##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended June 30, 2003

or

(  ) 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 |  | (I.R.S. employer      
|incorporation or organization)  |  | identification number)

4001 Burton Drive, Santa Clara, California 95054

(Address of Principal Executive Offices) (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 (X) No (  )

On July 31, 2003, 22,199,164 shares of the Registrants Common Stock,
$0.001 par value per share, were outstanding.





---

TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1: FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | 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 INDEX                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



---



##### Table of Contents



TVIA, INC. AND SUBSIDIARY

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2003

INDEX

|                                                                                              |                                                                |  |      |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                |  | Page
|                                                                                              |                                                                |  |     
|Part I: Financial Information                                                                 |                                                                |  |      |  
|Item 1: Financial Statements                                                                  |                                                                |  |      |  
|                                                                                              | Unaudited Condensed Consolidated Balance Sheets                |  | 1    |  
|                                                                                              | Unaudited Condensed Consolidated Statements of Operations      |  |      | 2 | 
|                                                                                              | Unaudited Condensed Consolidated Statements of Cash Flows      |  |      | 3 | 
|                                                                                              | Notes to Unaudited Condensed Consolidated Financial Statements |  |      | 4 | 
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                |  | 12   |  
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                            |                                                                |  | 24   |  
|Item 4: Controls and Procedures                                                               |                                                                |  | 25   |  
|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                                                      |                                                                |  | 26   |  
|Signatures                                                                                    |                                                                |  | 26   |  
|Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                      |                                                                |  | 27   |  

i



---



##### Table of Contents









PART I: FINANCIAL
INFORMATION
ITEM 1: FINANCIAL STATEMENTS

TVIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)

|                                       |  |                                                                                                               |       |                                            |         |          |        |           |         |   |        | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | ----- | ------------------------------------------ | ------- | -------- | ------ | --------- | ------- | - | ------ | 
|                                       |  |                                                                                                               |       |                                            |         | JUNE 30, |        | MARCH 31,
|                                       |  |                                                                                                               |       |                                            |         | 2003     |        | 2003     
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|ASSETS                                 |  |                                                                                                               |       |                                            |         |          |        |          
|Current assets:                        |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  | Cash and cash equivalents                                                                                     |       | $                                          | 9,769   |          |        | $         | 11,080  |  
|                                       |  | Restricted cash                                                                                               |       |                                            | 600     |          |        |           |        |  
|                                       |  | Short-term investments                                                                                        |       |                                            | 17,555  |          |        |           | 13,337  |  
|                                       |  | Accounts receivable, net                                                                                      |       |                                            | 268     |          |        |           | 331     |  
|                                       |  | Inventories                                                                                                   |       |                                            | 889     |          |        |           | 1,055   |  
|                                       |  | Prepaid expenses and other current assets                                                                     |       |                                            | 440     |          |        |           | 411     |  
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total current assets                       |         |          | 29,521 |           |         |   | 26,214 | 
|Property and equipment, net            |  |                                                                                                               | 2,865 |                                            |         |          | 3,209  |          
|Other assets                           |  |                                                                                                               | 1,720 |                                            |         |          | 1,770  |          
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total assets                               |         | $        | 34,106 |           |         | $ | 31,193 | 
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|LIABILITIES AND STOCKHOLDERS EQUITY   |  |                                                                                                               |       |                                            |         |          |        |          
|Current liabilities:                   |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  | Accounts payable                                                                                              |       | $                                          | 452     |          |        | $         | 632     |  
|                                       |  | Accrued liabilities and other                                                                                 |       |                                            | 910     |          |        |           | 1,175   |  
|                                       |  | Short-term portion of capital leases                                                                          |       |                                            | 135     |          |        |           | 134     |  
|                                       |  | Advance payment received                                                                                      |       |                                            | 5,533   |          |        |           |        |  
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total current liabilities                  |         |          | 7,030  |           |         |   | 1,941  | 
|Long-term portion of capital leases    |  |                                                                                                               | 336   |                                            |         |          | 486    |          
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total liabilities                          |         |          | 7,366  |           |         |   | 2,427  | 
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|Commitments and contingencies (Note 7) |  |                                                                                                               |       |                                            |         |          |        |          
|Stockholders equity:                  |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  | Common stock, $0.001 par value, 125,000 shares
authorized, 22,176 and
22,139 shares outstanding, respectively |       |                                            | 22      |          |        |           | 22      |  
|                                       |  | Additional paid-in-capital                                                                                    |       |                                            | 92,462  |          |        |           | 92,444  |  
|                                       |  | Accumulated comprehensive income                                                                              |       |                                            | 26      |          |        |           | 6       |  
|                                       |  | Accumulated deficit                                                                                           |       |                                            | (65,020 | )        |        |           | (62,956 | )
|                                       |  | Treasury stock                                                                                                |       |                                            | (750    | )        |        |           | (750    | )
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total stockholders equity                 |         |          | 26,740 |           |         |   | 28,766 | 
|                                       |  |                                                                                                               |       |                                            |         |          |        |          
|                                       |  |                                                                                                               |       | Total liabilities and stockholders equity |         | $        | 34,106 |           |         | $ | 31,193 | 
|                                       |  |                                                                                                               |       |                                            |         |          |        |          

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

1



---



##### Table of Contents



TVIA, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

|                                                              |              |                                             |        |     |                      |   |        |     |        |   | 
|------------------------------------------------------------- | ------------ | ------------------------------------------- | ------ | --- | -------------------- | - | ------ | --- | ------ | - | 
|                                                              |              |                                             |        |     | FOR THE THREE MONTHS
|                                                              |              |                                             |        |     | ENDED JUNE 30,      
|                                                              |              |                                             |        |     | 2003                 |   | 2002  
|                                                              |              |                                             |        |     |                      |   |       
|Total revenues                                                |              | $                                           | 580    |     |                      | $ | 706    |    
|Cost of revenues                                              |              |                                             | 343    |     |                      |   | 456    |    
|                                                              |              |                                             |        |     |                      |   |        |    
|                                                              | Gross profit |                                             |        | 237 |                      |   |        | 250 |       
|Operating expenses:                                           |              |                                             |        |     |                      |   |        |    
|                                                              |              | Research and development                    |        |     | 1,660                |   |        |     | 2,786  |  
|                                                              |              | Sales, general and administrative           |        |     | 735                  |   |        |     | 1,224  |  
|                                                              |              | Amortization of deferred stock compensation |        |     |                     |   |        |     | 198    |  
|                                                              |              |                                             |        |     |                      |   |        |    
|Total operating expenses                                      |              |                                             | 2,395  |     |                      |   | 4,208  |    
|                                                              |              |                                             |        |     |                      |   |        |    
|                                                              |              | Operating loss                              |        |     | (2,158               | ) |        |     | (3,958 | )
|                                                              |              |                                             |        |     |                      |   |        |    
|Interest income                                               |              |                                             | 94     |     |                      |   | 246    |    
|                                                              |              |                                             |        |     |                      |   |        |    
|Net loss                                                      |              | $                                           | (2,064 | )   |                      | $ | (3,712 | )  
|                                                              |              |                                             |        |     |                      |   |        |    
|Basic and diluted net loss per share                          |              | $                                           | (0.09  | )   |                      | $ | (0.17  | )  
|                                                              |              |                                             |        |     |                      |   |        |    
|Shares used in computing basic and diluted
net loss per share |              |                                             | 22,145 |     |                      |   | 21,983 |    
|                                                              |              |                                             |        |     |                      |   |        |    

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

2



---



##### Table of Contents



TVIA, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |        |       |   |      |  
|------------------------------------------------ | --------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------- | ---- | -------------------------- | ------ | ------ | ----- | - | ---- | -
|                                                 |                                                     |                                           |                                                                             |                                             |      | FOR THE
THREE MONTHS ENDED
|                                                 |                                                     |                                           |                                                                             |                                             |      | JUNE 30,                  
|                                                 |                                                     |                                           |                                                                             |                                             |      |                           
|                                                 |                                                     |                                           |                                                                             |                                             |      | 2003                       |        | 2002  
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Cash flows from operating activities:            |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|                                                 | Net loss                                            |                                           | $                                                                           | (2,064                                      | )    |                            | $      | (3,712 | )    
|                                                 |                                                     |                                           | Adjustments to reconcile net loss to net cash
used in operating activities: |                                             |      |                            |        |        |       |   |     
|                                                 |                                                     |                                           |                                                                             | Depreciation and amortization               |      |                            | 440    |        |       |   | 246  |  
|                                                 |                                                     |                                           |                                                                             | Amortization of deferred stock compensation |      |                            |       |        |       |   | 198  |  
|                                                 |                                                     |                                           |                                                                             | Change in assets and liabilities:           |      |                            |        |        |       |   |      |  
|                                                 |                                                     |                                           |                                                                             | Accounts receivable                         |      |                            | 63     |        |       |   | (291 | )
|                                                 |                                                     |                                           |                                                                             | Inventories                                 |      |                            | 166    |        |       |   | (60  | )
|                                                 |                                                     |                                           |                                                                             | Prepaid expenses and other current assets   |      |                            | (29    | )      |       |   | 381  |  
|                                                 |                                                     |                                           |                                                                             | Accounts payable                            |      |                            | (180   | )      |       |   | 103  |  
|                                                 |                                                     |                                           |                                                                             | Accrued liabilities and other               |      |                            | (264   | )      |       |   | 124  |  
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Net cash used in operating activities            |                                                     |                                           | (1,868                                                                      | )                                           |      |                            | (3,011 | )     
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Cash flows from investing activities:            |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|                                                 | Sales (purchases) of available-for-sale investments |                                           |                                                                             | (4,198                                      | )    |                            |        | 3,131  |      
|                                                 | Purchases of license technology                     |                                           |                                                                             | (44                                         | )    |                            |        | (5     | )    
|                                                 | Purchases of property and equipment                 |                                           |                                                                             | (3                                          | )    |                            |        | (177   | )    
|                                                 | Restricted cash                                     |                                           |                                                                             | (600                                        | )    |                            |        |       |      
|                                                 | Advance cash received from sale of software unit    |                                           |                                                                             | 5,533                                       |      |                            |        |       |      
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|                                                 |                                                     | Net cash provided by investing activities |                                                                             |                                             | 688  |                            |        |        | 2,949 |  
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Cash flows from financing activities:            |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|                                                 | Proceeds from issuance of common stock              |                                           |                                                                             | 18                                          |      |                            |        | 3      |      
|                                                 | Repayment of capital leases                         |                                           |                                                                             | (149                                        | )    |                            |        |       |      
|                                                 | Repurchase of common stock                          |                                           |                                                                             |                                            |      |                            |        | (11    | )    
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|                                                 |                                                     | Net cash used by financing activities     |                                                                             |                                             | (131 | )                          |        |        | (8    | )
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Decrease in cash and cash equivalents            |                                                     |                                           | (1,311                                                                      | )                                           |      |                            | (70    | )     
|Cash and cash equivalents at beginning of period |                                                     |                                           | 11,080                                                                      |                                             |      |                            | 6,445  |       
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       
|Cash and cash equivalents at end of period       |                                                     | $                                         | 9,769                                                                       |                                             |      | $                          | 6,375  |       
|                                                 |                                                     |                                           |                                                                             |                                             |      |                            |        |       

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

3



---



##### 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 months ended June 30, 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. It is suggested that 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

Use of Estimates

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

Consolidation

The 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.

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investment securities with
original maturities of three months or less from the date of purchase to be
cash and cash equivalents. Management determines the appropriate
classification of short-term investments at the time of purchase and evaluates
such designations as of each balance sheet date. To date, all short-term
investments have been categorized as available-for-sale and are carried at fair
value with unrealized gains and losses, if any, included as a component of
accumulated comprehensive income in stockholders equity, net of any related
tax effects. Interest, dividends and realized gains and losses are included in
interest income in the condensed consolidated statements of operations.

4



---



##### Table of Contents



Restricted Cash

Under the terms of the agreement with MediaTek for sale of its software
business and related software assets, the Company received $600,000 cash
consideration as of June 30, 2003 pursuant to the escrow agreement, which
requires the fund to be held in escrow for a period of ten months as security
to indemnify MediaTek for breaches of covenants, representations or warranties
made by the Company.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market value and include materials, labor and overhead. Allowances when
required are made to reduce excess inventories to their estimated net
realizable values.

Property and Equipment

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

Long-Lived Assets

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

Revenue Recognition

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

The Company also sells software development kits and application modules
to OEMs. The Company recognizes sales of software development kits and
application modules when an agreement has been executed or a definitive
purchase order has been received and the product has been delivered, no
significant obligations with regard to implementation remain, the fee is fixed
and determinable and collectibility is probable. The maintenance portion of
the arrangements is recognized over the maintenance period on a straight-line
basis.

Software Development Costs

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

Research and Development Expenses

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

5



---



##### Table of Contents



Income Taxes

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

Comprehensive Income (Loss)

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

|                                                  |  |                                     |        |      |  |   |        |  
|------------------------------------------------- |  | ----------------------------------- | ------ | ---- |  | - | ------ | -
|                                                  |  | For the Three Months Ended June 30,
|                                                  |  |                                    
|                                                  |  | 2003                                |        | 2002
|                                                  |  |                                     |        |     
|Net loss                                          |  | $                                   | (2,064 | )    |  | $ | (3,712 | )
|Unrealized gain on available-for-sale investments |  |                                     | 20     |      |  |   | 26     |  
|                                                  |  |                                     |        |      |  |   |        |  
|Comprehensive loss                                |  | $                                   | (2,044 | )    |  | $ | (3,686 | )
|                                                  |  |                                     |        |      |  |   |        |  

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and
Financial Accounting Standards Board Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation (FIN 44). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Companys stock at the date of grant over the stock option
exercise price. Expense associated with stock-based compensation is amortized
on an accelerated basis over the vesting period of the individual award
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28 (FIN 28). The Company accounts for stock issued to
non-employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure and Emerging Issues Task Force Consensus No. 96-18, Accounting
for Equity Instruments that are offered to other than employees for acquiring
or in conjunction with selling goods or services (EITF 96-18). Under SFAS
No. 123, SFAS No. 148 and EITF 96-18, stock option awards issued to
non-employees are accounted for at their fair value, determined using the
Black-Scholes option pricing method. The fair value of each non-employee stock
option or award is remeasured at each period end until a commitment date is
reached, which is generally the vesting date.

The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based
employee compensation.

|                                                                                                                                            |             |   |                                       |       |      |   |        |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------------------------- | ----- | ---- | - | ------ | ----- | -
|                                                                                                                                            |             |   | For the Three Months Ended           
|                                                                                                                                            |             |   | June 30,                             
|                                                                                                                                            |             |   |                                      
|                                                                                                                                            |             |   | 2003                                  |       | 2002
|                                                                                                                                            |             |   |                                       |       |     
|                                                                                                                                            |             |   | (In thousands, except per share data)
|Net loss as reported                                                                                                                        |             | $ | (2,064                                | )     |      | $ | (3,712 | )    
|Add: Stock-based employee compensation expense
included in reported net loss                                                                |             |   |                                      |       |      |   | 198    |      
|Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards, net of related tax effects |             |   | (253                                  | )     |      |   | ( 546  | )    
|                                                                                                                                            |             |   |                                       |       |      |   |        |      
|Pro forma net loss                                                                                                                          |             | $ | (2,317                                | )     |      | $ | (4,060 | )    
|                                                                                                                                            |             |   |                                       |       |      |   |        |      
|Basic and diluted net loss per share:                                                                                                       |             |   |                                       |       |      |   |        |      
|                                                                                                                                            | As reported |   | $                                     | (0.09 | )    |   | $      | (0.17 | )
|                                                                                                                                            | Pro forma   |   | $                                     | (0.10 | )    |   | $      | (0.18 | )

6



---



##### Table of Contents



Net Loss Per Share

Net loss per share has been calculated in accordance with the Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss
per share is computed using the weighted average number of shares of common
stock outstanding. Diluted loss per share information is the same as basic net
loss per share since common shares issuable upon conversion of the stock
options and warrants are antidilutive. The total numbers of shares excluded
from diluted net loss per share relating to these securities were 4,499,195 and
4,758,071 with an average exercise price of $1.98 and $2.71 for the three
months ended June 30, 2003 and 2002, respectively.

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

|                                                                               |                                                                     |   |                      |        |      |   |        |        |  
|------------------------------------------------------------------------------ | ------------------------------------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ | -
|                                                                               |                                                                     |   | For the three months
|                                                                               |                                                                     |   | ended June 30,      
|                                                                               |                                                                     |   |                      |       
|                                                                               |                                                                     |   | 2003                 |        | 2002
|                                                                               |                                                                     |   |                      |        |     
|Net loss                                                                       |                                                                     | $ | (2,064               | )      |      | $ | (3,712 | )     
|                                                                               |                                                                     |   |                      |        |      |   |        |       
|Basic and diluted:                                                             |                                                                     |   |                      |        |      |   |        |       
|                                                                               | Weighted average shares of common stock
outstanding                 |   |                      | 22,169 |      |   |        | 22,155 |  
|                                                                               | Less: Weighted average shares of common
stock subject to repurchase |   |                      | (24    | )    |   |        | (172   | )
|                                                                               |                                                                     |   |                      |        |      |   |        |       
|Weighted average shares used in computing basic
and diluted net loss per share |                                                                     |   | 22,145               |        |      |   | 21,983 |       
|                                                                               |                                                                     |   |                      |        |      |   |        |       
|Basic and diluted net loss per share                                           |                                                                     | $ | (0.09                | )      |      | $ | (0.17  | )     
|                                                                               |                                                                     |   |                      |        |      |   |        |       

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
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company believes that the adoption of this standard
will have no material impact on its financial statements.

In 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

7



---



##### Table of Contents



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 Company believes that the
adoption of this standard will have no material impact on its financial
statements.

Note 3. Balance Sheet Components (in thousands)

|                                 |                                                            |   |          |        |           |   |        |        |  
|-------------------------------- | ---------------------------------------------------------- | - | -------- | ------ | --------- | - | ------ | ------ | -
|                                 |                                                            |   | June 30, |        | March 31,
|                                 |                                                            |   | 2003     |        | 2003     
|                                 |                                                            |   |          |        |          
|Accounts receivable, net:        |                                                            |   |          |        |           |   |        |       
|                                 | Accounts receivable                                        |   | $        | 312    |           |   | $      | 381    |  
|                                 | Less: Allowance for doubtful accounts                      |   |          | (44    | )         |   |        | (50    | )
|                                 |                                                            |   |          |        |           |   |        |       
|                                 |                                                            | $ | 268      |        |           | $ | 331    |       
|                                 |                                                            |   |          |        |           |   |        |       
|Allowance for doubtful accounts: |                                                            |   |          |        |           |   |        |       
|                                 | Balance at beginning of the year                           |   | $        | 50     |           |   | $      | 112    |  
|                                 | Addition                                                   |   |          |       |           |   |        | 8      |  
|                                 | Utilized                                                   |   |          | (6     | )         |   |        | (70    | )
|                                 |                                                            |   |          |        |           |   |        |       
|                                 | Balance at end of the year                                 |   | $        | 44     |           |   | $      | 50     |  
|                                 |                                                            |   |          |        |           |   |        |       
|Short-term investments:          |                                                            |   |          |        |           |   |        |       
|                                 | U.S. government and agency securities                      |   | $        | 2,303  |           |   | $      | 2,810  |  
|                                 | U.S. corporate and bank debt                               |   |          | 15,252 |           |   |        | 10,527 |  
|                                 |                                                            |   |          |        |           |   |        |       
|                                 |                                                            | $ | 17,555   |        |           | $ | 13,337 |       
|                                 |                                                            |   |          |        |           |   |        |       
|Inventories:                     |                                                            |   |          |        |           |   |        |       
|                                 | Raw materials                                              |   | $        | 439    |           |   | $      | 446    |  
|                                 | Work-in-process                                            |   |          | 24     |           |   |        | 3      |  
|                                 | Finished goods                                             |   |          | 426    |           |   |        | 606    |  
|                                 |                                                            |   |          |        |           |   |        |       
|                                 |                                                            | $ | 889      |        |           | $ | 1,055  |       
|                                 |                                                            |   |          |        |           |   |        |       
|Property and equipment, net:     |                                                            |   |          |        |           |   |        |       
|                                 | Furniture and fixtures (Useful life of two years)          |   | $        | 85     |           |   | $      | 85     |  
|                                 | Machinery and equipment (Useful life of two to five years) |   |          | 3,160  |           |   |        | 3,158  |  
|                                 | Software (Useful life of two to five years)                |   |          | 3,713  |           |   |        | 3,713  |  
|                                 |                                                            |   |          |        |           |   |        |       
|                                 |                                                            |   | 6,958    |        |           |   | 6,956  |       
|                                 | Less: Accumulated depreciation and amortization            |   |          | (4,093 | )         |   |        | (3,747 | )
|                                 |                                                            |   |          |        |           |   |        |       
|                                 |                                                            | $ | 2,865    |        |           | $ | 3,209  |       
|                                 |                                                            |   |          |        |           |   |        |       

8



---



##### Table of Contents



|                  |                                                |   |          |       |           |   |       |       |  
|----------------- | ---------------------------------------------- | - | -------- | ----- | --------- | - | ----- | ----- | -
|                  |                                                |   | June 30, |       | March 31,
|                  |                                                |   | 2003     |       | 2003     
|                  |                                                |   |          |       |          
|Other assets:     |                                                |   |          |       |           |   |       |      
|                  | License technology (Amortized over five years) |   | $        | 1,971 |           |   | $     | 1,969 |  
|                  | Less: Amortization                             |   |          | (283  | )         |   |       | (231  | )
|                  |                                                |   |          |       |           |   |       |      
|                  | License technology, net                        |   |          | 1,688 |           |   |       | 1,738 |  
|                  | Deposits                                       |   |          | 32    |           |   |       | 32    |  
|                  |                                                |   |          |       |           |   |       |      
|                  |                                                | $ | 1,720    |       |           | $ | 1,770 |      
|                  |                                                |   |          |       |           |   |       |      
|Accrued expenses: |                                                |   |          |       |           |   |       |      
|                  | Accrued compensation costs                     |   | $        | 641   |           |   | $     | 593   |  
|                  | Accrued software maintenance                   |   |          |      |           |   |       | 99    |  
|                  | Other                                          |   |          | 269   |           |   |       | 483   |  
|                  |                                                |   |          |       |           |   |       |      
|                  |                                                | $ | 910      |       |           | $ | 1,175 |      
|                  |                                                |   |          |       |           |   |       |      

Note 4. Restructuring Charges

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

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

|                          |  |            |     |            |  |                |      |       |  |   |      |   |  |   |      |  
|------------------------- |  | ---------- | --- | ---------- |  | -------------- | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                          |  | License    |     | Leased     |  | Severances 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 June 30, 2003  |  | $          |    |            |  | $              |     |       |  | $ |     |   |  | $ |     |  
|                          |  |            |     |            |  |                |      |       |  |   |      |   |  |   |      |  

9



---



##### Table of Contents



Note 5. 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.

Significant customers

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

|                    |  |                      |    |      |  |  |    |  
|------------------- |  | -------------------- | -- | ---- |  |  | -- | -
|                    |  | For the Three Months
|                    |  | Ended June 30,      
|                    |  |                     
|                    |  | 2003                 |    | 2002 | 
|                    |  |                      |    |      | 
|Customer A          |  |                      | 27 | %    |  |  | *  |  
|Customer B          |  |                      | 15 | %    |  |  | *  |  
|Customer C          |  |                      | 14 | %    |  |  | *  |  
|Customer D          |  |                      | 12 | %    |  |  | 12 | %
|Customer E          |  |                      | 11 | %    |  |  | *  |  
|Customer F          |  |                      | *  |      |  |  | 41 | %
|(* = 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:

|                     |  |         |    |           |  |  |    |  
|-------------------- |  | ------- | -- | --------- |  |  | -- | -
|                     |  | June 30 |    | March 31,
|                     |  |         |    |          
|                     |  | 2003    |    | 2003     
|                     |  |         |    |          
|Accounts Receivable: |  |         |    |           |  |  |    |  
|Customer A           |  |         | 59 | %         |  |  | *  | %
|Customer B           |  |         | 13 | %         |  |  | 22 | %
|Customer C           |  |         | *  | %         |  |  | 21 | %
|Customer D           |  |         | *  | %         |  |  | 48 | %
|(* = 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

10



---



##### Table of Contents



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

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

Note 6. 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 Months
|              |  | Ended June 30,      
|              |  |                     
|              |  | 2003                 |    | 2002
|              |  |                      |    |     
|Europe        |  |                      | 38 | %    |  |  | 51 | %
|Taiwan        |  |                      | 20 | %    |  |  | 19 | %
|Japan         |  |                      | 11 | %    |  |  | 8  | %
|United States |  |                      | 18 | %    |  |  | 10 | %
|Korea         |  |                      | 12 | %    |  |  | 12 | %

Note 7. 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.

Note 8. Subsequent Event

On July 3, 2003, the Company sold its software business and
software-related assets to MediaTek, Inc. in exchange for $10 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 expects to report the gain from this transaction in the
results of operations in the quarter ending September 30, 2003 depending on
satisfaction of milestones and closing conditions. As part of this transaction,
MediaTek hired approximately 75 software-related personnel, all former
employees, primarily from Tvias China subsidiary.
11Table of Contents
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONSThis 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. 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.OverviewWe 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 82% and 90% of our total revenues for the three months ended
June 30, 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. Historically, a relatively small number of customers
and distributors have accounted for a significant portion of our product sales.
Our top five customers, including distributors, accounted for 78% of total
revenues in the three months ended June 30, 2003. Our top three customers,
including distributors, accounted for 61% of total revenues in the three months
ended June 30, 2002.Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position
of our products in their respective life cycles, yields and the mix of our
product sales and development contracts and other revenues. For example, newly
introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related gross
margins typically decline over product life cycles due to competitive pressures
and volume price agreements. Our gross margin and operating results in the
future may continue to fluctuate as a result of these and other factors.The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and inventory costs and
the generation of revenues from design wins.12Table of ContentsWe have sustained losses on a quarterly and annual basis since inception.
As of June 30, 2003, we had an accumulated deficit of approximately $65.0
million. These losses resulted from significant costs incurred in the planning
and development of our technology and services and from significant marketing
costs. We expect to experience significant research and development expenses,
as we design and market new technologies.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
general economic conditions, a slowdown in the interactive television industry
caused by a slower than anticipated emergence of the interactive television
market, a general industry inventory correction, 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 June 30, 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.13Table of ContentsCritical Accounting PoliciesFor 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. Critical
accounting policies affecting us have not changed materially since March 31,
2003.Results of OperationsThe following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue:

|                                            |  |                            |      |      |  |  |      |   
|------------------------------------------- |  | -------------------------- | ---- | ---- |  |  | ---- | --
|                                            |  | For the three months ended
|                                            |  | June 30,                  
|                                            |  |                           
|                                            |  | 2003                       |      | 2002
|                                            |  |                            |      |     
|Revenues                                    |  |                            | 100  | %    |  |  | 100  | % 
|Cost of revenues                            |  |                            | 59   |      |  |  | 65   |   
|                                            |  |                            |      |      |  |  |      |   
|Gross profit                                |  |                            | 41   |      |  |  | 35   |   
|                                            |  |                            |      |      |  |  |      |   
|Operating expenses:                         |  |                            |      |      |  |  |      |   
|Research and development                    |  |                            | 286  |      |  |  | 395  |   
|Sales, general and administrative           |  |                            | 127  |      |  |  | 173  |   
|Amortization of deferred stock compensation |  |                            |     |      |  |  | 28   |   
|                                            |  |                            |      |      |  |  |      |   
|Total operating expenses                    |  |                            | 413  |      |  |  | 596  |   
|                                            |  |                            |      |      |  |  |      |   
|Operating loss                              |  |                            | (372 | )    |  |  | (561 | ) 
|Interest income                             |  |                            | 16   |      |  |  | 35   |   
|                                            |  |                            |      |      |  |  |      |   
|Net loss                                    |  |                            | (356 | )%   |  |  | (526 | )%
|                                            |  |                            |      |      |  |  |      |   

Revenues. Revenues decreased to $580,000 in the three months ended June
30, 2003 compared to $706,000 in the three months ended June 30, 2002. The
decrease was primarily due to a slower than anticipated emergence of the
interactive television market and weak global general economic conditions.
Revenues to SMS Electronics, Ltd., iVAST Inc., Weikeng Industrial, Ltd., Micro
Network Korea Co., Ltd. and Kanematsu Devices Corporation accounted for 27%, 15%, 14%, 12% and 11%,
respectively, of total revenues for the three months ended June 30, 2003.
Revenues from two customers, Siemens Communications Ltd. and Micro Network
Korea Co., Ltd., accounted for 41% and 12%, respectively, of total revenues for
the three months ended June 30, 2002.

Gross margin. Gross margin for the three months ended June 30, 2003 was
41% compared to 35% in the same period of fiscal 2003. The increase in gross
margin resulted primarily from product revenues which costs were previously
reserved for and a high proportion of higher margin non-product revenues. 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 decreased to $1.7 million in the three months ended June
30, 2003 from $2.8 million in the three months ended June 30, 2002. Research
and development expenses as a percentage of total revenues were 286% in the
first three months ended June 30, 2003 compared to 395% in the same period of
fiscal 2003. The decrease in research and development expenses in absolute
dollars and as a percentage of revenues in the

14



---



##### Table of Contents



first three months ended June 30, 2003 compared to the same period of
fiscal 2003 is attributable primarily to a reduction of our research and
development operations in Santa Clara, California. As a result of the sale of
our software business unit to MediaTek, we expect absolute research and
development expenses in the next quarter to decline compared to the quarter
ended June 30, 2003.

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 $0.7 million in the
three months ended June 30, 2003 from $1.2 million in the three months ended
June 30, 2002. Sales, general and administrative expenses as a percentage of
total revenues was 127% in the first three months of fiscal year 2003 compared
to 173% in the same period of fiscal year 2003. The decrease in sales,
general and administrative expenses in absolute dollars and as a percentage of
revenues 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 June
30, 2003.

Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$0 and $198,000 in the three months ended June 30, 2003 and 2002, respectively.

Interest income. Interest income was $94,000 for the three months ended
June 30, 2003, compared to $246,000 for the three months ended June 30, 2002.
The decrease resulted from a lower return on our investments and declining
levels of amount of cash and investments.

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 months ended June 30, 2003 and 2002, and
therefore made no provision for income tax in these periods.

Liquidity and Capital Resources

During the three months ended June 30, 2003, we used $1.9 million of cash
and cash equivalents in our operating activities as compared to $3.0 million
during the three months ended June 30, 2002. Cash used in operations during
the three months ended June 30, 2003 resulted primarily from net loss of $2.1
million partially offset by non-cash items of depreciation and amortization of
$0.4 million and a decrease in accrued liabilities and other of $0.3 million.
Cash used in operations during the three months ended June 30, 2002 resulted
primarily from net loss of $3.7 million offset by a decrease in prepaid
expenses and other current assets of $0.4 million and non-cash items of
depreciation and amortization of $0.4 million.

Capital equipment and license technology purchases in the three months
ended June 30, 2003 and 2002 were none and $0.2 million, respectively. In June
2003, we received a partial payment of $5.5 million, of which $0.6 is in an
escrow account, from a sale of our software unit and related software assets to
MediaTek, Inc. of Taiwan. Working capital at June 30, 2003 was $22.5 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 June 30, 2003, the Company acquired 143,700
shares on the open market that it holds as treasury stock. At the June 30,
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
15Table of Contents

acquisition up to 5 million shares of common stock. As of June 30, 2003, we
had not repurchased any shares of common stock under this program.

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 June 30, 2003, the Company had approximately
$13,000 of outstanding purchase commitments with a supplier for the purchase of
wafers. The Company expects to receive and pay for the wafers, within the next
six months, from its existing cash balances.

Future payments due under capital and operating leases and other purchase
commitments as of June 30, 2003 are as follows (in thousands):

|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |     | 
|---------------------------------- | ---- | ------- | ---- | --------- |  | ----------- | --- | ----- |  |  | -- | -- |  |  | --- | --- | 
|Fiscal                             |      | Capital |      | Operating |  | Purchase    |     |       |  | 
|Year                               |      | Leases  |      | Leases    |  | Commitments |     | Total
|                                   |      |         |      |           |  |             |     |      
|                                   | 2004 |         | $    | 108       |  |             | $   | 141   |  |  | $  | 13 |  |  | $   | 262 | 
|                                   | 2005 |         |      | 374       |  |             |     | 82    |  |  |    |   |  |  |     | 456 | 
|                                   | 2006 |         |      |          |  |             |     | 11    |  |  |    |   |  |  |     | 11  | 
|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |    
|Total minimum lease payments       |      |         | 482  |           |  |             | 234 |       |  |  | 13 |    |  |  | 729 |    
|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |    
|Less: Amount representing interest |      |         | (11  | )         |  |             |     |       |  |  |    |    |  |  |     |    
|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |    
|Present value of minimum payments  |      |         | 471  |           |  |             |     |       |  |  |    |    |  |  |     |    
|Less: Current portion              |      |         | (135 | )         |  |             |     |       |  |  |    |    |  |  |     |    
|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |    
|Long-term portion                  |      | $       | 336  |           |  |             |     |       |  |  |    |    |  |  |     |    
|                                   |      |         |      |           |  |             |     |       |  |  |    |    |  |  |     |    

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 $27.3 million at June 30, 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.

16



---



##### Table of Contents



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 $65.0 million from our
inception in March 1993 through June 30, 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 SMS Electronics, Ltd., iVAST, Inc., Weikeng
Industrial, Ltd., Micro Network Korea Co., Ltd. and Kanematsu Devices
Corporation accounted for 27%, 15%, 14%, 12% and 11% of total revenues for the
three months ended June 30, 2003, respectively. Sales to Siemens
Communications, Ltd., and Micro Network Korea Co., Ltd. accounted for
approximately 41% and 12% of our total revenues for the three months ended June
30, 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.
17Table of ContentsBecause 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 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;18Table of Contents
    
    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;
    
    time to market;
    
    price;
    
    conformity to industry standards;
    
    product road maps; and
    
    technical support.We currently compete with ATI Technologies, Inc., Broadcom Corporation,
Genesis Microchip, Inc. and Silicon Image, Inc. In addition to these
competitors, we expect other major semiconductor manufacturers will enter our
targeted markets as the 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.19Table of ContentsSome 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 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
20Table of Contentsmanner. 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 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%, 82% and 90% of our total
revenues in fiscal years 2003, 2002 and 2001 and three months ended June 30,
2003 and 2002, 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 expensive21Table of Contentsto 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.Our operating expenses may increase as we build our business and these
increased expenses may impact our ability to become profitable.We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance, sales,
marketing and management information systems departments and our design center
located in the Peoples Republic of China. For the fiscal years ended March
31, 2003, 2002 and 2001 and the three months ended June 30, 2003 and 2002,
research and development expenses represented 402%, 107%, 51%, 286% and 395% of
our revenues, respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new products and
services. While we have implemented actions to reduce our operating expenses,
and our operating expenses may increase as a percentage of revenues if our
revenues decline. If our revenues do not increase, our business and results of
operations could suffer. We base our expense levels in part on our
expectations regarding future revenues. If our revenues for a particular
quarter are lower than we expect, we may be unable to proportionately reduce
our operating expenses for that quarter.22Table of ContentsWe depend on key personnel, the loss of whom would impair or inhibit the growth
of our business.Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on 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
23Table of Contentsfor our proprietary technologies and processes, and they do not prevent
independent third party development of competitive products. In addition, it
is difficult to monitor unauthorized use of technology, particularly in foreign
countries where laws may not protect our proprietary rights as fully as in the
United States.We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the claims we seek, if at all, or whether any patents we have or may receive
will be challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products.We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business.Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense
to us. Litigation would also divert the efforts of our technical and
management personnel, whether or not the litigation is determined in our favor.
Litigation could also require us to develop non-infringing technology or enter
into royalty or license agreements. These royalty or license agreements may
not be available on acceptable terms, including limitations on representations
and warranties regarding infringement and indemnification in the event of
infringement claims. Our failure or inability to develop non-infringing
technology, license the proprietary rights on a timely basis or receive
appropriate protection on licensed technology would harm our business.Regulation of our customers products may slow the process of introducing new
products and could impair our ability to compete.The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers.
Although our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products
are incorporated, are subject to direct government regulation. For example,
before they can be sold in the United States, advanced televisions and emerging
interactive displays must be tested and certified by Underwriters Laboratories
and meet FCC regulations. 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 RISKQuantitative and Qualitative Discussion of Market Interest Rate RiskFor 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. Our exposure to market
risk has not changed materially since March 31, 2003.24Table of Contents
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.
PART II: OTHER INFORMATION



ITEM 1: LEGAL PROCEEDINGSNoneITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDSNone
ITEM 3: DEFAULT UPON SENIOR SECURITIESNone
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERSNone
ITEM 5: OTHER INFORMATIONNone25Table of Contents




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits



|               |  |                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |                                                                                                        
|               |  |                                                                                                        
|31.1           |  | Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|31.2           |  | Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|32.1           |  | Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|32.2           |  | Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On May 8, 2002, the Company filed a Current Report on Form 8-K to furnish
the press release issued on May 6, 2003 entitled Tvia, Inc. Reports Results
for Fourth Quarter and Year Ended March 31, 2003.




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. |     |                                 
|                |  |            |     |                                 
|August 13, 2003 |  | By:        | /s/ | Arthur Nguyen                   
|                |  |            |     |                                 
|                |  |            |     | Arthur Nguyen                   
|                |  |            |     | Chief Financial Officer         
|                |  |            |     | (Principal Financial Officer and
|                |  |            |     | Duly Authorized Signatory)      

26



---



##### Table of Contents






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 June 30, 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.

|                      |  |     |  |                                      
|--------------------- |  | --- |  | -------------------------------------
|Date: August 13, 2003 |  | By: |  | /s/ Eli Porat                        
|                      |  |     |  |                                      
|                      |  |     |  | Eli Porat                            
|                      |  |     |  | Chief Executive Officer and President
|                      |  |     |  |                                      
|Date: August 13, 2003 |  | By: |  | /s/ Arthur Nguyen                    
|                      |  |     |  |                                      
|                      |  |     |  | Arthur Nguyen                        
|                      |  |     |  | Chief Financial Officer              

27



---



##### Table of Contents






EXHIBIT INDEX



|               |  |                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |                                                                                                        
|               |  |                                                                                                        
|31.1           |  | Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|31.2           |  | Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|32.1           |  | Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                        
|32.2           |  | Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.