UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 0-30539

TVIA, INC.

(Exact name of registrant as specified in its charter)

Securities registered to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

      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

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

      The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price on the Nasdaq Small Cap Market) on September 30, 2004 was approximately $24.8 million.

      As of May 31, 2005, there were 23,390,446 shares of Common Stock, $0.001 per share par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12, 13 and 14 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 2005 Annual Meeting of Stockholders to be held on August 11, 2005.

TVIA, INC. AND SUBSIDIARY

TABLE OF CONTENTS

2005 FORM 10-K

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.

      Tvia, Inc. is a fabless semiconductor company focused on designing, producing and marketing display processors for the digital and interactive TV market. The Company offers a family of flexible, high-quality display processors to TV manufacturers, creating next-generation digital high definition (HD) LCD TV, enhanced definition (ED) progressive-scan CRT TV and interactive multimedia display processors for Interactive Set Top Boxes.

      We currently offer five product families: the TrueView 5700 family, introduced in fiscal year 2005; the TrueView 5600 family, introduced in fiscal year 2004; the CyberPro 5202 family, introduced in calendar year 2002; the CyberPro 5300 family, introduced in calendar year 1999; and the CyberPro 5000 family, introduced in calendar year 1998. These product families currently generate most of our revenues. We sell our products through two channels. First, we sell our products directly to original equipment manufacturers, or OEMs, and recognize revenues at the time of shipment to these OEMs. We also 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 our proprietary software which we believe will continue to constitute a small percentage of total revenues in the future.

      Tvia was originally incorporated in California as Intergraphics Systems, Inc. in March 1993. In August 1997, we changed our name to IGS technologies. In March 2000, we changed our name to Tvia, Inc. In August 2000, we incorporated in Delaware. 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. Tvia operates in one principal industry segment.

Available Information

      Our internet address is http://www.tvia.com. Tvia makes the following filings available on its website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: 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.

Industry Background

      There are more than 2 billion standard analog televisions in the world today. All broadcast TV stations in the country have temporary use of a second, separate channel so that they can transition from analog broadcasting to digital. The target deadline for ending analog broadcasting is December 31, 2006, but this date may be extended. When analog broadcasting ends, consumers with analog sets will need to obtain a separate converter box to watch over-the-air TV. Analog sets equipped with a converter box will display the digital broadcasts, but not in full digital quality.

      Digital Television (DTV) is a new type of broadcasting that will transform your television viewing experience. Images and sound will be captured using digital technology, delivering a movie-quality experience with multicasting and interactive capabilities. That means better quality, more choices, and

      Over the next decade, we anticipate that digital television, or DTV, penetration will increase from 12 percent in 2004 to 44 percent by 2007. We believe this mass-scale global technology expansion will produce unique opportunities for superior display processor revenue growth. Several technologies are competing for a share of the DTV market including cathode ray tube (CRT), digital light processing (DLP), and plasma displays (PDP, and LCD).

      According to the market-research firm DisplaySearch, DTV is expected to follow a similar path to that of digital video disks (DVDs). DVD players have enjoyed rapid acceptance over the last few years. There are several factors that have contributed to the success of the DVD player, including ubiquitous content, smaller form factor, improved audio and visual quality and falling prices, a by-product of silicon integration. By comparison, the DTV market is small, but rapidly increasing. Based on current market conditions, we believe DTV unit shipments will increase over the next five years from 22 million in 2004 to 89 million in 2007.

      DTV growth drivers will largely mirror those of DVD players. Importantly, two of the largest components of DTV are glass and silicon, which we expect to drop materially in price over the next few years due to new capacity and better integration.

      Industry analysts define advanced television, or DTV, or digital displays, as displays that do not contain a digital tuner and integrated MPEG-2 decoder. In the case of LCD televisions, they tune and receive analog video signals and through the use of silicon-based processes such as 3D digital comb filtering and de-interlacing, significantly enhance the content so that it approaches the quality of DTV. At higher price points, the DTV televisions may include add-in board slots for DTV tuners and MPEG-2 decoders.

      According to SDI Marketing and Samsung, worldwide sales of DTVs, which include LCD, PDP, PJTV (projection televisions) and HDTV (CRT), are expected to grow from 22 million units in 2004 to 89 million units in 2007. Currently, television pictures are made up of lines that are scanned horizontally. HDTV pictures are created by scanning up to twice as many lines. This resolution and other technical factors improve the sharpness of the pictures, allowing you to read on your television small text commonly seen on your computer. HDTV sets have wider, movie-theater like screens that more closely resemble human peripheral vision, making it a better viewing experience.

      Within the emerging DTV market, LCD television is the largest and fastest growing sub-segment. Moreover, LCD televisions best illustrate the semi-conductor sales opportunities resulting from the transition to digital video through the use of silicon chips. LCD televisions principally receive analog television broadcasts and employ analog interfaces, yet they are incapable of scanning video in an interlaced manner. Interlaced video means that only half the image is scanned in or at any given frame or moment and as such, a viewer is only seeing half an image comprised of either odd or evenly scanned lines. LCDs only scan video progressively, and are fed interlaced or non-progressively with

      Our Solution

Products

      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 five product families: the TrueView 5700 family, introduced in calendar year 2004; the TrueView 5600 family, introduced in calendar year 2004; 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. Each of our semiconductor solutions include different features, which OEMs can select for inclusion in their products.

      The TrueView 5700 is a low pin count, low-cost, highly integrated digital video image display processor providing the key features necessary to design ED progressive scan CRT television.

      The TrueView 5600 product line targets the HD LCD television market and other LCD based applications such as, Multimedia displays, Web-pads, in-flight entertainment systems, and info-tainment system displays that process enhanced picture-in-picture and multiple source capabilities. Features that are optimized specifically for LCD’s include superior de-interlacing, advanced scaler performance and exceptional alpha blending features and multiple independent media streams. The strong alpha blending feature allows for transparent layers of media content used in creating outstanding menus and guides.

      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 LCDs, 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 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.

Customers

      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 digital television markets. The majority of our sales in fiscal 2005 were to manufacturers and distributors of DVR, electronic gaming, CRT-DTV, TV converter boxes, security market and transportation entertainment systems (airplanes, taxi and trains). In prior years, the majority of our sales were to the IPTV (TV over the internet) interactive set top market. Many of our customers manufacture or distribute products in more than one of our target markets.

      In fiscal 2005, sales to SMS Electronics, Ltd., Kanematsu Devices Corporation and Micro Network Korea Co., Ltd. represented 34%, 17% and 10% of revenues, respectively. In fiscal 2004, sales to Kanematsu Devices Corporation, SMS Electronics, Ltd., Weikeng Industrial Co., and Fujitsu-Siemens Computers Gmbh represented 15%, 12%, 12% and 10% of revenues, respectively. 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 2005, sales to customers in the Europe, Japan, China, the United States and Korea comprised 34%, 20%, 13%, 11% and 10% of revenues, respectively. In fiscal 2004, sales to customers in the United States, Europe, Taiwan and Japan comprised 24%, 24%, 18%, and 15% of revenues, respectively. In fiscal 2003, sales to customers in Europe, Taiwan, Japan, the United States and Korea comprised 35%, 25%, 16%, 14% and 10% of revenues, respectively.

Sales and Marketing

      We sell and market our display processors through our direct sales force, sales representatives and distributors.

      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 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, 2005, we employed a sales and marketing force of 24 people. We believe these personnel have the technical expertise and industry knowledge necessary to support a lengthy and complex sales process. We also employed ten field applications engineers to assist customers in

Research and Development

      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, 2005, our research and development staff consisted of 76 employees, (12 of whom were located in the United States and 64 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, where employee costs are lower than in the San Francisco Bay Area.

      Our research and development expenses for fiscal years 2005, 2004 and 2003 were $5.8 million, $6.8 million and $9.0 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.

Manufacturing

      We have adopted a fabless semiconductor manufacturing model and therefore 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 three foundries, United Manufacturing Corporation, or UMC, and Taiwan Semiconductor Manufacturing Corporation, or TSMC, both of which are located in Hsin Chu, Taiwan, and HuaHong NEC located in the People’s Republic of China. 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, TrueView 5600 and Trueview 5700 families. We use 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, and Belling Corp., Ltd. in ShangHai, People’s Republic of China. 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.

Competition

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

      Our current and primary competitors are ATI Technologies, Inc., Broadcom Corporation, Genesis Microchip, Inc., Pixelworks, Inc., Trident Microsystems, Inc. MediaTek Inc.(TWN), Morning Star (TWN), 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.

Intellectual Property

      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 been granted two United States patents, 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 December 2000, we entered into an agreement with Oak Technology, Inc. or 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 Technology, 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. In December 2003, we postponed the development of product related to this technology indefinitely; accordingly, we wrote off $1.5 million of license technology related to this MPEG-2 technology.

      In July 2003, we sold our software business and software-related assets to MediaTek, Inc. The software assets were developed internally to support our products, including Home IT, advanced digital video broadcasting, MPEG 4 software, SDK software and software drivers. In connection with this transaction, MediaTek granted to us a royalty-free license to continue to use those software assets to support our existing products and fulfill our maintenance obligations to our existing customers.

CyberPro and Tvia are registered trademarks, and the Tvia logo is a trademark of Tvia, Inc. in the United States and other jurisdictions.

Backlog

      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.

Seasonality

      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. The seasonal peak occurs prior to the Christmas holidays and the seasonal downturn occurs primarily during the June, July period. Industry downturns may be caused by adverse economic conditions. 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.

Employees

      As of March 31, 2005, we had 151 full time employees including 76 engaged in research and development, 24 engaged in sales and marketing, 26 engaged in operations and 25 engaged in general management and administration activities. Of these employees, 28 work in our Santa Clara facility, two work in Japan and 121 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 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 on December 31, 2006. We also lease a building located in Hefei, People’s Republic of China of approximately 15,000 square feet under a lease that expires in June 2007 for our research and development operations in China; a building in Beijing, People’s Republic of China of approximately 650 square feet that expires in November 2005, used for marketing and customer support purposes in China; and a building located in Shenzhen, People’s Republic of China of approximately 2,500 square feet that expires in August 2005 for our marketing and customer support 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 we 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 believe that any of the legal proceedings pending

      Not applicable.

Executive Officers

      The executive officers of the Company are as follows:

      Eli Porat, 59, was elected Chairman of the Board effective April 1, 2005 and succeeded Kenny Liu who resigned effective April 1, 2005. Mr. Porat has also served as our Chief Executive Officer since November 2001 and 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 B.S. and M.S. degrees in Electrical Engineering and Computer Science from the University of California, Berkeley.

      Diane Bjorkstrom, 49, joined the Company in September 2004 as Chief Financial Officer and Vice President of Administration. Prior to joining the Company, she served as an independent financial consultant from August 2002 to September 2004. From January 2002 to July 2002, Ms. Bjorkstrom served as the Chief Financial Officer of Blend MediaWorks, Inc., a software company. From October 1997 to January 2002, Ms. Bjorkstrom was employed by the Brenner Group Inc., an executive management firm. While there, she was the interim Chief Financial Officer of various high-tech companies. Ms. Bjorkstrom holds a B.S. in Commerce/ Accounting from Rider University. Ms. Bjorkstrom is a Certified Public Accountant.

      Jhi-Chung Kuo, 52, a co-founder 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.

      Benjamin. Silva, 44, joined the Company in September 2004 prior to being appointed Vice President of Worldwide Sales. From January 2004 through September 2004, he was the Executive Vice President of Marketing and Business Development at DG2L Technologies, Inc., a provider of next-generation digital media technologies. From October 2001 through December 2003, Mr. Silva served as the Vice President of Worldwide Sales and Business Development at iVAST, Inc., a digital media software company. From September 1999 through September 2001, he was the Vice President of Worldwide Sales and Business Development at Streaming 21, Inc., an Internet streaming video technology company. Mr. Silva holds a B.A. degree in communication/theatre with a minor in business administration from Boston University.

PART II

      The Company’s common stock, par value $0.001 (“Common Stock”), was 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

      As of May 31, 2005, the Common Stock was held by 165 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.

Securities Authorized for Issuance Under Compensation Plans

      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.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

      On November 10, 2001, the Board of Directors authorized a stock repurchase program to acquire outstanding common stock in the open market. Under this program, the Board of Directors authorized the acquisition of up to 200,000 shares of our common stock. This program does not have a stock repurchase maximum amount or an expiration date. As of March 31, 2005, we had acquired 143,700 shares on the open market that we hold as treasury stock.

      On August 20, 2002, the Board of Directors authorized an additional stock repurchase program to acquire up to 5 million shares of outstanding common stock in the open market for a maximum of $0.50 per share. This program does not have an expiration date. As of March 31, 2005, we had not repurchased any shares of common stock under this program.

      The following selected consolidated financial data should be read in conjunction with the consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. The consolidated statements of operations data for each of the five fiscal years in the period ended March 31, 2005, and the consolidated balance sheet data as of the end of each such fiscal year, are derived from our audited consolidated financial statements.

Quarterly Financial Data:

      The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. This document contains forward-looking statements that involve risks and uncertainties. Tvia’s (“the Company’s”) actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, fluctuations in customer demand, risks associated with competition, risks associated with product development, reliance on foreign manufacturers, foreign business, political and economic risks and risks identified in the Company’s Securities and Exchange Commission, filings, including, but not limited to, those discussed elsewhere in this Form 10-K under the heading “Risk Factors” located at the end of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K.

      We design, develop and market display processors for the interactive-television market as well as a family of flexible, high-quality display processors tailored to the Asia Pacific television manufacturers creating next-generation digital LCD, HD, and progressive-scan televisions.

      We currently offer five product families: the TrueView 5700 family, introduced in calendar year 2004; the TrueView 5600 family, introduced in calendar year 2003; 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. Historically, a relatively small number of customers and distributors have accounted for a significant portion of our product sales. In fiscal 2005, sales to SMS Electronics, Ltd., Kanematsu Devices Corporation and Micro Network Korea Co., Ltd. represented 34%, 17% and 10% of revenues, respectively. In fiscal 2004, sales to Kanematsu Devices Corporation, SMS Electronics, Ltd., Weikeng Industrial Co., and Fujitsu-Siemens Computers Gmbh represented 15%, 12%, 12% and 10% of revenues, respectively. 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. 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, plus 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 operating losses on a quarterly and annual basis since inception. As of March 31, 2005, we had an accumulated deficit of approximately $69.7 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 higher revenues for at least the next several quarters as compared to the same period in the prior fiscal year. We believe that this is due to an increase in demand in the digital television market.

      We have a subsidiary in Hefei, People’s Republic of China, which performs final production tests, research and development and logistics support. There are offices in Shenzhen and Beijing, People’s Republic of China, to provide sales and complete system support including design and integration to our customers.

Critical Accounting Policies and Estimates

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, inventory reserves, purchased intangible asset valuations, warranty reserves, and other contingencies. We base our estimates and assumptions on historic experience and on various other factors that we believe to be

      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:

      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, 2005, 2004 and 2003

      Revenues. Revenues were $3.3 million, $2.3 million and $2.2 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Revenues increased $1.0 million in fiscal year 2005 compared to fiscal year 2004. The increase in revenue for fiscal year ended March 31, 2005 was primarily the result of an increase in units shipped to customers. Revenues were relatively flat in fiscal year 2004 compared to fiscal year 2003. We generate most of our revenues from design wins with new OEMs that 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 89%, 76% and 86% of total revenues in fiscal

      Gross margin. Gross margin increased to 46% in fiscal year 2005 compared to 43% in fiscal 2004 primarily due to improved manufacturing yields and lower production costs. Gross margin increased to 43% in fiscal year 2004 compared to 31% in fiscal year 2003 primarily due to lower overhead burden and sale of inventories previously reserved for in fiscal year 2002. The reduction in overhead burden was due to lower headcount and facilities costs.

      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. Historically, 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. We are now focusing our research and development efforts on display processors for the interactive television market.

      Research and development expenses were $5.8 million, $6.8 million and $9.0 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. The decrease in research and development expense in absolute dollars and as a percentage of revenues from fiscal 2004 to fiscal 2005 is primarily due to a write-off of license technology totaling $1.5 million in fiscal 2004 without a comparable write-off in fiscal 2005. The decrease in research and development expense in absolute dollars and as a percentage of revenues from fiscal 2003 to fiscal 2004 resulted from the sale of our software business unit to MediaTek, Inc. in July 2003, partially offset by a write-off of license technology in fiscal 2004. 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 research and development activities in Santa Clara, California. In the foreseeable future, we expect research and development expenses in absolute dollars to slightly increase compared to the fourth quarter of fiscal 2005 expenses on an annualized basis.

      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 $3.7 million, $2.7 million and $3.5 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. The increase in sales, general and administrative expenses from fiscal year 2004 to fiscal year 2005 is primarily the result of hiring a direct sales staff in fiscal 2005, the related travel incurred by the sales staff, higher sales commission paid to sales staff and increased legal and audit fees. The decreases in sales, general and administrative expenses from fiscal year 2003 to fiscal year 2004 resulted from a reduction in workforce and other cost cutting measures. In the foreseeable future, we expect sales, general and administrative expenses in absolute dollars to be higher. This increase is expected to be primarily associated with the costs of compliance with the requirements established by the section 404 of the Sarbanes-Oxley Act of 2002.

      Amortization of deferred stock compensation. We grant stock options to hire, motivate and retain employees. We incurred stock compensation expense of $0.0 million, $0.0 million and $0.6 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively.

      Gain on Sale of Software Unit. The Company recorded a gain on a sale of its software business and software-related assets to MediaTek, Inc. in exchange for $10 million in cash in the fiscal year ended March 31, 2004. Expenses related to this transaction amounted to $0.9 million.

      Restructuring Charges. During fiscal 2003, the Company recorded a restructuring charge of $950,000 relating to a headcount reduction and termination of 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

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

      Other income (expense), net. Other income (expense), net consists primarily of interest income, interest expense and the gain on sale of our software business unit. Other income, net was $0.4 million, $9.5 million and $0.7 million for fiscal years 2005, 2004 and 2003, respectively. Other income, net, generated in the fiscal year ended March 31, 2005 was primarily a result of interest income earned from our investments. Other income, net, generated in the fiscal years ended March 31, 2004 primarily resulted from a gain of $9.1 million on sale of our software business and software-related assets to MediaTek, Inc. Other income, net, generated in the fiscal year ended March 31, 2003 was primarily a result of interest income earned from our investments.

      Provision for income taxes. We are taxed in our jurisdictions of operations based on the extent of taxable income generated in each jurisdiction. For income tax purposes, revenues are attributed to the taxable jurisdiction where the sales transactions generating the revenues were initiated. We incurred operating losses for each of the fiscal years ended March 31, 2005 and 2003, and therefore made no provision for income tax in these fiscal years. A provision for income tax for fiscal 2004 was recorded despite our prior years’ net operating losses. This was attributable to the US federal alternative minimum tax applied on the gain of the software business unit. As of March 31, 2005, we had federal, state, and foreign net cumulative operating losses of approximately $53 million, $17 million and $3.8 million, respectively, which are available to offset future taxable income. If not used, these net operating losses will expire on various dates through 2025, 2015 and 2007, respectively.

Liquidity and Capital Resources

      During the fiscal year ended March 31, 2005, net cash used in operating activities was $5.4 million, primarily resulting from an operating loss of $7.6 million, an increase in accounts receivable of $0.5 million, partially offset by an increase in accounts payable and accrued expenses of $1.2 million and depreciation and amortization expense of $1.3 million. During the fiscal year ended March 31, 2004, net cash used in operating activities was $5.4 million, primarily resulting from an operating loss of $8.5 million, a decrease in accrued expenses and accounts payable of $0.7 million, partially offset by a gain on the sale of our software business unit of $9.1 million, non-cash expenses of $3.0 million and a decrease of $0.5 million in inventories. During the fiscal year ended March 31, 2003, net cash used in operating activities was $10.5 million, primarily resulting from a net loss of $12.7 million, a decrease in accrued expenses and accounts payable of $0.9 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.

      Net cash flows used in financing activities were $0.2 million and $0.1 million for the fiscal years ended March 31, 2005 and 2004 respectively. The increase in fiscal 2005 compared to fiscal 2004 was primarily the result of payments of capital leases of $0.5 million, partially offset by the proceeds from the sale of common stock of $0.3 million under our Incentive Stock and Employee Stock Purchase Plans. Net cash flows used in financing activities were $0.1 million and $0.2 million for the fiscal years ended March 31, 2004 and 2003 respectively. The financing activities were primarily payments of capital leases and the repurchase of company stock, partially offset by the proceeds from the sale of common stock under our Incentive Stock and Employee Stock Purchase Plans.

      As of March 31, 2005, our principal source of liquidity consisted of cash and cash equivalents and short-term investments. Working capital at March 31, 2005 was $21.5 million.

      We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

      We lease facilities under non-cancelable operating leases expiring at various dates through June 2007. Under the terms of the leases, the Company is responsible for a portion of the facilities’ operating expenses, insurance and property taxes.

      Future contractual obligations as of March 31, 2005 were as follows (in thousands):

      Based on our current expectations, we believe that our cash, cash equivalents and short-term investments, which totaled $21.7 million at March 31, 2005, 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, 2005 we used $5.5 million of cash, cash equivalents and short-term investments.

Recently Issued Accounting Pronouncements

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R), Share-Based Payment. SFAS 123R requires the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in the Company’s consolidated financial statements. In addition, the adoption of SFAS 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. On March 29, 2005, the SEC issued Staff Accounting Bulletin 107 (SAB 107). This Bulletin summarizes the views of the SEC’s staff regarding the interaction between SFAS 123R, Share-Based Payment and certain Securities and Exchange Commission rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. As a result of the Securities and Exchange Commission’s

      In November 2004, the FASB issued SFAS No. 151 “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (SFAS 151). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed and production facilities overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently assessing the effects of adopting this Statement and does not expect the adoption will have a significant effect on its financial statements.

      In December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets — An Amendment of APB Opinion No. 29” (SFAS 153). The provisions of this statement are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance — that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The Company believes that the adoption of SFAS 153 will not have a significant effect on its financial statements.

      In December 2004, the FASB issued Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (SFAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. SFAS 109-2 provides accounting and disclosure guidance for the repatriation provision and was effective immediately upon issuance. The Company believes that the adoption of SFAS 109-2 will not have a significant effect on its financial statements.

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, except in fiscal year 2004. The net income reported in fiscal year 2004 was primarily due to the sale of our software business. We 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 display markets in 1996. We have incurred net losses of approximately $69.7 million from our inception in March 1993 through March 31, 2004. 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. In fiscal 2005, Sales to SMS Electronics, Ltd., Kanematsu Devices Corporation and Micro Network Korea Co., Ltd. represented 34%, 17% and 10% of total revenues in fiscal year ended March 31, 2005, respectively. Sales to Kanematsu Devices Corporation, SMS Electronics, Ltd., Weikeng Industrial Co., and Fujitsu-Siemens Computers Gmbh represented 15%, 12%, 12% and 10% of total revenues for the fiscal year ended March 31, 2004, respectively. 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. 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

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.

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

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:

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

      We currently compete with ATI Technologies, Inc., Broadcom Corporation, Genesis Microchip, Inc., Pixelworks, Inc., Trident Microsystems, 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 pre-existing 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 three 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 for the manufacture of our products, United Manufacturing Corporation, or UMC, located in Taiwan and HuaHong NEC in the People’s Republic of China. We do not have long term supply agreements with these foundries to manufacture our semiconductor products 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.

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

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

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

      Although we primarily utilize two independent foundries, most of our components are not manufactured at both foundries at any given time. The inability of one of the foundries to provide components could result in significant delays and harm our business. In the event either foundry experienced manufacturing or financial difficulties or suffered any damage or destruction to its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely 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 provide assurance 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

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 89%, 76% and 86% of our total revenues in fiscal years 2005, 2004 and 2003. 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.

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

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

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

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

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

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

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 three subcontractors, two of which are located in Taiwan, and one in Shanghai, People’s Republic of China. 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, most 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 two patents 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.

      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.

Quantitative and Qualitative Discussion of Market Interest Rate Risk

      Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, in the future, the fair market value of our investments. We manage the exposure to financial market risk by performing ongoing evaluations of our investment portfolio and 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 100 basis points change in interest rates would not have a material effect on the fair market value of our portfolio due mainly to the short-term nature of the major portion of our investment 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 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 100 basis points 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.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Tvia, Inc.:

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Tvia, Inc. and its subsidiary at March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005 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 the standards of the Public Company Oversight Board (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, 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.

San Jose, California

June 17, 2005

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)