<PAGE>
                                  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 December 31, 2001

                                       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 January 31, 2002, 22,027,938 shares of the Registrant's Common Stock, $0.001
par value per share, were outstanding.


<PAGE>
                            TVIA, INC. AND SUBSIDIARY

                                    FORM 10-Q

                    QUARTERLY PERIOD ENDED DECEMBER 31, 2001

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                                  <C>
Part I:    Financial Information

Item 1:    Financial Statements

           Condensed Consolidated Balance Sheets at December 31, 2001 and March 31, 2001              3

           Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
           December 31, 2001 and 2000                                                                 4

           Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
           December 31, 2001 and 2000                                                                 5

           Notes to Condensed Consolidated Financial Statements (Unaudited)                           6

Item 2:    Management's Discussion and Analysis of Financial Condition and Results of Operations     10

Item 3:    Quantitative and Qualitative Disclosures About Market Risk and Interest Rate Risk         21

Part II:    Other Information

Item 1:    Legal Proceedings                                                                         22

Item 2:    Change in Securities and Use of Proceeds                                                  22

Item 3:    Default upon Senior Securities                                                            22

Item 4:    Submission of Matters to Vote of Security Holders                                         22

Item 5:    Other Information                                                                         22

Item 6:    Exhibits and Reports on Form 8-K                                                          23

Signature                                                                                            23

Exhibit Index                                                                                        24
</TABLE>


                                       2


<PAGE>
                          PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                            TVIA, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in thousands)


<TABLE>
<CAPTION>
                                                            DECEMBER 31,    MARCH 31,
                                                               2001           2001
                                                            ------------    ---------
                                                            (Unaudited)
<S>                                                         <C>             <C>
ASSETS
Current Assets:

     Cash and cash equivalents                               $  8,392       $ 21,267
     Short-term investments                                    30,072         25,415
     Accounts receivable, net                                     571          1,941
     Inventories                                                1,455          4,343
     Other current assets and prepaid expenses                  1,173          1,352
                                                             --------       --------
        Total current assets                                   41,663         54,318

Property and Equipment, at cost:                                5,475          3,507
    Less accumulated depreciation and amortization             (2,293)        (1,533)
                                                             --------       --------
                                                                3,182          1,974
Other Assets                                                    2,491          1,143
                                                             --------       --------
        Total assets                                         $ 47,336       $ 57,435
                                                             ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Accounts payable                                         $    706       $  1,132
    Accrued liabilities and other                               2,162          2,881
                                                             --------       --------
        Total current liabilities                               2,868          4,013

Commitments and contingencies (Note 8)
Stockholders' Equity:
     Common stock                                                  22             22
     Additional paid-in-capital                                91,153         90,976
     Warrants to purchase common stock                          1,099          1,099
     Deferred stock compensation                                 (988)        (2,167)
     Accumulated comprehensive income                             160            148
     Accumulated deficit                                      (46,318)       (35,996)
     Treasury stock                                              (660)          (660)
                                                             --------       --------
        Total stockholders' equity                             44,468         53,422
                                                             --------       --------
        Total liabilities and stockholders' equity           $ 47,336       $ 57,435
                                                             ========       ========
</TABLE>


            See Notes to Condensed Consolidated Financial Statements.


                                       3


<PAGE>
                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per share amounts)

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                     DECEMBER 31,                   DECEMBER 31,
                                                               -----------------------       -----------------------
                                                                 2001           2000           2001           2000
                                                               --------       --------       --------       --------
<S>                                                            <C>            <C>            <C>            <C>
Total revenues                                                 $  4,210       $  3,254       $ 10,188       $ 11,118

Cost of revenues                                                  2,282          1,790          7,810          5,933
                                                               --------       --------       --------       --------
      Gross profit                                                1,928          1,464          2,378          5,185

Operating expenses:
      Research and development                                    3,244          1,943          9,156          4,867
      Sales, general and administrative                           1,212          1,767          3,845          4,013
      Amortization of deferred stock compensation                   393            681          1,179          2,035
                                                               --------       --------       --------       --------

Total operating expenses                                          4,849          4,391         14,180         10,915
                                                               --------       --------       --------       --------
      Operating loss                                             (2,921)        (2,927)       (11,802)        (5,730)

Other income, net:
      Interest income                                               401            866          1,480          1,334
      Interest expense                                               --             --             --            (78)
      Amortization of debt guarantee costs and other                 --             --             --           (327)
                                                               --------       --------       --------       --------

      Other income, net                                             401            866          1,480            929
                                                               --------       --------       --------       --------

      Net loss before extraordinary item                         (2,520)        (2,061)       (10,322)        (4,801)
      Extraordinary item, net of income taxes                        --             --             --            672
                                                               --------       --------       --------       --------
      Net loss                                                 $ (2,520)      $ (2,061)      $(10,322)      $ (5,473)
                                                               ========       ========       ========       ========

Dividend related to convertible preferred stock                $     --       $     --       $     --       $   (671)
                                                               --------       --------       --------       --------

      Net loss attributable to common stockholders             $ (2,520)      $ (2,061)      $(10,322)      $ (6,144)
                                                               ========       ========       ========       ========

Basic and diluted net loss attributable to
      common stockholders before extraordinary item            $  (0.12)      $  (0.10)      $  (0.48)      $  (0.37)
                                                               ========       ========       ========       ========
Basic and diluted net loss attributable to
      common stockholders after extraordinary item             $  (0.12)      $  (0.10)      $  (0.48)      $  (0.48)
                                                               ========       ========       ========       ========
Shares used in computing basic and diluted net loss
      attributable to common stockholders before and
      after extraordinary item                                   21,897         21,317         21,654         12,929
                                                               ========       ========       ========       ========
</TABLE>


            See Notes to Condensed Consolidated Financial Statements.


                                       4


<PAGE>
                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                     DECEMBER 31,
                                                               -----------------------
                                                                     (Unaudited)
                                                                 2001           2000
                                                               --------       --------
<S>                                                            <C>            <C>
Net cash used in operating activities                          $ (5,079)      $ (6,258)
                                                               --------       --------

Cash flows from investing activities:

        Purchases of available-for-sale investments              (4,657)        (8,109)
        Purchases of license technology                          (1,348)            --
        Purchases of property and equipment                      (1,968)          (840)
                                                               --------       --------
           Net cash used in investing activities                 (7,973)        (8,949)
                                                               --------       --------

Cash flows from financing activities:

        Proceeds from loans payable                                  --            159
        Payments on loans payable                                    --         (4,188)
        Proceeds from issuance of common stock                      177         56,261
        Restricted funds from stock subscription for
           convertible preferred stock                               --          3,075
        Acquisition of treasury stock                                --           (660)
                                                               --------       --------

           Net cash provided by financing activities                177         54,647
                                                               --------       --------

(Decrease)/Increase in cash and cash equivalents                (12,875)        39,440

Cash and cash equivalents at beginning of period                 21,267          3,789
                                                               --------       --------

Cash and cash equivalents at end of period                     $  8,392       $ 43,229
                                                               ========       ========
</TABLE>


            See Notes to Condensed Consolidated Financial Statements.


                                       5


<PAGE>
                            TVIA, INC. AND SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended December 31, 2001, are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2002. The 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, 2001, which are included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on June 29, 2001.

        The balance sheet at March 31, 2001 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT POLICIES

Consolidation

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

Cash and Cash Equivalents and Short-Term Investments

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


<TABLE>
<CAPTION>
                                              As of December 31, 2001 (in thousands)
                                              -------------------------------------
                                                           Aggregated
                                               Amortized      Fair      Unrealized
                                                  Cost        Value        Gain
                                              ----------   ----------   -----------
<S>                                           <C>          <C>          <C>
U.S. government and agency securities           $ 2,401      $ 2,404      $     3

U.S. corporate and bank debt                     27,511       27,668          157
                                                -------      -------      -------
                                                $29,912      $30,072      $   160
                                                =======      =======      =======
</TABLE>


                                       6


<PAGE>
Revenue Recognition

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. The Company has reviewed its revenue recognition policies
and determined that they are in compliance with SAB 101. Accordingly, there was
no impact on the Company's financial statements from adopting SAB 101 in fiscal
2001.

        Revenue consists primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company has agreements with certain distributors
which do not contain rights of return and price protection rights. However, a
limited number of distributor agreements do contain rights to return slow moving
inventory or discontinued products held in inventory by the distributor which
has not sold through to an end user. The Company defers revenue recognition
relating to sales to all distributors until such products are sold through to
the end customer by the distributor, or if sell through information is not
available from the distributor, when cash is received from the distributor.
Receipts of cash from those distributors which do not provide sell through
information have historically been indicative of sell through to an end user by
that distributor.

        The Company also sells software development kits and application modules
to OEMs. The Company recognizes sales of software development kits and
application modules in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended. Under SOP 97-2, software revenues are recognized when
an agreement has been executed or a definite 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 collection is
probable. For each of the three and nine months ended December 31, 2001 and
2000, revenues from the sale of software development kits and application
modules were less than 10% of net revenues.

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 and in short-term investment
securities. 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.

Comprehensive Loss

        Comprehensive loss includes unrealized investment gains (losses) that
have been previously excluded from net loss and reflected instead as a component
of accumulated comprehensive loss in stockholders' equity. A summary of
comprehensive loss is as follows (in thousands):


<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                        DECEMBER 31,                  DECEMBER 31,
                                                                  -----------------------       -----------------------
                                                                    2001           2000           2001           2000
                                                                  --------       --------       --------       --------
<S>                                                               <C>            <C>            <C>            <C>
Net loss                                                          $ (2,520)      $ (2,061)      $(10,322)      $ (6,144)
Unrealized (loss) gain on available-for-sale investments               (50)            37             12             37
                                                                  --------       --------       --------       --------
Comprehensive loss                                                $ (2,570)      $ (2,024)      $(10,310)      $ (6,107)
                                                                  ========       ========       ========       ========
</TABLE>


Recent Accounting Pronouncements

        In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Financial Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was
amended by SFAS No.138, "Accounting for Certain Derivative Financial Instruments
and Certain Hedging Activities", which amended or modified certain issues
discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either as an asset or a liability measured at
its fair value. The statements also require that changes in the derivative's
fair value be recognized currently in earnings unless specific


                                       7


<PAGE>
hedge accounting criteria are met. The Company does not engage in derivative
instruments or hedging activities. Accordingly, there was no impact on the
Company's financial statements from the adoption of SFAS No. 133 and SFAS. 138.

        In July 2001, the FASB issued SFAS No. 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment, applying a fair-value based test.
Additionally, an acquired intangible asset should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Other
intangible assets will continue to be valued and amortized over their estimated
lives; in-process research and development will continue to be written off
immediately. The Company does not expect that the implementation of these
guidelines will have a material impact on its financial position or results of
operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes one
accounting model to be used for long-lived assets to be disposed of by sale, and
broadens the presentation of discontinued operations to include more disposal
operations. SFAS 144 supersedes both SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and the accounting and reporting provisions of APB Opinion No. 30. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the adoption of SFAS No. 144 to have a material impact on its
financial position or the results of its operations.

NOTE 3 - INVENTORIES

        Inventories are stated at the lower of cost (first-in, first-out) or
market value and include materials, labor and overhead. The Company periodically
evaluates the quantities on hand relative to current and historical selling
prices and historical and projected sales volume. Based on these evaluations,
provisions are made to reduce excess inventories down to their net realizable
value. Estimates of net realizable value can change in the near term.
Inventories consist of the following (in thousands):


<TABLE>
<CAPTION>
                        December 31,     March 31,
                           2001            2001
                        ------------     ---------
<S>                     <C>              <C>
Raw material              $  265          $2,598
Work-in-process              258             243
Finished goods               932           1,502
                          ------          ------
                          $1,455          $4,343
                          ======          ======
</TABLE>


NOTE 4 -- OTHER ASSETS

        Other assets consist of technology licenses acquired relating to the
Company's existing and future products. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of, " the Company periodically evaluates the
carrying amount of its long-lived assets when events of changes in product
lifecycles have occurred which would indicate the carrying amount of such assets
may not be fully recoverable. To the extend that actual market conditions differ
significantly from management's estimates, the estimated fair market value of
our long-lived assets could change which may result in a future impairment
charge.

NOTE 5 - NET LOSS PER SHARE

        Net loss per share has been calculated in accordance with the FASB
Statement No. 128, "Earnings per Share" ("SFAS 128"). 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 redeemable convertible
preferred stock, convertible preferred stock, stock options and warrants are
antidilutive.


                                       8


<PAGE>
        The following table sets forth the computation of basic and diluted net
loss per share attributable to common stockholders (in thousands except per
share amounts):


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                     DECEMBER 31,                  DECEMBER 31,
                                                               -----------------------       -----------------------
                                                                 2001           2000           2001           2000
                                                               --------       --------       --------       --------
<S>                                                            <C>            <C>            <C>            <C>
Historical:
Net loss attributable to common stockholders                   $ (2,520)      $ (2,061)      $(10,322)      $ (6,144)

Basic and diluted:
  Weighted average shares of common stock
       outstanding                                               22,251         21,891         21,977         13,801
  Less: Weighted average shares of common
      stock subject to repurchase                                  (354)          (574)          (323)          (872)
                                                               --------       --------       --------       --------
Weighted average shares used in computing
      basic and diluted net loss per share                       21,897         21,317         21,654         12,929
                                                               ========       ========       ========       ========

Basic and diluted net loss per share attributable to
      common stockholders                                      $  (0.12)      $  (0.10)      $  (0.48)      $  (0.48)
                                                               ========       ========       ========       ========
</TABLE>


NOTE 6 - INCOME TAXES

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

        As a result of the Company's continued losses, there was no provision
for income taxes for the three and nine months ended December 31, 2001 and 2000.

NOTE 7 - SIGNIFICANT CUSTOMERS

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


<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                     DECEMBER 31,                DECEMBER 31,
                               ----------------------       ----------------------
                                 2001          2000           2001          2000
                               --------      --------       --------      --------
<S>                            <C>           <C>            <C>           <C>
Customer A                           76%            *             60%            *
Customer B                           12%           20%            17%           11%*
Customer C                            *             *              *            12%
Customer D                            *            26%             *            13%
Customer E                            *            17%             *             *
Customer F                            *            11%             *             *
(* = less than 10%)*
</TABLE>


The loss of one or more major distributors or customers could have a material
adverse effect on our business, financial condition and results of operations.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

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


                                       9


<PAGE>
NOTE 9. STOCK OPTION EXCHANGE OFFER

        In September 2001, the Company negotiated with certain employees for the
voluntarily exchange of certain stock options grants. These employees exchanged
certain of their existing options to purchase the Company's common stock for new
options to purchase an equal number of shares of the Company's common stock.
Approximately 621,528 options with a weighted-average exercise price of $7.26
were surrendered. During September 2001, those options were accepted and
cancelled by the Company. The Company will undertake to grant new stock options,
in lieu of the surrendered options, on a one-for-one basis to the employees. The
new options will not be granted until at least six months and one day after
acceptance of the old options for exchange and cancellation, and will not be
granted to any employee who terminates employment during that six-month period.
The exercise price of the new options will be the last reported trading price of
the Company's common stock on the grant date and will not be exercisable until
the employee has completed one year of service after the date of grant of the
new options.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
financial statements and notes thereto set forth in Item 1 of this report. The
statements contained in this report that are not purely historical are
forward-looking statements, including statements regarding our expectations,
beliefs, intentions, or strategies regarding the future. When used in this
discussion, the words "expects", "anticipates", "estimates" and similar
expressions are intended to identify forward-looking statements. These
statements relate to future periods and include statements as to expected
revenues, operating expenses, net loss, gross profit; reasons for decreased
revenues and the slowdown of the interactive television industry; the effect of
certain accounting principles; uses and sufficiency or our available cash, cash
equivalents and short-term investments; reliance on original equipment
manufacturers; effect of changes in foreign currency exchange rates; the ability
to commercialize new technologies; the performance and utility of products and
services; ability to compete and competitors; and anticipated uses of funds, are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed below, as well as risks relating to as
slower than anticipated emergence of the interactive television market; the
effect of the terrorist attacks in the United States and any resulting conflicts
or similar events worldwide on our customers' demand of our products; general
economic conditions and specific conditions in the markets we address;
dependence on a key customer; the loss of a key customer; our ability to
specify, develop or acquire, complete, introduce, market and transition to
volume production new products and technologies in a timely manner; the volume
of our product sales and pricing concessions on volume sales; the qualification,
availability and pricing of competing products and technologies and the
resulting effects on sales and pricing of our products; fluctuations in the
manufacturing yields of our third party semiconductor foundries and other
problems or delays in the fabrication, assembly, testing or delivery of our
products; changes in our products or customer mix; the risk that excess
inventory may result in write-offs, price erosion and decreased demand; the
level of orders received that can be shipped in a fiscal quarter; the impact of
foreign currency exchange rates; and the matters discussed in "Factors that May
Affect Future Results." These forward-looking statements speak only as of the
date hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based.

Overview

        We design, develop and market semiconductors for the broadband set-top
box, digital television and information access device markets. Our semiconductor
solutions process rich media content streams available from the Internet and
from television and enable consumers to have a customized and interactive
television viewing experience.

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


                                       10


<PAGE>
        Approximately 19%, 31%, 71% and 77% of our total revenues for the three
and nine months ended December 31, 2001 and 2000, respectively, were derived
from customers located outside the United States. All of our revenues to date
have been denominated in United States dollars. Historically, a relatively small
number of customers and distributors have accounted for a significant portion of
our product sales. Our top two customers accounted for 88% and 77% of total
revenues in the three and nine months ended December 31, 2001, respectively;
however, we anticipate that sales to these two customers in future periods will
not be at the level experienced in the quarter ended December 31, 2001. Our top
customers, including distributors, who accounted for ten percent or more of
total revenues, represented 74% and 37% of total revenues for the same periods
ended December 31, 2000, respectively.

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

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

        We have sustained losses on a quarterly and annual basis since
inception. As of December 31, 2001, we had an accumulated deficit of
approximately $46.3 million. These losses resulted from significant costs
incurred in the planning and development of our technology and services and from
significant marketing costs.

        We have a subsidiary in the People's Republic of China which performs
research and development, and a branch office in Taiwan which is primarily
engaged in sales efforts.

Results of Operations

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


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                                               DECEMBER 31,                   DECEMBER 31,
                                                        ------------------------        ------------------------
                                                          2001            2000            2001            2000
                                                        --------        --------        --------        --------
<S>                                                     <C>             <C>             <C>             <C>
Revenues                                                   100.0%          100.0%          100.0%          100.0%
Cost of revenues                                            54.2            55.0            76.7            53.4
                                                        --------        --------        --------        --------
Gross profit                                                45.8            45.0            23.3            46.6
Operating expenses:
Research and development                                    77.1            59.7            89.9            43.8
Sales, general and administrative                           28.8            54.3            37.7            36.1
Amortization of deferred stock compensation                  9.3            20.9            11.6            18.3
                                                        --------        --------        --------        --------
Total operating expenses                                   115.2           134.9           139.2            98.2
                                                        --------        --------        --------        --------
Operating loss                                             (69.4)          (89.9)         (115.9)          (51.6)
Interest income                                              9.5            26.6            14.6            12.0
Interest expense                                              --              --              --            (0.7)
Amortization of debt guarantee costs and other                --              --              --            (2.9)
                                                        --------        --------        --------        --------
Other income, net                                            9.5            26.6            14.6             8.4
                                                        --------        --------        --------        --------
Net loss before extraordinary item                         (59.9)          (63.3)         (101.3)          (43.2)
Extraordinary item                                            --              --              --             6.0
                                                        --------        --------        --------        --------
Net loss after extraordinary item                          (59.9)%         (63.3)%        (101.3)%         (49.2)%
                                                        --------        --------        --------        --------
</TABLE>


        Revenues. Revenues increased to $4.2 million in the three months ended
December 31, 2001, compared to $3.3 million in the same period in fiscal 2001
due to increased shipments to Prediwave Corporation. Revenues in the nine months
ended December 31, 2001 decreased to $10.2 million, compared to $11.1 million in
the nine months ended December 31, 2000. This decrease was primarily due to weak
general economic conditions in fiscal 2002 and a slower than anticipated
emergence of the interactive television market. Revenues from two customers,
Prediwave Corporation and Motorola Broadband (formerly General Instruments,
Inc.), accounted for 76%, 12%, 60% and 17%, of total revenues for the three and
nine months ended


                                       11


<PAGE>
December 31, 2001, respectively. We anticipate that Prediwave Corporation will
continue to be a significant customer in the three months ended March 31, 2002;
however, we anticipate that such sales will not be at the level of the quarter
ended December 31, 2001.

        Gross margin. Cost of goods sold in the three months ended December 31,
2001 was flat at 54.2%, compared to 55.0% in the same period in fiscal 2001.
Cost of goods sold in the nine months ended December 31, 2001 was 76.7%,
compared to 53.4% in the same period in fiscal 2001. Cost of goods sold in the
nine months ended December 31, 2001 included an inventory charge of $2.1 million
related to slow moving inventory impacted by the reduced revenue levels in the
interactive television market and product transition within the 5000 product
family. Excluding the inventory charge, gross margin decreased to 44.0% in the
nine months ended December 31, 2001 from 46.6% in the same period ended December
31, 2000. This decrease resulted primarily from unabsorbed overhead and lower
production yield issues on one of our product families in the first six months
of fiscal 2002. 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 broadband network and the Internet. Research and
development expenses increased to $3.2 million and $9.2 million in the three and
nine months ended December 31, 2001, respectively, from $1.9 million and $4.9
million in the three and nine months ended December 31, 2000, respectively. The
increases in absolute dollars were primarily attributable to an increase in the
number of research and development personnel as compared to the same periods in
fiscal 2001, higher levels of depreciation resulting from the acquisition of
computers, lab equipment and software, and the expansion of our research and
development operation in the People's Republic of China. Our research and
development activities in the People's Republic of China provide software and
application specific integrated circuit development support to our domestic
operations. We employed 285 engineers and supporting staff in the People's
Republic of China at December 31, 2001. Research and development expenses as a
percentage of total revenues were 77.1% and 89.9% in the three and nine months
ended December 31, 2001 compared to 59.7% and 43.8% in the same periods of
fiscal 2001, respectively. The increase in research and development expenses as
a percentage of revenues in the three and nine months ended December 31, 2001
compared to the same periods of fiscal 2001 is attributable to research and
development expenses increasing at a much faster rate than revenues in these
periods.

        Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses were $1.2 million and $3.8 million in
the three and nine months ended December 31, 2001, respectively, compared to
$1.8 million and $4.0 million in the three and nine months ended December 31,
2000, respectively. The decrease in the three and nine months ended December 31,
2001 over the same period in fiscal 2001 is primarily due to higher marketing
trade show expenses incurred in the third quarter of fiscal 2001, and a
collection of $162,000 in the third quarter of fiscal 2002 of a receivable that
had previously been expensed as uncollectible. Sales, general and administrative
expenses as a percentage of total revenues was 28.8% and 37.7% in the three and
nine months ended December 31, 2001, respectively, compared to 54.3% and 36.1%
in the same periods of fiscal year 2001, respectively. In the next few quarters,
we expect absolute sales, general and administrative expenses to remain
approximately at the expense level incurred in the three months ended December
31, 2001.

        Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$393,000, $1,179,000, $681,000 and $2,035,000 in the three and nine months ended
December 31, 2001 and 2000, respectively.

        Other income, net. Other income, net consists primarily of interest
income, interest expense and amortization of guarantee debt costs. Other income,
net was $401,000 and $1,480,000 for the three and nine months ended December 31,
2001, respectively, compared to other income, net of $866,000 and $929,000 for
the three and nine months ended December 31, 2000, respectively. Other income,
net generated in the three and nine months ended December 31, 2001, was
primarily a result of interest earned from our investments which increased
significantly in fiscal 2001 as a result of our initial public offering in
August 2000. Other income, net, in the three and nine months ended December 31,
2000 consisted of interest income, partially offset by the amortization of
deferred compensation related to warrants and options issued to guarantors of
our debt, and interest expense on this debt. The decrease in other income, net
in the three months ended December 31, 2001 from the three months ended December
31, 2000, was due to a lower amount of cash and investments and a lower return
on our investments.

        Provision for income taxes. We are taxed in our jurisdictions of
operations based on the extent of taxable income generated in each jurisdiction.
For income tax purposes, revenues are attributed to the taxable jurisdiction
where the sales transactions generating the revenues were initiated. We incurred
operating losses in the three and nine months ended


                                       12


<PAGE>
December 31, 2001 and 2000, and therefore made no provision for income tax in
these periods.

        Preferred stock dividend. During the nine months ended December 31,
2000, we recorded a preferred stock dividend of $671,000 representing the value
of the beneficial conversion feature on the issuance of convertible preferred
stock in April 2000. The beneficial conversion was calculated based on the
difference between the conversion price of $7.50 per share and the estimated
fair value of the common stock at that date.

Liquidity and Capital Resources

        During the nine months ended December 31, 2001, we used $5.1 million of
cash and cash equivalents in our operating activities as compared to $6.3
million during the nine months ended December 31, 2000. The improvement in cash
usage was mainly due to a significant decrease in receivables and inventories
during the nine months ended December 31, 2001 as compared to a significant
increase in the nine months ended December 31, 2000.

        Technology acquisitions and capital equipment purchases in the nine
months ended December 31, 2001 totaled $1.3 million and $2.0 million,
respectively, compared to none and $840,000 in the nine months ended December
31, 2000, respectively.

        In the third quarter of fiscal 2002, the Company's Board of Directors
approved a stock repurchase program of up to 200,000 shares of its common stock.
There has been no common stock repurchased as of December 31, 2001.

        At December 31, 2001, our principal source of liquidity consisted of
cash and cash equivalents and short-term investments totaling $38.5 million.
Working capital at December 31, 2001 was $38.8 million.

        Based on our current expectations, we believe that our cash and cash
equivalents and short-term investment balances will be sufficient to meet our
working capital and capital requirements through the next twelve months. We may
utilize cash to acquire or invest in complementary businesses or to obtain the
use of complementary technologies.

Inflation

        The impact of inflation on our business has not been material for the
periods ended December 31, 2001 and 2000.

Recent Accounting Pronouncements

        In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Financial Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was
amended by SFAS No.138, "Accounting for Certain Derivative Financial Instruments
and Certain Hedging Activities", which amended or modified certain issues
discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either as an asset or a liability measured at
its fair value. The statements also require that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company does not engage in derivative instruments or
hedging activities. Accordingly, there was no impact on the Company's financial
statements from the adoption of SFAS No. 133 and SFAS. 138.

        In July 2001, the FASB issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment, applying a fair-value based test.
Additionally, an acquired intangible asset should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Other
intangible assets will continue to be valued and amortized over their estimated
lives; in-process research and development will continue to be written off
immediately. The Company does not expect that the implementation of these
guidelines will have a material impact on its financial position or results of
operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes one
accounting model to be used for long-lived assets to be disposed of by sale, and
broadens the presentation of discontinued operations to include more disposal
operations. SFAS 144 supersedes both SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and the accounting and reporting provisions of APB Opinion No. 30. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The


                                       13


<PAGE>
Company does not expect the adoption of SFAS No. 144 to have a material impact
on its financial position or the results of its operations.

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 broadband set-top box, digital television and information access
device markets in 1996. We have incurred net losses of approximately $46.3
million from our inception in March 1993 through December 31, 2001. 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.

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,
2001, 2000, 1999 and for the three and nine months ended December 31, 2001,
research and development expenses represented 50.4%, 48.0%, 220.6%, 77.1% and
89.9% of our revenues, respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new products and
services, and on expanding our research and development. We expect that our
operating expenses will continue to increase in absolute dollars and may
increase as a percentage of revenues. 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.

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 semiconductor solutions 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 broadband
set-top boxes, digital televisions and information access devices 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 broadband set-top boxes, digital televisions, information access
devices and other products that are used for interactive television develops,
demand for products incorporating our semiconductor solutions may not be
sufficient to sustain our business.

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

        Historically we have been, and we expect to continue to be, dependent on
a relatively small number of OEMs for a significant portion of our total
revenues. Sales to Prediwave Corporation and Motorola Broadband (formerly
General Instruments, Inc.), OEMs, accounted for approximately 76%, 12%, 60% and
17% of our total revenues for the three and nine months ended December 31, 2001,
respectively. In the three months ended December 31, 2000, Kanematsu
Semiconductor Corp., a distributor, Motorola Broadband, Allwell Technology, Inc,
and Flextronics International, Ltd., OEMs, accounted for 26%, 20%, 17% and 11%
of total revenues, respectively. In the nine months ended December 30, 2000,
Kanematsu Semiconductor Corp. and Weikeng Industries, Inc., Ltd, distributors,
and Motorola Broadband, an OEM, accounted for 13%, 12% and 11% of our total
revenues, respectively. We may not be able to retain our two largest customers
or to obtain additional key accounts. Prediwave Corporation, one of our largest
customers, has not placed an order for delivery of our products after the fourth
quarter of fiscal 2002. While we expect that Prediwave Corporation will place
orders for additional products, we anticipate that sales to Prediwave
Corporation in the quarter ended March 31, 2002 and in future periods will not
be at the level experienced in the quarter ended December 31, 2001. Any
reduction or delay in sales of our products to


                                       14


<PAGE>
Prediwave or another 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 they have sold our products to
their customers. We recognize revenues on sales to our OEM customers when we
ship our products to the OEM. We generally permit our distributors to return
products to us. If our customers cancel or defer significant purchase orders or
our distributors return our products, our inventories would increase and our
revenues would decrease, which would materially harm our business as increases
in inventory reserves could be required. Refusal of OEM customers to accept
shipped products or delays or difficulties in collecting accounts receivable
could have an adverse effect on our business.

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

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

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

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

        We operate in a highly competitive, quickly changing environment marked
by new and emerging products and technologies. Our success depends on our
ability to develop, introduce and successfully market new products and enhance
our existing products in the broadband set-top box, digital television and
information access device 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 emerging markets for
broadband set-top boxes, digital televisions and information access devices. Our
future operating


                                       15


<PAGE>
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 in the semiconductor industry market;

        -       fluctuations in the volume of product sales, changes in product
                mix and pricing concessions on sales;

        -       the timing, rescheduling or cancellation of significant customer
                orders;

        -       the timing of investments in, and the results of, research and
                development;

        -       changes in industry standards;

        -       introduction of interactive television services by service
                providers;

        -       availability of manufacturing capacity and raw materials;

        -       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 broadband set-top boxes, digital televisions and
information access devices 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,
and TeraLogic, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the broadband
set-top box, digital television and information access device markets become
more established. A number of companies, including International Business
Machines Corporation, STMicroelectronics N.V., National Semiconductor
Corporation, Equator Technologies, Inc. and TeleCruz Technology, Inc., have
announced that they are developing or plan to introduce competing


                                       16


<PAGE>
products in the broadband set-top box, digital television and information access
markets which could result in significant competition.

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

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

        We do not own or operate our own fabrication facility. We currently
depend upon two outside foundries, Taiwan Semiconductor Manufacturing
Corporation, or TSMC, and United Manufacturing Corporation, or UMC. 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. 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. 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 the nine months ended December 31, 2001, our
gross margin decreased in part to unabsorbed overhead and lower production
yields on one of our product families in the first six months of fiscal 2002. In
addition, the foundries we use are located in a seismically active area, and
earthquakes have caused these foundries to close for repairs, resulting in a
delay in manufacturing our products.

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


                                       17


<PAGE>
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. In the nine months ended December 31, 2001, our gross margin
decreased in part to unabsorbed overhead and lower production yields on one of
our product families in the first six months of fiscal 2002. 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 67%, 71%, 81%, 19% and 31% of our total
revenues in fiscal years 2001, 2000, 1999 and for the three and nine months
ended December 31, 2001, 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 could also experience greater difficulties collecting
accounts receivable from customers outside of the United States. Accordingly,
our operations and revenues are subject to a number of risks associated with
foreign commerce.

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

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

        The primary customers for our products are companies in the broadband
set-top box, digital television and information access 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, is currently experiencing
a slowdown, which may negatively impact our business and operating results. Some
analysts have predicted that a further decline in the United States economy will
result from the terrorist attacks in the United States war. If the economy
continues to decline as a result of the recent economic, political and social
turmoil, existing and perspective customers may reduce their design budgets or
delay implementation of our products, which could harm our


                                       18


<PAGE>
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.

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

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

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

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

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

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

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

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


                                       19


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

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

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

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

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

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

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

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

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

We may experience power blackouts and higher electricity prices as a result of
California's current energy crisis, which could disrupt our operations and
increase our expenses.


                                       20


<PAGE>
        California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses which will increase our cost
of revenues and decrease our gross profits. If blackouts interrupt our power
supply, we may be temporarily unable to continue operations at our California
facilities. Any such interruption in our operations could delay our ability to
develop new products, or to do the final testing on our products. Also, such
disruptions could damage our reputation and result in lost revenue, either of
which could substantially harm our business and results of operations

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk

        Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in short term investment
grade government and corporate securities. These securities will be highly
liquid and generally mature within 12 months from the purchase date. Due to the
short maturities of our investments, the carrying value should approximate the
fair value. In addition, we do not use our investments for trading or other
speculative purposes. We have performed an analysis to assess the potential
effect of reasonably possible near term changes in interest and foreign currency
exchange rates. The effect of any change in foreign currency exchange rates is
not expected to be material to our results of operations, cash flows or
financial condition. Due to the short duration of our investment portfolio, an
immediate 10% change in interest rates would not have a material effect on the
fair market value of our portfolio. Therefore, we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risk

        We are an international company, selling our products globally and, in
particular, in Japan, Korea, the People's Republic of China and Taiwan. Although
we transact our business in United States dollars, we cannot assure you that
future fluctuations in the value of the United States dollar will not affect the
competitiveness of our products, gross profits realized, and results of
operations. Further, we incur expenses in the People's Republic of China, Taiwan
and other countries that are denominated in currencies other than United States
dollars. We cannot estimate the effect that an immediate 10% change in foreign
currency exchange rates would have on our future operating results or cash flows
as a direct result of changes in exchange rate. However, we do not believe that
we currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any derivative
financial instruments.


                                       21


<PAGE>
                           PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

        None

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

        None

ITEM 3: DEFAULT UPON SENIOR SECURITIES

        None

ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        None

ITEM 5: OTHER INFORMATION

        None


                                       22


<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits


<TABLE>
<CAPTION>
      Exhibit No.   Exhibit Description
      -----------   -------------------
<S>                 <C>
        10.18       Option agreement between Tvia, Inc. and Eli Porat dated November
                    30, 2001

        10.19       Option agreement between Tvia, Inc. and Eli Porat dated November
                    30, 2001
</TABLE>


        (b) Reports on Form 8-K

        The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 2001.

SIGNATURE

        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.

February 14, 2002                       By:      /s/ Michael Hoberg
                                           -------------------------------------
                                                     Michael Hoberg
                                               Vice President of Finance,
                                          Chief Financial Officer and Secretary
                                            (Principal Financial Officer and
                                               Duly Authorized Signatory)

                                       23


<PAGE>
                   EXHIBIT INDEX TO TVIA, INC. AND SUBSIDIARY

                          QUARTERLY REPORT ON FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>
      Exhibit No.   Exhibit Description
      -----------   -------------------
<S>                 <C>
        10.18       Option agreement between Tvia, Inc. and Eli Porat dated November
                    30, 2001

        10.19       Option agreement between Tvia, Inc. and Eli Porat dated November
                    30, 2001
</TABLE>


                                       24