##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
   
 Brillian Corporation
  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)
  (Registrants telephone number, including area code)
 þ o
 o þ
  CLASS
    
    OUTSTANDING AS OF JULY 31, 2005Common
    
    
    7,322,605Par value $.001 per share




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BRILLIAN CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
 FOR QUARTER ENDED JUNE 30, 2005
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS:Condensed Balance
Sheets (unaudited) 
June 30, 2005 and December 31, 2004
    
    
    1Condensed Statements
of Operations (unaudited) 
Three Months and Six Months Ended June 30, 2005 and 2004
    
    
    2Condensed Statements
of Cash Flows (unaudited) 
Six Months Ended June 30, 2005 and 2004
    
    
    3Notes
to Condensed Financial Statements
    
    
    4ITEM 2.
    
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    12ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    19ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    19PART II  OTHER INFORMATIONITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    20ITEM 5.
    
    OTHER INFORMATION
    
    
    21ITEM 6.
    
    EXHIBITS
    
    
    21SIGNATURES
    
    
    22Ex-31.1Ex-31.2EX-32.1Ex-32.2




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PART
I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 BRILLIAN CORPORATION
CONDENSED BALANCE SHEETS
 June 30,
    
    
    DECEMBER 31,2005
    
    
    2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,172
    
    
    $
    8,195Short-term investments
    
    
    
    
    
    
    13Accounts receivable, net
    
    
    814
    
    
    
    339Inventories
    
    
    6,103
    
    
    
    5,400Other current assets
    
    
    535
    
    
    
    368Total current assets
    
    
    8,624
    
    
    
    14,315Property, plant and equipment, net
    
    
    5,480
    
    
    
    6,082Other investments
    
    
    1,119
    
    
    
    1,119Total Assets
    
    $
    15,223
    
    
    $
    21,516LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,798
    
    
    $
    1,230Accrued compensation
    
    
    183
    
    
    
    216Accrued liabilities
    
    
    564
    
    
    
    1,462Total current liabilities
    
    
    3,545
    
    
    
    2,908Long-term debt (net of $2,527 discount)
    
    
    1,973
    
    
    
    Stockholders Equity:Common stock
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    60,952
    
    
    
    58,007Deferred compensation
    
    
    
    
    
    
    (616
    )Accumulated deficit
    
    
    (51,254
    )
    
    
    (38,790
    )Total stockholders equity
    
    
    9,705
    
    
    
    18,608Total Liabilities and Stockholders Equity
    
    $
    15,223
    
    
    $
    21,516
  1




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BRILLIAN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net product sales
    
    $
    1,006
    
    
    $
    1,035
    
    
    $
    1,864
    
    
    $
    1,375Design and engineering services
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    237Total net sales
    
    
    1,006
    
    
    
    1,134
    
    
    
    1,864
    
    
    
    1,612Costs and Expenses:Cost of
sales  products
    
    
    4,007
    
    
    
    2,586
    
    
    
    7,159
    
    
    
    4,848Cost of
sales  design and engineering services
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    189Selling, general, and administrative
    
    
    1,195
    
    
    
    1,107
    
    
    
    2,191
    
    
    
    2,193Research and development
    
    
    2,764
    
    
    
    2,104
    
    
    
    4,757
    
    
    
    4,5587,966
    
    
    
    5,864
    
    
    
    14,107
    
    
    
    11,788Operating loss
    
    
    (6,960
    )
    
    
    (4,730
    )
    
    
    (12,243
    )
    
    
    (10,176
    )Other Income (Expense):Interest, net
    
    
    (251
    )
    
    
    64
    
    
    
    (221
    )
    
    
    108Realized loss on short-term investment
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )Loss on investment in start-up company
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    (131
    )(251
    )
    
    
    (108
    )
    
    
    (221
    )
    
    
    (64
    )Net Loss
    
    $
    (7,211
    )
    
    $
    (4,838
    )
    
    $
    (12,464
    )
    
    $
    (10,240
    )Loss per common share:Basic and diluted
    
    $
    (1.03
    )
    
    $
    (0.78
    )
    
    $
    (1.78
    )
    
    $
    (1.77
    )Weighted average number of common shares:Basic and diluted
    
    
    6,992
    
    
    
    6,188
    
    
    
    6,988
    
    
    
    5,784
  2




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BRILLIAN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (12,464
    )
    
    $
    (10,240
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,232
    
    
    
    1,730Amortization of debenture discount and offering costs
    
    
    202
    
    
    
    Stock compensation
    
    
    536
    
    
    
    444Stock issued to pay interest
    
    
    35
    
    
    
    Stock issued for services
    
    
    138
    
    
    
    Deferred revenue
    
    
    
    
    
    
    168Provision for doubtful accounts
    
    
    (1
    )
    
    
    10Loss on investment in start-up company
    
    
    
    
    
    
    131Changes in assets and liabilities:Increase in accounts receivable
    
    
    (474
    )
    
    
    (408
    )Increase in inventories
    
    
    (703
    )
    
    
    (1,161
    )(Increase) decrease in other assets
    
    
    (167
    )
    
    
    353Increase in accounts payable and accrued liabilities
    
    
    637
    
    
    
    1,075Net cash used in operating activities
    
    
    (11,029
    )
    
    
    (7,898
    )Cash Flows from Investing Activities:Purchases of property, plant, and equipment
    
    
    (630
    )
    
    
    (1,920
    )Purchase of intangibles
    
    
    
    
    
    
    (243
    )Purchase of investments
    
    
    
    
    
    
    (79
    )Proceeds from maturities/sales of short-term investments
    
    
    13
    
    
    
    12,067Net cash provided by (used in) investing activities
    
    
    (617
    )
    
    
    9,825Cash Flows from Financing Activities:Proceeds of debenture offering
    
    
    4,500
    
    
    
    Proceeds of public stock offering
    
    
    
    
    
    
    11,969Issuance of shares related to Employee Stock Purchase Plan
    
    
    123
    
    
    
    96Stock options exercised
    
    
    
    
    
    
    53Net cash provided by financing activities
    
    
    4,623
    
    
    
    12,118Net increase (decrease) in cash and cash equivalents
    
    
    (7,023
    )
    
    
    14,045Cash and cash equivalents, beginning of period
    
    
    8,195
    
    
    
    2,417Cash and cash equivalents, end of period
    
    $
    1,172
    
    
    $
    16,462Supplemental Cash Flow Information:Cash paid for interest
    
    $
    21
    
    
    $
    
  3




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BRILLIAN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 Note A
 TM
      4




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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 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 fourth quarter of 2005 and that capacity will
exceed 1,000 units per month by the end of the fourth quarter of
2005. Note B
 June 30,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    5,152
    
    
    $
    4,479Work-in-process
    
    
    614
    
    
    
    806Finished goods
    
    
    337
    
    
    
    115$
    6,103
    
    
    $
    5,400  Note C
 June 30,
    
    
    December 31,2005
    
    
    2004Leasehold improvements
    
    $
    569
    
    
    $
    569Equipment
    
    
    16,815
    
    
    
    16,185Furniture
    
    
    78
    
    
    
    7817,462
    
    
    
    16,832Less accumulated depreciation
    
    
    (11,982
    )
    
    
    (10,750
    )$
    5,480
    
    
    $
    6,082 Note D
  5




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Note E
       NorthAmerica
    
    
    Asia
    
    
    Europe
    
    
    TotalThree months ended June 30, 2005Net sales
    
    $
    598
    
    
    $
    16
    
    
    $
    392
    
    
    $
    1,006Three months ended June 30, 2004Net sales
    
    $
    433
    
    
    $
    242
    
    
    $
    459
    
    
    $
    1,134Six months ended June 30, 2005Net sales
    
    $
    923
    
    
    $
    31
    
    
    $
    910
    
    
    $
    1,864Six months ended June 30, 2004Net sales
    
    $
    747
    
    
    $
    349
    
    
    $
    516
    
    
    $
    1,612 6




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Note F
  Tax Sharing Agreement
   Intellectual Property Agreement
  Real Property Sublease Agreement
  7




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Note G
  Note H
     8




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9




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Six Months
    
    
    Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2004Net loss as reported
    
    $
    (12,464
    )
    
    $
    (4,838
    )
    
    $
    (10,240
    )Add stock-based compensation
included in net loss as reported
    
    
    451
    
    
    
    81
    
    
    
    162Deduct total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (786
    )
    
    
    (387
    )
    
    
    (699
    )Pro forma net loss
    
    $
    (12,799
    )
    
    $
    (5,144
    )
    
    $
    (10,777
    )Basic and diluted net loss per share:As reported
    
    $
    (1.78
    )
    
    $
    (0.78
    )
    
    $
    (1.77
    )Pro forma
    
    $
    (1.83
    )
    
    $
    (0.83
    )
    
    $
    (1.86
    )
   Dividend yield:
    
    
    N/AVolatility:
    
    
    123
    %Risk-free interest rate:
    
    
    3.81
    %Expected life in years:
    
    
    10
  Fiscal Year
    
    Amount2005
    
    $
    6982006
    
    
    9492007
    
    
    673Thereafter
    
    
    202$
    2,522
 Note I
   10




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Note
J
  June 30,
    
    
    December 31,2005
    
    
    2004April 2005 7% Convertible Debentures maturing
April 20, 2008, convertible at $1.57 per share$
    2,500
    
    
    $
    April 2005 9% Senior Secured Debentures
maturing April 20, 2008, secured by a first lien
on our assets
    
    
    2,000
    
    
    
    4,500
    
    
    
    Less:Discount and beneficial conversion feature on
convertible debentures
    
    
    2,338
    
    
    
    Discount on secured debentures
    
    
    189
    
    
    
    Total
    
    $
    1,973
    
    
    $
    
  2006
    
    $
    2007
    
    
    2008
    
    $
    4,500Total
    
    $
    4,500
  Note
K
  Issuance of additional debentures.
  Definitive agreement to merge.
 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
     Net Sales.
 12




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Cost of Sales.
 Selling, General, and Administrative Expense.
 Research and Development Expense.
 Critical Accounting Policies and Estimates
     13




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Results of Operations
 Three months ended June 30, 2005 compared to three months ended June 30, 2004
 Net Sales.
 14




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Cost of Sales.
  Selling, General, and Administrative Expense.
 Research and Development Expense.
 Interest Expense .
 Net Loss.
 Six months ended June 30, 2005 compared to six months ended June 30, 2004
 Net Sales.
 15




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Cost of Sales.
  Selling, General, and Administrative Expense.
 Research and Development Expense.
 Net
Loss.
 Liquidity and Capital Resources
      16




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June 30, 2005
    
    
    June 30, 2005Actual
    
    
    Pro FormaConvertible debentures, net of discount
    
    $
    162
    
    
    $
    162Secured debentures, net of discount
    
    
    1,811
    
    
    
    2,644Total long-term debt
    
    
    1,973
    
    
    
    2,806Stockholders equity
    
    
    9,705
    
    
    
    15,872Total capitalization
    
    
    11,678
    
    
    
    18,678
  17




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Aggregate Contractual Obligations
  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
    
    $
    4,959
    
    
    $
    1,156
    
    
    $
    2,173
    
    
    $
    1,630
    
    
    $
    Purchase orders
    
    $
    3,231
    
    
    $
    3,231
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantee
    
    $
    265
    
    
    $
    265
    
    
    $
    
    
    
    $
    
    
    
    $
    
       
    
    $2.5 million principal of 7% convertible debentures due April 20, 2008.
Interest is due quarterly and is payable in cash or, if certain conditions have
been met, in Brillian common stock. These
 18




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convertible debentures are convertible into common stock at an initial conversion
price of $1.57 per share, subject to certain anti-dilution provisions, if approved
by our stockholders, and
 
    
    $5.0 million principal of 4% convertible debentures due July 12, 2008. Interest
is due quarterly and is payable in cash or, if certain conditions have been met, in
Brillian common stock. These convertible debentures are convertible into common
stock at an initial conversion price of $2.63 per share, subject to certain
anti-dilution provisions, if approved by our stockholders.
  
    
    $2.0 million principal of 9% senior secured debentures due April 20, 2008.
Interest is due monthly and is payable in cash, and
    
    $2.075 million principal of 9% senior secured debentures due July 12, 2008.
Interest is due monthly and is payable in cash.
  Off-Balance Sheet Arrangements
  Impact of Recently Issued Standards
   
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
  Primary Market Risk Exposures
  19




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ITEM 4. CONTROLS AND PROCEDURES
  
 PART
II  OTHER INFORMATION
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Nominees
    
    Votes in Favor
    
    

Votes
WithheldJack L. Saltich
    
    
    6,028,176
    
    
    
    613,405Vincent F. Sollitto, Jr.
    
    
    6,248,639
    
    
    
    392,942David P. Chavoustie
    
    
    6,166,616
    
    
    
    474,965David N.K. Wang
    
    
    6,162,213
    
    
    
    479,368John S. Hodgson
    
    
    6,179,106
    
    
    
    462,475
  Votes in Favor
    
    Opposed
    
    
    Abstain5,983,183
    
    
    589,023
    
    
    
    69,375
  Votes in Favor
    
    Opposed
    
    
    Abstain
    
    
    

Broker
Non-Votes1,954,549
    
    
    740,834
    
    
    
    204,226
    
    
    
    3,741,972
 20




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Votes in Favor
    
    Opposed
    
    
    Abstain
    
    
    

Broker
Non-Votes2,214,544
    
    
    602,208
    
    
    
    78,857
    
    
    
    3,741,972
 21




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ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act
of 1934, as amended32.1
    
    Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 22




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SIGNATURES
  BRILLIAN CORPORATIONDate:  August 15, 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 23




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INDEX
TO EXHIBITS
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act
of 1934, as amended32.1
    
    Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 24