e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended June 30, 2006


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

For the transition period from to

Commission File Number 0-30539

TVIA, INC.

(Exact name of registrant as specified in its charter)


Delaware				94-3175152

(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)

Registrant’s telephone number, including area code: (408) 982-8588

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

As of July 31, 2006 there were 23,927,500 shares of Common Stock, $0.001 per share par value, outstanding.

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

TVIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Unaudited


	June 30,			March 31,
	2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	4,767		$	8,455
Investments		3,995			4,502
Accounts receivable, net		7,436			3,662
Inventories, net		2,058			2,601
Other current assets and prepaid expenses		656			902

Total current assets		18,912			20,122

Property and equipment, net		1,244			928
Other assets		303			303


Total assets	$	20,459		$	21,353


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	778		$	802
Accrued liabilities and other		2,431			2,600
Short-term portion of notes payable		462			541
Cash settled stock appreciation rights		904			566

Total current liabilities		4,575			4,509

Long-term portion of notes payable		—			211

Total liabilities		4,575			4,720


Commitments and contingencies (Note 8)

Stockholders’ equity
Common stock, $0.001 par value: 125,000 shares authorized; and 23,916 and 23,866 shares outstanding, respectively		24			24
Additional paid-in-capital		95,923			95,395
Accumulated other comprehensive income		36			28
Accumulated deficit		(79,349	)		(78,064	)
Treasury stock: 204,400 shares		(750	)		(750	)

Total stockholders’ equity		15,884			16,633

Total liabilities and stockholders’ equity	$	20,459		$	21,353

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

TVIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Three months ended
	June 30,
	2006			2005
Cash Flows from Operating Activities:
Net (loss)	$	(1,286	)	$	(2,042	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization		253			332
Net Gain on the Sale of Assets		2			—
Change in inventory reserve		(31	)		64
Stock compensation expense — equity plans		477			280
Changes in operating assets and liabilities:
Accounts receivable		(3,774	)		(426	)
Inventories		574			(346	)
Other current assets and prepaid expenses		151			(31	)
Other long-term assets		(47	)
Accounts payable		(24	)		130
Accrued liabilities and others		(169	)		(573	)
Cash settled stock appreciation rights		338			—

Net cash used in operating activities		(3,536	)		(2,612	)


Cash Flows from Investing Activities:
Purchase of available-for-sale investments		(2,483	)		(2,240	)
Proceeds from sale of available-for-sale investments		3,000			6,650
Purchase of property and equipment		(435	)		(19	)

Net cash provided by investing activities		82			4,391


Cash Flows from Financing Activities:
Repayments of notes payable		(284	)		(115	)
Proceeds from issuance of common stock		50			107

Net cash used in financing activities		(234	)		(8	)


Net increase (decrease) in cash and cash equivalents		(3,688	)		1,771
Cash and cash equivalents at beginning of period		8,455			4,078

Cash and cash equivalents at end of period	$	4,767		$	5,849


Supplemental Cash Flow Information:
Interest paid	$	16		$	10

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

TVIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. INTERIM STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

These accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Tvia, Inc. (“the Company”) for the fiscal year ended March 31, 2006, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 27, 2006. Operating results for the three months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2007.

NOTE 2. SUMMARY OF SIGNIFICANT POLICIES

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, the Company’s management evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, inventory reserves, fair value of investments, property and equipment, income taxes, stock-based compensation, contingencies and litigation, among others. The estimates are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results could differ significantly from the estimates made by management with respect to these items and other items that require management’s estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Tvia, Inc. and its wholly owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investment securities with original maturities of three months or less from the date of purchase to be cash equivalents. Investments include debt securities issued by U.S. government agencies and corporate notes and bonds. Management determines the appropriate classification of investments at the time of purchase. To date, all investments have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated comprehensive loss in stockholders’ equity, net of any related tax effects. Interest, dividends and realized gains and losses are included in other income (expense) in the consolidated statements of operations.

Allowance for Sales Returns and Doubtful Accounts

Sales return allowances are recorded at the time when revenue is recognized based on historical returns, current economic trends and changes in customer demand. Such allowances are adjusted periodically to reflect actual experience and anticipated returns. No sales return allowances have been recorded during the quarters ended June 30, 2006 and 2005 based on these factors. The allowance for doubtful accounts is established as management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management determines the allowance based on historical write-off experience and reviews the allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.

Inventories

Inventories are stated at the lower of standard cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost). Costs are maintained using standard costs and include materials, labor and overhead. Allowances for obsolete product are recorded when required and are made to reduce carrying values of inventories to their estimated net realizable values.

Property and Equipment

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

Impairment of Long-Lived Assets

The Company reviews long-lived assets 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. If an asset is considered to be impaired, the impairment reflects the amount by which the carrying value of the asset exceeds its estimated fair market value.

Revenue Recognition

Revenues.

End Users Sales: The Company will recognize revenue from product sales to end users when persuasive evidence of an arrangement exists, title has transferred, the fee is fixed or determinable and collection of the related receivable is reasonably assured, which is generally determined by specific identification of payment terms and the ability of the customer to meet the terms.

Distributor Sales: It is the Company’s sales policy to ship to distributors only when an end user customer is defined and the shipment date confirmed. The Company does not have the distributors hold inventory. Revenue from product sales to distributors occurs only when the distributor can identify the end user and the distributor places a purchase order to the Company identifying the end user and ensures shipment to that end user. The sale must be supported by persuasive evidence that an arrangement exists, title has transferred, the fee is fixed or determinable and collection of the related receivable is reasonably assured, which is determined by specific identification of payment terms and the ability of the customer to meet the terms.

Customer Acceptance Requirements or Significant Obligations - The Company may agree to recognize customer acceptance criteria if documented on the purchase order. If these criteria are included in the arrangement, then the Company will not recognize revenue until all documented customer acceptance requirements or significant obligations are completed.

New Product Acceptance - When the Company launches a new chip product, the revenue is deferred until the Company can demonstrate that the ‘new’ product has been placed into production by the end user. If written documentation cannot be obtained from the end user or distributor, then acceptance can

be assumed when multiple orders of the ‘new’ product have shipped and/or three months have passed since the transfer of title of the product.

In response to competitive market conditions, the Company offers incentive programs common to the semiconductor industry. Accruals for estimated distributor incentives or commissions are established at the time of sale based on the incentive program.

Revenue from development contracts (non-recurring engineering agreements or NRE) is deferred and recognized upon achievement of NRE milestones. NRE revenue occurs infrequently and is generally insignificant when compared to semi-conductor revenue.

Software Development Costs

The Company has expensed all software development costs to date as substantially all of such development costs have been incurred prior to the Company’s products attaining technological feasibility.

Research and Development Expenses

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

Income Taxes

The Company accounts for income taxes in accordance with Statement of Accounting Standards No. 109 (SFAS No. 109), “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. As of June 30, 2006 the Company recorded a full valuation allowance for the entire deferred tax asset as a result of uncertainty regarding the realization of the asset balance due to the net losses incurred and lack of taxable income.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss), foreign currency translation adjustments and net unrealized gain (loss) on available-for-sale securities. A summary of comprehensive gain (loss) is as follows (in thousands):


	For the Three Months Ended
	June 30
	2006			2005
Net loss	$	(1,286	)	$	(2,042	)
Change in unrealized gain on available-for-sale-investments		8			44


Comprehensive loss	$	(1,278	)	$	(1,998	)

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation 48, (FIN 48) Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. Interpretation 48 clarifies Statement 109, Accounting for Income Taxes, to indicate a criterion that an individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s financial statements. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a significant impact on its financial condition or results of operations.

Foreign Currency Translation

The functional currency of the Company’s China subsidiary is the US dollar. The subsidiary functions primarily as a branch of the US parent, does not generate revenue and receives financing from the US parent. Monetary assets (cash and other assets and liabilities that will be settled in cash) are translated at the current rate. Non-monetary assets, liabilities and stockholders’ equity are translated at the historical rate in effect at the date the transaction in the non-monetary account originated. Statement of operations amounts related to non-monetary assets and liabilities are translated at the same rate used for the related balance sheet translation. Other revenues and expenses occurring evenly over the year are translated at the weighted-average exchange rate for the period.

Net Loss Per Share

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) 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 currently anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share (in thousands except per share amounts):


	For the Three Months Ended June 30
	2006			2005
Net loss	$	(1,286	)	$	(2,042	)
Weighted average shares used in computing basic and diluted net loss per share		23,901			23,191

Basic and diluted net loss per share	$	(0.05	)	$	(0.09	)

Options and warrants excluded from the computation of diluted net loss per share		7,437			6,833

Options and warrants were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect. While these common stock equivalents are currently anti-dilutive, they could be dilutive in the future if the Company records net income.

Note 3. Stock and Share-Based Payments

Share-Based Compensation

For the three months ended June 30, 2006 and 2005, the Company recognized approximately $0.7 million and $0.3 million, respectively, of share-based compensation expense related to stock options and stock appreciation rights (SARS), respectively. Included in the stock compensation expense for the quarter ended June 30, 2006 is a cumulative adjustment of $0.1 million that resulted in a reduction of operating expenses in the quarter. The adjustment more accurately reflects the forfeiture rate used to calculate the share based compensation expense in the prior fiscal year ended March 31, 2006.

Share-based compensation transactions are accounted for in accordance with the provisions of SFAS No. 123(R), “Share-Based Payment”. The fair value of all share-based awards is estimated on the date of grant, which is defined as the date the award is approved by the Board of Directors (or management with relevant authority). The substantial majority of granted awards are stock options and stock appreciation rights (SARS) that vest annually in equal amounts over a four-year period and all have an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Generally, the Company recognizes compensation expense for awards over the four-year vesting period.

Note 4. Balance Sheet Components (in thousands)


	June 30, 2006			March 31, 2006
Accounts receivable, net
Trade receivables	$	7,446		$	3,672
Less: Allowance for doubtful accounts		(10	)		(10	)

	$	7,436		$	3,662


Inventories (net of reserves):
Work in process	$	1,621		$	1,716
Finished goods		437			885

	$	2,058		$	2,601


Property and equipment, net:
Furniture and fixtures	$	188		$	175
Machinery and equipment		3,465			3,123
Software		3,019			2,943

		6,672			6,241
Less: Accumulated depreciation and amortization		(5,428	)		(5,313	)

	$	1,244		$	928


For the three months ended June 30, 2006 and 2005, depreciation expense was $115 and $212, respectively.

Other assets:
License technology	$	833		$	833
Less: Amortization		(563	)		(563	)

License technology, net	$	270			270
Deposits		33			33

	$	303		$	303


Accrued liabilities and others:
Accrued compensation costs	$	1,530		$	1,476
Accrued audit and legal		148			193
Accrued inventory		454			777
Other		299			154

	$	2,431		$	2,600

Note 5. Short-term Investments

The value of the Company’s investments by major security type is as follows:


	Mature Less Than 12 Months
	Cost		Aggregate		Unrealized
	Value		Fair Value		Gain/(Loss)
	(In thousands)
As of June 30, 2006
U.S. Corporate and Bank Debt	$	3,996	$	3,995	$	(1	)


As of March 31, 2006
U.S. Corporate and Bank Debt	$	4,505	$	4,502	$	(3	)

Note 6. Certain Risks

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.

Significant customers

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


	For the Three Months Ended
	June 30,
	2006			2005
Customer A		62	%		*
Customer B		*			33	%
Customer C		*			14	%
Customer D		*			12	%

(* = less than 10%)

Revenue by product

Revenues by product family as a percentage of revenue for the respective periods are summarized as follows:


	For the Three Months Ended
	June 30,
Product Family	2006			2005
5700 TrueView		41	%		15	%
5600 TrueView		45	%		30	%
5300 CyberPro		—			3	%
5200 CyberPro		12	%		34	%
5000 CyberPro		2	%		17	%
NRE and other		—			1	%

		100	%		100	%

Concentration of Credit Risk

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 in checking and money market accounts in financial institutions in the US and China. 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.

Accounts receivable were concentrated with customers as follows:


	June 30,			March 31,
	2006			2006

Customer A		42	%		*
Customer B		11	%		17	%
Customer C		10	%		24	%
Customer D		*			11	%
Customer E		*			11	%

(* = less than 10%)

Vendor Concentration

The Company does not own or operate a fabrication facility, and accordingly relies substantially on two outside foundries, United Manufacturing Corporation (“UMC”) and Hua Hong Nippon Electronics Co. (“HHNEC”) 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 three third-party subcontractors, Siliconware Precision Industries Ltd., and Advance Semiconductor Engineering, Inc., both located in Taiwan, and Belling Corp., Ltd. in the People’s Republic of China. 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.

Note 7. Segment and Geographic Information

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

The Company has operations in the United States and China. The total assets in the China subsidiary as of June 30, 2006 and March 31, 2006 were not material to the Company’s consolidated financial statements.

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


	For the Three Months Ended
	June 30,
	2006			2005
China		81	%		54	%
Europe		*			*
Japan		*			*
United States		*			20	%
Taiwan		*			12	%

(* = less than 10%)

Note 8. Commitments and Contingencies

Stock Repurchase

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 June 30, 2006, the Company acquired 204,400 shares on the open market that it holds as treasury stock.

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 of up to 5 million shares of common stock. As of June 30, 2006, the Company had not repurchased any shares of common stock under this program.

Litigation

the Company as an end-user of the software, seeking monetary damages. The lawsuit was filed in the Superior Court of California, County of Santa Clara. Trial has been set for October 16, 2006.

Because of the nature of litigation, the outcome is unpredictable. The Company may obtain a judgment in its favor but an adverse ruling is also possible. The Company believes it has meritorious defenses to Silvaco’s claims, but if an adverse ruling results, Tvia’s potential liability would likely be equivalent to a reasonable royalty and/or the value of the benefits received from its use of the software. Such a judgment is anticipated to range from $0 to $300,000, depending upon factual variables which are presently uncertain.

Lease Commitments

The Company leases its facilities under non-cancelable operating leases expiring at various dates through May 2008. Under the terms of the leases, the Company is responsible for a portion of the facilities’ operating expenses, insurance and property taxes. Rent expense under operating leases for the three months ended June 30, 2006 and June 30, 2005 were approximately $0.05 million, and $0.06 million, respectively.

In December 2004, the Company acquired the right to the use of design software for a period of two years in exchange for the issuance of notes payable. The note term is 21 months, bears interest at 9.00% and accrues interest monthly. Payments of $125,000 are due each calendar quarter. The final payment on the note is due September 2006.

In October 2005, the Company acquired additional rights to the use of design software for a period of two years in exchange for the issuance of notes payable. The note term is 21 months, bears interest at 6.02% and accrues interest monthly. A payment of $225,000 is due April 2007.

Future payments due under its leasing arrangements as of June 30, 2006 are as follows (in thousands):


	Notes			Operating
Fiscal Year	Payable			Leases		Total
2007	$	250		$	249	$	499
2008		225			206		431
2009		—			32		32

Total minimum payments		475		$	487	$	962

Less: Amount representing interest		(13	)


Present value of minimum payments		462

Less: Current portion		(462	)


Long-term portion	$	—

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

The following information should be read in conjunction with the condensed consolidated historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K as filed with the Securities and Exchange Commission on June 27, 2006.

The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. All forward-looking statements in this Form 10-Q are based upon information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from our current expectations. Factors that could cause or contribute to such differences include, but are not limited to: variation in demand for our products; the level and timing of sales; the extent of product and price competition; introductions or enhancements of products or delays in introductions or enhancements of products; hiring and retention of personnel; changes in the mix of products sold; general domestic and international economic and political conditions; and other factors and risks discussed in “Risk Factors” below and elsewhere in this Quarterly Report, and other Tvia filings with the Securities and Exchange Commission.

Overview

Tvia, Inc. is a fabless semiconductor company which designs and develops an extensive line of flexible, high-quality digital display processors creating next-generation digital LCD, HD, SD and progressive-scan TVs, as well as other multimedia-related devices.

We currently offer three product families: the TrueView 5700 family, introduced in calendar year 2004; the TrueView 5600 family, introduced in calendar year 2003; and the CyberPro 5202 family, introduced in calendar year 2002. 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. Second, we sell our products to a number of distributors.

Historically, a relatively small number of customers and distributors have accounted for a significant portion of our product sales. Approximately 94% and 80% of our total revenues for the three months ended June 30, 2006 and June 30, 2005, respectively, were derived from customers located outside the United States. Our top five customers, including distributors, accounted for 85% and 76% of total revenues in the three months ended June 30, 2006 and June 30, 2005, respectively.

Various factors have affected and may continue to affect our gross margin. These factors include, but are not limited to, our product mix, the position of our products in their respective life cycles, yields and the mix of our product sales. 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 two months to six months or more, plus an additional three to six months or more before an OEM customer commences volume production of equipment incorporating our products, if ever. Due to these lengthy sales cycles, we typically experience a delay between incurring operating expenses and inventory costs and the generation of revenues from design wins.

We have sustained operating losses on a quarterly and annual basis since inception in 1993. As of June 30, 2006, we had an accumulated deficit of approximately $79.3 million. These losses resulted from significant costs incurred in the planning and development of our technology and services and from significant marketing costs. Due to an increase in demand in the digital television market we anticipate

higher revenues for at least the next several quarters as compared to the same periods in the prior fiscal year. We have a subsidiary in Hefei, People’s Republic of China that performs final production tests, research and development and logistics support. We also have offices in Shenzhen and Beijing, People’s Republic of China, to provide sales and complete system support including design and integration to our customers.

Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our financial statements and accompanying notes. We believe that we consistently apply these judgments and estimates and the financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our statement of operations and financial condition. Critical accounting policies and estimates, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting policies and estimates include those regarding (1) revenue recognition; (2) valuation of accounts receivable; (3) valuation of inventories; (4) impairment of long-lived assets; and (5) stock-based compensation valuation assumptions. Refer to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 27, 2006 where critical accounting policies and estimates are more fully discussed.

Results of Operations

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


	For the Three Months Ended
	June 30,
	2006			2005

Revenues		100	%		100	%
Cost of revenues		50			55


Gross profit		50			45

Operating expenses:
		31			116
Sales and marketing		27			49
General and administrative		22			73

Total operating expenses		80			238


Operating loss		(30	)		(193	)

Cumulative effect of error correction		3			—
Interest income		2			9

Net loss		(25	)		(184	)

Revenues. Revenues for the three months ended June 30, 2006 increased to $5.1 million from $1.1 million in the comparable period of the prior year. The increase is attributable to sales generated by 22 new field sales engineers and sales representatives worldwide and increased volume of the TrueView 5725 product line to three new China end customers. A significant portion of the revenue was with one customer in China.

Gross margin. Gross margin was 50% for the three-month period ended June 30, 2006 and 45% for the period ended June 30, 2005. The improvement in gross margins was primarily due to higher testing yields and increased productivity partially offset by lower average selling prices. Other factors affect our profit margin, including, but not limited to, revenue growth, product mix, the position of our products in their respective life cycles, 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 were $1.6 million and $1.3 million in the three-months ended June 30, 2006 and 2005, respectively. As a percentage of total revenues they were 31% and 116% The increase in research and development expenses in absolute dollars is due primarily to an increase in stock compensation expense of $0.4 million and $ 0.1 million in salary related expenses for the addition of staff in China. The decrease as a percentage of revenues in the quarter ended June 30, 2006 compared to the same period in the prior fiscal year is attributable primarily to increased revenue in the quarter. Our research and development activities in the People’s Republic of China provide software and application specific integrated circuit development support to our domestic operations. The costs of our research and development activities in China are substantially lower than the costs of our research and development activities in Santa Clara, California. In the foreseeable future, we expect research and development expenses in absolute dollars to be higher.

Sales and marketing. Sales and marketing expenses consist primarily of personnel and other costs associated with the sale and marketing of our products. Sales and marketing expenses were $1.4 million and $0.5 million in the three months ended June 30, 2006 and 2005, respectively. Sales and marketing expenses as a percentage of total revenues were 27% and 49% in the three months ended June 30, 2006 and 2005, respectively. The increase in sales and marketing expenses in absolute dollars for the three months ended June 30, 2006 as compared to the same period of the prior fiscal year is primarily due to an increase in commissions of $0.4 million, higher payroll-related expenses of $ 0.2 million for added staff in the China design center and $0.2 million for stock compensation expense. In the foreseeable future, we expect sales and marketing expenses in absolute dollars to be higher.

General and administrative. General and administrative expenses consist primarily of personnel and other costs associated with the management of our business. General and administrative expenses were $1.1 million and $0.8 million in the three months ended June 30, 2006 and 2005, respectively. General and administrative expenses as a percentage of total revenues were 22% and 73%, respectively. The increase in general and administrative expenses in absolute dollars for the three months ended June 30, 2006 as compared to the same period of the prior fiscal year is primarily due to an increase in payroll-related expenses of $ 0.1 million and an increase of $0.1 million in stock compensation expense. The remainder of the change is comprised of an increases in accounting fees, professional and legal fees and IT expansion expenses totalling $0.1 million. In the foreseeable future, we expect general and administrative expenses in absolute dollars to be higher.

The stock based compensation expense of $0.7 million reported in the quarter ended June 30, 2006 includes a cumulative adjustment of $0.3 million to correct errors in calculating the expense in the prior fiscal year. The adjustment resulted in a reduction of expense in the quarter.

Other income, net. Other income, comprised primarily of interest income was $0.1 million for both the three months ended June 30, 2006 and June 30, 2005.

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-months ended June 30, 2006 and June 30, 2005, respectively, and therefore made no provision for income tax in these periods. Due to recurring losses, we continue to record a full valuation allowance against all of our net deferred tax assets due to uncertainty as to their future realization.

Liquidity and Capital Resources

During the three months ended June 30, 2006, we used $3.7 million of cash and cash equivalents in our operating activities as compared to $1.8 million during the three months ended June 30, 2005. Cash used in operations during the three months ended June 30, 2006 resulted primarily from a net loss of $1.3 million, an increase in accounts receivable of $3.8 million partially offset by a decrease in inventories of $0.5 million. This increase in receivables reflects the timing of shipments during the period and the extended payment terms offered to certain key customers. This trend is expected to continue as we compete with the terms offered by our competition. The majority of our business is in Asia where the payment terms are generally longer than standard terms in the United States.

Cash used in operations during the three months ended June 30, 2005 resulted primarily from a net loss of $2.0 million, an increase in accounts receivable of $0.4 million, an increase in inventories of $0.3 million, a decrease in accrued liabilities of $0.6 million partially offset by non-cash items of depreciation and amortization of $0.3, stock compensation expense of $0.3 million and an increase in accounts payable of $0.1 million.

Cash flows provided by investing activities were $0.1 million during the three months ended June 30, 2006 compared to $4.4 million during the three months ended June 30, 2005. This decrease was primarily due to the maturity of investments of $3.0 million offset by a purchase of investments of $2.5 million and the purchase of $0.4 million of Engineering and IT equipment plus furniture and improvements for the new Shenzhen design center office. Cash flows provided by investing activities during the three months ended June 30, 2005 were $4.4 million primarily due to the maturity of investments of $6.7 million offset by a purchase of investments of $2.2 million.

Net cash flows used in financing activities were $0.2 million and $0.0 million for the three months ended June 30, 2006 and 2005, respectively. The increase in the quarter ended June 30, 2006 compared to June 30, 2005 was primarily the result of payments of notes payable of $0.3 million, offset by the proceeds from the sale of common stock of approximately $0.1 million under our Incentive Stock and Employee Stock Purchase Plans.

As of June 30, 2006, our principal source of liquidity consisted of cash and cash equivalents and short-term investments. Working capital at June 30, 2006 and 2005 was $14.4 million and $15.6 million, respectively.

The following represent our significant working capital commitments:

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

On November 10, 2001, the Board of Directors authorized a stock repurchase program to acquire outstanding common stock in the open market. Under this program, the Board of Directors authorized the acquisition of up to 200,000 shares of our common stock. This program does not have a maximum stock repurchase price or an expiration date. As of June 30, 2006, we had acquired 204,400 shares on the open market that we hold as treasury stock.

On August 20, 2002, the Board of Directors authorized an additional stock repurchase program to acquire up to 5 million shares of outstanding common stock in the open market for a maximum of $0.50 per share. This program does not have an expiration date. As of June 30, 2006, we had not repurchased any shares of common stock under this program.

Off-Balance Sheet Arrangements

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

We lease facilities under non-cancelable operating leases expiring at various dates through May 2008. Under the terms of the leases, the Company is responsible for a portion of the facilities’ operating expenses, insurance and property taxes.

Future contractual obligations as of June 30, 2006 were as follows (in thousands):


Contractual
Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Notes Payable	$	475	$	250	$	225	$	—	$	—
Operating Lease Obligations		487		249		238		—		—
Total	$	962	$	499	$	463	$	—	$	—

Based on our current expectations, we believe that our cash, cash equivalents and short-term investments, which totaled $8.8 million at June 30, 2006, will be sufficient to meet our working capital and capital requirements through at least the next twelve months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities or obtain credit facilities. The decision to sell additional equity or debt securities could be made at any time and would likely result in additional dilution to our stockholders. In the quarter ended June 30, 2006 we used $4.2 million of cash, cash equivalents and short-term investments.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk and Foreign Currency Exchange Risk

Quantitative and Qualitative Discussion of Market Interest Rate Risk

Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, in the future, the fair market value of our investments. We manage the exposure to financial market risk by performing ongoing evaluations of our investment portfolio and we presently invest entirely in short-term, investment grade, government and corporate securities. These securities are highly liquid and generally mature within 12 months from the purchase date. Due to the short maturities of our investments, the carrying value should approximate the fair value. In addition, we do not use our investments for trading or other speculative purposes. We have performed an analysis to assess the potential effect of reasonably possible near term changes in interest and foreign currency exchange rates. The effect of any change in foreign currency exchange rates is not expected to be material to our results of operations, cash flows or financial condition. Due to the short duration of our investment portfolio, an immediate 100 basis points change in interest rates would not have a material effect on the fair market value of our portfolio due mainly to the short-term nature of the major portion of our investment portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risk

We are an international company, selling our products globally and, in particular, in Japan, Korea, the People’s Republic of China and Taiwan. Although we transact our business in United States dollars, we cannot assure you that future fluctuations in the value of the United States dollar will not affect the competitiveness of our products, gross profits realized, and results of operations. Further, we incur expenses in the People’s Republic of China, Taiwan and other countries that are denominated in currencies other than United States dollars. We cannot estimate the effect that an immediate 100 basis points change in foreign currency exchange rates would have on our future operating results or cash flows as a direct result of changes in exchange rates. However, we do not believe that we currently have any significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies or any derivative financial instruments.

ITEM 4: CONTROLS AND PROCEDURES

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.

An internal control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. An internal control significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In connection with the preparation of the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 27, 2006, an evaluation was performed under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the exchange act). In the course of this evaluation, management identified a material weakness in our control over accounting for stock-based compensation for cash settled stock appreciation rights (SARS) resulting in a fourth quarter adjustment. The adjustment consisted of additional stock compensation expense recorded in the fourth quarter. The additional expense was due to an error in calculating the compensation expense as SAR’s to be settled in stock and should have been calculated as SAR’s to be settled in cash.

During the quarter ended June 30, 2006 management identified a material weakness in our control over stock based compensation resulting in a cumulative adjustment in the quarter. The adjustment consisted of a reduction in stock based compensation expense resulting from applying incorrect assumptions to the stock compensation calculation in the prior fiscal year.

In the first quarter of fiscal 2007, the Company began implementing and fully intends to implement accounting procedures designed to correct the deficiency in accounting for stock compensation expense.

Changes in internal controls

Other than as stated above, 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 9A that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART II:

PART III: OTHER INFORMATION

Item 1: Legal Proceedings

From time to time we may be involved in litigation relating to claims arising in the ordinary course of business.

The Company previously purchased software from Circuit Semantics, Inc, or CSI. Silvaco Data Systems, the developer of the software, has filed a complaint against CSI asserting misappropriation of trade secrets and unlawful business practices. Silvaco Data Systems has filed a similar complaint against the Company as an end-user of the software, seeking monetary damages. The lawsuit was filed in the Superior Court of California, County of Santa Clara. Trial has been set for October 16, 2006.

Item 1A: Risk Factors

Risks that could have a negative impact on our business, revenues and performance results include risks associated with the following: continuing losses; a slow down in the DTV market; a relatively small number of customers; an increase in operating expenses; long product development process and sales cycles; failure to successfully develop, introduce and sell new products; fluctuations in operating results; our highly competitive industry; dependence on two independent foundries to manufacture our products; periods of semiconductor oversupply; the need to qualify new independent foundries for any of our products; high costs associated with correcting errors or defects in our semiconductors; high costs associated with correcting bugs or defects in our software; political and economic risks in connection with having a majority of our sales to customers outside of the United States; recession or other cyclical effects in the industries to which we sell our products; strains on our business and operations resulting from rapid growth; dependence on key personnel; pressure from strategic relationships to expend significant resources without guarantees that our endeavors will be profitable; dependence on third-party subcontractors for assembly of our semiconductors; political instability in the People’s Republic of China or Taiwan; use of our intellectual property and proprietary rights by competitors; intellectual property infringement claims; and regulation of our customers’ products. A more detailed description of each of these risk factors can be found under the caption “Risk Factors” in our most recent on Form 10-K filed with the Securities and Exchange Commission on June 27, 2006. There are no material changes to the risk factors described in the Form 10-K.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

None:

Item 3: Defaults Upon Senior Securities

None

Item 4: Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on August 10, 2006. There were three proposals up for approval. The results of voting are as follows:

1) The election of two Class III directors to serve until the 2009 Annual Meeting of Stockholders or until their successors are duly elected and qualified:


Nominee	For		Withhold
Mark Mangiola		20,713,606		816,758
Dr. Baichuan Du		21,407,967		122,397

Each of the foregoing candidates were elected and each received affirmative votes from more than a majority of the outstanding shares. The following directors were not elected at the meeting, but have terms continuing after the meeting, as set forth below:


		Elected through
R. David Dicioccio		2007 Annual Meeting
Eli Porat		2007 Annual Meeting
James Bunker		2008 Annual Meeting
Yves Faroudja		2008 Annual Meeting
Tom Oswold		2008 Annual Meeting

2) To ratify the appointment of BDO Seidman LLP as the Company’s independent registered public accounting firm:


					Broker
For	Against		Abstain		Non-votes
21,450,987		1,600		77,777	—

3) To consider and vote upon an amendment to the Company’s Amended and Restated 2000 Stock Incentive Plan to increase the number of shares available for issuance under the Plan by 2,400,000 shares;


					Broker
For	Against		Abstain		Non-votes
7,757,316		2,795,983		2,217		10,974,848

Item 5: Other Events

None

Item 6. Exhibits


Exhibit
Number		Exhibit Title
3(i).1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Amendment No. 8 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

3(ii).1		Amended and Restated Bylaws of Tvia, Inc. (incorporated by reference to Exhibit 3(ii)1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 (File No. 000-30539)).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

4.2		Form of Amended and Restated Registration Rights Agreement dated as of April 3, 2000 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

EXHIBIT INDEX


Exhibit
Number
3(i).1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Amendment No. 8 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

3(ii).1		Amended and Restated Bylaws of Tvia, Inc. . (incorporated by reference to Exhibit 3(ii)1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 (File No. 000-30539)).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

4.2		Form of Amended and Restated Registration Rights Agreement dated as of April 3, 2000 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-34024)).

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **


**		In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.


	Page
Part I: Financial Information

Item 1: Financial Statements

Unaudited Condensed Consolidated Balance Sheets		1

Unaudited Condensed Consolidated Statements of Operations		2

Unaudited Condensed Consolidated Statements of Cash Flows		3

Notes to Unaudited Condensed Consolidated Financial Statements		4

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3: Quantitative and Qualitative Disclosures about Market Risk		19

Item 4: Controls and Procedures		19

Part II: Other Information

Item 1: Legal Proceedings		20

Item 1A: Risk Factors		21

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		21

Item 3: Defaults Upon Senior Securities		21

Item 4: Submission of Matters to a Vote of the Security Holders		21

Item 5: Other Events		22

Item 6: Exhibits and Reports on Form 8-K		22

SIGNATURES		24
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2



	TVIA, INC.

August 11, 2006	By:	/s/ Diane Bjorkstrom

		Diane Bjorkstrom
		Chief Financial Officer and Vice President, Administration
		(Principal Financial Officer and
		Duly Authorized Signatory)

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**		In accordance with Item 601(b) (32) (ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.