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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
 Washington, D.C.
20549
 FORM 10-Q Quarterly Report Pursuant To Section 13 or 15(d) of
The Securities Exchange Act Of 1934
 For the Quarter Ended March 31, 2005 Commission file number 0-50289    Brillian Corporation 
  Delaware
    
    05-0567906(State or Other Jurisdiction
    
    (I.R.S. Employer Identification No.)of Incorporation or Organization)
 1600 North Desert Drive, Tempe, Arizona
    
    85281(Address of Principal Executive Offices)
    
    (Zip Code)
 (602) 389-8888 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.


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

YES o NO þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. CLASS
    
    OUTSTANDING AS OF APRIL 30, 2005Common stock
    
    
    6,935,335Par value $.001 per share




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BRILLIAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS:Condensed Balance Sheets (unaudited) -
March 31, 2005 and December 31, 2004
    
    
    1Condensed Statements of Operations (unaudited) -
Three Months Ended March 31, 2005 and 2004
    
    
    2Condensed Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 2005 and 2004
    
    
    3Notes to Unaudited Condensed Financial Statements
    
    
    4ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    16ITEM 4. CONTROLS AND PROCEDURES
    
    
    16PART II  OTHER INFORMATIONITEM 5. OTHER INFORMATION
    
    
    17ITEM 6. EXHIBITS
    
    
    17SIGNATURES
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS BRILLIAN CORPORATION 
 CONDENSED BALANCE SHEETS
 
 MARCH 31,
    
    
    DECEMBER 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,975
    
    
    $
    8,195Short-term investments
    
    
    
    
    
    
    13Accounts receivable, net
    
    
    785
    
    
    
    339Inventories
    
    
    7,205
    
    
    
    5,400Other current assets
    
    
    198
    
    
    
    368Total current assets
    
    
    11,163
    
    
    
    14,315Property, plant and equipment, net
    
    
    5,552
    
    
    
    6,082Other investments
    
    
    1,119
    
    
    
    1,119Total Assets
    
    $
    17,834
    
    
    $
    21,516LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,097
    
    
    $
    1,230Accrued compensation
    
    
    343
    
    
    
    216Accrued liabilities
    
    
    831
    
    
    
    1,462Total current liabilities
    
    
    4,271
    
    
    
    2,908Commitments and ContingenciesStockholders Equity:Common stock
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    58,130
    
    
    
    58,007Deferred compensation
    
    
    (531
    )
    
    
    (616
    )Accumulated deficit
    
    
    (44,043
    )
    
    
    (38,790
    )Total stockholders equity
    
    
    13,563
    
    
    
    18,608Total Liabilities and Stockholders Equity
    
    $
    17,834
    
    
    $
    21,516
 The accompanying notes are an integral part of these condensed financial statements. 1




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BRILLIAN CORPORATION 
 CONDENSED STATEMENTS OF OPERATIONS
   Three MonthsEnded March 31,2005
    
    
    2004Net product sales
    
    $
    858
    
    
    $
    340Design and engineering services
    
    
    
    
    
    
    138Total net sales
    
    
    858
    
    
    
    478Costs and Expenses:Cost of sales  products
    
    
    3,152
    
    
    
    2,262Cost of sales  design and engineering services
    
    
    
    
    
    
    122Selling, general, and administrative
    
    
    996
    
    
    
    1,086Research and development
    
    
    1,993
    
    
    
    2,454Total costs and expenses
    
    
    6,141
    
    
    
    5,924Operating loss
    
    
    (5,283
    )
    
    
    (5,446
    )Other Income (Expense):Interest, net
    
    
    30
    
    
    
    44Net Loss
    
    $
    (5,253
    )
    
    $
    (5,402
    )Loss per Common Share:Basic and diluted
    
    $
    (0.75
    )
    
    $
    (1.00
    )Weighted Average Number of Common Shares:Basic and diluted
    
    
    6,984
    
    
    
    5,380
 The accompanying notes are an integral part of these condensed financial statements. 2




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BRILLIAN CORPORATION 
 CONDENSED STATEMENTS OF CASH FLOWS
   Three Months EndedMarch 31,2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (5,253
    )
    
    $
    (5,402
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    628
    
    
    
    865Stock compensation
    
    
    85
    
    
    
    220Deferred revenue
    
    
    
    
    
    
    276Provision for doubtful accounts
    
    
    (1
    )
    
    
    (6
    )Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (445
    )
    
    
    245Increase in inventories
    
    
    (1,805
    )
    
    
    (469
    )Decrease in other current assets
    
    
    170
    
    
    
    284Increase in accounts payable and accrued liabilities
    
    
    1,363
    
    
    
    997Net cash used in operating activities
    
    
    (5,258
    )
    
    
    (2,990
    )Cash Flows from Investing Activities:Purchases of property, plant, and equipment
    
    
    (98
    )
    
    
    (1,268
    )Purchase of intangibles
    
    
    
    
    
    
    (176
    )Proceeds from maturities/sales of short-term investments
    
    
    13
    
    
    
    3,958Net cash (used in) provided by investing activities
    
    
    (85
    )
    
    
    2,514Cash Flows from Financing Activities:Issuance of shares related to Employee Stock Purchase Plan
    
    
    123
    
    
    
    96Stock options exercised
    
    
    
    
    
    
    53Net cash provided by financing activities
    
    
    123
    
    
    
    149Net decrease in cash and cash equivalents
    
    
    (5,220
    )
    
    
    (327
    )Cash and cash equivalents, beginning of period
    
    
    8,195
    
    
    
    2,417Cash and cash equivalents, end of period
    
    $
    2,975
    
    
    $
    2,090
 The accompanying notes are an integral part of these condensed financial statements. 3




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BRILLIAN
CORPORATION 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
  Note A
    Organization and Basis of PresentationWe design and develop large-screen, rear-projection,
high-definition televisions, or HDTVs, utilizing our proprietary
liquid crystal on silicon, or LCoSTM, microdisplay
technology. We market our HDTVs for sale under the brand names of
retailers, including high-end audio/video manufactures,
distributors of high-end consumer electronics, and consumer
electronics retailers. We have established a virtual manufacturing
model utilizing third-party contract manufacturers to produce our
HDTVs, which incorporate the LCoS microdisplays that we
manufacture. We also offer a broad line of LCoS microdisplay
products and subsystems that original equipment manufacturers, or
OEMs, can integrate into proprietary HDTV products, home theater
projectors, and near-to-eye applications, such as head-mounted
monocular or binocular headsets and 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 incorporate us as a wholly
owned subsidiary of TFS, to transfer our business and assets into
this subsidiary, and to distribute the common stock of this
subsidiary to its stockholders in a spin-off. We were formed on
May 7, 2003 in anticipation of this spin-off. The spin-off was
completed on September 15, 2003 as a special dividend to the
stockholders of TFS.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). Each TFS stockholder of record as of
September 4, 2003, received one share of our stock for every four
shares of TFS common stock they owned. 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 would be tax free. In connection with the spin-off, TFS
provided initial cash funding in the amount of $20.9 million, net
of $1.1 million of spin-off related costs incurred prior to the
spin-off.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
three-month period ended March 31, 2005 are not necessarily
indicative of the operating results that may be expected for the
entire year ending December 31, 2005. These financial statements
should be read in conjunction with our December 31, 2004 financial
statements and the accompanying notes thereto.The accompanying financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. We have incurred recurring operating losses and negative cash flows
since our inception as a division of TFS. We have never been profitable. Our net loss for
the quarter ended March 31, 2005, was $5.3 million, and was $32.9 million, $18.7 million,
and $23.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Net
cash used in operating activities was $5.3 million for the quarter ended March 31, 2005, and
$18.9 million, $15.9 million, and $20.1 million for the years ended December 31, 2004, 2003,
and 2002, respectively. At March 31, 2005, we had $6.9 million of working capital,
including cash and cash equivalents of $3.0 million. These factors, among others, may
indicate that we will be unable to continue as a going concern for a reasonable period of
time.The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going concern. Our
continuation as a going concern is dependent upon our ability to 4




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generate sufficient cash flow to meet our obligations on a timely basis, to obtain
additional capital as may be required, and ultimately to attain successful operations.The successful introduction of an HDTV product to market and securing volume orders
from consumer electronics retailers for HTDVs represent a key ingredient in our success. In
the second quarter of 2004, we signed a supply agreement to provide HDTVs to Sears Roebuck
and Company. In the third quarter of 2004, we began shipping HDTVs to Sears. Also in the
third quarter of 2004, our supplier of light engines, a major sub-assembly of the HDTV,
informed us that they were unable to supply us with the volume of light engines necessary to
satisfy our requirements. As a result of our not being able to supply the required number
of HDTVs, Sears exercised their option to terminate the supply agreement. In the fourth
quarter of 2004, our light engine supplier informed us that they would not be able to
manufacture the light engine in volume until the second quarter of 2005. In March of 2005,
we received authorization from our light engine supplier to have the light engine
manufactured on our behalf by a third party manufacturer and granted us a perpetual license
to the light engine technology. In April, 2005, we selected Suntron Corporation to
manufacture light engines on our behalf. We currently believe that light engine
availability will begin to increase in the third quarter of 2005 and that capacity will
exceed 1,000 units per month in the fourth quarter of 2005.We do not have any definitive agreements with retailers to
sell our HDTVs. We are currently manufacturing a limited quantity of
light engines in our manufacturing facility in Tempe, Arizona. This
will allow us to manufacture a limited number of HDTVs and support
low volume customers until we can obtain a high volume supply of
light engines. Until we obtain a high volume supply  of light engines,
we will not be able to manufacture and sell a sufficient number of
HDTVs to achieve positive cash flow or profitability. As a result of
this situation, we believe that our cash balances on
December 31, 2004 will not be sufficient to finance our
operations through 2005, and that we will need to obtain debt or
additional equity financing. We are actively pursuing additional
capital, but we currently have no commitments 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, or at all. We believe that obtaining
orders from customers and announcing progress towards obtaining a
high volume supply of light engines will increase our ability to
raise debt or additional equity financing.Note B
    Inventories consisted of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    6,449
    
    
    $
    4,479Work-in-process
    
    
    381
    
    
    
    806Finished goods
    
    
    375
    
    
    
    115$
    7,205
    
    
    $
    5,400
  Note C
    Property, plant, and equipment consisted of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Leasehold improvements
    
    $
    569
    
    
    $
    569Equipment
    
    
    16,283
    
    
    
    16,185Furniture
    
    
    78
    
    
    
    7816,930
    
    
    
    16,832Less accumulated depreciation
    
    
    (11,378
    )
    
    
    (10,750
    )$
    5,552
    
    
    $
    6,082
  Note D
    Loss per ShareBasic and diluted loss per common share was computed by dividing net loss by the weighted average number of shares
of common stock outstanding during the three-month periods ended March 31, 2005, and 2004. For the three-month
periods ended March 31, 2005, and 2004, the effect of approximately 1.6 million and 1.4 million stock options were
excluded from the calculation of diluted loss per share, as their effect would have been antidilutive and decreased
the loss per share.Note E
    Segment Reporting, Sales to Major Customers, and Geographic InformationSFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
establishes standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major customers. 5




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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 in accordance with SFAS No.
131. All of our assets are located in the United States.Projection device sales, which include HDTV sales, for the three months ended March 31,
2005, were $690,000, or 80% of sales, while near-to-eye sales were $168,000, or 20% of
sales. During the same period in 2004, projection device sales, which included $138,000 of
design and engineering sales, were $298,000, or 62% of sales, and near-to-eye sales were
$180,000, or 38% of sales.For the three months ended March 31, 2005, sales to SEOS Ltd., BAE Systems Avionics, and I-O
Display accounted for 23%, 15%, and 13%, respectively, of our net sales. For the three
months ended March 31, 2004, sales to I-O Display, Kodak, and Zehda Technology accounted for
approximately 28%, 25%, and 22%, 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 sets forth net sales (in
thousands) for our geographic areas: NorthAmerica
    
    
    Asia
    
    
    Europe
    
    
    TotalThree months ended
March 31, 2005Net sales
    
    $
    326
    
    
    $
    14
    
    
    $
    518
    
    
    $
    858Three months ended
March 31, 2004Net sales
    
    $
    314
    
    
    $
    107
    
    
    $
    57
    
    
    $
    478
  Note F
    Transactions with TFSOn the spin-off date, 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. In the three-month period
ended March 31, 2005, we paid TFS $272,000 for rent and $33,000 for engineering and design
services related to the development of printed circuit board assemblies and for purchases of
these assemblies for our HDTV product. In the three-month period ended March 31, 2004, we
paid TFS $234,000 for rent, $32,000 for engineering services and $553,000 engineering and
design services related to the development of printed circuit board assemblies and for
purchases of these assemblies for our HDTV product.Tax Sharing AgreementUnder the Tax Sharing Agreement, we have agreed to indemnify 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 agreed to indemnify 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 6




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respect to the spin-off. In addition, we have agreed to indemnify TFS for any tax resulting
from an acquisition by one or more persons of a 50% or greater interest in our company.Intellectual Property AgreementWe 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, trade names, 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 AgreementOn December 22, 2004, we and TFS amended and restated the Real Property Sublease Agreement
under which we lease office and manufacturing space in the TFS headquarters building. The
initial term of the sublease now terminates December 16, 2009, with 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 sublease approximately 55,780 square feet of
the building from TFS and share certain common areas in the building with TFS. Our monthly
rent payable to TFS is $61,592 plus $28,963 for 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 is not assignable by us without the prior written consent of TFS, which consent may
be withheld by TFS in its sole discretion.Note G
    Commitments and Contingencies:We made a guarantee in connection with a Small Business Administration loan to VoiceViewer
Technology, Inc., a private company developing microdisplay products. VoiceViewer is unable
to meet its current obligations under the loan agreement. We and the other guarantors are
making payments as they become due. We have determined that it is probable that VoiceViewer
will be unable to meet its future obligations under the loan agreement. Therefore, at March
31, 2005, we have accrued $292,000, which represents our maximum remaining obligation under
the guarantee. We have a security interest in, and second rights to, the intellectual
property of VoiceViewer, while the lending institution has the first rights. However, we do
not believe we can realize any significant value from VoiceViewers intellectual property.Note H
    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 were originally available for issuance
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 stock 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 is added to the number of shares
that may be subject to the granting of awards.Prior to the spin-off, certain of our employees were granted options to purchase TFS common
stock under TFS stock-based compensation plans. In connection with the spin-off, 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 and the
substitute Brillian options is identical for those employees who remained employees of TFS
immediately 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, and each preserved the ratio of the exercise
price to the fair market value of the 7




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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. Under
this arrangement, on September 15, 2003, we issued options to purchase 750,275 shares of
Brillian common stock. Of these options, 600,410 were issued to employees who remained
employees of TFS after the spin-off. Options granted under TFS plans generally vest over a
four-year period and are exercisable for a term of 10 years.In addition to the Brillian substitute options granted under 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. Options with
respect to approximately 300,000 shares have a vesting period of 32 months, and the
remaining options have vesting periods of 50 months. Additionally, on September 4, 2003, we
granted approximately 56,000 shares of restricted common stock to employees with a vesting
period of one year. As of March 31, 2005, all shares of this restricted common stock had
vested and been issued. On September 4, 2003, the spin-off had not been completed and,
therefore, no market had developed for our common stock. For purposes of setting the
exercise price of the options granted on that date, fair market value was estimated by our
board of directors. Based on the initial trading prices of our common stock, we recorded
deferred compensation of approximately $1.5 million related to the stock option and
restricted stock grants of September 4, 2003. The total amount of deferred compensation
will be expensed over the vesting terms of the options and shares of restricted stock.
During the quarter ended March 31, 2005, we recorded non-cash compensation expense of
$85,000 related to option grants.On January 26, 2005, our Board of Directors approved the immediate vesting of certain
unvested stock options previously awarded to employees (the Accelerated Options), and
re-priced certain stock options previously awarded to employees (the Re-priced Options).
The Board did not accelerate vesting or re-price any stock options previously awarded to
officers and directors. The Accelerated Options and Re-priced Options were issued under our
2003 Incentive Compensation Plan. The Board considered the need to retain employees in light
of recent stock price declines and that there were no merit increases, nor cash bonuses,
paid to employees in 2004. The Board also recognized that the exercise of any Accelerated
Options would bring cash into the Company. The closing market price per share of our common
stock on January 26, 2005 was $2.42 and the exercise prices of the approximately 183,000
Accelerated Options on that date ranged from $3.27 to $67.60. The original exercise prices
of the 268,950 Re-priced Options ranged from $3.90 to $12.06 and were re-priced to $2.42.
The original vesting schedules and all other terms of the Re-priced Options, except the
exercise prices, were not modified. Until the Re-priced Options are exercised, forfeited, or
expire unexercised, future compensation expense may result due to variable accounting rules.Employees will benefit from the accelerated vesting of their stock options in the event they
terminate their employment with or service to the Company prior to the completion of the
original vesting terms, as they would have the ability to exercise certain options that
would have otherwise been forfeited. For those employees who do benefit from the accelerated vesting, we are
required to record additional stock-based compensation expense equal to the intrinsic value
of the option on the date of modification.On February 28, 2005, 100,000 Restricted Stock Units were issued to certain officers of the
Company. The Restricted Stock Units expire on February 28, 2010 and may be exchanged for
our common stock on a one-for-one basis providing certain cash flow objectives are attained.
At March 31, 2005, the Company had not recognized any compensation related to these 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 3.81% and 2.99% for the options granted during
periods ended March 31, 2005, and 2004; expected dividend yields of zero for all scenarios;
expected lives of 5.0 years for all scenarios; and expected volatility (a measure of the 8




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amount by which a price has fluctuated or is expected to fluctuate during a period) of 123%
and 74% for options granted during the periods ended March 31, 2005, and 2004. Had
compensation cost for these plans been determined consistent with SFAS No. 123, our net loss
and loss per share for the three-months ended March 31, 2005, and 2004 would have been as
follows (in thousands, except per share data): Three Months EndedMarch 31,2005
    
    
    2004Net loss:As reported
    
    $
    (5,253
    )
    
    $
    (5,402
    )Stock-based compensation
included in net loss as reported
    
    $
    85
    
    
    $
    80Total stock-based employee
compensation expenses determined
under fair value based method for all
awards
    
    
    (420
    )
    
    
    (311
    )Pro forma net loss
    
    $
    (5,588
    )
    
    $
    (5,633
    )Basic and diluted net loss per share:As reported
    
    $
    (0.75
    )
    
    $
    (1.00
    )Pro forma
    
    $
    (0.80
    )
    
    $
    (1.05
    )
  Note I
    Recently Issued Accounting Standards:On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based
Payment that will require compensation costs related to share-based payment transactions
with employees to be recognized in our financial statements. With limited exceptions, the
amount of compensation cost will be measured based on the grant date fair value of the
equity or liability instruments issued. In addition, liability awards will be re-measured
each reporting period. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. Statement 123 (revised 2004) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees and is effective as of the first annual
reporting period that begins after June 15, 2005. We have not completed the process of
evaluating the impact that the adoption of Statement 123 (revised 2004) will have on our
financial position or results of operations.On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs, an Amendment of
ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We have not
completed the process of evaluating the impact that the adoption of Statement 151 will have
on our financial position or results of operations.Note J
    Subsequent Event:On April 20, 2005, we issued $2.5 million of 7% Convertible Debentures and $2.0
million of 9% Senior Secured Debentures, both maturing on April 20, 2008, to
institutional investors. The 7% Convertible Debentures are convertible into shares
of our common stock at a conversion price of $1.57 per share. Subject to
shareholder approval, interest on the 7% Convertible Debentures is payable, at our
option, in either stock or cash. The 9% Senior Secured Debentures are secured by a
first lien on our assets. The purchasers of both issues have also received
five-year options to purchase, for an exercise price of $1.57 per share,
approximately 1.75 million shares of our common stock beginning 181 days from
closing. 9




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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 which 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 2005 and
thereafter; the amounts, prices, timing, or terms under which we sell HDTVs to our customers;
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 design and develop large-screen, rear-projection, high-definition televisions, or HDTVs,
utilizing our proprietary liquid crystal on silicon, or LCoS, microdisplay technology. We market
our HDTVs for sale under the brand names of retailers, including high-end audio/video
manufacturers, distributors of high-end consumer electronics products, and consumer electronics
retailers. We have established a virtual manufacturing model utilizing third-party contract
manufacturers to produce our HDTVs, which incorporate the LCoS microdisplays that we manufacture.
We also offer a broad line of LCoS microdisplay products and subsystems that original equipment
manufacturers, or OEMs, can integrate into proprietary HDTV products, home theater projectors, and
near-to-eye applications, such as head-mounted monocular or binocular headsets and viewers, for
industrial, medical, military, commercial, and consumer applications. We derive revenue from the sale of our microdisplay products and from providing design and
engineering services. During 2004, we recorded revenue from product sales of $2.3 million, or 84%
of net sales, and revenue from design and engineering services of $426,000, or 16% of net sales.
We have never been profitable. Our net loss for the quarter ended March 31, 2005, was $5.3 million,
and was $32.9 million, $18.7 million, and $23.2 million for the years ended December 31, 2004,
2003, and 2002, respectively. We started the development of LCoS microdisplays in 1997 as a division of Three-Five Systems,
Inc., or TFS, under which we operated until our spin-off in September 2003. In anticipation of our
spin-off to the stockholders of TFS, TFS organized us as a wholly owned subsidiary. In connection
with the spin-off, TFS transferred to us its LCoS microdisplay business, including the related
manufacturing and business assets, personnel, and intellectual property. TFS also provided initial
cash funding to us in the amount of $20.9 million. The spin-off was completed on September 15,
2003 as a special dividend to the stockholders of TFS. We share occupancy with TFS in a building 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 and conduct research and development activities in Tempe. We also
operate a facility in Boulder, Colorado. In Boulder, we conduct sales and marketing activities and
research and development activities. Net Sales.Our sales result from both design and engineering services and product sales.
Until early 2002, substantially all of our sales were for use in projection-based applications.
After the purchase of certain assets in early 2002, however, we became equally focused on the
near-to-eye market. In the fourth quarter of 2003, we announced our intention to design, develop,
and sell a complete HDTV product based on our Gen II LCoS microdisplay. Since this announcement,
most of our efforts have been focused on the design of this product and the 10




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establishment of a supply chain to source the components that we do not manufacture. We
currently anticipate that sales of our HDTVs will comprise the majority of our total sales in
future periods. In addition to designing, developing, and selling our own HDTVs, we will continue to seek
selective OEM customers for our projection displays. We typically sell three displays and
associated electronics for products in the projection 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. Cost of Sales.Our gross margins are influenced by various factors, including manufacturing
efficiencies, yields, and absorption issues, product mix, product differentiation, product
uniqueness, inventory management, and volume pricing. The manufacturing-related issues have the
most significant impact on our gross margins. 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 it will be difficult to attain significant improvements in
gross margin until we can operate at higher production volumes. Selling, General, and Administrative Expense.Selling, general, and administrative expense
consists principally of administrative and selling costs; salaries, commissions, and benefits to
personnel; and related facilities 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.Research and development expense consists principally of
salaries and benefits to scientists, engineers, and other technical personnel; related facilities
costs; process development costs; and various expenses for projects, including new product
development. Research and development expense continues to be very high as we continue to develop
our LCoS technology and manufacturing processes, and refine our HDTV products. 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 ongoing
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. Under contracts where revenue is recognized based on milestones,
the fair value of milestones completed equals the fair value of work performed. Under a fixed
price contract whereby we were paid based on performance of tasks, we recognized revenue based on
the estimated percentage of completion of the entire project as measured by the costs for man hours
and materials incurred to date compared to the total estimated costs for man hours and materials.
Any anticipated losses on fixed price contracts are recorded in the period they are determinable.
All major design 11




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and engineering services projects for customers were complete at December 31, 2004, and such
work is expected to be minimal in the future. 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. We write down our inventory for obsolete 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. Deferred tax assets resulting from net
operating losses and tax credits generated by our pre-spin-off operations were retained by TFS in
accordance with applicable tax law. We do not expect to record a tax benefit on any losses that we
incur until we have a history of profitability. Long-term assets, such as property, plant, and equipment, intangibles, and other investments,
are originally recorded at cost. On an ongoing 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. During the fourth quarter of 2004, we recorded an impairment
charge of $10.2 million related to long-lived assets in accordance with this policy. Because our business serves new and developing markets, is based on a relatively new
technology, and is expected to be significantly influenced by the introduction of new HDTV
products, accurately forecasting revenue for a particular future period is difficult. To date, the
majority of our product sales to customers have been 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 volumes, we anticipate that
the amount of revenue recognized during the first half of 2005 will not result in a material change
to our cash consumption rate. We do anticipate, however, that as we continue the move into volume
production, we will continue to improve our manufacturing yields and more fully absorb our fixed
costs, which will result in improved gross margins and results of operations. However, as we
continue to increase our revenue and shift our product mix predominantly to HDTVs, we will use cash
to finance increases in working capital. Results of Operations Three months ended March 31, 2005 compared to three months ended March 31, 2004 Net Sales.Net sales increased 79% to $858,000 in the first quarter of 2005 from $478,000 in
the first quarter of 2004. Product sales increased to $858,000 in the first quarter of 2005 from
$340,000 in the first quarter of 12




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2004. There were no design and engineering services revenues recorded in the first quarter of
2005, compared with $138,000 recorded in the first quarter of 2004. Projection device sales, which include HDTV sales, for the three months ended March 31, 2005,
were $690,000, or 80% of net sales, while near-to-eye sales were $168,000, or 20% of net sales.
During the same period in 2004, projection device sales were $298,000, or 62% of net sales, and
near-to-eye sales were $180,000, or 38% of net sales. Net sales in North America totaled $326,000, or 38% of total net sales, in the first quarter
of 2005 compared with $314,000, or 66% of total net sales, in the first quarter of 2004. Net sales
in Asia totaled $14,000, or 2% of total net sales, in the first quarter of 2005 compared with
$107,000, or 22% of total net sales, in the first quarter of 2004. Net sales in Europe totaled
$518,000, or 60% of total net sales, the first quarter of 2005 compared with $57,000, or 12% of
total net sales, in the first quarter of 2004. Cost of Sales.Cost of sales was $3.2 million, or 367% of net sales, in the first quarter of
2005 compared with $2.4 million, or 499% of net sales, in the first quarter of 2004. 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 amounts 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. Selling, General, and Administrative Expense.Selling, general, and administrative expense
decreased 8% to $996,000 in the first quarter of 2005 from $1.1 million in the first quarter of
2004, primarily because of lower compensation costs. A savings of $160,000, resulting from not
awarding bonuses in 2005, was partially offset by an $80,000 increase in 2005 salaries due to
increased staffing. Research and Development Expense.Research and development expense decreased 19% to $2.0
million in the first quarter of 2005 from $2.5 million in the first quarter of 2004. A current
period $679,000 reduction in non-recurring engineering (NRE) costs was partially offset by a
$100,000 increase in salaries and benefits. NRE in the prior year was especially high because of
development of our first HDTV. Salaries increased in the current period because of increased
staffing. Net Loss.Net loss was $5.3 million in the first quarter of 2005 compared with a net loss of
$5.4 million in the first quarter of 2004. Liquidity and Capital Resources At March 31, 2005, we had cash and cash equivalents of $3.0 million, compared with $8.2
million at December 31, 2004. In the first quarter of 2005, we had $5.3 million in net cash outflow from operating
activities compared to $3.0 million in the first quarter of 2004. Most of the cash outflow in each
period related to our losses. Our depreciation and amortization expense was $628,000 in the first
quarter of 2005 and $865,000 in the first quarter of 2004. In the first quarter of 2005, investing activities used $85,000; proceeds from the sale of
investments provided $13,000, and purchases of property and equipment used $98,000. During the
first quarter of 2004, investing activities provided $2.5 million; we received proceeds from the
sale of short-term investments of $4.0 13




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million, while purchases of property and equipment totaled $1.3 million and purchases of
intangibles totaled $176,000. We have incurred recurring operating losses and negative cash flows since our inception as a
division of TFS. Our net losses were $32.9 million, $18.7 million, and $23.2 million in 2004,
2003, and 2002, respectively. At March 31, 2005, we had $6.9 million of working capital, including
cash and cash equivalents of $3.0 million. The successful introduction of an HDTV product to market and securing volume orders from
consumer electronics retailers for HTDVs represent a key ingredient in our success. In the second
quarter of 2004, we signed a supply agreement to provide HDTVs to Sears Roebuck and Company. In
the third quarter of 2004, we began shipping HDTVs to Sears. Also in the third quarter of 2004,
our supplier of light engines, a major sub-assembly of the HDTV, informed us that they were unable
to supply us with the volume of light engines necessary to satisfy our requirements and granted us
a temporary license to build light engines. As a result of our not being able to supply the
required number of HDTVs, Sears exercised their option to terminate the supply agreement. In the
fourth quarter of 2004, our light engine supplier informed us that they would not be able to
manufacture the light engine in volume until the second quarter of 2005, and granted us a temporary
license to build light engines. In March 2005, we received authorization from our light engine
supplier to have the light engine manufactured on our behalf by a third party manufacturer and
granted us a perpetual license to the light engine technology. In April, 2005, we selected Suntron
Corporation to manufacture light engines on our behalf. We currently believe that light engine
availability will begin to increase in the third quarter of 2005 and that capacity will exceed
1,000 units per month in the fourth quarter of 2005. We are currently manufacturing a limited quantity of light engines in our manufacturing
facility in Tempe, Arizona. This will allow us to manufacture a limited number of HDTVs and
support low volume customers until we can obtain a high volume supply of light engines. Until we
obtain a high volume supply of light engines, we will not be able to manufacture and sell a
sufficient number of HDTVs to achieve positive cash flow or profitability. As a result of this
situation, we believe that our cash balances on March 31, 2005 will not be sufficient to finance
our operations through 2005, and that we will need to obtain debt or additional equity financing.
On April 20, 2005, we issued $2.5 million of convertible debentures and $2.0 million of senior
secured debentures. However, we will still require additional debt or equity financing to finance
our operations through 2005. We are actively pursuing additional capital, but we currently have no
commitments 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,
or at all. We believe that obtaining orders from customers and announcing progress towards
obtaining a high volume supply of light engines will increase our ability to raise additional debt
or equity financing. Aggregate Contractual Obligations: The following table lists our commercial commitments: Amount of Commitment Expiration Per PeriodTotal Amounts
    
    
    LessOther Commercial Commitments
    
    Committed
    
    
    than 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    6 Years and Over(in thousands)Facilities leases
    
    $
    5,250
    
    
    $
    1,162
    
    
    $
    2,187
    
    
    $
    1,901
    
    
    $
    Development agreements
    
    $
    150
    
    
    $
    150
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase orders
    
    $
    3,400
    
    
    $
    3,400
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantee
    
    $
    292
    
    
    $
    292
    
    
    $
    
    
    
    $
    
    
    
    $
    
 We have contractual commitments for property leases for our Tempe headquarters and for our
development center in Boulder, Colorado. In addition, we have contractual commitments related to
the development and production of our HDTV products and have issued purchase orders to vendors for
materials totaling approximately $3.4 million. 14




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We made a guarantee in connection with a Small Business Administration loan to VoiceViewer
Technology, Inc., a private company developing microdisplay products. VoiceViewer is unable to meet
its current obligations under the loan agreement. We and the other guarantors are making payments
as they become due. We have determined that it is probable that VoiceViewer will be unable to meet
its future obligations under the loan agreement. Therefore, at March 31, 2005, we have accrued
$292,000, which represents our maximum remaining obligation under the guarantee. We have a security
interest in, and second rights to, the intellectual property of VoiceViewer, while the lending
institution has the first rights. However, we do not believe we can realize any significant value
from VoiceViewers intellectual property. We believe that the contribution by TFS of the assets related to our business and the
assumption by us of the related liabilities in exchange for our common stock, which was part of the
spin-off, should be treated as a reorganization within the meaning of Section 368(a)(1)(D) of the
Code, and the distribution should qualify as a tax-free distribution under Section 355 of the Code.
It should be noted that the application of Section 355 of the Code to the distribution is complex
and may be subject to differing interpretation. If the distribution does not qualify as a tax-free
distribution under Section 355 of the Code, then (i) TFS would recognize capital gains but not
losses equal to the difference between the fair market value of our common stock on the date of the
distribution and TFS tax basis in such stock; and (ii) the distribution may be taxable to
individual stockholders, depending on their individual tax basis. In addition, we have indemnified
TFS in the event the distribution is not tax-free to TFS because of actions taken by us or because
of failure to take various actions. Certain of the events that could trigger this obligation may
be beyond our control. In particular, the transaction may be taxable if the distribution is deemed
to be part of a plan in which one or more persons acquire directly or indirectly stock representing
a 50% or greater interest in either TFS or our company. At March 31, 2005, we had no debt. However, on April 20, 2005, we issued $2.5 million of 7%
Convertible Debentures and $2.0 million of 9% Senior Secured Debentures, both maturing on April 20,
2008, to institutional investors. The 7% Convertible Debentures are convertible into shares of our
common stock at a conversion price of $1.57 per share. Subject to shareholder approval, interest
on the 7% Convertible Debentures is payable, at our option, in either stock or cash. The 9% Senior
Secured Debentures are secured by a first lien on our assets. The purchasers of both issues also
received five-year warrants to purchase, for an exercise price of $1.57 per share, approximately
1.75 million shares of our common stock beginning 181 days from closing. 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 On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment
that will require compensation costs related to share-based payment transactions with
employees to be recognized in our financial statements. With limited exceptions, the amount
of compensation cost will be measured based on the grant date fair value of the equity or
liability instruments issued. In addition, liability awards will be re-measured each
reporting period. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. Statement 123 (revised 2004) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees and is effective as of the first annual
reporting period that begins after June 15, 2005. We have not completed the process of
evaluating the impact that the adoption of Statement 123 (revised 2004) will have on our
financial position or results of operations. On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs, an Amendment of
ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We have not
completed the process of evaluating the impact that the adoption of Statement 151 will have
on our financial position or results of operations. 15




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments At March 31, 2005, 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 in 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. During the quarterly period covered by this report, there have not
been any changes in our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting. 16




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##### Table of Contents



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. 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 ExhibitNumber
    
    Exhibit31.1
    

Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended31.2
    

Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act
of 1934, as amended32.1
    

Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    

Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 17




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRILLIAN CORPORATIONDate: May 16, 2005
    
    By:
    
    /s/ Vincent F. Sollitto Jr.Vincent F. Sollitto, Jr.President and Chief Executive OfficerBy:
    
    /s/ Wayne A. PrattWayne A. PrattVice President, Chief Financial Officer, Secretary,
and Treasurer
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