##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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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, 2002

or

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

For the transition period from      to

Commission File Number 0-30539

TVIA, INC.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 77-0549628
(I.R.S. employer
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



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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, 2003, 21,979,981 shares of the Registrants Common Stock,
$0.001 par value per share, were outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1: FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                              | ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4  CONTROLS AND PROCEDURES                                                             
|PART II: OTHER INFORMATION   
|                              | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3: DEFAULT UPON SENIOR SECURITIES                                                       
|                              | ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                    
|                              | ITEM 5: OTHER INFORMATION                                                                    
|                              | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|                              | CERTIFICATIONS PURSUANT TO THE SARBANES-OXLEY ACT OF 2002                                    
|                              | CERTIFICATION                                                                                
|Exhibit Index                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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TVIA, INC. AND SUBSIDIARY

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER
31, 2002

INDEX

| |      | 
| | ---- | 
| | Page
| |     

|Part I: Financial Information                                                                
|---------------------------------------------------------------------------------------------
|Item 1: Financial Statements                                                                 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4: Controls and Procedures                                                              
|Part II: Other Information                                                                   
|Item 1: Legal Proceedings                                                                    
|Item 2: Change in Securities and Use of Proceeds                                             
|Item 3: Default upon Senior Securities                                                       
|Item 4: Submission of Matters to Vote of Security Holders                                    
|Item 5: Other Information                                                                    
|Item 6: Exhibits and Reports on Form 8-K                                                     
|Signatures                                                                                   
|Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                     
|Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                     

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PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

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

(in thousands)


|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |       |        | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ------- | ------------ | ------ | --------- | ------- | ----- | ------ | 
|                                       |  |                                                                                                               |                                      |                                            |         | DECEMBER 31, |        | MARCH 31,
|                                       |  |                                                                                                               |                                      |                                            |         | 2002         |        | 2002     
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |          
|ASSETS                                 |  |                                                                                                               |                                      |                                            |         |              |        |          
|Current assets:                        |  |                                                                                                               |                                      |                                            |         |              |        |          
|                                       |  | Cash and cash equivalents                                                                                     |                                      | $                                          | 3,071   |              |        | $         | 6,445   |      
|                                       |  | Short-term investments                                                                                        |                                      |                                            | 23,300  |              |        |           | 29,060  |      
|                                       |  | Accounts receivable, net                                                                                      |                                      |                                            | 143     |              |        |           | 164     |      
|                                       |  | Inventories                                                                                                   |                                      |                                            | 1,125   |              |        |           | 1,510   |      
|                                       |  | Other current assets and prepaid expenses                                                                     |                                      |                                            | 751     |              |        |           | 1,262   |      
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      | Total current assets                       |         |              | 28,390 |           |         |       | 38,441 | 
|Property and equipment, net            |  |                                                                                                               | 2,900                                |                                            |         |              | 2,945  |          
|Other assets                           |  |                                                                                                               | 1,865                                |                                            |         |              | 2,001  |          
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      | Total assets                               |         | $            | 33,155 |           |         | $     | 43,387 | 
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|LIABILITIES AND STOCKHOLDERS EQUITY   |  |                                                                                                               |                                      |                                            |         |              |        |          
|Current liabilities:                   |  |                                                                                                               |                                      |                                            |         |              |        |          
|                                       |  |                                                                                                               | Accounts payable                     |                                            | $       | 198          |        |           | $       | 691   |       
|                                       |  |                                                                                                               | Accrued liabilities and other        |                                            |         | 1,845        |        |           |         | 1,771 |       
|                                       |  |                                                                                                               | Short-term portion of capital leases |                                            |         | 132          |        |           |         |      |       
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      | Total current liabilities                  |         |              | 2,175  |           |         |       | 2,462  | 
|Capital leases, net of short-term      |  |                                                                                                               | 174                                  |                                            |         |              |       |          
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      | Total liabilities                          |         |              | 2,349  |           |         |       | 2,462  | 
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|Commitments
and contingencies (Note 9) |  |                                                                                                               |                                      |                                            |         |              |        |          
|Stockholders equity:                  |  |                                                                                                               |                                      |                                            |         |              |        |          
|                                       |  | Common stock, $0.001 par value, 125,000 shares
authorized, 21,980 and 22,138 shares outstanding, respectively |                                      |                                            | 22      |              |        |           | 22      |      
|                                       |  | Additional paid-in-capital                                                                                    |                                      |                                            | 92,399  |              |        |           | 92,388  |      
|                                       |  | Deferred stock compensation                                                                                   |                                      |                                            |        |              |        |           | (595    | )    
|                                       |  | Accumulated comprehensive income                                                                              |                                      |                                            | 35      |              |        |           | 31      |      
|                                       |  | Accumulated deficit                                                                                           |                                      |                                            | (60,900 | )            |        |           | (50,261 | )    
|                                       |  | Treasury stock                                                                                                |                                      |                                            | (750    | )            |        |           | (660    | )    
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|Total stockholders equity             |  |                                                                                                               | 30,806                               |                                            |         |              | 40,925 |          
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      
|                                       |  |                                                                                                               |                                      | Total liabilities and stockholders equity |         | $            | 33,155 |           |         | $     | 43,387 | 
|                                       |  |                                                                                                               |                                      |                                            |         |              |        |           |         |      

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

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TVIA, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |       |         |   | 
|--------------------------------------------------- | ------------------------------------------- | -------------- | ------ | ----- | ------------------ | - | ----------------- | ----- | ------ | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | 
|                                                    |                                             |                |        |       | THREE MONTHS ENDED |   | NINE MONTHS ENDED
|                                                    |                                             |                |        |       | DECEMBER 31,       |   | DECEMBER 31,     
|                                                    |                                             |                |        |       |                    |   |                  
|                                                    |                                             |                |        |       | 2002               |   | 2001              |       | 2002   |   | 2001   
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |        
|Revenues                                            |                                             | $              | 438    |       |                    | $ | 4,210             |       |        | $ | 1,731   |       |         | $ | 10,188  |      
|Cost of revenues                                    |                                             |                | 304    |       |                    |   | 2,282             |       |        |   | 1,237   |       |         |   | 7,810   |      
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|                                                    | Gross profit                                |                |        | 134   |                    |   |                   | 1,928 |        |   |         | 494   |         |   |         | 2,378 |        
|Operating expenses:                                 |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|                                                    | Research and development                    |                |        | 1,880 |                    |   |                   | 3,244 |        |   |         | 7,303 |         |   |         | 9,156 |        
|                                                    | Sales, general and administrative           |                |        | 723   |                    |   |                   | 1,212 |        |   |         | 2,872 |         |   |         | 3,845 |        
|                                                    | Amortization of deferred stock compensation |                |        | 198   |                    |   |                   | 393   |        |   |         | 595   |         |   |         | 1,179 |        
|                                                    | Restructuring charges                       |                |        | 300   |                    |   |                   |      |        |   |         | 950   |         |   |         |      |        
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|Total operating expenses                            |                                             |                | 3,101  |       |                    |   | 4,849             |       |        |   | 11,720  |       |         |   | 14,180  |      
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|                                                    |                                             | Operating loss |        |       | (2,967             | ) |                   |       | (2,921 | ) |         |       | (11,226 | ) |         |       | (11,802 | )
|Interest income                                     |                                             |                | 149    |       |                    |   | 401               |       |        |   | 587     |       |         |   | 1,480   |      
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|Net loss                                            |                                             | $              | (2,818 | )     |                    | $ | (2,520            | )     |        | $ | (10,639 | )     |         | $ | (10,322 | )    
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|Basic and diluted net loss per share                |                                             | $              | (0.13  | )     |                    | $ | (0.12             | )     |        | $ | (0.48   | )     |         | $ | (0.48   | )    
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      
|Shares used in computing basic and diluted
net loss |                                             |                | 21,948 |       |                    |   | 21,897            |       |        |   | 21,943  |       |         |   | 21,654  |      
|                                                    |                                             |                |        |       |                    |   |                   |       |        |   |         |       |         |   |         |      

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

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TVIA, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |        |   |       |  
|------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------ | -------------------------------------------------------- | ------------------------------------------- | ----- | ----------------- | ------- | ------- | ------ | - | ----- | -
|                                                 |                                                     |                                                  |                                                          |                                             |       | NINE MONTHS ENDED
|                                                 |                                                     |                                                  |                                                          |                                             |       | DECEMBER 31,     
|                                                 |                                                     |                                                  |                                                          |                                             |       |                  
|                                                 |                                                     |                                                  |                                                          |                                             |       | 2002              |         | 2001   
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |        
|Cash flows from operating activities:            |                                                     |                                                  |                                                          |                                             |       |                   |         |        
|                                                 | Net loss                                            |                                                  | $                                                        | (10,639                                     | )     |                   | $       | (10,322 | )     
|                                                 |                                                     |                                                  | Adjustments to reconcile net loss to net operating cash: |                                             |       |                   |         |         |        |   |      
|                                                 |                                                     |                                                  |                                                          | Depreciation and amortization               |       |                   | 860     |         |        |   | 760   |  
|                                                 |                                                     |                                                  |                                                          | Amortization of deferred stock compensation |       |                   | 595     |         |        |   | 1,179 |  
|                                                 |                                                     |                                                  |                                                          | Change in assets and liabilities:           |       |                   |         |         |        |   |       |  
|                                                 |                                                     |                                                  |                                                          | Accounts receivable                         |       |                   | 21      |         |        |   | 1,370 |  
|                                                 |                                                     |                                                  |                                                          | Inventories                                 |       |                   | 385     |         |        |   | 2,888 |  
|                                                 |                                                     |                                                  |                                                          | Other assets and prepaid expenses           |       |                   | 652     |         |        |   | 179   |  
|                                                 |                                                     |                                                  |                                                          | Accounts payable                            |       |                   | (493    | )       |        |   | (426  | )
|                                                 |                                                     |                                                  |                                                          | Accrued liabilities and other               |       |                   | 380     |         |        |   | (719  | )
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Net cash used in operating activities            |                                                     |                                                  | (8,239                                                   | )                                           |       |                   | (5,091  | )      
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Cash flows from investing activities:            |                                                     |                                                  |                                                          |                                             |       |                   |         |        
|                                                 | Sales (purchases) of available-for-sale investments |                                                  |                                                          | 5,764                                       |       |                   |         | (4,645  | )     
|                                                 | Purchases of license technology                     |                                                  |                                                          | (5                                          | )     |                   |         | (1,348  | )     
|                                                 | Purchases of property and equipment                 |                                                  |                                                          | (815                                        | )     |                   |         | (1,968  | )     
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|                                                 |                                                     | Net cash provided (used) by investing activities |                                                          |                                             | 4,944 |                   |         |         | (7,961 | )
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Cash flows from financing activities:            |                                                     |                                                  |                                                          |                                             |       |                   |         |        
|                                                 | Proceeds from issuance of common stock              |                                                  |                                                          | 8                                           |       |                   |         | 177     |       
|                                                 | Repurchase of common stock                          |                                                  |                                                          | (87                                         | )     |                   |         |        |       
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|                                                 |                                                     | Net cash provided (used) by financing activities |                                                          |                                             | (79   | )                 |         |         | 177    |  
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Decrease in cash and cash equivalents            |                                                     |                                                  | (3,374                                                   | )                                           |       |                   | (12,875 | )      
|Cash and cash equivalents at beginning of period |                                                     |                                                  | 6,445                                                    |                                             |       |                   | 21,267  |        
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Cash and cash equivalents at end of period       |                                                     | $                                                | 3,071                                                    |                                             |       | $                 | 8,392   |        
|                                                 |                                                     |                                                  |                                                          |                                             |       |                   |         |         |       
|Non-cash items:                                  |                                                     |                                                  |                                                          |                                             |       |                   |         |        
|                                                 |                                                     | Non-cash financing activity                      |                                                          |                                             | 395   |                   |         |         |       |  

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

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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, 2002, are
not necessarily indicative of the results that may be expected for the fiscal
year ended March 31, 2003.

Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with general accepted accounting
principles have been condensed or omitted. It is suggested that these
accompanying unaudited condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements of Tvia, Inc.
and subsidiary (the Company) for the fiscal year ended March 31, 2002, which
are included in the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission on June 28, 2002.

NOTE 2  SUMMARY OF SIGNIFICANT POLICIES

Use of Estimates

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

Consolidation

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

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investment securities with
original maturities of three months or less from the date of purchase to be
cash and cash equivalents. Management determines the appropriate
classification of short-term investments at the time of purchase and evaluates
such designations as of each balance sheet date. To date, all short-term
investments have been 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 condensed consolidated statements of operations. The
value of the Companys investments by major security type is as follows:

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|                                 |  |                                        |        |       |  |            |        |            |  |   |    |  |  |   |   | 
|-------------------------------- |  | -------------------------------------- | ------ | ----- |  | ---------- | ------ | ---------- |  | - | -- |  |  | - | - | 
|                                 |  | As of December 31, 2002 (in thousands)
|                                 |  |                                       
|                                 |  |                                        |        |       |  | Aggregated |        |            |  |   |    |  |  |  
|                                 |  | Amortized                              |        | Fair  |  | Unrealized |        | Unrealized
|                                 |  | Cost                                   |        | Value |  | Gain       |        | Loss      
|                                 |  |                                        |        |       |  |            |        |           
|Government and agency securities |  | $                                      | 9,524  |       |  | $          | 9,529  |            |  | $ | 5  |  |  | $ |  | 
|U.S. corporate and bank debt     |  |                                        | 13,741 |       |  |            | 13,771 |            |  |   | 30 |  |  |   |  | 
|                                 |  |                                        |        |       |  |            |        |            |  |   |    |  |  |   |   | 
|                                 |  | $                                      | 23,265 |       |  | $          | 23,300 |            |  | $ | 35 |  |  | $ |  | 
|                                 |  |                                        |        |       |  |            |        |            |  |   |    |  |  |   |   | 

|                                 |  |                                     |        |       |  |            |        |            |  |   |    |  |  |   |     | 
|-------------------------------- |  | ----------------------------------- | ------ | ----- |  | ---------- | ------ | ---------- |  | - | -- |  |  | - | --- | 
|                                 |  | As of
March 31, 2002 (in thousands)
|                                 |  |                                    
|                                 |  |                                     |        |       |  | Aggregated |        |            |  |   |    |  |  |  
|                                 |  | Amortized                           |        | Fair  |  | Unrealized |        | Unrealized
|                                 |  | Cost                                |        | Value |  | Gain       |        | Loss      
|                                 |  |                                     |        |       |  |            |        |           
|Government and agency securities |  | $                                   | 2,249  |       |  | $          | 2,241  |            |  | $ |   |  |  | $ | (8) | 
|U.S. corporate and bank debt     |  |                                     | 26,780 |       |  |            | 26,819 |            |  |   | 39 |  |  |   |    | 
|                                 |  |                                     |        |       |  |            |        |            |  |   |    |  |  |   |     | 
|                                 |  | $                                   | 29,029 |       |  | $          | 29,060 |            |  | $ | 39 |  |  | $ | (8) | 
|                                 |  |                                     |        |       |  |            |        |            |  |   |    |  |  |   |     | 

Impairment of Long-Lived Assets

The Company performs reviews to determine whether the carrying value of
assets is impaired, based on comparison to undiscounted expected future cash
flows. If this comparison indicates that there is impairment, the impaired
asset is written down to fair value, which is typically calculated using a
weighted average of the market approach and discounted expected future cash
flows using a discount rate based upon the Companys weighted average cost of
capital. Impairment is based on the excess of the carrying amount over the
fair value of those assets.

Revenue Recognition

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

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

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, Accounting for Exit of
Disposal Activities. SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance set forth in Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and

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Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of SFAS No. 146 includes costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and certain termination benefits provided to
employees who are involuntarily terminated. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. Management does not
expect the adoption of SFAS No. 146 to have a significant impact on its
financial position or results of operations.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables,(EITF 00-21).
EITF 00-21 sets out criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple deliverable
arrangement. The criteria considers whether the delivered item has stand-alone
value to the customer, whether the fair value of the delivered item can be
reliably determined and the rights of returns for the delivered item. EITF
00-21 is effective for revenue arrangements entered into in the fiscal year
beginning April 1, 2003. The Company is currently assessing the impact of EITF
00-21 on its consolidated financial position and results of 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. It is possible that estimates of net realizable
value can change in the near term. Inventories consist of the following (in
thousands):

|                |  |              |       |           |  |   |       | 
|--------------- |  | ------------ | ----- | --------- |  | - | ----- | 
|                |  | December 31, |       | March 31,
|                |  | 2002         |       | 2002     
|                |  |              |       |          
|Raw material    |  | $            | 426   |           |  | $ | 371   | 
|Work-in-process |  |              | 82    |           |  |   | 220   | 
|Finished goods  |  |              | 617   |           |  |   | 919   | 
|                |  |              |       |           |  |   |       | 
|                |  | $            | 1,125 |           |  | $ | 1,510 | 
|                |  |              |       |           |  |   |       | 

NOTE 4 -  NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted loss per share information is the
same as basic net loss per share since common shares issuable upon conversion
of redeemable convertible preferred stock, convertible preferred stock, stock
options and warrants are antidilutive. The total numbers of shares excluded
from diluted net loss per share relating to these securities were 5,050,010,
5,050,010, 4,002,261 and 4,002,261 with an average exercise price of $2.12,
$2.12, $2.88 and $2.88 for the three and nine months ended December 31, 2002
and 2001, respectively.

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

|                                                                               |                                                     |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |        |      |  
|------------------------------------------------------------------------------ | --------------------------------------------------- | --------------------------- | ------ | ------------------ | --- | ----------------- | ------ | ------ | ---- | ---- | ------- | ------ | ---- | - | ------- | ------ | ---- | -
|                                                                               |                                                     |                             |        | Three months ended |     | Nine months ended
|                                                                               |                                                     |                             |        | December 31,       |     | December 31,     
|                                                                               |                                                     |                             |        |                    |     |                  
|                                                                               |                                                     |                             |        | 2002               |     | 2001              |        | 2002   |      | 2001
|                                                                               |                                                     |                             |        |                    |     |                   |        |        |      |     
|Net loss                                                                       |                                                     | $                           | (2,818 | )                  |     | $                 | (2,520 | )      |      | $    | (10,639 | )      |      | $ | (10,322 | )     
|Basic and diluted:                                                             |                                                     |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |       
|                                                                               | Weighted average shares of common stock
outstanding |                             |        | 21,987             |     |                   |        | 22,251 |      |      |         | 22,061 |      |   |         | 21,977 |     
|                                                                               | Less: Weighted average shares of common             |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |        |     
|                                                                               |                                                     | stock subject to repurchase |        |                    | (39 | )                 |        |        | (354 | )    |         |        | (118 | ) |         |        | (323 | )
|                                                                               |                                                     |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |       
|Weighted average shares used in computing
basic and diluted net loss per share |                                                     |                             | 21,948 |                    |     |                   | 21,897 |        |      |      | 21,943  |        |      |   | 21,654  |       
|                                                                               |                                                     |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |       
|Basic and diluted net loss per share                                           |                                                     | $                           | (0.13  | )                  |     | $                 | (0.12  | )      |      | $    | (0.48   | )      |      | $ | (0.48   | )     
|                                                                               |                                                     |                             |        |                    |     |                   |        |        |      |      |         |        |      |   |         |       

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NOTE 5 - INCOME TAXES

The Company accounts for income taxes using the liability method.
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, 2002 and 2001.

NOTE 6  RESTRUCTURING CHARGES

During the second quarter of fiscal 2003, the Company recorded a
restructuring charge of $0.7 million relating to a headcount reduction and an
operating lease for an abandoned building. The restructuring was recorded to
align the cost structure with changing market conditions. The plan resulted in
headcount reduction of approximately 33 employees, which was made up of 43% of
research and development staff, 33% of operations staff and 24% of general and
administrative staff. The charge in relation to the operating lease of the
abandoned building represents the estimated difference between the total
non-discounted future sublease income and the non-discounted lease commitments
relating to this building.

During the third quarter of fiscal 2003, the Company recorded additional
restructuring charges of $0.3 million for headcount reductions. The plan
resulted in headcount reduction of approximately 16 employees, which was made
up of 81% research and development staff and 19% of sales and marketing staff.

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

|                              |  |            |     |                |  |       |      |   |  |   |      |  
|----------------------------- |  | ---------- | --- | -------------- |  | ----- | ---- | - |  | - | ---- | -
|                              |  | Leased     |     | Severances and |  |      
|                              |  | Facilities |     | Benefits       |  | Total
|                              |  |            |     |                |  |       |     
|Balance at September 30, 2002 |  | $          | 135 |                |  | $     | 182  |   |  | $ | 317  |  
|Additions                     |  |            |    |                |  |       | 300  |   |  |   | 300  |  
|Non-cash charges              |  |            |    |                |  |       | (69  | ) |  |   | (69  | )
|Cash charges                  |  |            | (40 | )              |  |       | (309 | ) |  |   | (349 | )
|                              |  |            |     |                |  |       |      |   |  |   |      |  
|Balance at December 31, 2002  |  | $          | 95  |                |  | $     | 104  |   |  | $ | 199  |  
|                              |  |            |     |                |  |       |      |   |  |   |      |  

The Company anticipates that the remaining restructuring provision balance of
$199,000 will be substantially paid out by the end of the first quarter of
fiscal 2004.

NOTE 7  COMPREHENSIVE LOSS



|                                                              | 
|------------------------------------------------------------- | 
|A summary of comprehensive loss is as follows (in thousands):

|                                                                         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three months ended |        | Nine months ended
|                                                                         |  | December 31,       |        | December 31,     
|                                                                         |  |                    |        |                  
|                                                                         |  | 2002               |        | 2001              |  | 2002 |        | 2001
|                                                                         |  |                    |        |                   |  |      |        |     
|Net loss                                                                 |  | $                  | (2,818 | )                 |  | $    | (2,520 | )    |  | $ | (10,639 | ) |  | $ | (10,322 | )
|Change in unrealized gains (losses) on available-
  for-sale investments |  |                    | (11    | )                 |  |      | (50    | )    |  |   | 4       |   |  |   | 12      |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                                       |  | $                  | (2,829 | )                 |  | $    | (2,570 | )    |  | $ | (10,635 | ) |  | $ | (10,310 | )
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

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NOTE 8  CONCENTRATION OF SALES AND CREDIT RISK

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

|           |  |                    |    |                    |  |      |    |      |  |  |    |   |  |  |    |  
|---------- |  | ------------------ | -- | ------------------ |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|           |  | Three months       |    | Nine months       
|           |  | ended December 31, |    | ended December 31,
|           |  |                    |    |                   
|           |  | 2002               |    | 2001               |  | 2002 |    | 2001
|           |  |                    |    |                    |  |      |    |     
|Customer A |  |                    | 39 | %                  |  |      | *  |      |  |  | 17 | % |  |  | *  |  
|Customer B |  |                    | 16 | %                  |  |      | *  |      |  |  | *  |   |  |  | *  |  
|Customer C |  |                    | 11 | %                  |  |      | *  |      |  |  | *  |   |  |  | *  |  
|Customer D |  |                    | *  |                    |  |      | *  |      |  |  | 30 | % |  |  | *  |  
|Customer E |  |                    | *  |                    |  |      | 76 | %    |  |  | *  |   |  |  | 60 | %
|Customer F |  |                    | *  |                    |  |      | 12 | %    |  |  | *  |   |  |  | 17 | %

(* = less than 10%)

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.

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

|                     |            |  |              |    |           |  |  |    |  
|-------------------- | ---------- |  | ------------ | -- | --------- |  |  | -- | -
|                     |            |  | December 31, |    | March 31,
|                     |            |  |              |    |          
|                     |            |  | 2002         |    | 2002     
|                     |            |  |              |    |          
|Accounts receivable: |            |  |              |    |           |  |  |   
|                     | Customer A |  |              | 49 | %         |  |  | *  |  
|                     | Customer B |  |              | 24 | %         |  |  | *  |  
|                     | Customer C |  |              | *  |           |  |  | 71 | %

(* = less than 10%)

NOTE 9  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.

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

The following contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as anticipates,
expects, intends, plans, believes, seeks, estimates and similar
expressions identify such forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements. Factors which could cause actual results to differ materially
include those set forth in the following discussion, and, in particular, the
risks discussed below under the subheading Factors that May Affect Operating
Results and in other documents we file with the Securities and Exchange
Commission. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements.

Overview

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

We currently offer three product families: the CyberPro 5202 family,
introduced in calendar year 2002; the CyberPro 5300 family, introduced in
calendar year 1999; and the CyberPro 5000 family, introduced in calendar year
1998. These product families currently generate most of our revenues. We sell
our products to original equipment manufacturers, or OEMs, and to
distributors.. For sales to OEMs, we recognize revenues at the time of
shipment. For sales to distributors, we defer recognition of revenues until
the distributors have sold our products to end-users. We also generate
revenues from licensing software which we believe will continue to constitute a
small percentage of total revenues in the future.

Approximately 88%, 19%, 89% and 71% of our total revenues for the three
and nine months ended December 31, 2002 and 2001, respectively, were derived
from customers located outside the United States. All of our revenues to date
have been denominated in United States dollars. Historically, a relatively
small number of customers and distributors have accounted for a significant
portion of our product sales. Our top three customers, including
distributors, accounted for 66% of total revenues in the three months ended
December 31, 2002. Our top two customers, including distributors, accounted
for 88% of total revenues in the three months ended December 31, 2001. Our top
two customers, including distributors, accounted for 47% and 77% of total
revenues in the nine months ended December 31, 2002 and 2001, respectively.

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

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

We have sustained losses on a quarterly and annual basis since inception.
As of December 31, 2002, we had an accumulated deficit of approximately $60.9
million. These losses resulted from significant costs incurred in the planning
and development of our technology and services and from significant marketing
costs. We expect our operating expenses to remain relatively stable for the
remainder of fiscal 2003.We anticipate lower revenues for at least the next two
quarters ascompared to the same periods in the prior fiscal year. We believe
that this is due to

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general economic conditions, a slowdown in the interactive television
industry caused by a slower than anticipated emergence of the interactive
television market, a general industry inventory correction, and delay in
customer product introductions in order to incorporate additional third party
features. Due to anticipated lower revenues and continued spending on
research and development, we anticipate that we will continue to incur net
losses at the level incurred in the quarter ended December 31, 2002 for at
least the next two quarters.

We have a subsidiary in Hefei, Peoples Republic of China, which performs
primarily research and development, and product testing, a sales office in
Beijing, China and a branch office in Taipei, Taiwan, which are primarily
engaged in sales efforts.

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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of net revenue and expenses during the reporting period. We regularly evaluate
our estimates and assumptions related to allowances for doubtful accounts,
sales returns and allowances, inventory reserves, purchased intangible asset
valuations, warranty reserves, and other contingencies. We base our estimates
and assumptions on historic experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. To the extent there are
material differences between our estimates and the actual results, our future
results of operations will be affected.

We believe the following critical accounting policies, among others,
affect the significant judgments and estimates we use in the preparation of our
consolidated financial statements:



| |  | Revenues.We recognize revenues from product sales upon shipment
to OEMs and end users provided that persuasive evidence of an
arrangement exists, the price is fixed, title has transferred,
collection of resulting receivables is reasonably assured, there are no
customer acceptance requirements, and there are no remaining
significant obligations. Reserves for sales returns and allowances are
recorded at the time of shipment. Our sales to distributors are made
under agreements allowing for returns or credits under certain
circumstances. We defer recognition of revenue on sales to distributors
until products are resold by the distributor to the end user.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Warranty. Our products typically carry a one-year warranty. We
provide reserves for estimated product warranty costs at the time
revenue is recognized. Although we engage in extensive product quality
programs and processes, our warranty obligation is affected by product
failure rates, use of materials and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, use
of materials or service delivery costs differ from our estimates,
additional warranty reserves could be required, which could reduce
gross margins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Receivables. We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances could be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Inventory. We write down our inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of
inventory and the estimated realizable value based upon assumptions
about future demand and market conditions. If actual market conditions
are less favorable than those projected by management, additional
inventory write-downs could be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Impairment of Long-Lived Assets.We evaluate long-lived assets used
in operations, including purchased intangible assets, when indicators
of impairment, such as reductions in demand or significant economic
slowdowns in the semiconductor industry, are present. Reviews are
performed to determine whether the carrying value of assets is impaired
based on comparison to the undiscounted expected future cash flows. If
the comparison indicates that there is impairment, the impaired asset
is written down to fair value. Impairment is based on the excess of the
carrying amount over the fair value of those assets. Significant
management judgment is required in the forecast of future operating
results that is used in the preparation of expected discounted cash
flows. It is reasonably possible that the estimates of anticipated
future net revenue, the remaining estimated economic life of the
products and technologies, or both, could differ from those used to
assess the recoverability of these assets. In that event, additional
impairment charges or shortened useful lives of certain long-live
assets could be required.

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Results of Operations

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

|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | --- | ---- |  |  | ---- | -- |  |  | ---- | --
|                                            |  | Three months ended |      | Nine months ended
|                                            |  | December 31,       |      | December 31,     
|                                            |  |                    |      |                  
|                                            |  | 2002               |      | 2001              |  | 2002 |     | 2001
|                                            |  |                    |      |                   |  |      |     |     
|Revenues                                    |  |                    | 100  | %                 |  |      | 100 | %    |  |  | 100  | %  |  |  | 100  | % 
|Cost of revenues                            |  |                    | 69   |                   |  |      | 54  |      |  |  | 71   |    |  |  | 77   |   
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Gross profit                                |  |                    | 31   |                   |  |      | 46  |      |  |  | 29   |    |  |  | 23   |   
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Operating expenses:                         |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Research and development                    |  |                    | 429  |                   |  |      | 77  |      |  |  | 422  |    |  |  | 90   |   
|Sales, general and administrative           |  |                    | 165  |                   |  |      | 29  |      |  |  | 166  |    |  |  | 38   |   
|Amortization of deferred stock compensation |  |                    | 45   |                   |  |      | 9   |      |  |  | 34   |    |  |  | 11   |   
|Restructuring charges                       |  |                    | 69   |                   |  |      |    |      |  |  | 55   |    |  |  |     |   
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Total operating expenses                    |  |                    | 708  |                   |  |      | 115 |      |  |  | 677  |    |  |  | 139  |   
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Operating loss                              |  |                    | (677 | )                 |  |      | (69 | )    |  |  | (648 | )  |  |  | (116 | ) 
|Interest income                             |  |                    | 34   |                   |  |      | 9   |      |  |  | 34   |    |  |  | 15   |   
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   
|Net loss                                    |  |                    | (643 | )%                |  |      | (60 | )%   |  |  | (614 | )% |  |  | (101 | )%
|                                            |  |                    |      |                   |  |      |     |      |  |  |      |    |  |  |      |   

Revenues. Revenues decreased to $0.4 million and $1.7 million in the
three and nine months ended December 31, 2002 compared to $4.2 million and
$10.2 million in the three and nine months ended December 31, 2001,
respectively. The decrease was primarily due to a decline in revenues from
Prediwave, our largest customer in fiscal 2002, weak global general economic
conditions and a slower than anticipated emergence of the interactive
television market. Revenues from three customers, Kanematsu Semiconductor,
Inc., Chou Chin Industrial Co., Ltd. and Micro Network Co., Ltd. accounted for
39%, 16% and 11%, respectively, of total revenues for the three months ended
December 31, 2002. Siemens Communications, Ltd. and Kanematsu Semiconductor,
Ltd. accounted for approximately 30% and 17% of our total revenues for the nine
months ended December 31, 2002, respectively. Revenues from two customers,
Prediwave Corporation and General Instruments, Inc., accounted for 76%,12%, 60%
and 17%, respectively, of total revenues for the three and nine months ended
December 31, 2001.

Gross margin. Gross margin for the three and nine months ended December
31, 2002 was 31% and 29%, respectively, compared to 46% and 23% in the same
periods ended December 31, 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 in-transition inventory items within the 5000 product
family. Excluding this charge, gross margin was 44% in the nine months ended
December 31, 2001. The decrease in gross margins for the three and nine months
ended December 31, 2002 as compared to the same periods in fiscal 2002,
excluding inventory charges, resulted primarily from unabsorbed overhead on
lower revenues between periods. Many factors affect our profit margin,
including, but not limited to, our product mix, the position of our products in
their respective life cycles, yields and the mix of our product sales and
development contracts and other revenues.

Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors that process the rich media
content available on the Internet and the broadband network. Research and
development expenses decreased to $1.9 and $7.3 million in the three and nine
months ended December 31, 2002 from $3.2 million and $9.2 million in the same
periods ended December 31, 2001. The decrease in absolute dollars in fiscal
2003 was primarily attributable to a lower headcount as compared to the same
periods in fiscal 2002. 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 193
engineering staff in the Peoples Republic of China at December 31, 2002.
Research and development expenses as a percentage of total revenues were 429%
and 422% in the three and nine months ended December 31, 2002 compared to 77%
and 90% in the same periods of fiscal 2002. The increase in research and
development expenses

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as a percentage of revenues in the three and nine months
ended December 31, 2002 compared to the same periods of fiscal 2002 is
attributable to the decrease in revenues between periods. We expect absolute
research and development expenses in the next quarter to remain flat compared
to the quarter ended December 31, 2002.

Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses decreased to $0.7 million and $2.9
million in the three and nine months ended December 31, 2002 from $1.2 million
and $3.8 million in the three and nine months ended December 31, 2001,
respectively. The decrease was primarily due to a decline in salaries and
wages related to a lower headcount. Sales, general and administrative expenses
as a percentage of total revenues was 165% and 166% in the first three and nine
months of fiscal year 2003 compared to 29% and 38% in the same periods of
fiscal year 2002. The increase in sales, general and administrative expenses
as a percentage of revenues in the three and nine months ended December 31,
2002 compared to the same periods ended December 31, 2001 is attributable to
the decrease in revenues between periods. We expect that sales, general and
administrative expenses in the next quarter will be approximately at the same
level as the quarter ended December 31, 2002.

Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$0.2 million, $0.6 million, $0.4 million and $1.2 million in the three and nine
months ended December 31, 2002 and 2001, respectively.

Restructuring charges.During the second quarter of fiscal 2003, we
recorded restructuring charges of $0.7 million, consisting of $0.5 million for
headcount reductions and $0.2 million for consolidation of facilities. These
restructuring charges were recorded to align our cost structure with changing
market conditions. The plan resulted in headcount reduction of approximately
33 employees, which was made up of 43% of research and development staff, 33%
in operations staff and 24% general and administrative staff. The plan also
included a charge of $0.2 million in relation to an operating lease for an
abandoned building.

During the third quarter of fiscal 2003, the Company recorded additional
restructuring charges of $0.3 million for headcount reductions. The plan
resulted in headcount reduction of approximately 16 employees, which was made
up of 81% research and development staff and 19% of sales and marketing staff.

Interest income. Interest income was $0.1 million and $0.6 million for
the three and nine months ended December 31, 2002, compared to $0.4 million and
$1.5 million for the three and nine months ended December 31, 2001. The
decrease resulted from a lower return on our investments and declining levels
of amount of cash and investments.

Provision for income tax. We are taxed in our jurisdictions of operations
based on the extent of taxable income generated in each jurisdiction. For
income tax purposes, revenues are attributed to the taxable jurisdiction where
the sales transactions generating the revenues were initiated. We incurred
operating losses in the three and nine months ended December 31, 2002 and 2001,
and therefore made no provision for income tax in these periods. We provide
for a full valuation allowance against the tax benefit associated with these
losses.

Liquidity and Capital Resources

During the nine months ended December 31, 2002, we used $8.2 million of
cash and cash equivalents in our operating activities as compared to $5.1
million during the nine months ended December 31, 2001. Cash used in
operations during the nine months ended December 31, 2002 resulted primarily
from net loss of $10.6 million in partially offset by non-cash items of
depreciation and amortization of $1.5 million, and decreases of $0.7 million
and $0.4 million in other assets and prepaid expenses, and inventories,
respectively. Cash used in operations during the nine months ended December
31, 2001 resulted primarily from net loss of $10.3 million and decreases of
$0.7 million and $0.4 million in accrued liabilities and other, and accounts
payables, respectively, partially offset by decreases of $2.9 million and $1.4
million in inventories and accounts receivable, respectively, and non-cash
items of depreciation and amortization of $1.9 million.

Capital equipment purchases in the nine months ended December 31, 2002
were $0.8 million. Capital equipment and license technology purchases totaled
$2.0 million and $1.3 million in the nine months ended December 31, 2001,
respectively.

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At December 31, 2002, our principal source of liquidity consisted of cash
and cash equivalents and short-term investments totaling $26.4 million.
Working capital at December 31, 2002 was $26.2 million.

The following represent our more significant working capital commitments:

On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this
program, the Board of Directors authorized the acquisition of up to 200,000
shares of common stock. As of December 31, 2002, we had acquired 143,700
shares on the open market that we hold as treasury stock. At the December 31,
2002 stock price, the proceeds to be used to acquire up to an additional 56,300
shares of our common stock would have a minimal impact on our current cash,
cash equivalent and short-term investment balances.

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

We lease facilities under non-cancelable operating leases expiring at
various dates through June 2005. Under the terms of the leases, we are
responsible for a portion of the facilities operating expenses, insurance and
property taxes.

We place purchase orders with wafer foundries in the normal course of
business. As of December 31, 2002, we had approximately $48,000 of outstanding
purchase commitments with a supplier for the purchase of wafers. We expect to
receive and pay for the wafers, within the next nine months, from its existing
cash balances.

Future payments due under building lease and purchase commitments as of
December 31, 2002 are as follows (in thousands):

|       |  |         |     |          |  |             |     |       |  |   |    |  |  |   |     | 
|------ |  | ------- | --- | -------- |  | ----------- | --- | ----- |  | - | -- |  |  | - | --- | 
|Fiscal |  | Capital |     | Building |  | Purchase    |     |       |  |  
|Year   |  | Leases  |     | Lease    |  | Commitments |     | Total
|       |  |         |     |          |  |             |     |      
|2003   |  | $       | 32  |          |  | $           | 146 |       |  | $ | 48 |  |  | $ | 226 | 
|2004   |  |         | 134 |          |  |             | 227 |       |  |   |   |  |  |   | 361 | 
|2005   |  |         | 140 |          |  |             | 48  |       |  |   |   |  |  |   | 188 | 
|2006   |  |         |     |          |  |             | 11  |       |  |   |   |  |  |   | 11  | 
|       |  |         |     |          |  |             |     |       |  |   |    |  |  |   |     | 
|       |  | $       | 306 |          |  | $           | 432 |       |  | $ | 48 |  |  | $ | 786 | 
|       |  |         |     |          |  |             |     |       |  |   |    |  |  |   |     | 

Based on our current expectations, we believe that our cash and cash
equivalents and short-term investments, which totaled $26.4 million at December
31, 2002, will be sufficient to meet our working capital and capital
requirements through at least the next twelve months. In the three months
ended December 31, 2002, cash, cash equivalents and short-term investments
decreased by $2.7 million. As a result of anticipated net losses and purchases
of capital assets, we anticipate that we will use approximately the same amount
on a quarterly basis in fiscal 2003. We may also utilize cash to acquire or
invest in complementary businesses or to obtain the use of complementary
technologies.

There were no significant related party transactions during the three
months ended December 31, 2002.

Inflation

The impact of inflation on our business was not material for the periods
ended December 31, 2002 and 2001.

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Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, Accounting for Exit of
Disposal Activities. SFAS No. 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance set forth in Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of SFAS No. 146 includes costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and certain termination benefits provided to
employees who are involuntarily terminated. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. Management does not
expect the adoption of SFAS No. 146 to have a significant impact on its
financial position or results of operations.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables,(EITF 00-21).
EITF 00-21 sets out criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple deliverable
arrangement. The criteria considers whether the delivered item has stand-alone
value to the customer, whether the fair value of the delivered item can be
reliably determined and the rights of returns for the delivered item. EITF
00-21 is effective for revenue arrangements entered into in the fiscal year
beginning April 1, 2003. The Company is currently assessing the impact of EITF
00-21 on its consolidated financial position and results of 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 advanced television and emerging interactive display markets
in 1996. We have incurred net losses of approximately $60.9 million from our
inception in March 1993 through December 31, 2002. If we continue to incur net
losses, we may not be able to expand our business as quickly as we would like.
We do not know when or if we will become profitable and if we do become
profitable, we may not be able to sustain or increase our profitability.

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

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

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

Historically we have been, and we expect to continue to be, dependent on a
relatively small number of OEMs and distributors for a significant portion of
our total revenues. Sales to Kanematsu Semiconductor, Ltd.,

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Chou Chin Industrial Co., Ltd. and Micro Network Co., Ltd., accounted for
approximately 39%, 16% and 11% of our total revenues for the three months ended
December 31, 2002, respectively. For the three months ended December 31, 2001,
sales to Prediwave Corporation and General Instruments, Inc., both OEMs, accounted
for approximately 76% and 12% of total revenues, respectively. Siemens
Communications, Ltd. and Kanematsu Semiconductor, Ltd. accounted for
approximately 30% and 17% of our total revenues for the nine months ended
December 31, 2002, respectively. For the nine months ended December 31, 2001,
sales to Prediwave Corporation
and General Instruments, Inc. accounted for approximately 60% and 17% of
total revenues, respectively. We may not be able to retain our largest
customers or to obtain additional key accounts. Any reduction or delay in
sales of our products to one or more key customer or our inability to
successfully develop relationships with additional key customers could
negatively impact our financial results.

Our operating expenses may increase as we build our business and these
increased expenses may impact our ability to become profitable.

We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance, sales,
marketing and management information systems departments and our design center
located in the Peoples Republic of China. For the fiscal years ended March
31, 2002, 2001 and 2000 and the three and nine months ended December 31, 2002,
research and development expenses represented 107%, 51%, 48%, 429% and 422% of
our revenues, respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new products and
services, and on our research and development activities in China. While we
have implemented actions to reduce our operating expenses at our headquarters
in Santa Clara, California, our operating expenses may increase as a percentage
of revenues if our revenues decline. If our revenues do not increase, our
business and results of operations could suffer. We base our expense levels in
part on our expectations regarding future revenues. If our revenues for a
particular quarter are lower than we expect, we may be unable to
proportionately reduce our operating expenses for that quarter.

Our continued Nasdaq SmallCap Market listing is not assured

The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on the Nasdaq National Market. These
requirements include (i) having net tangible assets of at least $4 million and
(ii) maintaining a minimum bid price per share of $1.00. On July 29, 2002, we
received notification by the Nasdaq National Market that for 30 consecutive
trading days, the price of our common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule
4450(a)(5). In order to regain compliance with Marketplace Rule 4450(e)(2),
the bid price of our common stock must close at or above $1.00 per share or
more for a minimum of 10 consecutive trading days prior to October 28, 2002.

As we were not in compliance under the Nasdaq National Market minimum bid price
listing standard by October 28, 2002, we subsequently applied to transfer to
and began trading on the Nasdaq SmallCap Market on December 4, 2002.

Not maintaining a listing on a major stock market may:



| |  |  | result in a decrease in the trading price of our common stock;                   
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | lessen interest by institutions and individuals in investing in our common stock;
|
| |  |  | make it more difficult to obtain analyst coverage; and                           
|
| |  |  | make it more difficult for us to raise capital in the future.                    

In addition, current and prospective customers and strategic partners may limit
or cease their business relationships with us because of concerns or
perceptions regarding our listing status and future liquidity.

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.

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

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

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

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

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

We operate in a highly competitive, quickly changing environment marked by
new and emerging products and technologies. Our success depends on our ability
to develop, introduce and successfully market new products and enhance our
existing products in the advanced television and emerging interactive display
markets. The development of these new products is highly complex and, from
time to time, we have experienced delays in completing their development and
introduction. Any one of the following factors could affect our ability to
develop, introduce and sell new products and could materially harm our
business:



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

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

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



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

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

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



| |  |  | functionality;                   
| | - |  | ---------------------------------
|
| |  |  | performance;                     
|
| |  |  | time to market;                  
|
| |  |  | price;                           
|
| |  |  | conformity to industry standards;

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| |  |  | product road maps; and
| | - |  | ----------------------
|
| |  |  | technical support.    

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

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

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

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

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

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

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

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

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

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

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

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

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

Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly
when first introduced or when new versions are released. Determining whether
our software has defects may occur after our products are released into the
market and 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 32%, 67%, 71%, 88% and 89% of our total
revenues in fiscal years 2002, 2001, 2000 and the three and nine months ended
December 31, 2002, respectively. We anticipate that sales to customers located
outside the United

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States will continue to represent a significant portion of
our total sales in future periods. In addition, many of our domestic customers
sell their products outside of North America, thereby indirectly exposing us to
risks associated with foreign commerce. Asian economic instability impacts the
sales of products manufactured by our customers, as does the Chinese New Year,
during which time many manufacturers and businesses close their operations. We
may be negatively impacted by the terrorist attacks on the United States and
the resulting conflicts worldwide. We could also experience greater
difficulties collecting accounts receivable from customers outside of the
United States. Accordingly, our operations and revenues are subject to a
number of risks associated with foreign commerce.

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

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

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

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

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.

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Our success depends on the skills, experience and performance of our
executive officers and other key management, many of who would be difficult to
replace. We are particularly dependent on Kenny Liu, our Chairman, and Eli
Porat, our Chief Executive Officer and President. The loss of the service of
one or more of our
key employees, or our failure to attract, retain and motivate qualified
personnel would inhibit the growth of our business.

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

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

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

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

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

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

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

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

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

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

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

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

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




ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk

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.

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Foreign Currency Exchange Risk

We are an international company, selling our products globally and, in
particular, in the United Kingdom, 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.




ITEM 4  CONTROLS AND PROCEDURES

Tvia management, including the Chief Executive Officer and Acting Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Acting Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Acting Chief Financial Officer completed their
evaluation.




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

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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

|                  |  |                                                                                                                        
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------
|(a)      Exhibits |  |                                                                                                                        
|                  |  |                                                                                                                        
|Exhibit 99.1      |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                  |  |                                                                                                                        
|Exhibit 99.2      |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|(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, 2002.




SIGNATURES

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

|                 |     |                                                                                                         
|---------------- | --- | --------------------------------------------------------------------------------------------------------
|                 |     | TVIA, INC.                                                                                              
|                 |     |                                                                                                         
|February 7, 2003 | By: | /s/     Arthur Nguyen                                                                                   
|                 |     | Arthur Nguyen
Acting Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Signatory)

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TVIA, INC.

CERTIFICATIONS PURSUANT TO
SECTION 302 OFTHE SARBANES-OXLEY ACT OF
2002

CERTIFICATION

I, Eli Porat, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Tvia, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



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

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



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

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

| |  |                                                
| |  | -----------------------------------------------
| |  | Date: February 7, 2003                         
| |  |                                                
| |  | /s/ Eli Porat                                  
| |  | Eli Porat
Chief Executive Officer and President

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CERTIFICATION

I, Arthur Nguyen, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Tvia, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



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

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



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

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

| |  |                                             
| |  | --------------------------------------------
| |  | Date: February 7, 2003                      
| |  |                                             
| |  | /s/ Arthur Nguyen                           
| |  |                                             
| |  | Arthur Nguyen
Acting Chief Financial Officer

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Exhibit Index

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