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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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: 001-15473 OPENTV CORP. (Exact name of registrant as specified in its charter)
 British Virgin Islands(State or other jurisdiction of
incorporation or organization)
    
    98-0212376(I.R.S. Employer Identification No.)275 Sacramento Street, San Francisco, California(Address of principal executive offices)
    
    94111(Zip Code)
 (415) 962-5000(Registrants telephone number, including area code)   Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o As of March 31, 2005, the Registrant had outstanding (not including 76,327 Class A ordinary
shares held in treasury): 92,686,176 Class A ordinary shares, no par value; and
30,631,746 Class B ordinary shares, no par value




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Table of Contents  
 PagePart I.
    
    Financial Information
    
    I-1Item 1.
    
    Financial Statements
    
    I-1Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
    
    I-1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004
    
    I-2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    I-3Notes to Condensed Consolidated Financial Statements
    
    I-4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    I-14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    I-33Item 4.
    
    Controls and Procedures
    
    I-34Part II.
    
    Other Information
    
    II-1Item 1.
    
    Legal Proceedings
    
    II-1Item 6.
    
    Exhibits
    
    II-4SignatureExhibit IndexEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION




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Part I. Financial Information 
 Item 1. Financial Statements OPENTV CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,790
    
    
    $
    35,660Short-term marketable debt securities
    
    
    3,960
    
    
    
    1,986Accounts receivable, net of allowance for doubtful accounts of $564 and
$559 at March 31, 2005 and December 31, 2004, respectively
    
    
    16,192
    
    
    
    17,797Prepaid expenses and other current assets
    
    
    3,025
    
    
    
    3,073Total current assets
    
    
    59,967
    
    
    
    58,516Long-term marketable debt securities
    
    
    23,275
    
    
    
    25,374Property and equipment, net
    
    
    6,182
    
    
    
    6,858Goodwill
    
    
    70,492
    
    
    
    70,466Intangible assets, net
    
    
    23,827
    
    
    
    25,108Other assets
    
    
    6,045
    
    
    
    6,089Total assets
    
    $
    189,788
    
    
    $
    192,411LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,880
    
    
    $
    3,870Accrued liabilities
    
    
    20,963
    
    
    
    23,916Accrued
restructuring
    
    
    1,208
    
    
    
    1,394Due to Liberty Media
    
    
    190
    
    
    
    388Current portion of deferred revenue
    
    
    11,668
    
    
    
    10,520Total current liabilities
    
    
    37,909
    
    
    
    40,088Deferred revenue, less current portion
    
    
    6,343
    
    
    
    6,563Total liabilities
    
    
    44,252
    
    
    
    46,651Commitments and contingencies (Note 9)Minority interest
    
    
    525
    
    
    
    585Shareholders equity:Class A ordinary shares, no par value, 500,000,000 shares authorized;
92,762,503 and 91,552,293 shares issued and outstanding, including
treasury shares, at March 31, 2005 and December 31, 2004, respectively
    
    
    2,217,168
    
    
    
    2,213,951Class B ordinary shares, no par value, 200,000,000 shares authorized;30,631,746 shares issued and outstanding
    
    
    35,953
    
    
    
    35,953Additional paid-in capital
    
    
    470,522
    
    
    
    470,453Treasury shares at cost, 76,327 shares
    
    
    (38
    )
    
    
    (38
    )Deferred share-based compensation
    
    
    (8
    )
    
    
    (10
    )Accumulated other comprehensive income
    
    
    355
    
    
    
    523Accumulated deficit
    
    
    (2,578,941
    )
    
    
    (2,575,657
    )Total shareholders equity
    
    
    145,011
    
    
    
    145,175Total liabilities, minority interest and shareholders equity
    
    $
    189,788
    
    
    $
    192,411
    The accompanying notes are an integral part of these condensed (unaudited) consolidated financial statements. I-1




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OPENTV CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004Revenues:Royalties
    
    $
    14,878
    
    
    $
    9,105Services, support and other
    
    
    3,562
    
    
    
    4,105Fees and revenue shares
    
    
    3,663
    
    
    
    3,190License fees and programming
    
    
    726
    
    
    
    998Total revenues
    
    
    22,829
    
    
    
    17,398Operating expenses:Cost of
revenues
    
    
    8,819
    
    
    
    10,248Research and
development
    
    
    8,736
    
    
    
    7,139Sales and
marketing
    
    
    3,258
    
    
    
    3,449General and
administrative
    
    
    4,211
    
    
    
    4,228Restructuring and impairment costs
    
    
    485
    
    
    
    Amortization of intangible assets
    
    
    397
    
    
    
    1,207Total operating expenses
    
    
    25,906
    
    
    
    26,271Loss from operations
    
    
    (3,077
    )
    
    
    (8,873
    )Interest income
    
    
    320
    
    
    
    218Other expense, net
    
    
    (62
    )
    
    
    (42
    )Minority interest
    
    
    60
    
    
    
    61Loss before income taxes
    
    
    (2,759
    )
    
    
    (8,636
    )Income tax expense
    
    
    (525
    )
    
    
    (301
    )Net loss
    
    $
    (3,284
    )
    
    $
    (8,937
    )Net loss per share, basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.07
    )Shares used in per share calculation, basic and diluted
    
    
    122,501,915
    
    
    
    120,004,281
 The accompanying notes are an integral part of these condensed (unaudited) consolidated financial statements. I-2




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OPENTV CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004Cash flows provided from (used in) operating activities:Net loss
    
    $
    (3,284
    )
    
    $
    (8,937
    )Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:Depreciation and amortization of property and equipment
    
    
    1,115
    
    
    
    1,698Amortization of intangible assets
    
    
    1,281
    
    
    
    2,846Amortization of share-based compensation
    
    
    2
    
    
    
    9Non-cash employee compensation
    
    
    70
    
    
    
    467Provision for (reduction of) doubtful accounts
    
    
    
    
    
    
    (253
    )Non-cash impairment costs
    
    
    602
    
    
    
    Minority interest
    
    
    (60
    )
    
    
    (61
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,605
    
    
    
    338Prepaid expenses and other current assets
    
    
    48
    
    
    
    1,026Other assets
    
    
    44
    
    
    
    3Accounts payable
    
    
    10
    
    
    
    (3,177
    )Accrued liabilities
    
    
    227
    
    
    
    (819
    )Accrued restructuring
    
    
    (186
    )
    
    
    (1,785
    )Due to Liberty Media
    
    
    (198
    )
    
    
    131Deferred revenue
    
    
    928
    
    
    
    (231
    )Net cash provided from (used in) operating activities
    
    
    2,204
    
    
    
    (8,745
    )Cash flows provided from (used in) investing activities:Purchase of property and equipment
    
    
    (778
    )
    
    
    (261
    )Proceeds from sale of marketable debt securities
    
    
    6,068
    
    
    
    3,494Purchase of marketable debt securities
    
    
    (5,975
    )
    
    
    (22
    )Private
equity investments
    
    
    (300
    )
    
    
    Net cash provided from (used in) investing activities
    
    
    (985
    )
    
    
    3,211Cash flows provided from financing activities:Proceeds from issuance of ordinary shares
    
    
    10
    
    
    
    949Net cash provided from financing activities
    
    
    10
    
    
    
    949Effect of exchange rate changes on cash and cash equivalents
    
    
    (99
    )
    
    
    20Net increase (decrease) in cash and cash equivalents
    
    
    1,130
    
    
    
    (4,565
    )Cash and cash equivalents, beginning of period
    
    
    35,660
    
    
    
    47,747Cash and cash equivalents, end of period
    
    $
    36,790
    
    
    $
    43,182
 The accompanying notes are
an integral part of these condensed (unaudited) consolidated financial statements. I-3




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OPENTV CORP. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005
 (Unaudited)
 Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and
reflect all adjustments that in the opinion of management are necessary for a fair presentation of
the results of operations, financial position and cash flows as of,
and for, the periods shown. These adjustments consist of normal
recurring adjustments unless otherwise indicated.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The results of operations for such period are not necessarily
indicative of the results that may be expected for the year ending December 31, 2005, or for any
future period. These condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2004. The accompanying condensed consolidated financial statements include the accounts of OpenTV
Corp., sometimes referred to herein as OpenTV, together with its wholly-owned and majority-owned
subsidiaries. All intercompany accounts and transactions have been eliminated. Preparation of the accompanying condensed consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results could differ from those
estimates. Note 2. Summary of Significant Accounting Policies Share-Based Compensation We account for share-based employee compensation arrangements in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees, and comply with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. Under APB
No. 25 compensation expense is based on the difference, if any, on the date of the grant, between
the fair value of our shares and the exercise price of the option or purchase right. Had
compensation cost for options plans been determined based on the fair value at the grant dates for
the awards under a method prescribed by SFAS 123, our net loss would have been increased to the
pro-forma amounts indicated below (amounts in millions, except per share amounts): Three Month Ended March 31,2005
    
    
    2004Net loss, as reported
    
    $
    (3.3
    )
    
    $
    (8.9
    )Deduct: Share-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax
effects
    
    
    (1.0
    )
    
    
    (0.6
    )Pro-forma net loss
    
    $
    (4.3
    )
    
    $
    (9.5
    )Net loss per share, basic and diluted:As reported
    
    $
    (0.03
    )
    
    $
    (0.07
    )Pro-forma
    
    $
    (0.04
    )
    
    $
    (0.08
    )
 I-4




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These pro-forma amounts may not be representative of the effects on reported net loss for
future periods as options vest over several years and additional awards are generally made each
year. We calculated the fair value of each option grant on the date of the grant using the
Black-Scholes option pricing model with the following assumptions: Three Months Ended
    
    Three Months EndedMarch 31, 2005
    
    March 31, 2004Risk-free interest rate
    
    3.71% - 4.42%
    
    2.69% - 3.36%Average expected life (months)
    
    75
    
    60Volatility
    
    104%
    
    113%-115%Dividend yield
    
    
    
    
 The weighted average fair value of options granted during the three months ended March 31,
2005 and 2004 was $2.71 and $2.99, respectively. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in our consolidated statements of income.
The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15,
2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Although we have not yet determined whether the
adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures
under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have
a significant impact on our consolidated statements of income. Note 3. Net Loss Per Share Basic and diluted net loss per share were computed using the weighted average number of
ordinary shares outstanding during the periods presented. The following items as of March 31, 2005
and 2004 were not included in the computation of diluted net loss per share because the effect
would be anti-dilutive: Quarter
Ended March 31,2005
    
    

2004Class A ordinary shares issuable upon exercise of stock options
    
    
    10,796,093
    
    
    
    10,535,486Class A
ordinary shares issuable for shares of OpenTV, Inc. Class A
common stock (including shares of OpenTV, Inc. Class A common stock issuable upon exercise of stock options)
    
    
    744,428
    
    
    
    760,844Class B
ordinary shares issuable for shares of OpenTV, Inc. Class B common stock
    
    
    7,594,796
    
    
    
    7,594,796
 Had such items been included in the calculation of diluted net loss per share, shares
used in the calculation would have been increased by approximately 9.4 million and 10.5 million for
the three months ended March 31, 2005 and 2004, respectively. I-5




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Note 4. Goodwill Minority shareholders of OpenTV, Inc., which is a subsidiary of ours, have the ability, under
certain arrangements, to exchange their shares of OpenTV, Inc. for our shares, generally on a
one-for-one basis. As the shares are exchanged, they are accounted for at fair value. This
accounting effectively provides that at each exchange date, the exchange is accounted for as a
purchase of a minority interest in OpenTV, Inc., valued at the number of our Class A ordinary
shares issued to effect the exchange multiplied by the market price of a Class A ordinary share on
that date. Note 5. Intangible Assets, Net The components of intangible assets, excluding goodwill, were as follows (in millions): March 31, 2005
    
    
    Dec 31, 2004Useful
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Netlife in
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carryingyears
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmountIntangible assets:Patents
    
    
    5-13
    
    
    $
    20.7
    
    
    $
    (4.5
    )
    
    $
    16.2
    
    
    $
    16.8Developed technologies
    
    
    5
    
    
    
    7.1
    
    
    
    (2.8
    )
    
    
    4.3
    
    
    
    4.6Contracts and relationships
    
    
    2-5
    
    
    
    6.9
    
    
    
    (3.7
    )
    
    
    3.2
    
    
    
    3.6Purchased technologies
    
    
    5
    
    
    
    0.4
    
    
    
    (0.3
    )
    
    
    0.1
    
    
    
    0.1$
    35.1
    
    
    $
    (11.3
    )
    
    $
    23.8
    
    
    $
    25.1
 The intangible assets are being amortized on a straight-line basis over their estimated useful
lives. Amortization of intangible assets (including $0.9 million and $1.6 million for the three
months ended March 31, 2005 and 2004, respectively, that were reported in cost of revenues) was
$1.3 million and $2.8 million for the three months ended March 31, 2005 and 2004, respectively.
The future annual amortization expense is expected to be as follows (in millions): AmortizationYear ending December 31,
    
    Expense2005 (Remaining nine months)
    
    $
    3.72006
    
    
    4.92007
    
    
    3.92008
    
    
    1.82009
    
    
    1.3Thereafter
    
    
    8.2$
    23.8
 Note 6. Restructuring and Impairment Costs We monitor our organizational structure and associated operating expenses periodically.
Depending upon events and circumstances, actions may be taken to restructure the business,
including terminating employees, abandoning excess lease space and incurring other exit costs.
Restructuring and impairment costs are recorded in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred. Any
resulting restructuring accrual includes numerous estimates made by management, which are developed
based on managements knowledge of the activity being affected and the cost to exit existing I-6




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commitments. These estimates could differ from actual results. We monitor the initial
estimates periodically and record an adjustment for any significant changes in estimates. For the three months ended March 31, 2005, there was a restructuring and impairment provision
of $0.5 million relating to the closure of our Lexington, Massachusetts facility. In March 2005,
we negotiated a lease buy-out with the landlord of our Lexington, Massachusetts facility. We had
previously recorded amounts in respect of estimated sublease income that we anticipated receiving
based on the assumption that we would sublease that space. After recording those amounts, we
subsequently determined to terminate the lease entirely through a buyout of the remaining term.
The amount of that buyout was higher than the amount we previously recorded for expected sublease
income, and we, therefore, recorded an additional restructuring provision of $0.2
million in the quarter ended March 31, 2005. In addition, in connection with the restructuring of
our facility and operations in Lexington, we settled issues related to ownership of certain
equipment within our joint venture, Spyglass Integration. As a result, we recorded an impairment
of $0.3 million in respect of equipment that we transferred as part of that settlement arrangement.
The following sets forth the restructuring and impairment activity during the three months ended
March 31, 2005 (in millions): Excess 
Facilities
    
    
    Asset 
Impairment
    
    
    TotalBalance, December 31, 2004
    
    $
    1.4
    
    
    $
    
    
    
    $
    1.4Provision
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.5Cash payments
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )Non-cash charges
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.3
    )Balance, March 31, 2005
    
    $
    1.2
    
    
    $
    
    
    
    $
    1.2
 The outstanding accrual for excess facilities relates to operating lease obligations which
expire through 2006. Note 7. Employee Bonus During the three months ended March 31, 2005, we issued 1,162,180 of our Class A ordinary
shares with an aggregate value of $3.2 million (based on the closing market price for our stock on
the date of each grant) to employees in the United States and the United Kingdom pursuant to our
2004 bonus plan and also made certain cash bonus payments to employees in other foreign
jurisdictions. Note 8. Comprehensive Loss The components of comprehensive loss, net of tax, were as follows (in millions): Quarter Ended March 31,2005
    
    
    2004Net loss
    
    $
    (3.3
    )
    
    $
    (8.9
    )Other comprehensive loss:Foreign
currency translation gains (losses)
    
    
    (0.1
    )
    
    
    0.1Unrealized gains (losses) on investments, net
of income taxes
    
    
    
    
    
    
    Comprehensive loss
    
    $
    (3.4
    )
    
    $
    (8.8
    )
 I-7




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Note 9. Commitments and Contingencies Operating Leases We lease our facilities from third parties under operating lease agreements or sublease
agreements in the United States, Europe and Asia Pacific. These leases expire between July 2005 and
March 2016. Total rent expense was $1.2 million and
$1.5 million for the three months ended March
31, 2005 and 2004, respectively. There was no sublease income. Future minimum payments under non-cancelable operating leases as of March 31, 2005 were as
follows (in millions): MinimumYear ending March 31,
    
    Commitments2005 (remaining nine months)
    
    $
    3.32006
    
    
    4.12007
    
    
    3.52008
    
    
    3.42009
    
    
    3.2Thereafter
    
    
    3.7$
    21.2
 Other Commitments In the ordinary course of business we enter into various arrangements with vendors and other
business partners for bandwidth, marketing, and other services. Future minimum commitments under
these arrangements as of March 31, 2005 were $3.3 million for the remaining nine months of 2005
and $1.3 million for the year ending December 31, 2006. In addition, we also have arrangements with
certain parties that provide for revenue-sharing payments. As of March 31, 2005, we had two standby letters of credit aggregating approximately $2.0
million that were issued to landlords at two of our leased properties. Contingencies OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV, Inc., our
subsidiary, filed a lawsuit against Liberate Technologies, Inc. alleging patent infringement in
connection with two patents held by OpenTV, Inc. relating to interactive technology. The lawsuit is
pending in the United States District Court for the Northern District of California. On March 21,
2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for alleged infringement of
four patents allegedly owned by Liberate Technologies. Liberate Technologies has since dismissed
its claims of infringement on two of those patents. In January 2003, the District Court granted two
of OpenTV, Inc.s motions for summary judgment pursuant to which the court dismissed Liberate
Technologies claim of infringement on one of the remaining patents and dismissed a defense
asserted by Liberate Technologies to OpenTV, Inc.s infringement claims, resulting in only one
patent of Liberate Technologies remaining in the counterclaim. The District Court issued a claims
construction ruling for the two OpenTV patents and one Liberate patent remaining in the suit on
December 2, 2003. On January 10, 2005, after Liberates previous bankruptcy filing had been dismissed, Liberate
announced the signing of a definitive agreement to sell substantially all of the assets of its
North American business to Double C Technologies, a joint venture between Comcast Corporation and
Cox Communications, Inc. On February 11, I-8




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2005, the United States District Court for the Northern District of California issued an order
staying the patent litigation until further notice. Liberate completed its sale to Double C
Technologies on April 7, 2005 and indicated in a filing with the United States District Court that
Double C Technologies had assumed all liability related to this litigation. The parties recently
requested that the Court continue the stay until at least May 23, 2005, to allow Double C and its
new counsel time to familiarize themselves with the litigation and to allow the parties to evaluate
settlement prospects. We continue to believe that our lawsuit is meritorious and intend to continue vigorously
pursuing prosecution of our claims. In addition, we believe that we have meritorious defenses to
the counterclaims brought against OpenTV, Inc. and will defend ourselves vigorously. No provision
has been made in our consolidated financial statements for this matter. We are unable to predict
the likelihood of a favorable outcome or estimate our potential liability, if any, in respect of
any potential counterclaims if litigated to conclusion. Initial Public Offering Securities Litigation. In July 2001, the first of a series of
putative securities class actions, Brody v. OpenTV Corp., et al., was filed in United States
District Court for the Southern District of New York against certain investment banks which acted
as underwriters for our initial public offering, us and various of our officers and directors.
These lawsuits were consolidated and are captioned In re OpenTV Corp. Initial Public Offering
Securities Litigation. The complaints allege undisclosed and improper practices concerning the
allocation of our initial public offering shares, in violation of the federal securities laws, and
seek unspecified damages on behalf of persons who purchased OpenTV Class A ordinary shares during
the period from November 23, 1999 through December 6, 2000. The Court has appointed a lead
plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed an amended complaint.
Other actions have been filed making similar allegations regarding the initial public offerings of
more than 300 other companies, including Wink Communications as discussed in greater detail below.
All of these lawsuits have been coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS). Defendants in these cases filed an omnibus motion to dismiss
on common pleading issues. Oral argument on the omnibus motion to dismiss was held on November 1,
2002. All claims against our officers and directors have been dismissed without prejudice in this
litigation pursuant to the parties stipulation approved by the Court on October 9, 2002. On
February 19, 2003, the Court denied in part and granted in part the omnibus motion to dismiss filed
on behalf of defendants, including us. The Courts Order dismissed all claims against us except for
a claim brought under Section 11 of the Securities Act of 1933. The Court has given plaintiffs an
opportunity to amend their claims in order to state a claim. Plaintiffs have not yet filed an
amended complaint. Plaintiffs and the issuer defendants, including us, have agreed to a stipulation
of settlement, in which plaintiffs will dismiss and release their claims in exchange for a
guaranteed recovery to be paid by the insurance carriers of the issuer defendants and an assignment
of certain claims. The stipulation of settlement for the claims against the issuer-defendants,
including us, has been submitted to the Court. On February 15, 2005, the Court preliminarily
approved the settlement contingent on specified modifications. The Court has scheduled a hearing on
January 9, 2006, to consider final approval of the settlement. There is no guarantee that the
settlement will become effective, as it is subject to a number of conditions which cannot be
assured. If the settlement does not occur, and the litigation against us continues, we believe that
we have meritorious defenses to the claims asserted against us and will defend ourselves
vigorously. No provision has been made in our consolidated financial statements for this matter. We
are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability,
if any. In November 2001, a putative securities class action was filed in United States District Court
for the Southern District of New York against Wink Communications and two of its officers and
directors and certain investment banks which acted as underwriters for Wink Communications initial
public offering. We acquired Wink Communications in October 2002. The lawsuit is now captioned In
re Wink Communications, Inc. Initial Public Offering Securities Litigation. The operative amended
complaint alleges undisclosed and improper practices concerning the allocation of Wink
Communications initial public offering shares in violation of the federal securities laws, and
seeks unspecified damages on behalf of persons who purchased Wink Communications common stock
during the period from August 19, 1999 through December 6, 2000. This action has been consolidated
for pretrial purposes as In re Initial Public Offering Securities Litigation. On February 19, 2003,
the Court ruled on the motions to dismiss filed by all defendants in the consolidated cases. The
Court denied the motions to dismiss the claims under the Securities Act of 1933, granted the motion
to dismiss the claims under Section 10(b) of the Securities Exchange Act of 1934 against Wink
Communications and one individual defendant, and denied that motion against the other individual
defendant. As described above, a stipulation of settlement for the claims against the issuer
defendants has been submitted to and preliminarily approved by the Court. There is no I-9




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guarantee that the settlement will become effective, as it is subject to a number of
conditions, including approval of the Court, which cannot be assured. If the settlement does not
occur, and the litigation against Wink Communications continues, we believe that Wink
Communications has meritorious defenses to the claims brought against it and that Wink
Communications will defend itself vigorously. No provision has been made in our consolidated
financial statements for this matter. We are unable to predict the likelihood of an unfavorable
outcome or estimate our potential liability, if any. Litigation Relating to the Acquisition of ACTV, Inc.On November 18, 2002, a purported class
action complaint was filed in the Court of Chancery of the State of Delaware in and for the County
of New Castle against ACTV, Inc., its directors and us. The complaint generally alleges that the
directors of ACTV breached their fiduciary duties to the ACTV shareholders in approving the ACTV
merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that, in approving the
ACTV merger agreement, ACTVs directors failed to take steps to maximize the value of ACTV to its
shareholders. The complaint further alleges that we aided and abetted the purported breaches of
fiduciary duties committed by ACTVs directors on the theory that the merger could not occur
without our participation. No proceedings on the merits have occurred with respect to this action,
and the case is dormant. We believe that the allegations are without merit and intend to defend
against the complaint vigorously. No provision has been made in our consolidated financial
statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or
estimate our potential liability, if any. Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States
District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that
DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson
Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain
claims of United States patent no. 6,076,094, assigned to or licensed by BI. DIRECTV and certain
other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that
settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our
products, possibly in combination with the products provided by some of the defendants, infringe
BIs patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations
that may be triggered by the litigation. If liability is found against EchoStar in this matter, and
if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its
expectation of indemnification, in which case our business performance, financial position, results
of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named
as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted
claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter,
our business performance, financial position, results of operations or cash flows may be adversely
affected. On November 7, 2003, Broadcast Innovation filed suit against Charter Communications, Inc.
and Comcast Corporation in United States District Court for the District of Colorado, alleging that
Charter and Comcast also infringe the 094 patent. The agreements between Wink Communications and
Charter Communications include indemnification obligations of Wink Communications that may be
triggered by the litigation. While reserving all of our rights in respect of this matter, we have
conditionally reimbursed Charter for certain reasonable legal expenses that it incurred in
connection with this litigation. On August 4, 2004, the District Court found the 094 patent
invalid. On August 5, 2004, BI filed a motion for reconsideration in the case. On September 17,
2004, the District Court entered its summary judgment order based on the invalidity of the patent
in suit. On December 16, 2004, Broadcast Innovations filed its appeal brief of the district court
judges summary judgment order with the Court of Appeals for the Federal Circuit. The Federal
Circuit has scheduled oral argument in the appeal for June 9, 2005. Based on the information
available to us, we have established a reserve for costs and fees that may be incurred in
connection with this matter; that reserve is an estimate only and actual costs may be materially
different. Personalized Media Communications, LLC. On December 4, 2000, a suit was filed in the United
States District Court for the District of Delaware by Pegasus Development Corporation and
Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp.,
Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing
certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications.
Based on publicly available information, we believe that the case has been stayed in the District
Court pending re-examination by the United States Patent and Trademark Office. Though Wink
Communications is not a defendant in the suit, Personalized Media Communications may allege that
certain products of Wink Communications, possibly in combination with products provided by the
defendants, infringe Personalized Media Communications patents. The agreements between Wink
Communications and each of the defendants include indemnification obligations that may be triggered
by this litigation. If it is determined that I-10




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Wink Communications is obligated to defend any defendant in this matter, and/or that the
products of Wink Communications infringe any of the asserted claims, our business performance,
financial position, results of operations or cash flows may be adversely affected. No provision has
been made in our consolidated financial statements for this matter. We are unable to estimate our
potential liability, if any Other Matters. In the normal course of our business, we provide indemnification to customers
against claims of intellectual property infringement made by third parties arising from the use of
our products. Historically, costs related to these indemnification provisions have not been
significant and we are unable to estimate the maximum potential impact of these indemnification
provisions on our future results of operations, although our liabilities in those arrangements are
customarily limited in various respects, including monetarily. As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our
officers and directors for certain events or occurrences while the officer or director is, or was
serving, at our request in such capacity. The maximum potential amount of future payments we could
be required to make under these indemnification agreements is unlimited; however, we have director
and officer insurance coverage that limits our exposure and enables us to recover a portion of any
future amounts paid. We believe the estimated fair value of these indemnification agreements in
excess of applicable insurance coverage is not material. From time to time in the ordinary course of our business, we are also party to other legal
proceedings or receive correspondence regarding potential or threatened legal proceedings. While we
currently believe that the ultimate outcome of these other proceedings, individually and in the
aggregate, will not have a material adverse effect on our financial position or overall trends in
our results of operations, legal proceedings are subject to inherent uncertainties. Were an
unfavorable ruling to occur, there exists the possibility of a material adverse impact on the
results of operations of the period in which the ruling occurs. The estimate of the potential impact on our financial position or overall results of
operations for any of the legal proceedings described in this section could change in the future. Note 10. Related Party Transactions As of March 31, 2005, Liberty Medias total ownership represented approximately 31.9% of the
economic interest and approximately 78.7% of the voting power of our ordinary shares on an
undiluted basis. Since January 2004, we have participated in the Liberty Media medical insurance program for
employees in the United States at a cost of $0.4 million for the three months ended March 31, 2005
and $0.4 million for the three months ended March 31, 2004. We believe that this participation
provides us with better economic terms than we would otherwise be able to achieve independent of
Liberty Media. Note 11. Segment Information Prior to 2004, we did not have separately reportable operating segments. During 2004, we
redefined the reporting units of the Company resulting in three reportable business segments. Our Middleware and Integrated
Technologies business has responsibility for our core middleware and the technologies that are
customarily integrated as extensions of that middleware. Our Applications business has
responsibility for our applications and related technologies and products. Our BettingCorp
business has responsibility for fixed-odds and other wagering gaming
applications. We
report this information in a manner required by SFAS No. 131. Our Chief Executive Officer has been identified as the chief operating decision maker in
assessing the performance of the segments. Our management reviews and assesses the contribution
margin of each of these segments, which is not a financial measure in accordance with generally
accepted accounting principles, or GAAP. We define contribution margin, for these purposes, as
Adjusted EBITDA before unusual items and unallocated corporate overhead, which includes certain
functions, such as executive management, accounting, administration, legal, tax, treasury and
information technology infrastructure, that support but are not specifically attributable to our
operating segments. EBITDA is an acronym for earnings before interest, taxes, depreciation and
amortization. Adjusted EBITDA before unusual items is a non-GAAP financial measure which excludes
interest, taxes, depreciation and amortization, amortization of intangible assets, other income,
minority interest, restructuring and I-11




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impairment provisions and unusual items such as contract amendments that mitigated potential
loss positions. Adjusted EBITDA before unusual items does not take into account substantial costs
of doing business, such as income tax and interest. Management believes that segment contribution
margin is a helpful measure in evaluating operational performance for our company. While we may
consider contribution margin and Adjusted EBITDA before unusual items to be important measures of
comparative operating performance, these measures should be considered in addition to, but not as a
substitute for, loss from operations, net loss, cash flow used in operating activities and other
measures of financial performance prepared in accordance with accounting principles generally
accepted in the United States that are otherwise presented in our financial statements. In
addition, our calculations of contribution margin and Adjusted EBITDA before unusual items may be
different from the calculations used by other companies and, therefore, comparability may be
affected. Because these segments reflect the manner in which we review our business, they necessarily
involve judgments that management believes are reasonable in light of the circumstances under which
they are made. These judgments may change over time or may be modified to reflect new facts or
circumstances. Segments may also be changed or modified to reflect technologies and applications
that are newly created, or that change over time or other business conditions that evolve, each of
which may result in reassessing specific segments and the elements included within each of those
segments. Summarized information by segment was as follows (in millions): Three Months Ended March31,2005
    
    
    2004Revenues:Middleware and Integrated Technologies
    
    $
    18.8
    
    
    $
    14.0Applications
    
    
    3.1
    
    
    
    3.1BettingCorp
    
    
    0.9
    
    
    
    0.3Total Revenue
    
    
    22.8
    
    
    
    17.4Contribution
Margin:Middleware and Integrated Technologies
    
    
    9.2
    
    
    
    5.5Applications
    
    
    (2.0
    )
    
    
    (1.6
    )BettingCorp
    
    
    (1.4
    )
    
    
    (1.2
    )Total Contribution Margin
    
    
    5.8
    
    
    
    2.7Unallocated corporate overhead
    
    
    (6.0
    )
    
    
    (7.0
    )Adjusted EBITDA before unusual items
    
    
    (0.2
    )
    
    
    (4.3
    )Restructuring and impairment costs
    
    
    (0.5
    )
    
    
    Adjusted EBITDA
    
    
    (0.7
    )
    
    
    (4.3
    )Depreciation and amortization
    
    
    (1.1
    )
    
    
    (1.7
    )Amortization of intangible assets
    
    
    (1.3
    )
    
    
    (2.8
    )Interest income
    
    
    0.3
    
    
    
    0.2
 I-12




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Three Months Ended March31,2005
    
    
    2004Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )Minority interest
    
    
    0.1
    
    
    
    0.1Loss before income taxes
    
    
    (2.8
    )
    
    
    (8.6
    )Income tax expense
    
    
    (0.5
    )
    
    
    (0.3
    )Net loss
    
    $
    (3.3
    )
    
    $
    (8.9
    )
 Our revenues by geographic area based on the location of customers were as follows (in
millions): Three Months Ended March 31,2005
    
    
    %
    
    
    2004
    
    
    %Europe,
Middle East and AfricaUnited Kingdom
    
    $
    5.9
    
    
    
    26
    %
    
    $
    5.9
    
    
    
    34
    %Italy
    
    
    4.6
    
    
    
    20
    %
    
    
    0.5
    
    
    
    3
    %Other Countries
    
    
    3.2
    
    
    
    14
    %
    
    
    2.9
    
    
    
    17
    %Subtotal
    
    
    13.7
    
    
    
    60
    %
    
    
    9.3
    
    
    
    54
    %AmericasUnited States
    
    
    5.1
    
    
    
    23
    %
    
    
    5.3
    
    
    
    30
    %Other Countries
    
    
    1.0
    
    
    
    4
    %
    
    
    0.8
    
    
    
    5
    %Subtotal
    
    
    6.1
    
    
    
    27
    %
    
    
    6.1
    
    
    
    35
    %Asia Pacific
    
    
    3.0
    
    
    
    13
    %
    
    
    2.0
    
    
    
    11
    %$
    22.8
    
    
    
    100
    %
    
    $
    17.4
    
    
    
    100
    %
 Four major customers accounted for the following percentages of revenues: Three Months EndedMarch 31,Customer
    
    2005
    
    
    2004A
    
    
    20
    %
    
    
    1
    %B
    
    
    16
    %
    
    
    14
    %C
    
    
    4
    %
    
    
    12
    %D
    
    
    0
    %
    
    
    12
    %
 British Sky Broadcasting, or BSkyB, directly and indirectly accounted for 21% and 15% of total
revenues for the three months ended March 31, 2005 and 2004, respectively, taking into account the
royalties which are paid by four manufacturers who sell set-top boxes to BSkyB. One customer accounted for 32% of net accounts receivable as of March 31, 2005. Additional summarized information by geographic area was as follows (in millions): I-13




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Three Months EndedMarch 31,Capital expenditures, net:
    
    2005
    
    
    2004United States
    
    $
    0.5
    
    
    $
    0.2Other countries
    
    
    0.3
    
    
    
    0.1$
    0.8
    
    
    $
    0.3
 March 31,
    
    
    December 31,Long-lived assets (*):
    
    2005
    
    
    2004United States
    
    $
    9.7
    
    
    $
    10.3Other countries
    
    
    2.5
    
    
    
    2.6$
    12.2
    
    
    $
    12.9
   (*)
    
    Long-lived assets include property and equipment, and other assets. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report onForm 10-Qcontains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause the results of OpenTV Corp. and its consolidated subsidiaries to differ materially from those
expressed or implied by such forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements, including any
projections of revenue, expenses, earnings or losses from operations; any statements of the plans,
strategies and objectives of management for future operation; any statements concerning
developments, performance or market conditions relating to products or services; any statements
regarding future economic conditions or performance; any statements of expectation or belief; and
any statements of assumptions underlying any of the foregoing. You should not place undue reliance
on these forward-looking statements, which speak only as of the date of this Quarterly Report on
Form 10-Q. All these forward-looking statements are based on information available to us at this
time, and we assume no obligation to update any of these statements. Actual results could differ
materially from those projected in these forward-looking statements as a result of many factors,
including those identified in the section titled Factors That May Affect Future Results and
elsewhere. We urge you to review and consider the various disclosures made by us in this report,
and those detailed from time to time in our filings with the Securities and Exchange Commission,
that attempt to advise you of the risks and factors that may affect our future results. The following discussion should be read together with the unaudited condensed consolidated
financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q
and with our audited financial statements, the notes thereto and the section titled Managements
Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report onForm 10-Kfor the fiscal year ended December 31, 2004, as filed with the Securities and
Exchange Commission. Overview We are one of the worlds leading providers of software and solutions for interactive and
enhanced television. We derive our revenues from the licensing of our core software and related technologies, the
licensing and distribution of our content and applications and the delivery of professional
services. We typically receive one-time royalty fees from
manufacturers of set-top boxes or cable, satellite and digital
terrestrial operators, which we refer to as network
operators, once a
set-top box, which incorporates our software, has been shipped to, or activated by, the network
operator. We also receive professional services fees from consulting, I-14




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engineering and training engagements, fees for the maintenance and support of our products and fees
from revenue sharing arrangements related to the use of our interactive content and applications.
In addition, we also receive ongoing licensing fees for various software products that we sell. As of March 31, 2005, Liberty Media Corporations total ownership represented approximately
31.9% of the economic interest and 78.7% of the voting interest of our ordinary shares on an
undiluted basis. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. In preparing these consolidated financial statements, we made
our best estimates and judgments, which are normally based on knowledge and experience with regards
to past and current events and assumptions about future events, giving due consideration to
materiality. Actual results could differ materially from these estimates under different
assumptions or conditions. We believe the following critical accounting policies and estimates have the greatest
potential impact on our consolidated financial statements: revenue recognition; valuation
allowances, specifically the allowance for doubtful accounts and deferred tax assets; valuation of
investments in privately-held companies; impairment of goodwill and intangible assets; and
restructuring and impairment costs. All of these accounting policies, estimates and assumptions, as
well as the resulting impact to our financial statements, have been discussed with our audit
committee. Revenue Recognition We recognize revenue in accordance with current generally accepted accounting principles, or
GAAP, that have been prescribed for the software industry, the principal policies of which are
reflected in American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition and Securities and Exchange Commission Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition. Revenue recognition requirements in the
software industry are very complex and are subject to change. Our revenue recognition policy is one
of our critical accounting policies because revenue is a key component of our results of operations
and is based on complex rules that require us to make judgments and estimates. The application of
SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements,
and if so, whether vendor-specific objective evidence (VSOE) of fair value exists. In applying our
revenue recognition policy we must determine what portions of our revenue are recognized currently
and which portions must be deferred. In order to determine current and deferred revenue, we make
judgments and estimates with regard to future deliverable products and services and the appropriate
pricing for those products and services. Our assumptions and judgments regarding future products
and services could differ from actual events. Professional services revenues from software development contracts, customization services and
implementation support are recognized generally on the percentage of completion method. For fixed
bid contracts under the percentage of completion method, the extent of progress towards completion
is measured based on actual costs incurred to total estimated costs. The actual results could
differ from the percentage estimates by the time a project is completed. The recognition of revenues is partly based on our assessment of the probability of collection
of the resulting accounts receivable balance. As a result, the timing or amount of revenue
recognition may have been different if different assessments of the probability of collection of
accounts receivable had been made at the time the transactions were recorded in revenue. I-15




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Valuation Allowances We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our 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
may be required. We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. We consider our potential future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the amount of our valuation allowance. Currently,
we maintain a full valuation allowance on deferred tax assets in excess of deferred tax
liabilities. Adjustments may be required in the future if we determine that an amount of deferred
tax assets should be realizable. Valuation of Investments in Privately-Held Companies We invest in equity and debt instruments of privately-held companies for business and
strategic objectives, and typically we do not attempt to reduce or eliminate the inherent market
risks of these investments. We perform periodic reviews of these investments for impairment. Our
investments in privately-held companies are considered impaired when a review of the investees
operations and other indicators of impairment indicate that there has been a decline in the fair
value that is other than temporary and that the carrying value of the investment is not likely to
be recoverable. Such indicators include, but are not limited to, limited capital resources, need
for additional financing, and prospects for liquidity of the related securities. Impaired
investments in privately-held companies are written down to estimated fair value, which is the
amount we believe is recoverable from the investment. Impairment of Goodwill and Other Intangible Assets Our long-lived assets include goodwill and other intangible assets, which are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable and in the case of goodwill, annually. In assessing the recoverability
of our long-lived assets, we consider changes in economic conditions and make assumptions regarding
estimated future cash flows and other factors. The biggest assumption impacting estimated future
cash flows is revenue growth. Estimates of future cash flows are highly subjective judgments that
can be significantly impacted by changes in global and local business and economic conditions,
operating costs, competition and demographic trends. If our estimates or underlying assumptions
change in the future, we may be required to record additional impairment charges. Restructuring and Impairment Costs We monitor our organization structure and associated operating expenses periodically.
Depending upon events and circumstances, actions may be taken to restructure the business,
including terminating employees, abandoning excess lease space and incurring other exit costs. Any
resulting restructuring and impairment costs include numerous estimates made by us based on our
knowledge of the activity being affected and the cost to exit existing commitments. These estimates
could differ from actual results. We monitor the initial estimates periodically and record an
adjustment for any significant changes in estimates. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in our consolidated statements of income.
The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15,
2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Although we have not yet determined whether the
adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures
under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have
a significant impact on our consolidated statements of income. I-16




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Three Months Ended March 31, 2005 and 2004 Revenues Revenues for the three months ended March 31, 2005 were $22.8 million, an increase of $5.4
million, or 31%, from $17.4 million for the same period in 2004. Revenues by line item were as
follows (in millions): Three Months Ended March 31,2005
    
    
    %
    
    
    2004
    
    
    %Royalties
    
    $
    14.9
    
    
    
    66
    %
    
    $
    9.1
    
    
    
    52
    %Services, support and other
    
    
    3.5
    
    
    
    15
    %
    
    
    4.1
    
    
    
    24
    %Fees and revenue shares
    
    
    3.7
    
    
    
    16
    %
    
    
    3.2
    
    
    
    18
    %License fees and programming
    
    
    0.7
    
    
    
    3
    %
    
    
    1.0
    
    
    
    6
    %Total Revenues
    
    $
    22.8
    
    
    
    100
    %
    
    $
    17.4
    
    
    
    100
    %
 Royalties.We generally derive royalties from sales of set-top boxes and other products that
incorporate our software. Royalties are paid by either the set-top
box  manufacturer or by the network operator, depending upon the particular
arrangement. We recognize
royalties upon notification of unit shipments or activation of our software by manufacturers or
network operators. Royalty reports are generally received one quarter in arrears. For
non-refundable prepaid royalties, we recognize revenues upon delivery of the software. Royalties for the three months ended March 31, 2005 were $14.9 million, an increase of $5.8
million, or 64%, from $9.1 million in 2004. We experienced
growth in all regions during the three months ended March 31, 2005, with Europe, Middle East and Africa accounting for almost 80% of that increase due to strong
shipments to Sky Italia S.r.l. in the quarter ended March 31, 2005. Shipments by Echostar Communications Corp. in the U.S. and
Matsushita Electric Industrial Co., Ltd. in Japan were also higher
than the shipments in the same period of the prior year. Four of our customers sell set-top boxes to BSkyB, which accounted for $2.7 million, or 18%,
of our royalties for the three months ended March 31, 2005, compared with $2.5 million, or 27%, of
our royalties for the three months ended March 31, 2004. Sky Italia accounted for $4.5 million, or
30%, of our royalties for the three months ended March 31, 2005, compared with $0.1 million for the
three months ended March 31, 2004. Echostar accounted for $3.4 million, or 23%, of our royalties
for the three months ended March 31, 2005, compared with $2.3 million, or 25%, of our royalties for
the three months ended March 31, 2004. In certain instances, we provide volume discounts to
customers based on the number of copies of our software that they deploy. As a result of those
types of arrangements, although we may experience continued growth in middleware deployments, the
average price for each copy licensed to certain customers may decline over time, which could limit
the growth of our royalty payments in the future. If current deployment trends continue in a
manner consistent with those of 2004, we would expect the average pricing for our middleware, over
the course of 2005, to decline for certain customers. Services, Support and Other.Services, support and other revenue consist primarily of
professional services consulting engagements for set-top box manufacturers, network operators and
system integrators and maintenance, support and training for set-top box manufacturers and network
operators. For the three months ended March 31, 2005, revenues in this category were $3.5 million,
a decline of $0.6 million, or 15%, from $4.1 million in 2004. This decrease resulted from reduced
maintenance and support fees paid by customers. Fees and Revenue Shares.Fees and revenue shares consist of PlayJam games channel fees,
interactive advertising fees, net betting and gaming revenues, and revenue shares received for
advertising and other interactive services. For the three months ended March 31, 2005, fees and revenue shares were $3.7 million, an
increase of $0.5 million, or 16%, from $3.2 million for the same period in 2004. Net betting and
gaming revenues were $0.6 million higher than in the same period
of the prior year, while PlayJam revenues were $0.3
million lower than in the same period of the prior year due to competitive pressure from other gaming channels and
revenue share was $0.2 million higher than in the same period of the prior year. BSkyB accounted for $1.8 million, or
49%, of revenues in this category for the three months ended March 31, 2005. I-17




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License Fees and Programming.We derive license fees from the licensing of enterprise
products such as OpenTV Streamer and OpenTV Software Developers Kit, and programming fees from
NASCAR. For the three months ended March 31, 2005, total revenues in this category were $0.7
million, a decline of $0.3 million, or 30%, from $1.0 million in 2004. License fees accounted for
a decrease of $0.5 million and programming accounted for an increase of $0.2 million compared with
the same period in the prior year. Operating Expenses Our total operating expenses for the three months ended March 31, 2005 were $25.9
million, a decrease of $0.4 million, or 2%, from $26.3 million in 2004. Operating expenses by line
item were as follows (in millions): Three Months Ended March 31,% of
    
    
    
    
    
    
    % of2005
    
    
    Revenue
    
    
    2004
    
    
    RevenueCost of revenues
    
    $
    8.8
    
    
    
    39
    %
    
    $
    10.3
    
    
    
    59
    %Research and development
    
    
    8.7
    
    
    
    38
    %
    
    
    7.1
    
    
    
    41
    %Sales and marketing
    
    
    3.3
    
    
    
    15
    %
    
    
    3.5
    
    
    
    20
    %General and administrative
    
    
    4.2
    
    
    
    18
    %
    
    
    4.2
    
    
    
    24
    %Restructuring and impairment costs
    
    
    0.5
    
    
    
    2
    %
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    0.4
    
    
    
    2
    %
    
    
    1.2
    
    
    
    7
    %Total Operating Expenses
    
    $
    25.9
    
    
    
    114
    %
    
    $
    26.3
    
    
    
    151
    %
 Cost of Revenues.Cost of revenues consist primarily of compensation-related expenses and
related overhead costs associated with professional services engagements, network infrastructure
and bandwidth costs of our interactive games and betting channels, and amortization of developed
technology and patents. Cost of revenues for the three months ended March 31, 2005 were $8.8 million, a decrease of
$1.5 million, or 15%, from $10.3 million for the same period in 2004. As a percentage of revenues,
cost of revenues were 39% for the first three months of 2005 compared with 59% for the same period
in 2004. Amortization of developed technology accounted for $0.8 million of the decrease due to
the expiration of the amortization period for certain technology.
Other decreases were $1.1
million, due principally to the reallocation of staff to research and
development in 2005, and there were increases in bandwidth and
revenue share costs of $0.4 million. Research and Development.Research and development expenses consist primarily of
compensation-related expenses and related overhead costs incurred for both new product development
and enhancements to our range of software and application products. Research and development expenses for the three months ended March 31, 2005 were $8.7 million,
an increase of $1.6 million, or 23%, from $7.1 million in 2004. As a percentage of revenues,
research and development expenses were 38% for the first three months of 2005 compared with 41% for
the same period in 2004. The dollar increase resulted mainly from a reallocation of staff from
other areas into research and development in 2005. We believe that research and development spending is critical to remain competitive in the
marketplace. We will continue to focus on the timely development of new and enhanced interactive
television products for our customers, and we plan to continue investing at levels that are
adequate to develop our technologies and product offerings. Sales and Marketing.Sales and marketing expenses consist primarily of advertising and other
marketing-related expenses, compensation-related expenses and related overhead costs, and travel
costs. I-18




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Sales
and marketing expenses for the three months ended March 31, 2005
were $3.3 million, including a $0.3 million expense associated
with our investment in an interactive television company, a
decrease of $0.2 million, or 6%, from $3.5 million for the same period in 2004. As a percentage of
revenues, sales and marketing expenses were 15% for the first three months of 2005 compared with
20% for the same period in 2004. The decrease was due to reduced personnel costs. General and Administrative.General and administrative expenses consist primarily of
compensation-related expenses and related overhead costs, fees for professional services, including
litigation costs, and provision for doubtful accounts. General and administrative expenses for the three months ended March 31, 2005 were $4.2
million, the same amount as in the same period of 2004. As a percentage of revenues, general and administrative expenses were
18% for the first three months in 2005 compared with 24% for the same period in 2004. Legal fees
declined by $1.4 million with that decrease partially offset by increased professional fees of
$0.4 million for work related to our audit and Sarbanes-Oxley compliance efforts and an increase of
$0.7 million in personnel costs and other items. In the first three months of 2004, we also
recorded a credit of $0.3 million for bad debt recovery, but did
not have a similar credit during the three months ended March 31, 2005. Restructuring and Impairment Costs. For the three months ended March 31, 2005, there was a
restructuring and impairment provision of $0.5 million relating to the closure of our Lexington,
Massachusetts facility. In March 2005, we negotiated a lease buy-out with the landlord of our
Lexington, Massachusetts facility. We had previously recorded amounts in respect of estimated
sublease income that we anticipated receiving based on the assumption that we would sublease that
space. After recording those amounts, we subsequently determined to terminate the lease entirely
through a buyout of the remaining term. The amount of that buyout was higher than the amount we
previously recorded for expected sublease income, and we, therefore, recorded an additional
restructuring provision of $0.2 million in the quarter ended March 31, 2005. In
addition, in connection with the restructuring of our facility and operations in Lexington, we
settled issues related to ownership of certain equipment within our joint venture, Spyglass
Integration. As a result, we recorded an impairment of $0.3 million in respect of equipment that
we transferred as part of that settlement arrangement. Amortization of Intangible Assets. For the three months ended March 31, 2005, amortization of
intangible assets was $0.4 million, a decrease of $0.8 million, or 67%, from $1.2 million for the
same period in 2004. The decrease resulted from certain intangible assets having been fully
amortized in 2004. Interest Income, Other Expense and Minority Interest As
a result of increased interest rates, interest income was $0.3 million for the three months ended
March 31, 2005, compared with $0.2 million for the same period in the prior year. Income Taxes We had United States federal tax loss carryforwards of approximately $340 million as of March
31, 2005, although our ability to make use of those tax loss carryforwards may be limited under
applicable tax regulations. However, we are subject to income taxes in certain state and foreign
jurisdictions. The provision for income taxes was $0.5 million for the three months ended March
31, 2005, compared with $0.3 million for the prior year period due to an increase in foreign profitability. Business Segment Results In 2004, we redefined our financial reporting to better align our financial analysis with our
current businesses. Our management assesses our results and financial performance and prepares our
internal budgeting reports on the basis of the Middleware and Integrated Technologies business, the
Applications business and the BettingCorp business. We have prepared this segment analysis in
accordance with Statement of Financial Accounting Standards No. 131. I-19




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Our Middleware and Integrated Technologies business has responsibility for our core middleware
and the technologies that are customarily integrated as extensions of that middleware. Our
Applications business has responsibility for our applications and related technologies and
products. Our BettingCorp business has responsibility for fixed-odds and other wagering gaming
applications. The contribution margin of the segments represents adjusted EBITDA before unusual items and
corporate overhead. Adjusted EBITDA before unusual items is a non-GAAP financial measure which
excludes interest, taxes, depreciation and amortization, amortization of intangible assets, other
income, minority interest and unusual items such as contract amendments that mitigated potential
loss positions and restructuring and impairment provisions. Management believes that segment
contribution margin is an appropriate measure of evaluating operational performance. However, this
measure should be considered in addition to, not as a substitute for, or superior to, income from
operations or other measures of financial performance prepared in accordance with generally
accepted accounting principles. Because these segments reflect the manner in which management reviews our business, they
necessarily involve judgments that management believes are reasonable in light of the circumstances
under which they are made. These judgments may change over time or may be modified to reflect new
facts or circumstances. Segments may also be changed or modified to reflect technologies and
applications that are newly created, or that change over time, or other business conditions that
evolve, each of which may result in reassessing specific segments and the elements included within
each of those segments. Revenues by segment were as follows (in millions): Three Months Ended March 31,2005
    
    
    %
    
    
    2004
    
    
    %Middleware and Integrated
TechnologiesRoyalties
    
    $
    14.9
    
    
    
    79
    %
    
    $
    9.1
    
    
    
    65
    %Services, support and other
    
    
    3.4
    
    
    
    18
    %
    
    
    4.0
    
    
    
    29
    %License fees and programming
    
    
    0.5
    
    
    
    3
    %
    
    
    0.9
    
    
    
    6
    %Subtotal
    
    
    18.8
    
    
    
    100
    %
    
    
    14.0
    
    
    
    100
    %ApplicationsServices, support and other
    
    
    0.1
    
    
    
    3
    %
    
    
    0.1
    
    
    
    3
    %Fees and revenue shares
    
    
    2.8
    
    
    
    90
    %
    
    
    2.9
    
    
    
    94
    %License fees and programming
    
    
    0.2
    
    
    
    7
    %
    
    
    0.1
    
    
    
    3
    %Subtotal
    
    
    3.1
    
    
    
    100
    %
    
    
    3.1
    
    
    
    100
    %Betting Corp
    
    
    0.9
    
    
    
    
    
    
    
    0.3TOTAL
    
    $
    22.8
    
    
    
    
    
    
    $
    17.4
 Revenues from the Middleware and Integrated Technologies business for the three months ended
March 31, 2005 were $18.8 million, an increase of $4.8 million, or 34%, from $14.0 million for the
same period in 2004. The two major components of revenues are royalties and services and support.
Royalties from set-top boxes and other products that incorporate our software accounted for 79% of
segment revenues for the first three months in 2005, an increase from
65% for the same period in
2004. The increase in 2005 was primarily attributable to significant
shipments by Sky Italia and
other customers as described under Royalties above. Services, support and other accounted for
18% of segment revenues for the first three months in 2005, a decrease of $0.6 million, or 15%,
from the first three months in 2004 due primarily to a decline in maintenance and support revenues. License fees and
programming were $0.5 million, a decrease of $0.4 million,
or 44%, from $0.9 million in the first three months in 2004. I-20




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Revenues from the Applications business for the three months ended March 31, 2005 were $3.1
million, the same amount as in the same period in  2004. PlayJam games channel fees accounted for 90% of the applications
segment revenues. Revenues from the BettingCorp business for the three months ended March 31, 2005 were $0.9
million, an increase of $0.6 million, or 200%, from
$0.3 million for the same period in 2004 due to increased consumer
demand. Contribution margin by segment was as follows (in millions): Three
Months Ended March 31,2005
    
    
    2004Contribution
Margin:Middleware and Integrated Technologies
    
    $
    9.2
    
    
    $
    5.5Applications
    
    
    (2.0
    )
    
    
    (1.6
    )BettingCorp
    
    
    (1.4
    )
    
    
    (1.2
    )Total Contribution Margin
    
    
    5.8
    
    
    
    2.7Unallocated corporate overhead
    
    
    (6.0
    )
    
    
    (7.0
    )Adjusted EBITDA before unusual items
    
    
    (0.2
    )
    
    
    (4.3
    )Restructuring and impairment costs
    
    
    (0.5
    )
    
    
    Adjusted EBITDA
    
    
    (0.7
    )
    
    
    (4.3
    )Depreciation and amortization
    
    
    (1.1
    )
    
    
    (1.7
    )Amortization of intangible assets
    
    
    (1.3
    )
    
    
    (2.8
    )Interest income
    
    
    0.3
    
    
    
    0.2Other expense
    
    
    (0.1
    )
    
    
    (0.1
    )Minority interest
    
    
    0.1
    
    
    
    0.1Loss before income taxes
    
    
    (2.8
    )
    
    
    (8.6
    )Income tax expense
    
    
    (0.5
    )
    
    
    (0.3
    )Net loss
    
    $
    (3.3
    )
    
    $
    (8.9
    )
 Contribution margin for the Middleware and Integrated Technologies business increased for the
first three months in 2005 from the same period in 2004  due to increased revenue. Contribution loss for the Applications
business increased for the first three months in 2005 from the same
period in 2004  due to increased operating expenses
associated with that segment. Betting Corp.s expenses increased slightly more than revenues
resulting in a greater contribution loss for the first three months
in 2005 from the same
period in 2004. I-21




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Liquidity and Capital Resources We expect to be able to fund our capital requirements for at least the next twelve months by
using existing cash balances and short-term and long-term marketable debt securities, if our
assumptions about our revenues, expenses and cash commitments are generally accurate. Because we
cannot be certain that our assumptions about our business or the interactive television market in
general will prove to be accurate, our capital requirements may differ from our current
expectations. As of March 31, 2005, we had cash and cash equivalents of $36.8 million, which was an increase
of $1.1 million from the balance at December 31, 2004. Taking into account short-term and long-term
marketable debt securities of $27.2 million, our cash, cash equivalents and marketable debt
securities were $64.0 million as of March 31, 2005, compared with $63.0 million as of December 31,
2004. Our primary source of cash is receipts from revenues. The primary uses of cash are payroll,
general operating expenses and cost of revenues. Cash
provided from operating activities was $2.2 million for the three months ended March 31,
2005. Cash used in operating activities was $8.7 million for three months ended March 31, 2004.
The improvement in the first three months of 2005 versus the same
period of 2004 was due primarily to the reduced net loss and
working capital improvements. Cash
used in investing activities was $1.0 million for the three months ended March 31, 2005,
primarily due to the purchase of property and equipment. For the three months ended March 31, 2004, the cash
provided from investing activities was $3.2 million, primarily due to the net sale of marketable
debt securities. Cash provided from financing activities was not significant for the three months ended March
31, 2005, compared with $0.9 million for the three months ended March 31, 2004. The amount for 2004
represented proceeds from issuance of ordinary shares from the exercise of stock options. We use professional investment management firms to manage most of our invested cash. The
portfolio consists of highly liquid, high-quality investment grade securities of the United States
government and agencies, corporate notes and bonds and certificates of deposit that predominantly
have maturities of less than three years. All investments are made according to our investment
policy, which has been approved by our Board of Directors. Commitments and Contractual Obligations Information as of March 31, 2005 concerning the amount and timing of required payments under
our contractual obligations is summarized below (in millions): Payments due by periodDue inDue in
    
    
    Due in
    
    
    2009 orTotal
    
    
    Due in 2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    afterOperating lease obligations
    
    $
    21.2
    
    
    $
    3.3
    
    
    $
    7.6
    
    
    $
    6.6
    
    
    $
    3.7Non-cancelable purchase obligations
    
    
    4.6
    
    
    
    3.3
    
    
    
    1.3
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    25.8
    
    
    $
    6.6
    
    
    $
    8.9
    
    
    $
    6.6
    
    
    $
    3.7
 In the ordinary course of business we enter into various arrangements with vendors and other
business partners for bandwidth, marketing, and other services. Minimum commitments under these
arrangements as of March 31, 2005 were $3.3 million for the remaining nine months of 2005 and $1.3
million for the year ending December 31, 2006. In addition, we also have arrangements with certain
parties that provide for revenue-sharing payments. As of March 31, 2005, we had two standby letters of credit aggregating approximately $2.0
million that I-22




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were issued to landlords at two of our leased properties. Indemnifications In the normal course of our business, we provide indemnification to customers against claims
of intellectual property infringement made by third parties arising from the use of our products.
Historically, costs related to these indemnification provisions have not been significant and we
are unable to estimate the maximum potential impact of these indemnification provisions on our
future results of operations, although our liabilities in those arrangements are customarily
limited in various respects, including monetarily. As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our
officers and directors for certain events or occurrences while the officer or director is, or was
serving, at our request in such capacity. The maximum potential amount of future payments we could
be required to make under these indemnification agreements is unlimited; however, we have director
and officer insurance coverage that limits our exposure and enables us to recover a portion of any
future amounts paid. Factors That May Affect Future Results In addition to the other information contained in this Quarterly Report on Form 10-Q, you
should consider carefully the following factors in evaluating OpenTV and our business. We have a history of net losses, and we may continue to experience net losses in the future. We have incurred significant net losses since our inception. Our net losses for the years
ended December 31, 2004, 2003 and 2002 were approximately $22.0 million, $54.1 million and $802.6
million, respectively. We expect to continue to incur significant sales and marketing, product
development and administrative expenses and expect to continue to suffer net losses in the near
term. We will need to generate significant revenue to achieve and maintain profitability. We cannot
be certain that we will achieve, sustain or increase profitability in the future. Any failure to
significantly increase revenue as we implement our product and distribution strategies would
adversely affect our business, financial condition and operating results. We have historically derived a significant percentage of our revenues from
licensing our middleware to network operators. Our opportunities for future
revenue growth with middleware are limited by the actual number of worldwide
network operators and by technology decisions they make from time to time. We have on a historic basis derived a significant percentage of our total revenues from
royalties associated with the deployment of our middleware and fees charged for services rendered
in support of our middleware deployments. While we continue to seek deployments within the United
States, we have a significant number of customers outside of the United States that have deployed
our middleware. In most cases, the number of network operators in any particular country is
relatively small, and to the extent that we have already achieved deployments in those countries,
the opportunities for future growth of our middleware business may be limited. Our capacity to generate future revenues associated with our middleware may also be limited
due to a number of reasons, including:  
    network operators that have selected our middleware may switch to
another middleware platform for the provision of interactive services,
reduce their pace of set-top box deployment or stop deploying set-top
boxes enabled with our middleware, decrease or stop their use of our
support services, or choose not to upgrade or add additional features
to the version of our middleware running on their networks;
    network operators that have not selected our middleware may choose
another middleware platform for the provision of interactive services;
or
    a meaningful opportunity to deploy our middleware in the markets that
have not yet adopted interactive television on a large scale may never
develop or may develop at a very slow pace. I-23




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Any of these eventualities would have an adverse effect on our results of operations. We offer volume discounts to certain customers, which may, over time, depress
our average pricing. While deployments of our software may continue to grow,
those discounts, as they are triggered, may limit the rate of our royalty
growth in the future. In certain instances, we provide volume discounts to customers based on the number of copies
of our software that they deploy. As a result, although we may experience continued growth in
middleware deployments, the average price for each copy licensed to certain customers may decline
over time, which could slow the growth of our royalty payments in the future. If current deployment
trends continue in a manner consistent with those of 2004, we would expect the average pricing for
our middleware, over the course of 2005, to decline for certain customers, which could limit the
overall growth rate of our royalty revenues. We expect a more significant portion of our revenue growth in the future to be
derived from interactive applications that we develop and market. If we are not
successful in developing and marketing interactive applications, our future
revenue growth may be limited. We expect over the next several years to develop extensive interactive applications, including
addressable and targeted advertising and programming synchronous applications. The market for
interactive applications is still nascent and evolving. Historically, we have derived only a
relatively small percentage of our total revenue from these offerings. We cannot be certain that
the demand for or the market acceptance of interactive applications will develop as we anticipate,
and even if they do, we cannot be certain that we will be able to market that content and those
applications effectively and successfully respond to changes in consumer preferences. In addition,
our ability to market those products will be affected to a large degree by network operators. If
network operators determine that our interactive applications do not meet their business or
operational expectations, they may choose not to offer our applications to their customers. To the
extent that network operators fail to renew or enter into new or expanded contracts with us for
provision of interactive content, such as our enhanced interactive television service, and
applications, such as the PlayJam channel, we will be unable to maintain or increase the level of
distribution of our interactive applications and the associated revenue from those offerings.
Moreover, due to global economic conditions, network operators may slow down their deployment of
new content and applications offerings, and such actions would negatively impact our revenue.
Accordingly, our ability to generate substantial revenues from our interactive content and
applications offerings is uncertain. Two of our potential North American cable customers, Cox Communications and
Comcast Corporation, joined together in early 2005 to acquire certain assets
from Liberate Technologies, one of our direct competitors in the middleware
business. That acquisition, which closed in April 2005, is likely to eliminate
Cox and Comcast as potential customers for our middleware, which could
adversely affect our ability to grow. In April 2005, Double C Technologies, a joint venture formed by Cox Communications and Comcast
Corporation, acquired substantially all of the assets of Liberates North American business. Our
middleware competes directly with the middleware software included within those assets transferred by Liberate. To date, while we have licensed certain of our technologies to Comcast,
and expect to pursue additional applications opportunities with both Cox and Comcast, we have not
licensed to either of these companies our middleware solutions. Based on our current understanding
of the circumstances, we would not expect Cox or Comcast, in light of the assets that they acquired
from Liberate, to license middleware or related solutions from us. As a result, our opportunity to
license our middleware in the United States to cable operators may have been materially diminished
and our future revenue growth adversely affected. In addition, it is unclear whether Double C
Technologies will only develop that technology for the benefit of Comcast and Cox or whether it
will attempt to sell that technology and related products to other cable operators in competition
with OpenTV. I-24




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A significant percentage of our revenues are currently provided by entities
affiliated with The News Corporation, which also controls companies that
compete with us in certain market segments. Those circumstances may make it
more difficult for us, over the long-term, to sell products, technologies or
services to News Corporation affiliates in market segments in which other News
Corporation affiliates offer competing products. The News Corporation currently controls NDS Group and Gemstar-TV Guide International, Inc.,
each of which competes with us in certain respects. The News Corporation also controls, directly or
indirectly, or exerts significant influence over, a number of our customers, including BSkyB, Sky
Italia and FOXTEL. For the year ended December 31, 2004, BSkyB, Sky Italia and FOXTEL, accounted,
in the aggregate, for 38% of our revenues. While we believe that our relationships with each of
these customers is good, and we have multi-year contracts with each, the long-term implications of
The News Corporation owning technology companies that directly compete with us in certain respects
is difficult to assess. We may be at a disadvantage in selling certain of our products,
technologies or services to The News Corporation affiliates over the long-term when in direct
competition with other companies in which The News Corporation maintains a significant ownership
interest. We have concluded that our internal control over financial reporting and
disclosure controls were not effective as of December 31, 2004. While we have
remediated certain aspects of those control issues, we had not completed those
efforts as of March 31, 2005. If we do not properly address identified
weaknesses and implement additional controls to remedy those weaknesses, the
reliability of our financial statements could be implicated and, ultimately,
our financial results and our stock price could suffer. Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive
evaluation of their internal control over financial reporting and their disclosure controls. To
comply with this new statute, our management assessed our internal control over financial reporting
and our disclosure controls. We identified certain weaknesses in our internal control over
financial reporting as of December 31, 2004 that we have discussed in a separate report included as
part of our Annual Report. Those weaknesses related to a lack of segregation of certain duties
within our financial group and certain inadequacies in the controls associated with our financial
review and closing process. Based on those findings, we concluded that our internal control over
financial reporting was not effective as of December 31, 2004. We also concluded that, as a result
of those material weaknesses, our disclosure controls, as of December 31, 2004, were not effective.
We began to implement additional controls and procedures in the first quarter of 2005 with the
intention of remedying those weaknesses, but had not completed those efforts as of March 31, 2005.
As a result, we concluded that as of March 31, 2005, our internal control over financial reporting
was not yet effective, and that our disclosure controls were also not yet effective as of that
date. These efforts have required significant managerial effort, and we have incurred substantial
costs in undertaking those efforts. If our efforts to remedy the weaknesses we identified are not
successful, the reliability of our financial statements could be impaired, which could adversely
affect our stock price and could also affect our company in other adverse ways. In addition, the
ongoing costs associated with implementing such additional controls and procedures, and otherwise
complying with the requirements of Sarbanes-Oxley, are not immaterial, and while we would expect
those costs to decline over the next several years they do impose greater financial burdens on
medium sized companies such as ours than were originally anticipated. We may be unable in the future to raise additional capital required to support our operating activities. We expect to be able to fund our capital requirements for at least the next twelve months by
using existing cash balances and short-term and long-term marketable debt securities, if our
assumptions about our revenues, expenses and cash commitments are generally accurate. Nevertheless,
we have incurred to date and we expect that we will continue to incur in the future significant
expenses, many of which result from non-cancelable operating commitments. As of March 31, 2005, we
had $64.0 million of cash, cash equivalents and marketable debt securities. We generated
approximately $1.9 million in cash from operating activities during the fiscal quarter ended March
31, 2005 and used $16.2 million in cash for operating activities during the year ended December 31,
2004. We may need to raise additional capital in the future if our revenue growth does not meet our
expectations or we are unable to reduce substantially the amount of cash used in our operating
activities. While we continue to monitor our I-25




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operating expenses and seek to bring them in line with our revenues, there can be no assurance that
we will be successful in doing so. To the extent we are required to raise additional capital, we may not be able to do so at all
or we may be able to do so only on unacceptable terms. If we cannot raise additional capital on
acceptable terms, we may not be able to develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have an adverse effect on our business, results of operations or
future prospects. We realize a percentage of our revenue from revenue sharing and
subscription-based arrangements, especially in our applications business. We
are not certain that those revenue models will be generally acceptable to our
customers over the long-term or that they will offer us significant
opportunities for revenue growth, which could adversely affect the growth
opportunities for our applications business. We have historically generated a substantial portion of our revenue from royalty and licensing
fees related to the licensing of our middleware products and from fees for professional services
that we provide. We believe that our capacity to generate future revenues in this manner may be
limited, and if we are unsuccessful in evolving our revenue model, our opportunities for future
revenue growth, particularly outside of the United States, may be limited. While we currently
generate a percentage of our revenues from revenue sharing arrangements with network operators,
programmers and advertisers, and from subscriber-based arrangements, we cannot be certain that
those revenue models will be accepted by our customers over the long-term, or that our customers
will allow us to participate in their revenue streams on those bases. If our efforts to identify
other sources of revenue in addition to the licensing of our middleware are unsuccessful, then our
future results of operations will be adversely affected. The market for our products and services is subject to significant competition,
which could adversely affect our business. We face competition from a number of companies, including many that have significantly greater
financial, technical and marketing resources and better recognized brand names than we do. Current
and potential competitors in one or more aspects of our business include interactive technology
companies, companies developing interactive television content and entertainment, and, in the
professional services area, third party system integrators and internal information technology
staffs at our network operator customers. Some of our customers or their affiliates offer products
or services that compete with our products and services. For example, as we noted above, Double C
Technologies, a joint venture between Cox and Comcast, has acquired the North American assets of
Liberate Technologies, which includes its middleware business. SeaChange International has entered
into a definitive agreement to acquire substantially all of the assets of Liberate Technologies
business outside of North America. In addition to our PlayJam and PlayMonteCarlo applications,
BSkyB also offers its own competitive gaming and gambling applications through its broadcast
network. If any of these competitors achieves significant market penetration or other significant
success within the markets upon which we rely as a significant source of revenue, or in new markets
that we may enter in the future, our ability to maintain market share and sustain our revenues may
be materially and adversely affected. The trend of consolidation among industry participants may adversely impact our
business, results of operations and future prospects. There has been a worldwide trend of consolidation in the cable and direct broadcast satellite
industries. We believe this trend is likely to continue due to economic and competitive concerns.
This trend appears to be expanding to include other companies involved with the interactive
television industry. For example, in addition to the acquisition of
certain assets of Liberate Technologies by Double C Technologies discussed
above, Comcast and Gemstar-TV Guide International Inc., a media and technology company, formed a
joint venture last year called Guideworks to develop an interactive programming guide for the cable
television industry. While the full impact of this trend is uncertain at the present time, we will need to adapt to
changing relationships with industry participants and address competitive concerns that may arise
as companies consolidate. If we are unable to successfully manage these changing relationships and
address these competitive concerns, our business and results of operations may be adversely
affected. I-26




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Unanticipated fluctuations in our quarterly operating results could affect our stock price. We believe that quarter-to-quarter comparisons of our financial results are not necessarily
meaningful indicators of our future operating results and should not be relied on as an indication
of future performance. If our quarterly operating results fail to meet the expectations of
analysts, the market price of our publicly-traded securities could be negatively affected. Our
quarterly operating results have varied substantially in the past and they may vary substantially
in the future depending upon a number of factors described below, including many that are beyond
our control. Our operating results may vary from quarter to quarter as a result of a number of factors,
including:  
    Changes in the rate of capital spending and the rollout of interactive television-related
products and services by network operators;
    The number, size and scope of network operators deploying OpenTV-enabled interactive
services and the associated rollout to subscribers;
    Increased competition in general and any changes in our pricing policies that may result
from increased competitive pressures;
    Potential downturns in our customers businesses or in the domestic or international
markets for our products and services;
    The ability to generate applications-related revenue from existing and potential customers;
    Changes in technology, whether or not developed by us;
    Our ability to develop and introduce on a timely basis new or enhanced versions of our
products that can compete favorably in the marketplace; and
    The timing of revenue recognition associated with major licensing and services agreements. Because a high percentage of our expenses, particularly compensation, is fixed in advance of
any particular quarter, any of the factors listed above could cause significant variations in our
earnings on a quarter-to-quarter basis. You should not rely on the results of prior periods as an
indication of our future performance. Any decline in revenues or a greater than expected loss for
any quarter could cause the market price of our publicly-traded securities to decline. We depend upon key personnel, including our senior executives and technical and
engineering staff, to operate our business effectively, and we may be unable to
attract or retain such personnel. Our future success depends largely upon the continued service of our senior executive officers
and other key management and technical personnel. If certain of our senior executives were to leave
the company, we may be placed at a competitive disadvantage. On April 1, 2005, we announced the
resignation of our Chief Financial Officer effective May 15, 2005. As of the date of this Quarterly Report on Form 10-Q,
we had not appointed a new Chief Financial Officer, and until such time as we do we will not be
able to complete our remediation efforts with respect to certain material weaknesses we identified
in connection with our Sarbanes-Oxley compliance efforts. In addition, we may also need to
increase our technical, consulting and support staff to support new customers and the expanding
needs of our existing customers. We have, in the past, experienced difficulty in recruiting
qualified personnel. If we are not successful in those efforts, our business may be adversely
affected. I-27




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We continue to evaluate our business operations and may implement structural
and other changes that affect the conduct of our worldwide business operations.
As we continue to align our resources appropriately with our evolving business
we may face unintended consequences or suffer adverse effects on our operations
or personnel. We review our operations on an ongoing basis with a view towards improving our business
performance. Beginning in 2002, we undertook efforts to consolidate our operations, close and
relocate various offices around the world and divest non-strategic assets. We also effected certain
organizational changes in late 2004 to establish business units based on our middleware and
applications businesses. There is a risk that, as new business strategies and administrative
processes are developed and implemented, the changes we adopt will be unduly disruptive or less
effective than our old strategies and processes. This may adversely affect our business, results of
operations and future prospects. Interactive television remains an emerging business and it may not attract
widespread market acceptance or demand. Our success will depend upon, among other things, the broad acceptance of interactive
television by industry participants, including operators of broadcast and pay television networks,
network operators and manufacturers of televisions and set-top boxes, as well as by television
viewers and advertisers. Because the market for interactive television remains an emerging market,
the potential size of the market opportunity and the timing of its development are uncertain. The
growth and future success of our business will depend in part upon our ability to penetrate new
markets and convince network operators, television viewers and advertisers to adopt and maintain
their use of our products and services. Because much of our success and value lie in our ownership and use of our
intellectual property, our failure to protect our intellectual property and
develop new proprietary technology may negatively affect us. Our ability to effectively conduct our business will be dependent in part upon the maintenance
and protection of our intellectual property. We rely on patent, trademark, trade secret and
copyright law, as well as confidentiality procedures and licensing arrangements, to establish and
protect our rights in and to our technology. We have typically entered into confidentiality or
license agreements with our employees, consultants, customers, strategic partners and vendors, in
an effort to control access to, and distribution of, our software, related documentation and other
proprietary information. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our software and other proprietary information without authorization. Policing unauthorized use of our software and proprietary information will be difficult. The
steps we take may not prevent misappropriation of our intellectual property and the agreements we
enter into may not be enforceable in some instances. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain foreign countries
or, alternatively, such protection may be difficult to enforce. Litigation may be necessary in the
future to enforce or protect our intellectual property rights or to determine the validity and
scope of our intellectual property rights and the proprietary rights of others. Any such litigation
could cause us to incur substantial costs and diversion of resources, which in turn could adversely
affect our business. Intellectual property infringement claims may be asserted against us, which
could have the effect of disrupting our business. We may be the subject of claims by third parties alleging that we infringe their intellectual
property. The defense of any such claims could cause us to incur significant costs and could result
in the diversion of resources with respect to the defense of any claims brought, which could
adversely affect our financial condition and operating results. As a result of such infringement
claims, a court could issue an injunction preventing us from distributing certain products, which
could adversely affect our business. If any claims or actions are asserted against us, we may seek
to obtain a license under a third partys intellectual property rights in order to avoid any
litigation. However, a license under such circumstances may not be available on commercially
reasonable terms, if at all. I-28




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We grant certain indemnification rights to our customers when we license our
software technologies. We may, therefore, become subject to third party
infringement claims through those commercial arrangements. In addition, the
damages to which we are subject may be increased by the use of our technologies
in our customers products. Many of our and our subsidiaries agreements with customers contain an indemnification
obligation, which could be triggered in the event that a customer is named in an infringement suit
involving their products or involving the customers products or services that incorporate or use
our products. If it is determined that our products infringe any of the asserted claims in such a
suit, we may be prevented from distributing certain of our products and we may incur significant
indemnification liabilities, which may adversely affect our business, financial condition and
operating results. In addition, while damages claims in respect of an alleged infringement may, in many cases, be
based upon a presumed royalty rate that the patent holder would have otherwise been entitled to, it
is possible that our liability may increase as a result of the incorporation of our technology with
our customers products. In some cases, potential damages against us could be based on the profits
derived from a product that infringes through the use of our software even though we receive a
relatively moderate economic benefit from the licensing arrangement. The adoption of industry-wide standards for interactive television, such as the
OpenCable initiative in North America, could adversely affect our ability to
sell our products and services or place downward pressure on our pricing. Ongoing efforts to establish industry-wide standards for interactive television software
include a commitment by cable network operators in the United States to deploy a uniform platform
for interactive television based on a jointly developed specification known as the OpenCable
Applications Platform and an initiative by European television industry participants to create a
similar platform called Multimedia Home Platform. The establishment of these standards or other
similar standards could adversely affect the pricing of our products and services, significantly
reduce the value of our intellectual property and the competitive advantage our proprietary
technology provides, cause us to incur substantial expenditures to adapt our products or services
to respond to these developments, or otherwise hurt our business, particularly if our products
require significant redevelopment in order to conform to the newly established standards. Our failure to participate in certain industry standards setting organizations,
including CableLabs, may adversely affect our ability to sell products or
services to network operators or other potential customers that are members of
those organizations. We have not, to date, determined to become a member of CableLabs, the research and development
consortium managing the OpenCable initiative, and certain other standards setting organizations.
While we continually assess our position with respect to any relevant standards setting
organizations, and have joined several of them, our failure to participate in certain organizations
may affect the willingness of their respective members to conduct business with us. If that were
the case, our ability to continue to grow our business might be adversely affected. The adoption of incompatible standards by our industry and rapid technological
advances could render our products and services obsolete or non-competitive. The migration of television from analog to digital transmission, the convergence of
television, the Internet, communications and other media, and other emerging trends, such as the
deployment of high definition television and multicasting, are creating a dynamic and unpredictable
environment in which to operate. Our ability to anticipate trends and adapt to new technologies and
evolving standards is critical to our success. The deployment of new digital television applications, such as high-definition television and
multicasting multiple television programs through a single channel, may compete directly with our
products and services for broadcast distribution capacity. To the extent that such capacity cannot
accommodate all of the applications that a cable or direct broadcast satellite system operator
wants to distribute, then there is a risk that other applications will be deployed to the exclusion
of our content and applications. If this occurs, our results of operations could be I-29




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adversely affected. Any delay or failure on our part to respond quickly, cost-effectively and sufficiently to
these developments could render our products and services obsolete or non-competitive and have an
adverse effect on our business, financial condition and operating results. In addition, we must
stay abreast of cutting-edge technological developments and evolving service offerings to remain
competitive and increase the utility of our services, and we must be able to incorporate new
technologies into our products in order to address the increasingly complex and varied needs of our
customer base. There can be no assurance that we will be able to do so successfully, and any
failure to do so may adversely affect us. Government regulations may adversely affect our business. The telecommunications, media, broadcast and cable television industries are subject to
extensive regulation by governmental agencies. These governmental agencies continue to oversee and
adopt legislation and regulation over these industries, particularly in the areas of user privacy,
consumer protection, the online distribution of content and the characteristics and quality of
online products and services, which may affect our business, the development of our products, the
decisions by market participants to adopt our products and services or the acceptance of
interactive television by the marketplace in general. In particular, governmental laws or
regulations restricting or burdening the exchange of personally identifiable information could
delay the implementation of interactive services or create liability for us or any other
manufacturer of software that facilitates information exchange. These governmental agencies may
also seek to regulate interactive television directly. Future developments relating to any of these
regulatory matters may adversely affect our business. Changes to current accounting policies or in how such policies are interpreted
or applied to our business could have a significant effect on our reported
financial results or the way in which we conduct our business and could make it
difficult for investors to assess properly our financial condition or operating
results. We prepare our financial statements in conformity with accounting principles generally
accepted in the United States, which are subject to interpretation by the American Institute of
Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and
Exchange Commission and various other bodies formed to interpret and create appropriate accounting
policies. A change in these policies or in how such policies are interpreted or applied to our
business could have a significant effect on our reported results and may even retroactively affect
previously reported transactions. Our accounting policies that recently have been or may in the
future be affected by changes in the accounting rules are as follows:  
    Software revenue recognition;
    Accounting for stock-based compensation; and
    Accounting for goodwill and other intangible assets. As a software company, our revenue recognition policy, in particular, is a key component of
our results of operations and is based on complex rules that require us to make judgments and
estimates. In applying our revenue recognition policy, we must determine what portions of our
revenue are recognized currently and which portions must be deferred. As a result, we may receive
cash from a customer but not be able to recognize the revenue associated with that cash for some
period of time under applicable accounting rules. This results in our recording the cash as
deferred revenue on our balance sheet. Because different contracts may require different
accounting treatment, it may be difficult for investors to properly assess our financial condition
or operating results unless they carefully review all of our financial information, including our
statement of operations, our balance sheet and our statement of cash flows. In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123R which requires the measurement of all employer share-based payments
to employees, including grants of employee stock options, using a fair-value-based method and the
recording of such expense in our consolidated statements of income. The accounting provisions of
this standard are effective for fiscal years beginning after June 15, 2005. The adoption of those
provisions, which have been previously disclosed on a pro I-30




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forma basis in our financial footnotes, is likely to have a significant effect on our consolidated
statement of loss. Through the use of our technology, we have the ability to collect personal and
confidential information from set-top boxes. If we fail to protect this
information from security breaches or misuse this information, then our
operations could be disrupted and we could be subject to litigation and
liability under privacy laws. Through the technology that we license for use in set-top boxes, we have the ability, when
requested by our customers, to collect and store personal information from users of our
applications. Subject to applicable laws, and the agreement of our customers and consumers, we may
also seek to use such information to help develop addressable and targeted advertising businesses.
Storage and use of such information is subject to laws and regulations and may also subject us to
privacy claims relating to its use and dissemination. In addition, a third party might be able to
breach our security measures and gain unauthorized access to our servers where such information is
stored and misappropriate such information or cause interruptions to our business operations. We
may be required to expend significant capital and other resources to monitor the laws applicable to
privacy matters, to protect against security breaches or to deal with the consequences of any
breach. A breach of privacy rights by us, network operators or others could expose us to liability.
Any compromise of security or misuse of private information could materially and adversely affect
our business, reputation, operating results and financial condition and expose us to costly
litigation and regulatory action. Concerns over the security of personal information transmitted
through our applications and the potential misuse of such information might also inhibit market
acceptance of our applications, and if this occurs, our business and operating results will be
adversely affected. If we continue to develop and seek to market gaming and gambling applications,
we must assess the legality of these types of activities in different
jurisdictions. Our inability to launch these applications legally, the
uncertain regulatory landscape for these applications and the significant costs
associated with ongoing evaluations regarding the state of gaming and gambling
laws around the world may adversely affect our business. We develop and market gaming and gambling applications for interactive television based on
technologies and know-how that we acquired through BettingCorp. In many jurisdictions throughout
the world, the laws regulating gaming and gambling, particularly through media such as interactive
television and the Internet, are highly uncertain and subject to frequent change. The penalties in
many jurisdictions include both civil and criminal penalties. While we continually assess the laws
and regulations regarding gaming and gambling ventures, and engage special outside legal counsel to
assist in that process, we cannot be certain that our interpretation of, or the advice that we
receive from outside professionals with respect to, those laws will necessarily be the only
possible interpretation. The costs associated with that evaluative process are not, and will not
be, insignificant. In the event that we are incorrect in our interpretation of certain laws or
regulations, we may be subject to penalties. Moreover, we may be required to make significant
changes to our business, if those laws or regulations change in ways that we do not anticipate or
expect. The uncertainty inherent in these matters, the changing nature of these laws and
regulations, and the significant costs associated with our ongoing evaluation of those laws and
regulations, may adversely affect our business over time. If we do not believe that we can legally
and effectively launch gaming and gambling applications, our future growth may be impaired. Our multinational operations expose us to special risks that could increase our
expenses, adversely affect our operating results and require increased time and
attention of management. We derive a substantial portion of our revenue from customers located outside of the United
States and have significant operations in a number of countries around the world. Our international
operations are subject to special risks, including:  
    differing legal and regulatory requirements and changes in those requirements;
    potential loss of proprietary information due to piracy, misappropriation or
weaker laws regarding intellectual property protection;
    export and import restrictions, tariffs and other trade barriers; I-31




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
    currency fluctuations and devaluations;
    difficulties in staffing and managing offices as a result of, among other things,
distance, language and cultural differences;
    longer payment cycles and problems in collecting accounts receivable;
    political and economic instability; and
    potentially adverse tax consequences. Any of these factors could have an adverse effect on our business, financial condition and
operating results. Our software products may contain errors, which could cause us to lose revenue
and incur unexpected expenses. Software development is an inherently complex and subjective process, which frequently results
in products that contain errors, as well as defective features and functions. Moreover, our
technology is integrated into the products and services of our network operator customers.
Accordingly, a defect, error or performance problem with our technology could cause the systems of
our network operator customers to fail for a period of time or to be impaired in certain respects.
Any such failure could subject us to damage claims and claims for indemnification by our customers
and result in severe customer relations problems and harm to our reputation. While our agreements
with customers typically contain provisions designed to limit or exclude our exposure to potential
liability claims in those circumstances, those provisions may not be effective, in all respects,
under the laws of some jurisdictions. As a result, we could be required to pay substantial amounts
of damages in settlement or upon the determination of any of these types of claims. The interests of our majority owner may differ from yours and may result in
OpenTV acting in a manner inconsistent with your general interests. Liberty Media Corporation beneficially owns our Class A and Class B ordinary shares
representing approximately 31.9% of the economic interest and 78.7% of the voting power of our
ordinary shares outstanding as of March 31, 2005. As a result of its ownership of our ordinary
shares, Liberty Media has sufficient voting power, without the vote of any other stockholder, to
determine the outcome of any action presented to a vote of our stockholders, including amendments
of our memorandum of association and articles of association for any purpose (which could include
increasing or reducing our authorized capital or authorizing the issuance of additional shares).
The interests of Liberty Media may diverge from your interests, and Liberty Media may be in a
position, subject to general fiduciary obligations, to cause or require us to act in a way that is
inconsistent with the general interests of the holders of our Class A ordinary shares. Because we are controlled by Liberty Media, we are exempt from certain listing
requirements of the Nasdaq National Market relating to corporate governance
matters. Over the past several years, the National Association of Securities Dealers has adopted
certain listing requirements for the Nasdaq National Market System designed to enhance corporate
governance standards of the companies who are listed thereon. As a result of Liberty Medias
beneficial ownership of our Class A and Class B ordinary shares, we are not subject to some of
these requirements, including the requirement that a majority of our board of directors be
independent under the guidelines established by the National Association of Securities Dealers
and certain requirements regarding the determination of our Chief Executive Officers compensation
and our director nominees. While we do not believe that our exemption from those requirements
affects the manner and method by which we manage and operate the company, investors should be aware
that we are not subject to those provisions and may have no obligation to comply with those
requirements in the future unless our ownership profile changes. I-32




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Because we are a British Virgin Islands company, you may not be able to enforce
judgments against us that are obtained in United States courts. We are incorporated under the laws of the British Virgin Islands. As a result, it may be
difficult for investors to effect service of process upon us within the United States or to enforce
against us judgments obtained in the United States courts, including judgments predicated upon the
civil liability provisions of the federal securities laws of the United States. We have been advised by our British Virgin Islands counsel, Harney Westwood Riegels, that
judgments of United States courts predicated upon the civil liability provisions of the federal
securities laws of the United States may be difficult to enforce in British Virgin Islands courts
and that there is doubt as to whether British Virgin Islands courts will enter judgments in
original actions brought in British Virgin Islands courts predicated solely upon the civil
liability provisions of the federal securities laws of the United States. Because we are a British Virgin Islands company, your rights as a stockholder
may be less clearly established as compared to the rights of stockholders of
companies incorporated in other jurisdictions. Our corporate affairs are governed by our memorandum of association and articles of
association and by the International Business Companies Act of the British Virgin Islands.
Principles of law relating to such matters as the validity of corporate procedures, the fiduciary
duties of management and the rights of our stockholders may differ from those that would apply if
we were incorporated in the United States or another jurisdiction. The rights of stockholders under
British Virgin Islands law are not as clearly established as are the rights of stockholders in many
other jurisdictions. Thus, our stockholders may have more difficulty protecting their interests in
the face of actions by our board of directors or our controlling stockholder than they would have
as stockholders of a corporation incorporated in another jurisdiction. Certain provisions contained in our charter documents could deter a change of control of us. Certain provisions of our memorandum of association and articles of association may discourage
attempts by other companies to acquire or merge with us, which could reduce the market value of our
Class A ordinary shares. The comparatively low voting rights of our Class A ordinary shares as
compared to our Class B ordinary shares, approximately 99.6% of which are beneficially owned by
Liberty Media as of March 31, 2005, as well as other provisions of our memorandum of association
and articles of association, may delay, deter or prevent other persons from attempting to acquire
control of us. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to financial market risks. This exposure relates to our holdings of fixed
income investment securities, investments in privately-held companies and assets and liabilities
denominated in foreign currencies. Fixed Income Investment Risk We own a fixed income investment portfolio with various holdings, types and maturities. These
investments are generally classified as available-for-sale. Available-for-sale securities are
recorded on the balance sheet at fair value with unrealized gains or losses, net of tax, included
as a separate component of the balance sheet line item titled accumulated other comprehensive
income. Most of these investments consist of a diversified portfolio of highly liquid United States
dollar-denominated debt securities classified by maturity as cash equivalents, short-term
investments or long-term investments. These debt securities are not leveraged and are held for
purposes other than trading. Our investment policy limits the maximum maturity of securities in
this portfolio to three years and weighted-average maturity to 15 months. Although we expect that
market value fluctuations of our investments in short-term debt obligations will not be
significant, a sharp rise in interest rates could have a material adverse effect on the value of
securities with longer I-33




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maturities in the portfolio. Alternatively, a sharp decline in interest rates could have a
material positive effect on the value of securities with longer maturities in the portfolio. We do
not currently hedge interest rate exposures. Our investment policy limits investment concentration in any one issuer (other than with
respect to United States treasury and agency securities) and also restricts this part of our
portfolio to investment grade obligations based on the assessments of rating agencies. There have
been instances in the past where the assessments of rating agencies have failed to anticipate
significant defaults by issuers. It is possible that we could lose most or all of the value in an
individual debt obligation as a result of a default. A loss through a default may have a material
impact on our earnings even though our policy limits investments in the obligations of a single
issuer to no more than five percent of the value of our portfolio. The following table presents the hypothetical changes in fair values in our portfolio of
investment securities with original maturities greater than 90 days as of March 31, 2005 using a
model that assumes immediate sustained parallel changes in interest rates across the range of
maturities (in thousands): Valuation of
    
    
    
    
    
    
    Valuation of
    
    
    Valuation ofSecurities if
    
    
    
    
    
    
    Securities if
    
    
    Securities ifInterest Rates
    
    
    Fair Value as of
    
    
    Interest Rates
    
    
    Interest RatesIssuer
    
    Decrease 1%
    
    
    March 31, 2005
    
    
    Increase 1%
    
    
    Increase 2%U.S. government and agencies
    
    $
    5,970
    
    
    $
    5,922
    
    
    $
    5,875
    
    
    $
    5,828Corporate notes and bonds
    
    
    2,519
    
    
    
    2,488
    
    
    
    2,458
    
    
    
    2,428Auction rate securities
    
    
    16,825
    
    
    
    16,825
    
    
    
    16,825
    
    
    
    16,825Certificate of deposit
    
    
    2,029
    
    
    
    2,000
    
    
    
    1,931
    
    
    
    1,910$
    27,343
    
    
    $
    27,235
    
    
    $
    27,089
    
    
    $
    26,991
 The modeling technique used in the above table estimates fair values based on changes in
interest rates assuming static maturities. The fair value of individual securities in our
investment portfolio is likely to be affected by other factors including changes in ratings, market
perception of the financial strength of the issuers of such securities and the relative
attractiveness of other investments. Accordingly, the fair value of our individual securities could
also vary significantly in the future from the amounts indicated above. Foreign Currency Exchange Rate Risk We transact business in various foreign countries. We incur a substantial majority of our
expenses, and earn most of our revenues, in United States dollars. A majority of our worldwide
customers are invoiced and make payments in United States dollars. A minority of our worldwide
customers are invoiced by our non-United States business units under contracts that require
payments to be remitted in local currency. We have a foreign currency exchange exposure management policy. The policy permits the use of
foreign currency forward exchange contracts and foreign currency option contracts and the use of
other hedging procedures in connection with hedging foreign currency exposures. The policy requires
that the use of derivatives and other procedures qualify for hedge treatment under SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. We regularly assess foreign
currency exchange rate risk that results from our global operations. We did not use foreign
currency forward exchange contracts or options in hedging foreign currency exposures during the
first quarter of 2005. There were no foreign exchange forward contracts or other procedures
implemented to hedge foreign currency exposures outstanding as of March 31, 2005. We expect over
time, however, that a more significant number of our European customers will seek to pay us in
Euros, which may affect our risk profile and require us to make use of appropriate hedging
strategies. While we anticipate a certain portion of our revenues will be paid to us in 2005 in
the form of Euros, we do not believe that such payments will require a material change in our
existing hedging policies. 
 Item 4. Controls and Procedures Management of the company is responsible for establishing and maintaining adequate internal
control over financial reporting (Internal Control) as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange I-34




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Act of 1934, as amended (the Exchange Act). Management understands that a material weakness
is a significant deficiency (within the meaning of Public Company Accounting Oversight Board
Auditing Standard No. 2), or combination of significant deficiencies, that results in there being
more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management assessed the effectiveness of the companys Internal Control as of December 31,
2004 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework and identified certain material
weaknesses in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004. These
material weaknesses were described as follows, and this information should be read together with
managements complete report as included with the companys Annual Report on Form 10-K:  
    Certain duties within the companys financial group were not properly segregated; and
    Certain controls associated with the financial reporting and close process were not
effective, including the fact that:  o
    managements review of certain quarter-end accruals was not effective;o
    ineffective review of certain detailed schedules prepared in connection
with the companys financial reporting process led to errors in the statement of
cash flows, lease commitments and tax notes and required modification of those
notes as included in the Companys 2004 audited financial statements; ando
    the company did not have sufficient internal personnel and technical
expertise to properly apply accounting principles to certain non-routine matters. Based on those assessments and the relevant criteria, management concluded that, as of
December 31, 2004, the companys Internal Control was not effective. Based on these findings, management initiated certain remediation efforts in the first quarter
of 2005 with respect to each of the material weaknesses referred to above and continued those
efforts through March 31, 2005. These remediation efforts, which
are discussed below, are reasonably likely to materially affect our
Internal Control. Remediation of Material Weakness Related to Improper Segregation of Certain Duties within the
Financial Group Management introduced new procedures in the first quarter of 2005 to address the improper
segregation of duties. These new procedures require the companys Chief Financial Officer to
perform a detailed review of any and all non-recurring manual journal entries above a certain
dollar threshold and also to review all journal entries that are directed by the companys
Controller. The companys Chief Financial Officer was also charged with responsibility for
undertaking a reasonable review of all other non-recurring journal entries, to ensure that all such
entries are fully and properly authorized and reviewed. These procedures have been performed
monthly since January 2005. Management believes that the remediating and compensating controls that it initiated in the
first quarter of 2005 have effectively remediated this identified material weakness as of March 31,
2005. Remediation of Certain Controls Associated with the Financial Reporting and Close Process Management introduced new procedures in the first quarter of 2005 to address the financial
reporting and close process. These new procedures require the companys financial group to collect, analyze and monitor all
necessary and relevant supporting documentation for accrual balances and any adjustments.
Management also introduced additional procedures to ensure a more thorough review of financial data
in the financial reporting and close process. Management believes that these additional procedures
have effectively remediated certain aspects of this material weakness, although management
continues to assess the efficacy of these changes. I-35




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In the first quarter of 2005, management also began to evaluate its personnel, develop a plan
to enhance the current staffs capabilities and assess whether additional resources with
appropriate accounting knowledge and experience were required. On April 1, 2005, the company
announced the resignation of its Chief Financial Officer effective
May 15, 2005. As of the date of this Quarterly Report,
the company had not announced a new Chief Financial Officer. Until such time as the company hires
a new Chief Financial Officer, management does not believe that it will be able to complete its
remediation efforts with respect to the financial reporting and close process. As a result of the foregoing, management will continue to evaluate and to implement
remediation efforts with respect to these identified weaknesses. Management does not expect to be
able to report that its Internal Control is effective until it is able to
remediate these matters. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (Disclosure Controls), as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that
information required to be disclosed in our Exchange Act reports, including the companys Quarterly
Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the Disclosure Controls, our management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and our management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this report. As
described above, we identified
certain material weaknesses as of December 31, 2004 that we had not fully remediated as of March
31, 2005. The companys Chief Executive Officer and Chief Financial Officer have concluded that,
as a result of those material weaknesses that remain outstanding, the companys Disclosure
Controls, as of March 31, 2005, were, therefore, not effective. Our independent registered public accounting firm KPMG LLP has not audited the financial
statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, nor have
they attested to, or reported on, our remediation efforts. While we believe that we have
effectively remediated certain aspects of the material weaknesses we identified as of December 31,
2004, as discussed above, and have not identified any other material weaknesses since such date, we
cannot be certain that KPMG LLP would agree with our conclusions and assessments. I-36




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Part II. Other Information 
 Item 1. Legal Proceedings OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV, Inc., our
subsidiary, filed a lawsuit against Liberate Technologies, Inc. alleging patent infringement in
connection with two patents held by OpenTV, Inc. relating to interactive technology. The lawsuit is
pending in the United States District Court for the Northern District of California. On March 21,
2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for alleged infringement of
four patents allegedly owned by Liberate Technologies. Liberate Technologies has since dismissed
its claims of infringement on two of those patents. In January 2003, the District Court granted two
of OpenTV, Inc.s motions for summary judgment pursuant to which the court dismissed Liberate
Technologies claim of infringement on one of the remaining patents and dismissed a defense
asserted by Liberate Technologies to OpenTV, Inc.s infringement claims, resulting in only one
patent of Liberate Technologies remaining in the counterclaim. The District Court issued a claims
construction ruling for the two OpenTV patents and one Liberate patent remaining in the suit on
December 2, 2003. On January 10, 2005, after Liberates previous bankruptcy filing had been dismissed. Liberate
announced the signing of a definitive agreement to sell substantially all of the assets of its
North American business to Double C Technologies, a joint venture between Comcast Corporation and
Cox Communications, Inc. On February 11, 2005, the United States District Court for the Northern
District of California issued an order staying the patent litigation until further notice.
Liberate completed its sale to Double C Technologies on April 7, 2005 and indicated in a filing
with the United States District Court that Double C Technologies had assumed all liability related
to this litigation. The parties recently requested that the Court continue the stay until at least
May 23, 2005, to allow Double C and its new counsel time to familiarize themselves with the
litigation and to allow the parties to evaluate settlement prospects. We continue to believe that our lawsuit is meritorious and intend to continue vigorously
pursuing prosecution of our claims. In addition, we believe that we have meritorious defenses to
the counterclaims brought against OpenTV, Inc. and will defend ourselves vigorously. No provision
has been made in our consolidated financial statements for this matter. We are unable to predict
the likelihood of a favorable outcome or estimate our potential liability, if any, in respect of
any potential counterclaims if litigated to conclusion. Initial Public Offering Securities Litigation. In July 2001, the first of a series of
putative securities class actions, Brody v. OpenTV Corp., et al., was filed in United States
District Court for the Southern District of New York against certain investment banks which acted
as underwriters for our initial public offering, us and various of our officers and directors.
These lawsuits were consolidated and are captioned In re OpenTV Corp. Initial Public Offering
Securities Litigation. The complaints allege undisclosed and improper practices concerning the
allocation of our initial public offering shares, in violation of the federal securities laws, and
seek unspecified damages on behalf of persons who purchased OpenTV Class A ordinary shares during
the period from November 23, 1999 through December 6, 2000. The Court has appointed a lead
plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed an amended complaint.
Other actions have been filed making similar allegations regarding the initial public offerings of
more than 300 other companies, including Wink Communications as discussed in greater detail below.
All of these lawsuits have been coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS). Defendants in these cases filed an omnibus motion to dismiss
on common pleading issues. Oral argument on the omnibus motion to dismiss was held on November 1,
2002. All claims against our officers and directors have been dismissed without prejudice in this
litigation pursuant to the parties stipulation approved by the Court on October 9, 2002. On
February 19, 2003, the Court denied in part and granted in part the omnibus motion to dismiss filed
on behalf of defendants, including us. The Courts Order dismissed all claims against us except for
a claim brought under Section 11 of the Securities Act of 1933. The Court has given plaintiffs an
opportunity to amend their claims in order to state a claim. Plaintiffs have not yet filed an
amended complaint. Plaintiffs and the issuer defendants, including us, have agreed to a stipulation
of settlement, in which plaintiffs will dismiss and release their claims in exchange for a
guaranteed recovery to be paid by the insurance carriers of the issuer defendants and an assignment
of certain claims. The stipulation of settlement for the claims against the issuer-defendants,
including us, has been submitted to the Court. On February 15, 2005, the Court preliminarily
approved the settlement contingent on specified modifications. The Court has scheduled a hearing on
January 9, 2006, to II-1




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consider final approval of the settlement. There is no guarantee that the settlement will
become effective, as it is subject to a number of conditions which cannot be assured. If the
settlement does not occur, and the litigation against us continues, we believe that we have
meritorious defenses to the claims asserted against us and will defend ourselves vigorously. No
provision has been made in our consolidated financial statements for this matter. We are unable to
predict the likelihood of an unfavorable outcome or estimate our potential liability, if any. In November 2001, a putative securities class action was filed in United States District Court
for the Southern District of New York against Wink Communications and two of its officers and
directors and certain investment banks which acted as underwriters for Wink Communications initial
public offering. We acquired Wink Communications in October 2002. The lawsuit is now captioned In
re Wink Communications, Inc. Initial Public Offering Securities Litigation. The operative amended
complaint alleges undisclosed and improper practices concerning the allocation of Wink
Communications initial public offering shares in violation of the federal securities laws, and
seeks unspecified damages on behalf of persons who purchased Wink Communications common stock
during the period from August 19, 1999 through December 6, 2000. This action has been consolidated
for pretrial purposes as In re Initial Public Offering Securities Litigation. On February 19, 2003,
the Court ruled on the motions to dismiss filed by all defendants in the consolidated cases. The
Court denied the motions to dismiss the claims under the Securities Act of 1933, granted the motion
to dismiss the claims under Section 10(b) of the Securities Exchange Act of 1934 against Wink
Communications and one individual defendant, and denied that motion against the other individual
defendant. As described above, a stipulation of settlement for the claims against the issuer
defendants has been submitted to and preliminarily approved by the Court. There is no guarantee
that the settlement will become effective, as it is subject to a number of conditions, including
approval of the Court, which cannot be assured. If the settlement does not occur, and the
litigation against Wink Communications continues, we believe that Wink Communications has
meritorious defenses to the claims brought against it and that Wink Communications will defend
itself vigorously. No provision has been made in our consolidated financial statements for this
matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential
liability, if any. Litigation Relating to the Acquisition of ACTV, Inc.On November 18, 2002, a purported class
action complaint was filed in the Court of Chancery of the State of Delaware in and for the County
of New Castle against ACTV, Inc., its directors and us. The complaint generally alleges that the
directors of ACTV breached their fiduciary duties to the ACTV shareholders in approving the ACTV
merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that, in approving the
ACTV merger agreement, ACTVs directors failed to take steps to maximize the value of ACTV to its
shareholders. The complaint further alleges that we aided and abetted the purported breaches of
fiduciary duties committed by ACTVs directors on the theory that the merger could not occur
without our participation. No proceedings on the merits have occurred with respect to this action,
and the case is dormant. We believe that the allegations are without merit and intend to defend
against the complaint vigorously. No provision has been made in our consolidated financial
statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or
estimate our potential liability, if any. Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States
District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that
DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson
Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain
claims of United States patent no. 6,076,094, assigned to or licensed by BI. DIRECTV and certain
other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that
settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our
products, possibly in combination with the products provided by some of the defendants, infringe
BIs patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations
that may be triggered by the litigation. If liability is found against EchoStar in this matter, and
if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its
expectation of indemnification, in which case our business performance, financial position, results
of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named
as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted
claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter,
our business performance, financial position, results of operations or cash flows may be adversely
affected. On November 7, 2003, Broadcast Innovation filed suit against Charter Communications, Inc.
and Comcast Corporation in United States District Court for the District of Colorado, alleging that
Charter and Comcast also infringe the 094 patent. The agreements between Wink Communications and
Charter Communications include indemnification II-2




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obligations of Wink Communications that may be triggered by the litigation. While reserving
all of our rights in respect of this matter, we have conditionally reimbursed Charter for certain
legal reasonable expenses that it incurred in connection with this litigation. On August 4, 2004,
the District Court found the 094 patent invalid. On August 5, 2004, BI filed a motion for
reconsideration in the case. On September 17, 2004, the District Court entered its summary judgment
order based on the invalidity of the patent in suit. On December 16, 2004, Broadcast Innovations
filed its appeal brief of the district court judges summary judgment order with the Court of
Appeals for the Federal Circuit. The Federal Circuit has scheduled oral argument in the appeal for
June 9, 2005. Based on the information available to us, we have established a reserve for costs
and fees that may be incurred in connection with this matter; that reserve is an estimate only and
actual costs may be materially different. Personalized Media Communications, LLC. On December 4, 2000, a suit was filed in the United
States District Court for the District of Delaware by Pegasus Development Corporation and
Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp.,
Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing
certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications.
Based on publicly available information, we believe that the case has been stayed in the District
Court pending re-examination by the United States Patent and Trademark Office. Though Wink
Communications is not a defendant in the suit, Personalized Media Communications may allege that
certain products of Wink Communications, possibly in combination with products provided by the
defendants, infringe Personalized Media Communications patents. The agreements between Wink
Communications and each of the defendants include indemnification obligations that may be triggered
by this litigation. If it is determined that Wink Communications is obligated to defend any
defendant in this matter, and/or that the products of Wink Communications infringe any of the
asserted claims, our business performance, financial position, results of operations or cash flows
may be adversely affected. No provision has been made in our consolidated financial statements for
this matter. We are unable to estimate our potential liability, if any. Other
Matters. From time to time in the ordinary course of our business, we are also party to other legal
proceedings or receive correspondence regarding potential or threatened legal proceedings. While we
currently believe that the ultimate outcome of these other proceedings, individually and in the
aggregate, will not have a material adverse effect on our financial position or overall trends in
our results of operations, legal proceedings are subject to inherent uncertainties. Were an
unfavorable ruling to occur, there exists the possibility of a material adverse impact on the
results of operations of the period in which the ruling occurs. II-3




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Item 6. Exhibits Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 II-4




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Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OpenTV Corp.Date:
May 10, 2005/s/
Richard HornsteinRichard HornsteinSenior Vice President and Chief Financial Officer




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Exhibit Index Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002