##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the Quarterly Period Ended
    December 31, 2003                                        
|          
|or        
|          
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 0-30539

TVIA, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                           |  |                                            
|------------------------------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                                                   |  | 77-0549628                                 
|(State or other jurisdiction of
    incorporation or organization)                         |  | (I.R.S. employer
    identification number)
|                                                                                          
|4001 Burton Drive,
    Santa Clara, California(Address of Principal Executive
    Offices) |  | 95054(Zip Code)                            

Registrants telephone number, including
area code:

(408) 982-8588




---

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

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

On December 31, 2003, 22,453,022 shares of
the Registrants Common Stock, $0.001 par value per share,
were outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | Item 1: Financial Statements                                                                 
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                            
|                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                                  
|                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                  
|                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                             
|                              | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3: Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4: Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1: Legal Proceedings                                                                    
|                              | Item 2: Changes in Securities and Use of Proceeds                                            
|                              | Item 3: Default Upon Senior Securities                                                       
|                              | Item 4: Submission of Matters to Vote of Security Holders                                    
|                              | Item 5: Other Information                                                                    
|                              | Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|CERTIFICATION                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31,
2003

INDEX

|               |  |                                                                                           |    |      |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                           |    | Page
|               |  |                                                                                           |    |     
|               |  | Part I: Financial Information                                                             |    |      |    | 
|Item 1:        |  | Financial Statements                                                                      |    |      | 2  | 
|               |  | Unaudited Condensed Consolidated Balance Sheets                                           |    |      | 2  | 
|               |  | Unaudited Condensed Consolidated Statements of
    Operations                             |    |      | 3  | 
|               |  | Unaudited Condensed Consolidated Statements of
    Cash Flows                             |    |      | 4  | 
|               |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                        |    |      | 5  | 
|Item 2:        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 12 | 
|Item 3:        |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 23 | 
|Item 4:        |  | Controls and Procedures                                                                   |    |      | 24 | 
|               |  | Part II: Other Information                                                                |    |      |    | 
|Item 1:        |  | Legal Proceedings                                                                         |    |      | 25 | 
|Item 2:        |  | Change in Securities and Use of Proceeds                                                  |    |      | 25 | 
|Item 3:        |  | Default upon Senior Securities                                                            |    |      | 25 | 
|Item 4:        |  | Submission of Matters to Vote of Security Holders                                         |    |      | 25 | 
|Item 5:        |  | Other Information                                                                         |    |      | 25 | 
|Item 6:        |  | Exhibits and Reports on Form 8-K                                                          |    |      | 25 | 
|Signatures     |  |                                                                                           | 26 |     
|Certifications |  |                                                                                           | 27 |     

1



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##### Table of Contents






PART I: FINANCIAL INFORMATION






|        |                     
|------- | --------------------
|Item 1: | Financial Statements

TVIA, INC. AND SUBSIDIARY






CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


(in thousands)


|                                         |                                                                                                                   |                                            |       |           |        |  |       |         |        | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | --------- | ------ |  | ----- | ------- | ------ | 
|                                         |                                                                                                                   | December 31,                               |       | March 31,
|                                         |                                                                                                                   | 2003                                       |       | 2003     
|                                         |                                                                                                                   |                                            |       |          
|ASSETS                                  
|Current assets:                          |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         | Cash and cash equivalents                                                                                         |                                            | $     | 4,229     |        |  | $     | 11,080  |       
|                                         | Short-term investments                                                                                            |                                            |       | 24,120    |        |  |       | 13,337  |       
|                                         | Accounts receivable, net                                                                                          |                                            |       | 436       |        |  |       | 331     |       
|                                         | Inventories                                                                                                       |                                            |       | 601       |        |  |       | 1,055   |       
|                                         | Prepaid expenses and other current assets                                                                         |                                            |       | 1,417     |        |  |       | 411     |       
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total current assets                       |       |           | 30,803 |  |       |         | 26,214 | 
|Property and equipment, net              |                                                                                                                   |                                            | 2,239 |           |        |  | 3,209 |        
|Other assets                             |                                                                                                                   |                                            | 113   |           |        |  | 1,770 |        
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total assets                               |       | $         | 33,155 |  |       | $       | 31,193 | 
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         | Accounts payable                                                                                                  |                                            | $     | 661       |        |  | $     | 632     |       
|                                         | Accrued liabilities and other                                                                                     |                                            |       | 858       |        |  |       | 1,175   |       
|                                         | Short-term portion of capital leases                                                                              |                                            |       | 139       |        |  |       | 134     |       
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total current liabilities                  |       |           | 1,658  |  |       |         | 1,941  | 
|Long-term portion of capital leases      |                                                                                                                   |                                            | 36    |           |        |  | 486   |        
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total liabilities                          |       |           | 1,694  |  |       |         | 2,427  | 
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|Commitments and contingencies (Note 8)   |                                                                                                                   |                                            |       |           |        |  |       |        
|Stockholders equity:                    |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         | Common stock, $0.001 par value, 125,000 shares
    authorized, 22,453 and 22,139 shares outstanding, respectively |                                            |       | 23        |        |  |       | 22      |       
|                                         | Additional paid-in-capital                                                                                        |                                            |       | 92,739    |        |  |       | 92,444  |       
|                                         | Accumulated comprehensive income (loss)                                                                           |                                            |       | (27       | )      |  |       | 6       |       
|                                         | Accumulated deficit                                                                                               |                                            |       | (60,524   | )      |  |       | (62,956 | )     
|                                         | Treasury stock                                                                                                    |                                            |       | (750      | )      |  |       | (750    | )     
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total stockholders equity                 |       |           | 31,461 |  |       |         | 28,766 | 
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        
|                                         |                                                                                                                   | Total liabilities and stockholders equity |       | $         | 33,155 |  |       | $       | 31,193 | 
|                                         |                                                                                                                   |                                            |       |           |        |  |       |        

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

2



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)


(in thousands, except per share
amounts)


|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |         |  
|----------------------------------------- | ------------------------------------------- | -------------------- | ------ | ------------------- | - | ---- | ------ | ------ | - | - | ----- | ------ | - | - | ------- | ------- | -
|                                          |                                             |                      |        |                    
|                                          |                                             | For the Three Months |        | For the Nine Months
|                                          |                                             | Ended                |        | Ended              
|                                          |                                             | December 31,         |        | December 31,       
|                                          |                                             |                      |        |                    
|                                          |                                             | 2003                 |        | 2002                |   | 2003 |        | 2002  
|                                          |                                             |                      |        |                     |   |      |        |       
|Total revenues                            |                                             | $                    | 628    |                     |   | $    | 438    |        |   | $ | 1,828 |        |   | $ | 1,731   |        
|Cost of revenues                          |                                             |                      | 359    |                     |   |      | 304    |        |   |   | 1,056 |        |   |   | 1,237   |        
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|                                          | Gross profit                                |                      |        | 269                 |   |      |        | 134    |   |   |       | 772    |   |   |         | 494     |  
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Operating expenses:                       |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|                                          | Research and development                    |                      |        | 2,667               |   |      |        | 1,880  |   |   |       | 5,716  |   |   |         | 7,303   |  
|                                          | Sales, general and administrative           |                      |        | 650                 |   |      |        | 723    |   |   |       | 1,995  |   |   |         | 2,872   |  
|                                          | Amortization of deferred stock compensation |                      |        |                    |   |      |        | 198    |   |   |       |       |   |   |         | 595     |  
|                                          | Restructuring charges                       |                      |        |                    |   |      |        | 300    |   |   |       |       |   |   |         | 950     |  
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Total operating expenses                  |                                             |                      | 3,317  |                     |   |      | 3,101  |        |   |   | 7,711 |        |   |   | 11,720  |        
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|                                          | Operating loss                              |                      |        | (3,048              | ) |      |        | (2,967 | ) |   |       | (6,939 | ) |   |         | (11,226 | )
|Interest income                           |                                             |                      | 102    |                     |   |      | 149    |        |   |   | 296   |        |   |   | 587     |        
|Gain from sale of software unit           |                                             |                      |       |                     |   |      |       |        |   |   | 9,075 |        |   |   |        |        
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Net income (loss)                         |                                             | $                    | (2,946 | )                   |   | $    | (2,818 | )      |   | $ | 2,432 |        |   | $ | (10,639 | )      
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Basic net income (loss) per share         |                                             | $                    | (0.13  | )                   |   | $    | (0.13  | )      |   | $ | 0.11  |        |   | $ | (0.48   | )      
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Diluted net income (loss) per share       |                                             | $                    | (0.13  | )                   |   | $    | (0.13  | )      |   | $ | 0.10  |        |   | $ | (0.48   | )      
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|Shares used in the per share calculation: |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|                                          | Basic                                       |                      |        | 22,374              |   |      |        | 21,948 |   |   |       | 22,234 |   |   |         | 21,943  |  
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        
|                                          | Diluted                                     |                      |        | 23,374              |   |      |        | 21,948 |   |   |       | 23,695 |   |   |         | 21,943  |  
|                                          |                                             |                      |        |                     |   |      |        |        |   |   |       |        |   |   |         |        

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

3



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TVIA, INC. AND SUBSIDIARY






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED)


(in thousands)


|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |         |   |     |      |  
|------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------- | - | ------ | ------ | ------- | - | --- | ---- | -
|                                                        |                                                         |                                                                                
|                                                        |                                                         | For the                                                                        
|                                                        |                                                         | Nine Months Ended                                                              
|                                                        |                                                         | December 31,                                                                   
|                                                        |                                                         |                                                                                
|                                                        |                                                         | 2003                                                                            |                                             | 2002                                     
|                                                        |                                                         |                                                                                 |                                             |                                          
|Cash flows from operating activities:                   |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|                                                        | Net income (loss)                                       |                                                                                 | $                                           | 2,432                                     |   |        | $      | (10,639 | )
|                                                        |                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                             |                                           |   |        |        |         |   |    
|                                                        |                                                         |                                                                                 | Depreciation and amortization               |                                           |   | 1,251  |        |         |   | 860 |     
|                                                        |                                                         |                                                                                 | Amortization of deferred stock compensation |                                           |   |       |        |         |   | 595 |     
|                                                        |                                                         |                                                                                 | Write-off of licensed technology            |                                           |   | 1,449  |        |         |   |    |     
|                                                        |                                                         |                                                                                 | Gain from sale of software unit             |                                           |   | (9,075 | )      |         |   |    |     
|                                                        |                                                         |                                                                                 | Change in assets and liabilities:           |                                           |   |        |        |         |   |     |     
|                                                        |                                                         |                                                                                 |                                             | Accounts receivable                       |   |        | (105   | )       |   |     | 21   |  
|                                                        |                                                         |                                                                                 |                                             | Inventories                               |   |        | 454    |         |   |     | 385  |  
|                                                        |                                                         |                                                                                 |                                             | Prepaid expenses and other current assets |   |        | (256   | )       |   |     | 652  |  
|                                                        |                                                         |                                                                                 |                                             | Accounts payable                          |   |        | 29     |         |   |     | (493 | )
|                                                        |                                                         |                                                                                 |                                             | Accrued liabilities and other             |   |        | (317   | )       |   |     | 380  |  
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Net cash used in operating activities                   |                                                         |                                                                                 | (4,138                                      | )                                         |   |        | (8,239 | )      
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Cash flows from investing activities:                   |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|                                                        | Sales (purchases) of available-for-sale
    investments |                                                                                 |                                             | (10,816                                   | ) |        |        | 5,764   |  
|                                                        | Proceeds from sale of software unit                     |                                                                                 |                                             | 8,325                                     |   |        |        |        |  
|                                                        | Purchases of license technology                         |                                                                                 |                                             | (44                                       | ) |        |        | (5      | )
|                                                        | Purchases of property and equipment                     |                                                                                 |                                             | (75                                       | ) |        |        | (815    | )
|                                                        | Proceeds from disposal of fixed assets                  |                                                                                 |                                             | 46                                        |   |        |        |        |  
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Net cash provided by (used in) investing
    activities |                                                         |                                                                                 | (2,564                                      | )                                         |   |        | 4,944  |        
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Cash flows from financing activities:                   |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|                                                        | Proceeds from issuance of common stock                  |                                                                                 |                                             | 296                                       |   |        |        | 8       |  
|                                                        | Repayment of capital lease obligations                  |                                                                                 |                                             | (445                                      | ) |        |        |        |  
|                                                        | Repurchase of common stock                              |                                                                                 |                                             |                                          |   |        |        | (87     | )
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Net cash used by financing activities                   |                                                         |                                                                                 | (149                                        | )                                         |   |        | (79    | )      
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Decrease in cash and cash equivalents                   |                                                         |                                                                                 | (6,851                                      | )                                         |   |        | (3,374 | )      
|Cash and cash equivalents at beginning of period        |                                                         |                                                                                 | 11,080                                      |                                           |   |        | 6,445  |        
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Cash and cash equivalents at end of period              |                                                         | $                                                                               | 4,229                                       |                                           |   | $      | 3,071  |        
|                                                        |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|Supplemental disclosure of non-cash activities:         |                                                         |                                                                                 |                                             |                                           |   |        |        |        
|                                                        | Capital leases                                          |                                                                                 |                                             |                                          |   |        |        | 395     |  

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

4



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)


Note 1.  Interim
Statements

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended
December 31, 2003, are not necessarily indicative of the
results that may be expected for the fiscal year ending
March 31, 2004.

Certain information and footnote disclosures
normally included in the financial statements prepared in
accordance with general accepted accounting principles have been
condensed or omitted. These accompanying unaudited condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements of Tvia, Inc.
and subsidiary (the Company) for the fiscal year
ended March 31, 2003, which are included in the
Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission on June 24, 2003.

Note 2.  Summary of Significant
Policies



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

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



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

The Company reviews long-lived assets and certain
identifiable intangibles for impairment. The Company reviews
assets to be held and used whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. The Company measures
recoverability of assets by comparing their carrying amount to
the future undiscounted cash flows that they are expected to
generate. Impairment reflects the amount by which the carrying
value of the assets exceeds their fair market value. The Company
wrote off $1.5 million of licensed technology in the
quarter ended December 31, 2003.



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

Comprehensive income or loss includes all changes
in equity during a period from transactions and events from non
owner sources. A summary of comprehensive income (loss) is
as follows (in thousands):

|                                                             |  |                    |        |                   |  |      |        |      |  |   |       |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------- | -
|                                                             |  |                    |        |                  
|                                                             |  | For the            |        | For the          
|                                                             |  | Three Months Ended |        | Nine Months Ended
|                                                             |  | December 31,       |        | December 31,     
|                                                             |  |                    |        |                  
|                                                             |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                             |  |                    |        |                   |  |      |        |     
|Net income (loss)                                            |  | $                  | (2,946 | )                 |  | $    | (2,818 | )    |  | $ | 2,432 |   |  | $ | (10,639 | )
|Unrealized gain (loss) on available-for-sale
    investments |  |                    | (22    | )                 |  |      | (11    | )    |  |   | (33   | ) |  |   | 4       |  
|                                                             |  |                    |        |                   |  |      |        |      |  |   |       |   |  |   |         |  
|Comprehensive income (loss)                                  |  | $                  | (2,968 | )                 |  | $    | (2,829 | )    |  | $ | 2,399 |   |  | $ | (10,635 | )
|                                                             |  |                    |        |                   |  |      |        |      |  |   |       |   |  |   |         |  

5



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)




| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method.
Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Companys stock at the
date of grant over the stock option exercise price, and is
amortized over the vesting period of the individual award. The
following table illustrates the effect on net income
(loss) and earnings (loss) per share if the Company
had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to the stock-based employee compensation.

|                                                                                                                                                    |             |                    |        |                   |   |      |        |       |   |   |       |      |  |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------ | ------ | ----------------- | - | ---- | ------ | ----- | - | - | ----- | ---- |  | - | ------- | ----- | -
|                                                                                                                                                    |             |                    |        |                  
|                                                                                                                                                    |             | For the            |        | For the          
|                                                                                                                                                    |             | Three Months Ended |        | Nine Months Ended
|                                                                                                                                                    |             | December 31,       |        | December 31,     
|                                                                                                                                                    |             |                    |        |                  
|                                                                                                                                                    |             | 2003               |        | 2002              |   | 2003 |        | 2002 
|                                                                                                                                                    |             |                    |        |                   |   |      |        |      
|Net income (loss) as reported                                                                                                                       |             | $                  | (2,946 | )                 |   | $    | (2,818 | )     |   | $ | 2,432 |      |  | $ | (10,639 | )    
|Add: Stock-based employee compensation expense
    included in reported net income (loss)                                                           |             |                    |       |                   |   |      | 198    |       |   |   |      |      |  |   | 595     |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |             |                    | (384   | )                 |   |      | (546   | )     |   |   | (890  | )    |  |   | (1,638  | )    
|                                                                                                                                                    |             |                    |        |                   |   |      |        |       |   |   |       |      |  |   |         |      
|Pro forma net income (loss)                                                                                                                         |             | $                  | (3,330 | )                 |   | $    | (3,166 | )     |   | $ | 1,542 |      |  | $ | (11,682 | )    
|                                                                                                                                                    |             |                    |        |                   |   |      |        |       |   |   |       |      |  |   |         |      
|Basic net income (loss) per share:                                                                                                                  |             |                    |        |                   |   |      |        |       |   |   |       |      |  |   |         |      
|                                                                                                                                                    | As reported |                    | $      | (0.13             | ) |      | $      | (0.13 | ) |   | $     | 0.11 |  |   | $       | (0.48 | )
|                                                                                                                                                    | Pro forma   |                    | $      | (0.15             | ) |      | $      | (0.14 | ) |   | $     | 0.07 |  |   | $       | (0.53 | )
|Diluted net income (loss) per share:                                                                                                                |             |                    |        |                   |   |      |        |       |   |   |       |      |  |   |         |      
|                                                                                                                                                    | As reported |                    | $      | (0.13             | ) |      | $      | (0.13 | ) |   | $     | 0.10 |  |   | $       | (0.48 | )
|                                                                                                                                                    | Pro forma   |                    | $      | (0.15             | ) |      | $      | (0.14 | ) |   | $     | 0.07 |  |   | $       | (0.53 | )



| |                            
| | ---------------------------
| | Net Income (Loss) Per Share

Basic net income (loss) per share is
computed using the weighted average number of shares of common
stock outstanding. Diluted net income per share is computed
based on the weighted average number of shares of common stock
outstanding for the period plus dilutive common equivalent
shares including stock options and warrants using the treasury
stock method. Diluted loss per share information is the same as
basic net loss per share since common shares issuable upon
conversion of the stock options and warrants are antidilutive.
The total numbers of shares excluded from diluted net income
(loss) per share relating to these securities were
5,452,445, 5,310,461, 1,461,046 and 5,310,461 for the three and
nine months ended December 31, 2003 and 2002, respectively.

6



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)


The following table sets forth the computation of
basic and diluted net loss per share (in thousands except per
share amounts):

|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |        |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------ | ------ | ----------------- |  | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------ | -
|                                                                                  |                                                                         |                    |        |                  
|                                                                                  |                                                                         | For the            |        | For the          
|                                                                                  |                                                                         | Three Months Ended |        | Nine Months Ended
|                                                                                  |                                                                         | September 30,      |        | September 30,    
|                                                                                  |                                                                         |                    |        |                  
|                                                                                  |                                                                         | 2003               |        | 2002              |  | 2003 |        | 2002  
|                                                                                  |                                                                         |                    |        |                   |  |      |        |       
|Net income (loss)                                                                 |                                                                         | $                  | (2,946 | )                 |  | $    | (2,818 | )      |   | $ | 2,432  |        |   | $ | (10,639 | )     
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|Basic and diluted:                                                                |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|                                                                                  | Weighted average shares of common stock
    outstanding                 |                    |        | 22,374            |  |      |        | 21,987 |   |   |        | 22,254 |   |   |         | 22,061 |  
|                                                                                  | Less: Weighted average shares of common stock
    subject to repurchase |                    |        |                  |  |      |        | (39    | ) |   |        | (20    | ) |   |         | (118   | )
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|Weighted average shares used in computing basic
    net income (loss) per share   |                                                                         |                    | 22,374 |                   |  |      | 21,948 |        |   |   | 22,234 |        |   |   | 21,943  |       
|Diluted effect of common share equivalents                                        |                                                                         |                    |       |                   |  |      |       |        |   |   | 1,461  |        |   |   |        |       
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|Weighted average shares used in computing diluted
    net income (loss) per share |                                                                         |                    | 22,374 |                   |  |      | 21,948 |        |   |   | 23,695 |        |   |   | 21,943  |       
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|Basic net income (loss) per share                                                 |                                                                         | $                  | (0.13  | )                 |  | $    | (0.13  | )      |   | $ | 0.11   |        |   | $ | (0.48   | )     
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       
|Diluted net income (loss) per share                                               |                                                                         | $                  | (0.13  | )                 |  | $    | (0.13  | )      |   | $ | 0.10   |        |   | $ | (0.48   | )     
|                                                                                  |                                                                         |                    |        |                   |  |      |        |        |   |   |        |        |   |   |         |       



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

In November 2002, the Emerging Issues Task Force,
or EITF, reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. The adoption of this standard did not have a
material impact on its consolidated financial position, results
of operations or cash flows.

In May 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. SFAS No. 150 requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS
No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this standard did not have a
material impact on its consolidated financial position, results
of operations or cash flows.

Financial Accounting Standards Board
(FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), was issued in January 2003. FIN 46
requires that if an entity is the primary beneficiary of a
variable interest entity, the assets, liabilities, and results
of operations of the variable interest entity should be included
in the Consolidated Financial Statements of the entity. The
provisions of FIN 46 are effective immediately for all
arrangements entered into after January 31, 2003. For those
arrangements entered into prior to February 1, 2003, the
provisions of FIN 46 were required to be adopted at the
beginning of the first interim or annual period beginning after
June 15, 2003. However, in October 2003, the FASB deferred
the effective date of FIN 46 to the end of the first
interim or annual period ending after December 31, 2003 for
those arrangements entered into prior to February 1, 2003.
The Company believes that the adoption of this standard will not
have a material impact on its consolidated financial position,
results of operations or cash flows.

7



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)




|        |                                            
|------- | -------------------------------------------
|Note 3. | Balance Sheet Components (in
    thousands)

|                                 |                                                                |              |        |           |   |   |        |        |  
|-------------------------------- | -------------------------------------------------------------- | ------------ | ------ | --------- | - | - | ------ | ------ | -
|                                 |                                                                | December 31, |        | March 31,
|                                 |                                                                | 2003         |        | 2003     
|                                 |                                                                |              |        |          
|Accounts receivable, net:        |                                                                |              |        |           |   |   |        |       
|                                 | Accounts receivable                                            |              | $      | 464       |   |   | $      | 381    |  
|                                 | Less: Allowance for doubtful accounts                          |              |        | (28       | ) |   |        | (50    | )
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                | $            | 436    |           |   | $ | 331    |       
|                                 |                                                                |              |        |           |   |   |        |       
|Allowance for doubtful accounts: |                                                                |              |        |           |   |   |        |       
|                                 | Balance at beginning of the year                               |              | $      | 50        |   |   | $      | 112    |  
|                                 | Addition                                                       |              |        |          |   |   |        | 8      |  
|                                 | Utilized                                                       |              |        | (22       | ) |   |        | (70    | )
|                                 |                                                                |              |        |           |   |   |        |       
|                                 | Balance at end of the year                                     |              | $      | 28        |   |   | $      | 50     |  
|                                 |                                                                |              |        |           |   |   |        |       
|Short-term investments:          |                                                                |              |        |           |   |   |        |       
|                                 | U.S. government and agency securities                          |              | $      | 1,999     |   |   | $      | 2,810  |  
|                                 | U.S. corporate and bank debt                                   |              |        | 22,121    |   |   |        | 10,527 |  
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                | $            | 24,120 |           |   | $ | 13,337 |       
|                                 |                                                                |              |        |           |   |   |        |       
|Inventories:                     |                                                                |              |        |           |   |   |        |       
|                                 | Raw materials                                                  |              | $      | 109       |   |   | $      | 446    |  
|                                 | Work-in-process                                                |              |        | 6         |   |   |        | 3      |  
|                                 | Finished goods                                                 |              |        | 486       |   |   |        | 606    |  
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                | $            | 601    |           |   | $ | 1,055  |       
|                                 |                                                                |              |        |           |   |   |        |       
|Property and equipment, net:     |                                                                |              |        |           |   |   |        |       
|                                 | Furniture and fixtures (Useful life of two years)              |              | $      | 75        |   |   | $      | 85     |  
|                                 | Machinery and equipment (Useful life of two to
    five years) |              |        | 2,892     |   |   |        | 3,158  |  
|                                 | Software (Useful life of two to five years)                    |              |        | 3,337     |   |   |        | 3,713  |  
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                |              | 6,304  |           |   |   | 6,956  |       
|                                 | Less: Accumulated depreciation and amortization                |              |        | (4,065    | ) |   |        | (3,747 | )
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                | $            | 2,239  |           |   | $ | 3,209  |       
|                                 |                                                                |              |        |           |   |   |        |       
|Other assets:                    |                                                                |              |        |           |   |   |        |       
|                                 | License technology (Useful life of five years)                 |              | $      | 81        |   |   | $      | 1,969  |  
|                                 | Less: Accumulated amortization                                 |              |        |          |   |   |        | (231   | )
|                                 |                                                                |              |        |           |   |   |        |       
|                                 | License technology, net                                        |              |        | 81        |   |   |        | 1,738  |  
|                                 | Deposits                                                       |              |        | 32        |   |   |        | 32     |  
|                                 |                                                                |              |        |           |   |   |        |       
|                                 |                                                                | $            | 113    |           |   | $ | 1,770  |       
|                                 |                                                                |              |        |           |   |   |        |       

8



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)


|                  |                                    |              |     |           |  |   |       |     | 
|----------------- | ---------------------------------- | ------------ | --- | --------- |  | - | ----- | --- | 
|                  |                                    | December 31, |     | March 31,
|                  |                                    | 2003         |     | 2003     
|                  |                                    |              |     |          
|Accrued expenses: |                                    |              |     |           |  |   |       |    
|                  | Accrued compensation costs         |              | $   | 562       |  |   | $     | 593 | 
|                  | Accrued professional service costs |              |     | 52        |  |   |       | 174 | 
|                  | Accrued software maintenance       |              |     | 13        |  |   |       | 99  | 
|                  | Other                              |              |     | 231       |  |   |       | 309 | 
|                  |                                    |              |     |           |  |   |       |    
|                  |                                    | $            | 858 |           |  | $ | 1,175 |    
|                  |                                    |              |     |           |  |   |       |    



|        |                                                          
|------- | ---------------------------------------------------------
|Note 4. | Sale of Software Business and Software-Related
    Assets

On July 3, 2003, the Company sold its
software business and software-related assets to MediaTek, Inc.
in exchange for $10.0 million in cash, subject to the
completion of milestones and closing conditions. The software
assets were developed internally to support the Companys
products, including Home IT, advanced digital video
broadcasting, MPEG 4 software, SDK software and software
drivers. The development costs related to the software assets
were expensed as incurred. Under the agreement, MediaTek granted
to the Company a royalty-free license to continue to use those
software assets to support its existing products and fulfill its
maintenance obligations to its existing customers. The Company
reported a gain of $9.1 million from this transaction in
the results of operations in the quarter ending
September 30, 2003. On October 1, 2003, the Company
received $3.1 million, the final installment from this sale
of its software business and software-related assets to
MediaTek, Inc., except for $0.8 million in an escrow
account.



|        |                      
|------- | ---------------------
|Note 5. | Restructuring Charges

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

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

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



|        |                               
|------- | ------------------------------
|Note 6. | Concentration of Certain Risks

The Company is subject to the risks associated
with similar technology companies. These risks include, but are
not limited to: history of operating losses, dependence on a
small number of key individuals, customers and suppliers,
competition from larger and more established companies, the
impact of rapid technological changes and changes in customer
demand and requirements.

9



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)




| |                      
| | ---------------------
| | Significant Customers

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

|           |  |              |    |              |  |      |    |      |  |  |    |   |  |  |    |  
|---------- |  | ------------ | -- | ------------ |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|           |  |              |    |             
|           |  | Three Months |    | Nine Months 
|           |  | Ended        |    | Ended       
|           |  | December 31, |    | December 31,
|           |  |              |    |             
|           |  | 2003         |    | 2002         |  | 2003 |    | 2002
|           |  |              |    |              |  |      |    |     
|Customer A |  |              | 26 | %            |  |      | *  |      |  |  | 11 | % |  |  | *  |  
|Customer B |  |              | 23 | %            |  |      | *  |      |  |  | 15 | % |  |  | *  |  
|Customer C |  |              | *  |              |  |      | 39 | %    |  |  | 15 | % |  |  | 17 | %
|Customer D |  |              | *  |              |  |      | *  |      |  |  | 15 | % |  |  | 30 | %
|Customer E |  |              | *  |              |  |      | *  |      |  |  | 13 | % |  |  | *  |  
|Customer F |  |              | *  |              |  |      | 16 | %    |  |  | *  |   |  |  | *  |  
|Customer G |  |              | *  |              |  |      | 11 | %    |  |  | *  |   |  |  | *  |  



---

(* = less than 10%)

Concentration
of Credit Risk

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

Accounts receivable were concentrated with
customers as follows:

|                     |  |             |    |           |  |  |    |  
|-------------------- |  | ----------- | -- | --------- |  |  | -- | -
|                     |  | December 31 |    | March 31,
|                     |  | 2003        |    | 2003     
|                     |  |             |    |          
|Accounts Receivable: |  |             |    |           |  |  |    |  
|Customer A           |  |             | 34 | %         |  |  | 22 | %
|Customer B           |  |             | 24 | %         |  |  | *  |  
|Customer C           |  |             | 12 | %         |  |  | *  |  
|Customer D           |  |             | 12 | %         |  |  | *  |  
|Customer F           |  |             | *  |           |  |  | 48 | %
|Customer G           |  |             | *  |           |  |  | 21 | %



---

(* = less than 10%)

Vendor
Concentration

The Company does not own or operate a fabrication
facility, and accordingly relies substantially on two outside
foundries, United Manufacturing Corporation (UMC)
and Taiwan Semiconductor Manufacturing Corporation
(TSMC) to supply all of the Companys
semiconductor manufacturing requirements. There are significant
risks associated with the Companys reliance on outside
foundries, including the lack of ensured wafer supply, limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs and the unavailability
of or delays in obtaining access to key process technologies.
Any inability of one of the foundries to provide the necessary
components could result in significant delays and

10



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##### Table of Contents



TVIA, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)  (Continued)


could have a material adverse effect on the
Companys business, financial condition and results of
operations. In the event either foundry suffers financial
difficulties or suffers any damage or destruction to its
respective facilities, or in the event of any other disruption
of foundry capacity, the Company may not be able to qualify
alternative manufacturing sources for existing or new products
in a timely manner.

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



|        |                                   
|------- | ----------------------------------
|Note 7. | Segment and Geographic Information

The Company is organized and operates in one
reportable segment, which is the development, manufacture and
sale of streaming media integrated circuits for the advanced
television and emerging interactive display markets.

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

|              |  |               |    |              |  |      |    |      |  |  |    |   |  |  |    |  
|------------- |  | ------------- | -- | ------------ |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|              |  |               |    |             
|              |  | For the Three |    | For the Nine
|              |  | Months Ended  |    | Months Ended
|              |  | December 31,  |    | December 31,
|              |  |               |    |             
|              |  | 2003          |    | 2002         |  | 2003 |    | 2002
|              |  |               |    |              |  |      |    |     
|Europe        |  |               | 11 | %            |  |      | 37 | %    |  |  | 29 | % |  |  | 35 | %
|Japan         |  |               | 9  | %            |  |      | 12 | %    |  |  | 15 | % |  |  | 17 | %
|United States |  |               | 34 | %            |  |      | 12 | %    |  |  | 26 | % |  |  | 11 | %
|Taiwan        |  |               | 26 | %            |  |      | 32 | %    |  |  | 17 | % |  |  | 27 | %
|Korea         |  |               | 7  | %            |  |      | 6  | %    |  |  | 7  | % |  |  | 10 | %
|Other         |  |               | 13 | %            |  |      | 1  | %    |  |  | 6  | % |  |  | *  |  



|        |                              
|------- | -----------------------------
|Note 8. | Commitments and Contingencies

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

On September 19, 2003, plaintiff Silvaco
Data Systems, Inc. filed a civil action in the Superior Court of
the State of California in San Jose against Tvia alleging
misappropriation of trade secrets and unfair business practices.
The Company believes that the action has no merit and intends to
vigorously defend against it.

As permitted under Delaware law the Company has
agreements whereby the Company indemnifies its officers and
directors for certain events or occurrences while the officer or
director is, or was serving at the Companys request in
such capacity. The indemnification term is for the period that
the officer or director is serving in such capacity or is
subject to any possible claim or action by reason of the fact
that the officer or director was serving in that capacity. The
maximum potential amount of future payments the Company could be
unlimited; however the Company has a director and officer
insurance policy that limits the Companys exposure and
enables the Company to recover a portion of any future amounts
paid. As a result of the insurance policy coverage, the Company
believes that the estimated fair value of these agreements is
minimal.

11



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2: | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This Managements Discussion and Analysis
of Financial Condition and Results of Operations should be read
in conjunction with the unaudited condensed financial statements
and notes thereto set forth in Item 1 of this
report.

In addition to historical information, this
Quarterly Report on Form 10-Q contains forward-looking
statements, including statements regarding revenues and sources
of revenues, that involve risks and uncertainties that could
cause actual results to differ materially. Factors that might
cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Factors That May
Affect Future Performance. You should carefully review the
risks described herein and in other documents we file from time
to time with the Securities and Exchange Commission, including
the Annual Report on Form 10-K for fiscal 2003 and the
other Quarterly Report on Form 10-Q filed by us in our
fiscal 2004. When used in this report, the words
expects, anticipates,
estimates, and similar expressions, as well as
statements regarding Tvias focus for the future, are
generally intended to identify forward-looking statements. You
should not place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly
release any revisions to the forward-looking statements or
reflect events or circumstances after the date of this
document.

Overview

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

We currently offer three product families: the
CyberPro 5202 family, introduced in calendar year 2002; the
CyberPro 5300 family, introduced in calendar year 1999; and the
CyberPro 5000 family, introduced in calendar year 1998. These
product families currently generate most of our revenues. We
sell our products through two channels. First, we sell our
products directly to original equipment manufacturers, or OEMs,
and recognize revenues at the time of shipment to these OEMs. We
sell our products to a number of distributors. We defer
recognition of revenues for sales to our distributors until they
have sold our products to end-users.

Approximately 66%, 88%, 74% and 89% of our total
revenues for the three and nine months ended December 31,
2003 and 2002, respectively, were derived from customers located
outside the United States. All of our revenues to date have been
denominated in United States dollars.

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

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

We have sustained losses on a quarterly and
annual basis since inception. As of December 31, 2003, we
had an accumulated deficit of approximately $60.5 million.
These losses resulted from significant costs incurred in the
planning and development of our technology and services and from
significant marketing costs. We expect to experience significant
research and development expenses, as we design and market new
technologies.

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We anticipate flat revenues for at least the next
two quarters as compared to the same period in the prior fiscal
year. We believe that this is due to a slowdown in the
interactive television industry caused by a slower than
anticipated emergence of the interactive television market, and
delay in customer product introductions in order to incorporate
additional third party features. Due to anticipated flat
revenues, we anticipate that we will continue to incur net
losses at least at the level incurred in the quarter ended
December 31, 2003 for at least the next two quarters.

We have a subsidiary in Hefei, Peoples
Republic of China, which performs final test, sales and research
and development.

Critical Accounting Policies

For critical accounting policies affecting us,
see Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operations of our
Annual Report on Form 10-K for the year ended
March 31, 2003 and on Form 10-Q for the quarter ended
September 30, 2003. Critical accounting policies affecting
us have not changed materially since March 31, 2003.

Results of Operations

The following table sets forth, for the periods
indicated, certain financial data as a percentage of revenue:

|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|------------------------------------------- |  | ------------- | ---- | ------------ |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | --
|                                            |  |               |      |             
|                                            |  | For the Three |      | For the Nine
|                                            |  | Months Ended  |      | Months Ended
|                                            |  | December 31,  |      | December 31,
|                                            |  |               |      |             
|                                            |  | 2003          |      | 2002         |  | 2003 |      | 2002
|                                            |  |               |      |              |  |      |      |     
|Revenues                                    |  |               | 100  | %            |  |      | 100  | %    |  |  | 100  | % |  |  | 100  | % 
|Cost of revenues                            |  |               | 57   |              |  |      | 69   |      |  |  | 58   |   |  |  | 71   |   
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Gross profit                                |  |               | 43   |              |  |      | 31   |      |  |  | 42   |   |  |  | 29   |   
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Operating expenses:                         |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Research and development                    |  |               | 425  |              |  |      | 429  |      |  |  | 313  |   |  |  | 422  |   
|Sales, general and administrative           |  |               | 103  |              |  |      | 165  |      |  |  | 109  |   |  |  | 166  |   
|Amortization of deferred stock compensation |  |               |     |              |  |      | 45   |      |  |  |     |   |  |  | 34   |   
|Restructuring charges                       |  |               |     |              |  |      | 69   |      |  |  |     |   |  |  | 55   |   
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Total operating expenses                    |  |               | 528  |              |  |      | 708  |      |  |  | 422  |   |  |  | 677  |   
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Operating loss                              |  |               | (485 | )            |  |      | (677 | )    |  |  | (380 | ) |  |  | (648 | ) 
|Interest income                             |  |               | 16   |              |  |      | 34   |      |  |  | 16   |   |  |  | 34   |   
|Gain on sale of software business           |  |               |     |              |  |      |     |      |  |  | 496  |   |  |  |     |   
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   
|Net loss                                    |  |               | 469  | %            |  |      | (643 | )%   |  |  | 133  | % |  |  | (614 | )%
|                                            |  |               |      |              |  |      |      |      |  |  |      |   |  |  |      |   

Revenues.Revenues
increased to $0.6 million and $1.8 million in the
three and nine months ended December 31, 2003 compared to
$0.4 million and $1.7 million in the three and nine months
ended December 31, 2002. Revenues were flat from fiscal
2003 to fiscal 2004 primarily due to a slower than anticipated
emergence of the interactive television market and weak global
general economic conditions. Revenues to Hughes Network Systems
and Weikeng Industrial Co., Ltd. accounted for 26% and 23%,
respectively, of total revenues for the three months ended
December 31, 2003. Sales to Kanematsu Devices Corporation,
Chou Chin Industrial Co., Ltd. and Micro Network Korea Co., Ltd.
accounted for 39%, 16% and 11% of our total revenues for the
three months ended December 31, 2002, respectively. Sales
to SMS Electronics, Ltd., Kanematsu Devices Corporation, Weikeng
Industrial Co., Ltd., Fujitsu-Siemens Computers Gmbh and Hughes
Network Systems accounted for 15%, 15%, 15%, 13% and 11% of our
total revenues for the nine months ended December 31, 2003,
respectively. Sales to Siemens Communications, Ltd., and
Kanematsu Devices Corporation accounted for approximately 30%
and 17% of our total revenues for the nine months ended
December 31, 2002, respectively.

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Gross Margin.Gross
margin for the three and nine months ended December 31,
2003 was 43% and 42%, respectively, compared to 31% and 29% in
the same periods of fiscal 2003. The increase in gross margin
resulted primarily from product revenues which costs were
previously reserved for, a high proportion of higher margin
non-product revenues and lower overhead burden. Many factors
affect our profit margin, including, but not limited to, our
product mix, the position of our products in their respective
life cycles, yields and the mix of our product sales and
development contracts and other revenues.

Research and
Development.Research and development
expenses include personnel and other costs associated with the
development of product designs, process technology, software and
programming hardware. Our research and development expenses
reflect our continuing efforts to develop and bring to market
innovative and cost effective semiconductors that process the
rich media content available on the Internet and the broadband
network. Research and development expenses in the three months
ended December 31, 2003 were $2.7 million, including a
write-off of $1.5 million of licensed technology compared
to $1.8 million in the three months ended December 31,
2002. Excluding this write-off of $1.5 million of licensed
technology, research and development expenses were
$1.2 million and $4.2 million for the three and nine
months ended December 31, 2003 compared to
$1.9 million and $7.3 million in the three and nine
months ended December 31, 2002. Research and development
expenses as a percentage of total revenues were 425% and 313% in
the first three and nine months ended December 31, 2003
compared to 429% and 422% in the same periods of fiscal 2003.
The decrease in research and development expenses in absolute
dollars, excluding the $1.5 million write-off of license
technology, in the first three and nine months ended
December 31, 2003 compared to the same periods of fiscal
2003 is attributable primarily to a reduction of our research
and development operations in Santa Clara, California and the
sale of our software business unit to MediaTek. We expect
absolute research and development expenses in the fourth quarter
of fiscal 2004 to be at the same level as the quarter ended
December 31, 2003, excluding the $1.5 million
write-off of license technology.

Sales, General and
Administrative.Sales, general and
administrative expenses consist primarily of personnel and other
costs associated with the management of our business and with
the sale and marketing of our products. Sales, general and
administrative expenses decreased to $0.6 and $2.0 million
in the three and nine months ended December 31, 2003 from
$0.7 million and $2.9 million in the three and nine
months ended December 31, 2002. Sales, general and
administrative expenses as a percentage of total revenues was
103% and 109% in the first three and nine months of fiscal year
2003 compared to 165% and 166% in the same periods of fiscal
year 2003. The decrease in sales, general and administrative
expenses in absolute dollars resulted from a reduction in
workforce and other cost cutting measures. We expect that sales,
general and administrative expenses in the next quarter will be
approximately at the same level as the quarter ended
December 31, 2003.

Amortization of Deferred Stock
Compensation.We grant stock options
to hire, motivate and retain employees. We incurred stock
compensation expense of $0.2 million and $0.6 million
in the three and nine months ended December 31, 2002,
respectively.

Interest Income.Interest income was $0.1 million and $0.3 million for
the three and nine months ended December 31, 2003, compared
to $0.1 million and $0.6 million for the three and
nine months ended December 31, 2002. The decrease resulted
from a lower return on our investments and declining levels of
amount of cash and investments.

Gain on Sale of Software Unit.The Company recorded a gain on a sale
of its software business and software-related assets to
MediaTek, Inc. in exchange for $10 million in cash in the
second quarter ended September 30, 2003. Expenses related
to this transaction amounted to $.9 million.

Provision for Income
Tax.We are taxed in our jurisdictions
of operations based on the extent of taxable income generated in
each jurisdiction. For income tax purposes, revenues are
attributed to the taxable jurisdiction where the sales
transactions generating the revenues were initiated. We incurred
operating losses in the three and nine months ended
December 31, 2003 and 2002, and therefore made no provision
for income tax in these periods.

14



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Liquidity and Capital Resources

During the nine months ended December 31,
2003, $4.1 million of cash and cash equivalents were used
by our operating activities as compared to $8.2 million
during the nine months ended December 31, 2002. Cash used
by operations during the nine months ended December 31,
2003 resulted primarily from net income of $2.4 million,
non-cash items of depreciation and amortization of
$1.3 million, a write-off of $1.5 million licensed
technology and a decrease in inventories of $0.5 million,
partially offset by a $9.1 million gain from the sale of
the software unit, an increase in prepaid expenses and other
current assets of $0.3 million, and a decrease in accrued
liabilities and other of $0.3 million. Cash used in
operations during the nine months ended December 31, 2002
resulted primarily from net loss of $10.6 million offset by
non-cash items of depreciation and amortization of
$1.5 million and decreases of $0.7 million and
$0.4 million in prepaid expenses and other current assets
and inventories, respectively.

Capital equipment and license technology
purchases in the nine months ended December 31, 2003 and
2002 were $.1 million and $0.8 million, respectively.

On July 3, 2003, the Company sold its
software business and software-related assets to MediaTek, Inc.
in exchange for $10.0 million in cash, subject to the
completion of milestones and closing conditions. The software
assets were developed internally to support the Companys
products, including Home IT, advanced digital video
broadcasting, MPEG 4 software, SDK software and software
drivers. The development costs related to the software assets
were expensed as incurred. Under the agreement, MediaTek will
grant to the Company a royalty-free license to continue to use
those software assets to support its existing products and
fulfill its maintenance obligations to its existing customers.
The Company reported the gain from this transaction in the
results of operations in the quarter ending December 31,
2003. As of December 31, 2003, we received full payments of
$10.0 million, except for $0.8 million, which is in an
escrow account.

Working capital at December 31, 2003 was
$29.1 million.

The following represent our more significant
working capital commitments:



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

On November 10, 2001, the Board of Directors
authorized a stock repurchase program to acquire outstanding
common stock in the open market. Under this program, the Board
of Directors authorized the acquisition of up to 200,000 of the
Companys common stock. As of December 31, 2003, the
Company acquired 143,700 shares on the open market that it holds
as treasury stock. At the December 31, 2003 stock price,
the proceeds to be used to acquire up to 56,300 shares of the
Companys common stock will have a minimal impact on the
Companys current cash, cash equivalent and short-term
investment balances.

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



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

The Company has no off-balance sheet arrangements
as of December 31, 2003.



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

The Company leases its facilities under
non-cancelable operating leases expiring at various dates
through June 2005.

The Company places purchase orders with wafer
foundries throughout its normal course of business. As of
December 31, 2003, the Company had no outstanding wafer
purchase commitments.

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

|                             |      |         |     |           |  |             |     |       |  |   |     |     |  |   |     |     | 
|---------------------------- | ---- | ------- | --- | --------- |  | ----------- | --- | ----- |  | - | --- | --- |  | - | --- | --- | 
|                             |      | Capital |     | Operating |  | Purchase    |     |      
|Fiscal Year                  |      | Leases  |     | Leases    |  | Commitments |     | Total
|                             |      |         |     |           |  |             |     |      
|                             | 2004 |         | $   | 144       |  |             | $   | 38    |  |   | $   | 124 |  |   | $   | 306 | 
|                             | 2005 |         |     | 36        |  |             |     | 82    |  |   |     |    |  |   |     | 118 | 
|                             | 2006 |         |     |          |  |             |     | 11    |  |   |     |    |  |   |     | 11  | 
|                             |      |         |     |           |  |             |     |       |  |   |     |     |  |   |     |    
|Total minimum lease payments |      | $       | 180 |           |  | $           | 131 |       |  | $ | 124 |     |  | $ | 435 |    
|                             |      |         |     |           |  |             |     |       |  |   |     |     |  |   |     |    

Based on our current expectations, we believe
that our principal source of liquidity consisting of our cash
and cash equivalents and short-term investment, which totaled
$28.3 million at December 31, 2003, will be sufficient
to meet our working capital and capital requirements through at
least the next twelve months. We may also utilize cash to
acquire or invest in complementary businesses or to obtain the
use of complementary technologies.

Factors that May Affect Future
Results

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

We have incurred significant operating losses in
each year since our inception and expect to continue to incur
net losses for the foreseeable future, primarily as a result of
expenses for research and development. Our losses increased as
we transitioned our focus away from the personal computer market
toward the advanced television and emerging interactive display
markets in 1996. We have incurred net losses of approximately
$60.5 million from our inception in March 1993 through
December 31, 2003. If we continue to incur net losses, we
may not be able to expand our business as quickly as we would
like. We do not know when or if we will become profitable and if
we do become profitable, we may not be able to sustain or
increase our profitability.

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

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

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

Historically we have been, and we expect to
continue to be, dependent on a relatively small number of OEMs
and distributors for a significant portion of our total
revenues. Sales to Hughes Network Systems and Weikeng Industrial
Co., Ltd. accounted for 26% and 23% of our total revenues for
the three months ended December 31, 2003, respectively.
Sales to Kanematsu Devices Corporation, Chou Chin Industrial
Co., Inc. and Micro Network Korea Co., Ltd. accounted for 39%,
16% and 11% of our total revenues for the three

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months ended December 31, 2002,
respectively. Sales to SMS Electronics, Ltd., Kanematsu Devices
Corporation, Weikeng Industrial Co., Ltd., Fujitsu-Siemens
Computers Gmbh and Hughes Network Systems accounted for 15%,
15%, 15%, 11% and 11% of our total revenues for the nine months
ended December 31, 2003, respectively. Sales to Siemens
Communications, Ltd., and Kanematsu Devices Corporation
accounted for approximately 30% and 17% of our total revenues
for the nine months ended December 31, 2002, respectively.
We may not be able to retain our largest customers or to obtain
additional key accounts. Any reduction or delay in sales of our
products to one or more key customer or our inability to
successfully develop relationships with additional key customers
could negatively impact our financial results.


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

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

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

To develop market acceptance of our products, we
must dedicate significant resources to research and development,
production and sales and marketing. We develop products based on
forecasts of demand and we incur substantial product development
expenditures prior to generating associated revenues. Our
customers typically perform numerous tests and extensively
evaluate our products before incorporating them into their
systems. The time required for testing, evaluating and designing
our products into a customers equipment can take up to
nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of
equipment incorporating our products, if ever. Because of this
lengthy development cycle, we may experience a delay between the
time we accrue expenses for research and development and sales
and marketing efforts and the time when we generate revenues, if
any.

Furthermore, achieving a design win with a
customer does not necessarily mean that this customer will order
large volumes of our products. A design win is not a binding
commitment by a customer to purchase our products. Rather, it is
a decision by a customer to use our products in the design
process. In addition, our customers can choose at any time to
discontinue using our products in that customers designs
or product development efforts. If our products are chosen to be
incorporated into a customers products, we may still not
realize significant revenues from that customer if that
customers products are not commercially successful. As a
result, our profitability from quarter to quarter and from year
to year may be materially affected by the number and timing of
our new product introductions in any period and the level of
acceptance gained by these products.

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

We operate in a highly competitive, quickly
changing environment marked by new and emerging products and
technologies. Our success depends on our ability to develop,
introduce and successfully market new products and enhance our
existing products in the advanced television and emerging
interactive display markets. The development of these new
products is highly complex and, from time to time, we have

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experienced delays in completing their
development and introduction. Any one of the following factors
could affect our ability to develop, introduce and sell new
products and could materially harm our business:




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

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

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



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

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

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



| |   |               
| | - | --------------
| |  | functionality;
|
| |  | performance;  

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

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

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

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

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

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

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

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

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are particularly vulnerable to supply shortages.
As a result, we may be unable to fill orders and may lose
customers. Any future industry wide oversupply or undersupply of
semiconductors would materially harm our business and have a
negative impact on our earnings.


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

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

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

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

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

The manufacture of semiconductors is a complex
process. Foundries may not achieve acceptable product yields
from time to time due to the complexity of the integrated
circuit design, inadequate manufacturing processes and other
reasons. We refer to the proportion of final acceptable
integrated circuits that have been processed, assembled and
tested relative to the gross number of integrated circuits that
could have been produced from the raw materials as our product
yields. Identifying defects and determining the reason for low
yields may be discovered after production has begun and at
various stages of the production cycle. Our failure to discover
defects early in the production cycle will result in higher
costs and may require a diversion of our technical personnel and
resources away from product development in order to correct the
defect. In addition, defective products that have been released
into the market and distributed to our customers and end users
may result in harm to our reputation, significant warranty
costs, diversion of our technical and managerial resources and
potential product liability claims that would be costly to
defend.

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

Our products depend on complex software that we
develop internally and license from others. Complex software
often contains defects, particularly when first introduced or
when new versions are released. Determining whether our software
has defects may occur after our products are released into the
market and

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distributed to our customers and end users, and
may result in harm to our reputation, significant warranty
costs, diversion of our technical resources and potential
product liability claims that would be costly to defend and
divert managerial resources.


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

Sales of our products to our OEM customers and to
distributors located outside the United States accounted for
86%, 32%, 67%, 66% and 74% of our total revenues in fiscal years
2003, 2002 and 2001 and three and nine months ended
December 31, 2003, respectively. We anticipate that sales
to customers located outside the United States will continue to
represent a significant portion of our total sales in future
periods. In addition, many of our domestic customers sell their
products outside of North America, thereby indirectly exposing
us to risks associated with foreign commerce. Asian economic
instability impacts the sales of products manufactured by our
customers, as does the Chinese New Year, during which time many
manufacturers and businesses close their operations. We may be
negatively impacted by the terrorist attacks on the United
States and the resulting conflicts worldwide. We could also
experience greater difficulties collecting accounts receivable
from customers outside of the United States. Accordingly, our
operations and revenues are subject to a number of risks
associated with foreign commerce.

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

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

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

In addition, the markets of semiconductor
products are cyclical. In recent years, some Asian countries
have experienced significant economic difficulties, including
devaluation and instability business failures and a depressed
business environment. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced
budgets for chip design tools. In addition, the electronics
industry has historically been subject to seasonal and cyclical
fluctuations in demand for its products, and this trend may
continue in the future. These industry downturns have been, and
my continue to be, characterized by diminished product demand,
excess manufacturing capacity and subsequent erosion of average
selling prices. As a result, our future operating results may
reflect substantial fluctuations from period to period as a
consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and
other factors. Any negative factors affecting the semiconductor
industry, including the downturns described here, could
significantly harm our business, financial condition and results
of operations.

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

Our success depends on the skills, experience and
performance of our executive officers and other key management
and technical personnel, many of whom would be difficult to
replace. We are particularly

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dependent on Eli Porat, our Chief Executive
Officer and President. The competition for employees with
technical skills is intense and we may not be able to attract
and retain a sufficient number of such qualified new personnel
in the future. The loss of the service of one or more of our key
employees, or our failure to attract, retain and motivate
qualified personnel would inhibit the growth of our business.


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

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

Moreover, our customers may develop their own
solutions for products currently supplied by us, which could
have an adverse effect on our business.

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

Substantially all of our products are assembled
by one of two subcontractors, both of which are located in
Taiwan. Typically, we procure services from these subcontractors
on a purchase order basis. Their availability to assemble our
products could be adversely affected if either subcontractor
experiences financial difficulties or suffers any damage or
destruction to its facilities or any other disruption of its
assembly capacity. Because we rely on third party subcontractors
for assembly of our products, we cannot directly control product
delivery schedules. We have experienced in the past, and may
experience in the future, product shortages or quality assurance
problems that could increase the cost of manufacturing or
testing of our products. It is time consuming and difficult to
find and qualify alternative assemblers. If we are forced to
find substitute subcontractors, shipments of our products could
be delayed. Any problems associated with the delivery, quantity
or cost of our products could harm our business.

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

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

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

Our success depends in part upon our rights in
proprietary technology and processes that we develop and license
from, and to, others. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and
strategic partners in order to protect proprietary technologies
that use our products. We cannot assure you that these measures
will provide meaningful protection for our proprietary
technologies and processes, and they do not prevent independent

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third party development of competitive products.
In addition, it is difficult to monitor unauthorized use of
technology, particularly in foreign countries where laws may not
protect our proprietary rights as fully as in the United States.


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

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

Other parties may assert patent infringement
claims against us, including claims against technology that we
license from others, and our products or processes may infringe
issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in
significant expense to us. Litigation would also divert the
efforts of our technical and management personnel, whether or
not the litigation is determined in our favor. Litigation could
also require us to develop non-infringing technology or enter
into royalty or license agreements.

These royalty or license agreements may not be
available on acceptable terms, including limitations on
representations and warranties regarding infringement and
indemnification in the event of infringement claims. Our failure
or inability to develop non-infringing technology, license the
proprietary rights on a timely basis or receive appropriate
protection on licensed technology would harm our business.

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

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




Item 3:     Quantitative
and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Discussion of
Market Interest Rate Risk

For quantitative and qualitative disclosures
about market risks affecting us, see Item 7A
Quantitative Disclosure About Market Risk of our
Annual Report on Form 10-K for the year ended
March 31, 2003 and on Form 10-Q for the quarter ended
September 30, 2003. Our exposure to market risk has not
changed materially since March 31, 2003.

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Item 4:     Controls
and Procedures

(a) Evaluation of disclosure controls
and procedures.We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934
(the Exchange Act), that are designed to ensure that
information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure
controls and procedures, our management necessarily was required
to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.

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

(b) Changes in internal control over
financial reporting.There was no change in our internal
control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) identified in
connection with the evaluation described in Item 4(a) above
that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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PART II: OTHER INFORMATION




Item 1:     Legal
Proceedings

None




Item 2:     Changes
in Securities and Use of Proceeds

None




Item 3:     Default
Upon Senior Securities

None




Item 4:     Submission
of Matters to Vote of Security Holders

None




Item 5:     Other
Information

None






|        |                                     
|------- | ------------------------------------
|Item 6: | Exhibits and Reports on
    Form 8-K

(a) Exhibits

|        |    |    |  |                                                                                                                         
|------- | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |   
|Number  |    |   
|        |    |   
|        | 31 | .1 |  | Rule 13a-14(a) certification of Chief
    Executive Officer.                                                            
|        | 31 | .2 |  | Rule 13a-14(a) certification of Chief
    Financial Officer.                                                            
|        | 32 | .1 |  | Statement of Principal Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002
    (18 U.S.C. § 1350).
|        | 32 | .2 |  | Statement of Principal Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002
    (18 U.S.C. § 1350).

(b) Reports on Form 8-K

On October 28, 2003, the Company furnished a
Current Report on Form 8-K to furnish the press release
issued on October 28, 2003 entitled Tvia, Inc.
Reports Second Quarter Earnings.

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SIGNATURES

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



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



| |     |                  
| | --- | -----------------
| | By: | /s/ ARTHUR NGUYEN

| |                                 
| | --------------------------------
| |                                 
| | Arthur Nguyen                   
| | Chief Financial Officer         
| | (Principal Financial Officer and
| | Duly Authorized Signatory)      

February 13, 2004

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CERTIFICATION

Each of the undersigned hereby certifies, in
accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, in his
capacity as an officer of Tvia, Inc. (Tvia), that,
to his knowledge, the Quarterly Report of Tvia on Form 10-Q
for the period ended December 31, 2003, fully complies with
the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and that the information contained in such
report fairly presents, in all material respects, the financial
condition and results of operations of Tvia.



| |     |              
| | --- | -------------
| | By: | /s/ ELI PORAT

| |                                          
| | -----------------------------------------
| |                                          
| | Eli Porat                                
| | Chief Executive Officer and
    President

Date: February 13, 2004



| |     |                  
| | --- | -----------------
| | By: | /s/ ARTHUR NGUYEN

| |                        
| | -----------------------
| |                        
| | Arthur Nguyen          
| | Chief Financial Officer

Date: February 13, 2004

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EXHIBIT INDEX

|        |    |    |  |                                                                                                                         
|------- | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |   
|Number  |    |   
|        |    |   
|        | 31 | .1 |  | Rule 13a-14(a) certification of Chief
    Executive Officer.                                                            
|        | 31 | .2 |  | Rule 13a-14(a) certification of Chief
    Financial Officer.                                                            
|        | 32 | .1 |  | Statement of Principal Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002
    (18 U.S.C. § 1350).
|        | 32 | .2 |  | Statement of Principal Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002
    (18 U.S.C. § 1350).