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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, 2004 Commission file number 0-50289  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)
 (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 x 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 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 MAY 14, 2004Common stock
    
    
    6,893,118Par value $.001 per share




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BRILLIAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS:Condensed Balance Sheets (unaudited)  March 31, 2004 and December 31, 2003
    
    
    1Condensed Statements of Operations (unaudited)  Three Months Ended March 31, 2004 and 2003
    
    
    2Condensed Statements of Cash Flows (unaudited)  Three Months Ended March 31, 2004 and 2003
    
    
    3Notes to 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
    
    
    17ITEM 4. CONTROLS AND PROCEDURES
    
    
    17PART II  OTHER INFORMATIONITEM 5.OTHER INFORMATION
    
    
    17ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
    
    
    18SIGNATURES
    
    
    18EX-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
 MARCH 31,
    
    DECEMBER 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,090
    
    
    $
    2,417Short-term investments
    
    
    8,042
    
    
    
    12,000Accounts receivable, net
    
    
    208
    
    
    
    447Inventories
    
    
    3,204
    
    
    
    2,735Other current assets
    
    
    544
    
    
    
    828Total current assets
    
    
    14,088
    
    
    
    18,427Property, plant and equipment, net
    
    
    6,970
    
    
    
    6,267Intangibles, net
    
    
    8,644
    
    
    
    8,768Other investments
    
    
    6,331
    
    
    
    6,331Total Assets
    
    $
    36,033
    
    
    $
    39,793LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,065
    
    
    $
    457Accrued compensation
    
    
    213
    
    
    
    84Accrued liabilities
    
    
    936
    
    
    
    676Deferred revenue
    
    
    297
    
    
    
    21Total current liabilities
    
    
    2,511
    
    
    
    1,238Commitments and ContingenciesStockholders Equity:Common stock
    
    
    5
    
    
    
    5Additional paid-in capital
    
    
    45,878
    
    
    
    45,708Deferred compensation
    
    
    (1,066
    )
    
    
    (1,265
    )Accumulated deficit
    
    
    (11,295
    )
    
    
    (5,893
    )Total stockholders equity
    
    
    33,522
    
    
    
    38,555Total Liabilities and Stockholders Equity
    
    $
    36,033
    
    
    $
    39,793
 The accompanying notes are an integral part of these condensed financial statements. 1




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BRILLIAN CORPORATION 
 STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 Three MonthsEnded March 31,2004
    
    2003Net product sales
    
    $
    340
    
    
    $
    232Design and engineering services
    
    
    138
    
    
    
    139Total net sales
    
    
    478
    
    
    
    371Costs and Expenses:Cost of sales  products
    
    
    2,262
    
    
    
    1,993Cost of sales  design and engineering services
    
    
    122
    
    
    
    139Selling, general, and administrative
    
    
    1,086
    
    
    
    1,214Research and development
    
    
    2,454
    
    
    
    1,683Total costs and expenses
    
    
    5,924
    
    
    
    5,029Operating loss
    
    
    (5,446
    )
    
    
    (4,658
    )Other Income (Expense):Interest, net
    
    
    44
    
    
    
    Net Loss
    
    $
    (5,402
    )
    
    $
    (4,658
    )Loss per Common Share:Basic and diluted
    
    $
    (1.00
    )
    
    $
    (0.87
    )Weighted Average Number of Common Shares:Basic and diluted
    
    
    5,380
    
    
    
    5,329
 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 31,2004
    
    2003Cash Flows from Operating Activities:Net loss
    
    $
    (5,402
    )
    
    $
    (4,658
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    865
    
    
    
    942Stock compensation
    
    
    220
    
    
    
    Deferred revenue
    
    
    276
    
    
    
    (31
    )Provision for doubtful accounts
    
    
    (6
    )
    
    
    (11
    )Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    245
    
    
    
    81(Increase) decrease in inventories
    
    
    (469
    )
    
    
    (57
    )(Increase) decrease in other current assets
    
    
    284
    
    
    
    21Increase (decrease) in accounts payable and accrued liabilities
    
    
    997
    
    
    
    274Net cash used in operating activities
    
    
    (2,990
    )
    
    
    (3,439
    )Cash Flows from Investing Activities:Purchases of property, plant, and equipment
    
    
    (1,268
    )
    
    
    (7
    )Proceeds from sale of asset
    
    
    
    
    
    
    113Purchase of intangibles
    
    
    (176
    )
    
    
    (207
    )Proceeds from maturities/sales of short-term investments
    
    
    3,958
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,514
    
    
    
    (101
    )Cash Flows from Financing Activities:Net transfers from TFS
    
    
    
    
    
    
    3,540Issuance of shares related to Employee Stock Purchase Plan
    
    
    96
    
    
    
    Stock options exercised
    
    
    53
    
    
    
    Net cash provided by financing activities
    
    
    149
    
    
    
    3,540Net decrease in cash and cash equivalents
    
    
    (327
    )
    
    
    Cash and cash equivalents, beginning of period
    
    
    2,417
    
    
    
    Cash and cash equivalents, end of period
    
    $
    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 LCoS®, microdisplay technology. We
market our HDTVs for sale under the brand names of retailers,
including consumer electronics retailers, consumer retail stores,
personal computer manufacturers, and high-end audio/video
manufacturers. We recently received our first order for HDTVs. 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, 2004 are not necessarily
indicative of the operating results that may be expected for the
entire year ending December 31, 2004. These financial statements
should be read in conjunction with our December 31, 2003 financial
statements included in our Annual Report on Form 10-K, and the
accompanying notes thereto.The financial statements for
periods prior to the spin-off have been
prepared using TFS historical basis in the assets and liabilities
and the historical results of operations of Brillian.Note B
    
    Inventories consisted of the following (in thousands):
 March 31,
    
    December 31,2004
    
    2003Raw
materials
    
    $
    2,424
    
    
    $
    2,473Work-in-process
    
    
    300
    
    
    
    51Finished goods
    
    
    480
    
    
    
    211$
    3,204
    
    
    $
    2,735
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Note C
    
    Property, plant, and equipment consisted of the following (in thousands):
 March 31,
    
    December 31,2004
    
    2003Leasehold improvements
    
    $
    977
    
    
    $
    971Equipment
    
    
    14,757
    
    
    
    13,495Furniture
    
    
    62
    
    
    
    6215,796
    
    
    
    14,528Less accumulated depreciation
    
    
    (8,826
    )
    
    
    (8,261
    )$
    6,970
    
    
    $
    6,267
 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 March 31, 2004 (in
thousands):
 Acquisition
    
    Accumulated
    
    BookValue
    
    Amortization
    
    ValueAmortized Intangible Assets:Mask works
    
    $
    5,939
    
    
    $
    (2,206
    )
    
    $
    3,733Patents, patents pending, and other intangible assets
    
    
    3,833
    
    
    
    (350
    )
    
    
    3,483Licenses
    
    
    2,954
    
    
    
    (1,526
    )
    
    
    1,428$
    12,726
    
    
    $
    (4,082
    )
    
    $
    8,644
 Intangible assets consisted of the following at December 31, 2003 (in thousands):
 Acquisition
    
    Accumulated
    
    BookValue
    
    Amortization
    
    ValueAmortized Intangible Assets:Mask works
    
    $
    5,839
    
    
    $
    (2,206
    )
    
    $
    3,633Patents, patents pending, and other intangible assets
    
    
    3,758
    
    
    
    (198
    )
    
    
    3,560Licenses
    
    
    2,954
    
    
    
    (1,379
    )
    
    
    1,575$
    12,551
    
    
    $
    (3,783
    )
    
    $
    8,768
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Intangible asset amortization expense for the three months ended March
31, 2004 was $300,000 compared to $434,000 for the three months ended
March 31, 2003. Estimated future annual amortization expense through
2008 and thereafter related to intangible assets reported as of March 31,
2004 is as follows (in thousands):
 Fiscal Year
    
    Amount2004
    
    $
    8982005
    
    
    2,5912006
    
    
    2,4052007
    
    
    2,0012008
    
    
    578Thereafter
    
    
    241$
    8,644
 Note E
    
    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 period ended March 31, 2004. For the three-month period ended March 31,
2004, the effect of approximately 1.4 million stock options was excluded from the calculation of diluted loss per share
as their effect would have been antidilutive and decreased the loss per share.Per share information presented for the three-month period ended March 31, 2003 was calculated based on the number of
shares issued in the spin-off. The calculation of loss per share for this period assumed that the common shares were
outstanding for the entire period.Note F
    
    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.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.Net sales in the near-to-eye market totaled $180,000, or 38% of total net
sales, in the first quarter of 2004 and $249,000, or 67% of total net
sales, in the first quarter of 2003. The remaining net sales were in the
projection market.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. For the three months ended March 31,
2003, sales to Brashear, Mitsui, and Kodak accounted for approximately
28%, 18%, and 9%, 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:
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NorthAmerica
    
    Asia
    
    Europe
    
    TotalThree months ended March 31, 2004Net sales
    
    $
    314
    
    
    $
    107
    
    
    $
    57
    

    
    $
    478Three months ended March 31, 2003Net sales
    
    $
    221
    
    
    $
    109
    
    
    $
    41
    
    
    $
    371
 Note G
    
    Transactions with TFSPrior 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 $467,000 for the
three-month period ended March 31, 2003. Allocated costs included in
selling, general, and administrative expenses totaled $672,000 for the
three-month period ended March 31, 2003. Allocated costs included in our
research and development expenses totaled $285,000 for the three-month
period ended March 31, 2003. 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 of TFS.On 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. These agreements require us to pay a negotiated fee.
During the three months ended March 31, 2004, we paid $234,000 for rent
and $32,000 for engineering services to TFS under these agreements.
During this period, we also paid TFS $553,000 for engineering and design
services related to the development of printed circuit board assemblies
and for purchases of these assemblies for our HDTV product.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 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.
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Transition Services AgreementWe and TFS have entered into a Transition Services Agreement under which
TFS provides to us certain administrative services that may be necessary
to our business. The most significant service that TFS provides to us
relates to document control. TFS charges 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 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 AgreementWe 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
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.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. This loan guarantee has a five-year term and matures in
January 2007. As of March 31, 2004, our maximum liability under this
guarantee was $398,000. We have determined that it is probable that
VoiceViewer will be unable to meet its obligations under the loan
agreement. Accordingly, we have accrued $398,000 for our estimated
obligation under this guarantee. We have a security interest in, and
second rights to, the intellectual property of VoiceViewer, while the
lending institution has the first rights. We would obtain the VoiceViewer
intellectual property if in the future we are required to pay amounts
under the guarantee. However, we do not believe that it would be
possible to realize any significant value from the intellectual property.Note I
    
    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 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 is added to the number of shares that may be
subject to the granting of awards.
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Prior to the spin-off, certain of our employees were granted options to
purchase TFS 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 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 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, 2004,
approximately 33,000 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, 2004, we recorded non-cash compensation expense of $203,000 related
to these restricted stock and option grants.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. 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.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 2.99% 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 for the three months ended March 31, 2004 would have
been as follows (in thousands, except per share data):
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Net loss:As reported
    
    $
    (5,402
    )Total stock-based compensation expenses determined under
fair value based method for all awards, net of related
tax effects
    
    
    (231
    )Pro forma net loss
    
    $
    (5,633
    )Basic and diluted net loss per share:As reported
    
    $
    (1.00
    )Pro forma
    
    $
    (1.05
    )
 Note J
    
    Subsequent Event:On May 14, 2004, we completed an underwritten public offering of
1.5 million shares of our common stock at a public offering price of $9.00 per share. We received proceeds from the offering of $12.55
million, net of underwriting discounts and commissions.
 
 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 2004 and
thereafter; the amounts, prices, timing, or terms under which we sell HDTVs
under our agreement with our initial customer; 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 consumer electronics retailers, consumer retail
stores, personal computer manufacturers, and high-end audio/video
manufacturers. We recently received our first order for HDTVs. 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 2003, we recorded revenue
from product sales of $1.6 million, or 74% of net sales, and revenue from
design and engineering services of $565,000, or 26% of net sales. We have
never been profitable. In 2003, 2002, and 2001, we had net losses of $18.7
million, $23.2 million, and $22.3 million, 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, 10




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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 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 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 develop, manufacture,
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, the establishment of a supply chain to source the components that we
do not manufacture, and the establishment of a selling channel for the
marketing and sale of our HDTV product. In April 2004, we announced our first
customer contract for the sale of our HDTV product. We currently anticipate
that sales of our HDTVs will comprise the majority of our total sales in future
periods. In addition to manufacturing 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. The selling
prices of these products range from between $90 and $1,000 per unit. 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 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. 11




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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 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. 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. 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. In the near term, we do not expect to record a tax
benefit on any losses that we incur. Long-term assets, such as property, plant, and equipment, and intangibles
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. Non-marketable equity securities are accounted for at historical cost. All
of our investments are subject to a periodic impairment review; the
impairment analysis requires significant judgment to identify events or
circumstances that would likely have a significant adverse effect on the fair
value of the investment. The indicators we use to identify those
events and circumstances include the investees revenue and earnings trends
relative to predefined milestones and overall business prospects; the
technological feasibility of the investees products and technologies; the
general market conditions in the investees industry; and the investees
liquidity, debt ratios and the rate at which the investee is using cash.
Investments identified as having an indicator of impairment 12




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would be subject to further analysis to determine if the investment is
other than temporarily impaired, in which case the investment would be written
down to its impaired value. When an investee is not considered viable from a
financial or technological point of view, the entire investment would be
written down. If an investee obtains additional funding at a valuation lower
than our carrying amount or requires a new round of equity funding to
stay in operation, and the new funding does not appear imminent, it would be
presumed that the investment is other than temporarily impaired, unless
specific facts and circumstances indicate otherwise. Our historical financial statements for periods prior to our spin-off from
TFS 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 included herein for periods prior to the
spin-off 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. 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 $467,000 for the three-month period ended
March 31, 2003. Allocated costs included in selling, general, and
administrative expenses totaled $672,000 for the three-month period ended March
31, 2003. Allocated costs included in our research and development expenses
totaled $285,000 for the three-month period ended March 31, 2003. 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 of TFS. On 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. These agreements require us to pay a negotiated fee. During the
three months ended March 31, 2004, we paid $234,000 for rent and $32,000 for
engineering services to TFS under these agreements. During this period, we
also paid TFS $553,000 for engineering and design services related to the
development of printed circuit board assemblies and for purchases of these
assemblies for our HDTV product. 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. Since the spin-off, the actual costs for services needed by our business
have not differed materially from amounts historically allocated to us from
TFS. However, we are no longer 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. 13




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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. Certain
of 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. 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 yields, we
anticipate that the amount of revenue recognized during 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 improved gross margins and results of operations later in 2004 and
beyond. However, as we increase our revenue and shift our product mix
predominantly to the HDTVs, we will use cash to finance increases in working
capital. Results of Operations Three months ended March 31, 2004 compared to three months ended March 31,
2003 Net Sales.Net sales increased 29% to $478,000 in the first quarter of
2004 from $371,000 in the first quarter of 2003. Product sales increased to
$340,000 in the first quarter of 2004 from $232,000 in the first quarter of
2003. Design and engineering services revenue decreased to $138,000 in the
first quarter of 2004 from $139,000 in the first quarter of 2003. Net sales in the near-to-eye market totaled $180,000, or 38% of total net
sales, in the first quarter of 2004 and $249,000, or 67% of total net sales, in
the first quarter of 2003. The remaining net sales were in the projection
market. Net sales in North America totaled $314,000, or 66% of total net sales, in
the first quarter of 2004 compared to $221,000, or 60% of total net sales, in
the first quarter of 2003. Net sales in Asia totaled $107,000, or 22% of total
net sales, in the first quarter of 2004 compared to $109,000, or 29% of total
net sales, in the first quarter of 2003. Net sales in Europe totaled $57,000,
or 12% of net sales, the first quarter of 2004 compared to $41,000, or 11% of
net sales, in the first quarter of 2003. Cost of Sales.Cost of sales was $2.4 million, or 499% of net sales, in
the first quarter of 2004 compared to $2.1 million, or 575% of net sales, in
the first quarter of 2003. 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. Cost of sales for design and
engineering services decreased to $122,000 in the first quarter of 2004 from
$139,000 in the first quarter of 2003. 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 11% to $1.1 million in the first quarter of
2004 from $1.2 million in the first quarter of 2003. Selling, general, and 14




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administrative expense for the first quarter of 2003 included expenses of
$464,000 associated with our spin-off from TFS. No such expenses were incurred
in the first quarter of 2004. Research and Development Expense.Research and development expense
increased 46% to $2.5 million in the first quarter of 2004 from $1.7 million in
the first quarter of 2003. Research and development expense in the first
quarter of 2004 includes costs totaling approximately $900,000 associated with
the development of our HDTV products. Net Loss.Net loss was $5.4 million in the first quarter of 2004 compared
to a net loss of $4.7 million in the first quarter of 2003. Liquidity and Capital Resources At March 31, 2004, we had cash, cash equivalents, and short-term
investments of $10.1 million. At March 31, 2003, we had no cash, cash
equivalents, or short-term investments. 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 quarter of 2004, we had $3 million in net cash outflow from
operations compared to $3.4 million in the first quarter of 2003. Most of the
cash outflow in each period related to our losses, since we had little change
in our working capital in each period. Our depreciation and amortization
expense was $865,000 in the first quarter of 2004 and $942,000 in the first
quarter of 2003. Prior to the spin-off, our entire cash outflow was funded by
TFS on an as needed basis. In the first quarter of 2004, net cash provided by investing activities
totaled $2.5 million. During the quarter, we received proceeds from the sale
of short-term investments of $4.0 million. Purchases of property and equipment
totaled $1.3 million and purchases of intangibles totaled $176,000 in the first
quarter of 2004. During the first quarter of 2003, net cash used in investing activities
totaled $101,000. During the first quarter of 2003, we used $7,000 for the
purchase of property and equipment, received proceeds from the sale of property
and equipment of $113, and used $207,000 for the purchase of intangibles. We have incurred recurring operating losses and negative cash flows since
our inception as a division of TFS. Our net loss was $18.7 million, $23.2
million, and $22.3 million in 2003, 2002, and 2001, respectively. At March 31,
2004, we had $11.6 million of working capital, including cash, cash
equivalents, and short-term investments of $10.1 million. A key element of our business involves the ongoing commercialization of
our LCoS microdisplay technology. LCoS microdisplays are an emerging
technology with target markets that could be slow to develop or could utilize
competing technologies. Therefore, accurately forecasting revenue for any
given future period is difficult. We are currently focusing a majority of our
resources on penetrating the premium segment of the HDTV market. HDTV has only
recently become available to consumers, and widespread market acceptance is
uncertain. The successful introduction of an HDTV product to market and securing
volume orders from consumer electronics retailers for HDTVs represent a key
ingredient to our success. If we achieve significant sales volume of our
HDTVs, we will use cash in order to finance the working capital associated with
increasing sales. In March 2004, we received our first order from a large,
U.S.-based, consumer electronics retailer for the purchase of our HDTVs. In
May 2004 we completed an underwritten public offering of 1.5 million shares of
our common stock and received proceeds of $12.55 million, net of underwriting
discounts and commissions. We believe that the proceeds of the offering will
be sufficient to fund our operations and planned expenditures through 2005. 15




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Aggregate Contractual Obligations The following table lists our commercial commitments (in thousands): Amount of Commitment Expiration Per PeriodTotalOther Commercial Commitments
    
    Amounts
    
    Less than 1
    
    
    
    
    
    
    
    
    
    6 Years(in thousands)
    
    Committed
    
    Year
    
    1-3 Years
    
    4-5 Years
    
    and OverFacilities
leases
    
    $
    1,326,000
    
    
    $
    936,000
    
    
    $
    390,000
    
    
    $
    
    
    
    $
    Guarantee
    
    $
    398,000
    
    
    $
    398,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
 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. We have determined that it is probable that VoiceViewer will be unable to
meet its obligations under the loan agreement. Therefore, we have accrued
$398,000, which represents our maximum obligation under the guarantee amount.
We have a security interest in, and second rights to, the intellectual property
of VoiceViewer, while the lending institution has the first rights. We would
obtain the VoiceViewer intellectual property if in the future we are required
to pay amounts under the guarantee. However, we do not believe we can realize
any significant value from VoiceViewers intellectual property. Under 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 agreed to indemnify 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. Pursuant to the Tax Sharing Agreement, 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. 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 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 the
company. 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. 16




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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, 2004, 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. During the quarterly period covered by this
report, there have not been any changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 
 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 17




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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 January 6, 2004, furnishing Item 9 Regulation FD
disclosure. Report on Form 8-K dated January 28, 2004, furnishing Item 12 Results of
Operations and Financial Condition disclosure. Report on Form 8-K dated March 24, 2004, furnishing Item 9 Regulation FD
disclosure. 
 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 14, 2004
    
    By:
    
    /s/ Vincent F. Sollitto Jr.Vincent F. Sollitto Jr.President and Chief Executive OfficerBy:
    
    /s/ Wayne A. PrattWayne A. PrattChief Financial Officer, Secretary,
and Treasurer
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