TVIA INC - 10-Q Quarterly Report

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

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

On December 31, 2003, 22,453,022 shares of the Registrant’s Common Stock, $0.001 par value per share, were outstanding.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004.

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with general accepted accounting principles have been condensed or omitted. These accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Tvia, Inc. and subsidiary (“the Company”) for the fiscal year ended March 31, 2003, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 24, 2003.

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

The Company reviews long-lived assets and certain identifiable intangibles for impairment. The Company reviews assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. The Company measures recoverability of assets by comparing their carrying amount to the future undiscounted cash flows that they are expected to generate. Impairment reflects the amount by which the carrying value of the assets exceeds their fair market value. The Company wrote off $1.5 million of licensed technology in the quarter ended December 31, 2003.

Comprehensive income or loss includes all changes in equity during a period from transactions and events from non owner sources. A summary of comprehensive income (loss) is as follows (in thousands):

The Company accounts for stock-based employee compensation arrangements using the intrinsic value method. Compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the stock option exercise price, and is amortized over the vesting period of the individual award. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to the stock-based employee compensation.

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding. Diluted net income per share is computed based on the weighted average number of shares of common stock outstanding for the period plus dilutive common equivalent shares including stock options and warrants using the treasury stock method. Diluted loss per share information is the same as basic net loss per share since common shares issuable upon conversion of the stock options and warrants are antidilutive. The total numbers of shares excluded from diluted net income (loss) per share relating to these securities were 5,452,445, 5,310,461, 1,461,046 and 5,310,461 for the three and nine months ended December 31, 2003 and 2002, respectively.

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

In November 2002, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this standard did not have a material impact on its consolidated financial position, results of operations or cash flows.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on its consolidated financial position, results of operations or cash flows.

Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46”), was issued in January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity should be included in the Consolidated Financial Statements of the entity. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 31, 2003 for those arrangements entered into prior to February 1, 2003. The Company believes that the adoption of this standard will not have a material impact on its consolidated financial position, results of operations or cash flows.

On July 3, 2003, the Company sold its software business and software-related assets to MediaTek, Inc. in exchange for $10.0 million in cash, subject to the completion of milestones and closing conditions. The software assets were developed internally to support the Company’s products, including Home IT, advanced digital video broadcasting, MPEG 4 software, SDK software and software drivers. The development costs related to the software assets were expensed as incurred. Under the agreement, MediaTek granted to the Company a royalty-free license to continue to use those software assets to support its existing products and fulfill its maintenance obligations to its existing customers. The Company reported a gain of $9.1 million from this transaction in the results of operations in the quarter ending September 30, 2003. On October 1, 2003, the Company received $3.1 million, the final installment from this sale of its software business and software-related assets to MediaTek, Inc., except for $0.8 million in an escrow account.

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

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

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

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

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

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

could have a material adverse effect on the Company’s business, financial condition and results of operations. In the event either foundry suffers financial difficulties or suffers any damage or destruction to its respective facilities, or in the event of any other disruption of foundry capacity, the Company may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.

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

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

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

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

On September 19, 2003, plaintiff Silvaco Data Systems, Inc. filed a civil action in the Superior Court of the State of California in San Jose against Tvia alleging misappropriation of trade secrets and unfair business practices. The Company believes that the action has no merit and intends to vigorously defend against it.

As permitted under Delaware law the Company has agreements whereby the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving at the Company’s request in such capacity. The indemnification term is for the period that the officer or director is serving in such capacity or is subject to any possible claim or action by reason of the fact that the officer or director was serving in that capacity. The maximum potential amount of future payments the Company could be unlimited; however the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the insurance policy coverage, the Company believes that the estimated fair value of these agreements is minimal.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed financial statements and notes thereto set forth in Item 1 of this report.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding revenues and sources of revenues, that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Performance.” You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for fiscal 2003 and the other Quarterly Report on Form 10-Q filed by us in our fiscal 2004. When used in this report, the words “expects,” “anticipates,” “estimates,” and similar expressions, as well as statements regarding Tvia’s focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

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

We currently offer three product families: the CyberPro 5202 family, introduced in calendar year 2002; the CyberPro 5300 family, introduced in calendar year 1999; and the CyberPro 5000 family, introduced in calendar year 1998. These product families currently generate most of our revenues. We sell our products through two channels. First, we sell our products directly to original equipment manufacturers, or OEMs, and recognize revenues at the time of shipment to these OEMs. We sell our products to a number of distributors. We defer recognition of revenues for sales to our distributors until they have sold our products to end-users.

Approximately 66%, 88%, 74% and 89% of our total revenues for the three and nine months ended December 31, 2003 and 2002, respectively, were derived from customers located outside the United States. All of our revenues to date have been denominated in United States dollars.

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

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

We have sustained losses on a quarterly and annual basis since inception. As of December 31, 2003, we had an accumulated deficit of approximately $60.5 million. These losses resulted from significant costs incurred in the planning and development of our technology and services and from significant marketing costs. We expect to experience significant research and development expenses, as we design and market new technologies.

We anticipate flat revenues for at least the next two quarters as compared to the same period in the prior fiscal year. We believe that this is due to a slowdown in the interactive television industry caused by a slower than anticipated emergence of the interactive television market, and delay in customer product introductions in order to incorporate additional third party features. Due to anticipated flat revenues, we anticipate that we will continue to incur net losses at least at the level incurred in the quarter ended December 31, 2003 for at least the next two quarters.

We have a subsidiary in Hefei, People’s Republic of China, which performs final test, sales and research and development.

For critical accounting policies affecting us, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2003 and on Form 10-Q for the quarter ended September 30, 2003. Critical accounting policies affecting us have not changed materially since March 31, 2003.

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

Revenues. Revenues increased to $0.6 million and $1.8 million in the three and nine months ended December 31, 2003 compared to $0.4 million and $1.7 million in the three and nine months ended December 31, 2002. Revenues were flat from fiscal 2003 to fiscal 2004 primarily due to a slower than anticipated emergence of the interactive television market and weak global general economic conditions. Revenues to Hughes Network Systems and Weikeng Industrial Co., Ltd. accounted for 26% and 23%, respectively, of total revenues for the three months ended December 31, 2003. Sales to Kanematsu Devices Corporation, Chou Chin Industrial Co., Ltd. and Micro Network Korea Co., Ltd. accounted for 39%, 16% and 11% of our total revenues for the three months ended December 31, 2002, respectively. Sales to SMS Electronics, Ltd., Kanematsu Devices Corporation, Weikeng Industrial Co., Ltd., Fujitsu-Siemens Computers Gmbh and Hughes Network Systems accounted for 15%, 15%, 15%, 13% and 11% of our total revenues for the nine months ended December 31, 2003, respectively. Sales to Siemens Communications, Ltd., and Kanematsu Devices Corporation accounted for approximately 30% and 17% of our total revenues for the nine months ended December 31, 2002, respectively.

Gross Margin. Gross margin for the three and nine months ended December 31, 2003 was 43% and 42%, respectively, compared to 31% and 29% in the same periods of fiscal 2003. The increase in gross margin resulted primarily from product revenues which costs were previously reserved for, a high proportion of higher margin non-product revenues and lower overhead burden. Many factors affect our profit margin, including, but not limited to, our product mix, the position of our products in their respective life cycles, yields and the mix of our product sales and development contracts and other revenues.

Research and Development. Research and development expenses include personnel and other costs associated with the development of product designs, process technology, software and programming hardware. Our research and development expenses reflect our continuing efforts to develop and bring to market innovative and cost effective semiconductors that process the rich media content available on the Internet and the broadband network. Research and development expenses in the three months ended December 31, 2003 were $2.7 million, including a write-off of $1.5 million of licensed technology compared to $1.8 million in the three months ended December 31, 2002. Excluding this write-off of $1.5 million of licensed technology, research and development expenses were $1.2 million and $4.2 million for the three and nine months ended December 31, 2003 compared to $1.9 million and $7.3 million in the three and nine months ended December 31, 2002. Research and development expenses as a percentage of total revenues were 425% and 313% in the first three and nine months ended December 31, 2003 compared to 429% and 422% in the same periods of fiscal 2003. The decrease in research and development expenses in absolute dollars, excluding the $1.5 million write-off of license technology, in the first three and nine months ended December 31, 2003 compared to the same periods of fiscal 2003 is attributable primarily to a reduction of our research and development operations in Santa Clara, California and the sale of our software business unit to MediaTek. We expect absolute research and development expenses in the fourth quarter of fiscal 2004 to be at the same level as the quarter ended December 31, 2003, excluding the $1.5 million write-off of license technology.

Sales, General and Administrative. Sales, general and administrative expenses consist primarily of personnel and other costs associated with the management of our business and with the sale and marketing of our products. Sales, general and administrative expenses decreased to $0.6 and $2.0 million in the three and nine months ended December 31, 2003 from $0.7 million and $2.9 million in the three and nine months ended December 31, 2002. Sales, general and administrative expenses as a percentage of total revenues was 103% and 109% in the first three and nine months of fiscal year 2003 compared to 165% and 166% in the same periods of fiscal year 2003. The decrease in sales, general and administrative expenses in absolute dollars resulted from a reduction in workforce and other cost cutting measures. We expect that sales, general and administrative expenses in the next quarter will be approximately at the same level as the quarter ended December 31, 2003.

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

Interest Income. Interest income was $0.1 million and $0.3 million for the three and nine months ended December 31, 2003, compared to $0.1 million and $0.6 million for the three and nine months ended December 31, 2002. The decrease resulted from a lower return on our investments and declining levels of amount of cash and investments.

Gain on Sale of Software Unit. The Company recorded a gain on a sale of its software business and software-related assets to MediaTek, Inc. in exchange for $10 million in cash in the second quarter ended September 30, 2003. Expenses related to this transaction amounted to $.9 million.

Provision for Income Tax. We are taxed in our jurisdictions of operations based on the extent of taxable income generated in each jurisdiction. For income tax purposes, revenues are attributed to the taxable jurisdiction where the sales transactions generating the revenues were initiated. We incurred operating losses in the three and nine months ended December 31, 2003 and 2002, and therefore made no provision for income tax in these periods.

During the nine months ended December 31, 2003, $4.1 million of cash and cash equivalents were used by our operating activities as compared to $8.2 million during the nine months ended December 31, 2002. Cash used by operations during the nine months ended December 31, 2003 resulted primarily from net income of $2.4 million, non-cash items of depreciation and amortization of $1.3 million, a write-off of $1.5 million licensed technology and a decrease in inventories of $0.5 million, partially offset by a $9.1 million gain from the sale of the software unit, an increase in prepaid expenses and other current assets of $0.3 million, and a decrease in accrued liabilities and other of $0.3 million. Cash used in operations during the nine months ended December 31, 2002 resulted primarily from net loss of $10.6 million offset by non-cash items of depreciation and amortization of $1.5 million and decreases of $0.7 million and $0.4 million in prepaid expenses and other current assets and inventories, respectively.

Capital equipment and license technology purchases in the nine months ended December 31, 2003 and 2002 were $.1 million and $0.8 million, respectively.

On July 3, 2003, the Company sold its software business and software-related assets to MediaTek, Inc. in exchange for $10.0 million in cash, subject to the completion of milestones and closing conditions. The software assets were developed internally to support the Company’s products, including Home IT, advanced digital video broadcasting, MPEG 4 software, SDK software and software drivers. The development costs related to the software assets were expensed as incurred. Under the agreement, MediaTek will grant to the Company a royalty-free license to continue to use those software assets to support its existing products and fulfill its maintenance obligations to its existing customers. The Company reported the gain from this transaction in the results of operations in the quarter ending December 31, 2003. As of December 31, 2003, we received full payments of $10.0 million, except for $0.8 million, which is in an escrow account.

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

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

The Company leases its facilities under non-cancelable operating leases expiring at various dates through June 2005.

The Company places purchase orders with wafer foundries throughout its normal course of business. As of December 31, 2003, the Company had no outstanding wafer purchase commitments.

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

Based on our current expectations, we believe that our principal source of liquidity consisting of our cash and cash equivalents and short-term investment, which totaled $28.3 million at December 31, 2003, will be sufficient to meet our working capital and capital requirements through at least the next twelve months. We may also utilize cash to acquire or invest in complementary businesses or to obtain the use of complementary technologies.

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

We have incurred significant operating losses in each year since our inception and expect to continue to incur net losses for the foreseeable future, primarily as a result of expenses for research and development. Our losses increased as we transitioned our focus away from the personal computer market toward the advanced television and emerging interactive display markets in 1996. We have incurred net losses of approximately $60.5 million from our inception in March 1993 through December 31, 2003. If we continue to incur net losses, we may not be able to expand our business as quickly as we would like. We do not know when or if we will become profitable and if we do become profitable, we may not be able to sustain or increase our profitability.

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

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

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

Historically we have been, and we expect to continue to be, dependent on a relatively small number of OEMs and distributors for a significant portion of our total revenues. Sales to Hughes Network Systems and Weikeng Industrial Co., Ltd. accounted for 26% and 23% of our total revenues for the three months ended December 31, 2003, respectively. Sales to Kanematsu Devices Corporation, Chou Chin Industrial Co., Inc. and Micro Network Korea Co., Ltd. accounted for 39%, 16% and 11% of our total revenues for the three

months ended December 31, 2002, respectively. Sales to SMS Electronics, Ltd., Kanematsu Devices Corporation, Weikeng Industrial Co., Ltd., Fujitsu-Siemens Computers Gmbh and Hughes Network Systems accounted for 15%, 15%, 15%, 11% and 11% of our total revenues for the nine months ended December 31, 2003, respectively. Sales to Siemens Communications, Ltd., and Kanematsu Devices Corporation accounted for approximately 30% and 17% of our total revenues for the nine months ended December 31, 2002, respectively. We may not be able to retain our largest customers or to obtain additional key accounts. Any reduction or delay in sales of our products to one or more key customer or our inability to successfully develop relationships with additional key customers could negatively impact our financial results.

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

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

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

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

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

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

We operate in a highly competitive, quickly changing environment marked by new and emerging products and technologies. Our success depends on our ability to develop, introduce and successfully market new products and enhance our existing products in the advanced television and emerging interactive display markets. The development of these new products is highly complex and, from time to time, we have

experienced delays in completing their development and introduction. Any one of the following factors could affect our ability to develop, introduce and sell new products and could materially harm our business:


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

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

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

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

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

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


	•	the general condition of the semiconductor industry market;

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

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

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

	•	changes in industry standards;

	•	introduction of interactive television services by service providers;

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

	•	product introductions and price changes by our competitors;

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

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

	•	changes in earning estimates or investment recommendations by analysts;

	•	changes in investors perceptions; and

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

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

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


	•	time to market;

	•	price;

	•	conformity to industry standards;

	•	product road maps; and

	•	technical support.

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

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

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

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

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

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

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

are particularly vulnerable to supply shortages. As a result, we may be unable to fill orders and may lose customers. Any future industry wide oversupply or undersupply of semiconductors would materially harm our business and have a negative impact on our earnings.

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

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

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

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

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

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

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

Our products depend on complex software that we develop internally and license from others. Complex software often contains defects, particularly when first introduced or when new versions are released. Determining whether our software has defects may occur after our products are released into the market and

distributed to our customers and end users, and may result in harm to our reputation, significant warranty costs, diversion of our technical resources and potential product liability claims that would be costly to defend and divert managerial resources.

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

Sales of our products to our OEM customers and to distributors located outside the United States accounted for 86%, 32%, 67%, 66% and 74% of our total revenues in fiscal years 2003, 2002 and 2001 and three and nine months ended December 31, 2003, respectively. We anticipate that sales to customers located outside the United States will continue to represent a significant portion of our total sales in future periods. In addition, many of our domestic customers sell their products outside of North America, thereby indirectly exposing us to risks associated with foreign commerce. Asian economic instability impacts the sales of products manufactured by our customers, as does the Chinese New Year, during which time many manufacturers and businesses close their operations. We may be negatively impacted by the terrorist attacks on the United States and the resulting conflicts worldwide. We could also experience greater difficulties collecting accounts receivable from customers outside of the United States. Accordingly, our operations and revenues are subject to a number of risks associated with foreign commerce.

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

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

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

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

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

Our success depends on the skills, experience and performance of our executive officers and other key management and technical personnel, many of whom would be difficult to replace. We are particularly

dependent on Eli Porat, our Chief Executive Officer and President. The competition for employees with technical skills is intense and we may not be able to attract and retain a sufficient number of such qualified new personnel in the future. The loss of the service of one or more of our key employees, or our failure to attract, retain and motivate qualified personnel would inhibit the growth of our business.

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

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

Moreover, our customers may develop their own solutions for products currently supplied by us, which could have an adverse effect on our business.

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

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

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

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

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

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

third party development of competitive products. In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign countries where laws may not protect our proprietary rights as fully as in the United States.

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

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

Other parties may assert patent infringement claims against us, including claims against technology that we license from others, and our products or processes may infringe issued patents of others. Litigation is common in the semiconductor industry and any litigation could result in significant expense to us. Litigation would also divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor. Litigation could also require us to develop non-infringing technology or enter into royalty or license agreements.

These royalty or license agreements may not be available on acceptable terms, including limitations on representations and warranties regarding infringement and indemnification in the event of infringement claims. Our failure or inability to develop non-infringing technology, license the proprietary rights on a timely basis or receive appropriate protection on licensed technology would harm our business.

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

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

For quantitative and qualitative disclosures about market risks affecting us, see Item 7A “Quantitative Disclosure About Market Risk” of our Annual Report on Form 10-K for the year ended March 31, 2003 and on Form 10-Q for the quarter ended September 30, 2003. Our exposure to market risk has not changed materially since March 31, 2003.

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 4(a) above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On October 28, 2003, the Company furnished a Current Report on Form 8-K to furnish the press release issued on October 28, 2003 entitled “Tvia, Inc. Reports Second Quarter Earnings”.

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


	By:	/s/ ARTHUR NGUYEN



	Arthur Nguyen
	Chief Financial Officer
	(Principal Financial Officer and
	Duly Authorized Signatory)

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Tvia, Inc. (“Tvia”), that, to his knowledge, the Quarterly Report of Tvia on Form 10-Q for the period ended December 31, 2003, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Tvia.


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

		For the Quarterly Period Ended December 31, 2003

or


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

		For the transition period from to


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

4001 Burton Drive, Santa Clara, California (Address of Principal Executive Offices)		95054 (Zip Code)


PART I: FINANCIAL INFORMATION
	Item 1: Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Quantitative and Qualitative Disclosures About Market Risk
	Item 4: Controls and Procedures
PART II: OTHER INFORMATION
	Item 1: Legal Proceedings
	Item 2: Changes in Securities and Use of Proceeds
	Item 3: Default Upon Senior Securities
	Item 4: Submission of Matters to Vote of Security Holders
	Item 5: Other Information
	Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


		Page

	Part I: Financial Information
Item 1:	Financial Statements		2
	Unaudited Condensed Consolidated Balance Sheets		2
	Unaudited Condensed Consolidated Statements of Operations		3
	Unaudited Condensed Consolidated Statements of Cash Flows		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		23
Item 4:	Controls and Procedures		24
	Part II: Other Information
Item 1:	Legal Proceedings		25
Item 2:	Change in Securities and Use of Proceeds		25
Item 3:	Default upon Senior Securities		25
Item 4:	Submission of Matters to Vote of Security Holders		25
Item 5:	Other Information		25
Item 6:	Exhibits and Reports on Form 8-K		25
Signatures			26
Certifications			27


			December 31,			March 31,
			2003			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	4,229		$	11,080
	Short-term investments			24,120			13,337
	Accounts receivable, net			436			331
	Inventories			601			1,055
	Prepaid expenses and other current assets			1,417			411

		Total current assets		30,803			26,214
Property and equipment, net				2,239			3,209
Other assets				113			1,770

		Total assets	$	33,155		$	31,193

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	661		$	632
	Accrued liabilities and other			858			1,175
	Short-term portion of capital leases			139			134

		Total current liabilities		1,658			1,941
Long-term portion of capital leases				36			486

		Total liabilities		1,694			2,427

Commitments and contingencies (Note 8)
Stockholders’ equity:
	Common stock, $0.001 par value, 125,000 shares authorized, 22,453 and 22,139 shares outstanding, respectively			23			22
	Additional paid-in-capital			92,739			92,444
	Accumulated comprehensive income (loss)			(27	)		6
	Accumulated deficit			(60,524	)		(62,956	)
	Treasury stock			(750	)		(750	)

		Total stockholders’ equity		31,461			28,766

		Total liabilities and stockholders’ equity	$	33,155		$	31,193

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		For the Three Months						For the Nine Months
		Ended						Ended
		December 31,						December 31,

		2003			2002			2003			2002

Total revenues		$	628		$	438		$	1,828		$	1,731
Cost of revenues			359			304			1,056			1,237

	Gross profit		269			134			772			494

Operating expenses:
	Research and development		2,667			1,880			5,716			7,303
	Sales, general and administrative		650			723			1,995			2,872
	Amortization of deferred stock compensation		—			198			—			595
	Restructuring charges		—			300			—			950

Total operating expenses			3,317			3,101			7,711			11,720

	Operating loss		(3,048	)		(2,967	)		(6,939	)		(11,226	)
Interest income			102			149			296			587
Gain from sale of software unit			—			—			9,075			—

Net income (loss)		$	(2,946	)	$	(2,818	)	$	2,432		$	(10,639	)

Basic net income (loss) per share		$	(0.13	)	$	(0.13	)	$	0.11		$	(0.48	)

Diluted net income (loss) per share		$	(0.13	)	$	(0.13	)	$	0.10		$	(0.48	)

Shares used in the per share calculation:
	Basic		22,374			21,948			22,234			21,943

	Diluted		23,374			21,948			23,695			21,943



					For the
					Nine Months Ended
					December 31,

					2003			2002

Cash flows from operating activities:
	Net income (loss)				$	2,432		$	(10,639	)
		Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization			1,251			860
			Amortization of deferred stock compensation			—			595
			Write-off of licensed technology			1,449			—
			Gain from sale of software unit			(9,075	)		—
			Change in assets and liabilities:
				Accounts receivable		(105	)		21
				Inventories		454			385
				Prepaid expenses and other current assets		(256	)		652
				Accounts payable		29			(493	)
				Accrued liabilities and other		(317	)		380

Net cash used in operating activities						(4,138	)		(8,239	)

Cash flows from investing activities:
	Sales (purchases) of available-for-sale investments					(10,816	)		5,764
	Proceeds from sale of software unit					8,325			—
	Purchases of license technology					(44	)		(5	)
	Purchases of property and equipment					(75	)		(815	)
	Proceeds from disposal of fixed assets					46			—

Net cash provided by (used in) investing activities						(2,564	)		4,944

Cash flows from financing activities:
	Proceeds from issuance of common stock					296			8
	Repayment of capital lease obligations					(445	)		—
	Repurchase of common stock					—			(87	)

Net cash used by financing activities						(149	)		(79	)

Decrease in cash and cash equivalents						(6,851	)		(3,374	)
Cash and cash equivalents at beginning of period						11,080			6,445

Cash and cash equivalents at end of period					$	4,229		$	3,071

Supplemental disclosure of non-cash activities:
	Capital leases					—			395



	For the						For the
	Three Months Ended						Nine Months Ended
	December 31,						December 31,

	2003			2002			2003			2002

Net income (loss)	$	(2,946	)	$	(2,818	)	$	2,432		$	(10,639	)
Unrealized gain (loss) on available-for-sale investments		(22	)		(11	)		(33	)		4

Comprehensive income (loss)	$	(2,968	)	$	(2,829	)	$	2,399		$	(10,635	)


Note 4.	Sale of Software Business and Software-Related Assets


	License			Leased			Severances and
	Technology			Facilities			Benefits			Total

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

Balance at March 31, 2003		—			23			—			23
Cash charges					(23	)		—			(23	)

Balance at December 31, 2003	$	—		$	—		$	—		$	—



	Three Months						Nine Months
	Ended						Ended
	December 31,						December 31,

	2003			2002			2003			2002

Customer A		26	%		*			11	%		*
Customer B		23	%		*			15	%		*
Customer C		*			39	%		15	%		17	%
Customer D		*			*			15	%		30	%
Customer E		*			*			13	%		*
Customer F		*			16	%		*			*
Customer G		*			11	%		*			*


	December 31			March 31,
	2003			2003

Accounts Receivable:
Customer A		34	%		22	%
Customer B		24	%		*
Customer C		12	%		*
Customer D		12	%		*
Customer F		*			48	%
Customer G		*			21	%



	For the Three						For the Nine
	Months Ended						Months Ended
	December 31,						December 31,

	2003			2002			2003			2002

Europe		11	%		37	%		29	%		35	%
Japan		9	%		12	%		15	%		17	%
United States		34	%		12	%		26	%		11	%
Taiwan		26	%		32	%		17	%		27	%
Korea		7	%		6	%		7	%		10	%
Other		13	%		1	%		6	%		*


Item 2:	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


		Capital		Operating		Purchase
Fiscal Year		Leases		Leases		Commitments		Total

	2004	$	144	$	38	$	124	$	306
	2005		36		82		—		118
	2006		—		11		—		11

Total minimum lease payments		$	180	$	131	$	124	$	435


Item 1:	*Financial Statements*


	*Consolidation*


	*Long-Lived Assets*


	*Comprehensive Income (Loss)*


Exhibit
Number

	31	.1	Rule 13a-14(a) certification of Chief Executive Officer.
	31	.2	Rule 13a-14(a) certification of Chief Financial Officer.
	32	.1	Statement of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).
	32	.2	Statement of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).