TVIA INC - 10-K Annual Report

Indicate by check mark whether the registrant (1) has filed all reports required 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price on the Nasdaq National Market on May 31, 2003) was approximately $13,282,607.

As of May 31, 2003, there were 22,166,440 shares of Common Stock, $0.001 per share par value, outstanding.

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership) and 13 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2003 Annual Meeting of Stockholders to be held on September 2, 2003.

When used in this Report, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements as to the Company’s anticipated revenues, sources of revenues, expenses, the features, performance, advantages and anticipated benefits of our products, the importance of customer support, the expertise, industry knowledge and capabilities of our sales and marketing staff, our design support, the importance of design support, continued expenditures on research and development, our ability to migrate to smaller process geometries, the key competitive factors in our target markets, our ability to compete, increasing competition in our markets, sources of competition, our intellectual property, our ability to protect our intellectual property, our backlog as an indicator of strategy as to our future revenues, the status of our relations with our employees, the benefits of our operations in Hefei, the adequacy of our existing facilities, our dividend policy and our planned retention of our future earnings. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, risks related to slower than anticipated emergence of the interactive television market; general economic conditions and specific conditions in the markets we address; the timing, rescheduling or cancellation of significant customer orders; the loss of a key customer; the end of a key customer contract, our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner; the volume of our product sales and pricing concessions on volume sales; the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; the availability and pricing of foundry and assembly capacity and raw materials; insufficient customer support; fluctuations in the manufacturing yields of our third party semiconductor foundries and other problems or delays in the fabrication, assembly, testing or delivery of our products; problems or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design integration; the effects of new and emerging technologies; the risks and uncertainties associated with our international operations; changes in our products or customer mix; the risk that excess inventory may result in write-offs, price erosion and decreased demand; and the risks set forth below under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Results.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

All references to “Tvia,” “we,” “us,” “our” or the “Company” mean Tvia, Inc. and its subsidiary, except where it is made clear that the term means only the parent company.

We own various trademarks and trade names used in our business. These include CyberPro, FlexiBus, Tvia and the Tvia logo. Other trademarks referenced herein are the property of their respective owners.

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

We currently offer three product families: the CyberPro 5202 family, introduced in calendar year 2002; the CyberPro 5300 family, introduced in calendar year 1999; and the CyberPro 5000 family, introduced in calendar year 1998. These product families currently generate most of our revenues. We sell our products through two channels. First, we sell our products directly to original equipment manufacturers, or OEMs, and recognize revenues at the time of shipment to these OEMs. Finally, we sell our products to a number of

distributors. We defer recognition of revenues for sales to our distributors until they have sold our products to end-users. We also generate revenues from licensing software which we believe will continue to constitute a small percentage of total revenues in the future.

In recent years there has been an increase in demand for high speed access to information and entertainment, or rich media content, which combines audio, video, voice, text, graphics, pictures and animation. This demand is driven by the growth of rich media content available from the Internet and through television broadcasts and accessible via phone lines and via broadband transmission pipes including television antenna (analog or digital broadcast), cable, microwave, satellite, digital subscriber line, or DSL, and Ethernet connection. Demand has also been stimulated by the increasing availability, affordability and ease of use of consumer appliances and other devices that feature integrated Internet access.

Rich media content is available through a variety of devices including advanced television and emerging interactive display devices. Advanced televisions are televisions where a digital or analog signal is processed digitally and enhanced with resolutions ranging from standard resolution to high definition television, or HDTV. Emerging display devices include any kind of consumer electronics device that has expanded interaction functionality, such as set-top boxes, mobile web access appliances, personal video recorders and home gateway systems. Included in this category are broadband set-top boxes which permit consumer access to high-speed networks through broadband transmission pipes.

As rich media content becomes more pervasive, users are demanding faster access to the Internet. In an effort to meet demand for faster access to rich media content, the communications industry has begun to deploy new broadband access technologies that can deliver data at a rate of tens of megabits per second, or up to 700 times faster than today’s 56 kilobits per second, or Kbps, dial up modems. Users of dial up analog modems over standard telephone lines with maximum transmission rates of 56 Kbps often experience lengthy delays, failure of transmission and limitations on the volume of data that can be transmitted in real time. The slow speed of the telephone modem is frustrating to mainstream consumers who are accustomed to the immediate point and click interface of a television remote control. These customers may find the speed of broadband connections more satisfying.

The television is the consumer product that people are most comfortable with using for entertainment and information due to its sound and display qualities. Advanced televisions and emerging interactive displays can now act as the medium to access the Internet and traditional television broadcasts, and combine the rich media content and services for an interactive television experience.

Interactive television includes features such as electronic program guides, which enable a consumer to select both categories and specific movies and programs, such as those on video on demand, or VOD, and subscription video on demand, or SVOD, services. Interactive television also enables the consumer to view trailer clips of different movies and programs offered by such services. Interactive television enables consumers to watch a commercial and access, at the click of a button, additional information coming from the Internet or an interactive program. This information, such as an e-commerce website, could be displayed on a transparent window that would allow the consumer to continue viewing the commercial, access additional information and complete the purchase of advertised merchandise. Alternatively, a consumer could be watching a television program while chatting, emailing or instant messaging with friends. In addition, interactive television users could access selected additional information such as personalized stock quotes. Consumers could also play along with a game show and win prizes if they respond faster and more accurately than the contestants on television, or they could compete against other online players. This could be done by providing discrete windows for the interactive content and the main program, or by providing transparent windows that overlay the main program without obstructing it. Interactive content windows could be customized and configured, allowing the consumer to control the viewing experience.

Our multi-media display processors allow the consumer to customize the appearance of the display and manipulate multiple content streams to create an enriched and interactive viewing experience. We believe our multi-media display processors offer the following advantages:


	•	High Performance Processing of Rich Media Content. Our solutions act as a gateway that processes multiple streams of rich media content that converge from different transmission pipes and format standards enabling a high quality, clear display. With the advent of digital transmission, the convergence of multiple rich media content streams transported by the broadband network requires a process to unify and match the multiple transmission standards. For example, some of the broadcast streams are formatted with different resolution and screen size dimensions than Internet streams, thereby resulting in a distorted picture. Our technology converts these varying streams into a uniform stream and delivers an undistorted, high quality picture. The streams are then merged and blended to offer visual effects such as picture in picture, or transparency or the overlay of multiple content types, all enhancing the consumer’s viewing experience. In order to support real time processing of multiple streams, our processor provides high bandwidth with some internal data rates exceeding six gigabits per second.

	•	Support for Multiple Data Types, Transmission Pipes, Microprocessors, Operating Systems and Applications Software. Our multi-media display processors can accept any standard rich media content input signals through standard telephone lines and any broadband transmission pipes. Further, our products are designed with a flexible architecture that can work with most television formats and display types. These modules have been successfully ported to multiple platforms based on industry standard microprocessors, operating systems and content application software. Our focus on compatibility gives our OEM customers flexibility in design and allows devices using our solution to work with the end-users’ existing equipment.

	•	Upgradeable Platform. Our applications software provides advanced television and emerging interactive display manufacturers with a platform that can be expanded and upgraded over time by the consumer with only a software change, which can be downloaded over a network. We believe this helps to reduce the risk of product obsolescence and enables the integration of new features and technologies as they are developed.

	•	Programmable and Customizable Platform. Our multi-media display processors are programmable and allow manufacturers to add new features and customize the on screen user interface of their products. For example, manufacturers may program their advanced television or emerging interactive display to allow varying modes of transparency, multiple independent media window displays, multiple or combined audio streams, multiple display sizes and multiple horizontal and vertical resolutions and screen refresh rates, which affect the quality of the image and the amount of flicker on the screen.

	•	Accelerated Time to Market. We believe our multi-media display processors, software and reference designs enable our OEM customers to accelerate their time to market by reducing their systems engineering development. We have developed a number of platforms running with multiple microprocessors, operating systems and applications software which enable our customers to leverage these predeveloped hardware and software platforms to reduce their system engineering efforts. Our software development kits include modules that enable rapid customization and porting, which allow our customers to speed up their product development time. Our engineers work closely with our customers’ engineers to facilitate systems design. These benefits enable our OEM customers to bring products with rich features and differentiated systems to market quickly.

Our products are based on advanced architecture integrated circuits and system designs that provide real time, cost effective and high quality display processing. We currently offer three product families: the CyberPro 5202 family, introduced in calendar year 2002; the CyberPro 5300 family, introduced in calendar

year 1999; and the CyberPro 5000 family, introduced in calendar year 1998. Our semiconductor solutions include different features, which OEMs can select for inclusion in their products.

The CyberPro 5202 incorporates all the features of our CyberPro 5000, 5005, 5050 and 5055 products. In addition, a 24-bit digital interface directly supports liquid crystal displays, or LCD, and other digital interfaces. Enhanced, flexible alpha-blending capabilities allow overlay of different windows with programmable levels of opacity. Two advanced television encoders allow the user to configure the recording picture in personal video recorder, or PVR, applications. The processor maintains crisp text presentation, even as the opacity of the window is varied. The CyberPro 5202 is designed for displays to multiple devices such as traditional cathode ray tube televisions, advanced televisions, panel displays, emerging interactive displays and LCD products.

The CyberPro 5300 is the first product in the CyberPro 5300 family designed for broadband set-top boxes that require 3D animation, 3D effects or 3D graphics processing capability.

The CyberPro 5305, 5350 and 5355 are similar to our CyberPro 5005, 5050 and 5055 products, but also provide 3D animation, 3D effects or 3D graphics processing capability.

The CyberPro 5000 is the first product of the CyberPro 5000 family designed for broadband digital set-top boxes and advanced televisions. The CyberPro 5000 has enhanced text, graphics and video processing engines. It also includes two video ports for two simultaneous video streams, high picture quality of broadband video on television, hardware magnified view of web pages on television, and a flexible transparency algorithm for blending multiple video, text, graphics, pictures and animation on screen.

The CyberPro 5005 is designed for broadband set-top boxes and advanced televisions with Internet and DVD capability. In addition to CyberPro 5000 features, the 5005 provides MacroVision encryption for copy protection.

The CyberPro 5050 is designed for broadband set-top boxes and advanced televisions that have integrated audio capability. Additional features include an audio digital signal processor engine with audio synthesis, MIDI, I2S, PCM and stereo audio.

The CyberPro 5055 combines all of the features of our CyberPro 5000, 5005 and 5050 products. The CyberPro 5055 provides a solution for broadband set-top boxes and advanced televisions that process multiple media streams including DVD and full duplex audio.

Our software products and services are divided into three categories: software development kits, applications modules and custom software services. Our product strategy is based on providing OEMs a complete hardware and software solution, which we believe reduces both the OEMs’ system engineering time and their time to market. Our multi-media display solutions are configurable and flexible, and our software is key in enabling our customers to take advantage of this flexibility. Finally, our software modules enable us to provide our OEM customers with the capability to offer systems with differentiated features that enhance the television experience.

Our software development kits are a set of software modules designed to be easily and quickly ported on multiple hardware and software platforms. These kits are modularized in order to cater to different system requirements while minimizing the size of the software code. These modules have been successfully ported to multiple platforms based on industry standard microprocessors, operating systems and content application software.

Finally, by leveraging the comprehensive experience of our software design team, we provide custom software development for customers using our semiconductors.

We target customers in the advanced television and emerging interactive display markets. We began to focus on the emerging interactive display market in 1997, and later expanded our focus to include the

advanced television markets. The majority of our sales in fiscal 2003 were to the broadband set-top box market portion of the emerging interactive display market, primarily for video-on-demand applications. In prior years, the majority of our sales were to the emerging interactive display market. Many of our customers manufacture or distribute products in more than one of our target markets.

In fiscal 2003, sales to Siemens Communications Ltd., Kanematsu Devices Corporation and Micro Network Korea Co., Ltd. represented 24%, 17% and 10% of revenues, respectively. In fiscal 2002, sales to Prediwave Corporation and Motorola Broadband accounted for 62% and 14% of revenues, respectively. In fiscal 2001, sales to Prediwave Corporation, Kanematsu Devices Corporation and Weikeng Industrial Co., Ltd. accounted for 12%, 12% and 10 % of revenues, respectively.

In fiscal 2003, sales to customers in Europe, Taiwan, Japan, the United States and Korea comprised of 35%, 25%, 16%, 14% and 10% of revenues, respectively. In fiscal 2002, sales to customers in the United States and Taiwan comprised 68% and 22% of revenues, respectively. In fiscal 2001, sales to customers in Taiwan, the United States, Japan and Europe comprised 34%, 33%, 11% and 11% of revenues, respectively.

We sell and market our multi-media display processors through our direct sales force, sales representatives and distributors. For our software products, we also use value added resellers and system integrators that package and use our software products for resale as standard products or custom software development services.

Our products are marketed primarily through reference platforms and evaluation kits designed internally and with industry leading microprocessors, real time operating systems and other strategic partners directly or indirectly through our partners’ channels to OEMs for evaluation and development. These reference platforms and evaluation kits (hardware and software) have proven to be vital to our success in obtaining new design wins. We also promote our products through our website, trade shows, articles, press releases and joint promotions with our strategic partners.

Our personnel work closely with customers, sales representatives and authorized distributors to define product features, performance, price and market timing of new products. We provide technical support and design assistance directly to OEM customers, regardless of the sales channels used. We believe that a high level of customer support is necessary to successfully develop and maintain long-term relationships with our customers. These relationships begin at the design in phase and develop, as customer needs change and evolve. We provide support through both on site customer service and remote support from our facilities.

As of March 31, 2003, we employed a sales and marketing force of 14 people. We believe these personnel have the technical expertise and industry knowledge necessary to support a lengthy and complex sales process. We also employed four field applications engineers that assist customers in designing, testing and qualifying system designs that incorporate our integrated circuits and software products. We believe that the depth and quality of this design support are key to improving our customers’ time to market and maintaining a high level of customer satisfaction. Our three direct sales offices are located in Santa Clara, California; Taipei, Taiwan; and Hefei, People’s Republic of China. All of our sales offices provide hardware and software applications support. Information about geographic areas and operating segments is included in Note 10 to the Consolidated Financial Statements in Item 8.

Our research and development efforts are focused on four areas: device architecture and logic design, physical layer design, software development and device testing. As of March 31, 2003, our research and development staff consisted of 216 employees, (25 of whom were located in the United States and 191 of whom were located in the People’s Republic of China). Our research and development efforts have centered on architecture design, streaming media processing modes, high-speed digital and mixed signal design and software.

We conduct research and development at our design centers in Santa Clara, California and Hefei, People’s Republic of China. Our People’s Republic of China facility is located in a science park near Hefei University of Technology, and employee costs are lower than in the San Francisco Bay Area.

Our research and development expenses for fiscal years 2003, 2002 and 2001 were $9.0 million, $12.7 million, and $6.8 million, respectively. Research and development expenses consist mainly of personnel and other costs associated with the development of product designs, process technology, software and programming hardware. We anticipate that we will continue to commit substantial resources to research and development in the future.

We have adopted a fabless semiconductor manufacturing model and we outsource all of our semiconductor manufacturing and assembly. This approach allows us to focus our resources on the design, development, testing and marketing of our products and significantly reduces our capital requirements. We develop our designs to be compatible with two foundries, United Manufacturing Corporation, or UMC, and Taiwan Semiconductor Manufacturing Corporation, or TSMC, both of which are located in Hsin Chu, Taiwan. This allows us to shift production from one facility to the other in the event of a capacity constraint at one foundry. We currently use 0.35 micron technology for production of our CyberPro 5000 family, 0.3 micron technology for production of our CyberPro 5300 family, and 0.18 micron technology for production of our CyperPro 5202 family.

We internally design and optimize digital and analog cells through our physical layer design group. We believe this allows us to reduce the size of the semiconductor and therefore the cost. This also gives us greater control over the quality and reliability of our multi-media display processors.

Assembly of our devices is performed by Advance Semiconductor Engineering, Inc. in Kaohsiung, Taiwan. We may also use Siliconware Precision Industries Ltd., located in Hsin Chu, Taiwan. Final testing is primarily performed by us at our subsidiary in Hefei, People’s Republic of China.

The semiconductor industry in general, and the market for integrated circuits for advanced televisions and emerging interactive displays, in particular, is highly competitive. We believe we can compete favorably in each of the key competitive factors in our target markets. These factors are:


	•	functionality;

	•	performance;

	•	time to market;

	•	price;

	•	conformity to industry standards;

	•	product road maps; and

	•	technical support.

Our current and primary competitors in our target markets are ATI Technologies, Inc., Broadcom Corporation, Genesis Microchip, Inc. and Silicon Image, Inc. In addition to these competitors, we expect other major semiconductor manufacturers will enter the market as the advanced television and emerging interactive display markets develop. A number of companies, including International Business Machines Corporation, STMicroelectronics N.V., National Semiconductor, Equator Technologies, Inc., LSI Logic and Philips Electronics N.V., have announced that they are developing or plan to introduce competing products in the advanced television and emerging interactive display markets which could result in significant competition. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market.

We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect our intellectual property and proprietary rights that we develop and license from others.

We have filed two applications for United States patents, one of which has been allowed, containing claims covering various aspects of combining digital streams of video and graphics for presentation on an output display and for changing the size of graphic data for presentation on a television output display. We expect to file patent applications as we deem appropriate to protect our technology and products. We cannot be sure that our patent applications will result in the issuance of patents, or that any issued patents will provide commercially significant protection to our technology.

We also license from others certain audio, graphics and semiconductor technology that is incorporated in our semiconductors and certain intellectual property rights. These licenses are perpetual and survive the termination of the agreements under which we obtained such licenses. The protections we receive from others against infringement under the terms of these licensing agreements are limited and we cannot be sure that alternative technology exists.

In July 2000, we entered into an agreement with Hitachi, Ltd., which has developed proprietary technology on system-on-a-chip SH-4 microprocessors (“SH-4”). As a result of our agreement, Hitachi licensed to us the right to use this SH-4 technology for system-on-a-chip integration in our products and to manufacture, distribute and sublicense products using the SH-4 technology. In March 2002, the Company postponed the product related to this technology indefinitely; accordingly, the Company wrote off $500,000 of license technology related to this SH-4 technology.

In December 2000, we entered into an agreement with Oak Technology, Inc. (“Oak”), which has proprietary 3D graphics technology that permits incorporation of the 3D graphics function onto our chips. As a result of our agreement, we were granted the right to use this 3D graphics technology for 3D graphics integration in our products and to manufacture, distribute and sublicense products using the 3D graphics technology.

In April 2001, we amended the agreement with Oak, in order to license Oak’s proprietary MPEG-2 technology that permits the incorporation of MPEG-2 decoding functions onto our chips. As a result of our agreement, we were granted the right to use this MPEG-2 technology for MPEG-2 integration in our products and to manufacture, distribute and sublicense products using the MPEG-2 decoding technology.

We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. It is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. If our products violate third party proprietary rights, we might not be able to obtain licenses to continue offering these products without substantial reengineering. Efforts to undertake this reengineering might not be successful, licenses might be unavailable on commercially reasonable terms, if at all, and litigation might not be avoided or settled without substantial expense and damage awards.

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Due to industry practice which allows customers to cancel or change orders with limited advance notice prior to shipment, we believe that backlog is not a reliable indicator of future revenue levels.

We were originally incorporated in California as Integraphics Systems, Inc. in March 1993. We changed our name to IGS Technologies in August 1997. In March 2000, we changed our name to Tvia, Inc. In August 2000, we reincorporated in Delaware. Tvia operates in one principal industry segment.

Our subsidiary in Hefei, People’s Republic of China, had 237 employees as of March 31, 2003, including 191 employees in research and development. This facility handles our operations and testing, and performs sales and marketing, in addition to research and development activities. Our market focus is centered on the Asia Pacific region, including China, Taiwan, Japan and Korea. We believe our Hefei subsidiary affords a cost effective means for us to develop products and supports for our extensive hardware and software alliances. Our subsidiary also gives us a presence in the China market.

The electronics industry has historically been subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future. These industry downturns have been, and may continue to be, characterized by diminished product demand, excess manufacturing capacity and subsequent erosion of average selling prices.

As of March 31, 2003, we had 277 full time employees including 216 engaged in research and development, 14 engaged in sales and marketing, 32 engaged in operations and 15 engaged in general management and administration activities. Of these employees, 37 work in our Santa Clara facility, 3 work in our Taiwan office and 237 work at our facility in the People’s Republic of China. Our employees are not represented by any collective bargaining agreement and we have never experienced a work stoppage. We believe our relations with our employees are good.

Our internet address is www.tvia.com. We make available free of charge through a hyperlink on its website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Forms 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the material is furnished to the SEC. Our website and the information contained therein or connected thereto is not intended to be incorporated into this Annual Report on From 10-K.

Our headquarters, which also serves as our principal administrative, selling, marketing, customer support, applications engineering and product development facility, is located in Santa Clara, California, and consists of one building of approximately 16,500 square feet under a lease that expires in July 2004. We also lease a sales, marketing and customer support office in Taipei, Taiwan of approximately 1,500 square feet under a month-to-month lease and a building located in Hefei, People’s Republic of China of approximately 15,000 square feet under a lease that expires in June 2005 for our research and development operations in China.

We believe our existing facilities are adequate to meet our needs for the near future and that future growth can be accomplished by leasing additional or alternative space on commercially reasonable terms.

From time to time the Company may be involved in litigation relating to claims arising in the ordinary course of business. As of the date of this filing, we do not have any legal proceedings pending against the Company or, to the best of its knowledge, threatened against it.

Kenny Liu, 49, has served as our Chairman of the Board since January 1995, and as Chief Executive Officer from January 1995 to November 2001. From January 1989 to March 1994, Mr. Liu served as Chairman and Chief Executive Officer of OPTi Inc., a manufacturer of core logic chip sets for the personal computer market. Mr. Liu received a B.S. in Electrical Engineering from National Cheng-Kung University in Taiwan, an M.S. in Computer Science from Santa Clara University and an M.S. in Electrical Engineering from Ohio State University.

Eli Porat, 57, has served as our Chief Executive Officer since November 2001and as President since February 2002. Mr. Porat has served as a director of our Company since March 2001. From January 1997 to November 2001, Mr. Porat was Chief Executive Officer of OpenGrid, Inc., a mobile business solutions company. From 1991 to 1996, Mr. Porat was Chief Executive Officer of DSP Group, an audio digital signal processing company. From 1972 to 1983, Mr. Porat was with Intel Corporation. Mr. Porat earned a B.S. and M.S. degrees in Electrical Engineering and Computer Science from the University of California, Berkeley.

Arthur Nguyen, 51, has served as our Chief Financial Officer since March 2003. He joined us as Corporate Controller in October 2000, serving in that position until February 2003. Prior to joining us, he served as Director of Accounting at marchFIRST, an internet consulting company from November 1999 to September 2000. From July 1996 to October 1999, Mr. Nguyen was Chief Financial Officer of Hayward Quartz Technology, Inc., a semiconductor component manufacturer. Mr. Nguyen received a Master in Business Administration with a concentration in Accounting from the California State University, San Bernardino and a B.S. in Business Administration from California State University, Sacramento. Mr. Nguyen is a Certified Public Accountant.

Jhi-Chung Kuo, 50, a cofounder of the Company, has served as our Vice President of Engineering since April 2002. From July 2000 to March 2002, he served as our Chief Technology Officer. From March 1993 to June 2000, Mr. Kuo served as our Vice President of Engineering. Mr. Kuo received a B.S. in Physics from National Central University in Taiwan and an M.S. in Electrical Engineering from Mississippi State University.

James Tao, 52, has served as Vice President of Sales and Marketing since October 2002. He joined us in June 1997 as Senior Director of Business Development, and served from November 1999 to February 2002 as Vice President of Business Development, and Vice President of Worldwide Marketing from March 2002 to September 2002. From March 1989 to May 1997, Mr. Tao served as Vice President of Sales and Marketing at Focus Information Systems, a personal computer peripheral product company. Mr. Tao received an M.B.A. in Telecommunication Management from Golden Gate University and an M.S. in Computer Science from the University of Hawaii.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s common stock, par value $0.001 (“Common Stock”), is traded on the Nasdaq National Market (“Nasdaq”) under the symbol “TVIA”, until December 4, 2002, when it began to trade on the Nasdaq SmallCap Market under the same ticker symbol. The following table sets forth, for the periods indicated, the range of high and low sales prices for the Common Stock on the Nasdaq National Market and SmallCap Market, as applicable.

As of May 31, 2003, the Common Stock was held by 299 stockholders of record (not including beneficial holders of stock held in street name). The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends in the foreseeable future. The Company currently intends to retain future earnings for the development of its business.

Information regarding securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report on Form 10-K.

The selected consolidated financial data set forth below with respect to our consolidated statements of operations data for the years ended March 31, 2003, 2002 and 2001, and with respect to our consolidated balance sheets at March 31, 2003 and 2002, are derived from our Consolidated Financial Statements and related Notes which are included in this Form 10-K. The selected consolidated statements of operations data for the years ended March 31, 2000 and 1999 and our consolidated balance sheet data at March 31, 2001, 2000 and 1999 are derived from our audited consolidated financial statements not included in this Form 10-K. The data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included in this Form 10-K.

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included elsewhere in this Report.

When used in this discussion, the words “expects,” “anticipates,” “estimates,” and similar expressions are intended to identify forward-looking statements. These statements relate to future periods and include statements as to expected revenues and sources of revenues, level of future revenues, decrease in sales to our top customers, reasons for decreased revenues, including the slowdown of the interactive television industry, an inventory correction, delay in customer product introductions and general economic uncertainty, net losses, future profitability, the reasonableness of our accounting assumptions and estimates, expected expenditures and the level of expenditures, the effect of certain accounting principles on our consolidated financial statements, future sales to key customers, the level of our research and development expense, development of new products, research and development in China, uses and adequacy of our current cash, cash equivalents and short-term investments, the impact of the adoption of accounting pronouncements, reliance on a small number of original equipment manufacturers, our ability to compete, increasing competition in our markets and our competitors, sales to customers outside of the United States, effect of foreign currency exchange rates, and changes in interest rates, are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as risks relating to as slower than anticipated emergence of the interactive television market; a further decrease in revenues, inability to timely reduce expenses; the effect of the terrorist attacks in the United States and any resulting conflicts or similar events worldwide on our customers’ demand of our products; the impact of worldwide events on our operations in China; general economic conditions and specific conditions in the markets we address; dependence on a key customer or OEM; the loss of a key customer; or key customer contract decreases in sales to a key OEM; our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner; the volume of our product sales and pricing concessions on volume sales; the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; fluctuations in the manufacturing yields of our third party semiconductor foundries and other problems or delays in the fabrication, assembly, testing or delivery of our products; purchases of capital assets; changes in our products or customer mix; the risk that excess inventory may result in write-offs, price erosion and decreased demand; the level of orders received that can be shipped in a fiscal quarter; the impact of foreign currency exchange rates; and the matters discussed in “Factors that May Affect Results.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

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

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

Approximately 86%, 32% and 67% of our total revenues for the fiscal years ended March 31, 2003, 2002 and 2001, respectively, were derived from customers located outside the United States. All of our revenues to date have been denominated in United States dollars. Historically, a relatively small number of customers and distributors have accounted for a significant portion of our product sales. Our top three customers accounted for 24%, 17% and 10% of total revenues in the fiscal year ended March 31, 2003, respectively. Our top two customers accounted for 62% and 14% of total revenues in the fiscal year ended March 31, 2002, respectively. Our top three customers accounted for 12%, 12% and 10% of total revenues for the fiscal year ended March 31, 2001, respectively.

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

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

We have sustained losses on a quarterly and annual basis since inception. As of March 31, 2003, we had an accumulated deficit of approximately $63.0 million. These losses resulted from significant costs incurred in the planning and development of our technology and services and from significant marketing costs. We anticipate lower revenues for at least the next several quarters as compared to the same periods in the prior fiscal year. We believe that this is due to a slowdown in the interactive television industry caused by a slower than anticipated emergence of the interactive television market, a general industry inventory correction, delay in customer product introductions in order to incorporate additional third-party features, and general economic uncertainty.

In connection with the grant of stock options to employees, we have recorded stock based compensation related to stock options granted below deemed fair market value cumulatively through March 31, 2003 of approximately $6.4 million. This amount represents the difference between the exercise price of these stock option grants and the deemed fair value of the common stock at the time of grant and it was fully amortized through March 31, 2003.

We have a subsidiary in Hefei, People’s Republic of China, which performs final test, sales and research and development, and a branch office in Taipei, Taiwan, which is primarily engaged in sales efforts.

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

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


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

	•	Receivables. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

	•	Inventory. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs could be required.

	•	Impairment of Long-Lived Assets. We evaluate long-lived assets used in operations, including purchased intangible assets, when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-live assets could be required.

The following tables set forth, for the periods indicated, certain consolidated statement of operations data reflected as a percentage of revenues. Our results of operations are reported as a single business segment.

Results of Operations for the Fiscal Years Ended March 31, 2003, 2002 and 2001

Revenues. Revenues were $2.2 million, $11.8 million and $13.4 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Revenues decreased by $9.6 million from fiscal year 2002 to fiscal year 2003 and $1.6 million from fiscal year 2001 to fiscal year 2002. These decreases were primarily due to a slower than anticipated emergence of the interactive television market and general economic conditions in fiscal years 2003 and 2002. Most of our revenues are from design wins with new OEMs which rely on third-party manufacturers or distributors to provide inventory management and purchasing functions.

Export revenues, consisting primarily of product sales and development contracts to OEMs, sales representatives and distributors in Asia, represented 86%, 32% and 67% of total revenues in fiscal years 2003,

2002 and 2001, respectively. All export revenues are denominated in United States dollars. We believe export sales will represent a majority of our revenues in the foreseeable future.

Gross margin. Gross margin was 31%, 27% and 43% for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Gross margin increased to 31% in fiscal 2003 from 27% in fiscal 2002 resulting from higher margin from non-product revenues. Gross margin decreased from 43% in fiscal 2001 to 27% in fiscal 2002 primarily as a result of inventory charges related to slow moving inventory impacted by the reduced revenues and product transition within our CyberPro 5000 product family and lower revenues over relatively fixed product cost.

Research and development. Research and development expenses include personnel and other costs associated with the development of product designs, process technology, software and programming hardware. Our research and development expenses reflect our continuing efforts to develop and bring to market innovative and cost effective multi-media display processors that process the rich media content available on the broadband network. Research and development expenses were $9.0 million, $12.7 million and $6.8 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. As a percentage of revenues, research and development expenses represented 402%, 107% and 51% for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. The decrease in research and development expenses in absolute dollars from fiscal year 2002 to fiscal year 2003 resulted primarily from a reduction of our research and development operations in Santa Clara, California. The increase in research and development expenses in absolute dollars and as a percentage of revenues from fiscal year 2001 to fiscal year 2002 was primarily attributable to the increase in the number of research and development personnel in both the second half of fiscal year 2001 and fiscal year 2002, higher levels of depreciation resulting from the acquisition of computers, lab equipment, and software, and a $0.5 million write-down of licensed technology. We now employ 216 employees in research and development, of which 25 are located in the United States and 191 are located in the People’s Republic of China. Our research and development activities in the People’s Republic of China provide software and application specific integrated circuit development support to our domestic operations. The costs of our research and development activities in China are substantially lower than the costs of our activities in Santa Clara. In the foreseeable future, we expect research and development expenses in absolute dollars to continue to slightly decline.

Sales, general and administrative. Sales, general and administrative expenses consist primarily of personnel and other costs associated with the management of our business and with the sale and marketing of our products. Sales, general and administrative expenses were $3.5 million, $5.1 million and $5.7 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. As a percentage of revenues, sales, general and administrative expenses were 159%, 43% and 42% for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. The decrease in sales, general and administrative expenses from fiscal year 2002 to fiscal year 2003 resulted from a reduction in workforce and other cost cutting measures. The decrease in sales, general and administrative expenses in absolute dollars from fiscal year 2001 to fiscal year 2002 was primarily due to approximately $0.4 million of higher tradeshow marketing expenses incurred in fiscal 2001. In the foreseeable future, we expect sales, general and administrative expenses in absolute dollars to continue to slightly decline.

Amortization of deferred stock compensation. We grant stock options to hire, motivate and retain employees. We incurred stock compensation expense of $0.6 million, $1.6 million and $2.7 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.

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

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

The Company anticipates that the remaining restructuring provision balance of $23,000 will be paid out by the end of the first quarter of fiscal 2004.

Other expense (income), net. Other expense (income), net consists primarily of interest income, interest expense and amortization of guarantee debt costs. Other income, net was $0.7 million, $1.8 million and $1.6 million for fiscal years 2003, 2002 and 2001, respectively. Other income, net, generated in the fiscal years ended March 31, 2003, 2002 and 2001 was primarily a result of interest income earned from our investments which increased significantly in fiscal year 2001 as a result of investments made using the proceeds from our initial public offering, and to a lesser extent, the repayment of our outstanding debt, partially offset by amortization of debt guarantee. Other income, net was further offset in fiscal years 2003 and 2002 by a lower return on our investments and declining levels of amount of cash and investments.

Provision for income taxes. We are taxed in our jurisdictions of operations based on the extent of taxable income generated in each jurisdiction. For income tax purposes, revenues are attributed to the taxable jurisdiction where the sales transactions generating the revenues were initiated. We incurred operating losses for each of the fiscal years ended March 31, 2003, 2002 and 2001, and therefore made no provision for income tax in these fiscal years. As of March 31, 2003, we had federal and state net cumulative operating losses of approximately $46.0 million and $9.0 million, respectively, which are available to offset future taxable income. If not used, these federal and state net operating losses will expire through 2023 and 2013, respectively.

Extraordinary item. In August 2000, we used a portion of the proceeds of our initial public offering to repay approximately $4.0 million of debt that was outstanding at that time. As a result of this early extinguishment of debt, the unamortized portion of the debt guarantee costs was recorded as an extraordinary item, net of income taxes, in the amount of $0.7 million for the fiscal year ended March 31, 2001.

Preferred stock dividend. During the fiscal year ended March 31, 2001, we recorded a preferred stock dividend of $0.7 million, representing the value of the beneficial conversion feature on the issuance of convertible preferred stock. The beneficial conversion feature was calculated at the commitment date based on the difference between the conversion price of $3.75 per share and the estimated fair value of the common stock at that date.

During the fiscal year ended March 31, 2003, net cash used in operating activities was $10.2 million, primarily due to net loss of $12.7 million, a decrease in accrued expenses of $0.6 million and an increase in accounts receivable of $0.2 million, partially offset by non-cash expenses of $2.0 million and decreases of $0.8 million and $0.5 million in prepaid expenses and other current assets, and inventories, respectively. During the fiscal year ended March 31, 2002, net cash used in operating activities was $8.0 million, primarily due to net loss of $14.3 million, a decrease in accrued expenses of $1.1 million, partially offset by non-cash expenses of $3.2 million and decreases of $1.8 million and $2.8 million in accounts receivable and inventories, respectively. During the fiscal year ended March 31, 2001, net cash used in operating activities was $9.6 million primarily due to net loss of $8.5 million, increase in inventories of $3.0 million and increase in other prepaid expenses and current assets of $1.3 million, partially offset by non-cash expenses of $4.3 million.

Purchases of property and equipment were $0.8 million, $2.1 million and $2.2 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. As of March 31, 2003, we did not have any significant capital purchase commitments.

Net cash flows from financing activities were $0.0 million, $0.3 million and $54.7 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Net cash flows from financing activities in fiscal 2002 resulted primarily from the proceeds from the sale of common stock under our Employee Stock Purchase Plan. Net cash flows from financing activities in fiscal 2001 resulted primarily from the proceeds from the issuance of common stock in our initial public offering completed in August 2000, the sale of 409,992 shares of Series I convertible preferred stock, and the sale of common stock to Wind River, partially offset by the repayment of outstanding debt and the repurchase of our common stock.

As of March 31, 2003, our principal source of liquidity consisted of cash and cash equivalents and short-term investments. Working capital at March 31, 2003 was $24.3 million.

The following represent our more significant working capital commitments which information is included in Note 11 to the Consolidated Financial Statements in Item 8:

The Company leases its facilities under non-cancelable operating leases expiring at various dates through June 2005. The Company purchased certain software under capital leases. Future minimum lease payments under all capital and operating leases, and other purchase commitments as of March 31, 2003 were as follows (in thousands):

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

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

The Company places purchase orders with wafer foundries throughout its normal course of business. As of March 31, 2003, the Company had approximately $64,000 of outstanding purchase commitments with a supplier for the purchase of wafers. The Company expects to receive and pay for the wafers, within the next six months, from its existing cash balances.

Based on our current expectations, we believe that our cash and cash equivalents and short-term investment, which totaled $24.4 million at March 31, 2003, will be sufficient to meet our working capital and capital requirements through at least the next twelve months. In the fiscal year ended March 31, 2003, we used $11.1 million of cash and cash equivalents and short-term investments. As a result of anticipated net losses and purchases of capital assets, we anticipate that we will use a slightly lower amount in the fiscal year ending March 31, 2004. We may also utilize cash to acquire or invest in complementary businesses or to obtain the use of complementary technologies.

In September 2001, the Company implemented option exchanges with the Chairman of the Board of Directors and the former Vice President of Engineering. These officers were given the opportunity to exchange options for a new grant for the same number of shares at least six months and a day after completion of the option exchange. On April 5, 2002, the Company granted these officers new options to replace the eligible options that had been cancelled.

Our former President resigned on January 31, 2002 and received a severance package that included additional salary equal to $94,000 and an additional six months of vesting for his stock options.

A member of the Board of Directors was a former officer of a company which is an affiliate company of a major customer. Sales to this customer were $31,000, $127,000 and $43,000 for the years ended March 31, 2003, 2002 and 2001, respectively.

A member of the Board of Directors was a former officer of companies which are affiliated to the Company’s major vendors UMC and TSMC, respectively. Purchases from UMC amounted to $443,000 and $2,485,000 for the fiscal year ended March 31, 2003 and 2002, respectively. Total combined purchases from UMC and TSMC amounted to $7,062,000 for the fiscal year ended March 31, 2001. The accounts payable outstanding to UMC as of March 31, 2003 and 2002 were $64,000 and $173,000, respectively. The total combined accounts payable outstanding to UMC and TSMC as of March 31, 2001 was $312,000.

Another member of the Board of Directors received $0, $13,000 and $10,500 in the years ended March 31, 2003, 2002 and 2001, respectively, and an option to purchase 25,000 shares of common stock in the year ended March 31, 2001, for providing management consulting services. The consulting agreement with this Board member terminated on August 1, 2002.

The impact of inflation on our business has not been material for the fiscal years ended March 31, 2003, 2002, and 2001.

In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be realized in the period which it is incurred if a reasonable estimate of fair value can be made. Companies are required to adopt SFAS No. 143 for fiscal years beginning after June 15, 2002, but early adoption is encouraged. The Company has determined that this standard will not have a material impact on its financial position and results of operations.

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.” Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS No. 145 provisions regarding

early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company believes that the adoption of this standard will have no material impact in its financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We adopted SFAS No. 146 during the first quarter of fiscal year 2003. The provisions of EITF No. 94-3 continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this standard did not have a material impact on our financial position, results of operations or cash flows. Our products typically carry on a one-year warranty. We have historically experienced minimal warranty costs.

In November 2002, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements and believes that the adoption of the remaining provisions of this standard will have no material impact on its financial statements.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after

January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this standard did not have a material impact on its financial statements.

The following table presents selected unaudited quarterly results of operations data for each of the eight quarters in the period ended March 31, 2003. We believe that the historical quarterly information has been prepared substantially on the same basis as the audited financial statements, and the necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly unaudited quarterly results of operation data (in thousands, except per share data):

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

We have incurred significant operating losses in each year since our inception and expect to continue to incur net losses for the foreseeable future, primarily as a result of expenses for research and development. Our losses increased as we transitioned our focus away from the personal computer market toward the advanced television and emerging interactive display markets in 1996. We have incurred net losses of approximately $63.0 million from our inception in March 1993 through March 31, 2003. If we continue to incur net losses, we may not be able to expand our business as quickly as we would like. We do not know when or if we will become profitable and if we do become profitable, we may not be able to sustain or increase our profitability.

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

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

Our success will also depend on the ability of OEMs and service providers that work with our OEMs to create demand for and market the products incorporating our semiconductors. Unless a sufficiently large market for advanced televisions and emerging interactive displays and other products that are used for interactive television develops, demand for products incorporating our semiconductor solutions may not be sufficient to sustain our business.

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

Historically we have been, and we expect to continue to be, dependent on a relatively small number of customers for a significant portion of our total revenues. Sales to Siemens Communications Ltd., Kanematsu Devices Corporation and Micro Network Korea Co, Ltd. represented 24%, 17% and 10% of our total revenues for the fiscal year ended March 31, 2003, respectively. Sales to Prediwave Corporation and Motorola Broadband accounted for approximately 62% and 14% of our total revenues for the fiscal year ended March 31, 2002, respectively. For fiscal year ended March 31, 2001 sales to Prediwave Corporation, Kanematsu Devices Corporation and Weikeng Industrial, Ltd. accounted for approximately 12%, 12% and 10% of our total revenues, respectively. We may not be able to retain our largest customers or to obtain additional key accounts. Any reduction or delay in sales of our products to any key customer or our inability to successfully develop relationships with additional key customers could negatively impact our financial results.

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

We have made substantial expenditures on research and development and organizational infrastructure consisting of an executive team, finance, sales, marketing and management information systems departments and our design center located in the People’s Republic of China. For the fiscal years ended March 31, 2003, 2002 and 2001, research and development expenses represented 402%, 107% and 51% of our revenues, respectively. We expect to continue to spend substantial financial and other resources on developing and introducing new products and services, and on our research and development activities in China. While we have implemented actions to reduce our operating expenses at our headquarters in Santa Clara, California, our operating expenses may increase as a percentage of revenues if our revenues decline. If our revenues do not increase, our business and results of operations could suffer. We base our expense levels in part on our expectations regarding future revenues. If our revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter.

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

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

Effective at the beginning of trading on December 4, 2002, the listing of our common stock was transferred to the Nasdaq SmallCap Market and if we are unable to maintain our listing on the Nasdaq SmallCap Market, the price and liquidity of our common stock may decline.

Beginning at the commencement of trading on December 4, 2002, our common stock was listed on the Nasdaq SmallCap Market. The transfer of our common stock to the Nasdaq SmallCap Market will result in decreased liquidity of our common stock and may further decrease the price per share of our common stock.

As a result of the transfer to the Nasdaq SmallCap Market, we may become subject to certain sections of the California Corporations Code that may affect our charter documents. For example, we may not be able to continue to have a classified board or continue to eliminate cumulative voting. In addition, certain provisions of our Certificate of Incorporation that call for supermajority voting may need to be approved by stockholders every two years or be eliminated. Also, in the event of a reorganization, stockholders may have certain dissenting stockholder rights. The transfer to the Nasdaq SmallCap Market may also require that we amend provisions of our stock incentive plan and employee stock purchase plan.

There can be no assurance that we will be able to satisfy all of the quantitative maintenance criteria for continued listing on the Nasdaq SmallCap Market including a continued minimum bid price of $1.00 per share. Although we were unable to comply with this criteria for at least 10 consecutive trading days before January 27, 2003, Nasdaq granted us an additional 180 days, or until July 28, 2003, to comply with the minimum closing bid price requirement because we met the initial listing requirements of the Nasdaq SmallCap Market on that date. If we are unable to comply with this criteria for 10 consecutive trading days before July 28, 2003, or we are unable to continue to meet any of the Nasdaq SmallCap Market’s initial listing requirements during the 180 days grace period, we may be delisted from the Nasdaq SmallCap Market, which could further decrease the price per share and the liquidity of our common stock, and make it more difficult for us to raise capital in the future.

In addition, many companies that face delisting as a result of closing bid prices that are below the Nasdaq SmallCap Market’s continued listing standards seek to maintain the listing of their securities by effecting reverse stock splits. However, reverse stock splits do not always result in a sustained closing bid price per share. We are currently considering the merits of implementing a reverse split and plan to submit a proposal to such effect in our proxy materials for our 2003 annual meeting of stockholders. We will continue to evaluate this option as well as other courses of action.

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

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

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

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

We operate in a highly competitive, quickly changing environment marked by new and emerging products and technologies. Our success depends on our ability to develop, introduce and successfully market new products and enhance our existing products in the advanced television and emerging interactive display

markets. The development of these new products is highly complex and, from time to time, we have experienced delays in completing their development and introduction. Any one of the following factors could affect our ability to develop, introduce and sell new products and could materially harm our business:


	•	our failure to complete new product designs in a timely manner;

	•	our inability to manufacture our new products according to design specifications;

	•	our inability to deliver our products to our customers in a timely manner for any reason, including a lack of manufacturing capacity or the failure of our contracted foundries to meet targeted manufacturing yields; and

	•	our sales force’s and independent distributors’ inability to create adequate demand for our products.

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

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


	•	the general condition of the semiconductor industry market;

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

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

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

	•	changes in industry standards;

	•	introduction of interactive television services by service providers;

	•	availability of manufacturing capacity and raw materials, and inventory write-offs;

	•	product introductions and price changes by our competitors;

	•	our ability to specify, develop, introduce and market new products with smaller geometries, more features and higher levels of design integration in accordance with design requirements and design cycles;

	•	the level of orders received that can be shipped in a given period;

	•	changes in earning estimates or investment recommendations by analysts;

	•	changes in investors perceptions; and

	•	the effect of the terrorist attacks in the United States and any related conflicts or similar events worldwide.

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

The market for advanced televisions and emerging interactive displays in particular, and the semiconductor industry in general, are highly competitive. We compete with a number of domestic and international suppliers of semiconductors in our targeted markets. We expect competition to intensify as current

competitors expand their product offerings and new competitors enter our targeted markets. We believe that we must compete on the basis of a variety of factors, including:


	•	functionality;

	•	performance;

	•	time to market;

	•	price;

	•	conformity to industry standards;

	•	product road maps; and

	•	technical support.

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

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

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

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

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

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

The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, its products. These fluctuations have resulted in circumstances when supply and demand for the industry’s products have been widely out of balance. Our operating results may be materially harmed by industry wide semiconductor oversupply, which could result in severe pricing pressure or inventory write-

downs. For example, in fiscal 2002 we took a slow moving inventory charge, which negatively impacted our gross margin for fiscal 2002. On the other hand, in a market with undersupply, we would have to compete with larger companies for limited manufacturing capacity. If material shortages occur, we may incur additional costs to procure the scarce components or be unable to have our products manufactured in a timely manner or in quantities necessary to meet our requirements. Since we outsource all of our manufacturing, we are particularly vulnerable to supply shortages. As a result, we may be unable to fill orders and may lose customers. Any future industry wide oversupply or undersupply of semiconductors would materially harm our business and have a negative impact on our earnings.

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

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

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

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

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

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

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

Our products depend on complex software that we develop internally and license from others. Complex software often contains defects, particularly when first introduced or when new versions are released. Determining whether our software has defects may occur after our products are released into the market and distributed to our customers and end users, and may result in harm to our reputation, significant warranty costs, diversion of our technical resources and potential product liability claims that would be costly to defend and divert managerial resources.

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

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

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

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

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

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

The sale of our software business and software related assets may not close or we may not meet the milestone requirements, either of which could negatively impact our cash flow.

On June 18, 2003, we entered into an agreement with MediaTek, Inc. and certain of its subsidiaries to sell our software business and software related assets for $10.0 million. The closing of the transaction is subject to closing conditions. If we are unable to meet the closing conditions, then the transaction will not close and MediaTek will not purchase our software business and software related assets. If the transaction does not close, we will not receive the cash expected for the sale, and we will need to reevaluate our long-term strategy for the software business, which will consume management time and resources. Additionally, the payment of a portion of the purchase price is conditioned on our achieving specified milestones. If we are unable to meet the milestone requirements, than we will not receive a portion of the purchase price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Federal Communications Commission, or the FCC, has broad jurisdiction over our target markets. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations.

Accordingly, the effects of regulation on our customers or the industries in which our customers operate may, in turn, harm our business. FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on systems of suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business.

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

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemable convertible preferred stock and stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Tvia, Inc. and its subsidiary at March 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements of Tvia, Inc. for the year ended March 31, 2000 were audited by other independent accountants who have ceased operations. These independent accountants expressed an unqualified opinion on those consolidated financial statements in their report dated April 30, 2001.

We have audited the accompanying consolidated balance sheets of Tvia, Inc. and subsidiary (a Delaware corporation) as of March 31, 2001 and 2000, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended March 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tvia, Inc. and subsidiary as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with generally accepted accounting principles in the United States.

Our audits were made for the purpose of forming an opinion on the basic financial statements as a whole. The schedule listed under Item 14(a) is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied to our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements as a whole.

This audit report of Arthur Andersen LLP, our former independent public accountants, is a copy of the original report dated April 30, 2001 rendered by Arthur Andersen LLP on our consolidated financial statements included in our Form 10-K filed on June 29, 2001, and has not been reissued by Arthur Andersen LLP since that date. The consolidated balance sheets of Tvia, Inc. as of March 31, 2001 and 2000, and related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the two years in the period ended March 31, 2000 referred to in the audit report of Arthur Andersen LLP are not included in this Annual Report on Form 10-K. We are including this copy of the Arthur Andersen LLP audit report pursuant to Rule 2-02(e) of Regulation S-X under the Securities Act of 1933. See Exhibit 23.2 to this report for further discussion.

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY



																Common Stock
	Redeemable Convertible									Convertible
	Preferred Stock									Preferred Stock
																			Par
	Shares			Amount			Warrants			Shares			Amount			Shares			Amount


	(In thousands, except per share data)
Balance at March 31, 2000		5,107,385		$	16,594		$	849			5,802,112		$	9,242			5,233,806		$	—
Conversion of common stock from no par to $0.001 par value		—			—			—			—			—			—			5
Dividend related to redeemable convertible preferred stock		—			671			—			—			—			—			—
Shares issued in initial public offering, net of costs		—			—			—			—			—			5,675,050			6
Conversion of preferred stock to common stock		(5,107,385	)		(17,265	)					(5,802,112	)		(9,242	)		10,909,497			11
Conversion of preferred stock warrants to common stock warrants		—			—			(849	)		—			—			—			—
Issuance of warrants to WindRiver		—			—			—			—			—			—			—
Deferred stock compensation		—			—			—			—			—			—			—
Issuance of common stock for bonus		—			—			—			—			—			—			—
Amortization of deferred stock compensation		—			—			—			—			—			—			—
Sale of common stock to WindRiver		—			—			—			—			—			90,909			—
Repurchase of common stock		—			—			—			—			—			(22,369	)		—
Common stock issued under employee stock purchase plan		—			—			—			—			—			1,685			—
Exercise of options		—			—			—			—			—			1,110			—
Purchase of treasury stock		—			—			—			—			—			(60,000	)		—
Unrealized gain on available-for-sale investments		—			—			—			—			—			—			—
Net loss		—			—			—			—			—			—			—

Balance at March 31, 2001		—			—			—			—			—			21,829,688			22
Amortization of deferred stock compensation		—			—			—			—			—			—			—
Issuance of common stock under ESPP and through exercises of stock options		—			—			—			—			—			307,915			—
Unrealized loss on available-for-sale investments		—			—			—			—			—			—			—
Net loss		—			—			—			—			—			—			—

Balance at March 31, 2002		—			—			—			—			—			22,137,603			22
Amortization of deferred stock compensation		—			—			—			—			—			—			—
Purchase of treasury stock		—			—			—			—			—			(143,700	)		—
Repurchase of common stock		—			—			—			—			—			(93,691	)		—
Issuance of common stock under ESPP and through exercises of stock options		—			—			—			—			—			238,865			—
Unrealized loss on available-for-sale investments		—			—			—			—			—			—			—
Net loss		—			—			—			—			—			—			—

Balance at March 31, 2003		—		$	—		$	—			—		$	—			22,139,077		$	22

[Continued from above table, first column(s) repeated]


							Accumulated
	Additional			Deferred			Other
	Paid-in			Stock			Comprehensive			Accumulated			Treasury			Stockholders’
	Capital			Compensation			Income			Deficit			Stock			Equity (Deficit)


	(In thousands, except per share data)
Balance at March 31, 2000	$	7,846		$	(4,499	)	$	—		$	(26,855	)	$	—		$	(14,266	)
Conversion of common stock from no par to $0.001 par value		(5	)		—			—			—			—			—
Dividend related to redeemable convertible preferred stock		—			—			—			(671	)		—			(671	)
Shares issued in initial public offering, net of costs		55,230			—			—			—			—			55,236
Conversion of preferred stock to common stock		26,496			—			—			—			—			17,265
Conversion of preferred stock warrants to common stock warrants		849			—			—			—			—			849
Issuance of warrants to WindRiver		250			—			—			—			—			250
Deferred stock compensation		367			(369	)		—			—			—			(2	)
Issuance of common stock for bonus		28			—			—			—			—			28
Amortization of deferred stock compensation		—			2,701			—			—			—			2,701
Sale of common stock to WindRiver		1,000			—			—			—			—			1,000
Repurchase of common stock		(2	)					—			—			—			(2	)
Common stock issued under employee stock purchase plan		16			—			—			—			—			16
Exercise of options		—			—			—			—			—			—
Purchase of treasury stock		—			—			—			—			(660	)		(660	)
Unrealized gain on available-for-sale investments		—			—			148			—			—			148
Net loss		—			—			—			(8,470	)		—			(8,470	)

Balance at March 31, 2001		92,075			(2,167	)		148			(35,996	)		(660	)		53,422
Amortization of deferred stock compensation		—			1,572			—			—			—			1,572
Issuance of common stock under ESPP and through exercises of stock options		313			—			—			—			—			313
Unrealized loss on available-for-sale investments		—			—			(117	)		—			—			(117	)
Net loss		—			—			—			(14,265	)		—			(14,265	)

Balance at March 31, 2002		92,388			(595	)		31			(50,261	)		(660	)		40,925
Amortization of deferred stock compensation		—			595			—			—			—			595
Purchase of treasury stock		—			—			—			—			(90	)		(90	)
Repurchase of common stock		(14	)		—			—			—			—			(14	)
Issuance of common stock under ESPP and through exercises of stock options		70			—			—			—			—			70
Unrealized loss on available-for-sale investments		—			—			(25	)		—			—			(25	)
Net loss		—			—			—			(12,695	)		—			(12,695	)

Balance at March 31, 2003	$	92,444		$	—		$	6		$	(62,956	)	$	(750	)	$	28,766

The accompanying notes are an integral part of these consolidated financial statements.

Tvia, Inc. (“the Company” or “Tvia”) was incorporated in California in March 1993 and reincorporated as a Delaware corporation in August 2000. Tvia designs, develops and markets multi-media display processors for the advanced television and emerging interactive display markets. The Company’s products, which consist of integrated circuits and proprietary software, process video, graphics and audio signals from terrestrial broadcast, narrow band telephone lines, cable, satellite and Ethernet and blend them together on one or more displays for a high quality, customized and interactive viewing experience. The Company sells its multi-media display processors to manufacturers of advanced television and emerging interactive displays. The Company has a subsidiary in the People’s Republic of China that supports the Company’s research and development activities and performs product testing and sales and marketing functions, and a branch in Taiwan that operates as a sales office.

On August 14, 2000, the Company closed its initial public offering in which it sold 5,000,000 shares of its common stock at $11.00 per share, and granted the underwriters an option to purchase up to 750,000 shares to cover over-allotments. Upon the closing of the offering, all of the Company’s 10,909,497 shares of preferred stock automatically converted into common stock, and warrants to purchase 288,330 shares of preferred stock automatically converted into warrants to purchase common stock. On September 11, 2000, the underwriters exercised the over-allotment option to purchase 675,050 shares of common stock at $11.00 per share. Proceeds from the offering were $55.2 million, net of all initial public offering costs.

A loan payable guaranteed by a related party of $3.0 million was repaid from proceeds of the initial public offering and, as a result of the early extinguishment of debt, the unamortized portion of the debt guarantee cost was recorded as an extraordinary item, net of income taxes, which totaled to $672,000.

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

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

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

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

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

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

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

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

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

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

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

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

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

recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based employee compensation.

In June 2000, the Company’s board of directors approved a 1-for-3 stock split of the Company’s common and preferred stock. All references in the accompanying consolidated financial statements to earnings per share and the number of shares have been retroactively restated to reflect the stock split.

Net loss per share has been calculated in accordance with the Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Basic net loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted loss per share information is the same as basic net loss per share since common shares issuable upon conversion of the redeemable convertible preferred stock, convertible preferred stock, stock options and warrants are antidilutive.

are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We adopted SFAS No. 146 during the first quarter of fiscal year 2003. The provisions of EITF No. 94-3 continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred

FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this standard did not have a material impact on its financial statements.

Depreciation and amortization expense were $1.3 million, $1.1 million and $0.4 million for fiscal years 2003, 2002 and 2001, respectively.

License technology is being amortized over estimated useful lives of five years. Estimated future amortization expense is as follows (in thousands):

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

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

The Company anticipates that the remaining restructuring provision balance of $23,000 will be paid out by the end of the first quarter of fiscal 2004.

As a result of the Company’s continued losses, there was no provision for income taxes for the years ended March 31, 2003, 2002 and 2001.

The following is a reconciliation of the statutory federal tax rate to the Company’s effective tax rate is as follows:

At March 31, 2003, the Company had net cumulative operating loss carryforwards for federal and state income tax reporting purposes of approximately $46.0 million and $9.0 million, respectively. The federal net operating loss carryforwards expire on various dates through 2023. The state net operating loss carryforwards expire on various dates through 2013. As of March 31, 2003, the Company had federal and state research and development tax credit carryforwards of approximately $1.4 million and $1.5 million, respectively available to offset future taxes. Utilization of net operating losses may be subject to annual limitations due to ownership change limitations imposed by the Internal Revenue Service and similar state provisions. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainty regarding the realization of the asset balance due to the net losses incurred and lack of taxable income.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

The following outstanding options and warrants were excluded from the computation of diluted net loss per share (in thousands):

The 2000 Stock Incentive Plan (the “2000 Plan”) provides for the issuance of shares of the Company’s common stock to directors, employees and consultants. The 2000 Plan provides for the issuance of incentive stock options or non-qualified stock options. The 2000 Plan provides for the issuance of up to 2,333,333 shares of common stock, plus, commencing on January 1, 2001, annual increases equal to the lesser of 73,000 shares (amended on August 21, 2001 to 730,000 shares), 3% of the fully diluted outstanding common stock on January 1 of each year, or a lesser amount determined by the Board of Directors. Pursuant to the 2000 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For non-qualified stock options, the exercise price is no less than 85% of the fair market value on the date of grant. Options generally expire in 10 years. Options generally vest ratably over four years beginning the date of grant. As of March 31, 2003, 2,261,441 shares were available for grant under the 2000 Plan.

In March 2000, the Board of Directors adopted an Employee Stock Purchase Plan (the “ESPP”). A total of 333,333 shares of the Company’s common stock were reserved for issuance under the ESPP, plus, commencing on April 1, 2001, annual increases equal to the lesser of 83,333 shares, 3% of the outstanding common stock on such date, or a lesser amount determined by the Board of Directors. Each participant may purchase up to 4,000 shares on any purchase date. The ESPP permits eligible employees to contribute up to 15% of cash compensation toward the semi-annual purchase of the Company’s common stock. The purchase price is 85% of the fair market value on the day prior to the beginning of the six-month period at which an eligible employee is enrolled, or the end of each six-month offering period, whichever is lower. Employees purchased 39,851, 251,289 and 1,685 shares in fiscal 2003, 2002 and 2001, respectively. As of March 31, 2003, 623,841 shares were available for purchase under the ESPP.

The Stock Incentive Plan (the “1999 Plan”) provides for the issuance of up to 5,166,667 shares of the Company’s common stock to directors, employees and consultants. The 1999 Plan provides for the issuance of restricted stock bonuses, restricted stock purchase rights, incentive stock options or non-qualified stock options. Pursuant to the 1999 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For non-qualified stock options, the exercise price is no less than 85% of the fair market value on the date of grant.

Options generally expire in 10 years. Vesting periods are determined by the Board of Directors; however, options generally vest ratably over four years beginning one year after the date of grant. Options may be exercised prior to full vesting. Any unvested shares so exercised are subject to a repurchase right in favor of the Company with the repurchase price to be equal to the original purchase price of the stock. The right to repurchase at the original price lapses at a minimum rate of 20% per year over five years from the date the options granted. The 2000 Plan is the successor to the 1999 Plan. Since the 2000 Plan became effective, no further grants were made under the 1999 Plan.

The Stock Option Plan (the “1994 Plan”) provides for the issuance of options to acquire the Company’s common stock to directors, employees and consultants. The 1994 Plan provides for the issuance of incentive stock options or non-qualified stock options. Pursuant to the 1994 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For non-qualified stock options, the exercise price is no less than 85% of the fair market value on the date of grant. Options generally expire in 10 years. Options generally vest ratably over five years beginning the date of grant. In June 1999, all options outstanding under the 1994 Plan were cancelled and reissued under the 1999 Plan with the same terms and conditions as the previous options.

In November 2001, the Company issued two out of plan non-qualified options to acquire the Company’s common stock. One grant was for 800,000 shares, vesting over a 4 year period. The second grant was for 200,000 shares, vesting over a 6 year period but with a provision for earlier vesting one year after the grant date provided that certain criteria are achieved. Both grants had an exercise price of $1.27 per share, the fair market value on the date of grant, and expire in 10 years.

The following table summarizes activity under all of the Company’s stock option plans and out-of-plan options:


(1)	Includes 624,028 options cancelled pursuant to the Company’s agreements with certain officers and employees.

The weighted average fair values of options granted in fiscal years 2003, 2002 and 2001 were $0.86, $1.66 and $4.92, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

Under the 2000 Employee Stock Purchase Plan, the Company does not recognize compensation cost related to employee purchase rights under the Stock Purchase Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees’ purchase rights using the Black-Scholes option pricing model with the following assumptions for those rights granted in fiscal years 2003 and 2002:

The weighted average fair values of the purchase rights granted in fiscal years 2003 and 2002 were $0.18 and $1.59, respectively.

Deferred stock compensation represents the aggregate difference, at the grant date, between the respective exercise price of stock options and the fair value of the underlying stock. The deferred stock compensation expense is amortized on an accelerated basis over the vesting period of the individual award, generally four years. This method is in accordance with Financial Accounting Standards Board Interpretation No. 28. The Company had recorded unearned stock-based compensation of approximately $0.0 million, $0.0 million, and $0.4 million in the fiscal years ended March 31, 2003, 2002 and 2001, respectively, and has amortized deferred stock compensation of $0.6 million, $1.6 million and $2.7 million in these periods, respectively.

The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited.

In connection with the exercise of options pursuant to the 1999 Plan, employees entered into restricted stock purchase agreements with the Company. Under the terms of these agreements, the Company has a right to repurchase any shares at the original exercise price of the shares upon termination of employment. The repurchase right lapses ratably over the vesting term of the original grant. As of March 31, 2003, 27,459 shares were subject to repurchase by the Company.

In September 2001, the Company implemented option exchanges with eight officers and employees. These individuals were given the opportunity to exchange options for a new grant for the same number of shares at least six months and a day after completion of the option exchange. In September 2001, the Company accepted for cancellation options to purchase an aggregate of 624,028 shares of the Company’s common stock with a weighted-average exercise price of $7.48.

On April 5, 2002, in fiscal year 2003, the Company granted new options to purchase an aggregate of 624,028 shares of common stock to replace the eligible options that had been cancelled. The exercise price per share for the new options was $1.67, the last reported trading price of the Company’s common stock on that date.

Substantially all of the Company’s employees are eligible to participate in the Tvia 401(k) Plan. The Company contributed $98,000, $37,000 and $9,000 to the 401(k) Plan for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.

Our former President resigned on January 31, 2002 and received a severance package that included additional salary equal to $94,000 and an additional six months of vesting for his stock options.

A member of the Board of Directors was a former officer of companies which are affiliated with the Company’s major vendors UMC and TSMC, respectively. Purchases from UMC amounted to $443,000 and $2,485,000 for the fiscal year ended March 31, 2003 and 2002, respectively. Total combined payments to UMC and TSMC amounted to $7,062,000 for the fiscal year ended March 31, 2001. The accounts payable outstanding to UMC as of March 31, 2003 and 2002 was$64,000 and $173,000, respectively. The total combined accounts payable outstanding to UMC and TSMC as of March 31, 2001 were $312,000.

Another member of the Board of Directors received $0, $13,000 and $10,500 in the year ended March 31, 2003, 2002 and 2001, respectively, and an option to purchase 25,000 shares of common stock in the year ended March 31, 2001, for providing management consulting services. The consulting agreement with this Board member terminated on August 1, 2002.

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

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

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

As of March 31, 2003 and 2002, accounts receivable were concentrated with customers as follows:

The Company recorded bad debt expense of $8,000 and $100,000 for fiscal years 2003 and 2002, respectively.

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

In the event either foundry suffers financial difficulties or suffers any damage or destruction to its respective facilities, or in the event of any other disruption of foundry capacity, the Company may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.

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

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

The Company has operations in the United States, Taiwan and China. The operating expenses of the Taiwan branch and the China subsidiary for the years ended March 31, 2003, 2002 and 2001, and the total assets as of the respective dates in Taiwan and China were not material to the Company’s consolidated financial statements.

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

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

The Company leases its facilities under non-cancelable operating leases expiring at various dates through June 2005. Under the terms of the leases, the Company is responsible for a portion of the facilities’ operating expenses, insurance and property taxes. Rent expense under operating leases for the years ended March 31, 2003, 2002 and 2001, were approximately $0.6 million, $0.6 million and $0.4 million, respectively.

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

In June 2003, the Company entered into an agreement to sell its software business and software-related assets to Mediatek, Inc. in exchange for $10 million in cash, subject to milestones and closing conditions. The software assets were developed internally to support the Company’s products, including Home IT, advanced digital video broadcasting, MPEG 4 software, SDK software and software drivers. Under the agreement, MediaTek will grant to the Company a royalty-free license to continue to use those software assets to support its existing products and fulfil its maintenance obligations to its existing customers. The development costs related to the software assets were expensed as incurred. The Company expects to report the gain from this transaction in the results of operations in the quarter ending June 30, 2003 depending on satisfaction of milestones and closing conditions. The Company expects the Mediatek will hire approximately 90 software employees of the Company who have worked with the software technologies.

All schedules are omitted because they are applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

On April 8, 2002, the Board of Directors of the Company, upon recommendation of the Company’s Audit Committee, made a determination to no longer engage Arthur Andersen LLP (“Arthur Andersen”) as the Company’s independent public accountants and engaged PricewaterhouseCoopers LLP on April 10, 2002 to serve as the Company’s independent public accountants for the fiscal year ended March 31, 2002.

Arthur Andersen’s reports on the Company’s consolidated financial statements for each of the fiscal years ended March 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended March 31, 2001 and 2000 and the subsequent interim period through April 10, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such years, and there were no reportable events as set forth in Item 304(a)(1)(v) of Regulation S-K.

The information required by this item (with respect to Directors) is incorporated by reference from the information under the caption “Election of Directors” contained in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2003 Annual Meeting of Stockholders to be held on September 2, 2003 (the “Proxy Statement”).

Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

For information with respect to the executive officers of the Company, see “Executive Officers of the Registrant” at the end of Part I of this report.

The information required by this item is incorporated by reference from the information under the captions “Election of Directors — Director Compensation,” “Executive Compensation,” and “Election of Director — Compensation Committee Interlocks and Insider Participation” contained in the Proxy Statement.

The information required by this item is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement.

Set forth in the table below is certain information regarding the number of shares of Common Stock that were subject to outstanding stock options or other compensation plan grants and awards as of March 31, 2003.


(1)	Includes shares to be issued upon exercise of outstanding options and warrants granted under the 1999 Plan and the 2000 Plan. Options or warrants to purchase shares of the Company’s Common Stock are no longer granted under the 1999 Plan.

(2)	In November 2001, the Company issued two out-of-plan non-qualified options. The first grant is for 800,000 shares of Common Stock, with an exercise price of $1.27, the fair market value on the date of grant. The option vests over a four year period. The second grant is for 200,000 shares of Common Stock, with an exercise price of $1.27, the fair market value on the date of grant. If certain performance objectives are met, the second option will vest ratably over 48 months beginning on the last day of the first month following the first anniversary of the vesting commencement date. If the performance objectives are not met, the option will vest in full on the sixth anniversary of the vesting commencement date.

(3)	Includes warrants to purchase 26,666 and 166,665 shares of Common Stock at exercise prices of $3.00 and $3.75 per share, respectively. The warrants were issued between December 1997 and January 2000 to related party guarantors of loans previously incurred by the Company. The loans were repaid. Each of the warrants has a term of five years and terminates between April 2004 and January 2005.

(4)	Includes warrants to purchase 13,333 and 8,333 shares of Common Stock at exercise prices of $3.00 and $3.75 per share, respectively. The warrants were issued to a bank in June 1999 and in December 1999 in connection with loans previously incurred by the Company. The loans were repaid. The warrants have a term of five years and terminate in June 2004 and December 2004.

(5)	Includes a warrant to purchase 45,454 shares of Common Stock at an exercise price of $11.00 per share. The warrant was issued to a company that provided marketing services to the Company. The warrant has a term of three years and expires in July 2003.

(6)	Includes 623,841 shares reserved for issuance under the Company’s 2000 Employee Stock Purchase Plan (the “ESPP”). The number of shares reserved for issuance under the ESPP increases on April 1, of every year, by the lesser of: 83,333 shares; 3% of the outstanding Common Stock on such date; or a lesser amount determined by the Board of Directors. Each participant may purchase up to 4,000 shares on any purchase date. The ESPP permits eligible employees to contribute up to 15% of cash compensation toward the semi-annual purchase of the Company’s Common Stock. The purchase price is 85% of the fair market value on the day prior to the beginning of the six-month period at which an eligible employee is enrolled, or the end of each six-month offering period, whichever is lower.

The information required by this item is incorporated by reference from the information contained under the captions “Certain Relationships and Related Party Transactions” contained in the Proxy Statement.

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of a date within 90 days prior to the filing date of this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

(b) Changes in internal controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	Reference is made to the Index to Consolidated Financial Statements of Tvia, Inc., under Item 8 of Part II hereof.


	Reference is made to the Index to Consolidated Financial Statements of Tvia, Inc., under Item 8 of Part II hereof. All schedules are omitted because they are not applicable or not required or because the information is included elsewhere in the Consolidated Financial Statements or the Notes thereto.


	See Item 15(c) below. Each management contract or compensatory plan or arrangement required to be filed has been identified.

The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the quarter ended March 31, 2003.


*	Filed herewith.

#	Indicates management contact or compensatory plan or arrangement.


†	Confidential treatment has been requested or granted with respect to certain portions of these agreements.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eli Porat and Arthur Nguyen, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


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

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

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

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


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


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


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


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


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

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

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

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


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


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


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


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


*	Filed herewith.

#	Indicates management contact or compensatory plan or arrangement.

†	Confidential treatment has been requested or granted with respect to certain portions of these agreements.


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

		For the fiscal year ended March 31, 2003

OR

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

		For the transition period from to


Delaware		77-0549628
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

4001 Burton Drive, Santa Clara, California 95054		(408) 982-8588
(Address of principal executive offices)		(Registrant’s telephone number, including area code)


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
CERTIFICATION
EXHIBIT INDEX
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 99.1
EXHIBIT 99.2


		Page

PART I
Item 1.	Business		2
Item 2.	Properties		9
Item 3.	Legal Proceedings		10
Item 4.	Submission of Matters to a Vote of Security Holders		10
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		11
Item 6.	Selected Consolidated Financial Data		12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk		31
Item 8.	Financial Statements and Supplementary Data		32
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		55
PART III
Item 10.	Directors and Executive Officers of the Registrant		55
Item 11.	Executive Compensation		55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		55
Item 13.	Certain Relationships and Related Transactions		56
Item 14.	Controls and Procedures		57
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		57
Signatures			60
Certifications			61
Exhibit Index			63


		High		Low

2001 Quarter Ended:
	June 30	$	3.00	$	1.44
	September 30		2.50		1.21
	December 31		2.11		0.87
2002 Quarter Ended:
	March 31		2.15		1.45
	June 30		1.90		0.88
	September 30		0.99		0.45
	December 31		0.77		0.47
2003 Quarter Ended:
	March 31		0.70		0.51



					Year Ended March 31,

					2003			2002			2001			2000			1999


					(In thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues:
	Product sales				$	1,771		$	11,342		$	12,743		$	6,528		$	1,432
	Development contracts and other					461			498			701			529			90

			Total revenues			2,232			11,840			13,444			7,057			1,522

Cost of revenues:
	Product sales					1,460			8,522			7,650			3,622			1,257
	Development contracts and other					83			109			68			185			51

			Total cost of revenues			1,543			8,631			7,718			3,807			1,308

Gross profit						689			3,209			5,726			3250			214

Operating expenses:
	Research and development					8,983			12,664			6,774			3,390			3,357
	Sales, general and administrative					3,545			5,056			5,695			3,370			2,062
	Amortization of deferred stock compensation					595			1,572			2,701			1,499			2
	Restructuring costs					950			—			—			—			—

				Total operating expenses		14,073			19,292			15,170			8,259			5,421

		Operating loss				(13,384	)		(16,083	)		(9,444	)		(5,009	)		(5,207	)
Other expense (income), net
	Interest income					(703	)		(1,818	)		(2,105	)		(49	)		(7	)
	Interest expense					14			—			132			328			173
	Amortization of debt guarantee debt and other					—			—			327			753			298

		Other expense (income), net				(689	)		(1,818	)		(1,646	)		1,032			464

Net loss before extraordinary item						(12,695	)		(14,265	)		(7,798	)		(6,041	)		(5,671	)
Extraordinary item, net of income taxes						—			—			672			—			—

Net loss						(12,695	)		(14,265	)		(8,470	)		(6,041	)		(5,671	)
Dividend related to convertible preferred stock						—			—			671			2,161			—

Net loss attributable to common stockholders					$	(12,695	)	$	(14,265	)	$	(9,141	)	$	(8,202	)	$	(5,671	)

Basic and diluted net loss attributable to common stockholders before extraordinary item					$	(0.58	)	$	(0.66	)	$	(0.56	)	$	(2.63	)	$	(2.56	)

Extraordinary item, net of income taxes					$	—		$	—		$	0.05		$	—		$	—

Basic and diluted net loss attributable to common stockholders					$	(0.58	)	$	(0.66	)	$	(0.61	)	$	(2.63	)	$	(2.56	)

Shares used in computing basic and diluted net loss per share to common stockholders before and after extraordinary item						21,952			21,631			15,052			3,118			2,219


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	License			Leased			Severances and
	Technology			Facilities			Benefits			Total

Balance at March 31, 2002	$	—		$	—		$	—		$	—
Additions		69			162			719			950
Write-off		(69	)		—			—			(69	)
Cash charges		—			(139	)		(719	)		(858	)

Balance at March 31, 2003	$	—		$	23		$	—		$	23


	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter

2003:
Total revenues	$	706		$	587		$	438		$	501
Gross margin		250			110			134			195
Net loss		(3,712	)		(4,109	)		(2,818	)		(2,056	)
Basic and diluted net loss per share	$	(0.17	)	$	(0.19	)	$	(0.13	)	$	(0.09	)
Shares used in computing basic and fully diluted net loss per share		21,983			21,969			21,948			22,012
2002:
Total revenues	$	2,463		$	3,515		$	4,210		$	1,652
Gross margin		(1,148	)		1,598			1,928			831
Net loss		(4,948	)		(2,854	)		(2,520	)		(3,943	)
Basic and diluted net loss per share	$	(0.23	)	$	(0.13	)	$	(0.12	)	$	(0.18	)
Shares used in computing basic and fully diluted net loss per share		21,493			21,551			21,897			21,831


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


			Page

Consolidated Financial Statements of Tvia, Inc.
	Report of Independent Accountants — PricewaterhouseCoopers LLP			33
	Independent Auditors’ Report — Arthur Andersen LLP			34
	Consolidated Balance Sheets			35
	Consolidated Statements of Operations			36
	Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity			37
	Consolidated Statements of Cash Flows			38
	Notes to Consolidated Financial Statements			39
Financial Statement Schedule
		All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto		54



				March 31,

				2003			2002


				(In thousands)
ASSETS
Current Assets:
	Cash and cash equivalents			$	11,080		$	6,445
	Short term investments				13,337			29,060
	Accounts receivable, net				331			164
	Inventories				1,055			1,510
	Prepaid expenses and other current assets				411			1,262

		Total current assets			26,214			38,441
Property and equipment, net					3,209			2,945
Other assets					1,770			2,001

		Total assets		$	31,193		$	43,387

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
	Accounts payable			$	632		$	691
	Accrued expenses				1,175			1,771
	Short-term portion of capital leases				134			—

		Total current liabilities			1,941			2,462
	Long-term portion of capital leases				486			—

		Total liabilities			2,427			2,462

Commitments and contingencies (Note 11)
Stockholders’ Equity
	Preferred stock, $0.001 par value: 5,000 shares authorized; none outstanding				—			—
	Common stock, $0.001 par value: 125,000 shares authorized; 22,139 and 21,138 shares outstanding, respectively				22			22
	Additional paid-in-capital				92,444			92,388
	Deferred stock compensation				—			(595	)
	Accumulated comprehensive income				6			31
	Accumulated deficit				(62,956	)		(50,261	)
	Treasury stock				(750	)		(660	)

			Total stockholders’ equity		28,766			40,925

			Total liabilities and stockholders’ equity	$	31,193		$	43,387



	For the Year Ended March 31,

	2003			2002			2001

Net loss	$	(12,695	)	$	(14,265	)	$	(9,141	)
Unrealized gain (loss) on available-for-sale investments		25			(117	)		148

Comprehensive loss	$	(12,720	)	$	(14,382	)	$	(8,993	)


Other Assets:
	License technology	$	1,969		$	1,969
	Less: Amortization		(231	)		—

	License technology, net	$	1,738		$	1,969
	Deposits		32			32

		$	1,770		$	2,001


Item 1.	*Business*


	*Software*


Fiscal
Year	Amount

2004		494
2005		568
2006		11

	$	1,073


	/s/ ARTHUR ANDERSEN LLP


Accrued Expenses:
	Accrued compensation costs	$	593	$	952
	Accrued software maintenance		99		99
	Other		483		720

		$	1,175	$	1,771


	License			Leased			Severances
	Technology			Facilities			and Benefits			Total

Balance at March 31, 2002	$	—		$	—		$	—		$	—
Additions		69			162			719			950
Write-off		(69	)		—			—			(69	)
Cash charges		—			(139	)		(719	)		(858	)

Balance at March 31, 2003	$	—		$	23		$	—		$	23



	Fiscal Years Ended
	March 31,

	2003			2002

Statutory federal tax rate		34.0	%		34.0	%
State income taxes, net of federal tax benefit		6.3			6.1
Stock-based compensation amortization		(1.6	)		(3.7	)
Research and development credit		6.6			2.8
Valuation allowance		(44.5	)		(35.9	)
Other		(0.8	)		(3.3	)

Effective tax rate		—	%		—	%


	2000 Stock Incentive Plan and 2000 Employee Stock Purchase Plan


		Outstanding			Weighted Average
		Options			Exercise Price

Balance at March 31, 2000			1,487,764			3.98
	Granted		1,448,977			5.98
	Exercised		(1,110	)		0.12
	Cancellations		(174,574	)		5.06

Balance at March 31, 2001			2,761,057			4.97
	Granted		2,530,324			1.66
	Exercised		(56,623	)		0.26
	Cancellations		(1,073,105	)(1)		6.51

Balance at March 31, 2002			4,161,653		$	2.62
	Granted		2,233,401			0.86
	Exercised		(199,014	)		0.26
	Cancellations		(1,746,232	)		2.81

Balance at March 31, 2003			4,449,808		$	1.79



Options Outstanding and Exercisable

Number						Number
Outstanding at		Weighted Average		Weighted		Exercisable at		Weighted
March 31,		Remaining		Average		March 31,		Average
2003		Contractual Life		Exercise Price		2003		Exercise Price

	1,290,830		9.56	$	0.50		—	$	0.50
	220,000		9.55		0.59		—		0.59
	1,000,000		8.67		1.27		466,666		1.27
	484,574		8.70		1.61		278,288		1.61
	475,353		8.31		2.07		295,354		2.07
	526,804		7.42		4.79		376,489		4.79
	101,666		6.98		8.85		76,249		8.85
	26,665		7.33		9.00		18,331		9.00
	39,667		7.33		11.00		26,442		11.00
	284,249		6.40		0.27		127,354		0.27

	4,449,808		8.58	$	1.79		1,665,173	$	1.79



		For the Year
		Ended March 31,

		2003			2002			2001

Accounts Receivable:
	Customer A		24	%		*			*
	Customer B		17	%		*			12	%
	Customer C		10	%		*			*
	Customer D		*			62	%		12	%
	Customer E		*			14	%		*
	Customer F		*			*			10	%


	Capital			Operating		Purchase
Fiscal Year	Leases			Leases		Commitments		Total

2004	$	144		$	296	$	64	$	504
2005		490			82		—		572
2006		—			11		—		11

Total minimum lease payments		634		$	389	$	64	$	1,087

Less: Amount representing interest		(14	)

Present value of minimum lease payments		620
Less: Current portion		(134	)

Long-term portion	$	486


Item 9.	*Changes In and Disagreements With Accountants on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters*


						Number of Securities
						Remaining Available
						for Future Issuance
	Number of Securities			Weighted-Average		Under Equity
	to be Issued Upon			Exercise Price of		Compensation Plans
	Exercise of			Outstanding		(Excluding
	Outstanding Options,			Options, Warrants		Securities Reflected
Plan Category	Warrants and Rights			and Rights		in Column (a))

Equity compensation plans approved by security holders		3,449,808	(1)	$	1.94		2,885,282
Equity compensation plans not approved by security holders		1,260,451	(2)(3)(4)(5)	$	2.02		—

Totals		4,710,259		$	1.96		2,885,282	(6)


Item 13.	*Certain Relationships and Related Transactions*


Item 15.	*Exhibits, Financial Statement Schedules, and Reports on Form 8-K*


Exhibit
Number		Description of Document

3(i).1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).
3(ii).		1 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).
4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).



	Title	Date
Name

/s/ ELI PORAT Eli Porat	Chief Executive Officer and President (Principal Executive Officer)	June 23, 2002

/s/ ARTHUR NGUYEN Arthur Nguyen	Chief Financial Officer (Principal Financial and Accounting Officer)	June 23, 2002

/s/ KENNY LIU Kenny Liu	Chairman of the Board	June 23, 2002

/s/ STEVEN CHENG Steven Cheng	Director	June 23, 2002

/s/ JAMES BUNKER James Bunker	Director	June 23, 2002

/s/ MARK MANGIOLA Mark Mangiola	Director	June 23, 2002

/s/ R. DAVID DICIOCCIO R. David Dicioccio	Director	June 23, 2002


	/s/ ELI PORAT

	Eli Porat
	Chief Executive Officer and President