##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d) of
the Securities Exchange Act of 1934
 For the Quarter Ended September 30, 2005
 Commission file number 0-50289
 
 Brillian Corporation
  Delaware
    
    05-0567906(State or Other Jurisdiction
    
    (I.R.S. Employer Identification No.)of Incorporation or Organization)
 1600 North Desert Drive, Tempe, Arizona
    
    85281(Address of Principal Executive Offices)
    
    (Zip Code)
 (602) 389-8888(Registrants telephone number, including area code)
 þ o
 o þ
 o þ
  CLASS
    
    
    
    OUTSTANDING AS OF OCTOBER 31, 2005Common
    
    
    
    
    8,242,470Par value $.001 per share




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BRILLIAN CORPORATION AND SUBSIDIARY
 QUARTERLY REPORT ON FORM 10-Q
 FOR QUARTER ENDED SEPTEMBER 30, 2005
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS:Condensed
Consolidated Balance Sheets (unaudited)  September 30, 2005 and December 31, 2004
    
    
    1Condensed
Consolidated Statements of Operations (unaudited)  Three Months
and Nine Months Ended September 30, 2005 and 2004
    
    
    2Condensed
Consolidated Statements of Cash Flows (unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2.
    
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    20ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    20PART II  OTHER INFORMATIONITEM 5.
    
    OTHER INFORMATION
    
    
    21ITEM 6.
    
    EXHIBITS
    
    
    21SIGNATURES
    
    
    22EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 BRILLIAN CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,423
    
    
    $
    8,195Short-term investments
    
    
    
    
    
    
    13Accounts receivable, net
    
    
    487
    
    
    
    339Inventories
    
    
    5,296
    
    
    
    5,400Other current assets
    
    
    455
    
    
    
    368Total current assets
    
    
    8,661
    
    
    
    14,315Property, plant and equipment, net
    
    
    5,724
    
    
    
    6,082Other assets
    
    
    1,165
    
    
    
    Other investments
    
    
    
    
    
    
    1,119Total Assets
    
    $
    15,550
    
    
    $
    21,516LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,599
    
    
    $
    1,230Accrued compensation
    
    
    408
    
    
    
    216Accrued liabilities
    
    
    724
    
    
    
    1,462Total current liabilities
    
    
    3,731
    
    
    
    2,908Long-term debt (net of $7,798 discount)
    
    
    4,365
    
    
    
    Stockholders Equity:Common stock
    
    
    8
    
    
    
    7Additional paid-in capital
    
    
    68,268
    
    
    
    58,007Deferred compensation
    
    
    
    
    
    
    (616
    )Accumulated deficit
    
    
    (60,822
    )
    
    
    (38,790
    )Total stockholders equity
    
    
    7,454
    
    
    
    18,608Total Liabilities and Stockholders Equity
    
    $
    15,550
    
    
    $
    21,516
  1




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BRILLIAN CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net product sales
    
    $
    659
    
    
    $
    673
    
    
    $
    2,523
    
    
    $
    2,048Design and engineering services
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    297Total net sales
    
    
    659
    
    
    
    733
    
    
    
    2,523
    
    
    
    2,345Costs and Expenses:Cost of
sales  products
    
    
    4,145
    
    
    
    4,338
    
    
    
    11,304
    
    
    
    9,186Cost of
sales  design and engineering services
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    220Selling, general, and administrative
    
    
    1,233
    
    
    
    508
    
    
    
    3,424
    
    
    
    2,701Research and development
    
    
    2,470
    
    
    
    2,225
    
    
    
    7,227
    
    
    
    6,7837,848
    
    
    
    7,102
    
    
    
    21,955
    
    
    
    18,890Operating loss
    
    
    (7,189
    )
    
    
    (6,369
    )
    
    
    (19,432
    )
    
    
    (16,545
    )Other Income (Expense):Interest, net
    
    
    (1,260
    )
    
    
    47
    
    
    
    (1,481
    )
    
    
    155Realized loss on short-term investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )Loss on investment in start-up company
    
    
    (1,119
    )
    
    
    
    
    
    
    (1,119
    )
    
    
    (131
    )(2,379
    )
    
    
    47
    
    
    
    (2,600
    )
    
    
    (17
    )Net Loss
    
    $
    (9,568
    )
    
    $
    (6,322
    )
    
    $
    (22,032
    )
    
    $
    (16,562
    )Loss per Common Share:Basic and diluted
    
    $
    (1.30
    )
    
    $
    (0.91
    )
    
    $
    (3.10
    )
    
    $
    (2.69
    )Weighted Average Number of Common Shares:Basic and diluted
    
    
    7,337
    
    
    
    6,931
    
    
    
    7,106
    
    
    
    6,168
 2
    Table of Contents   BRILLIAN CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine Months EndedSeptember 30,2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (22,032
    )
    
    $
    (16,652
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,814
    
    
    
    2,714Amortization of debenture discount and offering costs
    
    
    1,393
    
    
    
    Stock compensation
    
    
    827
    
    
    
    600Stock issued to pay interest
    
    
    35
    
    
    
    Stock issued for services
    
    
    138
    
    
    
    Deferred revenue
    
    
    
    
    
    
    108Provision for obsolete inventory
    
    
    2,100
    
    
    
    Provision for doubtful accounts
    
    
    (1
    )
    
    
    10Loss on investment in start-up company
    
    
    1,119
    
    
    
    131Changes in assets and liabilities:Increase in accounts receivable
    
    
    (147
    )
    
    
    (272
    )(Increase) decrease in inventories
    
    
    (1,996
    )
    
    
    (2,124
    )(Increase) decrease in other assets
    
    
    (87
    )
    
    
    161Increase in accounts payable and accrued liabilities
    
    
    823
    
    
    
    2,442Net cash used in operating activities
    
    
    (16,014
    )
    
    
    (12,792
    )Cash Flows from Investing Activities:Purchases of property, plant, and equipment
    
    
    (1,456
    )
    
    
    (2,980
    )Purchase of intangibles
    
    
    
    
    
    
    (886
    )Purchase of investments
    
    
    
    
    
    
    (79
    )Cash paid for merger costs
    
    
    (193
    )
    
    
    Proceeds from maturities/sales of short-term investments
    
    
    13
    
    
    
    12,066Net cash provided by (used in) investing activities
    
    
    (1,636
    )
    
    
    8,121Cash Flows from Financing Activities:Proceeds of debenture offerings
    
    
    12,500
    
    
    
    Cash paid for offering costs
    
    
    (1,082
    )
    
    
    Proceeds of public stock offering
    
    
    
    
    
    
    11,969Issuance of shares related to Employee Stock Purchase Plan
    
    
    224
    
    
    
    241Warrants exercised
    
    
    236
    
    
    
    Stock options exercised
    
    
    
    
    
    
    60Net cash provided by financing activities
    
    
    11,878
    
    
    
    12,270Net increase (decrease) in cash and cash equivalents
    
    
    (5,772
    )
    
    
    7,599Cash and cash equivalents, beginning of period
    
    
    8,195
    
    
    
    2,417Cash and cash equivalents, end of period
    
    $
    2,423
    
    
    $
    10,016Supplemental Cash Flow InformationCash paid for interest
    
    $
    92
    
    
    $
    
 3
    Table of Contents   BRILLIAN CORPORATION AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note A
 TM
      4




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Note B
 September 30,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    4,366
    
    
    $
    4,479Work-in-process
    
    
    593
    
    
    
    806Finished goods
    
    
    337
    
    
    
    115$
    5,296
    
    
    $
    5,400
 Note C
 September 30,
    
    
    December 31,2005
    
    
    2004Leasehold improvements
    
    $
    569
    
    
    $
    569Equipment
    
    
    17,641
    
    
    
    16,185Furniture
    
    
    78
    
    
    
    7818,288
    
    
    
    16,832Less
accumulated depreciation and amortization
    
    
    (12,564
    )
    
    
    (10,750
    )$
    5,724
    
    
    $
    6,082
 5




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Note D
  Note E
       6




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NorthAmerica
    
    Asia
    
    Europe
    
    TotalThree
months ended September 30, 2005Net sales
    
    $
    425
    
    
    $
    
    
    
    $
    234
    
    
    $
    659Three
months ended September 30, 2004Net sales
    
    $
    499
    
    
    $
    142
    
    
    $
    92
    
    
    $
    733Nine
months ended September 30, 2005Net sales
    
    $
    1,348
    
    
    $
    31
    
    
    $
    1,144
    
    
    $
    2,523Nine
months ended September 30, 2004Net sales
    
    $
    1,246
    
    
    $
    491
    
    
    $
    608
    
    
    $
    2,345
 Note F
  Tax Sharing Agreement
   Intellectual Property Agreement
  7




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Real Property Sublease Agreement
  Note G
  Note H
    8




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9




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(in thousands, except per share date)
 Nine Months
    
    
    Three Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Net loss as reported
    
    $
    (22,032
    )
    
    $
    (6,322
    )
    
    $
    (16,562
    )Add stock-based compensation
included in net loss as reported
    
    
    802
    
    
    
    79
    
    
    
    241Deduct total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (1,137
    )
    
    
    (464
    )
    
    
    (1,163
    )Pro forma net loss
    
    $
    (22,367
    )
    
    $
    (6,707
    )
    
    $
    (17,484
    )Basic and diluted net loss per share:As reported
    
    $
    (3.10
    )
    
    $
    (0.91
    )
    
    $
    (2.69
    )Pro forma
    
    $
    (3.15
    )
    
    $
    (0.97
    )
    
    $
    (2.83
    )
   Dividend yield:
    
    
    N/AVolatility:
    
    
    125
    %Risk-free interest rate:
    
    
    3.82
    %Expected life in years:
    
    
    10
  10




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Fiscal Year
    
    Amount2005
    
    $
    3532006
    
    
    9662007
    
    
    691Thereafter
    
    
    235$
    2,245
 Note I
   Note J
  September 30,
    
    
    December 31,2005
    
    
    2004April 2005 7% Convertible Debentures
maturing April 2008, convertible at $1.57
per share
    
    $
    2,088
    
    
    $
    April 2005 9% Senior Secured Debentures
maturing April 2008, secured by a first
lien on our assets
    
    
    2,000
    
    
    
    July 2005 7% Convertible Debentures
maturing July 2008, convertible at $1.57
per share
    
    
    5,000
    
    
    
    July 2005 9% Senior Secured Debentures
maturing July 2008, secured by a first
lien on our assets
    
    
    2,075
    
    
    
    September 2005 7% Junior Secured
Debentures maturing September 2008,
secured by a lien on our assets
    
    
    1,000
    
    
    
    12,163
    
    
    
    Less:Discount and beneficial conversion feature
on convertible debentures
    
    
    6,414
    
    
    
    Discount on secured debentures
    
    
    1,384
    
    
    
    Total
    
    $
    4,365
    
    
    $
    
  2006
    
    $
    2007
    
    
    2008
    
    
    12,163Total
    
    $
    12,163
 11




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Note K
 Issuance of additional debentures.
 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
     Definitive Agreement to Merge
 13




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Net Sales.
  Cost of Sales.
 Selling, General, and Administrative Expense.
 Research and Development Expense.
 Critical Accounting Policies and Estimates
     14




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15




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Results of Operations
 Three months ended September 30, 2005 compared to three months ended September 30, 2004
 Net Sales.
   Cost of Sales.
  Selling, General, and Administrative Expense.
 Research and Development Expense.
 Loss on Investment in Start-up Company .
 Interest.
 Net Loss.
 16




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Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
 Net Sales.
   Cost of Sales.
  Selling, General, and Administrative Expense .
 Research and Development Expense.
 Loss on Investment in Start-up Company .
 Interest.
 Net Loss.
 17




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Liquidity and Capital Resources
         18




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Aggregate Contractual Obligations
  Amount of Commitment Expiration Per PeriodTotalAmounts
    
    Less
    
    
    
    
    
    
    
    
    
    6 YearsOther Commercial Commitments
    
    Committed
    
    than 1 Year
    
    1-3 Years
    
    4-5 Years
    
    and Over(in thousands)Facilities leases
    
    $
    4,669
    
    
    $
    1,137
    
    
    $
    2,173
    
    
    $
    1,359
    
    
    $
    Purchase orders
    
    $
    4,303
    
    
    $
    4,303
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantee
    
    $
    247
    
    
    $
    247
    
    
    $
    
    
    
    $
    
    
    
    $
    
     Off-Balance Sheet Arrangements
  Impact of Recently Issued Standards
  19




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ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
  Primary Market Risk Exposures
    
 ITEM 4. CONTROLS AND PROCEDURES
  20




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PART
II  OTHER INFORMATION
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act
of 1934, as amended32.1
    
    Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 21




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SIGNATURES
  BRILLIAN CORPORATIONDate: November 14, 2005
    By:
    /s/ Vincent F. Sollitto Jr.Vincent F. Sollitto, Jr.President and Chief Executive OfficerBy:
    /s/ Wayne A. PrattWayne A. PrattVice President, Chief Financial Officer, Secretary,
and Treasurer 22




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Index to Exhibits
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act
of 1934, as amended32.1
    
    Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002