three months ended June 30,2004 compared to 13.0% for the three months ended June 30, 2003. Grossmargin also declined to 13.8% for the six months ended June 30, 2004 comparedto 14.3% for the six months ended June 30, 2003.

*Selling, Generaland Administrative*

Selling, general andadministrative expenses increased $2.3 million, or 7.6%, to$32.8 million for the three months ended June 30, 2004 compared to$30.5 million for the three months ended June 30, 2003. Selling,general and administrative expenses increased $1.6 million, or 2.5%, to$65.2 million for the six months ended June 30, 2004 compared to$63.6 million for the six months ended June 30, 2003. The dollarincrease was mainly attributable to higher personnel costs of $1.5 million and$4.1 million for the three and six months ended June 30, 2004 to supportregional expansion in our existing markets such as China, Russia and other keyregional markets as well as to support expansion of our existing and newproduct categories such as LCD TVs, plasma displays and Tablet PCs. Inaddition, we had higher advertising and marketing costs of $1.5 million and $847,000for the three and six months ended June 30, 2004 to support regional andproduct expansion and higher professional fees of $1.1 million and $1.0 millionfor the three and six months ended June 30, 2004. The increase waspartially offset by lower product development expenses of $1.2 million and $3.4million for the three and six months ended June 30, 2004. As a percentageof net sales, selling, general and administrative expenses decreased to 12.4%for the three months ended June 30, 2004 from 12.7% for the three monthsended June 30, 2003. Also, as a percentage of net sales, selling, generaland administrative expenses decreased to 11.7% for the six months ended June 30,2004 from 12.6% for the six months ended June 30, 2003.

*(Loss) Income fromOperations*

Income from operations decreased $1.4 million, or213.5%, to a loss of $(749,000) for the three months ended June 30, 2004when compared to $660,000 for the three months ended June 30, 2003. However,income from operations increased $2.9 million, or 32.6%, to$11.8 million for the six months ended June 30, 2004 when compared to$8.9 million for the six months ended June 30, 2003. As a percentageof net sales, income from operations decreased to (0.3) % for the three monthsended June 30, 2004 when compared to 0.3% for the three months ended June 30,2003. However, as a percentage of net sales, income from operations increasedto 2.1% for the six months ended June 30, 2004 when compared to 1.8% forthe six months ended June 30, 2003.

*Americas*—Inour Americas region, income from operations increased $375,000, or 32.0%, to$1.6 million for the three months ended June 30, 2004 when comparedto $1.2 million for the three months ended June 30, 2004. Also, incomefrom operations increased $1.4 million, or 22.2%, to $7.5 million for the sixmonths ended June 30, 2004 when compared to $6.1 million for the sixmonths ended June 30, 2003. The increase for the three and six monthsended June 30, 2004 when compared to the three and six months 

15

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ended June 30, 2003was mainly due to lower advertising, marketing expenses and product developmentcosts partially offset by lower net sales and higher personnel costs.

*Europe**—*In our Europe region, income from operations decreased $1.2 million,or 190.2%, to a loss of $(588,000) for the three months ended June 30,2004 when compared to a loss of $652,000 for the three months ended June 30,2003. However, income from operations increased $1.7 million, or 50.7%, to $5.2million for the six months ended June 30, 2004 when compared to $3.4million for the six months ended June 30, 2003. The decrease for the threemonths ended June 30, 2004 when compared to the three months ended June 30,2003 was mainly due to higher inventory write-downs and higher LCD productcosts. The decrease was also due to higher advertising and marketing costs, andhigher personnel costs to support increased sales volume in existing marketspartially offset by higher net sales in the three months ended June 30,2004 when compared to the three months ended June 30, 2003. The increasefor the six months ended June 30, 2004 when compared to six months ended June 30,2003 was primarily due to the increase in net sales partially offset by higherLCD product costs, higher inventory write-downs, higher advertising andmarketing expenses and higher personnel related expenses to support increasedsales volume in existing markets.

*Asia Pacific*—Inour Asia Pacific region, loss from operations increased $545,000, or 46.7%, to aloss of $(1.7) million for the three months ended June 30, 2004 whencompared to a loss of $(1.2) million for the three months ended June 30,2003. Also, loss from operations increased $(209,000), or (29.7)%, to a loss of$(912,000) for the six months ended June 30, 2004 when compared to a lossof $(703,000) for the six months ended June 30, 2003. The increase in lossfor the three and six months was due to higher advertising and marketingexpenses and higher personnel related costs related to supporting the increasingmarketing efforts in China partially offset by an increase in net sales in theChina market.

*Other Income(Expense), Net*

Other income (expense),net decreased $1.6 million, or 451.3%, to $(1.2) million for the three monthsended June 30, 2004 compared to $351,000 for the three months ended June 30,2003. Net other income (expense) also decreased $2.2 million, or 124.4%, to $(439,000)for the six months ended June 30, 2004 compared to $1.8 million for thesix months ended June 30, 2003. The decrease was mainly related to foreigncurrency exchange losses, which totaled $(1.2) million and $(417,000) for thethree and six months ended June 30, 2004 compared to foreign currency exchangegains of $883,000 and $1.8 million for the three and six months ended June 2003.The decrease was partially offset by gains on sale of investments of $553,000and $861,000 for the three and six months ended June 30, 2004 compared toa loss of $(590,000) for the three and six months ended June 30, 2003.

*Provision forIncome Taxes*

The (benefit)/provision for income taxes was $(92,000),or 4.6% on loss from continuing operations for the three months ended June 30,2004 as compared to $378,000, or 37.4% on income from continuing operations forthe three months ended June 30, 2003. The effective tax rate on net income(i.e., provision) decreased from 37.4% for the three months ended June 30,2003 to an effective tax rate on net losses (i.e., benefit) of (4.6)% for thethree months ended June 30, 2004 primarily due to greater losses that weresustained in jurisdictions where no tax benefit can be provided as well as anaccumulated earnings tax in Taiwan that accrued during the three months ended June 30,2003.

The provision for incometaxes was $3.3 million, or 28.9%, on income from continuing operations forthe six months ended June 30, 2004 as compared to $2.2 million, or20.6%, on income from continuing operations for the six months ended June 30,2003. The effective tax rate increased from 20.6% for the six months ended June 30,2003 to 28.9% for the six months ended June 30, 2004 primarily due to alarger 

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utilizationof loss carryforwards from non-U.S. jurisdictions where no tax benefit hadpreviously been provided.

*(Loss) Income from DiscontinuedOperations*

During the second quarterof 2004, we entered into negotiations to sell ADO, one of our majority ownedsubsidiaries. As of June 30, 2004, the net assets of ADO were classifiedas held for sale. In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, the results ofoperations of these businesses are reported as discontinued operations for theperiods indicated (in thousands). See Part I, Item 1, Note 10 to ourconsolidated condensed financial statements for more information on thistransaction.

**Liquidity andCapital Resources**
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| Net cash provided by (used in) operating activities  |       | $                                             | 4,393      |   | $ | (33,682 | ) |
| Net cash (used  in) provided by investing activities |       | (2,063                                        | )          | 1,794 |   |
| Net cash (used  in) provided by financing activities |       | (5,187                                        | )          | 7,973 |   |
| Net decrease in  cash and cash equivalents           |       | $                                             | (2,857     | ) | $ | (23,915 | ) |

 

As of June 30, 2004,we had cash, cash equivalents and short-term investments of $89.3 million.Our cash balances are held in numerous locations throughout the world. Most ofthe amounts held outside the United States could be repatriated to the UnitedStates, but, under current law, would be subject to United States federalincome taxes, less applicable foreign tax credits. In certain countries,foreign exchange limitations limit the amount of cash that can be repatriated.We have accounted for the United States federal tax liability on these amountsfor financial statement purposes except for foreign earnings that areconsidered indefinitely reinvested outside the United States. Repatriationcould result in additional United States federal income tax payments in futureyears. Where local restrictions prevent an efficient inter-companytransfer of funds, our intent is that cash balances would remain in the foreigncountry and we would meet United States liquidity needs through ongoing cashflows from operations, external borrowings, or both. We utilize a variety oftax planning and financing strategies in an effort to ensure that our worldwidecash is available in the locations in which it is needed. We expect to meetexpected and unexpected cash flow needs by accessing our credit lines in theAmericas, Europe, and Asia Pacific.

*OperatingActivities*

Cash flow provided by operating activities was$4.4 million during the six months ended June 30, 2004 compared to cashflow used in operating activities of $(33.7) million during the six monthsended June 30, 2003. The increase between the six months ended June 30,2004 and June 30, 2003 was primarily due to a decrease in accountsreceivable and an increase in accounts payable partially offset by an increasein inventory.

Accounts receivable decreased by $11.7 million to$120.1 million at June 30, 2004 from $131.8 million at December 31,2003 primarily due to the timing of sales. Days sales outstanding remainedrelatively stable at 41 days at June 30, 2004 compared to39 days at June 30, 2003. As of June 30, 2004 we had no majorcollection or billing problems that had not already been accounted for in ourallowance for doubtful accounts. We have not materially changed our paymentterms or delinquency policies between 2003 and 2004.

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Inventories increased by $47.3 million to$176.1 million at June 30, 2004 compared to $128.8 million at December 31,2003. Our inventory turns have remained relatively stable at three times forthe six months ended June 30, 2004 and 2003.

Accounts payable increasedapproximately $29.8 million to $267.1 million at June 30, 2004compared to $237.3 million at December 31, 2003. The increase waslargely due to the increase in inventory balances and timing of our payments toour suppliers.

*InvestingActivities*

Cash flow used ininvesting activities was $(2.1) million during the six months ended June 30,2004 compared to cash flow provided by investing activities of$1.8 million during the six months ended June 30, 2003. The primaryreason for the variance between periods was the sale of long-term investmentsin 2003 and the purchase of short-term investments in 2004.

*FinancingActivities*

Cash flow used infinancing activities was $(5.2) million during the six months ended June 30,2004 compared to cash flow provided by financing activities of$8.0 million during the six months ended June 30, 2003. The primaryreason for the variance was the net decrease of bank borrowings during the sixmonths ended June 30, 2004 compared to a net increase of bank borrowingsduring the six months ended June 30, 2003 to fund operations in our AsiaPacific region.

**Contractual Obligations and Commitments**

At June 30,2004, we had contractual obligations and commercial commitments of $67.4million as shown in the table below. The table below excludes obligationsrelated to accounts payable and accrued liabilities incurred in the ordinarycourse of business.
| ** **                                         | ** ** | ** **              | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                   | ** ** | ** **              | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than   5 years** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Operating lease  obligations                       |       | $                       | 5,854      |                                      |       | $ | 1,362 |   |   | $ | 3,490 |   | $ | 1,002 |   |   | $ | — |   |   |
| Materials and  supplies—purchase  commitments |       | 678                     |       |                                      | 678        |   |   | — |   | — |   |   | — |   |   |
| Licensing  agreements                              |       | 1,738                   |       |                                      | —     |   |   | 1,738 |   | — |   |   | — |   |   |
| Bank borrowings                                    |       | 1,117                   |       |                                      | 1,117      |   |   | — |   | — |   |   | — |   |   |
| Subordinated  notes payable                        |       | 43,000                  |       |                                      | —     |   |   | — |   | 43,000 |   |   | — |   |   |
| Preferred stock  mandatory redemption              |       | 15,000                  |       |                                      | —     |   |   | 15,000 |   | — |   |   | — |   |   |
| Total                                              |       | $                       | 67,387     |                                      |       | $ | 3,157 |   |   | $ | 20,228 |   | $ | 44,002 |   |   | $ | — |   |   |
|                                                    |            |                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**CreditFacilities**

As of June 30, 2004, wehad no outstanding balance on our line of credit with CIT Group/BusinessCredit, Inc. As of June 30, 2004, the Asia Pacific region had outstandingcash advances of approximately $596,000 and other term loans of approximately $521,000.In June 2004, ViewSonic Europe Limited entered into a $20.0 millionline of credit facility with Burdale Financial Limited. This line of creditis secured by trade receivable and inventory of ViewSonic Europe Limited. Advancesbear interest at Libor plus a margin cost. There were no borrowings againstthis facility as of June 30, 2004.

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**Off-Balance Sheet Arrangements**

As of June 30, 2004and 2003, we did not have any off-balance sheet arrangements or relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purposes entities, which aretypically established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.

**Seasonality**

The market for ourproducts historically has experienced seasonal shifts in demand due to changesin buying patterns by our customers. Buying patterns vary geographically, andthe impact on our operating results in a given period may vary depending on ouractual or anticipated level of activity in the relevant region. We generallyexperience a decline in net sales from the first quarter to the second quarterof each year and we tend to experience the highest net sales in the fourthquarter of the year due to a strong buying season in the fourth quarter bylarge wholesale distribution partners and retailers due to the holiday seasonin the Americas. Our seasonality is moderated through slightly differentseasonal variations in the three regions.

**Operating Capital and Capital Expenditure Requirements**

We believe that ourexisting cash balances, credit facilities and anticipated cash flows fromoperations will be sufficient to meet our operating, acquisition and capitalrequirements for at least the next 12 months. However, there is no assurancethat we will not need to raise additional equity or debt financing within this timeframe. We also may require additional capital for other purposes not presentlycontemplated. If we are unable to obtain sufficient capital, we could berequired to curtail capital equipment purchases or research and developmentexpenditures, which could harm our business. Factors that could affect our cashused or generated from operations and, as a result, our need to seek additionalborrowings or capital include:

·       decreaseddemand and market acceptance for our products;

·       inabilityto successfully develop our next-generation products;

·       competitivepressures resulting in lower than expected average selling prices; and

·       new product announcementsor product introductions by our competitors.

**Critical Accounting Policies and Estimates**

Our critical accounting policies reflecting ourestimates and judgments are described in Item 2 Financial Information of our registrationstatement on Form 10/A for the fiscal year ended December 31, 2003,filed with the Securities and Exchange Commission on June 25, 2004. Wehave not changed those policies since such date. Investors should thereforeread this Item 2 in conjunction with such description.

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**ITEM 3.**   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial market risk arises from fluctuations inforeign currencies. A majority of our net sales, expense and capital purchasingactivities are transacted in U.S. Dollars. However, we do enter into thesetransactions in other currencies, primarily the Euro and certain Asiancurrencies. Our net sales and purchasing transactions denominated in currenciesother than the U.S. Dollar are subject to exchange rate fluctuations and couldpotentially negatively impact our financial results.

We have significant European net sales denominated inthe Euro. Product shipping, and selling, general and administrative costsassociated with a portion of these sales are U.S. Dollar-denominated.During the six months ended June 30, 2004, the Euro-to-U.S. Dollar foreigncurrency exchange rate continued to strengthen against the U.S. Dollarincreasing 2.3% compared to the year-end rate of 2003. During the six monthsended June 30, 2003, the Euro-to-U.S. Dollar increased by 16.0% comparedto the year-end rate of 2002. The strengthening of the Euro positively impactedthe three months ended June 30, 2004 net sales by $409,000 and income fromoperations by $288,000, assuming all other factors remain constant. It alsopositively impacted the six months ended June 30, 2004 net sales by$1.9 million and income from operations by $1.4 million, assuming allother factors remain constant. We currently estimate that a 1.0% change invalue of the Euro-to-U.S. Dollar exchange rates could impact net sales by $826,000.We cannot determine the ultimate impact of future changes to these and othercurrency exchange rates on our 2004 net sales, income from operations, netincome, equity, and comprehensive income.

We have a portfolio ofinvestments that includes marketable securities classified asavailable-for-sale long-term investments. To the extent that these investmentscontinue to have strategic value, we typically do not attempt to reduce oreliminate our market exposure. For those securities that are no longerconsidered strategic, management will evaluate market and economic factors inits decision on the timing of disposal. Our investments are generally incompanies in the high-technology industry.

**Factors that May Affect Our Business andFinancial Results**

*Our revenues and profitability can fluctuate fromperiod to period and are often difficult to predict for particular periods dueto factors beyond our control.*

Our results ofoperations for any quarter or year are not necessarily indicative of results tobe expected in future periods. Our operating results have historically been,and are expected to continue to be, subject to quarterly and yearlyfluctuations as a result of a number of factors, including:

·       Theintroduction and market acceptance of new technologies, products, and services;

·       Variationsin product costs and the mix of products sold;

·       Thesize and timing of customer orders, which, in turn, will often depend upon thesuccess of our customers’ business or specific products or services;

·       Adversechanges in the conditions in the markets for display products;

·       Thesize and timing of capital expenditures by our customers;

·       Inventorypractices of our customers;

·       Conditionsin the broader markets for information technology and communications;

·       Adversechanges in the credit quality of our customers and suppliers;

·       Adversechanges in the supply of components such as LCD panels; and

·       Theimpact of acquired businesses and technologies.

These trends and factorscould harm our business, operating results and financial condition.

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*If we fail to maintain and/or expand our saleschannels, our revenue may decline.*

To maintain and grow our market share, net sales andbrand, we must maintain and expand our sales channels. We currently sell ourproducts through distributors, retailers, VARs, system integrators, commercialor enterprise resellers, direct marketing/e-retailers, and ViewSonic onlinestores. These entities purchase our products directly from us or through ourdistributors. We have no minimum purchase commitments or long-term contractswith any of these third parties. Our agreements are generally non-exclusive andgenerally may be terminated by either party for any reason or no reason with30 days notice.

Retailers have limited shelf space and promotionalbudgets, and competition is intense for these resources. A competitor with moreextensive product lines and stronger brand identity may have greater bargainingpower with these retailers. The competition for retail shelf space mayincrease, which would require us to increase our marketing expenditures tomaintain current levels of retail shelf space.

We must also continuously monitor and evaluateemerging sales channels. If we fail to establish a presence in an importantdeveloping sales channel, our business could be harmed. If we are unable toestablish relationships in emerging sales channels, our sales could decline andwe would lose market share.

*We rely on a limited number of wholesale distributorsand national retailers for most of our sales, and changes in price orpurchasing patterns could lower our revenue or gross margins.*

We sell our products through wholesale distributorssuch as Ingram Micro, Tech Data Corporation and Synnex Corporation and nationalretailers such as Best Buy Co., Inc. and Comp USA, Inc. We expectthat a majority of our net sales will continue to come from sales to a smallnumber of wholesale distributors and national retailers for the foreseeablefuture. We have no minimum purchase commitments or long-term contracts with anyof these customers. The wholesale distributors and retailers could decide atany time to discontinue, decrease or delay their purchases of our products. Inaddition, the prices that wholesale distributors and retailers pay for ourproducts are subject to negotiation and could change frequently. If any of ourmajor wholesale distributors or retailers change their purchasing patterns orrefuse to pay the prices that we set for our products, our net sales andoperating results could be negatively impacted. If our wholesale distributorsand retailers increase the size of their product orders without sufficientlead-time for us to process the order, our ability to fulfill product demandswould be compromised. In addition, because our accounts receivable areconcentrated within a small group of wholesale distributors and retailers, thefailure of any of them to pay on a timely basis, or at all, would reduce ourcash flow.

*If we do not effectively manage our sales channelinventory and product mix, we may incur costs associated with excess inventoryor lose sales from having too few products or the wrong mix of products.*

If we are unable to properly monitor, control andmanage our sales channel inventory and maintain an appropriate level and mix ofproducts with our customers and within our sales channels, we may incurincreased and unexpected costs associated with this inventory. We generallyallow wholesale distributors and retailers to return a limited amount of ourproducts in exchange for other products. Under our price protection policy,subject to certain conditions, if we reduce the list price of a product, weissue a credit in an amount equal to the reduction for each of the productsheld in inventory by our wholesale distributors and retailers. If our wholesaledistributors and retailers are unable to sell their inventory in a timelymanner, we may under our policy lower the price of the products, or theseparties may exchange the products for newer products. If we improperly forecastdemand for our products we could end up with too many products and be unable tosell the excess inventory in a timely manner, if at all, or, alternatively wecould end up with too few products and not be able to satisfy demand. If theseevents occur, we could incur increased expenses associated with writing offexcessive or obsolete inventory or lose sales and therefore suffer declininggross margins.

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*The average selling price of our products typicallydecreases rapidly over the life of the product, which negatively affects ourgross margins.*

The market in which we compete is subject totechnological advances with yearly new product releases and price competition.As a result, the price at which we can sell our products typically declinesover the life of the product. The price at which a product may be sold isgenerally referred to as the average selling price. For example, the averageselling price of our CRT monitors declined approximately 5.0% and 9.2% for thethree and six months ended June 30, 2004 when compared to the three andsix months ended June 30, 2003, respectively. However, the average sellingprice of our LCD monitors increased approximately 13.8% and 11.6% for the threeand six months ended June 30, 2004 when compared to three and six monthsended June 30, 2003, respectively. In order to sell products that have adeclining average selling price and still maintain our gross margins, we needto continually reduce our product costs. To manage product sourcing costs, wemust collaborate with our contract manufacturers to engineer the mostcost-effective design for our products. In addition, we must carefully manage theprice paid for components used in our products. We must also successfullymanage our freight and inventory holding costs to reduce overall product costs.We also need to continually introduce new products with higher sales prices andgross margins in order to maintain our overall gross margins. If we are unableto manage the cost of older products or successfully introduce new productswith higher gross margins, our net sales will decrease and our gross marginswill decline.

*We depend on third-party contract manufacturers tomanufacture our products. If these contract manufacturers experience any delay,disruption or quality control problems in their operations, we could losemarket share and revenues, and our reputation may be harmed.*

All of our products are manufactured, assembled,tested and packaged by contract manufacturers. We rely on several contractmanufacturers to procure components and, in some cases, subcontract engineeringwork. Some of our products are manufactured by a single contract manufacturer.Our contract manufacturers are primarily located in mainland China, Taiwan,Korea, Japan and Thailand and may be subject to disruption by earthquakes,typhoons and other natural disasters, as well as political, social or economicinstability. We do not have any long-term contracts with any of our third-partycontract manufacturers. All of our contracts with our contract manufacturersare terminable by either party with 90 days notice for any reason or noreason. Our four largest contract manufacturers for the three and six monthsended June 30, 2004 were Delta Electronics, Inc., CoretronicCorporation, Techview International Technology Inc, and Jean Company Ltd. Theloss of the services of any of our primary contract manufacturers could cause asignificant disruption in operations and delays in product shipments.Qualifying a new contract manufacturer and commencing volume production isexpensive and time consuming.

Our reliance oncontract manufacturers also exposes us to the following risks over which wehave limited control:

·       Unexpectedincreases in manufacturing and repair costs;

·       Interruptionsin shipments if one of our manufacturers is unable to complete production;

·       Inabilityto control the quality of finished products;

·       Inabilityto control delivery schedules;

·       Unpredictabilityof manufacturing yields; and

·       Potentiallack of adequate capacity to manufacture all or a part of the products werequire.

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*We rely upon third parties for technology that iscritical to our products, and if we are unable to continue to license thistechnology and future technology, our ability to offer competitive productscould be harmed and our costs of production could increase.*

We rely on third parties to obtain non-exclusivesoftware license rights to technologies that are incorporated into andnecessary for the operation and functionality of our products. Because theintellectual property we license is available from third parties, barriers toentry for our competitors may be lower than if we owned exclusive rights to thetechnology we license and use. On the other hand, if a competitor enters intoan exclusive arrangement with any of our third-party technology providers, ourability to develop and sell products containing that technology could beseverely limited. Our licenses often require royalty payments or otherconsideration to third parties. Our success will depend in part on ourcontinued ability to have access to these technologies on commerciallyreasonable terms. If we are unable to license the necessary technology, we maybe forced to acquire or develop alternative technology of lower quality orperformance standards. This could limit and delay our ability to offercompetitive products and increase our costs of production. As a result, ourgross margins, market share, and operating results could be harmed.

*If we are unable to provide our third-party contractmanufacturers with an accurate forecast of our component and materialrequirements, we may experience delays in the manufacturing of our products andthe costs of our products may increase.*

We provide our third-party contract manufacturers witha rolling forecast of demand which they use to determine their material andcomponent requirements. Lead times for ordering materials and components varysignificantly and depend on various factors, such as the specific supplier,contract terms and demand and supply for a component at a given time. Some ofour components have long lead times. If our forecasts are less than our actualrequirements, our contract manufacturers may be unable to manufacture productsin a timely manner. If our forecasts are too high, our contract manufacturerswill be unable to use the components they have purchased. The cost of thecomponents used in our products tends to drop rapidly as volumes increase andthe technologies mature. Therefore, if our contract manufacturers are unable topromptly use components purchased on our behalf, our cost of producing productsmay be higher than our competitors due to an over-supply of higher-pricedcomponents. Moreover, if they are unable to use certain components, we may needto reimburse them for any losses they incur.

*If disruptions in our transportation network occur orour shipping costs substantially increase, our operating expense could increaseand our financial results could be negatively impacted.*

We are highly dependent upon the transportationsystems we use to ship our products, including surface, ocean and air freight.Our attempt to closely match our inventory levels to our product demandintensifies the need for our transportation systems to function effectively andwithout delay. The transportation network is subject to disruption from avariety of causes, including labor disputes or port strikes, acts of war orterrorism and natural disasters. If our delivery times increase unexpectedlyfor these or any other reasons, our ability to deliver products on time couldresult in delayed or lost revenue. In addition, if the recent increases in fuelprices were to continue, our transportation costs would likely increase. Aprolonged transportation disruption or a significant increase in the cost offreight could severely disrupt our business and harm our operating results.

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*If we fail to continue to introduce new products thatachieve broad market acceptance on a timely basis, we will not be able tocompete effectively and we will be unable to increase or maintain net sales andgross margins.*

We operate in ahighly competitive, quickly changing environment, and our future successdepends on our ability to develop and introduce new products and productenhancements that achieve broad market acceptance in the business and homemarkets. Our future success will depend in large part upon our ability to:

·       Identifydemand trends in the business and home display markets and quickly develop,manufacture and sell products that satisfy these demands;

·       Manageour cost structure to enable us to bring new products to market at competitiveprices;

·       Respondeffectively to new product announcements by our competitors by designing,either internally or through third parties, competitive products; and

·       Providecompatibility and interoperability of our products with products offered byother vendors and new technologies as they emerge.

*We depend on our officers, and if we are not able toretain them, our business will suffer.*

We are highly dependent on James Chu, our Chairman ofthe Board and Chief Executive Officer and majority stockholder, and otherofficers. Due to the specialized knowledge each of our officers possesses withrespect to our business and our operations, the loss of service of any of ourofficers could adversely affect our business. We do not carry key man lifeinsurance on our officers.

We not have employment agreements with any of ourofficers. Each of our officers may terminate their employment without noticeand without cause or good reason. We currently are not aware that any officeris planning to leave or retire.

*If we do not succeed in executing our growthstrategies within our markets, our revenues may not increase.*

Our strategiesinclude further expanding our business in markets in which we currentlyoperate, including China, Russia, Eastern and Western Europe. In many of thesemarkets, we face barriers in the form of long-standing relationships betweenour potential customers and their local suppliers, as well as protectiveregulations. In addition, pursuing international growth opportunities mayrequire us to make significant investments long before we realize returns onthe investments, if any. Increased investments may result in expenses growingat a faster rate than revenues. Our overseas investments could be adverselyaffected by:

·       Reversalsor delays in the opening of foreign markets to new participants;

·       Exchangecontrols;

·       Restrictionson foreign investment or the repatriation of profits or invested capital;

·       Nationalizationof local industry;

·       Changesin export or import restrictions;

·       Changesin the tax system or rate of taxation in the countries where we do business;and

·       Economic,social, and political risks.

In addition, difficulties in foreign financialmarkets, economies and foreign financial institutions, particularly in emergingmarkets, could adversely affect demand from customers in the affectedcountries. Because of these factors, we may not succeed in expanding ourbusiness in international markets. This could hurt our business growthprospects and results of operations.

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*Intellectual property litigation and infringementclaims could cause us to incur significant expenses or prevent us from sellingour products.*

Many of our products are designed to include softwareor other intellectual property licenses from third parties. Competitors’protected technology may be unavailable to us or be made available to us onlyon unfavorable terms and conditions. While it may be necessary in the future toseek or renew licenses relating to various aspects of our products, we believethat, based upon past experience and standard industry practice, these licensesgenerally can be obtained on commercially reasonable terms. There can be noassurances, however, that we will be able to obtain, on commercially reasonableterms or at all, from third parties the licenses that we will need. Due to theexistence of a large number of patents in our field and the rapid rate ofissuance of new patents, it is not practical to determine in advance whether aproduct or any of its components infringe the patent rights of others.

We routinely receive claims regarding patent and otherintellectual property matters. Pursuant to our agreements with our suppliers,we generally seek indemnification from our suppliers in connection with suchclaims. Whether or not these claims have merit, they may require significantresources to defend. To date, none of these claims have had a material impacton our business. We are currently involved in several such proceedings. None ofwhich we believe are material to our business. If an infringement claim issuccessful and we are unable to obtain the license for the infringed technologyor substitute similar non-infringing technology, our business could be harmed.

*We may be subject to product liability claims thatcould result in significant direct or indirect costs to us.*

There is a risk that defects may occur in our productsand services. The occurrence of these defects could make us liable for damagescaused by these defects, including consequential damages. To date, none ofthese claims have had a material impact on our business. Negative publicityconcerning these problems could also make it more difficult to convincecustomers to buy our products and services. Both could hurt our business,operating results, and financial condition.

*We rely on our contract manufacturers for assistancein new product development, and our new product introduction efforts could beharmed by any adverse change in these relationships.*

We work with our contract manufacturers to developand/or incorporate new technologies and products. Our contract manufacturersdesign the electronic and mechanical systems of a display product around ourchoice of major components and our specific industrial design. Aside from thesemajor specifications mandated by us, the contract manufacturers chooseelectronic and mechanical solutions of standard design to reduce thedevelopment time, engineering cost and procurement risk associated with morecustomized designs. Our relationships with these contract manufacturersgenerally do not include a long-term commitment on behalf of either party. Ifour contract manufacturers encounter financial or other business difficulties,if their strategic objectives change, or if they perceive us to no longer be anattractive customer, they may no longer assist us in our product developmentefforts. Our business could be harmed if we were unable to continue one or moreof our contract manufacturing relationships.

*Impairment of our investment portfolio could harm ournet earnings.*

We have an investmentportfolio that includes a variety of investments. In most cases, we do notattempt to reduce or eliminate our market exposure on these investments. Wecould incur losses related to the impairment of these investments, which couldresult in charges to net earnings. Some of our investments are in public andprivately-held companies that are still in the start-up or development stage,which have inherent risks because the technologies or products they have underdevelopment are typically in the early stages and may never become successful.Furthermore, the values of our investments in publicly-traded companies aresubject to significant market price volatility. We often couple our investmentsin technology companies with a strategic commercial relationship. Ourcommercial agreements with these companies may not be sufficient to allow us toobtain and integrate such products 

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andservices into our offerings or otherwise benefit from the relationship, andthird parties, including competitors, may subsequently acquire these companies.Economic weakness could further impact our investment portfolio.

**Item 4.**   Controlsand Procedures

*Evaluation ofDisclosure Controls and Procedures*

Based on their evaluation as of June 30, 2004,our chief executive officer and chief financial officer have concluded that,our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) weresufficiently effective to ensure that the information required to be disclosedby us in this Quarterly Report on Form 10-Q was recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal controls will preventall error and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of a simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of thecontrol. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate.

*Changes in InternalControls*

There were no changes in our internal controls overfinancial reporting during the quarter ended June 30, 2004 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM1.**   LEGAL PROCEEDINGS

In the ordinary course ofbusiness, we are involved in lawsuits, claims, investigations, proceedings, andthreats of litigation consisting of intellectual property, commercial,employment and other matters. In accordance with SFAS No. 5, “*Accounting for Contingencies*,” we make aprovision for a liability when it is both probable that a liability has beenincurred and the amount of the loss can be reasonably estimated. Theseprovisions are reviewed at least quarterly and adjusted to reflect the impactsof negotiations, settlements, rulings, advice of legal counsel and otherinformation and events pertaining to a particular case. Litigation isinherently unpredictable. However, we believe that we have valid defenses withrespect to the legal matters pending against us, as well as adequate provisionsfor any probable and estimable losses. If an unfavorable ruling were to occurin any specific period, there exists the possibility of a material adverseimpact on our results of operations for that period. We believe that, given ourcurrent liquidity and cash and investment balances, even were we to receive anadverse judgment with respect to litigation that we are currently a party to,it is likely that such a judgment would not have a material impact on ourfinancial condition, results of operations or liquidity.

**ITEM 2.**   CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURPOSES OF EQUITY SECURITIES

From April 1,2004 through June 30, 2004, we sold and issued the following unregisteredsecurities:

(1)   From April 1,2004 through June 30, 2004, we did not grant any stock options to purchaseshares of our common stock, to employees, consultants and directors pursuant toour 1999 Stock Plan. During this period, stock options to purchase an aggregateof 1,002,681 shares of our common stock were canceled without being exercised.

(2)   From April 1,2004 through June 30, 2004, we issued an aggregate of 22,662 shares of ourcommon stock, at an exercise price between $1.00 and $1.09 per share, pursuantto the exercise of outstanding stock options to purchase shares of our commonstock granted pursuant to our 1999 Stock Plan.

The securities described in(2) above may not have been exempt from either registration under theSecurities Act or qualification under state securities laws. Consequently,recipients of the options and purchasers of the shares for which registrationor qualification may have been required under the Securities Act or statesecurities laws may have the right to rescind their grant of options andpurchases of shares. We concluded a rescission offer, as permitted underCalifornia state law, to certain holders of our options and shares on June 24,2004. As a result approximately 469,000 options and 15,000 common stock shareswere tendered back to, and accepted by, ViewSonic. There are no assurances thatwe will not be subject to penalties or fines relating to these issuances. Webelieve our rescission offer could provide us with additional meritoriousdefenses against any future claims relating to these shares. See Part I, Item1, Note 9 to our consolidated condensed financial statements for moreinformation.

**ITEM 3.**   DEFAULTSUPON SENIOR SECURITIES

Not applicable.

**ITEM 4.**   SUBMISSIONOF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.

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**ITEM 5.**   OTHERINFORMATION

Consistent with Section 10A(i)(2) ofthe Securities Exchange Act of 1934, as added by Section 202 of the PublicCompany Accounting Reform and Investor Protection Act of 2002, we areresponsible for disclosing the nature of the non-audit services approved by ourAudit Committee during a quarter to be performed by our independent auditor.Non-audit services are services other than those provided by our independentauditor in connection with an audit or a review of our financial statements. Duringthe second quarter of fiscal 2004, our Audit Committee did not approve any newor recurring non-audit services.

**ITEM 6.**   EXHIBITSAND REPORTS ON FORM 8-K

(a)   Exhibits
| 10.10 | Facility Agreement between ViewSonic Europe Limited  and Burdale Financial Limited, dated June 24, 2004.                                                           |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11 | Deed of Debenture among  ViewSonic Europe Limited, others as Chargors and Burdale Financial Limited,  dated June 24, 2004.                                    |
| 10.12 | Pledge Agreement between  ViewSonic Europe Limited and Burdale Financial Limited, dated June 24,  2004.                                                       |
| 10.13 | Third Party Pledgeholder  Agreement among ViewSonic Europe Limited, Burdale Financial Limited and Furness  Logistics B.V., dated June 24, 2004.               |
| 31.1  | Certification of Chief  Executive Officer as required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                             |
| 31.2  | Certification of Chief  Financial Officer as required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                             |
| 32.1* | Certification of Chief  Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of  the Securities Exchange Act of 1934, as amended. |

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*       Thecertification attached as Exhibit 32.1, accompanies this Quarterly Reporton Form 10-Q, is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing ofViewSonic Corporation under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporationlanguage contained in such filing.

(b)   Reports on Form 8-K

None.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on August 16, 2004.
|        | **ViewSonic Corporation** |
|--------|---------------------------|
|   | By:                       | /s/ James A. Morlan |
|   |                      | James A. Morlan |
|   |                      | *Chief Financial Officer* |
|   |                      | *(Principal Financial and Accounting Officer)* |

 

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**EXHIBITINDEX**
|                     | ** ** | ** **                                                                                                                                                         | ** ** | ** ** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Exhibit  Number** | ** ** | **Exhibit Title**                                                                                                                                                  | ** ** | ** ** |
| 10.10               |       | Facility Agreement between ViewSonic Europe Limited  and Burdale Financial Limited, dated June 24, 2004.                                                           |
| 10.11               |       | Deed of Debenture among  ViewSonic Europe Limited, others as Chargors and Burdale Financial Limited,  dated June 24, 2004.                                    |
| 10.12               |       | Pledge Agreement between  ViewSonic Europe Limited and Burdale Financial Limited, dated June 24,  2004.                                                       |
| 10.13               |       | Third Party Pledgeholder  Agreement among ViewSonic Europe Limited, Burdale Financial Limited and Furness  Logistics B.V., dated June 24, 2004.               |
| 31.1                |       | Certification of Chief  Executive Officer as required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                             |
| 31.2                |       | Certification of Chief  Financial Officer as required by Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                             |
| 32.1*               |       | Certification of Chief  Executive Officer and Chief Financial Officer as required by Rule 13a-14(b) of  the Securities Exchange Act of 1934, as amended. |

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*       Thecertification attached as Exhibit 32.1, accompanies this Quarterly Reporton Form 10-Q, is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing ofViewSonic Corporation under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate of this Form 10-Q, irrespective of any general incorporationlanguage contained in such filing.

 

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