TIVO INC - 10-Q Quarterly Report

TIVO INC.

Date: June 16, 2003

/s/ MICHAEL RAMSAY

Michael Ramsay

Chief Executive Officer and Chairman of the Board of

Directors

(Principal Executive Officer)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 64,866,286 as of June 6, 2003.

TiVo Inc. (the “Company” or “TiVo”) was incorporated in August 1997 as a Delaware corporation and is located in Alviso, California. On August 21, 2000, TiVo (UK) Ltd., a wholly owned subsidiary of TiVo Inc., was incorporated in the United Kingdom. On October 9, 2001 the Company formed a subsidiary, TiVo International, Inc., also a Delaware corporation.

The Company has developed a subscription-based television service (the “TiVo Service”) that provides viewers with the ability to pause, rewind and play back live or recorded television broadcasts, as well as to search for, watch and record programs. The TiVo Service provides television listings, daily suggestions and special viewing packages. The TiVo Service also offers service providers, advertisers, content creators, and television networks a new platform for promotions, content delivery, and audience research. The TiVo Service is enabled through a digital video recorder (the “DVR”) designed and developed by TiVo and manufactured by the Company or one of its third party manufacturers. The Company conducts its operations through one reportable segment.

The Company continues to be subject to certain risks, including the dependence on third parties for manufacturing, marketing and sales support; the uncertainty of the market for personal television; dependence on key management; limited manufacturing, marketing and sales experience; and the uncertainty of future profitability and positive cash flow.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of the Regulation S-X. Accordingly, the unaudited interim condensed consolidated financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete audited annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of April 30, 2003 and January 31, 2003 and the results of operations and condensed consolidated statements of cash flows for the three-month periods ended April 30, 2003 and 2002. Additionally included is the statement of stockholders’ deficit for the three-month period ended April 30, 2003. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of January 31, 2003 and 2002, including the notes thereto, included in the Company’s 2003 Annual Report on Form 10-K. Operating results for the three-month period ended April 30, 2003 are not necessarily indicative of results that may be expected for the year ending January 31, 2004.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Actual results could differ from those estimates.

Certain reclassifications have been made to prior periods’ financial statements to conform with the current period presentation.

The Company classifies all highly liquid investments as cash equivalents if the original maturity of such investments is three months or less.

TiVo introduced its Series2 TiVo-enabled DVRs in January 2002. The Company sells these units to certain retailers and distributors, including Best Buy, who make the recorders available nationwide in retail stores as well as through TiVo’s own online direct sales. As part of these hardware sales activities, TiVo maintains a finished goods inventory of the Series2 TiVo-enabled DVRs throughout the year. Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out method.

Accounts Receivable–related parties consist of amounts owed to the Company from companies such as DIRECTV, Inc. (“DIRECTV”), Philips Electronics North America Corporation (“Philips”) and Hughes Electronics Corporation (“Hughes”), all of which held stock in the Company. These receivables are comprised of subscription revenue collected from subscribers on the Company’s behalf, volume discounts and amounts owed for reimbursement of a portion of the Company’s development costs.

Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over estimated useful lives as follows:

Deferred rent and other long-term liabilities consist primarily of accrued rent resulting from the recognition of the long-term portion of rent and related property taxes and insurance for the Company’s vacant facility in Alviso, California and sales office in the United Kingdom. The Company’s assumption inherent in the estimate is that given the current real estate market conditions it would not be able to acquire a sublessee for the remaining term of the lease.

During the three months ended April 30, 2003 and 2002 the Company generated service revenues from fees for providing the TiVo Service to consumers. The Company also generated technology revenues from providing licensing and engineering professional services to other entities that were creating products that provide DVR functionality. In addition, in an effort to increase its subscription growth, the Company began manufacturing and distributing TiVo branded Series2 DVRs. This effort resulted in revenues from the sale of hardware products that run the TiVo Service.

Revenues for the three months ended April 30, 2003 and 2002, respectively, were as follows:

For the three months ended April 30, 2003 one customer generated $1.6 million of technology revenues and one customer generated $4.7 million of hardware revenues that accounted for 5% and 15% of total revenues, respectively. Of the total service revenues and technology revenues for the three months ended April 30, 2003, $2.4 million and $1.9 million, respectively, were generated from related parties. For the three months ended April 30, 2002 one customer generated $1.6 million of technology revenues and one customer generated $1.1 million of hardware revenues that accounted for 12% and 8% of total revenues, respectively. For the three months ended April 30, 2002, all of the technology revenues were generated from related parties. Revenues for the three months ended April 30, 2003 and 2002 as a percentage of total revenues were as follows:

Revenue from monthly and annual subscription fees to the TiVo Service is recognized over the period benefited and is included in service revenues. TiVo offers a lifetime subscription option for the life of the DVR for a one-time, upfront payment. Subscription revenues from lifetime subscriptions are recognized ratably over a four-year period, the Company’s estimate of the useful life of the digital video recorder. Additionally included in service revenues are revenues received from the sale of the Home Media Option, a premium feature package that allows subscribers to enjoy video, digital music and photos throughout their home.

The Company recognizes technology revenue under technology license and engineering professional services agreements in accordance with the American Institute of Certified Public Accountant’s Statement of Position, 97-2, “Software Revenue Recognition”. These agreements contain multiple-element arrangements in which vendor specific objective evidence (“VSOE”) of fair value is required for all undelivered elements in order to recognize revenue related to the delivered element. Elements included in the Company’s arrangements may include technology licenses and associated

maintenance and support, engineering professional services and other services. The timing of revenue recognition related to these transactions will depend, in part, on whether the Company can establish VSOE for undelivered elements and on how these transactions are structured. As such, revenue recognition may not correspond to the timing of related cash flows or the Company’s work effort.

In arrangements which include engineering professional services that are essential to the functionality of the software or involve significant customization or modification of the software, the Company recognizes revenue using the percentage-of-completion method, as described in SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, if the Company believes it is able to make reasonably dependable estimates of the extent of progress toward completion. The Company measures progress toward completion based on the ratio of costs incurred to date to total estimated costs of the project, an input method. The Company believes it is able to reasonably estimate, track and project the current progress and remaining effort to completion. The Company has engineering professional service agreements with DIRECTV and AOL for which it uses the percentage-of-completion method of revenue recognition. If the Company is not able to estimate total project revenues or costs or progress toward completion but is able to estimate that no loss will be incurred on an arrangement, the Company recognizes revenue to the extent of incremental direct costs until the engineering professional services are complete. Thereafter, any remaining revenue is recognized over the period the maintenance and support or other services are provided.

The Company recognizes hardware revenues from the sales of its Series2 TiVo-enabled DVRs. Hardware revenues are recognized upon shipment to consumers and upon delivery to retail customers. The fees for shipping and handling paid by customers are recognized as hardware revenues. The costs associated with shipping and handling these Series2 DVRs are expensed as hardware cost of revenues.

In connection with the Company’s adoption of Emerging Issues Task Force (EITF) 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)” on February 1, 2002, certain payments to customers are shown as a reduction to revenue rather than as a sales and marketing expense. These payments are classified as “rebates, revenue share and other payments to channel”.

Deferred revenue consists of unrecognized service and technology fees that have been collected, however the related service has not yet been provided or VSOE does not exist for the undelivered elements.

Research and development expenses consist primarily of employee salaries and related expenses and consulting fees relating to the development of the TiVo Service platform and products that enable the TiVo Service. Research and development costs are expensed as incurred.

Sales and marketing — related parties expense consists of cash and non-cash charges related to the Company’s agreements with DIRECTV, Philips, Maxtor, Sony, Discovery, NBC and AOL, all of which held stock in the Company.

Interest expense and other consists of cash and non-cash charges related to interest expense paid to related parties and non-related parties. Included in interest expense are cash charges for coupon interest expense and cash charges for interest expense payable to Comdisco. Included in interest expense– related parties are cash charges for coupon interest expense related to the convertible notes and cash charges for interest expense payable according to negotiated deferred payment schedules. Included in non-cash interest expense and other is amortization of discount on convertible notes payable, debt issuance costs and warrants issued to Comdisco. The following table summarizes the components of interest expense and other:

The Company has stock option plans and an Employee Stock Purchase Plan, under which officers, employees, consultants and non-employee directors may be granted options to purchase shares of the company’s authorized but unissued common stock. The Company’s stock option plans are accounted for under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. During the three months ended April 30, 2003, all options granted under the stock option plans were granted at exercise prices equal to the market price of the underlying common stock on the grant date. Therefore, no deferred stock-based employee compensation was recorded. In previous years the Company did issue certain stock options with exercise prices less than fair market value on the date of grant. The deferred compensation, which was valued using the intrinsic value method was amortized over the four-year vesting period of these options.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an Amendment of FASB Statement No. 123” (SFAS No. 148). SFAS No. 148 provides alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. TiVo continues to account for its stock option plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, and related Interpretations. Effective for interim periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the company had applied the fair value recognition provisions of SFAS No. 123.

The following table illustrates the effect on the Company’s net loss and basic and diluted loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the Company’s Equity Incentive Plans and under the Company’s Employee Stock Purchase Plan for the three months ended April 30, 2003 and 2002:

The Company has not reflected this pro forma expense net of any tax benefit because the net realizable tax benefit is unknown.

The fair value of each option grant under SFAS 123 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock options and employee stock purchase plan awards:

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

Net loss per share is calculated in accordance with SFAS No. 128, “Earnings Per Share”. Under the provisions of SFAS No. 128, basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. The net loss attributable to common stockholders is calculated by deducting the Series A redeemable convertible preferred stock dividend and accretion to redemption value of Series A redeemable convertible preferred stock from the net loss. Shares used in the computation of net loss per share amounts exclude options and warrants to purchase common stock and Series A convertible preferred stock, common shares issuable

upon conversion of convertible notes payable, and any unvested, repurchasable common stock issued under the Company’s employee stock option plans.

Diluted net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding. Diluted net loss per share does not include the effect of the following antidilutive potential common stock:

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments.

Because the Company’s convertible notes are not publicly traded, the Company estimates the fair value of its outstanding convertible notes by utilizing the value of the common stock that the notes were convertible into. As these convertible notes are deeply in the money, the Company estimates that the convertible notes can be valued using the fair value of the underlying stock.

As of April 30, 2003, the convertible notes payable long-term, face value of $10,450,000, were convertible (using the conversion price then in effect of $3.99) into 2,619,047 shares of the Company’s common stock. The closing price of the Company’s common stock on April 30, 2003 was $5.94 as quoted on the Nasdaq. If converted, the total fair value of these shares at the closing price would have been $15.6 million. The convertible notes payable-related parties long-term, face value of $10,000,000, were convertible (using the conversion price of $3.99 then in effect) into 2,506,265 shares of the Company’s common stock at April 30, 2003. If converted, the total fair value of these shares at the closing price would have been $14.9 million.

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash with various financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. The majority of the Company’s customers are concentrated in the United States. The Company is subject to a minimal amount of credit risk related to these customers as service revenue is primarily obtained through credit card sales. The reserves for doubtful accounts receivable at April 30,

2003 and January 31, 2003 were $13,000 and $8,000 for accounts receivable, respectively. The Company does not consider credit risk associated with accounts receivable—related parties (DIRECTV, Philips and Hughes) to be significant.

The Company is dependent on single suppliers for several key components and services. The Company does not have contracts or arrangements with such suppliers. Instead, the Company purchases these components and services by submitting purchase orders with these companies. The Company also has an agreement with Tribune Media Services, its sole supplier of programming guide data for the TiVo Service. If these suppliers fail to perform their obligations, the Company may be unable to find alternative suppliers or deliver its products and services to its customers on time or at all.

In connection with the Company’s adoption of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the Company is including the following disclosure applicable to its product warranties. The Company is also including disclosures pertaining to the Company’s indemnification arrangements.

The Company accrues for warranty costs for the expected material and labor costs to provide warranty services. The methodology used in determining liability for product warranty services was based upon historical information and experience. The Company’s warranty reserve is calculated as the total volume of unit sales multiplied by the expected volume of the warranty return rate multiplied by the estimated cost to replace or repair the customers’ warranty returns. The Company offers standard warranties for its DVRs consisting of 90 days free labor and one year parts exchange. The following table summarizes the activity related to the product warranty liability during the three months ended April 30, 2003:

The Company’s warranty accrual is included in accrued liabilities in the accompanying condensed consolidated balance sheet.

The Company undertakes indemnification obligations in its ordinary course of business in connection with, among other things, the licensing of its products, the provision of consulting services and the issuance of securities. Pursuant to these agreements, the Company may indemnify the other party for certain losses suffered or incurred by the indemnified party, generally its business partners or customers, underwriters or certain investors, in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, negligence and intentional acts in the performance of services and violations of laws, including certain violations of securities laws. The term of these indemnification obligations is generally perpetual. The Company’s obligation to provide indemnification would arise in the event that a third party filed a claim against one of the parties that was covered by the Company’s indemnification obligation. As an example and not a limitation, if a third party sued a customer for intellectual property infringement and the Company agreed to indemnify that customer against such claims, its obligation would be triggered. For example, as the Company has disclosed in Note 6, it is currently indemnifying Sony against a claim of intellectual property infringement brought by Command Audio in connection with Sony’s manufacture and sale of TiVo devices.

The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to its indemnification obligations. A few of the variables affecting any such assessment include but are not limited to: the nature of the claim asserted, the relative merits of the claim, the financial ability of the party suing the indemnified party to engage in protracted litigation, the number of parties seeking indemnification, the nature and amount of damages claimed by the party suing the indemnified party and the willingness of such party to engage in settlement negotiations. Due to the speculative nature of the Company’s potential indemnity liability, its indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business.

Under certain circumstances, the Company may have recourse through its insurance policies that would enable it to recover from its insurance company some or all amounts paid pursuant to its indemnification obligations. The Company does not have any assets held either as collateral or by third parties that, upon the occurrence of an event requiring it to indemnify a customer, the Company could obtain and liquidate to recover all or a portion of the amounts paid pursuant to its indemnification obligation.

As permitted under Delaware law and the Company’s by-laws and certificate of incorporation, the Company has agreements whereby it indemnifies the Company’s officers and directors for certain events or occurrences while the officer or director is, or was, serving at its request in such capacity. The potential amount of future payments the Company could be required to make under these indemnification agreements is unknown; however, the Company has a directors’ and officers’ liability insurance policy that may enable it to recover a portion of any future amounts paid.

On February 15, 2002, the Company entered into a product development agreement (the “Development Agreement”) and a services agreement (the “Services Agreement”) with DIRECTV, Inc., with whom it jointly introduced the first DIRECTV receiver with the Company’s digital video recording technology in October of 2000. The Development Agreement provides for the development of the next generation DIRECTV-TiVo combination receiver known as the “Provo receiver” and for software upgrades to the existing combination receivers, known as “Reno receivers”, to enable customers to receive the upgraded DVR functionality.

On April 17, 2003, the Company entered into the Fourth Amendment to the Development Agreement. The amendment revises provisions relating to, among other things, hardware and software requirements and development schedules under the Development Agreement.

During the three months ended April 30, 2003, the Company recognized $1.4 million in revenue for engineering professional services related to the Development Agreement (see Note 2. Summary of Significant Accounting Policies—“Revenue Recognition and Deferred Revenue”).

On August 28, 2001, the Company closed a private placement of $51.8 million in face value of convertible notes payable and warrants and received cash proceeds, net of issuance costs, of approximately $40.1 million from accredited investors.

During the three months ended April 30, 2003 there were no conversions of notes payable. As of April 30, 2003 the carrying value of the convertible notes payable is as follows:

Assuming there are no conversions, 7 % coupon interest for the outstanding noteholders is paid semi-annually with the next payment of $365,750 for convertible notes payable and $350,000 for convertible notes payable – related parties scheduled to be paid on August 15, 2003.

On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against TiVo in the U.S. District Court for the Northern District of California alleging willful and deliberate violation of U.S. Patent Number 4,706,121, entitled “TV Schedule System and Process”, held by StarSight. The complaint alleged that TiVo infringed the StarSight patent by, among other things, making, using, selling, offering to sell and/or importing its TV schedule systems and processes without a license from StarSight. On February 25, 2000, TiVo counterclaimed against StarSight, Gemstar Development Corporation and Gemstar International Group Limited seeking damages for federal antitrust violations and state unfair business practices claims, as well as declaratory relief of non-infringement, invalidity and unenforceability with respect to the patent. On June 21, 2002, a United States International Trade Commission (“ITC”) Administrative Law Judge found, among other things, that there had been no infringement of the this patent by EchoStar Communications, Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer New Media Technologies Inc., Pioneer North America, Inc., Scientific-Atlanta Inc. and SCI Systems Inc. and that StarSight had misused this patent which was also found to be unenforceable for failure to name a co-inventor. On August 2, 2002, the Court entered an Order staying all proceedings in the StarSight lawsuit until after final resolution to this ITC action (including any and all appeals) involving this patent. TiVo is not a party to this ITC action although the same patent is at issue. On August 29, 2002, StarSight announced that the ITC had declined to review the decision of its Administrative Law Judge and that StarSight intended to appeal the decision of the ITC to the United States Court of Appeals for the Federal Circuit.

On June 6, 2003, the Company entered into a licensing agreement with Gemstar – TV Guide International, Inc. (“Gemstar”) pursuant to which Gemstar granted a non-exclusive license of certain interactive program guide-related patents to the Company and its subsidiaries for use in TiVo-branded devices. In consideration for the license granted under the agreement, the Company agreed to pay Gemstar an upfront license fee for existing units that have entered the stream of commerce prior to the effective date of the agreement and a per unit fee for future TiVo-enabled devices. The Company has also agreed to provide Gemstar with TiVo Showcases and certain branding in the TiVo interface of its Series2 devices. In exchange for its promise to provide these and other services, Gemstar has waived the upfront license fee and will pay the Company a certain per unit fee. The Company may use the per unit fees Gemstar will pay to it to offset a portion of the per unit fees it will pay to Gemstar.

The per unit fees are payable upon activation of the TiVo Service on the unit, including activation of the recently announced no-fee TiVo Basic service level. The license applies to TiVo-enabled devices that are manufactured by the Company. In certain circumstances, the license may be extended to TiVo-enabled devices manufactured by existing and future licensees of the TiVo technology. Notwithstanding the foregoing, the license does not extend to TiVo-enabled DIRECTV set-top boxes or any other service provider-provisioned devices, and the upfront fee did not include DIRECTV set-top boxes.

Without either party admitting any wrong-doing or liability, the Company and Gemstar have also agreed to release and dismiss without prejudice all claims against each other and their respective subsidiaries related to the StarSight Telecast, Inc. v. TiVo, Inc., Case No. C-00-20133 litigation filed in the United States District Court for the Northern District of California, San Jose Division. The Company and Gemstar also agreed to release each other from all claims and liabilities relating to the subject matter of the StarSight litigation and all other actual or alleged infringing acts occurring prior to the effective date of the agreement, except that Gemstar did not release its claims against the Company or its licensees, customers and other third parties for patent infringement relating to any past, current or future TiVo-enabled DIRECTV set-top boxes.

The agreement has a five-year term. In the event that the agreement is terminated because of a material breach by the Company of its obligations to provide Gemstar with TiVo Showcases and certain other branding that is not cured within a certain period of time, the Company is contractually required to pay liquidated damages to Gemstar in the amount of the upfront license fee.

Under the agreement, the Company is not required to incorporate Gemstar television program guide data and is permitted to continue using the data provided to it by Tribune Media Services, Inc.

On June 12, 2001, a securities class action lawsuit in which the Company and certain of its officers and directors are named as defendants was filed in the United States District Court for the Southern District of New York. In addition to the TiVo defendants, this action, which is captioned Wercberger v. TiVo et al., also names several of the underwriters involved in the Company’s initial public offering as defendants. This class action was brought on behalf of a purported class of purchasers of the Company’s common stock from September 30, 1999, the time of its initial public offering, through December 6, 2000. The central allegation in this action is that the underwriters in the initial public offering solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased TiVo common stock in the initial public offering and the after-market. The complaint also alleges that the TiVo defendants violated the federal securities laws by failing to disclose in the initial public offering prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 150 issuers have been named in similar lawsuits. In July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers (including the TiVo defendants) was filed by the entire group of issuer defendants in these similar actions. On October 8, 2002, TiVo’s executive officers were dismissed as defendants in the complaint. On February 19, 2003, the court in this action issued its decision on defendants’ omnibus motion to dismiss. This decision dismissed the Section 10(b) claim as to TiVo but denied the motion to dismiss the Section 11 claim as to TiVo and virtually all of the other issuer-defendants. The Company believes it has meritorious defenses and intends to defend this action vigorously; however, it could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, its business could be harmed.

On September 25, 2001, Pause Technology filed a complaint against TiVo in the U.S. District Court for the District of Massachusetts alleging willful and deliberate infringement of U.S. Reissue Patent No. 36,801, entitled “Time Delayed Digital Video System Using Concurrent Recording and Playback”. Pause Technology alleges that it is the owner of this patent, and further alleges that TiVo has willfully and deliberately infringed this patent by making, selling, offering to sell, and using within the United States the TiVo digital video recorder. Pause Technology seeks unspecified monetary damages as well as an injunction against TiVo’s operations. It also seeks attorneys’ fees and costs. The Company’s answer was filed on December 26, 2001. The Company believes it has meritorious defenses and intends to defend this action vigorously; however, it could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, its business could be harmed.

On February 5, 2002, Sony Corporation notified TiVo that Command Audio Corporation had filed a complaint against Sony Electronics, Inc. on February 2, 2002 in the U.S. District Court for the Northern District of California. The complaint alleges that, in connection with its sale of digital video recorders and other products, Sony infringes upon two patents owned by Command Audio (U.S. Patent Nos. 5,590,195 (“Information Dissemination Using Various Transmission Modes”) and 6,330,334 (“Method and System for Information Dissemination Using Television Signals”). The complaint seeks injunctive relief, compensatory and treble damages and Command Audio’s costs and expenses, including reasonable attorneys’ fees. Under the terms of our agreement with Sony governing the distribution of certain digital video recorders that enable the TiVo Service, TiVo is required to indemnify Sony against any and all claims, damages, liabilities, costs and expenses relating to claims that its technology infringes upon intellectual property rights owned by third parties. The Company believes Sony has meritorious defenses against this lawsuit; however, due to its indemnification obligations, it could be forced to incur material expenses during this litigation, and, if Sony were to lose this lawsuit, the Company’s business could be harmed.

On July 9, 2002, Andrew Townsley, a broadcast center analyst, filed a charge of discrimination against TiVo with the California Department of Fair Employment and Housing. Mr. Townsley claims that he has suffered discrimination based on his disability. The Company believes it has meritorious defenses and intends to defend this action vigorously; however, it could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, the Company’s business could be harmed.

The Company is involved in numerous lawsuits in the ordinary course of its business. The Company assesses potential liabilities in connection with these lawsuits under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” The Company accrues an estimated loss from these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. As of April 30, 2003, the Company has not accrued a liability for any of the lawsuits filed against it as the conditions for accrual have not been met.

In October 1999, the Company entered into an office lease with WIX/NSJ Real Estate Limited Partnership for its headquarters. The lease began on March 10, 2000 and has a seven-year term. Monthly rent is approximately $236,000 with built-in base rent escalations periodically throughout the lease term. The lease is classified as an operating lease. Rent expense is recognized using the straight-line method over the lease term. Additionally, the Company delivered a letter of credit totaling $476,683, to WIX/NSJ Real Estate Limited Partnership as collateral for performance by the Company of all of its obligations under the lease. The letter of credit is to remain in effect the entire term of the lease.

The Company’s corporate headquarters consists of two buildings, which are used for administrative, sales and marketing, customer service and product development activities, and are located in Alviso, California. One of the buildings was vacant during most of the fiscal year ended January 31, 2003. The Company had subleased a portion of the idle space through August 2002. The Company has reoccupied one floor of the vacant building during the three months ended April 30, 2003 but does not intend to occupy the second floor for the remaining term of the lease. The Company is actively searching

for tenants to sublease the idle space; however given the current real estate market conditions, the Company does not expect to sublease these facilities.

Additionally, the Company leases office space in Berkshire, United Kingdom under an operating lease that expires in March 2006. The Company abandoned this facility in May 2002. TiVo is actively searching for tenants to sublease the office; however given the current real estate market conditions, the Company does not expect to sublease these facilities.

The following table summarizes the accrued facilities expenses recorded as a result of the Company’s partially unoccupied facilities as of April 30, 2003:

Of the total accrued facilities expenses recorded as a result of the Company’s partially unoccupied facilities, $2.7 million is included in deferred rent and other long-term liabilities and $973,000 is included in accrued liabilities in the accompanying condensed consolidated balance sheet at April 30, 2003.

In March 1999, the Company entered into an equipment lease line for $2.5 million over the 12 months following the date of the lease. The annual interest rate is 7.25%, and the line is repayable over 36 months. The lessor, Comdisco, Inc., received a warrant for 60,814 shares of the Company’s Series B preferred stock at an exercise price of $1.26 per share. The Company expenses the estimated fair value of the warrants of $304,000 over the life of the lease. The estimated fair value of the warrants was determined using the Black-Scholes option-pricing model. The principal assumptions used in the computation are: ten year term, deemed fair value at the date of issuance of $5.50 per share, a risk-free rate of return of 5.07%, dividend yield of zero percent and a volatility of 50%. As of April 30, 2003, $2.3 million of the available lease line has been used and has been accounted for as a capital lease. The unused equipment lease line expired February 2000. The current portion of the capital lease obligation, net of interest expense, at April 30, 2003 and 2002 is zero and $329,000, respectively.

On June 6, 2003, the Company entered into a licensing agreement with Gemstar - TV Guide International, Inc. (“Gemstar”) pursuant to which Gemstar granted a non-exclusive license of certain interactive program guide-related patents to the Company and its subsidiaries for use in TiVo-branded devices. In consideration for the license granted under the agreement, the Company agreed to pay Gemstar an upfront license fee for existing units that have entered the stream of commerce prior to the effective date of the agreement and a per unit fee for future TiVo-enabled devices. The Company has also agreed to provide Gemstar with TiVo Showcases and certain branding in the TiVo interface of its Series2 devices. In exchange for its promise to provide these and other services, Gemstar has waived the upfront license fee and will pay the Company a certain per unit fee. The Company may use the per unit fees Gemstar will pay to it to offset a portion of the per unit fees it will pay to Gemstar.

Under the agreement, the Company is not required to incorporate Gemstar television program guide data and is permitted to continue using the data provided to it by Tribune Media Services, Inc.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TiVo is a leading provider of television services for digital video recorders, or DVRs, a rapidly growing consumer electronics category. Our subscription-based TiVo Service provides consumers with an easy way to record, watch, and control television. The TiVo Service also offers service providers, advertisers, content creators, and television networks a new platform for promotions, content delivery, and audience research. Our intent is to build recurring revenues by developing advanced television services based on our patented technology. As of April 30, 2003, we had approximately 703,000 subscriptions to the TiVo Service.

TiVo was incorporated in August 1997 as a Delaware corporation and is located in Alviso, California. In August of 2000, we formed a wholly owned subsidiary, TiVo (UK) Ltd., in the United Kingdom. In October of 2001, we formed a subsidiary, TiVo International, Inc., a Delaware corporation. We conduct our operations through one reportable segment.

We continue to be subject to certain risks, including the dependence on third parties for manufacturing, marketing and sales support; the uncertainty of the market for digital video recorders; dependence on key management; limited manufacturing, marketing and sales experience; and the uncertainty of future profitability and positive cash flow. Additionally, we operate in an emerging industry and face significant competition. Our success is dependent upon the market’s acceptance of the TiVo Service and the DVRs which enable the TiVo Service. To date, we have recognized limited revenue, have incurred significant losses and have had substantial negative cash flow. During the three months ended April 30, 2003, we had net losses of $7.9 million. As of April 30, 2003, we had an accumulated deficit of $553.1 million. We believe that our cash and cash equivalents, together with funds generated from operations, will be sufficient to fund our operations, capital expenditures and working capital needs through the fiscal year ending January 31, 2004.

Our revenues for the three months ended April 30, 2003 and 2002, respectively, as a percentage of total revenues were as follows:

Revenues from advertising and research services included in service revenues were not material during these periods. For the three months ended April 30, 2003 one customer generated $1.6 million of technology revenues and one customer generated $4.7 million of hardware revenues that accounted for 5% and 15% of total revenues, respectively. Of the total service revenues and technology revenues for the three months ended April 30, 2003, $2.4 million and $1.9 million, respectively, were generated from related parties. For the three months ended April 30, 2002 one customer generated $1.6 million of technology revenues and one customer generated $1.1 million of hardware revenues that accounted for 12% and 8% of total revenues, respectively. For the three months ended April 30, 2002, all of the technology revenues were generated from related parties.

We market the TiVo Service in two ways. First, we sell directly to consumers who have purchased a TiVo-enabled DVR. We sell the TiVo Service for either a monthly subscription rate of $12.95, or for a single payment of $299 for the lifetime of the DVR.

Second, we market our service through our relationship with DIRECTV. DIRECTV pays us a per-household monthly fee for the ability to offer our service to their customers. DIRECTV makes all pricing decisions regarding the service it sells to its own customer base. In order to receive DIRECTV or other satellite or cable service, the consumer must purchase the subscription television service from that provider.

Below is a table that details the growth in our subscription base during the past eight quarters. The TiVo Service Subscriptions lines refer to standalone TiVo DVRs, including those manufactured by TiVo, Sony, Philips and others. The Service Provider Subscriptions line items refer to integrated DIRECTV satellite receivers with TiVo. Additionally, we provide a breakdown of the percent of TiVo Service Subscriptions (excluding integrated DIRECTV DVRs) for which we are paid on a recurring monthly or annual basis. A “subscription” is a DVR for which (i) a customer has paid for the TiVo Service and (ii) service is not canceled. For households with multiple DVRs, we count each DVR as a subscription.

During the three months ended April 30, 2003, we activated approximately 79,000 net new subscriptions to the TiVo Service, bringing the total installed subscription base to approximately 703,000 as of April 30, 2003, approximately 67% greater than the installed base as of April 30, 2002. We intend to generate continued subscriber growth through close direct relationships with leading retailers like Best Buy, Circuit City, and others. These relationships increase the supply of TiVo-enabled DVRs and provide marketing and distribution support, allowing us to increase subscriptions. We also intend to generate significant subscription growth through relationships similar to our revised agreements with DIRECTV and our agreements with consumer electronics manufacturers such as Sony, pursuant to which these third parties manufacture and/or market and distribute TiVo-enabled platforms through their own distribution and marketing networks. We intend to continue to invest limited amounts in general sales and marketing expenditures to support subscriber growth.

In May 2003, we announced a new introductory service level called TiVo Basic. This service will provide our licensees the opportunity to include entry-level DVR functionality with integrated products. TiVo Basic service offers consumers limited DVR functionality such as pausing live TV, recording from a guide with 3 days of program guide data, and manual repeat recording by time and date. TiVo Basic service will not include a number of popular TiVo Service features, such as Season Pass^™, WishList^™ and Search by Title. Products shipped with TiVo Basic can be upgraded to the full TiVo Service including Home Media Option.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles as described in Note 1. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on other assumptions 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. Actual results may differ from these estimates under different assumptions or conditions. We believe that our most critical accounting policies are those described below. For a detailed discussion on the application of these and other accounting policies, see Item I. Note 2. “Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collectibility is reasonably assured, and we have received customer acceptance, or are otherwise released from our service obligation or customer acceptance obligations.

TiVo offers a lifetime subscription option for the life of the DVR for a one-time, upfront payment. Subscription revenues from lifetime subscriptions are recognized ratably over a four-year period, the estimate of the useful life of the digital video recorder. If the useful life of the recorder was shorter or longer than the estimated four-year period, revenues would be recognized earlier or later, respectively, than our current policy. Our product is still relatively new and as more user information is gathered, this estimated life could be revised.

Technology revenues for engineering professional services that are essential to the functionality of the software or involve significant customization or modification, are generally recognized using the percentage-of- completion method, as described in SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, since we believe we are able to make reasonably dependable estimates of the extent of progress toward completion. We measure progress toward completion based on the ratio of costs incurred to total estimated costs, an input method. We believe we are able to reasonably estimate, track progress and project the remaining effort to completion. Had different cost estimates been used, or different methods of measuring progress to completion, our revenues and expenses during the period may have been materially different. To date we have engineering professional service agreements with DIRECTV and AOL for which we use the percentage-of completion method for revenue recognition.

We have a number of related party transactions and commitments. Many of these transactions are complex and involve multiple elements and types of consideration, including cash, debt, equity, and services. For example, our relationship with DIRECTV has historically included subscription revenue share expense, engineering professional services revenue, common stock and warrants issued for services and various platform subsidies. Many of our arrangements require us to make estimations for the valuation of non-cash expenses, such as warrants issued for services, which must be assigned a value using financial models that require us to estimate certain parameters. We have utilized our best estimate of the value of the various elements in accounting for these transactions. Had alternative assumptions been used, the values obtained may have been materially different.

We recognize revenue under technology license and engineering professional services agreements in accordance with the American Institute of Certified Public Accountant’s Statement of Position, 97-2, “Software Revenue Recognition”. These agreements contain multiple-element arrangements in which vendor specific objective evidence of fair value is required for all undelivered elements in order to recognize license revenue. We may enter into additional technology licensing transactions, and the timing of revenue recognition related to these transactions will depend, in part, on whether we can establish vendor specific objective evidence for undelivered elements and on how these transactions are structured. As such, revenue recognition may not correspond to the timing of related cash flows or our work effort.

We also recognize revenue in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” in connection with arrangements consisting of a technology software license, engineering professional services and maintenance for the term of the contract. Contract accounting is applied to these arrangements due to significant customization of the software in the form of engineering professional services. There is no objective fair value of the basic DVR service or the maintenance since maintenance is included in the term of the contract with no quoted renewal rates or is mandatory in order to continue to manufacture the product. However we can estimate that no loss will be incurred under these contracts. Therefore, we apply contract accounting by recognizing revenue to the extent of contract costs until the engineering customization services are complete. In accordance with SOP 81-1 paragraph 25(c), we use a zero estimate of profit because “estimating the final outcome may be impractical except to assure that no loss will be incurred.” The remainder of the revenue and any profit will be recognized on a straight-line basis over the period that the maintenance and basic DVR service, if applicable, are delivered. Amounts received prior to the recognition of revenue will be deferred. To date we have agreements with these arrangements with Toshiba Corporation, Toshiba Semiconductor and Pioneer Corporation.

In accordance with Emerging Issues Task Force (EITF) 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)”, we recorded the maximum potential liability for our consumer rebate program since we cannot reasonably and reliably estimate the amount of rebates that will ultimately be redeemed. The maximum amount was estimated based on the number of receivers that were with sold or available for sale during the rebate period. As of April 30, 2003 the balance of our liability for consumer rebates was $3.6 million. Upon completion of the consumer rebate program, any unredeemed consumer rebate expense will be reversed. The consumer rebates are recognized as “rebates, revenue share and other payments to channel” in our condensed consolidated financial statements.

We have a history of issuing stock options to employees and directors as an integral part of our compensation programs. Generally accepted accounting principles allow alternative methods of accounting for these plans. We have chosen to account for our stock option plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, which requires that only the intrinsic value of stock option grants be recognized as an expense on our condensed consolidated statement of operations. Accordingly, no compensation expense related to the time value of stock options is included in determining net loss and net loss per share in our condensed consolidated financial statements. The alternative method of accounting for stock options is prescribed by Statement of Financial Accounting Standards No. 123, and requires that both the intrinsic value and time value of options be recognized as an expense for employee stock option awards. Had we used SFAS No. 123 to value our employee stock option awards, our net loss and net loss per share would have been greater for all periods presented.

We also have issued warrants to non-employees for consulting services. We have used Black-Scholes option-pricing model to calculate the estimated fair market value of these warrants. Several assumptions are made in the model such as the term, volatility and risk-free rate of return.

The Company is involved in numerous lawsuits in the ordinary course of its business. We assess potential liabilities in connection with these lawsuits under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” We accrue an estimated loss from these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. As of April 30, 2003, we have not accrued a liability for any of the lawsuits filed against us as the conditions for accrual have not been met.

We provided a valuation allowance of $211.0 million against our entire net deferred tax asset balance, primarily consisting of net operating loss carryforwards as of January 31, 2003. The valuation allowance was recorded given the losses we incurred through January 31, 2003 and our uncertainties regarding future operating profitability and taxable income. If we do not achieve profitability, we will not fully realize the deferred tax benefits.

Service Revenues. Service revenues for the three months ended April 30, 2003 were $12.7 million, a 55% increase over the $8.2 million of service revenues for the three months ended April 30, 2002. During the three months ended April 30, 2003, we activated approximately 79,000 new subscriptions to the TiVo Service bringing the total installed subscription base to approximately 703,000 as of April 30, 2003, approximately 67% greater than the installed base as of April 30, 2002. We anticipate fiscal year 2004 will have continued revenue growth as our subscription base grows. Non-subscription revenues primarily include advertising revenue from consumer companies and media networks that have provided content on the TiVo Service and from our audience measurement research customers. Revenues from advertising and research services included in service revenues were not material during these periods.

Technology Revenues. Technology revenues consist of revenues generated from licensing our technology to consumer electronics companies and service providers for the purpose of creating an open standards platform design for DVRs. Also included in technology revenues are engineering professional services revenues for engineering services performed. Technology revenues for the three months ended April 30, 2003 were $3.4 million due to the recognition of technology licensing and engineering professional services revenue compared to $1.6 million for the three months ended April 30, 2002. During the three months ended April 30, 2003, one customer generated technology revenues of $1.6 million, which accounted for 5% of total revenues. We anticipate that we will continue to recognize revenue from technology licenses and engineering professional services agreements in the fiscal year ending January 31, 2004.

Hardware Revenues. We introduced our Series2 TiVo-enabled DVRs in January 2002. We sell these units to retailers and distributors, and directly to consumers through our online sales efforts. Hardware revenues for the three months ended April 30, 2003 were $14.8 million compared to $3.8 million for the three months ended April 30, 2002 due to increased volume of units sold to retailers and consumers. During the three months ended April 30, 2003, one customer generated $4.7 million of hardware revenues that accounted for 15% of total revenues.

Rebates, revenue share and other payments to channel. Rebates, revenue share and other payments to channel increased by approximately $1.8 million for the three months ended April 30, 2003 as compared to the prior year period. The largest component of this increase was the rebate accrual during fiscal year 2004 for rebate programs that began October 1, 2002 and ended on April 30, 2003. In accordance with EITF 01-09, we recorded the maximum potential liability for our consumer rebate programs based on the number of DVRs that were either sold or available for sale during the rebate periods. As of April 30, 2003 the balance of our liability for consumer rebates was $3.6 million. Following the final calculation of actual rebate fulfillment, we will reverse any unredeemed consumer rebate expense that was accrued. Additionally, in accordance with EITF 01-09, the revenue share and subsidy payments made to customers are presumed to be a reduction of the selling prices of our products or services and, therefore, should be characterized as a reduction of revenues when recognized on our statement of operations. During the fiscal year ended January 31, 2003, payments made to Sony and AT&T Broadband under agreements entered into during the fiscal year ended January 31, 2002 and payments made to several retailers entered into during the fiscal year ended January 31, 2003 were included as reduction of revenue.

Cost of service revenues. Cost of service revenues for the three months ended April 30, 2003 and 2002 was $4.2 million. Costs of revenues consist primarily of telecommunication and network expenses, employee salaries, call center and other expenses related to providing the TiVo Service to subscribers. Telecommunications and network expense decreased by 40%, or over $543,000, for the three months ended April 30, 2003. This decrease was a result of continued reduction of the

service cost per subscriber including using satellite transmission of the TiVo Service for subscribers using the DIRECTV Receiver with TiVo. This decrease was offset by increases in employee salaries and related expenses of approximately $244,000, service center expenses of $216,000 and web hosting and development expense of $123,000. We expect to continue to control spending in our broadcast and customer service operations, resulting in further reductions in our per-subscriber cost of revenue.

Cost of technology revenues. Cost of technology revenues consist of expenses related to providing engineering professional services to our customers, including employee salaries and related costs, as well as prototyping and other material costs. Cost of technology revenues was $3.6 million for the three months ended April 30, 2003 compared to $1.3 million for the three months ended April 30, 2002 due to increase in revenue recognized.

Cost of hardware revenues. Cost of hardware revenues for the three months ended April 30, 2003 was $14.2 million compared to $3.7 million for the three months ended April 30, 2002 due to the related cost of increased revenues for units sold to retailers and consumers. Costs of hardware revenues include all product costs and direct costs associated with the Series2 platforms, including manufacturing-related overhead and personnel, warranty expenses, certain licensing expenses, and order fulfillment expenses such as shipping costs. We expect these costs per unit to reduce over time as the cost of manufacturing the DVRs decreases.

Research and development expenses. Our research and development expenses consist primarily of employee salaries and related expenses and consulting fees. Research and development expenses for the three months ended April 30, 2003 were $5.5 million, 9% higher than the year ago period due to increased salary expense. As a percentage of total revenues, research and development expenses were 18% for three months ended April 30, 2003. Research and development expenses that are related to the deployment of engineers to complete engineering professional services are classified as costs of technology revenues.

Sales and marketing expenses. Sales and marketing expenses consist primarily of employee salaries and related expenses, media advertising, public relations activities, special promotions, trade shows and the production of product related items, including collateral and videos. Sales and marketing expenses for the three months ended April 30, 2003 were $2.1 million, 73% lower than sales and marketing expenses for the corresponding fiscal year 2003 period. The largest contributor to the reduction of total sales and marketing expenses was non-related party subsidy expense that decreased $1.9 million from the year ago period. This commitment ended prior to the three months ended April 30, 2003. Sales and marketing expenses were 7% of total revenues for the three months ended April 30, 2003.

Sales and marketing—related parties expense. Sales and marketing—related parties expense consists of cash and non-cash charges related primarily to agreements with parties that held stock in us. Sales and marketing—related parties expense for the three months ended April 30, 2003 was $1.9 million, 92% lower than sales and marketing—related parties expense in the corresponding fiscal year 2003 period.

Sales and marketing—related parties expense for the three months ended April 30, 2003, consisted of cash charges of $1.3 million and non-cash charges of $611,000. Sales and marketing—related parties expense for the same period in the prior fiscal year consisted of cash charges of $10.7 million and non-cash charges of $12.2 million.

The cash portion of sales and marketing—related parties expense is comprised of revenue share and manufacturing subsidy payments to Philips, Sony, Maxtor, formerly known as Quantum, and DIRECTV. Also included were media insertion orders paid to NBC. During the three months ended April 30, 2003 revenue share and subsidy expense decreased by 44% and 90%, or $400,000 and $3.2 million, respectively, compared to the corresponding fiscal year 2003 period. These decreases are a result of renegotiated contracts with DIRECTV and lower manufacturing volumes by consumer electronic manufacturers. Revenue share is calculated as an agreed upon percentage of revenue for a specified group of TiVo subscriptions.

The non-cash portion is related to the amortization of prepaid marketing expense related to warrants or common stock issued for services to AOL and DIRECTV. We amortize the prepaid marketing expense on a straight-line basis over the period that the services are provided. Approximately 50% of the total sales and marketing—related parties expense for the three months ended April 30, 2002, $11.6 million, was non-cash expense related to the amortization of the prepaid marketing expense from the June 2000 Investment Agreement with AOL, which was terminated by the Funds Release Agreement in April 2002.

To date, sales and marketing – related party expenses have accounted for the largest classification of expense and have been the largest contributor of our losses.

General and administrative expenses. General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative, accounting, information systems, customer operations personnel, facility costs, and professional fees. General and administrative expenses for the three months ended April 30, 2003 and 2002, were $3.8 million. As a percentage of total revenues and hardware revenues, general and administrative expenses were 12% for the three months ended April 30, 2003.

Interest income. Interest income resulting from cash and cash equivalents held in interest bearing accounts and short- term investments was $114,000 for the three months ended April 30, 2003, 97% lower than interest income in the corresponding period in fiscal year 2002. Interest income decreased because in the prior year we received a one time payment of $3.9 million in interest earned on the restricted cash from the agreement with AOL that was released from the escrow account to us.

Interest expense and other. Total interest expense and other was $1.3 million for the three months ended April 30, 2003. Interest expense and other for the three months ended April 30, 2003, consisted of cash charges of $358,000 and non-cash charges of $916,000. Interest expense and other for the same period in the prior fiscal year consisted of cash charges of $932,000 and non-cash charges of $1.1 million.

As shown in the following table, interest expense for the three months ended April 30, 2003 includes coupon interest expense of $183,000 related to the convertible notes. Additionally $916,000 million is attributable to the amortization of debt discount and issuance costs related to the convertible notes. Of the total interest expense and other, $175,000 was related to interest expense – related parties for the three months ended April 30, 2003 for the coupon interest expense on the convertible notes payable. For the three months ended April 30, 2002, interest expense and other was $2.0 million. This includes the coupon interest expense of $512,000 on the convertible notes payable and the amortization of the value assigned to the Comdisco warrant for interest expense of $8,000. Additionally, $1.1 million is attributable to the amortization of interest expense related to the debt issuance costs for the convertible senior notes. Of the total interest expense and other, $412,000 was related to interest expense – related parties for the three months ended April 30, 2002. This includes $149,000 for interest expense payable to our consumer electronics manufacturers according to negotiated deferred payment schedules.

Provision for income taxes. Income tax expense for the three months ended April 30, 2003 and 2002 was $12,000 and zero, respectively due to estimated income taxes paid to various states.

Series A convertible preferred stock dividend. Under the terms of the Series A convertible preferred stock, we were previously required to pay dividends to the Series A convertible preferred stockholders. On April 30, 2002, we repurchased 1.6 million shares of our Series A convertible preferred stock. On September 13, 2002, the remaining 1,111,861 outstanding shares of Series A convertible preferred stock were converted into an equal number of shares of our common stock. The dividends payable for the three months ended April 30, 2003 were therefore zero compared to $220,000 for the three months ended April 30, 2002. Under the terms of the Funds Release Agreement dated April 29, 2002, AOL waived the preferred dividends and associated rights it was otherwise entitled to effective April 1, 2002.

Accretion to redemption value of convertible preferred stock. As a result of our repurchase on April 30, 2002 of 1.6 million shares of our Series A convertible preferred stock held by AOL for $48.0 million, the associated issuance costs incurred last fiscal year were accreted during the three months ended April 30, 2002. Prior to the first quarter of fiscal year 2003, these issuance costs were classified as additional paid-in capital for the Series A redeemable convertible preferred stock.

The following table represents certain unaudited statement of operations data for our eight most recent quarters ended April 30, 2003. In management’s opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair representation of the unaudited information for the quarters presented. This information should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. The results of operations for any quarter are not necessarily indicative of results that may be expected for any future period. Prior quarters have been reclassified in order to conform to current quarter classifications.

The TiVo Service is enabled through a digital video recorder that is sold in retail channels like other consumer electronic devices. We anticipate that our business will continue to be seasonal and we expect to generate a significant number of our annual new subscriptions during and immediately after the holiday shopping season. We also expect to generate a portion of future revenues from licensing agreements. It is likely this will lead to an uneven pattern of quarterly revenue and revenue growth.

From inception through April 30, 2003, we financed our operations and met our capital expenditure requirements primarily from the proceeds of the sale of equity securities, the proceeds from our initial public offering and the August 2001 private placement of convertible debt with warrants. Our cash resources are subject, in part, to the amount and timing of cash received from our subscribers, licensing and engineering professional services customers, and hardware customers. On April 30, 2003, we had $39.7 million of cash and cash equivalents. We believe these funds and funds generated from operations represent sufficient resources to fund operations, capital expenditures and working capital needs through the fiscal year ending January 31, 2004.

Impact of changes to our business model. Over the past few years we have significantly changed our business to reduce emphasis on deployment and focus on accelerating our progress towards profitability. There were three components to this change:

audience measurement research revenue streams. Although we expect that reported revenues and gross profit from each DIRECTV subscription will decrease relative to past periods, we also expect cost of service revenues and subscriber acquisition costs per new subscriber to decrease.

The combination of these factors and the growing base of recurring revenues from our subscriptions significantly reduced our net cash used in operating activities during the three months ended April 30, 2003 compared to the three months ended April 30, 2002.

Net cash used in operating activities was $5.6 million for the three months ended April 30, 2003. During this period, we continued to provide the TiVo Service, incurring a net loss of $7.9 million. Uses of cash from operating activities included a decrease in accrued liabilities of $1.6 million, a decrease in accrued liabilities-related parties of $1.4 million, a decrease in deferred revenue-related parties of $1.1 million, a decrease in accounts payable of $888,000, an increase in accounts receivable of $489,000, a decrease in other long-term liabilities of $308,000, an increase in prepaid expenses-related parties of $97,000 and an increase in prepaid expenses of $30,000. Sources of cash provided by operating activities consisted of an increase in deferred revenue of $1.4 million, an increase in long-term deferred revenue of $1.1 million and a decrease in accounts receivable-related parties of $384,000.

Cash from deferred revenues has increased because we sell lifetime subscriptions and receive up front license and engineering professional services payments. These activities cause us to receive cash payments in advance of providing the services for which the cash is received, which we recognize as deferred revenues.

Net cash used in investing activities for the three months ended April 30, 2003 was $407,000 for the acquisition of property and equipment.

Net cash provided by financing activities was $1.4 million for the three months ended April 30, 2003. We obtained $820,000 from the issuance of common stock through our employee stock purchase plan. Additionally, $617,000 was obtained from the issuance of common stock for stock options exercised.

7% Convertible Senior Notes Due 2006. On August 28, 2001, we closed a private placement of $51.8 million in face value of convertible notes and received cash proceeds of approximately $43.7 million from investors. In addition, we received non-cash consideration of $8.1 million in the form of advertising and promotional services from Discovery Communications, Inc. and the National Broadcasting Company, Inc., who are existing stockholders. Debt issuance costs were approximately $3.6 million, resulting in net cash proceeds of approximately $40.1 million. Of the total proceeds of $51.8 million, $8.1 million was recorded as prepaid advertising and promotional services. As part of the transaction, we paid $5.0 million in October 2001 to NBC for advertising that ran during the period that began October 1, 2001 and ended March 31, 2002.

The indenture governing our convertible senior notes specified a reduction of the conversion price of outstanding convertible notes on August 23, 2002 if the conversion price was greater than the average closing price per share of our

common stock for the 10 consecutive trading days preceding August 23, 2002, subject to a floor of $4.21 per share. On August 23, 2002, pursuant to the terms of the indenture, the conversion price of the notes was accordingly adjusted to $4.21 per share.

On October 7, 2002, we entered into an agreement for the issuance of common stock and warrants for cash of $25.0 million to institutional investors. Pursuant to the terms of the indenture governing the notes, we attributed a value of $3.23 per share to the common stock issued in this transaction, which was less than the “effective” conversion price of the notes at that time of $3.41 per share. Accordingly, we were required pursuant to the terms of the indenture governing the notes as described below to reduce the conversion price of the notes from $4.21 per share to $3.99 per share so that the “effective” conversion price of the notes would equal to the value of this common stock. The adjustment to the “effective” conversion price resulted in an increase to the value of the beneficial conversion on the notes of $3.2 million and we recorded additional debt discount of this amount, which will be amortized as interest expense over the remaining term of the notes or until the notes are converted.

During the period beginning on December 30, 2002 and ending on January 28, 2003, we temporarily reduced the conversion price of our convertible notes from $3.99 to $3.70 per share pursuant to the indenture governing the notes in order to induce early conversions and thereby simplify our capital structure and reduce future cash interest payment obligations. During this period, $22,701,000 principal amount of the $43,151,000 outstanding principal amount of the notes were converted into an aggregate of 6,135,400 shares of our common stock. The reduced conversion price resulted in 445,936 shares of common stock being issued in addition to the 5,689,464 shares of common stock that would have been issuable upon conversion of the $22,701,000 principal amount of notes at $3.99 per share.

We entered into a registration rights agreement with the holders of 375,216 of the additional shares issued upon conversion of the notes which were “restricted securities” as defined by Rule 144 under the Securities Act of 1933, as amended. Pursuant to this registration rights agreement, in February 2003 we filed with the Securities and Exchange Commission a shelf registration statement covering the resale of the 375,216 additional restricted shares and have agreed to use our best efforts to cause that registration statement to be declared effective as promptly as practicable. We have agreed to use our best efforts to keep this shelf registration statement continuously, subject to certain blackout periods, effective until the earlier of the sale under the registration statement of all transfer restricted securities (as defined in the registration rights agreement) or two years after the date on which we issued the notes from which these shares were converted.

In addition, the conversion price on our outstanding convertible senior notes will be reduced if, prior to August 28, 2003, we issue common stock or common stock equivalents at an issuance price less than what the indenture governing the notes refers to as the “effective” conversion price on the notes (or with respect to common stock equivalents, such additional common stock is issued with a conversion or exercise price per share less than the “effective” conversion price of the notes.) The “effective” conversion price would be derived by multiplying the conversion price in effect at the time of measurement by the percentage of the proceeds from the convertible senior notes and warrants transaction that were attributed to the notes. If we issue warrants in addition to common stock or common stock equivalents, the indenture requires that we calculate the issuance price of the common stock or common stock equivalents by multiplying the per share issuance price of the common stock or common stock equivalents by the percentage of the proceeds from the issuance that we attribute to the common stock or common stock equivalents for income tax purposes. The conversion price of the notes is currently $3.99, with a current “effective” conversion price, as described above, of $3.23. Accordingly, we cannot issue common stock or common stock equivalents at an issuance price, determined as described above, below $3.23 without triggering a conversion price adjustment. If the conversion price on our convertible notes is reduced, holders of the notes will be entitled to receive a greater number of shares of our common stock in connection with the conversion of the notes, thereby resulting in dilution to the existing holders of our common stock.

Acqua Wellington Agreements. On January 10, 2002, we sold to Acqua Wellington North American Equities Fund, Ltd. 2,147,239 shares of our common stock at $6.52 per share, pursuant to a common stock purchase agreement we entered into with Acqua Wellington on December 21, 2001. Our net proceeds from this sale were approximately $13.8 million, after deducting our estimated sales expense. We used the net proceeds from this sale for general corporate purposes, including

funding research, development, sales and marketing, increasing our working capital, reducing our indebtedness, and for capital expenditures. During February 2002, we entered into a second common stock purchase agreement with Acqua Wellington which, under certain circumstances, allowed us to sell to Acqua Wellington North American Equities Fund, Ltd. up to $19.0 million of our common stock. This common stock purchase agreement expired April 13, 2003 pursuant to its terms and was not utilized.

We have agreed to share a substantial portion of our subscription and other fees with some of our customers, consumer electronics manufacturers and retailers in order to promote the TiVo Service and encourage the manufacture and distribution of the DVRs that enable the TiVo Service. These agreements may require us to share substantial portions of the subscription and other fees attributable to the same subscriber with multiple parties. Our decision to share subscription revenues is based on our expectation that these relationships will help us obtain subscribers, broaden market acceptance of digital video recorders and increase our future revenues. If these expectations are not met, we may be unable to generate sufficient revenue to cover our expenses and obligations. Expenses paid in exchange for marketing services to our consumer electronics manufacturers who are also stockholders are recognized as “sales and marketing—related parties expenses.” Expenses paid in exchange for marketing services to our consumer electronics manufacturers that are not our stockholders are recognized as “sales and marketing expenses.” Expenses paid in exchange for marketing services to our customers are recognized as a reduction of revenue as “rebates, revenue share and other payments to channel”.

Although we intend to reduce subsidy payments in the future, in certain agreements we agreed to pay our customers a per-unit subsidy for each DVR that they manufacture and sell. The amount of the payments varies depending upon the manufacturing costs and selling prices. In addition, in the event our consumer electronics manufacturers are unable to manufacture the DVRs at the costs currently estimated or if selling prices are less than anticipated, we may owe additional amounts to them, which could adversely affect our operating results. Under some of these arrangements, we are obligated to pay a portion of the subsidy when the DVR is shipped, and we will not receive any revenues related to the unit until the unit is sold to the consumer and the consumer activates the TiVo Service. We may make additional subsidy payments in the future to consumer electronics and other manufacturers in an effort to maintain a commercially viable retail price for the DVRs and other devices that enable the TiVo Service.

Additionally, a substantial portion of our contractual cash obligations come from our convertible notes due in 2006. Based principally on the temporary reduction in the conversion price of the convertible notes in the fourth quarter, approximately $23 million principal amount of the convertible notes were converted into equity during the fiscal year ended January 31, 2003, reducing our cash interest payment obligations and the principal amount due upon maturity of these notes.

We may from time to time seek to retire our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, temporary conversion price reductions or otherwise. Such repurchases or exchanges will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Our future capital requirements will depend on a variety of factors, including market acceptance of the digital video recorder and the TiVo Service, the resources we devote to developing, marketing, selling and supporting our products and other factors. We expect to devote substantial capital resources:

We have commitments for future lease payments under facilities operating leases of $12.3 million as of April 30, 2003.

As of April 30, 2003, we had contractual obligations to make the following cash payments:

In addition, in order to meet long-term liquidity needs, we may need to raise additional funds, establish a credit facility or seek other financing arrangements. Additional funding may not be available on favorable terms or at all. See “Factors That May Affect Future Operating Results–If we are unable to raise additional capital on acceptable terms, our ability to effectively manage growth and build a strong brand could be harmed.”

We believe that inflation has not had a significant impact on our operating results.

In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects:

We have recognized limited revenue, have incurred significant net losses and may never achieve profitability.

We have recognized limited revenue, have incurred significant losses and have had substantial negative cash flow. During the three months ended April 30, 2003 we recognized net revenues of $28.5 million. As of April 30, 2003, we had an accumulated deficit of $553.1 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. As a result, we expect to continue to incur losses

for the foreseeable future. The size of these net losses depends in part on our subscriber revenues and on our expenses. We will need to generate significant additional revenues to achieve profitability. Consequently, we may never achieve profitability, and even if we do, we may not sustain or increase profitability on a quarterly or annual basis in the future.

Our limited operating history may make it difficult for us or investors to evaluate trends and other factors that affect our business.

We were incorporated in August 1997 and we have been providing services to subscribers only since March 31, 1999. Prior to that time, our operations consisted primarily of research and development efforts. To date, only a limited number of DVRs have been sold and we have obtained only a limited number of subscribers to the TiVo Service.

As a result of our limited operating history, our historical financial and operating information is of limited value in evaluating our future operating results. It may be difficult to accurately predict our future revenues, costs of revenues, expenses or results of operations. In addition, any evaluation of our business must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving markets. DVR services are a new product category for consumers and it may be difficult to predict the future growth rate, if any, or size of the market for our products and services. We may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us. As a result, we may be unable to make accurate financial forecasts and adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. Such inability could cause our net losses in a given quarter to be greater than expected, which could cause the price of our stock to decline.

We face a number of challenges in the sale and marketing of the TiVo Service and products that enable the TiVo Service.

Our success depends upon a continually successful retail marketing of the TiVo Service and related DVRs, which began in the third quarter of calendar year 1999.

Many consumers are not aware of the benefits of our products. DVR products and services represent a relatively new consumer electronics category. Retailers, consumers and potential partners may perceive little or no benefit from digital video recorder products and services. We have only been providing the TiVo Service since 1999 and many consumers are not aware of its benefits and therefore, may not value the TiVo Service and products that enable the TiVo Service. We will need to devote a substantial amount of time and resources to educate consumers and promote our products in order to increase our subscribers. We cannot be sure that a broad base of consumers will ultimately subscribe to the TiVo Service or purchase the products that enable the TiVo Service.

Consumers may not be willing to pay for our products and services. Many of our customers already pay monthly fees for cable or satellite television. We must convince these consumers to pay an additional subscription fee to receive the TiVo Service. Consumers may perceive the TiVo Service and related DVR as too expensive. In order to continue to grow our subscribers base, we will need to continue to reduce our costs and lower the price of our DVR. The availability of competing services that do not require subscription fees will harm our ability to effectively attract and retain subscribers. In addition, DVRs that enable the TiVo Service can be used to pause, rewind and fast-forward through live shows without an active subscription to the TiVo Service. If a significant number of purchasers of the TiVo-enabled DVRs use these devices without subscribing to the TiVo Service or cancel their existing subscriptions, our revenue growth will decline and we may not achieve profitability.

We compete with other consumer electronics products and home entertainment services for consumer spending. DVRs and the TiVo Service compete in markets that are crowded with other consumer electronics products and home entertainment services. The competition for consumer spending is intense and many consumers on limited budgets may choose other products and services over ours. DVRs compete for consumer spending with products such as DVD players, satellite television systems, personal computers and video game consoles. The TiVo Service competes with home entertainment services such as cable and satellite television, movie rentals, pay-per-view and video on demand.

Many of these products or services have established markets, broad user bases and proven consumer acceptance. In addition, many of the manufacturers and distributors of these competing devices and services have substantially greater brand recognition, market presence, distribution channels, advertising and marketing budgets and promotional and other strategic partners. Faced with this competition, we may be unable to effectively differentiate the DVR or the TiVo Service from other consumer electronics devices or entertainment services.

It is expensive to establish a strong brand. We believe that establishing and strengthening the TiVo brand is critical to achieving widespread acceptance of our products and services and to establishing key strategic relationships. The importance of brand recognition will increase as current and potential competitors enter the digital video recorder market with competing products and services. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality services and customer support. These activities are expensive and we may not generate a corresponding increase in subscribers or revenues to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract subscribers and effectively compete in the digital video recorder market.

We rely on our customers and consumer electronics manufacturers to market and distribute our products and services. In addition to our own efforts, our customers and consumer electronics manufacturers distribute DVRs that enable the TiVo Service. We rely on their sales forces, marketing budgets and brand images to promote and support DVRs and the TiVo Service. We expect to continue to rely on our relationships with these companies to promote and support DVRs and other devices that enable the TiVo Service. The loss of one or more of these companies could require us to undertake more of these activities on our own. As a result, we would spend significant resources to support DVRs and other devices that enable the TiVo Service. We also expect to rely on DIRECTV and other partners to provide marketing support for the TiVo Service. The failure of one or more of these companies to provide anticipated marketing support will require us to divert more of our limited resources to marketing the TiVo Service. If we are unable to provide adequate marketing support for DVRs and the TiVo Service, our ability to attract subscribers to the TiVo Service will be limited.

We have agreed to share a substantial portion of the revenue we generate from subscription fees with some of our customers and consumer electronics companies. We may be unable to generate enough revenue to cover these obligations.

We have agreed to share a substantial portion of our subscription and other fees with some of our customers and consumer electronics manufacturing companies in exchange for manufacturing, distribution and marketing support, and discounts on key components for DVRs. Under these agreements, we may be required to share substantial portions of the subscription and other fees attributable to the same subscriber with multiple companies. These agreements also require us to share a portion of our subscription fees whether or not we increase or decrease the price of the TiVo Service. If we change our subscription fees in response to competitive or other market factors, our operating results would be adversely affected. Our decision to share subscription revenues is based on our expectation that these relationships will help us obtain subscribers, broaden market acceptance of digital video recorders and increase our future revenues. If these expectations are not met, we may be unable to generate sufficient revenue to cover our expenses and obligations.

We depend on a limited number of third parties to manufacture, distribute and supply critical components and services for the DVRs that enable the TiVo Service. We may be unable to operate our business if these parties do not perform their obligations.

The TiVo Service is enabled through the use of a DVR made available by us and a limited number of third parties. In addition, we rely on sole suppliers for a number of key components for the DVRs. We do not control the time and resources that these third parties devote to our business. We cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform their obligations in a timely manner, we may be delayed or prevented from commercializing our products and services. Because our relationships with these parties are non-

exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our products and services. This outcome would harm our ability to compete effectively and achieve increased market acceptance and brand recognition.

If our manufacturing relationships are not successful, we may be unable to satisfy demand for our products and services. We manufacture DVRs that enable the TiVo Service through a third-party contract manufacturer. We also have entered and anticipate entering into agreements with consumer electronics manufacturers to manufacture and distribute DVRs that enable the TiVo Service. However, we have no minimum volume commitments from any manufacturer. The ability of our consumer electronics manufacturers to reach sufficient production volume of DVRs to satisfy anticipated demand is subject to delays and unforeseen problems such as defects, shortages of critical components and cost overruns. Moreover, they will require substantial lead times to manufacture anticipated quantities of the DVRs that enable the TiVo Service. Delays, product shortages, and other problems could impair the retail distribution and brand image and make it difficult for us to attract subscribers. In addition, the loss of a manufacturer would require us to identify and contract with alternative sources of manufacturing, which we may be unable to do and which could prove time-consuming and expensive. Although we expect to continue to contract with additional consumer electronics companies for the manufacture of DVRs in the future, we may be unable to establish additional relationships on acceptable terms.

We are dependent on single suppliers for several key components and services. If these suppliers fail to perform their obligations, we may be unable to find alternative suppliers or deliver our products and services to our customers on time. We currently rely on sole suppliers for a number of the key components and services used in the DVRs and the TiVo Service. For example:

Tribune is the sole supplier of the program guide data for the TiVo Service. On June 1, 1998 we entered into a television listing agreement with Tribune. Tribune agreed to provide program guide data for the TiVo Service in exchange for a monthly fee. In the event that we request format changes or require additional services, Tribune may increase its fees depending on the change in service requested. The term of the television listing agreement was for eighteen months and automatically renews for one year periods unless either party provides written notice of termination. On November 10, 1998, we entered into a data license agreement with Tribune Media Services which sets forth a schedule of fees for the program guide data provided to us. The term of the data license agreement was for twenty-one months and automatically renews for one year periods unless either party provides written notice of termination.

Because we do not require customized components from NEC, Broadcom or ATMEL suppliers, we do not have binding supply agreements with these suppliers. Therefore, they are not contractually obligated to supply us with these key components on a long-term basis or at all. In addition to the above, we have several sole suppliers for key components of our products currently under development.

If our arrangements or our consumer electronics manufacturers’ arrangements with NEC, Broadcom, ATMEL or Tribune Media Services were to terminate or expire, or if we or our manufacturers were unable to obtain sufficient quantities

of these components or required program guide data from our suppliers, our search for alternate suppliers could result in significant delays, added expense or disruption in product or service availability.

We have limited experience in overseeing manufacturing processes and managing inventory and failure to do so effectively may result in supply imbalances or product recalls.

We have contracted for the manufacture of certain Series2 TiVo-enabled DVRs with a contract manufacturer. We sell these units to retailers and distributors, as well as through our own online sales efforts. As part of this effort, we expect to maintain some finished goods inventory of the Series2 units throughout the year. Overseeing manufacturing processes and managing inventory are outside of our core business and our experience in these areas is limited. If we fail to effectively oversee the manufacturing process and manage inventory, we may suffer from insufficient inventory to meet consumer demand or excess inventory. Ineffective oversight of the manufacturing process could also result in product recalls.

We have agreed to subsidize the cost of manufacturing DVRs, which may adversely affect our operating results and ability to achieve profitability.

We have entered into agreements with our consumer electronics manufacturers to manufacture DVRs that enable the TiVo Service. Although we intend to reduce subsidy payments in the future, in certain agreements we have agreed to pay our manufacturers a per-unit subsidy for each DVR that they manufacture and sell. The amount of the payments can vary depending upon the manufacturing costs and selling prices. In addition, in the event our manufacturers are unable to manufacture the DVRs at the costs currently estimated or if selling prices are less than anticipated, we may owe additional amounts to them, which could adversely affect our operating results. Under some of these arrangements, we are obligated to pay a portion of the subsidy when the DVR is shipped, and we will not receive any revenues related to the unit until the unit is sold and the purchaser activates the TiVo Service. We may make additional subsidy payments in the future to consumer electronic and other manufacturers in an effort to maintain a commercially viable retail price for the DVRs and other devices that enable the TiVo Service.

The lifetime subscriptions to the TiVo Service that we currently offer commit us to providing services for an indefinite period. The revenue we generate from these subscriptions may be insufficient to cover future costs.

We currently offer product lifetime subscriptions that commit us to provide service for as long as the DVR is in service. We receive the lifetime subscription fee for the TiVo Service in advance and amortize it as subscription revenue over four years, which is our estimate of the service life of the DVR. If these lifetime subscribers use the DVR for longer than anticipated, we will incur costs without a corresponding revenue stream and therefore will be required to fund ongoing costs of service from other sources.

We must manage product transitions successfully in order to remain competitive.

The introduction of a new product or product line is a complex task, involving significant expenditures in research and development, training, promotion and sales channel development, and management of existing product inventories to reduce the cost associated with returns and slow moving inventory. As new products are introduced, we intend to monitor closely the inventory of products to be replaced, and to phase out their manufacture in a controlled manner. However, we cannot assure you that we will be able to execute product transitions in this manner or that product transitions will be executed without harming our operating results. Failure to develop products with required features and performance levels or any delay in bringing a new product to market could significantly reduce our revenues and harm our competitive position.

If we fail to manage our growth, it could disrupt our business and impair our ability to generate revenues.

The growth in our subscriber base has placed, and will continue to place, a significant strain on our management, operational and financial resources and systems. Specific risks we face as our business expands include:

We reduced our headcount and other expenditures in the last fiscal year and as a result, our headcount may be inadequate to support our business. In the current economic environment, reducing expenditures and conserving cash has become one of our priorities. We reduced our headcount in the last fiscal year and we are aggressively pursing cost-saving opportunities. As a result, our current resources may be inadequate to support our business during the holiday shopping season, which is typically the busiest season of our business, or to support the future growth of our business.

Any inability of our systems to accommodate our expected subscriber growth may cause service interruptions or delay our introduction of new services. We internally developed many of the systems we use to provide the TiVo Service and perform other processing functions. The ability of these systems to scale as we rapidly add new subscribers is unproven. We must continually improve these systems to accommodate subscriber growth and add features and functionality to the TiVo Service. Our inability to add software and hardware or to upgrade our technology, systems or network infrastructure could adversely affect our business, cause service interruptions or delay the introduction of new services.

We will need to provide acceptable customer support, and any inability to do so would harm our brand and ability to generate and retain new subscribers. Our ability to increase sales, retain current and future subscribers and strengthen our brand will depend in part upon the quality of our customer support operations. Some customers require significant support when installing the DVR and becoming acquainted with the features and functionality of the TiVo Service. We have limited experience with widespread deployment of our products and services to a diverse customer base, and we may not have adequate personnel to provide the levels of support that our customers require. In addition, we have entered into agreements with third parties to provide this support and will rely on them for a substantial portion of our customer support functions. Our failure to provide adequate customer support for the TiVo Service and DVR will damage our reputation in the digital video recorder and consumer electronics marketplace and strain our relationships with customers and consumer electronics manufacturers. This could prevent us from gaining new or retaining existing subscribers and could cause harm to our reputation and brand.

We will need to improve our operational and financial systems to support our expected growth, and any inability to do so will adversely impact our billing and reporting. To manage the expected growth of our operations, we will need to improve our operational and financial systems, procedures and controls. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. For example, we replaced our accounting and billing system at the beginning of August 2000. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could adversely impact our relationships with subscribers and cause harm to our reputation and brand. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could also result in errors in our financial and other reporting.

In the future, tiered pricing for the TiVo Service may reduce our average revenue per user.

In May 2003 we announced that we will provide licensees the opportunity to include the TiVo Basic service, which will provide our licensees the opportunity to include entry-level DVR functionality with their integrated products. The service will be offered for an up-front cost to the consumer and will be part of the price of the product. This service can be upgraded by the consumer to the full TiVo Service for $12.95 a month or $299 for the lifetime of the product. To the extent that consumers do not upgrade to the full TiVo Service, our average revenue per user will decline. In addition, we may elect to offer additional tiers of the TiVo Service at various price points, which may also have the effect of reducing our average revenue per user.

If we are unable to create multiple revenue streams, we may not be able to cover our expenses or meet our obligations to strategic partners and other third parties.

Although our initial success will depend on building a significant customer base and generating subscription fees from the TiVo Service, our long-term success will depend on securing additional revenue streams such as:

In order to derive substantial revenues from these activities, we will need to attract and retain a large and growing base of subscribers to the TiVo Service. We also will need to work closely with television advertisers, cable and satellite network operators, electronic commerce companies and consumer electronics manufacturers to develop products and services in these areas. We may not be able to effectively work with these parties to develop products that generate revenues that are sufficient to justify their costs. In addition, we are currently obligated to share a portion of these revenues with several of our strategic partners. Any inability to attract and retain a large and growing group of subscribers and strategic partners will seriously harm our ability to support new services and develop new revenue streams.

We face intense competition from a number of sources, which may impair our revenues and ability to generate subscribers.

The DVR market is new and rapidly evolving, and we expect to face significant competition in our efforts to secure broad market acceptance. We believe that the principal competitive factors in the DVR market are brand recognition, brand awareness, ease of use, pricing, and functionality. We currently see two primary categories of DVR competitors: standalone DVRs offered by consumer electronics companies, and integrated DVRs offered by cable and satellite operators.

Within each of these two categories, the competition can be further segmented into those offering what we define as basic DVR functionality, and those offering enhanced DVR functionality. Basic DVR functionality includes no or limited program guide data and “VCR-like” controls with manual timeslot-based recordings, usually with no DVR service fee after the consumer purchases the enabling hardware. Enhanced DVR functionality includes rich program guide data and enhanced scheduling and personalization features, and may or may not require a DVR service fee. The TiVo Service is an example of enhanced DVR functionality.

Moreover, the market for in-home entertainment is intensely competitive and subject to rapid technological change. If new technologies render the DVR market obsolete, we may be unable to generate sufficient revenue to cover our expenses and obligations.

Consumer Electronics Competitors. We compete against several types of products with basic or enhanced DVR functionality offered by consumer electronics companies. These products record an analog television signal output from a cable or satellite set-top box, analog cable feed, or antenna.

electronics products. We expect ReplayTV under D&M Holdings ownership to attempt to mount determined competition.

Satellite and Cable Integrated DVR Competitors. The DIRECTV satellite receiver with TiVo Service competes against other cable and satellite set-top boxes that integrate basic or enhanced DVR functionality into multi-channel receivers.

In the past, we faced significant competition from Microsoft’s UltimateTV, which was launched in Spring 2001 and, like the DIRECTV receiver with TiVo Service, combined DIRECTV satellite programming reception and DVR functionality. In 2002, DIRECTV and TiVo announced that DIRECTV had selected the TiVo platform as its main DVR platform, and Microsoft ceased further production of UltimateTV hardware.

Motorola has licensed DVR technology from ReplayTV and Gotuit, and has announced its own plans for integrated cable DVRs. In addition, both Scientific-Atlanta and Motorola have announced plans to build integrated cable DVRs for cable operator Charter Communications using Moxi Media Center software from Digeo.

Other DVR technology providers targeting the integrated DVR space include set-top box manufacturers Pioneer and Pace, and software providers NDS and Canal+ Technologies. We expect international competitors such as NDS and Canal+ to be a presence in the European markets as they develop; however, their presence in the U.S. market has been insignificant to date.

free. To the extent that cable operators begin to offer regular television programming as part of their VOD offerings, consumers will have an alternate means of watching time-shifted shows other than using DVRs. AOL Time Warner is reportedly developing a VOD system called Mystro that will allow users to view certain television programming on demand and Comcast has rolled VOD out in several markets.

Licensing Fees. Our licensing revenues depend both upon our ability to successfully negotiate licensing agreements with our customers and, in turn, upon our customers and consumer electronics manufacturers’ successful commercialization of their underlying products. In addition, we face competition from companies such as Microsoft, OpenTV, Metabyte Networks, NDS, Canal+ Technologies, D&M Holdings, Digeo and Gotuit who have created competing digital video recording technologies. Such companies may offer more economically attractive licensing agreements to manufacturers of DVRs.

Established competition for advertising budgets. Digital video recorder services, in general, and TiVo, specifically, also competes with traditional advertising media such as print, radio and television for a share of advertisers’ total advertising budgets. If advertisers do not perceive digital video recording services as an effective advertising medium, they may be reluctant to devote a significant portion of their advertising budget to promotions on the TiVo Service. In addition, advertisers may not support or embrace the TiVo technology due to a belief that our technology’s ability to fast forward through commercials will reduce the effectiveness of general television advertising. In addition, advertisers may not support or embrace the TiVo technology due to a belief that our technology’s ability to fast forward through commercials will reduce the effectiveness of general television advertising.

Entertainment companies may claim that some of the features of our DVRs violate copyright laws, which could force us to incur significant cost in defending such actions and impact our ability to market the TiVo Service and the products that enable the TiVo Service.

Although we have not been the subject of such actions to date, one of our competitor’s digital video recorders is currently the subject of several copyright infringement lawsuits by a number of major entertainment companies, including the three major television networks. These lawsuits allege that the competitor’s digital video recorders violate copyright laws by allowing users to skip commercials, delete recordings only when instructed and use the Internet to send recorded materials to other users. TiVo Series2 DVRs have some, but not all, of the same features, including the ability to fast forward through commercials and the ability to delete recordings only when instructed. Based on market or consumer pressures, we may decide in the future to add additional features similar to our competitor’s or that may otherwise be objectionable to entertainment companies. If similar actions are filed against us based on current or future features of our DVRs, entertainment companies may seek injunctions to prevent us from including these features and/or damages. Such litigation can be costly and may divert the efforts of our management. Furthermore, if we were ordered to remove features from our DVRs, we may experience increased difficulty in marketing the TiVo Service and related TiVo-enabled DVRs and may suffer reduced revenues as a result.

Our relationship with DIRECTV could be affected by a proposed acquisition of Hughes Electronics by News Corp.

In April 2003, General Motors announced that it had agreed to split off Hughes Electronics Corporation, the parent company of DIRECTV and simultaneously sell its 19.9% economic interest in Hughes to News Corp. Pursuant to this agreement, News Corp. would also acquire an additional 34% of the split-off entity from stockholders

If this transaction closes, it is possible that DIRECTV under News Corp. control could seek to transition to an alternate DVR technology platform, such as that created by NDS, which is owned by News Corp. It is also possible that News Corp. could slow the pace of DVR deployment by DIRECTV in an effort to protect its content businesses from perceived threats posed by DVRs.

If we are unable to introduce new products or services, or if our new products and services are unsuccessful, the growth in our subscriber base and revenues may suffer.

To attract and retain subscribers and generate revenues, we must continue to add functionality and content and introduce products and services which embody new technologies and, in some instances, new industry standards. This challenge will require hardware and software improvements, as well as new collaborations with programmers, advertisers, network operators, hardware manufacturers and other strategic partners. These activities require significant time and resources and may require us to develop and promote new ways of generating revenue with established companies in the television industry. These companies include television advertisers, cable and satellite network operators, electronic commerce companies and consumer electronics manufacturers. In each of these examples, a small number of large companies dominate a major portion of the market and may be reluctant to work with us to develop new products and services for digital video recorders. If we are unable to further develop and improve the TiVo Service or expand our operations in a cost-effective or timely manner, our ability to attract and retain subscribers and generate revenue will suffer.

Product defects, system failures or interruptions to the TiVo Service may have a negative impact on our revenues, damage our reputation and decrease our ability to attract new subscribers.

Our ability to provide uninterrupted service and high quality customer support depends on the efficient and uninterrupted operation of our computer and communications systems. Our computer hardware and other operating systems for the TiVo Service are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. These types of interruptions in the TiVo Service may reduce our revenues and profits. We currently house the server hardware that delivers the TiVo service at only one location and are exploring the benefits of establishing a backup facility. Our business also will be harmed if consumers believe our service is unreliable. In addition to placing increased burdens on our engineering staff, service outages will create a flood of customer questions and complaints that must be responded to by our customer support personnel. Any frequent or persistent system failures could irreparably damage our reputation and brand.

We have detected and may continue to detect errors and product defects. These problems can affect system uptime and result in significant warranty and repair problems, which could cause customer service and customer relations problems. Correcting errors in our software or fixing defects in our products requires significant time and resources, which could delay product releases and affect market acceptance of the TiVo Service. Any delivery by us of products or upgrades with undetected material product defects or software errors could harm our credibility and market acceptance of the DVRs and the TiVo Service. In addition, defective products could cause a risk of injury that may subject us to litigation or cause us to have to undertake a product recall. For example, we have become aware of occasions where a part has come loose from the remote control device that comes with the DVRs that enable the TiVo Service, including occurrences where a young child has gagged on or ingested a part of the remote control device. While we are unaware of any injuries resulting from the use of our products, if we are required to repair or replace any of our products, we could incur significant costs, which would have a negative impact on our financial condition and results of operations.

Intellectual property claims against us can be costly and could result in the loss of significant rights.

From time to time, we receive letters form third parties alleging that we are infringing their intellectual property. Regardless of their merit, we are forced to devote time and resources to respond to these letters. In addition, if any of these third parties or others were to bring suit against us, our business could be harmed because intellectual property litigation may:

The emerging enhanced-television industry is highly litigious, particularly in the area of on-screen program guides. Additionally, many patents covering interactive television technologies have been granted but have not been commercialized. For example, we are aware of at least seven patents for pausing live television. A number of companies in the enhanced-television industry earn substantial profits from technology licensing, and the introduction of new technologies such as ours is likely to provoke lawsuits from such companies. A successful claim of infringement against us, our inability to obtain an acceptable license from the holder of the patent or other right, or our inability to design around an asserted patent or other right could cause our manufacturers to cease manufacturing DVRs that enable the TiVo Service, our retailers to stop selling the product or us to cease providing our service, or all of the above, which would eliminate our ability to generate revenues.

Under our agreements with many of our manufacturing and licensing partners, we are obligated to indemnify them in the event that our technology infringes upon the intellectual property rights of third parties. Due to these indemnity obligations, we could be forced to incur material expenses if our manufacturing and licensing partners are sued and if they were to lose the lawsuit, our business could be harmed. In addition, because the products sold by our manufacturing and licensing partners often involve the use of other persons’ technology, this increases our exposure to litigation in circumstances where there is a claim of infringement asserted against the product in question, even if the claim does not pertain to our technology.

Pending intellectual property litigations. On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging willful and deliberate violation of U.S. Patent Number 4,706,121, entitled “TV Schedule System and Process,” held by StarSight. The complaint alleged that we infringed the patent by, among other things, making, using, selling, offering to sell and/or importing our TV schedule systems and processes without a license from StarSight. On February 25, 2000, we counterclaimed against StarSight, Gemstar Development Corporation and Gemstar International Group Limited seeking damages for federal antitrust violations and state unfair business practices claims, as well as declaratory relief of non-infringement, invalidity and unenforceability with respect to the patent. On June 21, 2002, a United States International Trade Commission, or ITC, Administrative Law Judge found, among other things, that there had been no infringement of this patent by EchoStar Communications, Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer New Media Technologies Inc., Pioneer North America, Inc., Scientific-Atlanta Inc. and SCI Systems Inc. and that StarSight had misused this patent which was also found to be unenforceable for failure to name a co-inventor. On August 2, 2002, the Court entered an order staying all proceedings in the StarSight lawsuit until after final resolution to this ITC action (including any and all appeals) involving this patent. We are not a party to the ITC action although the same patent is at issue. On August 29, 2002, StarSight announced that the ITC had declined to review the decision of its Administrative Law Judge and that StarSight intended to appeal the decision of the ITC to the United States Court of Appeals for the Federal Circuit.

On June 6, 2003, we entered into a licensing agreement with Gemstar - TV Guide International, Inc. (“Gemstar”) pursuant to which Gemstar granted a non-exclusive license of certain interactive program guide-related patents to us and our subsidiaries for use in TiVo-branded devices. In consideration for the license granted under the agreement, we agreed to pay Gemstar an upfront license fee for existing units that have entered the stream of commerce prior to the effective date of the agreement and a per unit fee for future TiVo-enabled devices. We have also agreed to provide Gemstar with TiVo Showcases and certain branding in the TiVo interface of our Series2 devices. In exchange for our promise to provide these and other services, Gemstar has waived the upfront license fee and will pay us a certain per unit fee. We may use the per unit fees Gemstar will pay to us to offset a portion of the per unit fees we will pay to Gemstar.

The per unit fees are payable upon activation of the TiVo Service on the unit, including activation of the recently announced no-fee TiVo Basic service level. The license applies to TiVo-enabled devices that are manufactured by us. In certain circumstances, the license may be extended to TiVo-enabled devices manufactured by existing and future licensees of the TiVo technology. Notwithstanding the foregoing, the license does not extend to TiVo-enabled DIRECTV set-top boxes or any other service provider-provisioned devices, and the upfront fee did not include DIRECTV set-top boxes.

Without either party admitting any wrong-doing or liability, we and Gemstar have also agreed to release and dismiss without prejudice all claims against each other and our respective subsidiaries related to the StarSight Telecast, Inc. v. TiVo, Inc., Case No. C-00-20133 litigation filed in the United States District Court for the Northern District of California, San Jose Division. We and Gemstar also agreed to release each other from all claims and liabilities relating to the subject matter of the StarSight litigation and all other actual or alleged infringing acts occurring prior to the effective date of the agreement, except that Gemstar did not release its claims against us or our licensees, customers and other third parties for patent infringement relating to any past, current or future TiVo-enabled DIRECTV set-top boxes.

The agreement has a five-year term. In the event that the agreement is terminated because of a material breach by us of our obligations to provide Gemstar with TiVo Showcases and certain other branding that is not cured within a certain period of time, we are contractually required to pay liquidated damages to Gemstar in the amount of the upfront license fee.

Under the agreement, we are not required to incorporate Gemstar television program guide data and are permitted to continue using the data provided to us by Tribune Media Services, Inc.

On September 25, 2001, Pause Technology filed a complaint against us in the U.S. District Court for the District of Massachusetts alleging willful and deliberate infringement of U.S. Reissue Patent No. 36,801, entitled “Time Delayed Digital Video System Using Concurrent Recording and Playback.” Pause Technology alleges that it is the owner of this patent, and further alleges that we have willfully and deliberately infringed this patent by making, selling, offering to sell, and using

within the United States the TiVo-enabled DVR. Pause Technology seeks unspecified monetary damages as well as an injunction against our operations. It also seeks attorneys’ fees and costs. Our answer was filed on December 26, 2001. We could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed. Because the lawsuit is still in the pre-trial discovery stage, we cannot determine the total expense or possible loss, if any, that may result from this litigation.

On February 5, 2002, Sony Corporation notified us that Command Audio Corporation had filed a complaint against Sony Electronics, Inc. on February 2, 2002 in the U.S. District Court for the Northern District of California. The complaint alleges that, in connection with its sale of DVRs, Sony infringes upon two patents owned by Command Audio (U.S. Patent Nos. 5,590,195 (“Information Dissemination Using Various Transmission Modes”) and 6,330,334 (“Method and System for Information Dissemination Using Television Signals”). The complaint seeks injunctive relief, compensatory and treble damages and Command Audio’s costs and expenses, including reasonable attorneys’ fees. Under the terms of our agreement with Sony governing the distribution of certain DVRs that enable the TiVo Service, we are required to indemnify Sony against any and all claims, damages, liabilities, costs and expenses relating to claims that our technology infringes upon intellectual property rights owned by third parties. Due to our indemnification obligations, we could be forced to incur material expenses during this litigation, and, if Sony were to lose this lawsuit, our business could be harmed.

In addition, we are aware that some media companies may attempt to form organizations to develop standards and practices in the digital video recorder industry. These organizations or individual media companies may attempt to require companies in the digital video recorder industry to obtain copyright or other licenses. Lawsuits or other actions taken by these types of organizations or companies could make it more difficult for us to introduce new services, delay widespread consumer acceptance of our products and services, restrict our use of some television content, increase our costs and adversely affect our business.

If there is an adverse outcome in the class action litigation that has been filed against us, our business may be harmed.

We and certain of our officers and directors are named as defendants in a consolidated securities class action lawsuit filed in the U.S. District Court for the Southern District of New York. This action, which is captioned Wercberger v. TiVo et al., also names several of the underwriters involved in our initial public offering as defendants. This class action is brought on behalf of a purported class of purchasers of our common stock from September 30, 1999, the time of our initial public offering, through December 6, 2000. The central allegation in this action is that the underwriters in our initial public offering solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased our common stock in the initial public offering and the after-market. The complaint also alleges that the TiVo defendants violated the federal securities laws by failing to disclose in the initial public offering prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 150 issuers have been named in similar lawsuits. In July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers, including the TiVo defendants, was filed by the entire group of issuer defendants in these similar actions. On October 8, 2002, our executive officers were dismissed as defendants in the complaint. On February 19, 2003, the court in this action issued its decision on defendants’ omnibus motion to dismiss. This decision dismissed the Section 10(b) claim as to TiVo but denied the motion to dismiss the Section 11 claim as to TiVo and virtually all of the other issuer-defendants. We believe we have meritorious defenses and intend to defend this action vigorously; however, we could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed.

If there is an adverse outcome in the discrimination litigation that has been filed against us, our business may be harmed.

On July 9, 2002, Andrew Townsley, a broadcast center analyst, filed a charge of discrimination against us with the California Department of Fair Employment and Housing. Mr. Townsley claims that he has suffered discrimination based on

his disability. We believe we have meritorious defenses and intend to defend this action vigorously; however, we could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed.

Our success depends on our ability to secure and protect patents, trademarks and other proprietary rights.

Our success and ability to compete are substantially dependent upon our internally developed technology. We rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, the steps we take to protect our proprietary rights may be inadequate. We have filed patent applications and provisional patent applications covering substantially all of the technology used to deliver the TiVo Service and its features and functionality. To date, several of these patents have been granted, but we cannot assure you that any additional patents will ever be granted, that any issued patents will protect our intellectual property or that third parties will not challenge any issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us. Our failure to secure and protect our proprietary rights could have a material adverse effect on our business.

Legislation, laws or regulations that govern the television industry, the delivery of programming and the collection of viewing information from subscribers.

The delivery of television programming and the collection of viewing information from subscribers via the TiVo Service and a DVR represents a new category in the television and home entertainment industries. As such, it is difficult to predict what laws or regulations will govern our business. Changes in the regulatory climate, the enactment of new legislation, or the expansion, enforcement or interpretation of existing laws could expose us to additional costs and expenses and could require changes to our business. For example, legislation regarding subscriber privacy or copyright could be enacted or expanded to apply to the TiVo Service, which could adversely affect our business. New or existing copyright laws could be applied to restrict the capture of television programming, which would adversely affect our business. It is unknown whether existing laws and regulations will apply to the digital video recorder market. Therefore, it is difficult to anticipate the impact of current or future laws and regulations on our business.

The Federal Communications Commission has broad jurisdiction over the telecommunications and cable industries. The majority of FCC regulations, while not directly affecting us, do affect many of the companies on whom we substantially rely for the marketing and distribution of the DVR and the TiVo Service. As such, the indirect effect of these regulations may adversely affect our business. In addition, the FCC could promulgate new regulations, or interpret existing regulations in a manner that would cause us to incur significant compliance costs or force us to alter the features or functionality of the TiVo Service.

We need to safeguard the security and privacy of our subscribers’ confidential data, and any inability to do so may harm our reputation and brand and expose us to legal action.

The DVR collects and stores viewer preferences and other data that many of our subscribers consider confidential. Any compromise or breach of the encryption and other security measures that we use to protect this data could harm our reputation and expose us to potential liability. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could compromise or breach the systems we use to protect our subscribers’ confidential information. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches.

Uncertainty in the marketplace regarding the use of data from subscribers could reduce demand for the TiVo Service and result in increased expenses. Consumers may be concerned about the use of viewing information gathered by the TiVo Service and DVR. Currently, we gather anonymous information about our subscribers’ viewing choices while using the TiVo Service, unless a subscriber affirmatively consents to the collection of personally identifiable viewing information. This anonymous viewing information does not identify the individual subscriber. Privacy concerns, however, could create uncertainty in the marketplace for digital video recording and our products and services. Changes in our privacy policy could

reduce demand for the TiVo Service, increase the cost of doing business as a result of litigation costs or increased service delivery costs,or otherwise harm our reputation and business.

In the future, our revenues and operating results may fluctuate significantly, which may adversely affect the market price of our common stock.

We expect our revenues and operating results to fluctuate significantly due to a number of factors, many of which are outside of our control. Therefore, you should not rely on period-to-period comparisons of results of operations as an indication of our future performance. It is possible that in some periods our operating results may fall below the expectations of market analysts and investors. In this event, the market price of our common stock would likely fall.

Because our expenses precede associated revenues, unanticipated shortfalls in revenue could adversely affect our results of operations for any given period and cause the market price of our common stock to fall.

Seasonal trends may cause our quarterly operating results to fluctuate and our inability to forecast these trends may adversely affect the market price of our common stock.

Consumer electronic product sales have traditionally been much higher during the holiday shopping season than during other times of the year. Although predicting consumer demand for our products is very difficult, we have experienced that sales of DVRs and new subscriptions to the TiVo Service have been disproportionately high during the holiday shopping season when compared to other times of the year. If we are unable to accurately forecast and respond to consumer demand for our products, our reputation and brand will suffer and the market price of our common stock would likely fall.

We expect that a portion of our future revenues will come from targeted commercials and other forms of television advertising enabled by the TiVo Service. Expenditures by advertisers tend to be seasonal and cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. A decline in the economic prospects of advertisers or the

economy in general could alter current or prospective advertisers’ spending priorities or increase the time it takes to close a sale with our advertisers, which could cause our revenues from advertisements to decline significantly in any given period.

If we are unable to raise additional capital on acceptable terms, our ability to effectively manage growth and build a strong brand could be harmed.

We expect that our existing capital resources will be sufficient to meet our cash requirements through the fiscal year ending January 31, 2004. However, as we continue to grow our business, we may need to raise additional capital, which may not be available on acceptable terms or at all. If we cannot raise necessary additional capital on acceptable terms, we may not be able to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements.

If additional capital is raised through the issuance of equity securities, the percentage ownership of our existing stockholders will decline, stockholders may experience dilution in net book value per share, or these equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. Any debt financing, if available, may involve covenants limiting, or restricting our operations or future opportunities.

If we lose key management personnel, we may not be able to successfully operate our business.

Our future performance will be substantially dependent on the continued services of our senior management and other key personnel. The loss of any members of our executive management team and our inability to hire additional executive management could harm our business and results of operations. In addition, we do not have employment agreements with, or key man insurance policies for, any of our key personnel.

The nature of some of our relationships may restrict our ability to operate freely in the future.

From time to time, we may engage in discussions with other parties concerning relationships, which may include equity investments by such parties in our company. We currently have such relationships with companies, including America Online, DIRECTV, Sony and Philips. While we believe that such relationships have enhanced our ability to finance and develop our business model, the terms and conditions of such relationships may place some restrictions on the operation of our business in the future.

We may be required to repurchase our outstanding convertible senior notes upon a repurchase event; however, we may not be able to do so.

Holders of our convertible senior notes may require us to repurchase all or any portion of their notes for cash upon a repurchase event, which includes certain changes in control and a failure of our shares of common stock to be listed for trading on the Nasdaq or a U.S. national securities exchange. Although there are currently no restrictions on our ability to pay the repurchase price, future debt agreements may prohibit us from repaying the repurchase price in cash. If we are prohibited from repurchasing the notes, we could seek consent from our lenders to repurchase the notes. If we are unable to obtain their consent, we could attempt to refinance the notes. If we were unable to obtain a consent or refinance, we would be prohibited from repurchasing the notes. Even if we are not prohibited from repurchasing the notes, we may not have sufficient funds to do so. If we were unable to repurchase the notes upon a repurchase event, it would result in an event of default under the indenture governing the notes. The occurrence of an event of default under the notes could lead to the acceleration of all amounts outstanding under the notes, and may also trigger cross-default provisions resulting in the acceleration of our other then-existing debt. These events in turn could harm our share price as well as our ability to continue our operations.

If the conversion price on our outstanding convertible senior notes were reduced, it would result in dilution to the existing holders of our common stock.

The conversion price on our convertible senior notes will be reduced if, prior to August 28, 2003, we issue common stock or common stock equivalents at an issuance price less than what the indenture governing the notes refers to as the “effective” conversion price on the notes (or with respect to common stock equivalents, such additional common stock is issued with a conversion or exercise price per share less than the “effective” conversion price of the notes.) The “effective” conversion price is derived by multiplying the conversion price in effect at the time of measurement by the percentage of the proceeds from the convertible senior notes and warrants transaction that were attributed to the notes, which was 81%. If we issue warrants in addition to common stock or common stock equivalents, the indenture requires that we calculate the issuance price of the common stock or common stock equivalents by multiplying the per share issuance price of the common stock or common stock equivalents by the percentage of the proceeds from the issuance that we attribute to the common stock or common stock equivalents for income tax purposes. The conversion price of the notes is currently $3.99, with a current “effective” conversion price, as described above, of $3.23. Accordingly, we cannot issue common stock or common stock equivalents at an issuance price, determined as described above, below $3.23 without triggering a conversion price adjustment. If the conversion price on our convertible notes is reduced, holders of the notes will be entitled to receive a greater number of shares of our common stock in connection with the conversion of the notes, thereby resulting in dilution to the existing holders of our common stock.

Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs and may affect our ability to be in compliance with such new corporate governance provisions in the future.

The existing federal securities laws and regulations impose complex and continually changing regulatory requirements on our operations and reporting. With the enactment of the Sarbanes-Oxley Act of 2002 in July 2002, a significant number of new corporate governance requirements have been adopted or proposed. The new requirements impose comprehensive reporting and disclosure requirements, set stricter independence and financial expertise standards for audit committee members and impose increased civil and criminal penalties for companies, their chief executive officers, chief financial officers and directors for securities law violations. We expect these developments to increase our legal compliance costs, increase the difficulty and expense in obtaining director and officer liability insurance, and make it harder for us to attract and retain qualified members of our board of directors and/or qualified executive officers. Such developments could harm our results of operations and divert management’s attention from business operations. We may not be successful in complying with these requirements at all times.

The current legislative and regulatory environment affecting accounting principles generally accepted in the United States of America is uncertain and volatile, and significant changes in current principles could affect our financial statements going forward.

The accounting rules and regulations that we must comply with are complex and continually changing. Recent actions and public comments from the Securities Exchange Commission have focused on the integrity of financial reporting generally. Similarly, the U.S. Congress has considered a variety of bills that could affect certain accounting principles. The FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, or are developing new proposed standards, such as accounting for guarantees, restructuring charges and stock options, some of which would represent a significant change from current industry practices. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. While we believe that our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, we cannot predict the impact of future changes to accounting principals or our accounting policies on our financial statements going forward. In addition, were we to change our critical accounting policies, including with respect to the recognition of revenue from our lifetime subscriptions, our results of operations could be significantly impacted.

Our former independent public accountant, Arthur Andersen LLP, has been found guilty of federal obstruction of justice charges and you are unlikely to be able to exercise effective remedies against them in any legal action.

Although we have dismissed Arthur Andersen as our independent public accountants and engaged KPMG LLP, our consolidated financial statements as of and for the one-month transition period ended January 31, 2001, and the fiscal year ended December 31, 2000 have only been audited by Arthur Andersen. On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the government’s investigation of Enron Corporation. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen guilty of these federal obstruction of justice charges. On October 16, 2002, Arthur Andersen was sentenced to five years probation and fined $500,000 as a result. In light of the jury verdict and the underlying events, Arthur Andersen informed the Securities and Exchange Commission that it would cease practicing before the Securities and Exchange Commission by August 31, 2002, unless the Securities and Exchange Commission determines another date is appropriate. A spokesperson for Arthur Andersen announced that, as of August 31, 2002, Arthur Andersen voluntarily relinquished, or consented to revocation of, its firm permits in all states where it was licensed to practice public accountancy with state regulators. Substantially all of Arthur Andersen’s personnel have already left the firm, including the individuals responsible for auditing our audited financial statements included or incorporated by reference in this Quarterly Report on Form 10-Q. Because it is unlikely that Arthur Andersen will survive, you are unlikely to be able to exercise effective remedies or collect judgments against them.

In addition, in connection with the re-audit by KPMG LLP of our fiscal year 2002 financial statements and the resulting restatement of such financial statements, Arthur Andersen has informed us that it has withdrawn its audit report dated March 28, 2002. In our financial statements attached to our annual report on Form 10-K, we included a copy of the audit report of Arthur Andersen dated March 2, 2001 included in our transition report on Form 10-K/T filed on April 30, 2001 without Arthur Andersen’s consent in reliance on Rule 2-02(e) of Regulation S-X. Because Arthur Andersen has not consented to the inclusion of their audit report dated March 2, 2001 in our annual report on Form 10-K and has withdrawn its audit report dated March 28, 2002, investors’ ability to recover against Arthur Andersen with respect to the financial statements included in our annual report on Form 10-K may be limited.

Moreover, as a public company, we are required to file with the Securities and Exchange Commission periodic financial statements audited or reviewed by an independent public accountant. The Securities and Exchange Commission has said that it will continue accepting financial statements audited by Arthur Andersen so long as a reasonable effort is made to have Arthur Andersen reissue its audit reports and to obtain a manually signed audit report from Arthur Andersen. Arthur Andersen has informed us that it is no longer able to reissue its audit reports because both the partner and the audit manager who were assigned to our account have left the firm. In addition, Arthur Andersen is unable to perform procedures to assure the continued accuracy of its audit report on our audited financial statements incorporated by reference in this our annual report on Form 10-K. Arthur Andersen will also be unable to perform such procedures or to provide other information or documents that would customarily be received by us or underwriters in connection with financings or other transactions, including consents and “comfort” letters. As a result, we may encounter delays, additional expense and other difficulties in future financings. Any resulting delay in accessing or inability to access the public capital markets could have a material adverse effect on us.

The large number of shares available for future sale could adversely affect the market price for our stock.

Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur could adversely affect the market price of our common stock.

Several of our significant stockholders own a substantial number of our shares. As of May 16, 2003 AOL owned 6,726,890 shares of our common stock and presently exercisable warrants to purchase an additional 295,428 shares of our common stock. On May 16, 2003 AOL also held unvested warrants to purchase an aggregate of 5,207,806 shares of our common stock, which pursuant to their terms can never be exercisable. As of May 16, 2003 Hughes Electronics Corporation owned 3,386,601 shares of our common stock and presently exercisable warrants to purchase an additional 155,941 shares. We have granted Hughes demand and piggyback registration rights with respect to the shares issuable upon exercise of their warrants and Hughes may sell their shares in registered offerings pursuant to their registration rights, and AOL and Hughes may sell their shares in accordance with Rule 144 under the Securities Act.

In addition, in August 2001, we issued $51,750,000 aggregate principal amount of our convertible senior notes due 2006, of which, as of January 31, 2003, there was $20,450,000 in principal amount still outstanding. As of January 31, 2003, these notes were convertible into 5,125,310 shares of our common stock. In connection with the convertible notes offering, we also issued five-year warrants to purchase 2,682,600 shares of our common stock, all of which were still outstanding as of April 30, 2003. Pursuant to registration rights agreements with the investors in that offering, we have registered the resale of the convertible notes, warrants and shares of common stock issuable upon conversion or exercise of the convertible notes or warrants.

As of April 30, 2003, options to purchase a total of 12,795,485 shares were outstanding under our option and equity incentive plans, and there were 8,976,374 shares available for future grants. We have filed registration statements with respect to the shares of common stock issuable under our option and equity incentive plans.

Future sales of the shares of the common stock described above, or the registration for sale of such common stock, could adversely affect the market price of our common stock. The sale of such stock, as well as the existence of outstanding options and shares of common stock reserved for issuance under our option and equity incentive plans, as well as the shares issuable upon conversion or exercise of our outstanding convertible notes and warrants, also may adversely affect the terms upon which we are able to obtain additional capital through the sale of equity securities.

We may issue common stock to satisfy our current or future cash payment obligations and as a result of such issuances, common stockholders may experience immediate dilution and our stock price may go down.

We amended our agreements with Thomson Multimedia and BSkyB in order to enable us to issue common stock to reduce or eliminate some of our cash payment obligations to them. As a result of these amendments, in July 2002, we issued 633,072 shares and 379,843 shares to BSkyB and Thomson Multimedia, respectively. Under our agreement with Thomson Multimedia, we can continue to satisfy future cash payment obligations, in part, in shares of common stock. We may negotiate similar amendments to our agreements with other customers in order to reduce our cash payment obligations in the future.

The market price of our common stock is highly volatile. Since our initial public offering in September 1999 through June 6, 2003, our common stock has closed between $71.50 per share and $2.55 per share, closing at $9.71 on June 6, 2003. The market price of our common stock may be subject to significant fluctuations in response to, among other things, the factors discussed in this section and the following factors:

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

Our Certificate of Incorporation, Bylaws, Rights Agreement and Delaware law could discourage a third party from acquiring us and consequently decrease the market value of our common stock.

We may become the subject of an unsolicited attempted takeover of our company. Although an unsolicited takeover could be in the best interests of our stockholders, certain provisions of Delaware law, our organizational documents and our Rights Agreement could be impediments to such a takeover.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Our Amended and Restated Certificate of Incorporation and Bylaws also require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of our stockholders may be called only by our board of directors, the chairman of the board or the chief executive officer. Our Amended and Restated Certificate of Incorporation and Bylaws also provide that directors may be removed only for cause by a vote of a majority of the stockholders and that vacancies on the board of directors created either by resignation, death, disqualification, removal or by an increase in the size of the board of directors may be filled by a majority of the directors in office, although less than a quorum. Our Amended and Restated Certificate of Incorporation also provides for a classified board of directors and specifies that the authorized number of directors may be changed only by resolution of the board of directors.

On January 9, 2001, our board of directors adopted a Rights Agreement. Each share of our common stock has attached to it a right to purchase one one-hundredth of a share of our Series B Junior Participating Preferred Stock at a price of $60 per one one-hundredth of a preferred share in the event that the rights become exercisable. The rights become exercisable upon the earlier to occur of

These provisions of Delaware law, our Amended and Restated Certificate of Incorporation and Bylaws and our Rights Agreement could make it more difficult for us to be acquired by another company, even if our acquisition is in the best interests of our stockholders. Any delay or prevention of a change of control or change in management could cause the market price of our common stock to decline.

This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements regarding our anticipated financial results, revenues, subscribers, use of funds and business plan. You can recognize forward-looking statements by use of the words “believes,” “anticipates,” “expects,” and words of similar import or the negative of those terms or expressions. Such forward-looking statements will have known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those set forth in such forward-looking statements as a result of the “Factors That May Affect Future Operating Results” and other risks detailed in our reports filed with the Securities and Exchange Commission subsequent to the date of the original filing of this quarterly report.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio and we conduct transactions in U.S. dollars. Our investment portfolio only includes highly liquid instruments with original maturities of less than one year.

We are subject to fluctuating interest rates that may impact, adversely or otherwise, our results of operations or cash flows for our cash and cash equivalents and our short-term investments.

The table below presents principal amounts and related weighted average interest rates as of April 30, 2003 for our cash and cash equivalents. We had no short-term investments at this time.

In future quarters the conversion price on the convertible notes may be reduced if we issue securities below a certain price. See “Factors That May Affect Future Operating Results—If the conversion price on the notes were reduced, it would result in dilution to the existing holders of our common stock.” In addition, a reduced conversion price on the convertible notes would increase the beneficial conversion calculation, thus increasing our interest expense.

Although payments under the operating lease for our facility are tied to market indices, we are not exposed to material interest rate risk associated with the operating lease. Our capital lease obligations are not subject to changes in the interest rate and, therefore, are not exposed to interest rate risk.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance in achieving our desired control objectives, and our Chief Executive Officer and Chief Financial Officer have concluded that our controls and procedures are effective in reaching that level of reasonable assurance.

Within 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation.

StarSight Telecast Inc. On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging willful and deliberate violation of U.S. Patent Number 4,706,121, entitled “TV Schedule System and Process”, held by StarSight. The complaint alleged that we infringed the StarSight patent by, among other things, making, using, selling, offering to sell and/or importing our TV schedule systems and processes without a license from StarSight. On February 25, 2000, we counterclaimed against StarSight, Gemstar Development Corporation and Gemstar International Group Limited seeking damages for federal antitrust violations and state unfair business practices claims, as well as declaratory relief of non-infringement, invalidity and unenforceability with respect to the patent. On June 21, 2002, a United States International Trade Commission (“ITC”) Administrative Law Judge found, among other things, that there had been no infringement of this patent by EchoStar Communications, Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer New Media Technologies Inc., Pioneer North America, Inc., Scientific-Atlanta Inc. and SCI Systems Inc. and that StarSight had misused this patent which was also found to be unenforceable for failure to name a co-inventor. On August 2, 2002, the Court entered an Order staying all proceedings in the StarSight lawsuit until after final resolution to this ITC action (including any and all appeals) involving this patent. We are not a party to this ITC action although the same patent is at issue. On August 29, 2002, StarSight announced that the ITC had declined to review the decision of its Administrative Law Judge and that StarSight intended to appeal the decision of the ITC to the United States Court of Appeals for the Federal Circuit.

On June 6, 2003, we entered into a licensing agreement with Gemstar – TV Guide International, Inc. (“Gemstar”) pursuant to which Gemstar granted a non-exclusive license of certain interactive program guide-related patents to us and our subsidiaries for use in TiVo-branded devices. In consideration for the license granted under the agreement, we agreed to pay Gemstar an upfront license fee for existing units that have entered the stream of commerce prior to the effective date of the agreement and a per unit fee for future TiVo-enabled devices. We have also agreed to provide Gemstar with TiVo Showcases and certain branding in the TiVo interface of our Series2 devices. In exchange for our promise to provide these and other services, Gemstar has waived the upfront license fee and will pay us a certain per unit fee. We may use the per unit fees Gemstar will pay to us to offset a portion of the per unit fees we will pay to Gemstar.

The per unit fees are payable upon activation of the TiVo Service on the unit, including activation of the recently announced no-fee TiVo Basic service level. The license applies to TiVo-enabled devices that are manufactured by us. In certain circumstances, the license may be extended to TiVo-enabled devices manufactured by existing and future licensees of the TiVo technology. Notwithstanding the foregoing, the license does not extend to TiVo-enabled DIRECTV set-top boxes or any other service provider-provisioned devices, and the upfront fee did not include DIRECTV set-top boxes.

Under the agreement, we are not required to incorporate Gemstar television program guide data and are permitted to continue using the data provided to us by Tribune Media Services, Inc.

IPO Litigation. We and certain of our officers and directors are named as defendants in a consolidated securities class action lawsuit filed in the U.S. District Court for the Southern District of New York. This action, which is captioned Wercberger v. TiVo et al., also names several of the underwriters involved in our initial public offering as defendants. This

class action is brought on behalf of a purported class of purchasers of our common stock from September 30, 1999, the time of our initial public offering, through December 6, 2000. The central allegation in this action is that the underwriters in our initial public offering solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased our common stock in the initial public offering and the after-market. The complaint also alleges that the TiVo defendants violated the federal securities laws by failing to disclose in the initial public offering prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 150 issuers have been named in similar lawsuits. In July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers (including the TiVo defendants) was filed by the entire group of issuer defendants in these similar actions. On October 8, 2002, our executive officers were dismissed as defendants in the complaint. On February 19, 2003, the court in this action issued its decision on defendants’ omnibus motion to dismiss. This decision dismissed the Section 10(b) claim as to TiVo but denied the motion to dismiss the Section 11 claim as to TiVo and virtually all of the other issuer-defendants. We believe we have meritorious defenses and intend to defend this action vigorously; however, we could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed.

Pause Technology LLC. On September 25, 2001, Pause Technology filed a complaint against us in the U.S. District Court for the District of Massachusetts alleging infringement of U.S. Reissue Patent No. 36,801, entitled “Time Delayed Digital Video System Using Concurrent Recording and Playback”. Pause Technology alleges that it is the owner of this patent, and further alleges that we have willfully and deliberately infringed this patent by making, selling, offering to sell, and using within the United States the TiVo digital video recorder. Pause Technology seeks unspecified monetary damages as well as an injunction against our operations. It also seeks attorneys’ fees and costs. Our answer was filed on December 26, 2001. We believe we have meritorious defenses and intend to defend this action vigorously; however, we could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed.

Indemnification of Sony Corporation Against Command Audio Corporation Lawsuit. On February 5, 2002, Sony Corporation notified us that Command Audio Corporation had filed a complaint against Sony Electronics, Inc. on February 2, 2002 in the U.S. District Court for the Northern District of California. The complaint alleges that, in connection with its sale of digital video recorders and other products, Sony infringes upon two patents owned by Command Audio (U.S. Patent Nos. 5,590,195 (“Information Dissemination Using Various Transmission Modes”) and 6,330,334 (“Method and System for Information Dissemination Using Television Signals”). The complaint seeks injunctive relief, compensatory and treble damages and Command Audio’s costs and expenses, including reasonable attorneys’ fees. Under the terms of our agreement with Sony governing the distribution of certain DVRs that enable the TiVo Service, we are required to indemnify Sony against any and all claims, damages, liabilities, costs and expenses relating to claims that our technology infringes upon intellectual property rights owned by third parties. We believe Sony has meritorious defenses against this lawsuit; however, due to our indemnification obligations, we could be forced to incur material expenses during this litigation, and, if Sony were to lose this lawsuit, our business could be harmed.

Andrew Townsley. On July 9, 2002, Andrew Townsley, a broadcast center analyst, filed a charge of discrimination against us with the California Department of Fair Employment and Housing. Mr. Townsley claims that he has suffered discrimination based on his disability. We believe we have meritorious defenses and intend to defend this action vigorously; however, we could be forced to incur material expenses in the litigation, and in the event there is an adverse outcome, our business could be harmed.

In May 2003, we announced that we will offer a new introductory service level, TiVo Basic service. This service will provide licensees the opportunity to include entry-level DVR functionality with integrated products such as a combined DVD/DVR.

The TiVo Basic service level provides consumer electronics companies the ability to offer consumers basic DVR functionality with the easy-to-use TiVo interface. The TiVo Basic service will only be packaged with licensees’ integrated consumer electronics products. Licensees will set pricing of their products based on the combined value of the TiVo Basic service and other features and functionality offered in the product.

All integrated DVR/DVD products shipped with the ability to receive the TiVo Basic service can be automatically upgraded to the full TiVo Service for $12.95 a month or $299 product lifetime subscription fee. A customer can take advantage of a built-in trial of the TiVo Service and upgrade at any time as well as purchase the Home Media Option.

Consumers purchasing devices with the ability to receive the TiVo Basic service will get limited DVR functionality such as pausing live TV, recording from a guide with 3 days of program guide data and manual repeat recording by time and date. The basic service will not include a number of popular service features, such as Season Pass^™, WishList^™ and Search by Title.

TiVo licensee Toshiba is the first to announce an integrated product with the TiVo Basic service included. Toshiba’s SD-H400 integrated DVD with TiVo is expected to be available at retail this fall.

The per unit fees are payable upon activation of the TiVo Service on the unit, including activation of the recently announced no-fee TiVo Basic service level. The license applies to TiVo-enabled devices that are manufactured by us. In certain circumstances, the license may be extended to TiVo-enabled devices manufactured by existing and future licensees of the TiVo technology. Notwithstanding the foregoing, the license does not extend to TiVo-enabled DIRECTV set-top boxes or any other service provider-provisioned devices, and the upfront fee did not include DIRECTV set-top boxes.

Under the agreement, we are not required to incorporate Gemstar television program guide data and are permitted to continue using the data provided to us by Tribune Media Services, Inc.

The registrant filed the following reports on Form 8-K during the quarter ended April 30, 2003:

Subsequent to April 30, 2003, the registrant filed the following reports on Form 8-K:

“Can’t Miss TV”, Jump logo, TiVo (logo and character), TiVo Central, TiVolution, Ipreview and “What you want, when you want it” are registered trademarks of TiVo Inc.

“Active Preview”, “DIRECTIVO”, Home Media Option, Instant Replay logo, “Life’s too short for bad TV”, “Overtime Scheduler”, “Personal TV”, “Personal Video Recorder”, “Primetime Anytime”, “Season Pass”, “See it, want it, get it”, “Thumbs Down” (logo and text), “Thumbs Up” (logo and text), “TiVomatic”, “WishList” and “TrickPlay” are trademarks of the registrant. All other trademarks or trade names appearing in this report are the property of their respective owners.

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

/s/ Michael Ramsay

Michael Ramsay

Chief Executive Officer

/s/ David H. Courtney

David H. Courtney

Executive Vice President, Worldwide

Operations and Administration and

Chief Financial Officer

Delaware		77-0463167
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2160 Gold Street, PO Box 2160, Alviso, CA		95002
(Address of principal executive offices)		(Zip Code)

PART I : FINANCIAL INFORMATION		3

ITEM 1. FINANCIAL STATEMENTS		3
CONDENSED CONSOLIDATED BALANCE SHEETS		3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT		6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		56
ITEM 4. CONTROLS AND PROCEDURES		56

PART II : OTHER INFORMATION		57

ITEM 1. LEGAL PROCEEDINGS		57
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS		58
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		59
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		59
ITEM 5. OTHER INFORMATION		59
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K		60
SIGNATURES AND OFFICER CERTIFICATIONS		61

	April 30, 2003		January 31, 2003
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	39,657,000	$	44,201,000
Accounts receivable, net of allowance for doubtful accounts of $13,000 and $8,000		6,328,000		5,839,000
Accounts receivable-related parties		887,000		1,271,000
Inventories		5,269,000		7,273,000
Prepaid expenses and other		2,326,000		2,376,000
Prepaid expenses and other-related parties		2,948,000		2,851,000

Total current assets		57,415,000		63,811,000
LONG-TERM ASSETS
Property and equipment, net		11,059,000		12,143,000
Prepaid expenses and other		1,193,000		1,392,000
Prepaid expenses and other-related parties		4,879,000		4,974,000

Total long-term assets		17,131,000		18,509,000

Total assets	$	74,546,000	$	82,320,000


LIABILITIES AND STOCKHOLDERS’ DEFICIT

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	14,372,000	$	15,260,000
Accrued liabilities		12,337,000		13,980,000
Accrued liabilities-related parties		1,978,000		3,359,000
Deferred revenue		25,385,000		24,000,000
Deferred revenue-related parties		4,988,000		6,077,000

Total current liabilities		59,060,000		62,676,000
LONG-TERM LIABILITIES
Convertible notes payable (face value $10,450,000)		4,692,000		4,265,000
Convertible notes payable-related parties (face value $10,000,000)		4,329,000		3,920,000
Deferred revenue		33,521,000		32,373,000
Deferred rent and other		3,475,000		3,783,000

Total long-term liabilities		46,017,000		44,341,000

	April 30, 2003			January 31, 2003
Total liabilities		105,077,000			107,017,000
COMMITMENTS AND CONTINGENCIES (see Note 6)		—			—
STOCKHOLDERS’ DEFICIT
Common stock, par value $0.001:
Authorized shares are 150,000,000 Issued and outstanding shares are 64,342,710 and 63,918,686, respectively		64,000			64,000
Additional paid-in capital		523,538,000			522,101,000
Prepaid marketing expense		(627,000	)		(1,003,000	)
Note receivable-related parties		(392,000	)		(627,000	)
Accumulated deficit		(553,114,000	)		(545,232,000	)

Total stockholders’ deficit		(30,531,000	)		(24,697,000	)

Total liabilities and stockholders’ deficit	$	74,546,000		$	82,320,000

	Three Months Ended April 30,
	2003			2002
Revenues
Service and technology revenues (includes $4,312,000 and $1,644,000 of revenues-related parties for the three months ended April 30, 2003 and 2002, respectively)	$	16,068,000		$	9,860,000
Hardware revenues		14,809,000			3,780,000
Rebates, revenue share and other payments to channel (includes $2,270,000 and $600,000 of contra-revenues- related parties for the three months ended April 30, 2003 and 2002, respectively)		(2,357,000	)		(600,000	)

Net revenues		28,520,000			13,040,000
Costs of revenues
Costs of service and technology revenues		7,803,000			5,453,000
Cost of hardware revenues		14,178,000			3,665,000

Total cost of revenues		21,981,000			9,118,000

Gross margin		6,539,000			3,922,000

Research and development		5,472,000			5,002,000
Sales and marketing		2,126,000			7,855,000
Sales and marketing-related parties		1,873,000			22,922,000
General and administrative		3,778,000			3,759,000

Total operating expenses		13,249,000			39,538,000

Loss from operations		(6,710,000	)		(35,616,000	)
Interest income		114,000			4,099,000
Interest expense and other (includes $175,000 and $412,000 interest expense-related parties for the three months ended April 30, 2003 and 2002, respectively)		(1,274,000	)		(1,992,000	)

Loss before income taxes		(7,870,000	)		(33,509,000	)
Provision for income taxes		(12,000	)		—

Net loss		(7,882,000	)		(33,509,000	)
Less: Series A redeemable convertible preferred stock dividend		—			(220,000	)
Less: Accretion to redemption value of Series A redeemable convertible preferred stock		—			(1,445,000	)

Net loss attributable to common stockholders	$	(7,882,000	)	$	(35,174,000	)

Net loss per common share basic and diluted	$	(0.12	)	$	(0.74	)

Weighted average common shares outstanding—basic and diluted		64,021,345			47,343,887

	Common Stock			Additional Paid-In Capital		Prepaid Marketing Expense			Note Receivable- Related Parties			Accumulated Deficit
	Shares	Amount		Additional Paid-In Capital		Prepaid Marketing Expense			Note Receivable- Related Parties			Accumulated Deficit			Total
BALANCE JANUARY 31, 2003	63,918,686	$	64,000	$	522,101,000	$	(1,003,000	)	$	(627,000	)	$	(545,232,000	)	$	(24,697,000	)
Issuance of common stock related to exercise of common stock options	235,918		—		617,000		—			—			—			617,000
Issuance of common stock related to employee stock purchase plan	188,106		—		820,000		—			—			—			820,000
Amortization of prepaid marketing expense	—		—		—		376,000			—			—			376,000
Amortization of note receivable	—		—		—		—			235,000			—			235,000
Net loss	—		—		—		—			—			(7,882,000	)		(7,882,000	)

BALANCE APRIL 30, 2003	64,342,710	$	64,000	$	523,538,000	$	(627,000	)	$	(392,000	)	$	(553,114,000	)	$	(30,531,000	)

	Three Months Ended April 30,
	2003			2002
CASH AND CASH EQUIVALENTS:
Balance at beginning of period		44,201,000			52,327,000

Balance at end of period	$	39,657,000		$	35,879,000

SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH FLOW INFORMATION
Cash paid for interest	$	(183,000	)	$	(973,000	)
Cash paid for interest-related parties		(175,000	)		(679,000	)
Reversal of deferred stock-based compensation		—			171,000
SUPPLEMENTAL DISCLOSURE OF RESTRICTED CASH AND OTHER NON-CASH INVESTING AND FINANCING INFORMATION
Interest income recognized on restricted cash		—			3,735,000
Accretion to redemption value of Series A redeemable convertible preferred stock		—			1,445,000
Redemption of shares of Series A convertible preferred stock using restricted cash		—			(48,000,000	)

Furniture and fixtures		3-5 years
Computer and office equipment		3-5 years
Lab equipment		3 years
Leasehold improvements		The shorter of 7 years or the life of the lease
Capitalized software		1-5 years

Revenues	Three Months Ended April 30, 2003		Three Months Ended April 30, 2002
Service Revenues	$	12,702,000	$	8,216,000
Technology Revenues		3,366,000		1,644,000
Hardware Revenues		14,809,000		3,780,000

	Three Months Ended April 30,
	2003		2002
Cash interest expense	$	183,000	$	520,000
Cash interest expense – related parties		175,000		412,000

Total cash interest expense		358,000		932,000

Total non-cash interest expense and other		916,000		1,060,000

Total interest expense and other	$	1,274,000	$	1,992,000

	Three Months Ended
	April 30, 2003			April 30, 2002
Net loss attributable to common stockholders, as reported	$	(7,882,000	)	$	(35,174,000	)
Add back: stock based compensation expense recognized		—			118,000

Pro forma effect of stock based compensation expense determined under the fair value method for all awards		(3,631,000	)		(3,926,000	)

Net loss attributable to common stockholders, pro forma	$	(11,513,000	)	$	(38,982,000	)

Basic and diluted loss per share, as reported	$	(0.12	)	$	(0.74	)

Basic and diluted loss per share, pro forma	$	(0.18	)	$	(0.82	)

	Equity Incentive Plans		Employee Stock Purchase Plan
	Three Months Ended		Three Months Ended
	April 30, 2003	April 30, 2002	April 30, 2003	April 30, 2002
Expected life (in years)	4.0	4.0	.5-1.0	.5
Risk free interest rate	3.96%-4.10%	4.0%-4.10%	1.55%-1.92%	2.05%

Volatility	50%	50%	50%	50%

Dividend yield	zero	zero	zero	zero

Balance at January 31, 2003	$	980,000
Reduction of warranty accrual		(58,000	)
Actual warranty costs incurred during the year		(19,000	)

Balance at April 30, 2003	$	903,000

	Convertible notes payable			Convertible notes payable- related parties			Total
Face value of convertible notes payable	$	10,450,000		$	10,000,000		$	20,450,000
Unamortized discount resulting from warrants issued to noteholders		(1,384,000	)		(1,142,000	)		(2,526,000	)
Unamortized discount resulting from beneficial conversion feature		(4,374,000	)		(4,529,000	)		(8,903,000	)

Carrying value of convertible notes payable	$	4,692,000		$	4,329,000		$	9,021,000

Fiscal Year Ending	Facilities Leases
January 31, 2004	$	2,322,000
January 31, 2005		3,178,000
January 31, 2006		3,270,000
January 31, 2007		3,288,000
January 31, 2007		273,000

Total	$	12,331,000

	Three Months Ended
	Jul 31, 2001		Oct 31, 2001		Jan 31, 2002		Apr 30, 2002		Jul 31, 2002		Oct 31, 2002		Jan 31, 2003		Apr 30, 2003
	(Subscriptions in thousands)
TiVo Service Subscriptions Net Additions	22		24		40		24		21		30		75		37
Service Provider Subscriptions Net Additions	18		27		60		18		21		16		40		42

Total Subscriptions Net Additions	40		51		100		42		42		46		115		79
TiVo Service Cumulative Subscriptions	182		206		246		270		291		321		396		433
Service Provider Cumulative Subscriptions	47		74		134		152		173		189		228		270

Total Cumulative Subscriptions	229		280		380		422		464		510		624		703
% of TiVo Service Cumulative Subscriptions paying recurring fees	37	%	39	%	41	%	34	%	33	%	34	%	34	%	34	%

	Three Months Ended
	Jul 31, 2001			Oct 31, 2001			Jan 31, 2002			Apr 30, 2002			Jul 31, 2002			Oct 31, 2002			Jan 31, 2003			Apr 30, 2003
	(unaudited, in thousands except per share data)
Revenues
Service revenues	$	4,106		$	5,242		$	6,753		$	8,216		$	9,510		$	10,185		$	11,350		$	12,702
Technology revenues		—			100			—			1,644			14,344			2,556			2,365			3,366
Hardware revenues		—			—			—			3,780			11,109			16,220			14,511			14,809
Rebates, revenue share and other payments to channel		—			—			—			(600	)		—			(3,968	)		(5,212	)		(2,357	)

Net revenues		4,106			5,342			6,753			13,040			34,963			24,993			23,014			28,520
Costs of Revenues
Cost of service revenues		4,408			5,156			4,822			4,161			4,387			3,852			4,719			4,174
Cost of technology revenues		—			62			—			1,292			3,189			1,442			2,110			3,629
Cost of hardware revenues		—			—			—			3,665			11,346			15,588			14,048			14,178

Total costs of revenues		4,408			5,218			4,822			9,118			18,922			20,882			20,877			21,981

Gross margin (loss)		(302	)		124			1,931			3,922			16,041			4,111			2,137			6,539
Operating Expenses
Research and development		6,898			7,510			5,874			5,002			4,518			4,875			6,319			5,472
Sales and marketing		5,899			7,228			2,770			7,855			5,608			2,050			2,116			2,126
Sales and marketing—related parties		16,146			11,239			24,959			22,922			3,434			2,283			1,849			1,873
General and administrative		4,379			5,326			4,587			3,759			3,589			3,752			3,365			3,778

Loss from operations		(33,624	)		(31,179	)		(36,259	)		(35,616	)		(1,108	)		(8,849	)		(11,512	)		(6,710	)
Interest income		607			65			101			4,099			146			89			149			114
Interest expense and other		(45	)		(1,171	)		(4,465	)		(1,580	)		(1,607	)		(2,293	)		(20,744	)		(1,099	)
Interest expense—related parties		(559	)		(553	)		(531	)		(412	)		(358	)		(316	)		(259	)		(175	)

Loss before income taxes		(33,621	)		(32,838	)		(41,154	)		(33,509	)		(2,927	)		(11,369	)		(32,366	)		(7,870	)
Provision for income taxes		—			(1,000	)		—			—			(111	)		(150	)		(164	)		(12	)

Net loss		(33,621	)		(33,838	)		(41,154	)		(33,509	)		(3,038	)		(11,519	)		(32,530	)		(7,882	)
Less: Series A redeemable convertible preferred stock dividend		(840	)		(658	)		(428	)		(220	)		—			—			—			—
Less: Accretion to redemption value of convertible preferred Stock		—			—			—			(1,445	)		—			—			—			—

Net loss attributable to common stockholders	$	(34,461	)	$	(34,496	)	$	(41,582	)	$	(35,174	)	$	(3,038	)	$	(11,519	)	$	(32,530	)	$	(7,882	)

Net loss per share
Basic and diluted	$	(0.82	)	$	(0.81	)	$	(0.92	)	$	(0.74	)	$	(0.06	)	$	(0.23	)	$	(0.56	)	$	(0.12	)

	Accrual balance at January 31, 2003		Total cash payments for the three months ended April 30, 2003			Accrual balance at April 30, 2003
TiVo, Alviso, CA facility lease expenses	$	3,640,000	$	(347,000	)	$	3,293,000
TiVo, Berkshire, United Kingdom facility lease expenses		367,000		(28,000	)		339,000

Total	$	4,007,000	$	(375,000	)	$	3,632,000

Revenues	Three Months Ended April 30, 2003	Three Months Ended April 30, 2002
Service Revenues	41%	60%
Technology Revenues	11%	12%
Hardware Revenues	48%	28%

	Total		Less than 1 year		1-3 years		4-5 years		Over 5 years
Operating leases	$	12,331,000	$	3,110,000	$	9,221,000	$	—		—
Long-term convertible notes payable at face value		20,450,000		—		—		20,450,000		—
Coupon interest on long-term convertible notes payable		5,010,000		1,432,000		2,863,000		715,000		—

Total contractual cash obligations	$	37,791,000	$	4,542,000	$	12,084,000	$	21,165,000	$	—

	Total		Less than 1 year		1-3 years		4-5 years		Over 5 years
Standby letter of credit	$	477,000	$	—	$	477,000	$	—	$	—

Total commercial commitments	$	477,000	$	—	$	477,000	$	—	$	—

Cash and cash equivalents		$	39,657,000
Average interest rate			2.34	%

EXHIBIT NUMBER		DESCRIPTION
10.1		Supplemental Offer Letter dated April 28, 2003 from TiVo Inc. to Martin J. Yudkovitz (filed herewith).