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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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, 2003

Commission file number 0-50289



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Brillian Corporation

(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 05-0567906                          
|                                                               |  |                                     
|(State or Other Jurisdiction
of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

|                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------
|1600 North Desert
Drive, Tempe, Arizona           85281
(Address of Principal Executive Offices)           (Zip Code)
|                                                                                                                     
|(602) 389-8888
(Registrants telephone number, including area code)                                                  

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 [  ] NO [X]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date.

|                                 |  |                                    |           | 
|-------------------------------- |  | ---------------------------------- | --------- | 
|CLASS                            |  | OUTSTANDING AS OF OCTOBER 31, 2003
|                                 |  |                                   
|Common
Par value $.001 per share |  |                                    | 5,332,966 | 





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TABLE OF CONTENTS



|                               |                                                                                               |                                         |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                               |                                                                                               | CONDENSED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION   
|                               | ITEM 5. OTHER INFORMATION                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EX-31.1                       
|Ex-31.2                       
|EX-32.1                       
|EX-32.2                       



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##### Table of Contents



BRILLIAN CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

|                                                                                              |                                                                                                                 |                                |    |      |  | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------ | -- | ---- |  | 
|                                                                                              |                                                                                                                 |                                |    | Page
|                                                                                              |                                                                                                                 |                                |    |     
|                                                                                              |                                                                                                                 | PART I  FINANCIAL INFORMATION |    |      |  | 
|ITEM 1. FINANCIAL STATEMENTS:                                                                 |                                                                                                                 |                                |    |     
|                                                                                              | Condensed Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002                                 |                                |    | 1    | 
|                                                                                              | Condensed Statements of Operations (unaudited) -
Three Months and Nine Months Ended September 30, 2003 and 2002 |                                |    | 2    | 
|                                                                                              | Condensed Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 2003 and 2002                  |                                |    | 3    | 
|                                                                                              | Notes to Condensed Financial Statements                                                                         |                                |    | 4    | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |                                                                                                                 |                                | 11 |     
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |                                                                                                                 |                                | 20 |     
|ITEM 4. CONTROLS AND PROCEDURES                                                               |                                                                                                                 |                                | 20 |     
|                                                                                              |                                                                                                                 | PART II  OTHER INFORMATION    |    |      |  | 
|ITEM 5. OTHER INFORMATION                                                                     |                                                                                                                 |                                | 20 |     
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                                                                                 |                                | 21 |     
|SIGNATURES                                                                                    |                                                                                                                 |                                | 21 |     





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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




BRILLIAN CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)

|                                     |                            |                            |                                            |        |        |               |       |              |        |        |  | 
|------------------------------------ | -------------------------- | -------------------------- | ------------------------------------------ | ------ | ------ | ------------- | ----- | ------------ | ------ | ------ |  | 
|                                     |                            |                            |                                            |        |        | SEPTEMBER 30, |       | DECEMBER 31,
|                                     |                            |                            |                                            |        |        | 2003          |       | 2002        
|                                     |                            |                            |                                            |        |        |               |       |             
|                                     |                            |                            |                                            |        |        | (unaudited)   |       |              |        |       
|ASSETS                               |                            |                            |                                            |        |        |               |       |             
|Current Assets:                      |                            |                            |                                            |        |        |               |       |             
|                                     | Cash and cash equivalents  |                            | $                                          | 19,537 |        |               | $     |             |       
|                                     | Accounts receivable, net   |                            |                                            | 574    |        |               |       | 348          |       
|                                     | Inventories                |                            |                                            | 2,848  |        |               |       | 2,584        |       
|                                     | Deferred tax asset         |                            |                                            | 511    |        |               |       |             |       
|                                     | Other current assets       |                            |                                            | 765    |        |               |       | 427          |       
|                                     |                            |                            |                                            |        |        |               |       |             
|                                     |                            | Total current assets       |                                            |        | 24,235 |               |       |              | 3,359  |       
|                                     |                            |                            |                                            |        |        |               |       |             
|Property, plant and equipment, net   |                            |                            | 6,776                                      |        |        |               | 8,218 |             
|Intangibles, net                     |                            |                            | 8,943                                      |        |        |               | 9,627 |             
|Other investments                    |                            |                            | 6,331                                      |        |        |               | 6,331 |             
|                                     |                            |                            |                                            |        |        |               |       |             
|                                     |                            | Total Assets               |                                            | $      | 46,285 |               |       | $            | 27,535 |       
|                                     |                            |                            |                                            |        |        |               |       |             
|LIABILITIES AND STOCKHOLDERS EQUITY |                            |                            |                                            |        |        |               |       |             
|Current Liabilities:                 |                            |                            |                                            |        |        |               |       |             
|                                     | Accounts payable           |                            | $                                          | 690    |        |               | $     | 516          |       
|                                     | Accrued compensation       |                            |                                            | 222    |        |               |       | 573          |       
|                                     | Accrued liabilities        |                            |                                            | 612    |        |               |       | 192          |       
|                                     | Deferred revenue           |                            |                                            | 72     |        |               |       | 335          |       
|                                     |                            |                            |                                            |        |        |               |       |             
|                                     |                            | Total current liabilities  |                                            |        | 1,596  |               |       |              | 1,616  |       
|                                     |                            |                            |                                            |        |        |               |       |             
|Deferred tax liability               |                            |                            | 1,441                                      |        |        |               |      |             
|Commitments and Contingencies        |                            |                            |                                            |        |        |               |       |             
|Stockholders Equity:                |                            |                            |                                            |        |        |               |       |             
|                                     | TFS net investment         |                            |                                            |       |        |               |       | 25,919       |       
|                                     | Common stock               |                            |                                            | 5      |        |               |       |             |       
|                                     | Additional paid-in capital |                            |                                            | 45,688 |        |               |       |             |       
|                                     | Deferred compensation      |                            |                                            | (1,466 | )      |               |       |             |       
|                                     | Accumulated deficit        |                            |                                            | (979   | )      |               |       |             |       
|                                     |                            |                            |                                            |        |        |               |       |              |       
|                                     |                            | Total stockholders equity |                                            |        | 43,248 |               |       |              | 25,919 |       
|                                     |                            |                            |                                            |        |        |               |       |              |       
|                                     |                            |                            | Total Liabilities and Stockholders Equity |        | $      | 46,285        |       |              | $      | 27,535 | 
|                                     |                            |                            |                                            |        |        |               |       |             

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

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BRILLIAN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)

|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |       |  |         |  
|----------------------------------------- | ----------------------------------------------- | - | -------------- | ----- | ------------------- | ------ | ------------------- | ----- | ---- | ------ | ------- | ----- | - | ------- | ------- | ----- |  | ------- | -
|                                          |                                                 |   |                |       | Three Months        |        | Nine Months        
|                                          |                                                 |   |                |       | Ended September 30, |        | Ended September 30,
|                                          |                                                 |   |                |       |                     |        |                    
|                                          |                                                 |   |                |       | 2003                |        | 2002                |       | 2003 |        | 2002   
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |        
|Net product sales                         |                                                 | $ | 602            |       |                     | $      | 194                 |       |      | $      | 1,411   |       |   | $       | 516     |      
|Design and engineering services           |                                                 |   | 101            |       |                     |        | 151                 |       |      |        | 423     |       |   |         | 278     |      
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          | Total net sales                                 |   |                | 703   |                     |        |                     | 345   |      |        |         | 1,834 |   |         |         | 794   | 
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|Costs and Expenses:                       |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          | Cost of sales - products                        |   |                | 2,279 |                     |        |                     | 2,507 |      |        |         | 6,814 |   |         |         | 9,524 | 
|                                          | Cost of sales  design and engineering services |   |                | 97    |                     |        |                     | 131   |      |        |         | 380   |   |         |         | 255   | 
|                                          | Selling, general, and administrative            |   |                | 1,169 |                     |        |                     | 825   |      |        |         | 3,434 |   |         |         | 2,637 | 
|                                          | Research and development                        |   |                | 1,814 |                     |        |                     | 2,004 |      |        |         | 5,211 |   |         |         | 6,628 | 
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          |                                                 |   | 5,359          |       |                     |        | 5,467               |       |      |        | 15,839  |       |   |         | 19,044  |      
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          |                                                 |   | Operating loss |       |                     | (4,656 | )                   |       |      | (5,122 | )       |       |   | (14,005 | )       |       |  | (18,250 | )
|Other Income (Expense):                   |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          | Interest, net                                   |   |                | 14    |                     |        |                     |      |      |        |         | 14    |   |         |         |      | 
|Loss before income taxes                  |                                                 |   | (4,642         | )     |                     |        | (5,122              | )     |      |        | (13,991 | )     |   |         | (18,250 | )    
|Benefit from income taxes                 |                                                 |   | (160           | )     |                     |        |                    |       |      |        | (160    | )     |   |         |        |      
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|Net Loss                                  |                                                 | $ | (4,482         | )     |                     | $      | (5,122              | )     |      | $      | (13,831 | )     |   | $       | (18,250 | )    
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|Loss per Common Share:                    |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          | Basic and diluted                               |   | $              | (0.84 | )                   |        |                     |       |      |        | $       | (2.59 | ) |         |         |       | 
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|Weighted Average Number of Common Shares: |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      
|                                          | Basic and diluted                               |   |                | 5,333 |                     |        |                     |       |      |        |         | 5,333 |   |         |         |       | 
|                                          |                                                 |   |                |       |                     |        |                     |       |      |        |         |       |   |         |         |      

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

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BRILLIAN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |         |        |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------- | ---- | ------- | ------ | ------- | -
|                                                     |                                                                             |                                                                 |                                                     |         | Nine Months Ended
|                                                     |                                                                             |                                                                 |                                                     |         | September 30,    
|                                                     |                                                                             |                                                                 |                                                     |         |                  
|                                                     |                                                                             |                                                                 |                                                     |         | 2003              |         | 2002
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |     
|Cash Flows from Operating Activities:                |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     | Net loss                                                                    |                                                                 | $                                                   | (13,831 | )                 |         | $    | (18,250 | )     
|                                                     | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                 |                                                     |         |                   |         |      |         |       
|                                                     |                                                                             | Depreciation and amortization                                   |                                                     |         | 2,683             |         |      |         | 2,521  |        
|                                                     |                                                                             | Stock compensation                                              |                                                     |         | 67                |         |      |         |       |        
|                                                     |                                                                             | Deferred revenue                                                |                                                     |         | (263              | )       |      |         |       |        
|                                                     |                                                                             | Provision for doubtful accounts                                 |                                                     |         |                  |         |      |         | 62     |        
|                                                     |                                                                             | Deferred income taxes                                           |                                                     |         | (160              | )       |      |         |       |        
|                                                     | Changes in assets and liabilities:                                          |                                                                 |                                                     |         |                   |         |      |         |       
|                                                     |                                                                             | (Increase) decrease in accounts receivable                      |                                                     |         | (226              | )       |      |         | (122   | )      
|                                                     |                                                                             | (Increase) decrease in inventories                              |                                                     |         | (264              | )       |      |         | 1,179  |        
|                                                     |                                                                             | (Increase) decrease in other assets                             |                                                     |         | (338              | )       |      |         | (205   | )      
|                                                     |                                                                             | Increase (decrease) in accounts payable and accrued liabilities |                                                     |         | 243               |         |      |         | (1,798 | )      
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     |                                                                             |                                                                 | Net cash used in operating activities               |         |                   | (12,089 | )    |         |        | (16,613 | )
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|Cash Flows from Investing Activities:                |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     | Purchases of property, plant, and equipment                                 |                                                                 |                                                     | (334    | )                 |         |      | (2,991  | )     
|                                                     | Proceeds from sale of asset                                                 |                                                                 |                                                     | 114     |                   |         |      | 125     |       
|                                                     | Purchase of intangibles                                                     |                                                                 |                                                     | (337    | )                 |         |      | (4,735  | )     
|                                                     | Investment in Colorlink                                                     |                                                                 |                                                     |        |                   |         |      | (5,081  | )     
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     |                                                                             |                                                                 | Net cash provided by (used in) investing activities |         |                   | (557    | )    |         |        | (12,682 | )
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|Cash Flows from Financing Activities:                |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     | Net transfers from TFS                                                      |                                                                 |                                                     | 11,317  |                   |         |      | 29,295  |       
|                                                     | Cash transfer from TFS at spin-off                                          |                                                                 |                                                     | 20,853  |                   |         |      |        |       
|                                                     | Stock options exercised                                                     |                                                                 |                                                     | 13      |                   |         |      |        |       
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|                                                     |                                                                             |                                                                 | Net cash provided by (used in) financing activities |         |                   | 32,183  |      |         |        | 29,295  |  
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                 | 19,537                                              |         |                   |         |     |        
|Cash and cash equivalents, beginning of period       |                                                                             |                                                                 |                                                    |         |                   |         |     |        
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |         |       
|Cash and cash equivalents, end of period             |                                                                             | $                                                               | 19,537                                              |         |                   | $       |     |        
|                                                     |                                                                             |                                                                 |                                                     |         |                   |         |      |        

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

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BRILLIAN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



|Note A |  | Organization and Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | We develop, manufacture, and market microdisplay products and
system solutions utilizing liquid crystal on silicon, or LCoS,
microdisplay technology for a variety of markets. These markets
include rear-projection high-definition televisions;
front-projector multimedia and home theater projectors; and
near-to-eye, or personal display applications, including
head-mounted monocular and binocular headsets or viewers for
industrial, medical, military, commercial, and consumer
applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|      
|       |  | Historically, we operated as a division of Three-Five Systems, Inc.
(TFS). On March 17, 2003, TFS announced that its board of
directors had approved a decision to form a wholly owned
subsidiary, to transfer its microdisplay business and assets into
this subsidiary, and to distribute the common stock of this
subsidiary to its stockholders in a spin-off. Pursuant to this
decision, on May 7, 2003, TFS formed our company under the name
Brillian Corporation (Brillian) under Delaware law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|      
|       |  | On September 1, 2003, we and TFS entered into a Master Separation
and Distribution Agreement under which TFS transferred to us
substantially all of the assets of, and we assumed substantially
all of the corresponding liabilities of, TFS microdisplay
business. On September 15, 2003, TFS distributed all outstanding
shares of Brillian common stock owned by TFS to TFS stockholders as
a dividend (the Spin-Off). In addition, we entered into
ancillary agreements that govern various ongoing relationships
between us and TFS. In connection with the Spin-Off, TFS received
a ruling from the Internal Revenue Service (the IRS) that the
Spin-Off is tax free. In connection with the Spin-Off, TFS
provided initial cash funding in the amount of $22 million. We
incurred Spin-Off related costs of $699,000 and $1.5 million in the
three- and nine-month periods ended September 30, 2003.                                                                                                            
|      
|       |  | The accompanying unaudited Condensed Financial Statements have been
prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
the instructions to Form 10-Q. Accordingly, they do not include
all the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In our opinion, all adjustments, which include only
normal recurring adjustments, necessary to present fairly the
financial position, results of operations, and cash flows for all
periods presented have been made. The results of operations for the
nine-month period ended September 30, 2003 are not necessarily
indicative of the operating results that may be expected for the
entire year ending December 31, 2003. These financial statements
should be read in conjunction with our December 31, 2002 financial
statements and the accompanying notes thereto included in our Form
10 filing.
|      
|       |  | The financial statements as of September 30, 2003 have been
prepared using TFS historical basis in the assets and liabilities
and the historical results of operations of Brillian.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      
|       |  | The financial information for the period prior to the Spin-Off
includes allocations of certain TFS corporate expenses to us.
These amounts have been allocated to us on the basis that is
considered by us and TFS to reflect most fairly or reasonably the
utilization of the services provided to, or the benefits received
by, us. We believe the methods used to allocate these amounts are
reasonable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|      
|       |  | Certain amounts that were included as research and development in
the 2002 statements of operations have been reclassified to cost of
sales  products in order to be consistent with changes to our
internal reporting structure made after the Spin-Off. The amounts
that were reclassified are from departments that perform process
improvement engineering and other production-related activities.
Amounts reclassified from research and development expense to cost
of sales  products totaled $939,000 and $1.5 million for the
three-month periods ended September 30, 2003, and 2002,
respectively. For the nine-month periods ended September 30, 2003
and 2002, $3.6 million and $5.0 million, respectively, was
reclassified.                                                                                                                                                                                                                                                                                

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|Note B |  | Inventories consisted of the following (in thousands):
|------ |  | ------------------------------------------------------

|                |  |              |       |              |  |   |       | 
|--------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                |  | September 30 |       | December 31,
|                |  | 2003         |       | 2002        
|                |  |              |       |             
|Raw materials   |  | $            | 2,643 |              |  | $ | 2,512 | 
|Work-in-process |  |              | 11    |              |  |   | 46    | 
|Finished goods  |  |              | 194   |              |  |   | 26    | 
|                |  |              |       |              |  |   |       | 
|                |  | $            | 2,848 |              |  | $ | 2,584 | 
|                |  |              |       |              |  |   |       | 



|Note C |  | Property, plant, and equipment consisted of the following (in thousands):
|------ |  | -------------------------------------------------------------------------

|                              |  |              |        |              |  |   |        |  
|----------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                              |  | September 30 |        | December 31,
|                              |  | 2003         |        | 2002        
|                              |  |              |        |             
|Leasehold improvements        |  | $            | 971    |              |  | $ | 930    |  
|Equipment                     |  |              | 13,441 |              |  |   | 14,326 |  
|Furniture                     |  |              | 64     |              |  |   | 78     |  
|                              |  |              |        |              |  |   |        |  
|                              |  |              | 14,476 |              |  |   | 15,334 |  
|Less accumulated depreciation |  |              | (7,700 | )            |  |   | (7,116 | )
|                              |  |              |        |              |  |   |        |  
|                              |  | $            | 6,776  |              |  | $ | 8,218  |  
|                              |  |              |        |              |  |   |        |  



|Note D |  | Intangibles:                                                                                                                                                                                                                                                                              
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Intangibles consist of mask works, patents, licenses, and other
intangible assets acquired from third parties. Intangibles are recorded
at cost and amortized using the straight-line method over the estimated
useful lives of the respective assets, which range from two to five
years.
|      
|       |  | Intangible assets consisted of the following at September 30, 2003 (in
thousands):                                                                                                                                                                                                        

|                             |                                                       |   |             |       |              |   |        |        |   |   |       |       | 
|---------------------------- | ----------------------------------------------------- | - | ----------- | ----- | ------------ | - | ------ | ------ | - | - | ----- | ----- | 
|                             |                                                       |   | Acquisition |       | Accumulated  |   | Book  
|                             |                                                       |   | Value       |       | Amortization |   | Value 
|                             |                                                       |   |             |       |              |   |       
|Amortized Intangible Assets: |                                                       |   |             |       |              |   |        |        |   |   |       |      
|                             | Mask works                                            |   | $           | 5,739 |              |   | $      | (2,207 | ) |   | $     | 3,532 | 
|                             | Patents, patents pending, and other
intangible assets |   |             | 3,734 |              |   |        | (47    | ) |   |       | 3,687 | 
|                             | Licenses                                              |   |             | 2,954 |              |   |        | (1,230 | ) |   |       | 1,724 | 
|                             |                                                       |   |             |       |              |   |        |        |   |   |       |      
|                             |                                                       | $ | 12,427      |       |              | $ | (3,484 | )      |   | $ | 8,943 |      
|                             |                                                       |   |             |       |              |   |        |        |   |   |       |      



| |  | Intangible assets consisted of the following at December 31, 2002 (in
thousands):
| |  | ---------------------------------------------------------------------------------

|                             |                                                       |   |             |       |              |   |        |        |   |   |       |       | 
|---------------------------- | ----------------------------------------------------- | - | ----------- | ----- | ------------ | - | ------ | ------ | - | - | ----- | ----- | 
|                             |                                                       |   | Acquisition |       | Accumulated  |   | Book  
|                             |                                                       |   | Value       |       | Amortization |   | Value 
|                             |                                                       |   |             |       |              |   |       
|Amortized Intangible Assets: |                                                       |   |             |       |              |   |        |        |   |   |       |      
|                             | Mask works                                            |   | $           | 5,695 |              |   | $      | (1,655 | ) |   | $     | 4,040 | 
|                             | Patents, patents pending, and other
intangible assets |   |             | 3,431 |              |   |        | (10    | ) |   |       | 3,421 | 
|                             | Licenses                                              |   |             | 2,954 |              |   |        | (788   | ) |   |       | 2,166 | 
|                             |                                                       |   |             |       |              |   |        |        |   |   |       |      
|                             |                                                       | $ | 12,080      |       |              | $ | (2,453 | )      |   | $ | 9,627 |      
|                             |                                                       |   |             |       |              |   |        |        |   |   |       |      

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| |  | Intangible asset amortization expense for the nine months ended September
30, 2003 was $1.0 million compared to $1.3 million for the nine months
ended September 30, 2002. Estimated annual amortization expense through
2007 related to intangible assets reported as of September 30, 2003 is as
follows (in thousands):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |      |        |       |       | 
|----------- | ---- | ------ | ----- | ----- | 
|Fiscal Year |      | Amount
|            |      |       
|            | 2003 |        | $     | 160   | 
|            | 2004 |        |       | 2,445 | 
|            | 2005 |        |       | 2,515 | 
|            | 2006 |        |       | 2,318 | 
|            | 2007 |        |       | 737   | 
|Thereafter  |      |        | 768   |      
|            |      |        |       |      
|            |      | $      | 8,943 |      
|            |      |        |       |      



|Note E |  | Loss per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock
outstanding during the three- and nine-month periods ended September 30, 2003. Diluted loss per common share is
determined assuming that outstanding dilutive options and warrants were exercised at the beginning of the period or at
the time of issuance, if later. For the three- and nine-month periods ended September 30, 2003, the effect of
approximately 1.3 million shares were excluded from the calculation of loss per share as their effect would have been
antidilutive and decreased the loss per share.
|      
|       |  | Per share information is not presented for the three- and nine-month periods ended September 30, 2002 because we were
not a publicly held company during those periods. Loss per share information is presented for the three- and nine-month
periods ended September 30, 2003 as our common shares were issued on September 15, 2003. The calculation of loss per
share assumes that the common shares were outstanding for the entire period.                                                                                                                                                                                                
|      
|Note F |  | Segment Reporting, Sales to Major Customers, and Geographic Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      
|       |  | We have adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic
areas, and major customers.                                                                                                                                                                                                                                                                                                                              
|      
|       |  | Because the products we sell for use in near-to-eye and projection
devices share the same underlying technology and have similar economic
characteristics, production processes, and customer types, we operate and
report internally as one segment. All of our assets are located in the
United States.                                                                                                                                                                                                                                                                                                                                      
|      
|       |  | For the nine months ended September 30, 2003, sales to T Q Systems,
Kaiser Electronics, and Brashear LP accounted for approximately 14%, 12%,
and 10%, respectively, of our net sales. For the nine months ended
September 30, 2002, sales to Brashear LP and RCA Thompson accounted for
approximately 23% and 16%, respectively, of our net sales.                                                                                                                                                                                                                                                                                            
|      
|       |  | We also track net sales by geographic location. Net sales by geographic
area are determined based upon the location of the end customer. The
following includes net sales (in thousands) for our geographic areas:                                                                                                                                                                                                                                                                                                                                                                                                                             

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|                                      |  |         |     |      |  |        |     |       |  |   |     |  |  |   |       | 
|------------------------------------- |  | ------- | --- | ---- |  | ------ | --- | ----- |  | - | --- |  |  | - | ----- | 
|                                      |  | North   |     |      |  |        |     |       |  |   |     |  |  |  
|                                      |  | America |     | Asia |  | Europe |     | Total
|                                      |  |         |     |      |  |        |     |      
|Three months ended
September 30, 2003 |  |         |     |      |  |        |     |       |  |   |     |  |  |   |       | 
|Net sales                             |  | $       | 229 |      |  | $      | 155 |       |  | $ | 319 |  |  | $ | 703   | 
|Three months ended
September 30, 2002 |  |         |     |      |  |        |     |       |  |   |     |  |  |   |       | 
|Net sales                             |  | $       | 207 |      |  | $      | 87  |       |  | $ | 51  |  |  | $ | 345   | 
|Nine months ended
September 30, 2003  |  |         |     |      |  |        |     |       |  |   |     |  |  |   |       | 
|Net sales                             |  | $       | 925 |      |  | $      | 372 |       |  | $ | 537 |  |  | $ | 1,834 | 
|Nine months ended
September 30, 2002  |  |         |     |      |  |        |     |       |  |   |     |  |  |   |       | 
|Net sales                             |  | $       | 479 |      |  | $      | 170 |       |  | $ | 145 |  |  | $ | 794   | 



|Note G |  | Transactions with TFS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Prior to the Spin-Off, our costs and expenses included allocations from
TFS for centralized legal, accounting, treasury, quality assurance, real
estate, information technology, engineering, and other TFS corporate
services and infrastructure costs. These allocations were determined on
the basis that we and TFS considered to be reasonable reflections of the
utilization of services provided to, or the benefits received by, us.
Allocated costs included in our cost of sales totaled $322,000 and
$481,000 for the nine-month periods ended September 30, 2003 and 2002,
respectively. Allocated costs included in selling, general, and
administrative expenses totaled $2.5 million and $2.0 million for the
nine-month periods ended September 30, 2003 and 2002, respectively.
Allocated costs included in our research and development expenses totaled
$1.7 million and $3.6 million for the nine-month periods ended September
30, 2003 and 2002, respectively. The basis for the amounts allocated to
us included the following: legal, accounting, treasury, quality
assurance, and other TFS corporate functions, including officers
salaries, were allocated based on managements estimation of time devoted
to the microdisplay business for these functions; facility costs and
information technology services were allocated on the basis of headcount
of the microdisplay business, which is most representative of utilization
of these resources; and engineering services were allocated to us based
on the actual hours of services used. The allocation methodologies
utilized represent managements best estimate of the actual hours
utilized by the microdisplay business.
|      
|       |  | Our financial results subsequent to the Spin-Off may differ materially
from those recorded historically. These potential differences are the
result of several factors, including the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| | 1. |  | actual costs for services needed by our business may differ
from amounts historically allocated to us from TFS;                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | certain items, including facilities charges, that were
recorded by the TFS combined entity as depreciation will now be
recorded as rent expense by us, for which we will need to pay cash;
and
|
| | 3. |  | changes in the way we manage our business as a stand-alone
entity as opposed to a division may result in different business
decisions.                                                        



| |  | Prior to the Spin-Off, we and TFS entered into a series of agreements to
facilitate our separation from TFS. These agreements included certain
transitional services, leases, intellectual property transfers, and tax
sharing agreements. These agreements require us to pay a negotiated fee.
If we are unable to build an infrastructure to provide these services
internally, our operating results could be adversely affected.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Tax Sharing Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Under the Tax Sharing Agreement, we are liable for and have indemnified
TFS against any taxes (other than Separation Taxes) that are attributable
to us since our formation, even while we were a member of TFS federal
consolidated tax group. TFS has indemnified us against any taxes (other
than Separation Taxes) that are attributable to the businesses retained
by TFS. The Tax Sharing Agreement sets forth rules for determining taxes
attributable to us and taxes attributable to the businesses retained by
TFS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | We have agreed not to take any action that would cause the Spin-Off not
to qualify under Section 355 of the Internal Revenue Code of 1986, as
amended (the Code). We have agreed not to take certain actions for two
years following the Spin-Off unless we obtain an IRS ruling or an opinion
of counsel to the effect that these actions will not affect the tax-free
nature of the Spin-Off. These actions include certain issuances of our
stock, a liquidation or merger of our company, and dispositions of assets
outside the ordinary course of our business. If any of these
transactions were to occur, the Spin-Off could be deemed to be a taxable
distribution to TFS. This would subject TFS to a substantial tax
liability. We have indemnified TFS and its affiliates to the extent that
any action we take or fail to take gives rise to a tax incurred by TFS or
any of its affiliates with respect to the Spin-Off. In addition, we have
indemnified TFS for any tax resulting from an acquisition by one or more
persons of a 50% or greater interest in our company.                                                                                                                                                                                                                                                              
|
| |  | Transition Services Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We and TFS have entered into a Transition Services Agreement under which
TFS will provide to us certain administrative services that may be
necessary to our business. The most significant service that TFS will
provide to us relates to document control. TFS will charge us mutually
agreed upon hourly rates for these services. This agreement will expire
on August 31, 2004 unless the parties mutually agree upon a renewal or
unless earlier terminated by mutual consent of the parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Intellectual Property Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We and TFS have entered into an Intellectual Property Agreement under
which we granted to TFS a nonexclusive, royalty-free, worldwide,
perpetual, fully paid up license in and to all intellectual property that
was assigned to us and that is used in all fields other than in the field
of microdisplays. This intellectual property includes all patents,
copyrights, trademarks, tradenames, trade dress, trade secrets, know how,
and show how whether or not legal protection has been sought or obtained.
In addition, the license granted to TFS is non-assignable and
non-licensable to third parties except that TFS may sublicense its rights
to the intellectual property to any party or entity in which TFS owns at
least a 50% equity interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Real Property Sublease Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We and TFS have entered into a Real Property Sublease Agreement under
which we lease office and manufacturing space in the TFS headquarters
building. The initial term of the sublease expires August 31, 2005, with
two automatic one-year renewal terms thereafter unless either party
elects to terminate the sublease upon notice delivered at least six
months prior to the expiration of the then applicable sublease term. The
agreement also sets forth certain circumstances under which all or a
portion of the sublease may be terminated without penalty. We lease
approximately 42,500 square feet of the building from TFS and share
certain common areas in the building with TFS. Our fixed monthly rent
payable to TFS is approximately $40,000. This amount includes all normal
and customary services in connection with the operation and maintenance
of the building. This amount does not, however, include water or
electrical utilities, which we pay separately based on our use of those
items. The sublease also requires that TFS provide us with
facilities-related information technology management services, for which
we pay a minimum monthly fee of approximately $38,000. The sublease is
not assignable by us without the prior written consent of TFS, which
consent may be withheld by TFS in its sole discretion.

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|Note H |  | Commitments and Contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | In February 2002, we guaranteed up to $500,000 of the debt of VoiceViewer
Technology, Inc., a private start-up company developing microdisplay
products. As of September 30, 2003, the outstanding balance on the debt
was $382,000. This loan guarantee has a five year term and matures in
January 2007. At this time, no liability has been recognized by us. We
will be required to pay this guarantee to the lender if the start-up
company defaults on its debt obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      
|       |  | During June 2003, we loaned $60,000 under a short-term bridge loan
package to VoiceViewer. This loan bears interest at the rate of 7.0%
with interest due monthly and principal due on December 30, 2003. We
currently believe that VoiceViewer will be able to meet its obligations
under the debt facility guaranteed by us. We have a security interest
and second rights to the intellectual property of VoiceViewers
technology, while the lending institution has the first rights. However,
we would obtain the VoiceViewer intellectual property if we are required
in the future to pay amounts under the guarantee.                                                                                                                                                                                                                                                                                                                                                           
|      
|Note I |  | Income Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      
|       |  | During the third quarter of 2003, we recorded a benefit from income taxes
of $160,000. When the assets and liabilities were transferred to us from
TFS, we recorded a net deferred tax liability of $1.1 million related to
differences between the book and tax basis of the assets transferred to
us. As we incur tax losses subsequent to the Spin-Off, we will record a
benefit for income taxes until we have offset this entire net deferred
tax liability. All of the tax benefit related to our losses incurred
was retained by TFS after the Spin-Off. We do not expect to record a
deferred tax asset for the tax benefit on any losses that we may incur
after the deferred tax liability has been offset, until we believe it is
more likely than not that all or a portion of the deferred tax asset will
be realized.                                                                                                                                                      
|      
|Note J |  | Stock Compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      
|       |  | Our 2003 Incentive Compensation
Plan was adopted by our board of directors
and approved by our stockholder on August 26, 2003. Under the 2003
Incentive Compensation Plan, an aggregate of 1,650,000 shares of common
stock may be issued pursuant to options granted to acquire common stock,
the direct granting of restricted common stock and deferred stock, the
granting of stock appreciation rights, and the granting of dividend
equivalents. On the first day of each fiscal year, an additional number
of shares equal to 4% of the total number of shares then outstanding will
be added to the number of shares that may be subject to the granting of
awards.                                                                                                                                                                                                                                                                                                              
|      
|       |  | Pursuant to the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, we account for options granted to our employees pursuant to
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees. We have computed compensation cost, for pro forma
disclosure purposes, based on the fair value of all options awarded on
the date of grant, utilizing the Black-Scholes option pricing method with
the following weighted assumptions: risk-free interest rates of 2.46% for
all scenarios; expected dividend yields of zero for all scenarios;
expected lives of 5.0 years for all scenarios; and expected volatility (a
measure of the amount by which a price has fluctuated or is expected to
fluctuate during a period) of 74% for all scenarios. Had compensation
cost for these plans been determined consistent with SFAS No. 123, our
net loss and loss per share would have been as follows (in thousands,
except per share data):

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|                                      |                                                                                                                              |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                      |                                                                                                                              |  | Three Months Ended |        | Nine Months Ended
|                                      |                                                                                                                              |  | September 30,      |        | September 30,    
|                                      |                                                                                                                              |  |                    |        |                  
|                                      |                                                                                                                              |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                      |                                                                                                                              |  |                    |        |                   |  |      |        |     
|Net loss:                             |                                                                                                                              |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |  | $                  | (4,482 | )                 |  | $    | (5,122 | )    |  | $ | (13,831 | ) |  | $ | (18,250 | )
|                                      | Total stock-based compensation

expenses determined under fair
value based method for all
awards, net of related tax
effects |  |                    | (52    | )                 |  |      |       |      |  |   | (52     | ) |  |   |        |  
|                                      |                                                                                                                              |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                                      | Pro forma net loss                                                                                                           |  | $                  | (4,534 | )                 |  | $    | (5,122 | )    |  | $ | (13,883 | ) |  | $ | (18,250 | )
|                                      |                                                                                                                              |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        
|Basic and diluted net loss per share: |                                                                                                                              |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |  | $                  | (0.84  | )                 |  |      |        |      |  | $ | (2.59   | ) |  |   |         |  
|                                      | Pro forma                                                                                                                    |  | $                  | (0.85  | )                 |  |      |        |      |  | $ | (2.60   | ) |  |   |         |  



|       |  | Pursuant to the terms of the Master Separation and Distribution
Agreement, each outstanding TFS option granted prior to the Spin-Off was
converted into both an adjusted TFS option and a substitute Brillian
option. The treatment of such TFS options is identical for those
employees who remained employees of TFS after the Spin-Off and for those
employees who became employees of Brillian in connection with the
Spin-Off. These TFS options were converted in a manner that preserved
the aggregate exercise price of each option, which was allocated between
the adjusted TFS option and the substitute Brillian option based on a
comparison of the market capitalization of TFS and Brillian after the
record date. Both options, when combined, preserved the intrinsic value
of the existing option, and each preserved the ratio of the exercise
price to the fair market value of the stock subject to the option. For
employees who remained employees of TFS after the Spin-Off, employment
with TFS will be taken into account in determining when each substitute
Brillian option becomes exercisable and when it terminates, and in all
other respects the terms of the substitute option is substantially the
same as the original TFS option. Pursuant to this arrangement, on
September 15, 2003, we granted options to purchase 754,651 shares of
Brillian common stock. Of these options, 604,357 were granted to
employees who remained employees of TFS after the Spin-Off.
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | In addition to the Brillian substitute options granted pursuant to the
terms of the Master Separation and Distribution Agreement, on September
4, 2003, we granted options to our employees to purchase approximately
526,000 shares of our common stock with an exercise price of $6.50 per
share. Options with respect to approximately 300,000 shares have a
vesting period of 32 months, and the remainder have vesting periods of 50
months. Additionally, on September 4, 2003, we granted approximately
56,000 shares of restricted stock to employees with a vesting period of
one year. In connection with these grants of options and restricted
stock, we recorded deferred compensation of $1.5 million as of September
30, 2003. The total amount of deferred compensation will be expensed
over the vesting terms of the options and shares of restricted stock.
During the three- and nine-month periods ended September 30, 2003, we
recorded non-cash compensation expense of $67,000 related to these
restricted stock and option grants. The non-cash compensation expense
was recorded as a component of cost of sales  products; selling, general
and administrative expense; and research and development in the amounts
of $9,000, $33,000, and $25,000, respectively.                                                                                                                                                                                                           
|      
|Note K |  | Recently Issued Accounting Standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|       |  | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -Transition and Disclosure. This Statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. We have adopted the disclosure requirements of SFAS
No. 148.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      
|       |  | In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This
Interpretation addresses the disclosures to be made by a guarantor in its
financial statements and its obligations under guarantees. The
Interpretation also clarifies the requirements related to the recognition
of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  | a liability by the guarantor at the inception of a guarantee. Under the
Interpretation, initial recognition of a liability is applied only on a
prospective basis to guarantees issued or modified after December 31,
2002. We adopted the requirements of FIN 45 as of January 1, 2003, and
there was no material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
expectations, anticipation, intentions, beliefs, or strategies
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for fiscal 2003 and
thereafter; technological innovations; future products or product development;
our product development strategies; potential acquisitions or strategic
alliances; the success of particular product or marketing programs; the amounts
of revenue generated as a result of sales to significant customers; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this report are based on information available to us as
of the filing date of this report, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially
from the forward-looking statements.

Overview

We develop, manufacture, and market microdisplay products utilizing our
liquid crystal on silicon, or LCoS®, microdisplay technology for a variety of
markets. These markets include rear projection, high-definition televisions;
front-projector multimedia and home theater projectors; and near-to-eye, or
personal, display applications, including head-mounted monocular or binocular
headsets and viewers for industrial, medical, military, commercial, and
consumer applications. Our LCoS microdisplays consist of a CMOS backplane,
liquid crystal layer, and glass packaged for connectivity using highly advanced
packaging technologies.

We derive revenue from the sale of our microdisplay products and from
providing design and engineering services. During 2002, we recorded revenue
from product sales of $772,000, or 53.6% of net sales, and revenue from design
and engineering services of $667,000, or 46.4% of net sales. We have never
been profitable.

Prior to the Spin-Off, we operated as a division of TFS. In anticipation
of the Spin-Off, TFS organized us as a wholly owned subsidiary. TFS
transferred to us its entire LCoS microdisplay business, including all related
manufacturing and business assets, personnel, and intellectual property. TFS
also provided initial cash funding in the amount of $22 million less Spin-Off
related costs paid by TFS.

Historically, our operating losses and capital expenditures were funded by
TFS. We no longer have access to the assets and resources of TFS. Based on
current conditions, we believe the initial cash funding of $22 million will be
adequate for us to pay the expenses of the Spin-Off and to fund our current
level of operations and planned expenditures through 2004. However, if we are
successful in launching our rear projection television (RPTV) product in
2004, we will require additional funding for increased working capital. If we
are not successful in launching our RPTV product, in order to continue
operating past 2004, it may be necessary to reduce substantially our operating
losses (through increased sales, reduced expenses, or both) or to raise
additional funds. We cannot provide assurance that we will be able to reduce
our operating losses or that additional capital will be available to us.

We share occupancy with TFS in a building owned by TFS in Tempe, Arizona.
We manufacture all of our LCoS microdisplays on our high-volume liquid crystal
on silicon manufacturing line in that Tempe facility, where we also maintain
our corporate headquarters. In addition, we conduct all testing and assembly
of LCoS modules in Tempe. We also operate a facility in Boulder, Colorado,
which focuses on our near-to-eye product offerings. In Boulder, we conduct
sales and marketing activities and research and development activities related
to near-to-eye products.

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We started the development of LCoS microdisplays in 1997 as a division of
TFS. In August 1997, we entered into a strategic alliance with National
Semiconductor Corporation for the development of LCoS microdisplay products.
Under that alliance, National Semiconductor focused on the silicon technologies
needed for microdisplays, and we focused on the liquid crystal technologies. In
1999, National Semiconductor decided to close its microdisplay business unit.
In connection with that closing, in July 1999, we purchased certain assets and
licensed silicon technologies from National Semiconductor relating to LCoS
microdisplays. We paid approximately $3.0 million in cash and issued warrants
to purchase 140,000 shares of TFS common stock in the transaction, which valued
the transaction at approximately $3.6 million. No additional payments are
required under the licenses. We also hired several key technical employees of
National Semiconductor to assist in the implementation of the acquired
technologies.

In April 1998, we entered into a strategic relationship with Inviso, Inc.,
a privately held company with numerous patents and proprietary technology
related to microdisplay development. We acquired a minority equity interest in
Inviso for approximately $3.3 million. In March 2000, we acquired an additional
interest in Inviso for $500,000, raising our total minority equity interest to
$3.8 million. As part of this strategic relationship, we provided proprietary
manufacturing capabilities and liquid crystal expertise, and Inviso provided
patented and proprietary technologies and components for the joint development
of microdisplay products. In the second quarter of 2001, we wrote off our
investment of $3.8 million in Inviso because we determined that our investment
was impaired, as that term is defined under generally accepted accounting
principles. Subsequent to our write-off, Inviso was unable to raise funds to
operate its business and ceased operations. In the second quarter of 2002, we
purchased all of the intellectual property of Inviso for $780,000.

In August 1999, we licensed the microdisplay technology of S-Vision
Corporation, a former microdisplay competitor that had recently ceased
operations. Under this agreement, we acquired an irrevocable, royalty free,
fully paid-up, worldwide license to the intellectual property associated with
S-Visions digital backplane and optical systems, which provides us rights to
manufacture certain microdisplay products and patented optical engines. In
addition, S-Vision assigned to us a patent relating to the design and
manufacture of microdisplay products.

In March 2001, we invested $1.25 million in Silicon Bandwidth, Inc., a
privately held company providing unique semiconductor and optoelectronic
interconnect solutions based upon multiple, patented, proprietary technologies.
We are working closely with Silicon Bandwidth to design unique, cost-effective,
reconfigurable packaging platforms for LCoS microdisplays.

In January 2002, we hired seven key technical persons formerly employed by
Zight Corporation, a private company focused on microdisplays for personal
display system applications. At that time, Zight had ceased operations. We then
purchased certain assets of Zight at a liquidators auction for approximately
$600,000. Following that auction, we then negotiated with the representatives
of the defunct Zight Corporation to purchase its intellectual property for
approximately $2.0 million.

In July 2002, we invested $5.0 million in ColorLink, Inc. ColorLink has a
leading position worldwide in the development and manufacture of color
management technologies for LCoS microdisplays. ColorLinks products consist of
color management components and system architectures that are critical for
digital projection systems that use high-resolution microdisplays. Those
projection systems include color monitors, high-definition televisions, and
multi-media projectors. This investment furthers our efforts to accelerate as
much as possible the establishment of the necessary infrastructure for LCoS
microdisplays. An additional $81,000 was recorded as investment in ColorLink
during the third quarter of 2002 for legal and due diligence expenses.

Until early 2002, substantially all of our sales were for use in
projection-based applications. After the purchase of the Zight assets, however,
we became equally focused on the near-to-eye market. We derive revenue from
both development contracts and product sales.

We typically sell three displays and associated electronics for products
in the projector market. In the near-to-eye market, we sell either one or two
displays and associated electronics. The displays and electronics are sold
together as a kit. We also sell optical modules in the near-to-eye market.The
selling price of our products range from between $90 and $1,000 per unit.

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Our gross margins are influenced by various factors, including
manufacturing efficiencies, yields, absorption issues, product mix, product
differentiation, product uniqueness, inventory management, and volume pricing.
The most significant impact on our gross margins is the manufacturing-related
issues. To date, our manufacturing capacity has exceeded our manufacturing
volume, resulting in the inability to fully absorb the cost of our
manufacturing infrastructure. As a result, we expect that it will be difficult
to attain significant improvements in yields until we run higher volumes.

Selling, general, and administrative expense consists principally of
administrative and selling costs; salaries, commissions, and benefits to
personnel; and related facility costs. We make substantially all of our sales
directly to OEMs through a very small sales force that consists primarily of
direct technical sales persons. Therefore, there is no material cost of
distribution in our selling, general, and administrative expense.

Research and development expense consists principally of salaries and

benefits to scientists, engineers, and other technical personnel; related
facility costs; process development costs; and various expenses for projects,
including new product development. Research and development expense continues
to be high since LCoS microdisplays are a new technology.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
During preparation of these financial statements, we are required to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to bad debts, inventories, investments, fixed assets,
intangible assets, income taxes, and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances. The results form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

We recognize revenue from product sales when persuasive evidence of a sale
exists; that is, a product is shipped under an agreement with a customer; risk
of loss and title have passed to the customer; the fee is fixed and
determinable; and collection of the resulting receivable is reasonably assured.
Sales allowances are estimated based upon historical experience of sales
returns.

We recognize revenue related to design and engineering services depending
on the relevant contractual terms. Under fixed-price contracts that contain
project milestones, revenue is recognized as milestones are met. For contracts
under which revenue is recognized based on milestones, the fair value of
milestones completed equals the fair value of work performed. Under a fixed
price contract under which we are paid based on performance of tasks, we
recognize revenue based on the estimated percentage of completion of the entire
project as measured by the costs for man hours and materials. Any anticipated
losses on fixed price contracts are recorded in the period they are
determinable. Revenue related to design and engineering services is recognized
based on these methods and is non-refundable.

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
determine the adequacy of this allowance by regularly evaluating individual
customer receivables and considering a customers financial condition, credit
history, and current economic conditions. If the financial condition of our
customers were to deteriorate, additional allowances could be required.

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We write down our inventory for estimated obsolescence or unmarketable
inventory. We write down our inventory to estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by us, additional inventory
write-downs may be required.

Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, requires
that a valuation allowance be established when it is more likely than not that
all or a portion of a deferred tax asset will not be realized. Changes in
valuation allowances from period to period are included in our tax provision in
the period of change. In determining whether a valuation allowance is
required, we take into account all evidence with regard to the utilization of a
deferred tax asset, including our past earnings history, expected future
earnings, the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization
of a deferred tax asset, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset. The tax benefit for the previous losses remain with TFS. In the near
term, once we have reversed the deferred tax liability recorded in connection
with the Spin-Off, we do not expect to accrue for a tax benefit on any losses
that we incur.

Long-term assets, such as property, plant, and equipment, intangibles, and
other investments, are originally recorded at cost. On an on-going basis, we
assess these assets to determine if their current recorded value is impaired.
When assessing these assets, we consider projected future cash flows to
determine if impairment is applicable. These cash flows are evaluated for
objectivity by using weighted probability techniques and also comparisons of
past performance against projections. We may also identify and consider
independent market values of assets that we believe are comparable. If we were
to believe that an assets value was impaired, we would write down the carrying
value of the identified asset and charge the impairment as an expense in the
period in which the determination was made.

Our historical financial statements for periods prior to the Spin-Off
include those assets, liabilities, revenues, and expenses directly attributable
to our operations and allocations of certain TFS corporate expenses to us.
These amounts have been allocated to us on the basis that we and TFS considered
to reflect most fairly or reasonably the utilization of the services provided
to, or the benefits received by, us. We believe the methods used to allocate
these amounts are reasonable.

The financial information for periods prior to the Spin-Off included
herein is not necessarily indicative of our future financial position, results
of operations, or cash flows, nor is it necessarily indicative of what the
financial position, results of operations, and cash flows would have been had
we operated as a stand-alone public entity during the periods covered. The
financial statements for periods prior to the Spin-Off do not reflect the many
significant changes that have occurred in our funding and operations as a
result of becoming a stand-alone public entity.

Prior to the Spin-Off, our costs and expenses included allocations from
TFS for centralized legal, accounting, treasury, quality assurance, real
estate, information technology, engineering, and other TFS corporate services
and infrastructure costs. These allocations were determined on the basis that
we and TFS considered to be reasonable reflections of the utilization of
services provided to, or the benefits received by, us. Allocated costs
included in our cost of sales totaled $322,000 and $481,000 for the nine-month
periods ended September 30, 2003 and 2002, respectively. Allocated costs
included in selling, general, and administrative expenses totaled $2.5 million
and $2.0 million for the nine-month periods ended September 30, 2003 and 2002,
respectively. Allocated costs included in our research and development
expenses totaled $1.7 million and $3.6 million for the nine-month periods ended
September 30, 2003 and 2002, respectively.

The determination and basis of the amounts of costs and expenses allocated
to us varied depending on the situation. Legal, accounting, treasury, quality
assurance, and other TFS corporate functions including officers salaries, were
allocated based on managements estimation of time devoted to the microdisplay
business for these functions. Facility costs and information technology
services were allocated on the basis of headcount of the microdisplay business,
which is most representative of utilization of these resources. Engineering
services were allocated to us based on the actual hours of services used. The
allocation methodologies utilized represent managements best estimate of the
actual hours utilized by the microdisplay business.

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Our financial results subsequent to the Spin-Off may differ materially
from those recorded historically. These potential differences are the result
of several factors, including the following:



| |  | 1. actual costs for services needed by our business may differ from
amounts historically allocated to us from TFS;                                                                               
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2. certain items, including facilities charges, that were recorded by
the TFS combined entity as depreciation will now be recorded as rent
expense by us, for which we will need to pay cash; and
|
| |  | 3. changes in the way we manage our business as a stand-alone entity as
opposed to a division may result in different business decisions.                                                        

While we do not anticipate that the actual costs for services needed by
our business will initially differ materially from amounts historically
allocated to us from TFS, we will no longer be part of a larger organization;
therefore, certain expense items may increase more rapidly. If this occurs and
we are unable to decrease other expense items or increase revenue to offset
this increased expense, our results of operations will be adversely affected.

Because our business serves new and developing markets and is based on a
relatively new technology, accurately forecasting revenue for a particular
future period is difficult. The majority of our product sales to customers are
for their use in designing their end products or for improving their production
processes as opposed to volume production lots. Therefore, the amount of
revenue recorded in any given period may fluctuate significantly, and
predictable revenue trends have not yet developed. While we anticipate that
our revenue will increase, there can be no assurances that this will occur or
when it will occur. Because a significant amount of our expenses are fixed in
nature and we still experience low manufacturing yields, we anticipate that the
amount of revenue recognized during the remainder of 2003 and the first half of
2004 will not result in a material impact to our cash consumption rate. We do
anticipate, however, that as we move into volume production, we will improve
our manufacturing yields and more fully absorb our fixed costs, which will
result in improvements in our cash consumption rate later in 2004 and beyond.

We and TFS have entered into a series of agreements to facilitate our
separation from TFS. These agreements include certain transitional services,
leases, intellectual property transfers, and tax sharing agreements. These
agreements require us to pay a negotiated fee. If we are unable to build an
infrastructure to provide these services internally, our operating results
could be adversely affected.

Results of Operations

Three months ended September 30, 2003 compared to three months ended
September 30, 2002

Net Sales.Net sales increased 103.8% to $703,000 in the third quarter of
2003 from $345,000 in the third quarter of 2002. Product sales increased to
$602,000 in the third quarter of 2003 from $194,000 in the third quarter of
2002. Design and engineering services revenue decreased to $101,000 in the
third quarter of 2003 from $151,000 in the third quarter of 2002.

Net sales in the near-to-eye market totaled $318,000 in the third quarter
of 2003 and $239,000 in the third quarter of 2002. In January 2002, we hired
seven key technical persons formerly employed by Zight Corporation, a private
company focused on microdisplays for personal display system applications. At
that time, Zight had ceased operations. We then purchased certain assets of
Zight at a liquidators auction for approximately $600,000. Following that
auction, we then negotiated with the representatives of the defunct Zight
Corporation to purchase its intellectual property for approximately $2.0
million. Prior to this series of transactions, substantially all of our sales
were for use in projection-based applications. Net sales in the projection
market totaled $385,000 in the third quarter of 2003 compared to $106,000 in
the comparable period of 2002.

Net sales in North America totaled $229,000, or 32.6% of total net sales,
in the third quarter of 2003 compared to $207,000, or 60.0% of total net sales,
in the third quarter of 2002. Net sales in Asia totaled $155,000, or 22.0% of
total net sales, in the third quarter of 2003 compared to $87,000, or 25.2% of
total net sales, in the third quarter of 2002. The remainder of our net sales
were in Europe.

Cost of Sales.Cost of sales was $2.4 million, or 338% of net sales, in
the third quarter of 2003 compared to $2.6 million, or 765% of net sales, in
the third quarter of 2002. Cost of sales for the third quarter of 2003

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included a $153,000 write-down of inventory compared to $256,000 in the
third quarter of 2002. Effective as of the Spin-Off date, certain costs that
previously were included in research and development expense have been included
in cost of sales. These are costs related to personnel expense, facilities,
depreciation, and amortization from departments involved in product and process
engineering after a product or process has been released to manufacturing.
When we were part of TFS, these costs were accounted for as research and
development expense because microdisplays represented new technology within the
entire TFS product family. Now that we are independent and our entire focus is
on microdisplays, these costs are more appropriately accounted for in cost of
sales. For the third quarters of 2003 and 2002, $939,000 and $1.5 million,
respectively, have been reclassified from research and development to cost of
sales. The large negative gross margin in each period resulted primarily from
the low volume of shipments and low manufacturing yields in the shipped
products. To date, our manufacturing capacity has exceeded our manufacturing
volume, resulting in the inability to fully absorb the cost of our
manufacturing infrastructure. As is typical in most segments of the
high-technology industry, we anticipate downward pressure on the prices of our
products. A significant portion of our manufacturing costs are fixed in nature
and consist of items such as utilities, depreciation, and amortization. The
amount of these costs do not vary period to period based on the number of units
produced nor can the amounts of these costs be adjusted in the short term.
Therefore, in periods of lower production volume, these fixed costs are
absorbed by a lower number of units, thus increasing the cost per unit. As a
result, we expect it will be difficult to attain significant improvements in
gross margins until we can operate at higher production volumes. Cost of sales
for design and engineering services decreased to $97,000 in the third quarter
of 2003 from $131,000 in the third quarter of 2002 due to the decrease in
design and engineering services provided to customers.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 41.7% to $1.2 million in the third quarter of
2003 from $825,000 in the third quarter of 2002. The increase in the third
quarter of 2003 was primarily a result of recording expenses of approximately
$699,000 associated with the Spin-Off.

Research and Development Expense.Research and development expense
decreased 9.5% to $1.8 million in the third quarter of 2003 from $2.0 million
in the third quarter of 2002. The decrease in the third quarter of 2003 was due
to cost reduction efforts that resulted in lower headcount and, therefore,
lower personnel costs in comparison to the third quarter of 2002. All of our
research and development expense relates to ongoing efforts to develop LCoS
microdisplay products as well as our continued development and improvement of
the manufacturing process for LCoS microdisplays.

Benefit from Income Taxes.During the third quarter of 2003, we recorded
a benefit from income taxes of $160,000. When the assets and liabilities were
transferred to us from TFS, we recorded a net deferred tax liability of $1.1
million related to differences between the book and tax basis of the assets
transferred to us. As we incur tax losses subsequent to the Spin-Off, we will
record a benefit for income taxes until we have offset this entire net deferred
tax liability. All of the tax benefit related to our losses incurred was
retained by TFS after the Spin-Off. We do not expect to record a deferred tax
asset for the tax benefit on any losses that we may incur after the deferred
tax liability has been offset, until we believe it is more likely than not that
all or a portion of the deferred tax asset will be realized.

Net Loss.Net loss was $4.5 million in the third quarter of 2003 compared
to a net loss of $5.1 million in the third quarter of 2002.

Nine months ended September 30, 2003 compared to nine months ended
September 30, 2002

Net Sales.Net sales increased 131% to $1.8 million in the first nine
months of 2003 from $794,000 in the first nine months of 2002. Product sales
increased to $1.4 million in the first nine months of 2003 from $516,000 in the
first nine months of 2002. Design and engineering services revenue increased
to $423,000 in the first nine months of 2003 from $278,000 in the first nine
months of 2002.

Net sales in the near-to-eye market totaled $738,000 in the first nine
months of 2003 and $336,000 in the first nine months of 2002. In January 2002,
we hired seven key technical persons formerly employed by Zight Corporation, a
private company focused on microdisplays for personal display system
applications. At that time,

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Zight had ceased operations. We then purchased certain assets of Zight at a
liquidators auction for approximately $600,000. Following that auction, we
then negotiated with the representatives of the defunct Zight Corporation to
purchase its intellectual property for approximately $2.0 million. Prior to
this series of transactions, substantially all of our sales were for use in
projection-based applications. Net sales in the projection market totaled $1.1
million in the first nine months of 2003 as compared to $458,000 in the first
nine months of 2002.

Net sales in North America totaled $925,000, or 50.4% of total net sales,
in the first nine months of 2003 compared to $479,000, or 60.3% of total net
sales, in the first nine months of 2002. Net sales in Asia totaled $372,000,
or 20.3% of total net sales, in the first nine months of 2003 compared to
$170,000, or 21.4% of total net sales, in the first nine months of 2002. The
remainder of our net sales were in Europe.

Cost of Sales.Cost of sales was $7.2 million, or 392% of net sales, in
the first nine months of 2003 compared to $9.8 million, or 1,232% of net sales,
in the first nine months of 2002. Cost of sales for the first nine months of
2003 included a $216,000 write-down of inventory compared to $1.2 million in
the first nine months of 2002. Effective as of the Spin-Off date, certain
costs that previously were included in research and development expense have
been included in cost of sales. These are costs related to personnel expense,
facilities, depreciation, and amortization from departments involved in product
and process engineering after a product or process has been released to
manufacturing. When we were part of TFS, these costs were accounted for as
research and development expense because microdisplays represented new
technology within the entire TFS product family. Now that we are independent
and our entire focus is on microdisplays, these costs are more appropriately
accounted for in cost of sales. For the first nine months of 2003 and 2002,
$3.6 million and $5.0 million, respectively, have been reclassified from
research and development to cost of sales. The large negative gross margin in
each period resulted primarily from the low volume of shipments and low
manufacturing yields in the shipped products. To date, our manufacturing
capacity has exceeded our manufacturing volume, resulting in the inability to
fully absorb the cost of our manufacturing infrastructure. As is typical in
most segments of the high-technology industry, we anticipate downward pressure
on the prices of our products. A significant portion of our manufacturing
costs are fixed in nature and consist of items such as utilities, depreciation,
and amortization. The amount of these costs do not vary period to period based
on the number of units produced nor can the amounts of these costs be adjusted
in the short term. Therefore, in periods of lower production volume, these
fixed costs are absorbed by a lower number of units, thus increasing the cost
per unit. As a result, we expect it will be difficult to attain significant
improvements in gross margins until we can operate at higher production
volumes. Cost of sales for design and engineering services increased to
$380,000 in the first nine months of 2003 from $255,000 in the first nine
months of 2002 due to the increase in design and engineering services provided
to customers.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 30.2% to $3.4 million in the first nine months
of 2003 from $2.6 million in the first nine months of 2002. The increase in
the first nine months of 2003 was primarily a result of recording expenses of
approximately $1.5 million associated with the Spin-Off.

Research and Development Expense.Research and development expense
decreased 21.4% to $5.2 million in the first nine months of 2003 from $6.6
million in the first nine months of 2002. The decrease in the first nine months
of 2003 was due to cost reduction efforts that resulted in lower headcount and,
therefore, lower personnel costs in comparison to the first nine months of
2002. All of our research and development expense relates to ongoing efforts
to develop LCoS microdisplay products as well as our continued development and
improvement of the manufacturing process for LCoS microdisplays.

Benefit from Income Taxes.During the first nine months of 2003, we
recorded a benefit from income taxes of $160,000. When the assets and
liabilities were transferred to us from TFS, we recorded a net deferred tax
liability of $1.1 million related to differences between the book and tax basis
of the assets transferred to us. As we incur tax losses subsequent to the
Spin-Off, we will record a benefit for income taxes until we have offset this
entire net deferred tax liability. All of the tax benefit related to our
losses incurred was retained by TFS after the Spin-Off. We do not expect to
record a deferred tax asset for the tax benefit on any losses that we may incur
after the deferred tax liability has been offset, until we believe it is more
likely than not that all or a portion of the deferred tax asset will be
realized.

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Net Loss.Net loss was $13.8 million in the first nine months of 2003
compared to a net loss of $18.3 million in the first nine months of 2002.

Liquidity and Capital Resources

At September 30, 2003, we had cash and cash equivalents of $19.5 million.
At December 31, 2002, we had no cash or cash equivalents. At that time, we
were a division of TFS and all cash needs were funded by TFS on an as needed
basis.

In the first nine months of 2003, we had $12.1 million in net cash outflow
from operations compared to $16.6 million in the first nine months of 2002.
Most of the cash outflow in each period related to our losses, since we had
very little change in our working capital in each period. Our depreciation and
amortization expense was $2.7 million in the first nine months of 2003 and $2.5
million in the first nine months of 2002. Prior to the Spin-Off, our entire
cash outflow was funded by TFS on an as needed basis.

In the first nine months of 2003, net cash used for investing activities
totaled $557,000, which was primarily a result of the purchase of intangible
assets related to mask sets and tooling investments.

Capital expenditures and other investments during the first nine months of
2002 were approximately $12.7 million, which consisted of the following: $3.0
million related to the purchase of manufacturing equipment; $4.7 million
related to purchases of intangible assets, such as the intellectual property
from Zight and Inviso as well as mask sets and related tooling investments; and
$5.1 million related to our investment in ColorLink.

We no longer have access to the assets and resources of TFS. As a result,
in order to continue operating past 2004, and based on current conditions, it
will be necessary for us to reduce substantially our operating losses (through
increased sales, reduced expenses, or both) or to raise additional funds.
Because a significant amount of our manufacturing costs are fixed and cannot be
reduced in the near term, we must increase the sales of our existing
microdisplay products and develop new products to sell as the existing products
fulfill their product life cycles. We have no commitments for or
understandings regarding any additional funding with any person or firm. We
can provide no assurance that we will be able to obtain any necessary financing
on satisfactory terms, particularly because we will no longer have the assets
or resources of TFS previously available to us with respect to any such
financing that we may require.

If we are unable to increase our sales or obtain additional financing, the
primary cost component that can be reduced in a timely manner is personnel
related costs, the majority of which relate to our research and development
efforts. If we were to significantly reduce our research and development
efforts, our ability to develop new products to replace existing products that
have reached the end of the product life cycle would be diminished, which would
further hamper our ability to achieve profitability.

Based on current conditions, we believe the initial cash funding of $22
million will be adequate for us to pay the expenses of the Spin-Off and to fund
our current level of operations and planned expenditures through 2004.
However, if we are successful in launching and marketing our RPTV product in
2004, we will require additional funding for increased working capital. If we
are not successful in launching our RPTV product, in order to continue
operating past 2004, it may be necessary to reduce substantially our operating
losses (through increased sales, reduced expenses, or both), or to raise
additional funds. Although no assurances can be given, we believe that we will
be able to increase our revenue to the extent necessary to fund our operations
and planned expenditures beyond 2004. We also believe that if we are
successful in launching and marketing our RPTV product in 2004, we will be able
to obtain the necessary funding for increased working capital. However,
because we are serving new and developing markets with a relatively new
technology, accurately forecasting revenue for any given future period is
difficult and creates uncertainty as to our ability to obtain additional debt
or equity financing. We believe that obtaining design wins with respect to
which an OEM designs our display into their product, which reaches volume
production, and/or establishing a relationship with a channel partner to
distribute our RPTV product represent significant and critical milestones.
Once one or more of these milestones have been achieved, we believe that
further design wins and channel partner relationships can be obtained.
Additionally, we believe that design wins

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that result in volume production and channel partner relationships
increase our ability to raise additional debt or equity financing.

Aggregate Contractual Obligations

The following table lists our commercial commitments (in thousands):

|                             |  |           |       |             |  |                                            |       |           |  |          |       |  |  |         |    |  |  |   |   | 
|---------------------------- |  | --------- | ----- | ----------- |  | ------------------------------------------ | ----- | --------- |  | -------- | ----- |  |  | ------- | -- |  |  | - | - | 
|                             |  |           |       |             |  | Amount of Commitment Expiration Per Period
|                             |  |           |       |             |  |                                           
|                             |  | Total     |       |             |  |                                            |       |           |  |          |       |  |  |         |    |  |  |  
|Other Commercial Commitments |  | Amounts   |       | Less than 1 |  |                                            |       |           |  |          |       |  |  | 6 Years
|(in thousands)               |  | Committed |       | Year        |  | 1-3 Years                                  |       | 4-5 Years |  | and Over
|                             |  |           |       |             |  |                                            |       |           |  |         
|Facilities leases            |  | $         | 2,016 |             |  | $                                          | 1,008 |           |  | $        | 1,008 |  |  | $       |   |  |  | $ |  | 
|Guarantee                    |  | $         | 382   |             |  | $                                          | 92    |           |  | $        | 203   |  |  | $       | 87 |  |  | $ |  | 

At present, the only contractual operating commitments we have are the
property leases for our Tempe headquarters and for our development center in
Boulder, Colorado. The guarantee relates to our guarantee in connection with a
Small Business Administration loan to VoiceViewer Technology, Inc., a private
company developing microdisplay products. If the lending institution were to
declare VoiceViewer to be in default under the loan, we would be required to
pay the guaranteed amount.

During June 2003, we loaned $60,000 under a short-term bridge loan package
to VoiceViewer. This loan bears interest at the rate of 7.0% with interest due
monthly and principal due on December 30, 2003. We currently believe that
VoiceViewer will be able to meet its obligations under the debt facility
guaranteed by us. We have a security interest and second rights to the
intellectual property of VoiceViewers technology, while the lending
institution has the first rights. However, we would obtain the VoiceViewer
intellectual property if in the future we are required to pay amounts under the
guarantee.

We have no debt. In addition, we have no capital lease obligations,
unconditional purchase obligations, other long-term obligations, or any other
commercial commitments except as noted above.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Impact of Recently Issued Standards

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -Transition and Disclosure. This Statement amends
SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. Specifically, SFAS No. 148 prohibits companies from utilizing
the prospective method of transition, the only method offered under the
original SFAS No. 123, in fiscal years beginning after December 15, 2003. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results using a prescribed tabular format
and requiring disclosure in the Summary of Significant Accounting Policies or
its equivalent. We intend to continue to measure stock-based compensation for
option grants using the intrinsic value method pursuant to APB No. 25,
Accounting for Stock Issued to Employees. We have adopted the new disclosure
requirements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This Interpretation addresses
the disclosures to be made by a guarantor in its financial statements and its
obligations under guarantees. The Interpretation also clarifies the
requirements related to the recognition of a liability by the guarantor at the
inception of a guarantee. Under the Interpretation, initial recognition of a
liability is applied only on a prospective basis to guarantees issued or
modified after December 31, 2002. We adopted the requirements of FIN 45 as of
January 1, 2003, and there was no material impact on our financial position or
results of operations.

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|        |  |                                                           
|------- |  | ----------------------------------------------------------
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

At September 30, 2003, we did not participate in any derivative financial
instruments, or other financial or commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. We hold no investment securities that would require disclosure of
market risk.

Primary Market Risk Exposures

Our primary market risk exposures are in the areas of foreign currency
exchange rate risk. Foreign currency devaluations, especially in Asian
currencies, such as the Japanese yen, the Korean won, and the Taiwanese dollar,
may cause a foreign competitors products to be priced significantly lower than
our products.

Fluctuations in foreign currency exchange rates could affect our cost of
goods and operating margins. In addition, currency devaluation can result in a
loss to us if we hold deposits of that currency. Hedging foreign currencies
can be difficult, especially if the currency is not freely traded.

We have not attempted to hedge or otherwise mitigate this risk because our
exposure to any given currency is nominal. A change in the currency exchange
rate of 10% in any given currency would not have a material impact on our
results of operations. If, in the future, our exposure to a given currency
increases, we would contemplate hedging at that time. Based on the foregoing,
we cannot provide assurance that fluctuations and currency exchange rates in
the future will not have an adverse effect on our operations.




|        |  |                        
|------- |  | -----------------------
|ITEM 4. |  | CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer have reviewed and evaluated the effectiveness of
our disclosure controls and procedures, which included inquiries made to
certain other of our employees. Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have each concluded that our disclosure
controls and procedures are effective and sufficient to ensure that we record,
process, summarize, and report information required to be disclosed by us in
our periodic reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.




PART II  OTHER INFORMATION




|        |  |                  
|------- |  | -----------------
|ITEM 5. |  | OTHER INFORMATION

Our Insider Trading Policy permits our directors, officers, and other key
personnel to establish purchase and sale programs in accordance with Rule
10b5-1 adopted by the Securities and Exchange Commission. The rule permits
employees to adopt written plans at a time before becoming aware of material
nonpublic information and to sell shares according to a plan on a regular basis
(for example, weekly or monthly), regardless of any subsequent nonpublic
information they receive. In our view, Rule 10b5-1 plans are beneficial
because systematic, pre-planned sales that take place over an extended period
should have a less disruptive influence on the price of our stock. We also
believe plans of this type are beneficial because they inform the marketplace
about the nature of the trading activities of our directors and officers. In
the absence of such information, the market could mistakenly attribute
transactions as reflecting a lack of confidence in our company or an indication
of an impending event involving our company. We recognize that our directors
and officers may have reasons totally apart from the company in determining to
effect transactions in our common stock.

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These reasons could include the purchase of a home, tax and estate planning,
the payment of college tuition, the establishment of a trust, the balancing of
assets, or other personal reasons. The establishment of any trading plan
involving our company requires the pre-clearance by our Chief Executive Officer
or Chief Financial Officer. An individual adopting a trading plan must comply
with all requirements of Rule 10b5-1, including the requirement that the
individual not possess any material nonpublic information regarding our company
at the time of the establishment of the plan. In addition, sales under a
trading plan may be made no earlier than 30 days after the plan establishment
date.

No officers currently maintain trading plans.




|        |  |                                 
|------- |  | --------------------------------
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits                                                                                                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 31.1 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 amended
|   
|    |  | 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Act of 1934, as
amended                       
|   
|    |  | 32.1 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 2002        
|   
|    |  | 32.2 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                      
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                         
|   
|    |  | Report on Form 8-K dated September 3, 2003, furnishing Item 9 Regulation
FD Disclosure.                                                                                     




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                        |  |                      |  |                                                  
|----------------------- |  | -------------------- |  | -------------------------------------------------
|                        |  | BRILLIAN CORPORATION
|                        |  |                      |  |                                                  
|Date: November 12, 2003 |  | By:                  |  | /s/ Vincent F. Sollitto Jr.                      
|                        |  |                      |  |                                                  
|                        |  |                      |  | Vincent F. Sollitto Jr.                          
|                        |  |                      |  | President and Chief Executive Officer            
|                        |  |                      |  |                                                  
|                        |  | By:                  |  | /s/ Wayne A. Pratt                               
|                        |  |                      |  |                                                  
|                        |  |                      |  | Wayne A. Pratt                                   
|                        |  |                      |  | Chief Financial Officer, Secretary, and Treasurer

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