UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

     For the quarterly period ended March 31, 2004

or

     For the transition period from            to

Commission file number: 001-15473

OPENTV CORP.

275 Sacramento Street
San Francisco, California 94111
(415) 962-5000
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

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

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

     As of March 31, 2004, the Registrant had outstanding (not including 76,327 Class A ordinary shares held in treasury):

90,205,494 Class A ordinary shares, no par value; and
30,631,746 Class B ordinary shares, no par value

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OPENTV CORP.

* The consolidated balance sheet at December 31, 2003 has been derived from the Company’s audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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

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OPENTV CORP.

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

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OPENTV CORP.

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

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OPENTV CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)

Note 1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that in the opinion of management are necessary for a fair presentation of the results of operations, financial position and cash flows as of, and for, the periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results of operations for such period are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, or for any future period. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.

     The accompanying condensed consolidated financial statements include the accounts of OpenTV Corp., sometimes referred to herein as OpenTV, together with its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.

     Preparation of the accompanying condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Note 2. Summary of Significant Accounting Policies

Share-Based Compensation

     We account for share-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which was effective for the year ended December 31, 2003. Under APB No. 25 compensation expense is based on the difference, if any, on the date of the grant, between the fair value of our shares and the exercise price of the option or purchase right. Had compensation cost for options plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS 148, our net loss would have been increased to the pro-forma amounts indicated below (amounts in millions, except per share amounts):

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     These pro-forma amounts may not be representative of the effects on reported net loss for future years as options vest over several years and additional awards are generally made each year.

     We calculated the fair value of each option grant on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

     The weighted average fair value of options granted during the quarter ended March 31, 2004 was $2.45. There were no options granted during the quarter ended March 31, 2003.

Recent Accounting Pronouncements

     In December 2003, the FASB issued Interpretation No. 46R, or FIN 46R, a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective for the first reporting period ending after March 15, 2004. We do not have any ownership in any variable interest entities as of March 31, 2004. We will apply the consolidation requirements of FIN 46R in future periods if we should acquire any interest in any variable interest entity.

     In December 2003, the Staff of the Securities and Exchange Commission issued SAB 104, “Revenue Recognition,” which amends SAB 101, “Revenue Recognition in Financial Statements.” SAB 104 rescinds accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. The adoption of SAB 104 did not have a material impact on our financial position, results of operations, or cash flows.

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Note 3. Net Loss Per Share

     Basic and diluted net loss per share were computed using the weighted-average number of ordinary shares outstanding during the periods presented. The following items as of March 31, 2004 and 2003 were not included in the computation of diluted net loss per share because the effect would be anti-dilutive:

     Had such items been included in the calculation of diluted net loss per share, shares used in the calculation would have been increased by approximately 10.5 million and 8.5 million during the quarters ended March 31, 2004 and 2003, respectively.

Note 4. Goodwill

     Minority shareholders of OpenTV, Inc., which is a subsidiary of ours, have the ability, under certain arrangements, to exchange their shares of OpenTV, Inc. for our shares, generally on a one-for-one basis. As the shares are exchanged, they are accounted for at fair value. This accounting effectively provides that at each exchange date, the exchange is accounted for as a purchase of a minority interest in OpenTV, Inc., valued at the number of our Class A ordinary shares issued to effect the exchange multiplied by the market price of a Class A ordinary share on that date. As a result of applying purchase accounting to the exchanges, we recorded $0.1 million in additional goodwill during the quarter ended March 31, 2004.

Note 5. Intangible Assets, Net

     The components of intangible assets, excluding goodwill, were as follows (in millions):

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     The intangible assets are being amortized on a straight-line basis over their estimated useful lives. Amortization of intangible assets (including amounts reported in cost of revenues) was $2.8 million and $3.8 million for the quarters ended March 31, 2004 and 2003, respectively. The future annual amortization expense is expected to be as follows (in millions):

Note 6. Restructuring Costs

     We monitor our organizational structure and associated operating expenses periodically. Depending upon events and circumstances, actions may be taken to restructure the business, including terminating employees, abandoning excess lease space and incurring other exit costs. Restructuring costs are recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Any resulting restructuring accrual includes numerous estimates made by management, which are developed based on management’s knowledge of the activity being affected and the cost to exit existing commitments. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

     The following sets forth the payments made during the quarter ended March 31, 2004, relating to various restructuring activities initiated in 2002 and 2003 (in millions):

     The outstanding accrual for employee severance and benefits is expected to be paid in 2004 and the accrual for excess facilities relates to operating lease obligations that continue through 2006.

Note 7. Employee Bonus

     During the quarter ended March 31, 2004, we issued 558,640 of our Class A ordinary shares to employees in the United States and the United Kingdom pursuant to our 2003 bonus plan and also made certain cash equivalent bonus payments to employees in other foreign jurisdictions. The final bonus amount actually paid to all employees was less than the bonus accrual provided in fiscal 2003, and so a credit of $0.5 million was recorded in operating expenses in the quarter ended March 31, 2004. The compensation committee of our Board of Directors approved a similar bonus plan for 2004, which will be based on corporate and individual performance objectives.

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Note 8. Comprehensive Loss

     The components of comprehensive loss, net of tax, were as follows (in thousands):

Note 9. Commitments and Contingencies

Operating Leases

     We lease our facilities from third parties under operating lease agreements or sublease agreements in the United States, Europe and Asia Pacific. These leases expire between May 2004 and March 2016. Total rent expense was $1.5 million and $2.1 million for the quarters ended March 31, 2004 and 2003, respectively. There was no sublease income.

     Future minimum payments under non-cancelable operating leases as of March 31, 2004 were as follows (in millions):

Other Commitments

     In the ordinary course of business we enter into various arrangements with vendors and other business partners for bandwidth, marketing, and other services. Future minimum commitments under these arrangements as of March 31, 2004 were $2.3 million for the remaining nine months of the year ending December 31, 2004 and $1.6 million and $0.1 million for the years ending December 31, 2005 and 2006, respectively. In addition, we have a variable commitment with a cable provider that is based on households that receive our OpenTV ProSync service. Based on current expectations, we believe that this commitment may aggregate up to approximately $0.8 million for the remaining nine months of the year ending December 31, 2004.

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     As of March 31, 2004, we had two standby letters of credit aggregating approximately $2.0 million that were issued to landlords at two of our leased properties and we had $10.0 million of marketable debt securities pledged with a bank for foreign exchange facilities.

     In March 1998, we entered into a licensing and distribution agreement with Sun Microsystems, Inc. under which Sun Microsystems granted us a non-exclusive, non-transferable license to develop and distribute products based upon Sun Microsystems’s Java technology. Subsequent amendments extended our license through December 2006. As amended, the agreement requires us to make a payment of $4.0 million to Sun Microsystems in February 2007, less any amounts previously paid for support and royalty fees, which have been nominal to date.

Contingencies

     Royalty Dispute. In March 2004, we received notice from a set-top box manufacturer that licenses software from us indicating that it believed it had inadvertently over-reported royalties by $1.1 million for the period beginning in the fourth quarter of 2002 through December 2003, and had, therefore, incorrectly made payments to us in that amount over that period. We have notified the customer of our intention to invoke our audit rights under the agreement to verify its claim. We are, therefore, unable to predict the outcome of this matter, and whether we may be required to pay a refund to that customer, credit certain of those amounts against future payments or simply take no action with respect to this claim. Based on current information, we are unable effectively to assess the likelihood of any outcome or to estimate the amount of a refund if that were to be required upon conclusion of our investigation. As a result, we have made no provision in our consolidated financial statements at this time in respect of this matter. In addition, this customer has also indicated that it inadvertently over-reported royalties by $0.2 million for the quarter ended March 31, 2004, and had, therefore, incorrectly made payments to us in that amount in the first quarter of 2004. In light of the notification we have received, we have deferred recognition of this amount and have not included it in our revenue for the quarter pending a resolution of our audit.

     OpenTV, Inc. v. Liberate Technologies, Inc. On February 7, 2002, OpenTV, Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc. alleging patent infringement in connection with two patents held by OpenTV, Inc. relating to interactive technology. The lawsuit is pending in the United States District Court for the Northern District of California. On March 21, 2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for alleged infringement of four patents allegedly owned by Liberate Technologies. Liberate Technologies has since dismissed its claims of infringement on two of those patents. In January 2003, the District Court granted two of OpenTV, Inc.’s motions for summary judgment pursuant to which the court dismissed Liberate Technologies’ claim of infringement on one of the remaining patents and dismissed a defense asserted by Liberate Technologies to OpenTV, Inc.’s infringement claims, resulting in only one patent of Liberate Technologies remaining in the counterclaim. The District Court issued a claims construction ruling for the two OpenTV patents and one Liberate patent remaining in the suit on December 2, 2003. In early March 2004, Liberate produced in excess of 200,000 pages of materials in response to various outstanding discovery requests by OpenTV. The parties subsequently filed a joint motion requesting an extension of the court’s calendar for the case. The District Court granted the parties’ motion on March 15, 2004 and the trial date has now been set for February 7, 2005. We believe that our lawsuit is meritorious, and, subject to the bankruptcy stay referred to in the next paragraph, we intend to vigorously pursue prosecution of our claims against Liberate Technologies. In addition, we believe that we have meritorious defenses to the counterclaims brought against OpenTV, Inc. and will defend ourselves vigorously.

     On May 3, 2004, Liberate Technologies filed a voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. As a result of that filing, our litigation with Liberate Technologies has been stayed. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

     Initial Public Offering Securities Litigation. In July 2001, the first of a series of putative securities class actions, Brody v. OpenTV Corp., et al., was filed in United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for our initial public offering, us and various of our officers and directors. These lawsuits were consolidated and are captioned In re OpenTV Corp. Initial Public Offering Securities Litigation. The complaints allege undisclosed and improper practices concerning the

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allocation of our initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased OpenTV Class A ordinary shares during the period from November 23, 1999 through December 6, 2000. A proposal has been made for the settlement and release of claims against the issuer defendants, including us, in exchange for a guaranteed recovery to be paid by the insurance carriers of the issuer defendants and an assignment of certain claims. We have approved the settlement proposal and are awaiting definitive documentation. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the Court. If the settlement does not occur, and the litigation against us continues, we believe that we have meritorious defenses to the claims asserted against us and will defend ourselves vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

     In November 2001, a putative securities class action was filed in United States District Court for the Southern District of New York against Wink Communications and two of its officers and directors and certain investment banks which acted as underwriters for Wink Communications’ initial public offering. We acquired Wink Communications in October 2002. The lawsuit is now captioned In re Wink Communications, Inc. Initial Public Offering Securities Litigation. The operative amended complaint alleges undisclosed and improper practices concerning the allocation of Wink Communications’ initial public offering shares in violation of the federal securities laws, and seeks unspecified damages on behalf of persons who purchased Wink Communications’ common stock during the period from August 19, 1999 through December 6, 2000. This action is among the over 300 lawsuits that have been consolidated for pretrial purposes as In re Initial Public Offering Securities Litigation. As described above, a proposal has been made for the settlement and release of claims against the issuer defendants. Wink Communications has approved the settlement proposal and is awaiting definitive documentation. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the Court. If the settlement does not occur, and the litigation against Wink Communications continues, we believe that Wink Communications has meritorious defenses to the claims brought against it and that Wink Communications will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

     Litigation Relating to the Acquisition of ACTV, Inc. On November 18, 2002, a purported class action complaint was filed in the Court of Chancery of the State of Delaware in and for the County of New Castle against ACTV, Inc., its directors and us. The complaint generally alleges that the directors of ACTV breached their fiduciary duties to the ACTV shareholders in approving the ACTV merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that, in approving the ACTV merger agreement, ACTV’s directors failed to take steps to maximize the value of ACTV to its shareholders. The complaint further alleges that we aided and abetted the purported breaches of fiduciary duties committed by ACTV’s directors on the theory that the merger could not occur without our participation. No proceedings on the merits have occurred with respect to this action, and the case is dormant. We believe that the allegations are without merit and intend to defend against the complaint vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

     Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by BI. Though we are not currently a defendant in the suit, BI may allege that certain of our products, possibly in combination with the products provided by some of the defendants, infringe BI’s patent. The agreements between (1) OpenTV, Inc. and EchoStar and (2) Wink Communications and DIRECTV include indemnification obligations of OpenTV, Inc. and Wink Communications, respectively, that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. Based on publicly available information, we believe that certain of the defendants in the suit, including DIRECTV, reached agreement with BI to

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settle the litigation on July 17, 2003. We are unaware of the specific terms of that settlement and are unable to assess the implications of that settlement, if any, on Wink Communications. On November 7, 2003, Broadcast Innovation filed suit against Charter Communications, Inc. and Comcast Corporation in United States District Court for the District of Colorado, alleging that Charter and Comcast also infringe the ‘094 patent. The agreements between Wink Communications and Charter Communications include indemnification obligations of Wink Communications that may be triggered by the litigation. If liability is found against Charter in this matter, and if such a decision implicates our technology or products, Charter could notify Wink of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for these matters. We are unable to estimate our potential liability, if any.

     Personalized Media Communications, LLC. On December 4, 2000, a suit was filed in the United States District Court for the District of Delaware by Pegasus Development Corporation and Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications. Based on publicly available information, we believe that the case has been stayed in the District Court pending re-examination by the United States Patent and Trademark Office. Though Wink Communications is not a defendant in the suit, Personalized Media Communications may allege that certain products of Wink Communications, possibly in combination with products provided by the defendants, infringe Personalized Media Communication’s patents. The agreements between Wink Communications and each of the defendants include indemnification obligations that may be triggered by this litigation. If it is determined that Wink Communications is obligated to defend any defendant in this matter, and/or that the products of Wink Communications infringe any of the asserted claims, our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for this matter. We are unable to estimate our potential liability, if any.

     Other Matters. In the normal course of our business, we provide indemnification to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations, although our liabilities in those arrangements are customarily limited in various respects, including monetarily. As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is not material.

     In the ordinary course of our business, we encounter certain circumstances, from time to time, in which layoffs, dismissals or other forms of separation with employees result in settlements between certain employees and the company to address claims that we or our employee may allegedly have against the other party. We recently reached a tentative settlement with a former employee to resolve various claims that, if it becomes effective, will result in a payment by us of approximately $550,000. We would expect to make that payment in the second quarter of 2004.

     From time to time in the ordinary course of our business, we are also party to other legal proceedings or receive correspondence regarding potential or threatened legal proceedings. While we currently believe that the ultimate outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in our results of operations, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs. The estimate of the potential impact on our financial position or overall results of operations for any of the legal proceedings described above could change in the future.

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Note 10. Related Party Transactions

     On August 27, 2002, Liberty Media Corporation and one of its subsidiaries (collectively, “Liberty Media”) completed a transaction in which Liberty Media acquired a controlling ownership stake in us. As of March 31, 2004, Liberty Media’s total ownership represented approximately 32.6% of the economic interest and approximately 79.2% of the voting power of our ordinary shares on an undiluted basis.

     Commencing in August 2002, a subsidiary of Liberty Media provided certain management services for us. We reimbursed them for the services based on the estimated percentage of time that various individuals dedicated to the performance of services for us. In addition, we also reimbursed them for an allocated portion of their administrative costs. Total management charges from Liberty Media for compensation and general administrative costs were $0.3 million and $0.5 million for the quarters ended March 31, 2004 and 2003, respectively. In February 2004, our management relationship with that subsidiary was terminated.

     Beginning in January 2004, we participated in the Liberty Media medical insurance program for employees in the United States at a cost of $0.4 million for the quarter ended March 31, 2004.

     The services and support revenue from Liberty Media entities was nominal during the quarter ended March 31, 2004. We recorded $0.5 million in services and support revenue from Liberty Media entities for the quarter ended March 31, 2003.

     On March 23, 2004, in consideration for the issuance by Liberty Media to James Chiddix of options to purchase 50,000 shares of Liberty Media Series A common stock as an inducement to Mr. Chiddix agreeing to serve as Executive Chairman of our Board of Directors, we issued to Liberty Media an aggregate of 76,982 of our Class A ordinary shares. The number of our Class A ordinary shares issued to Liberty Media was determined by multiplying the Black-Scholes value per option to purchase a share of Liberty Media Series A common stock ($4.603495) by 50,000, and dividing the resulting number by the closing sale price of our Class A ordinary share on the Nasdaq National Market on March 23, 2004 ($2.99). We accounted for the issuance of our shares to Liberty Media as a dividend equal to the fair value of the shares of $0.2 million during the quarter ended March 31, 2004.

     In June 2000, we entered into an employment agreement with James Ackerman, our Chief Executive Officer and a member of our Board of Directors, pursuant to which we agreed, among other things, (a) to provide an interest-free loan of approximately $2.4 million to be forgiven in annual installments over a period of four years and (b) to issue Class A ordinary shares having an aggregate fair market value of approximately $0.6 million in annual installments over the same four-year period. The final 25% of the loan was forgiven in January 2004 and 43,662 Class A ordinary shares were issued. The amounts forgiven annually were reported as compensation expense. The annual grants of Class A ordinary shares were also reported as compensation expense.

Note 11. Segment Information

     SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires enterprises to report information about operating segments and it establishes standards for related disclosures about products, geographic areas and major customers. The method for determining what information to report is based upon the “management” approach. Our Chief Executive Officer reviews revenues by both geography and customer, and we do not have separately reportable operating segments.

     Our revenues by geographic area based on the location of customers were as follows (in millions):

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