##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of
The Securities Exchange Act Of 1934


For the Quarter Ended June 30, 2003

Commission file number 1-4373



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THREE-FIVE SYSTEMS, INC.




(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 86-0654102                          
|                                                               |  |                                     
|(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) 389-8600




(Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES  [X]   NO  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES  [X]   NO  [  ]

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

|                         |  |                                 |            | 
|------------------------ |  | ------------------------------- | ---------- | 
|CLASS                    |  | OUTSTANDING AS OF JUNE 30, 2003
|                         |  |                                
|Common                   |  |                                 | 21,296,019 | 
|Par value $.01 per share |  |                                 |            | 





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TABLE OF CONTENTS



|              |                                                                                                |                                                      |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|              | ITEM 1. FINANCIAL STATEMENTS                                                                  
|              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS               
|              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|              |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|              | ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|              | ITEM 4. CONTROLS AND PROCEDURES                                                               
|PART II      
|              | ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|              | ITEM 5. OTHER INFORMATION                                                                     
|              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES   
|EXHIBIT INDEX
|EX-10.6      
|EX-31.1      
|EX-31.2      
|EX-32.1      
|EX-32.2      



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##### Table of Contents



THREE-FIVE SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                                                                    |    |  |   |      |  | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ | -- |  | - | ---- |  | 
|           |  |                                                                                       |  |                                                                                                                    |    |  |   | Page
|           |  |                                                                                       |  |                                                                                                                    |    |  |   |     
|           |  |                                                                                       |  | PART I                                                                                                             |    |  |   |     
|ITEM 1.    |  | FINANCIAL STATEMENTS:                                                                 |  |                                                                                                                    |    | 
|           |  |                                                                                       |  | Condensed
Consolidated Balance Sheets -
December 31, 2002 and June 30, 2003 (unaudited)                            |    |  | 1 |     
|           |  |                                                                                       |  | Condensed
Consolidated Statements of Income (unaudited) -
Three Months and Six Months Ended June 30, 2002 and 2003 |    |  | 2 |     
|           |  |                                                                                       |  | Condensed
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2002 and 2003              |    |  | 3 |     
|           |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                               |    |  | 4 |     
|ITEM 2.    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |  |                                                                                                                    | 9  | 
|ITEM 3.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |                                                                                                                    | 20 | 
|ITEM 4.    |  | CONTROLS AND PROCEDURES                                                               |  |                                                                                                                    | 20 | 
|           |  |                                                                                       |  | PART II                                                                                                            |    |  |   |     
|ITEM 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |                                                                                                                    | 21 | 
|ITEM 5.    |  | OTHER INFORMATION                                                                     |  |                                                                                                                    | 21 | 
|ITEM 6.    |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |                                                                                                                    | 22 | 
|SIGNATURES |  |                                                                                       |  |                                                                                                                    | 22 | 





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##### Table of Contents






ITEM 1.      FINANCIAL STATEMENTS




THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                             |                                      |                            |         |              |         |          |         |             |         | 
|-------------------------------------------- | ------------------------------------ | -------------------------- | ------- | ------------ | ------- | -------- | ------- | ----------- | ------- | 
|                                             |                                      |                            |         | DECEMBER 31, |         | JUNE 30,
|                                             |                                      |                            |         | 2002         |         | 2003    
|                                             |                                      |                            |         |              |         |         
|                                             |                                      |                            |         |              |         |          |         | (unaudited)
|ASSETS                                       |                                      |                            |         |              |         |          |         |            
|Current Assets:                              |                                      |                            |         |              |         |          |         |            
|                                             | Cash and cash equivalents            |                            | $       | 18,389       |         |          | $       | 28,418      |        
|                                             | Short-term investments               |                            |         | 62,178       |         |          |         | 34,913      |        
|                                             | Accounts receivable, net             |                            |         | 16,970       |         |          |         | 27,802      |        
|                                             | Inventories                          |                            |         | 19,876       |         |          |         | 35,264      |        
|                                             | Taxes receivable                     |                            |         | 561          |         |          |         | 604         |        
|                                             | Deferred tax asset                   |                            |         | 3,561        |         |          |         | 3,585       |        
|                                             | Assets held for sale                 |                            |         | 841          |         |          |         |            |        
|                                             | Other current assets                 |                            |         | 2,507        |         |          |         | 3,286       |        
|                                             |                                      |                            |         |              |         |          |         |            
|                                             |                                      | Total current assets       |         |              | 124,883 |          |         |             | 133,872 | 
|Property, plant and equipment, net           |                                      |                            | 31,563  |              |         |          | 41,309  |            
|Intangibles, net                             |                                      |                            | 14,919  |              |         |          | 17,556  |            
|Goodwill                                     |                                      |                            | 34,901  |              |         |          | 34,438  |            
|Long-term deferred tax asset                 |                                      |                            | 9,642   |              |         |          | 15,531  |            
|Other investments                            |                                      |                            | 6,331   |              |         |          | 6,331   |            
|Other assets, net                            |                                      |                            | 455     |              |         |          | 676     |            
|                                             |                                      |                            |         |              |         |          |         |            
|                                             |                                      | $                          | 222,694 |              |         | $        | 249,713 |            
|                                             |                                      |                            |         |              |         |          |         |            
|LIABILITIES AND STOCKHOLDERS EQUITY         |                                      |                            |         |              |         |          |         |            
|Current Liabilities:                         |                                      |                            |         |              |         |          |         |            
|                                             | Accounts payable                     |                            | $       | 8,760        |         |          | $       | 28,808      |        
|                                             | Accrued liabilities                  |                            |         | 5,166        |         |          |         | 5,648       |        
|                                             | Deferred revenue                     |                            |         | 358          |         |          |         | 153         |        
|                                             | Term loans                           |                            |         | 2,714        |         |          |         | 9,143       |        
|                                             |                                      |                            |         |              |         |          |         |            
|                                             |                                      | Total current liabilities  |         |              | 16,998  |          |         |             | 43,752  | 
|                                             |                                      |                            |         |              |         |          |         |            
|Long-term Debt                               |                                      |                            | 20      |              |         |          | 8,082   |            
|                                             |                                      |                            |         |              |         |          |         |            
|Other Long-term Liabilities                  |                                      |                            | 8       |              |         |          |        |            
|                                             |                                      |                            |         |              |         |          |         |            
|Commitments and Contingencies (Note J)      
|Minority Interest in Consolidated Subsidiary |                                      |                            |        |              |         |          | 2,570   |            
|                                             |                                      |                            |         |              |         |          |         |            
|Stockholders Equity:                        |                                      |                            |         |              |         |          |         |            
|                                             | Common stock                         |                            |         | 219          |         |          |         | 219         |        
|                                             | Additional paid-in capital           |                            |         | 200,763      |         |          |         | 200,813     |        
|                                             | Retained earnings                    |                            |         | 13,695       |         |          |         | 3,344       |        
|                                             | Stock subscription note receivable   |                            |         | (174         | )       |          |         | (180        | )      
|                                             | Accumulated other comprehensive loss |                            |         | (332         | )       |          |         | (384        | )      
|                                             | Less
 treasury stock, at cost       |                            |         | (8,503       | )       |          |         | (8,503      | )      
|                                             |                                      |                            |         |              |         |          |         |            
|                                             |                                      | Total stockholders equity |         |              | 205,668 |          |         |             | 195,309 | 
|                                             |                                      |                            |         |              |         |          |         |            
|                                             |                                      | $                          | 222,694 |              |         |          | 249,713 |            
|                                             |                                      |                            |         |              |         |          |         |            

The accompanying notes are an integral part of these condensed consolidated balance sheets.

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THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)

|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |        |         |  
|------------------------------------------------------------- | -------------------------------------------------- | -------------- | ------- | -------------- | ------- | -------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                              |                                                    |                |         | Three Months   |         | Six Months    
|                                                              |                                                    |                |         | Ended June 30, |         | Ended June 30,
|                                                              |                                                    |                |         |                |         |               
|                                                              |                                                    |                |         | 2002           |         | 2003           |        | 2002   |        | 2003
|                                                              |                                                    |                |         |                |         |                |        |        |        |     
|Net Sales                                                     |                                                    | $              | 24,087  |                |         | $              | 46,752 |        |        | $    | 47,197  |        |         | $ | 72,447  |       
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Costs and Expenses:                                           |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              | Cost of sales                                      |                |         | 23,484         |         |                |        | 45,355 |        |      |         | 46,386 |         |   |         | 71,268 |        
|                                                              | Selling, general, and administrative               |                |         | 2,812          |         |                |        | 4,623  |        |      |         | 5,937  |         |   |         | 8,967  |        
|                                                              | Research, development, and engineering             |                |         | 4,796          |         |                |        | 3,983  |        |      |         | 9,614  |         |   |         | 7,783  |        
|                                                              | Loss (gain) on sale of assets                      |                |         | 4,545          |         |                |        | 8      |        |      |         | 4,545  |         |   |         | (5     | )      
|                                                              | Amortization of customer lists/distribution rights |                |         |               |         |                |        | 511    |        |      |         |       |         |   |         | 1,022  |        
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              |                                                    |                | 35,637  |                |         |                | 54,480 |        |        |      | 66,482  |        |         |   | 89,035  |       
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              |                                                    | Operating loss |         |                | (11,550 | )              |        |        | (7,728 | )    |         |        | (19,285 | ) |         |        | (16,588 | )
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Other Income (Expense):                                       |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              | Interest, net                                      |                |         | 944            |         |                |        | 199    |        |      |         | 2,006  |         |   |         | 495    |        
|                                                              | Other, net                                         |                |         | (50            | )       |                |        | (47    | )      |      |         | 86     |         |   |         | (38    | )      
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              |                                                    |                | 894     |                |         |                | 152    |        |        |      | 2,092   |        |         |   | 457     |       
|Minority Interest in Loss (Income) of
Consolidated Subsidiary |                                                    |                | (21     | )              |         |                | (43    | )      |        |      | 84      |        |         |   | (43     | )     
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Loss before Income Taxes                                      |                                                    |                | (10,677 | )              |         |                | (7,619 | )      |        |      | (17,109 | )      |         |   | (16,174 | )     
|                                                              | Benefit from income taxes                          |                |         | (4,037         | )       |                |        | (2,743 | )      |      |         | (6,159 | )       |   |         | (5,823 | )      
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Net Loss                                                      |                                                    | $              | (6,640  | )              |         | $              | (4,876 | )      |        | $    | (10,950 | )      |         | $ | (10,351 | )     
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Loss per Common Share:                                        |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              | Basic and diluted                                  |                | $       | (0.31          | )       |                | $      | (0.23  | )      |      | $       | (0.51  | )       |   | $       | (0.49  | )      
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|Weighted Average Number of Common Shares:                     |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       
|                                                              | Basic and diluted                                  |                |         | 21,522         |         |                |        | 21,293 |        |      |         | 21,515 |         |   |         | 21,288 |        
|                                                              |                                                    |                |         |                |         |                |        |        |        |      |         |        |         |   |         |       

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

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THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |         |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ------- | ---------------- | ------ | ------ | ------- | ------- | ------ | -
|                                                     |                                                                             |                                                                 |                                                     |         | Six Months Ended
|                                                     |                                                                             |                                                                 |                                                     |         | June 30,        
|                                                     |                                                                             |                                                                 |                                                     |         |                 
|                                                     |                                                                             |                                                                 |                                                     |         | 2002             |        | 2003  
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |       
|Cash Flows from Operating Activities:                |                                                                             |                                                                 |                                                     |         |                  |        |        |        
|                                                     | Net loss                                                                    |                                                                 | $                                                   | (10,950 | )                |        | $      | (10,351 | )      
|                                                     | Adjustments to reconcile net loss to net cash
used in operating activities: |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     |                                                                             | Depreciation and amortization                                   |                                                     |         | 3,383            |        |        |         | 5,470   |       
|                                                     |                                                                             | Stock compensation                                              |                                                     |         | 74               |        |        |         | 50      |       
|                                                     |                                                                             | Minority interest in consolidated subsidiary                    |                                                     |         | (84              | )      |        |         | 43      |       
|                                                     |                                                                             | Deferred revenue                                                |                                                     |         |                 |        |        |         | (205    | )     
|                                                     |                                                                             | Provision for accounts receivable valuation reserves            |                                                     |         | 186              |        |        |         | 51      |       
|                                                     |                                                                             | Loss (gain) on disposal of assets                               |                                                     |         | 4,545            |        |        |         | (5      | )     
|                                                     |                                                                             | Benefit from deferred taxes, net                                |                                                     |         | (6,359           | )      |        |         | (5,889  | )     
|                                                     |                                                                             | Interest on notes payable                                       |                                                     |         |                 |        |        |         | 58      |       
|                                                     |                                                                             | Interest on officer loan                                        |                                                     |         | (6               | )      |        |         | (6      | )     
|                                                     | Changes in assets and liabilities:                                          |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     |                                                                             | (Increase) decrease in accounts receivable                      |                                                     |         | 3,720            |        |        |         | (11,162 | )     
|                                                     |                                                                             | (Increase) decrease in inventories                              |                                                     |         | 3,394            |        |        |         | (5,125  | )     
|                                                     |                                                                             | (Increase) decrease in other assets                             |                                                     |         | 610              |        |        |         | (209    | )     
|                                                     |                                                                             | Increase (decrease) in accounts payable and accrued liabilities |                                                     |         | (6,282           | )      |        |         | 19,060  |       
|                                                     |                                                                             | Decrease in taxes payable/receivable                            |                                                     |         | (360             | )      |        |         | (43     | )     
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     |                                                                             |                                                                 | Net cash used in operating activities               |         |                  | (8,129 | )      |         |         | (8,263 | )
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|Cash Flows from Investing Activities:                |                                                                             |                                                                 |                                                     |         |                  |        |        |        
|                                                     | Purchases of property, plant, and equipment                                 |                                                                 |                                                     | (2,402  | )                |        |        | (1,196  | )      
|                                                     | Proceeds from sale of assets                                                |                                                                 |                                                     | 600     |                  |        |        | 353     |        
|                                                     | Purchase of intangibles                                                     |                                                                 |                                                     | (4,803  | )                |        |        | (648    | )      
|                                                     | Purchase of short-term investments                                          |                                                                 |                                                     | (72,946 | )                |        |        | (8,263  | )      
|                                                     | Proceeds from maturities/sales of short-term investments                    |                                                                 |                                                     | 76,630  |                  |        |        | 35,458  |        
|                                                     | Licenses and acquisitions                                                   |                                                                 |                                                     |        |                  |        |        | (9,516  | )      
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     |                                                                             |                                                                 | Net cash provided by (used in) investing activities |         |                  | (2,921 | )      |         |         | 16,188 |  
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|Cash Flows from Financing Activities:                |                                                                             |                                                                 |                                                     |         |                  |        |        |        
|                                                     | Payments on notes payable                                                   |                                                                 |                                                     |        |                  |        |        | (417    | )      
|                                                     | Stock options exercised                                                     |                                                                 |                                                     | 150     |                  |        |        |        |        
|                                                     | (Distribution to) receipt from minority interest                            |                                                                 |                                                     | (239    | )                |        |        | 2,527   |        
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     |                                                                             |                                                                 | Net cash provided by (used in) financing activities |         |                  | (89    | )      |         |         | 2,110  |  
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|                                                     | Effect of exchange rate changes on cash and cash equivalents                |                                                                 |                                                     | 52      |                  |        |        | (6      | )      
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                 | (11,087                                             | )       |                  |        | 10,029 |        
|Cash and cash equivalents, beginning of period       |                                                                             |                                                                 | 37,003                                              |         |                  |        | 18,389 |        
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|Cash and cash equivalents, end of period             |                                                                             | $                                                               | 25,916                                              |         |                  | $      | 28,418 |        
|                                                     |                                                                             |                                                                 |                                                     |         |                  |        |        |         |        
|Noncash Investing and Financing Activities:          |                                                                             |                                                                 |                                                     |         |                  |        |        |        
|                                                     | Note payable due on purchase of DI distribution rights                      |                                                                 | $                                                   |        |                  |        | $      | 2,882   |        
|                                                     | Note payable due on purchase of Microtune inventory and equipment           |                                                                 |                                                     |        |                  |        |        | 2,594   |        
|                                                     | Capital lease due on purchase of Unico equipment                            |                                                                 |                                                     |        |                  |        |        | 9,375   |        

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

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|       |  | THREE-FIVE SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|Note A |  | The accompanying unaudited Condensed Consolidated 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 six-month period ended June 30, 2003 are not
necessarily indicative of the operating results that may be expected for
the entire year ending December 31, 2003. These financial statements
should be read in conjunction with our December 31, 2002 financial
statements and the accompanying notes thereto.                                                                                                                                                     
|      
|       |  | We announced in March 2003 that our board of directors has approved a
decision to spin-off our Microdisplay division into a newly created and
separately traded public company. We have filed a Form 10 with the
Securities and Exchange Commission indicating that our Board of Directors
has approved the contribution of all of the assets of our Microdisplay
division, plus approximately $22 million in cash, to Brillian
Corporation, a wholly owned corporation, followed by a pro rata
distribution, or spin-off, of all of the outstanding common stock of
Brillian Corporation to the holders of our common stock. For more
information on the reason for the spin-off, as well as the description of
business and risks associated with the spin-off, please refer to the Form
10 and the related amendments and associated filings with the Securities
and Exchange Commission. We currently expect that the spin-off of
Brillian Corporation will occur toward the end of the third quarter of
2003, although the actual timing will depend upon when the final SEC
comments on filings related to the spin-off are received and addressed.
|      
|Note B |  | Basic loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the
three- and six-month periods ended June 30, 2002 and 2003. Diluted loss
per common share is determined assuming that outstanding dilutive options
and warrants were exercised at the beginning of the period or at the time
of issuance, if later. For the three months ended June 30, 2002 and June
30, 2003, the effect of 355,082 and 63,545 shares, respectively, and for
the six months ended June 30, 2002 and June 30, 2003, the effect of
394,689 and 24,575 shares, respectively, as determined using the treasury
stock method, were excluded from the calculation of loss per share as
their effect would have been antidilutive and decreased the loss per
share. Set forth below are the disclosures required pursuant to SFAS No.
128  Earnings per Sharefor the three months and six months ended June
30, 2002 and June 30, 2003.                                                                                                                                                          

|                      |                                |                        |        |                    |       |                  |        |                                       |       |      |         |        |       |   |         |        |       |  
|--------------------- | ------------------------------ | ---------------------- | ------ | ------------------ | ----- | ---------------- | ------ | ------------------------------------- | ----- | ---- | ------- | ------ | ----- | - | ------- | ------ | ----- | -
|                      |                                |                        |        | Three Months Ended |       | Six Months Ended
|                      |                                |                        |        | June 30,           |       | June 30,        
|                      |                                |                        |        |                    |       |                 
|                      |                                |                        |        | 2002               |       | 2003             |        | 2002                                  |       | 2003
|                      |                                |                        |        |                    |       |                  |        |                                       |       |     
|                      |                                |                        |        |                    |       |                  |        | (in thousands, except per share data) |       |      |         |       
|Basic loss per share: |                                |                        |        |                    |       |                  |        |                                       |       |      |         |        |       |   |         |       
|Net loss              |                                | $                      | (6,640 | )                  |       | $                | (4,876 | )                                     |       | $    | (10,950 | )      |       | $ | (10,351 | )     
|                      |                                |                        |        |                    |       |                  |        |                                       |       |      |         |        |       |   |         |       
|                      | Weighted average common shares |                        |        | 21,522             |       |                  |        | 21,293                                |       |      |         | 21,515 |       |   |         | 21,288 |      
|                      |                                |                        |        |                    |       |                  |        |                                       |       |      |         |        |       |   |         |       
|                      |                                | Basic per share amount |        | $                  | (0.31 | )                |        | $                                     | (0.23 | )    |         | $      | (0.51 | ) |         | $      | (0.49 | )
|                      |                                |                        |        |                    |       |                  |        |                                       |       |      |         |        |       |   |         |       



|Note C |  | Inventories consist of the following (in thousands):
|------ |  | ----------------------------------------------------

|                |  |              |        |          |  |   |        | 
|--------------- |  | ------------ | ------ | -------- |  | - | ------ | 
|                |  | December 31, |        | June 30,
|                |  | 2002         |        | 2003    
|                |  |              |        |         
|Raw materials   |  | $            | 13,428 |          |  | $ | 23,795 | 
|Work-in-process |  |              | 2,913  |          |  |   | 7,836  | 
|Finished goods  |  |              | 3,535  |          |  |   | 3,633  | 
|                |  |              |        |          |  |   |        | 
|                |  | $            | 19,876 |          |  | $ | 35,264 | 
|                |  |              |        |          |  |   |        | 

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|Note D |  | Property, plant, and equipment consist of the following (in thousands)
at:
|------ |  | --------------------------------------------------------------------------

|                              |  |              |         |          |  |   |         |  
|----------------------------- |  | ------------ | ------- | -------- |  | - | ------- | -
|                              |  | December 31, |         | June 30,
|                              |  | 2002         |         | 2003    
|                              |  |              |         |         
|Building and improvements     |  | $            | 16,476  |          |  | $ | 16,496  |  
|Furniture and equipment       |  |              | 47,806  |          |  |   | 60,581  |  
|                              |  |              | 64,282  |          |  |   | 77,077  |  
|                              |  |              |         |          |  |   |         |  
|Less accumulated depreciation |  |              | (32,719 | )        |  |   | (35,768 | )
|                              |  |              |         |          |  |   |         |  
|                              |  | $            | 31,563  |          |  | $ | 41,309  |  
|                              |  |              |         |          |  |   |         |  



|Note E |  | Intangibles:                                                                                                                                                                                                                                                                                                                                                                                               
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Intangibles consist of mask works, patents, licenses, customer lists,
distribution rights, and other intangible assets. 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. Our policy is to commence amortization of intangibles when
their related benefits begin to be realized.
|      
|       |  | Intangible assets consist of the following (in thousands) at June 30, 2003:                                                                                                                                                                                                                                                                                                                                

|                             |                                     |   |             |       |              |   |        |        |   |   |        |       | 
|---------------------------- | ----------------------------------- | - | ----------- | ----- | ------------ | - | ------ | ------ | - | - | ------ | ----- | 
|                             |                                     |   | Acquisition |       | Accumulated  |   | Book  
|                             |                                     |   | Value       |       | Amortization |   | Value 
|                             |                                     |   |             |       |              |   |       
|Amortized Intangible Assets: |                                     |   |             |       |              |   |        |        |   |   |        |      
|                             | Mask works                          |   | $           | 6,611 |              |   | $      | (2,206 | ) |   | $      | 4,405 | 
|                             | Patents and other intangible assets |   |             | 3,709 |              |   |        | (34    | ) |   |        | 3,675 | 
|                             | Customer lists                      |   |             | 5,000 |              |   |        | (889   | ) |   |        | 4,111 | 
|                             | Distribution rights                 |   |             | 3,882 |              |   |        | (388   | ) |   |        | 3,494 | 
|                             | Licenses                            |   |             | 2,955 |              |   |        | (1,084 | ) |   |        | 1,871 | 
|                             |                                     |   |             |       |              |   |        |        |   |   |        |      
|                             |                                     | $ | 22,157      |       |              | $ | (4,601 | )      |   | $ | 17,556 |      
|                             |                                     |   |             |       |              |   |        |        |   |   |        |      



| |  | Intangible asset amortization expense for the six months ended June 30,
2002 was $847,000, compared to $1,893,000 for the six months ended June
30, 2003. Estimated annual amortization expense through 2007 related to
intangible assets (in thousands) reported as of June 30, 2003 is as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |  |        |       | 
|----------- |  | ------ | ----- | 
|Fiscal Year |  | Amount
|            |  |       
|2003        |  | $      | 4,095 | 
|2004        |  |        | 4,776 | 
|2005        |  |        | 4,810 | 
|2006        |  |        | 3,572 | 
|2007        |  |        | 2,108 | 



|Note F |  | Goodwill:                                                                                                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Goodwill decreased $463,000 due to the net of an $807,000 purchase
accounting adjustment to the ETMA acquisition, which closed in
mid-December 2002, and $344,000 of capitalized costs related to the Unico
and ETMA acquisitions.
|      
|       |  | Changes in goodwill from December 31, 2002 to June 30, 2003 (in
thousands) were as follows:                                                                                                                                       

|                             |  |     |        |              |  |       |   |  |  |   |        |  
|---------------------------- |  | --- | ------ | ------------ |  | ----- | - |  |  | - | ------ | -
|                             |  | ISD |        | Microdisplay |  | Total
|                             |  |     |        |              |  |      
|Balance at December 31, 2002 |  | $   | 34,901 |              |  | $     |  |  |  | $ | 34,901 |  
|Change                       |  |     | (463   | )            |  |       |  |  |  |   | (463   | )
|                             |  |     |        |              |  |       |   |  |  |   |        |  
|Balance at June 30, 2003     |  | $   | 34,438 |              |  | $     |  |  |  | $ | 34,438 |  
|                             |  |     |        |              |  |       |   |  |  |   |        |  

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|Note G |  | Segment Information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | We monitor and evaluate the financial performance of our operations by
our two product lines (operating segments): Integrated Systems and
Displays (ISD) and Microdisplay. In our ISD division, we offer advanced
design and manufacturing services and display products to original
equipment manufacturers, commonly referred to as OEMs. Historically, we
have focused on display-oriented products, although we have always
performed extended manufacturing in conjunction with the display module.
In the past nine months, we expanded the value-added manufacturing
services we provide in the ISD division through several acquisitions. As
a result, we now provide printed circuit board assembly, or PCBA, radio
frequency, or RF, module assembly, new product introduction, or NPI, box
build, and order fulfillment, even in products that do not need displays.
In products that do include displays, we specialize in custom and
standard display solutions utilizing various display technologies,
including liquid crystal displays, or LCDs, organic light emitting
diodes, or OLEDs, and cathode ray tubes, or CRTs. The products we
manufacture for OEMs are of varying sizes and have varying levels of
integration.
|      
|       |  | In our second business segment, referred to as our Microdisplay division,
we develop, manufacture, and market microdisplay products and system
solutions utilizing our liquid crystal on silicon, or LCoS, microdisplay
technology for a variety of markets. These markets include rear
projection, high-definition televisions; front-projector multimedia and
home theater projectors; and near-to-eye, or personal, display
applications, including head-mounted monocular or binocular headsets and
viewers for industrial, medical, military, commercial, and consumer
applications. Our LCoS microdisplays consist of a CMOS backplane, liquid
crystal layer, and glass packaged for connectivity using highly advanced
packaging technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|       |  | The accounting policies of the operating segments are the same as those
described in our Form 10-K for the year ended December 31, 2002 in Note
2, Summary of Significant Accounting Policies. Non-specific operating
segment expenses were allocated based upon estimated usage. Interest
income was split between the ISD and the Microdisplay segments. The
worldwide average tax rate was used for both segments. The following
includes financial information (in thousands) for our two operating
segments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                 |  |     |        |              |  |       |        |   |  |   |        |  
|-------------------------------- |  | --- | ------ | ------------ |  | ----- | ------ | - |  | - | ------ | -
|                                 |  | ISD |        | Microdisplay |  | Total
|                                 |  |     |        |              |  |      
|Three
months ended
June 30, 2002 |  |     |        |              |  |       |        |   |  |   |        |  
|Net sales                        |  | $   | 23,862 |              |  | $     | 225    |   |  | $ | 24,087 |  
|Other income                     |  |     | 447    |              |  |       | 447    |   |  |   | 894    |  
|Benefit from income taxes        |  |     | (1,744 | )            |  |       | (2,293 | ) |  |   | (4,037 | )
|Net loss                         |  |     | (3,042 | )            |  |       | (3,598 | ) |  |   | (6,640 | )
|Goodwill                         |  |     |       |              |  |       |       |   |  |   |       |  

|                                 |  |     |        |              |  |       |        |   |  |   |        |  
|-------------------------------- |  | --- | ------ | ------------ |  | ----- | ------ | - |  | - | ------ | -
|                                 |  | ISD |        | Microdisplay |  | Total
|                                 |  |     |        |              |  |      
|Three months ended
June 30, 2003 |  |     |        |              |  |       |        |   |  |   |        |  
|Net sales                        |  | $   | 45,992 |              |  | $     | 760    |   |  | $ | 46,752 |  
|Other income                     |  |     | 102    |              |  |       | 50     |   |  |   | 152    |  
|Benefit from income taxes        |  |     | (1,072 | )            |  |       | (1,671 | ) |  |   | (2,743 | )
|Net loss                         |  |     | (1,906 | )            |  |       | (2,970 | ) |  |   | (4,876 | )
|Goodwill                         |  |     | 34,438 |              |  |       |       |   |  |   | 34,438 |  

|                               |  |     |        |              |  |       |        |   |  |   |         |  
|------------------------------ |  | --- | ------ | ------------ |  | ----- | ------ | - |  | - | ------- | -
|                               |  | ISD |        | Microdisplay |  | Total
|                               |  |     |        |              |  |      
|Six months ended
June 30, 2002 |  |     |        |              |  |       |        |   |  |   |         |  
|Net sales                      |  | $   | 46,746 |              |  | $     | 451    |   |  | $ | 47,197  |  
|Other income                   |  |     | 1,045  |              |  |       | 1,047  |   |  |   | 2,092   |  
|Benefit from income taxes      |  |     | (1,971 | )            |  |       | (4,188 | ) |  |   | (6,159  | )
|Net loss                       |  |     | (3,505 | )            |  |       | (7,445 | ) |  |   | (10,950 | )
|Goodwill                       |  |     |       |              |  |       |       |   |  |   |        |  

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|                               |  |     |        |              |  |       |        |   |  |   |         |  
|------------------------------ |  | --- | ------ | ------------ |  | ----- | ------ | - |  | - | ------- | -
|                               |  | ISD |        | Microdisplay |  | Total
|                               |  |     |        |              |  |      
|Six
months ended
June 30, 2003 |  |     |        |              |  |       |        |   |  |   |         |  
|Net sales                      |  | $   | 71,316 |              |  | $     | 1,131  |   |  | $ | 72,447  |  
|Other income                   |  |     | 306    |              |  |       | 151    |   |  |   | 457     |  
|Benefit from income taxes      |  |     | (2,512 | )            |  |       | (3,311 | ) |  |   | (5,823  | )
|Net loss                       |  |     | (4,464 | )            |  |       | (5,887 | ) |  |   | (10,351 | )
|Goodwill                       |  |     | 34,438 |              |  |       |       |   |  |   | 34,438  |  



| |  | We also track net sales by geographic location. Net sales by geographic
area are determined based upon the location of the end customer. The
following includes net sales (in thousands) for our geographic areas:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |  |         |        |      |  |        |        |       |  |   |        |  |  |   |        | 
|-------------------------------- |  | ------- | ------ | ---- |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------ | 
|                                 |  | North   |        |      |  |        |        |       |  |   |        |  |  |  
|                                 |  | America |        | Asia |  | Europe |        | Total
|                                 |  |         |        |      |  |        |        |      
|Three months ended
June 30, 2002 |  |         |        |      |  |        |        |       |  |   |        |  |  |   |        | 
|Net sales                        |  | $       | 1,685  |      |  | $      | 17,639 |       |  | $ | 4,763  |  |  | $ | 24,087 | 
|Three
months ended
June 30, 2003 |  |         |        |      |  |        |        |       |  |   |        |  |  |   |        | 
|Net sales                        |  | $       | 24,526 |      |  | $      | 10,885 |       |  | $ | 11,341 |  |  | $ | 46,752 | 
|Six months ended
June 30, 2002   |  |         |        |      |  |        |        |       |  |   |        |  |  |   |        | 
|Net sales                        |  | $       | 4,189  |      |  | $      | 29,928 |       |  | $ | 13,080 |  |  | $ | 47,197 | 
|Six months ended
June 30, 2003   |  |         |        |      |  |        |        |       |  |   |        |  |  |   |        | 
|Net sales                        |  | $       | 40,507 |      |  | $      | 17,664 |       |  | $ | 14,276 |  |  | $ | 72,447 | 



|Note H |  | Comprehensive loss (in thousands) for the periods was as follows:
|------ |  | -----------------------------------------------------------------

|                                   |                                                  |   |                    |    |                  |   |        |     |      |   |         |      |   |   |         |     |  
|---------------------------------- | ------------------------------------------------ | - | ------------------ | -- | ---------------- | - | ------ | --- | ---- | - | ------- | ---- | - | - | ------- | --- | -
|                                   |                                                  |   | Three Months Ended |    | Six Months Ended
|                                   |                                                  |   | June 30,           |    | June 30,        
|                                   |                                                  |   |                    |    |                 
|                                   |                                                  |   | 2002               |    | 2003             |   | 2002   |     | 2003
|                                   |                                                  |   |                    |    |                  |   |        |     |     
|Net loss                           |                                                  | $ | (6,640             | )  |                  | $ | (4,876 | )   |      | $ | (10,950 | )    |   | $ | (10,351 | )  
|Other comprehensive income (loss): |                                                  |   |                    |    |                  |   |        |     |      |   |         |      |   |   |         |    
|                                   | Foreign currency translation
adjustment          |   |                    | 36 |                  |   |        | 3   |      |   |         | 52   |   |   |         | (6  | )
|                                   | Unrealized gain (loss) on
securities, net of tax |   |                    | 89 |                  |   |        | (29 | )    |   |         | (208 | ) |   |         | (46 | )
|                                   |                                                  |   |                    |    |                  |   |        |     |      |   |         |      |   |   |         |    
|Comprehensive loss                 |                                                  | $ | (6,515             | )  |                  | $ | (4,902 | )   |      | $ | (11,106 | )    |   | $ | (10,403 | )  
|                                   |                                                  |   |                    |    |                  |   |        |     |      |   |         |      |   |   |         |    



|Note I |  | Debt:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | We have extended the term of our credit facility with Comerica Bank to
September 1, 2003. That credit facility is a $15.0 million unsecured
revolving line of credit. No borrowings were outstanding under that
credit facility on June 30, 2003. Advances under the facility may be made
as prime rate advances, which accrue interest payable monthly at the
banks prime lending rate, or as LIBOR rate advances, which bear interest
at 150 basis points in excess of the LIBOR base rate. We are currently
renegotiating our credit facilities. As of June 30, 2003, our Beijing
subsidiary had an outstanding $2.7 million unsecured term loan due
January 14, 2004 to the Bank of China.

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| |  | In January 2003, we signed a note payable of $2.9 million to Data
International that is payable over the next two years. In March 2003, we
signed a note payable of $2.7 million to Microtune that is payable within
the next six months. In May 2003, we entered into a capital lease of
$12.0 million with Unico that is payable at the rate of $3.0 million per
year over the next four years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note JCommitments and Contingencies:



| |  | In February 2002, we guaranteed up to $500,000 of the debt of a private
start-up company, VoiceViewer Technology, Inc., which is developing
microdisplay products. As of June 30, 2003, the outstanding balance on
the debt was $382,000. This loan guarantee has a five-year term and
matures in January 2007. At this time, no liability has been recognized
by us. We will be required to pay this guarantee to the lender if the
start-up company defaults on its debt obligations.                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During June 2003, we provided a $60,000 short-term bridge loan to
VoiceViewer. This loan bears interest at the rate of 7.0% with interest
due monthly and principal due on December 30, 2003. We currently believe
that VoiceViewer will be able to meet its obligations under the debt
facility guaranteed by us. We have a security interest and second rights
to the intellectual property of VoiceViewer technology, while the lending
institution has the first rights. However, we would obtain the
VoiceViewer intellectual property if in the future we are required to pay
amounts under the guarantee.
|
| |  | We are also involved in certain administrative proceedings arising in the
normal course of business. In our opinion, the ultimate settlement of
these administrative proceedings will not materially impact our financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                    

Note KLicenses and Acquisitions:



| |  | In January 2003, we signed licensing and manufacturing agreements with
Data International Co., Ltd. of Taiwan. Under those agreements, we
became the exclusive channel in the Americas for standard and custom LCD
products manufactured by Data International. We also have the right to
sell those products through our worldwide channels. The agreements
provide us with access to a full suite of standard display products that
round out our existing standard product portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The cost of the license was $3.9 million, of which $1.0 million was paid
upon signing and the remaining $2.9 million is due as a note payable over
the next two years. The unpaid $2.9 million is subject to reduction if
certain revenue and margin targets are not met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In March 2003, we signed an agreement with Microtune, Inc. under which we
agreed to manufacture, assemble, and test Microtunes radio frequency, or
RF, tuner modules and wireless module products in our manufacturing
facility in Manila, the Philippines. As part of the agreement, Microtune
sold to us certain of its own equipment and inventory for $8.2 million,
of which $2.7 million is due as a note payable in the next three months,
and contracted with us to provide 100% of Microtunes current demand for
fully assembled RF subsystems. We also hired approximately 500 Microtune
employees in Manila, and are in the process of transferring those
employees to our nearby manufacturing facility. After qualifications are
complete for our facility, Microtune plans to close its Manila
manufacturing facility.                                                                                                                                                                                                                                                                                                                              
|
| |  | In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang.
Unico was an electronic manufacturer for OEM customers in the computer,
computer peripheral, and communications industries. The Unico business
was acquired by TFS Electronic Manufacturing Services Sdn. Bhd., or
TFS-Malaysia, a joint venture owned 60% by an overseas subsidiary of ours
and 40% by Unico Holdings Bhd., the former parent of Unico. Unico
Holdings is the investment arm of the Chinese Chamber of Commerce of
Malaysia. Our share of the initial cost of capitalizing TFS-Malaysia was
$3.8 million and Unicos share was $2.5 million, most of which will be
used for working capital. TFS-Malaysia purchased $4.1 million in
inventory from Unico, of which $2.7 million was paid at the time of the
purchase. The balance of $1.4 million is included in accounts payable
and accrued liabilities. No advance payment was required for the
acquisition of the property, plant, and equipment of Unico, all of which
will be leased from the seller. The equipment lease from the seller will
be

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| |  | accounted for as a capital lease of $12.0 million that is payable by
TFS-Malaysia at the rate of $3.0 million per year over the next four
years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Note LStock Compensation:



| |  | 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, under which no compensation cost has been
recognized. However, 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 4.08% for
the three and six months ended June 30, 2002, and 2.46% for the three and
six months ended June 30, 2003; expected dividend yields of zero for all
scenarios; expected lives of 6.1 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 74.2% for all scenarios. Had
compensation cost for these plans been determined consistent with SFAS
No. 123, our net income and earnings per share would have been as follows
(in thousands, except per share data):
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |                                                                                                                             |  |   |                    |   |                  |   |        |   |      |   |         |   |  |   |         |   | 
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------ | - | ---------------- | - | ------ | - | ---- | - | ------- | - |  | - | ------- | - | 
|                                      |                                                                                                                             |  |   | Three Months Ended |   | Six Months Ended
|                                      |                                                                                                                             |  |   | June 30,           |   | June 30,        
|                                      |                                                                                                                             |  |   |                    |   |                 
|                                      |                                                                                                                             |  |   | 2002               |   | 2003             |   | 2002   |   | 2003
|                                      |                                                                                                                             |  |   |                    |   |                  |   |        |   |     
|Net loss:                             |                                                                                                                             |  |   |                    |   |                  |   |        |   |      |   |         |   |  |   |        
|                                      | As reported                                                                                                                 |  | $ | (6,640             | ) |                  | $ | (4,876 | ) |      | $ | (10,950 | ) |  | $ | (10,351 | )
|                                      | Total stock-based compensation
expenses determined under fair
value based method for all
awards, net of related tax
affects |  |   | (1,146             | ) |                  |   | (930   | ) |      |   | (2,170  | ) |  |   | (1,694  | )
|                                      |                                                                                                                             |  |   |                    |   |                  |   |        |   |      |   |         |   |  |   |         |  
|                                      | Pro forma net loss                                                                                                          |  | $ | (7,786             | ) |                  | $ | (5,806 | ) |      | $ | (13,120 | ) |  | $ | (12,045 | )
|                                      |                                                                                                                             |  |   |                    |   |                  |   |        |   |      |   |         |   |  |   |         |  
|Basic and diluted net loss per share: |                                                                                                                             |  |   |                    |   |                  |   |        |   |      |   |         |   |  |   |        
|                                      | As reported                                                                                                                 |  | $ | (0.31              | ) |                  | $ | (0.23  | ) |      | $ | (0.51   | ) |  | $ | (0.49   | )
|                                      | Pro forma                                                                                                                   |  |   | (0.36              | ) |                  |   | (0.27  | ) |      |   | (0.61   | ) |  |   | (0.57   | )

Note MRecently Issued Accounting Standards:



| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -Transition and Disclosure. This Statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. We have adopted the disclosure requirements of SFAS
No. 148.                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This
Interpretation addresses the disclosures to be made by a guarantor in its
financial statements and its obligations under guarantees. The
Interpretation also clarifies the requirements related to the recognition
of a liability by the guarantor at the inception of a guarantee. Per the
Interpretation, initial recognition of a liability shall be applied only
on a prospective basis to guarantees issued or modified after December
31, 2002. We adopted the requirements of FIN 45 as of January 1, 2003,
and there was no material impact on our financial position or results of
operations.

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
expectations, anticipation, intentions, beliefs, or strategies
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for fiscal 2003 and
thereafter; the proposed spin-off of our Microdisplay division; 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 have two business divisions, each reportable as a segment. The first
segment is referred to as the Integrated Systems and Displays, or ISD,
division. The second segment is referred to as our Microdisplay division. We
have filed a Form 10 with the Securities and Exchange Commission indicating
that our Board of Directors has approved the contribution of all of the assets
of our Microdisplay division plus approximately $22 million in cash to Brillian
Corporation, a wholly owned corporation, followed by a pro rata distribution,
or spin-off, of all of the outstanding common stock of Brillian Corporation to
the holders of our common stock. For more information on the reason for the
spin-off as well as the description of business and risks associated with the
spin-off, please refer to the Form 10 and the related amendments and associated
filings with the Securities and Exchange Commission. We currently expect that
the spin-off of Brillian Corporation will occur towards the end of the third
quarter of 2003, although the actual timing will depend upon when final SEC
comments on filings related to the spin-off are received and addressed. For
purposes of clarity in this document, we have provided a separate overview for
each division.

ISD Division Overview

In our ISD division, we offer advanced design and manufacturing services
and display products to original equipment manufacturers, commonly referred to
as OEMs. Historically, we have focused on display-oriented products, although
we have always performed value-added manufacturing in conjunction with the
display module. In the past nine months, we expanded the value-added
manufacturing services we provide in the ISD division through several
acquisitions, described below. As a result, we now provide printed circuit
board assembly, radio frequency module assembly, new product introduction, box
build, and order fulfillment, even in products that do not need displays. In
products that do include displays, we specialize in custom and standard display
solutions utilizing various display technologies, including liquid crystal
displays, or LCDs, organic light emitting diodes, or OLEDs, and cathode ray
tubes, or CRTs. The products we manufacture for OEMs are of varying sizes and
have varying levels of integration. The typical design program life cycle of a
custom-designed product is three to 15 months and includes technical design,
prototyping, pilot manufacturing, and high-volume manufacturing. The cycle is
shorter in products where no display is involved and where the OEM customer has
already completed the design.

Prior to 2002, our strategy in our ISD business was to seek large-volume
programs from major OEMs, typically 100,000 units per year or higher, with
selling prices of approximately $10 per unit. From 1998 to 2002, substantially
all of our large volume business was in providing display modules for Motorola
handsets. In 2002, we re-focused our strategy on lower-volume programs with
potentially higher gross margins. In addition, in 2003 we also began focusing
on providing manufacturing services even for products that do not need
displays. The selling price of our products sold in the ISD division now range
from between $3 and $4,300 per unit. As a result of our change in strategy,
none of our design wins in 2001 and 2002 have been with the handset group at
Motorola. Consequently, we expect total Motorola business to decline sharply in
2003. In 2002, Motorola accounted for 76.9% of our revenue. Motorola accounted
for 21.4% of our revenue in the first quarter of 2003, and 13.4% of our revenue
in the second quarter of 2003. For the second half of 2003, and for all of
2003, we expect Motorola to account for less than 10% of our revenue.

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As a result of the foregoing, we have substantially changed our ISD
business in the last four quarters. We have reduced our concentration in
Motorola revenue. We have expanded our business organically, through the
acquisitions of AVT, ETMA, and Unico. We have also expanded through the
license arrangement with Data International and through our manufacturing
agreement with Microtune. The following is a summary of those various
transactions.

In September 2002, we purchased the assets and ongoing business of AVT, a
privately held company that specializes in the design and integration of
complex, high-resolution display systems. AVT designs and provides customized
and ruggedized flat panel, touchscreen, and rackmount systems for original
equipment manufacturers, including General Electric, Westinghouse, Gillette,
and the U.S. military. AVT sources its display components from a variety of
companies, including Sony, Sharp, NEC, LG, and Samsung. The purchase price of
the acquisition was $12.0 million, which we paid entirely in cash.

In December 2002, we purchased the stock of ETMA Corporation, a privately
held Seattle-based electronic manufacturer for OEM customers in the automotive,
computer peripheral, medical monitoring, and Internet security industries. ETMA
offers the manufacturing capabilities of six surface mount manufacturing lines,
including one dedicated to new product introduction and prototyping activity.
ETMA provides engineering support, automated printed circuit board assembly,
in-circuit and functional testing, systems integration and box build, complete
supply chain management, and turnkey packaging and fulfillment services. The
purchase price of the acquisition was $38.1 million, which we paid entirely in
cash.

In January 2003, we signed licensing and manufacturing agreements with
Data International Co., Ltd. of Taiwan. Under those agreements, we became the
exclusive channel in the Americas for standard and custom LCD products
manufactured by Data International. We also have the right to sell those
products through our worldwide channels. The agreements provide us with access
to a full suite of standard display products that round out our existing
standard product portfolio. In conjunction with the agreement, we have
established a sales office in Orlando and hired sales and applications
engineering personnel from a distributor that had previously supported Data
Internationals products. The cost of the license is anticipated to be $3.9
million, of which $1.0 million was paid upon signing and $2.9 million will be
due over the next two years. The unpaid $2.9 million is subject to reduction
if certain revenue and margin targets are not met.

In March 2003, we signed an agreement with Microtune, Inc. in which we
agreed to manufacture, assemble, and test Microtunes radio frequency, or RF,
tuner modules and wireless module products in our manufacturing facility in
Manila, the Philippines. As part of the agreement, Microtune sold to us certain
of its own equipment and inventory for $8.2 million, of which $2.7 million is
due on a note payable in the next three months, and contracted with us to
provide 100% of Microtunes current demand for fully assembled RF subsystems.
We also hired approximately 500 Microtune employees in Manila, and will
transfer those employees to our nearby manufacturing facility. After
qualifications are complete for our facility, Microtune plans to close its
Manila manufacturing facility.

In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang. Unico
was an electronic manufacturer for OEM customers in the computer, computer
peripheral, and communications industries. The Unico business was acquired by
TFS Electronic Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a joint
venture owned 60% by an overseas subsidiary of ours and 40% by Unico Holdings
Bhd., the former parent of Unico. Unico Holdings is the investment arm of the
Chinese Chamber of Commerce of Malaysia. Our share of the initial cost of
capitalizing TFS-Malaysia was $3.8 million and Unicos share was $2.5 million,
most of which will be used for working capital. TFS-Malaysia purchased $4.1
million in inventory from Unico, of which $3.0 million was paid at the time of
the purchase. The balance of $1.1 million is included in accounts payable. No
advance payment was required for the acquisition of the property, plant, and
equipment of Unico, all of which will be leased from the seller. The equipment
lease from the seller will be accounted for as a capital lease of $12.0 million
that is payable by TFS-Malaysia at the rate of $3.0 million per year over the
next four years.

In the second quarter, our ISD division generated more than 98% of our
company-wide sales. ISD revenue was derived principally from manufacturing
services and display products.

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Several factors impact our gross margins, including manufacturing
efficiencies, product mix, product differentiation, product uniqueness,
inventory management, and volume pricing. We have United States factories in
the Seattle and Boston areas. We also have factories in the Philippines,
Malaysia, and China. In Seattle and in Malaysia, we provide engineering
support, automated printed circuit board assembly, in-circuit and functional
testing, systems integration and box build, complete supply chain management,
and turnkey packaging and fulfillment services. In Boston, we provide
aftermarket customization of CRT and LCD monitors. In the Philippines and in
China, we assemble displays into modules and are adding some of the
manufacturing services offered in Seattle and Malaysia. We also assemble RF
tuners in the Philippines.

Prior to 2001, we used our own front-end LCD production line in the
Phoenix-area for the manufacture of more technologically complex and custom
high-volume LCDs. We also purchased LCDs from third parties to provide us an
alternate source and to ensure available capacity. In order to take advantage
of lower labor costs, we traditionally shipped LCDs to our facilities in the
Philippines and China for assembly into modules.

During 2001, we decided to shut down our front-end LCD manufacturing line.
We now purchase all of our LCDs from third parties. Thus, no manufacturing for
the ISD division is done in the United States. During 2002, we signed a
Cooperative Agreement with a Chinese company under which we agreed to sell the
equipment used in our front-end LCD line and establish a supply agreement.
Under the terms of the Cooperative Agreement, in exchange for our front-end LCD
line, we will receive a total of $3.0 million in cash, favorable LCD glass
pricing, and flexible yet assured manufacturing capacity from this strategic
partner. In the second quarter of 2002, as a result of signing the Cooperative
Agreement, we realized a charge of $4.5 million for the write-down on the LCD
equipment to be sold to the Chinese company. This charge was reported as a
separate line item in operating expense. In connection with the Cooperative
Agreement, we received $2.1 million in 2002, all of which was applied against
the $3.0 million sales price and recorded as a reduction in the carrying value
of the LCD equipment held for sale. The sale of the equipment is now complete,
and we received another $300,000 payment in the first quarter of 2003. No
payments were received in the second quarter. An additional $600,000 is due to
us upon installation of the line, and we expect full payment in the second half
2003.

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

Research, development, and engineering expense consists principally of
salaries and benefits to design engineers and other technical personnel,
related facility costs, process development costs, and various expenses for
projects, including new product development. We do very little pure research
work. Most of this expense relates to the design costs associated with custom
display programs and the development of standard display products.

Microdisplay Division Overview

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

In our Microdisplay business unit, we derive revenue from the sale of our
microdisplay products and from providing design and engineering services.
During 2002, we recorded revenue from product sales of $772,000, or 53.6% of
net Microdisplay sales, and revenue from design and engineering services of
$667,000, or 46.4% of net Microdisplay sales. Our Microdisplay division has
never been profitable.

We manufacture all of our LCoS microdisplays on our high-volume liquid
crystal on silicon manufacturing line in our Phoenix facility. In addition, we
conduct all testing and assembly of LCoS modules in Phoenix. We also

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operate a facility in Boulder, Colorado, which focuses on our near-to-eye
product offerings. In Boulder, we conduct sales and marketing activities and
research and development activities related to near-to-eye products.

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

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

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

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

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

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

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

We typically sell three displays and associated electronics for products
in the projector market. In the near-to-eye market, we sell either one or two
displays and associated electronics. The displays and electronics are sold

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together as a kit. We also sell optical modules in the near-to-eye market
and light engines in the projector market. The selling price of our products
range from between $90 and $1,000 per unit.

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 most significant impact on our gross margins arises from
manufacturing-related issues. To date, our manufacturing capacity has exceeded
our manufacturing volume, resulting in the inability to fully absorb the cost
of our manufacturing infrastructure. As a result, we expect it will be
difficult to attain significant improvements in yields until we run higher
volumes.

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

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles (GAAP) 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 sales returns, pricing concessions, bad debts,
inventories, investments, fixed assets, intangible assets, income taxes,
pensions, 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 or
determinable; and collection of the resulting receivable is reasonably assured.
Sales allowances are estimated based upon historical experience of sales
returns.

Design and engineering services consist of engineering services necessary
to conform our displays to a customer or potential customers product or
device, as well as contract research and development arrangements, under which
we research the application of new technologies or manufacturing processes and
develop new products for third parties. We recognize revenue related to design
and engineering services and contract research and development arrangements
depending on the relevant contractual terms. For time and materials
arrangements, revenue is based on a fee per hour basis and is recognized as
services are provided. Under fixed-price contracts, revenue is recognized as
milestones are met. If no milestones exist, we use percentage of completion to
recognize revenue. Cost of sales related to these services approximates the
related revenues.

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

Pursuant to Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
income taxes are recorded based on current year amounts

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payable or refundable, as well as the consequences of events that give
rise to deferred tax assets and liabilities. We base our estimate of current
and deferred taxes on the tax laws and rates that are currently in effect in
the appropriate jurisdiction. Changes in tax laws or rates may affect the
current amounts payable or refundable as well as the amount of deferred tax
assets or liabilities.

We currently have $19.1 million of net deferred tax assets resulting
primarily from net operating loss and tax credit carryforwards. SFAS No. 109
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. We believe that the net deferred tax assets of $19.1
million will be realized based primarily on our projected future earnings and
scheduling of our deferred tax liabilities. However, the amount of the
deferred tax assets actually realized could differ if we have little or no
future earnings.

Long-term assets, such as long-term investments, property, plant, and
equipment, intangibles, goodwill, and other investments, are originally
recorded at cost. On an on-going basis, we assess these assets to determine if
their current recorded value is impaired. When assessing these assets, we
consider projected future cash flows to determine if impairment is applicable.
These cash flows are evaluated for objectivity by using weighted probability
techniques and also comparisons of past performance against projections.
Assets may also be evaluated by identifying independent market values of assets
that we believe to be comparable. If we 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.

Results of Operations

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

Net Sales.Net sales increased 94.2% to $46.8 million in the second
quarter of 2003 from $24.1 million in the second quarter of 2002. The increase
in revenue was a result of the acquisition of additional manufacturing
businesses in Seattle and Malaysia, the addition of our Microtune business, the
addition of our monitor business in Boston, the addition of our standard
display product business licensed from Data International, increased sales of
color display modules to European handset manufacturers, and increased sales to
display-oriented manufacturing customers other than Motorola. Our sales to
Motorola declined, both in dollars and as a percentage of our revenue. Motorola
accounted for 13.4% of our revenue in the second quarter of 2003 compared to
88.2% in the second quarter of 2002. We had two other customers that each
exceeded more than 10% of our revenue in the second quarter of 2003. One of
those customers is in the computer peripherals business and accounted for 21.2%
of our revenue, and the other customer is a European handset design company and
accounted for 11.3% of our revenue. Geographically, 52.4% of our sales were in
the United States; 23.3% of our sales were in Asia; and 24.3% of our sales were
in Europe. Our recent trend has been to have increased sales in the United
States, primarily as a result of the acquired businesses in the United States
but also because of increased display-oriented manufacturing business. Sales
in Europe increased primarily as a result of the increased sales of color LCD
modules to a European handset design company. Asia sales have declined because
of the reduced sales to Motorola, most of which was sold into China. Not
including Motorola, however, sales in Asia have increased. Most of our Asian
sales are to United States-based, multinational companies with factories
located in Asia. Our net sales in our ISD division were $46.0 million compared
to $760,000 in our Microdisplay division.

Cost of Sales.Cost of sales decreased to 97.0% of net sales in the
second quarter of 2003 from 97.5% in the second quarter of 2002. Our gross
margin is equal to the difference between our revenue and our cost of sales.
Consequently, our company-wide gross margin in the second quarter was $1.4
million, or 3% of net sales. The gross margin in our ISD division was $2.0
million, or 4.3% of net sales. For products manufactured in Seattle, Boston,
and Malaysia, our gross margin was higher than this aggregate ISD division
gross margin. For display-oriented products manufactured in Beijing and Manila,
the gross margins were lower than the aggregate ISD division gross margin for
three reasons. First, the unit volume of our sales in Beijing was lower because
of the reduced sales to Motorola and

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because the replacement sales to other customers have lower volumes but
higher selling prices. These reduced manufacturing volumes resulted in
under-absorption of our fixed manufacturing costs and increased cost of sales.
Second, in Manila the gross margins on our color display products were negative
because of yield loss and because we have not obtained expected pricing
reductions for color panels. Third, we are still in the process of ramping up
our RF module manufacturing and those products are currently selling at near
breakeven during this ramp-up phase. The gross margin in the Microdisplay
segment was a negative $572,000, or a negative 75.3% of net sales, resulting
primarily from the low volume of shipments and low manufacturing yields in the
shipped products.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 64.3% in absolute dollars to $4.6 million in
the second quarter of 2003 from $2.8 million in the second quarter of 2002. As
a percentage of net sales, however, SG&A expense decreased to 9.9% of net sales
in the second quarter of 2003 from 11.7% of net sales in the second quarter of
2002. This change in SG&A expense occurred primarily because of four items:
(1) the additional SG&A costs associated with the acquired EMS business in
Seattle of $762,000, (2) the additional SG&A costs associated with the acquired
EMS business in Malaysia of $524,000, (3) increased sales expenses of $271,000
as a result of increased display sales, and (4) the recording of expenses of
approximately $338,000 associated with the planned spin-off of our Microdisplay
division.

Research, Development, and Engineering Expense.Research, development,
and engineering expense decreased 16.7% to $4.0 million in the second quarter
of 2003 from $4.8 million in the second quarter of 2002. Research, development,
and engineering expense also decreased as a percentage of net sales, declining
to 8.5% of net sales in the second quarter of 2003 from 19.9% of net sales in
the second quarter of 2002. The decrease in the second quarter of 2003 was due
to cost reduction efforts and lower head count in our Microdisplay division in
comparison to the second quarter of 2002.

Loss (Gain) on Sale of Assets.During the second quarter of 2003, we
incurred a loss of $8,000 for the sale of certain assets compared to a loss of
$4.5 million in the second quarter of 2002. The loss in the second quarter of
2002 was related to the sale of our front-end manufacturing LCD equipment,
described above in Overview  ISD Division Overview.

Amortization of Customer Lists and Distribution Rights.During the second
quarter of 2003, we had $511,000 of amortization relating to acquisitions and
distribution rights compared to no amortization expense of these items for the
second quarter of 2002. The amortization in 2003 relates to the acquisitions of
AVT and ETMA and to the license agreement with Data International, all
described above in Overview  ISD Division Overview. The amortizable asset
associated with AVT is $3.0 million and is being amortized over five years. The
amortizable asset associated with ETMA is $2.0 million and is being amortized
over three years. The amortizable asset associated with Data International is
$3.9 million and is being amortized over five years.

Other Income, Net.Other income was $152,000 in the second quarter of
2003 compared to $894,000 in the second quarter of 2002. The primary
difference is that interest income decreased by $714,000 because of decreased
cash and investment balances and because the interest rate earned on
investments was lower in the second quarter of 2003 than in the second quarter
of 2002.

Minority Interest. We own 60% of the business in Malaysia. Since that
business was profitable in the second quarter, we recorded a charge of $43,000
to account for the profits allocated to the minority interest holder compared
to a charge of $21,000 in the second quarter of 2002 relating to the winding-up
of another investment with a minority partner.

Benefit from Income Taxes.We recorded a benefit from income taxes of
$2.7 million in the second quarter of 2003 compared to a benefit from income
taxes of $4.0 million for the second quarter of 2002. The tax rate used to
calculate the benefit was 36% for the second quarter of 2003 compared to 37.8%
for the second quarter of 2002. The decreased tax benefit rate was a result of
a higher estimated annual loss in lower tax rate jurisdictions and because of
the allocation of our loss between various countries.

Net Loss.Net loss was $4.9 million, or $0.23 per diluted share, in the
second quarter of 2003 compared to a net loss of $6.6 million, or $0.31 per
diluted share, in the second quarter of 2002. As previously noted, we plan to
spin off our Microdisplay division as a separate public company by the end of
the third quarter of 2003. The net loss

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for the Microdisplay division in the second quarter of 2003 was $3.0 million.
The net loss for the ISD division in the second quarter of 2003 was $1.9
million.

Six months ended June 30, 2003 compared to six months ended June 30, 2002

Net Sales.Net sales increased 53.4% to $72.4 million in the first half
of 2003 from $47.2 million in the first half of 2002. The increase in revenue
was a result of the acquisition of additional manufacturing businesses in
Seattle and Malaysia, the addition of our Microtune business, the addition of
our monitor business in Boston, the addition of our standard product display
business licensed from Data International, increased sales of color display
modules to European handset manufacturers, and increased sales to
display-oriented manufacturing customers other than Motorola. Our sales to
Motorola declined, both in dollars and as a percentage of our revenue. Motorola
was 16.3% of our revenue in the first half of 2003 compared to 87.2% in the
first half of 2002. We had two other customers that each exceeded more than 10%
of our revenue in the first half of 2003. One customer is in the computer
peripherals business and one is in the Internet security business, and they
accounted for 19.9% and 10.5% of our revenue, respectively. Geographically, in
the first half of 2003, 55.9% of our sales were in the United States, 24.4% of
our sales were in Asia, and 19.7% of our sales were in Europe. Our recent trend
has been to have increased sales in the United States and Europe. Our increased
sales in the United States are primarily a result of several recently acquired
businesses but also because of increased display-oriented manufacturing
business. Our increased sales in Europe are primarily as a result of the
increased sales of color LCD modules to a European handset design company.
Asia sales have declined because of the reduced sales to Motorola, most of
which was sold into China. Not including Motorola, however, the trend has been
that our sales in Asia are increasing. Most of our Asian sales are to United
States-based, multinational companies with factories located in Asia. Our net
sales for the first half of 2003 in our ISD division were $71.3 million
compared to $1.1 million in our Microdisplay division.

Cost of Sales.Cost of sales slightly increased to 98.4% of net sales in
the first half of 2003 from 98.3% in the first half of 2002. Our gross margin
is equal to the difference between our revenue and our cost of sales.
Consequently, our company-wide gross margin in the first half was $1.2 million,
or 1.6% of net sales. The gross margin in our ISD division was $2.2 million, or
3.1% of net sales. For products manufactured in Seattle, Boston, and Malaysia,
our gross margin was higher than this aggregate ISD division gross margin. For
display-oriented products manufactured in Beijing and Manila, the gross margins
were lower than the aggregate ISD division gross margin for three reasons.
First, the unit volume of our sales in Beijing and Manila was lower because of
the reduced sales to Motorola and because the replacement sales to other
customers have lower volumes but higher selling prices. These reduced
manufacturing volumes resulted in under-absorption of our fixed manufacturing
costs and increased cost of sales. Second, in Manila the gross margins on our
color display products were negative because of yield loss and because we have
not obtained expected pricing reductions of color panels. Third, we are still
in the process of ramping up our RF module manufacturing and those products are
currently selling at near breakeven during this ramp-up phase. The gross margin
in the Microdisplay segment was negative $1.0 million, or a negative 91.4% of
net sales, resulting primarily from the low volume of shipments and low
manufacturing yields in the shipped products.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 52.5% in absolute dollars to $9.0 million in
the first half of 2003 from $5.9 million in the first half of 2002. As a
percentage of net sales, however, SG&A expense decreased from 12.6% of net
sales in the first half of 2002 to 12.4% of net sales in the first half of
2003. This change in SG&A expense occurred primarily because of four items:
(1) the additional SG&A costs associated with the acquired EMS business in
Seattle of $1.6 million, (2) the additional SG&A costs associated with the
acquired EMS business in Malaysia of $524,000, (3) increased sales expenses as
a result of increased display sales of $627,000, and (4) the recording of
expenses of approximately $802,000 associated with the planned spin-off of our
Microdisplay division.

Research, Development, and Engineering Expense.Research, development,
and engineering expense decreased 18.8% to $7.8 million in the first half of
2003 from $9.6 million in the first half of 2002. Research, development and
engineering expense also decreased as a percentage of net sales, declining to
10.7% of net sales in the first half of 2003 from 20.4% of net sales in the
first half of 2002. The decrease in the first half of 2003 was due to cost
reduction efforts and lower head count in our Microdisplay division in
comparison to the first half of 2002.

Loss (Gain) on Sale of Assets.During the first half of 2003, we realized
a gain of $5,000 for the sale of certain assets compared to a loss of $4.5
million in the first half of 2002. The loss in the first half of 2002 is
related

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to the sale of our front-end manufacturing LCD equipment, described above
in Overview  ISD Division Overview.

Amortization of Customer Lists and Distribution Rights.During the first
half of 2003, we had $1.0 million of amortization relating to acquisitions and
distribution rights compared to no amortization expense for the first half of
2002. The amortization in 2003 relates to the acquisitions of AVT and ETMA and
to the license agreement with Data International, all described above in
Overview  ISD Division Overview. The amortizable asset associated with AVT
is $3.0 million and is being amortized over five years. The amortizable asset
associated with ETMA is $2.0 million and is being amortized over three years.
The amortizable asset associated with Data International is $3.9 million and is
being amortized over five years.

Other Income, Net.Other income was $457,000 in the first half of 2003
compared to $2.1 million in the first half of 2002. The primary difference is
that interest income decreased by $1.5 million because of decreased cash and
investment balances and because the interest rate earned on investments was
lower in the first half of 2003 than in the first half of 2002.

Minority Interest.We own 60% of the business in Malaysia. Since that
business was profitable in the first half, we recorded a charge of $43,000 to
account for the profits allocated to the minority interest holder compared to
income of $84,000 in the first half of 2002 relating to the winding-up of
another investment with a minority partner.

Benefit from Income Taxes.We recorded a benefit from income taxes of
$5.8 million in the first half of 2003 compared to a benefit from income taxes
of $6.1 million for the first half of 2002. The tax rate used to calculate the
benefit was 36.0% for the first half of 2003 and 2002.

Net Loss.Net loss was $10.4 million, or $0.49 per diluted share, in the
first half of 2003 compared to a net loss of $11.0 million, or $0.51 per
diluted share, in the first half of 2002. As previously noted, we plan to spin
off our Microdisplay division as a separate public company by the end of the
third quarter of 2003. The net loss for the Microdisplay division in the first
half of 2003 was $5.9 million. The net loss for the ISD division in the first
half of 2003 was $4.5 million.

Liquidity and Capital Resources

At June 30, 2003, we had cash, cash equivalents, and liquid investments of
$63.3 million compared to cash, cash equivalents, and liquid investments of
$80.6 million at December 31, 2002. This decrease is primarily due to our net
loss, our acquisition of Microtune inventory and equipment, our purchase of the
license of Data Internationals distribution rights, and our increased working
capital needs because of the sharp increase in sales. In addition, we funded
the working capital needs of the newly acquired business in Malaysia, including
the purchase of inventory and the carrying of accounts receivable during the
start-up period.

Inventory turns were 5.8 in the second quarter of 2003 compared to 7.0 in
the second quarter of 2002, and accounts receivable DSOs (day sales
outstanding) were 44 days in the second quarter of 2003 compared to 53 days in
the second quarter of 2002. The decrease in turns was largely attributable to
the inventory purchased in connection with the Microtune and Unico
transactions. The calculation of inventory turns and DSOs is based on
comparing average balances for the quarter in question against annualized sales
data for the same quarter. Depreciation and amortization expense increased to
$3.0 million for the second quarter of 2003 compared to $1.7 million for the
second quarter of 2002. This increase related primarily to increased
amortization of intangibles for acquisitions, which was $511,000 for the second
quarter of 2003 compared to zero for the second quarter of 2002, increased
depreciation of equipment related to acquisitions, and increased amortization
of intangibles associated with the Microdisplay division. The total
depreciation and amortization expense for the second quarter of 2003 was $2.0
million for the ISD division and $1.0 million for the Microdisplay division.

In the quarter ended June 30, 2003, we had $8.8 million in net cash
outflow from operations compared to $2.5 million in net cash outflow from
operations in the quarter ended June 30, 2002. This net cash outflow in the
second quarter of 2003 was due to our loss, combined with $3.7 million in
working capital requirements to support the sharp increase in sales. The
increased working capital requirements were primarily a result of increased

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inventory and accounts receivable balances, both of which were partially
but not completely offset by a higher accounts payable balance.

In the six months ended June 30, 2003, we had $8.3 million net cash
outflow from operations compared to $8.1 million in net cash outflow from
operations in the six months ended June 30, 2002. Depreciation and
amortization expense increased to $5.5 million in the six months ended June 30,
2003 from $3.4 million in the six months ended June 30, 2002. This increase
related primarily to increased amortization of intangibles for acquisitions,
which was $1.0 million for the first half of 2003 compared to zero for the
first half of 2002, increased depreciation of equipment related to
acquisitions, and increased amortization of intangibles associated with the
Microdisplay division.

Our working capital was $90.1 million at June 30, 2003 and $107.9 million
at December 31, 2002. Our current ratio was 3.1-to-1 at June 30, 2003 compared
to 7.3-to-1 at December 31, 2002. Our working capital and current ratio have
decreased primarily as a result of the addition of approximately $6.4 million
of current debt and notes payable. That increased debt is related to a note
owing to Microtune for inventory, a note owing to Data International for
license fees, and the current portion of our capital lease obligation to Unico
for equipment in Malaysia.

We have extended the term of our credit facility with Comerica Bank to
September 1, 2003. That credit facility is a $15.0 million unsecured revolving
line of credit. No borrowings were outstanding under that credit facility on
June 30, 2003. Advances under the facility may be made as prime rate advances,
which accrue interest payable monthly at the banks prime lending rate, or as
LIBOR rate advances, which bear interest at 150 basis points in excess of the
LIBOR base rate. We are currently renegotiating our credit facilities. As of
June 30, 2003, our Beijing subsidiary had an outstanding $2.7 million unsecured
term loan due January 14, 2004 to the Bank of China.

In the quarter ended June 30, 2003, we incurred approximately $1.4 million
in capital expenditures and $465,000 in expenses related to the acquisition of
the Malaysian manufacturing facility.

The following tables list our contractual obligations and commercial
commitments:

|                                   |  |           |        |           |  |                        |        |           |  |          |        |  |  |         |       |  |  |   |       | 
|---------------------------------- |  | --------- | ------ | --------- |  | ---------------------- | ------ | --------- |  | -------- | ------ |  |  | ------- | ----- |  |  | - | ----- | 
|                                   |  |           |        |           |  | Payments due by Period
|                                   |  |           |        |           |  |                       
|                                   |  | Total     |        |           |  |                        |        |           |  |          |        |  |  |         |       |  |  |  
|Contractual Obligations            |  | Amounts   |        | Less than |  |                        |        |           |  |          |        |  |  | 6 Years
|(in thousands)                     |  | Committed |        | 1 Year    |  | 1-3 Years              |        | 4-5 Years |  | and Over
|                                   |  |           |        |           |  |                        |        |           |  |         
|Term Loan                          |  | $         | 2,706  |           |  | $                      | 2,706  |           |  | $        |       |  |  | $       |      |  |  | $ |      | 
|Notes Payable                      |  |           | 5,534  |           |  |                        | 4,093  |           |  |          | 1,441  |  |  |         |      |  |  |   |      | 
|Operating Leases                   |  |           | 23,787 |           |  |                        | 4,570  |           |  |          | 6,631  |  |  |         | 3,070 |  |  |   | 9,516 | 
|Capital Leases                     |  |           | 8,985  |           |  |                        | 2,344  |           |  |          | 4,287  |  |  |         | 2,354 |  |  |   |      | 
|                                   |  |           |        |           |  |                        |        |           |  |          |        |  |  |         |       |  |  |   |       | 
|Total Contractual Cash Obligations |  | $         | 41,012 |           |  | $                      | 13,713 |           |  | $        | 12,359 |  |  | $       | 5,424 |  |  | $ | 9,516 | 
|                                   |  |           |        |           |  |                        |        |           |  |          |        |  |  |         |       |  |  |   |       | 

|                             |  |           |     |             |  |                                            |    |           |  |          |     |  |  |         |    |  |  |   |   | 
|---------------------------- |  | --------- | --- | ----------- |  | ------------------------------------------ | -- | --------- |  | -------- | --- |  |  | ------- | -- |  |  | - | - | 
|                             |  |           |     |             |  | Amount of Commitment Expiration Per Period
|                             |  |           |     |             |  |                                           
|                             |  | Total     |     |             |  |                                            |    |           |  |          |     |  |  |         |    |  |  |  
|Other Commercial Commitments |  | Amounts   |     | Less than
1 |  |                                            |    |           |  |          |     |  |  | 6 Years
|(in thousands)               |  | Committed |     | Year        |  | 1-3 Years                                  |    | 4-5 Years |  | and Over
|                             |  |           |     |             |  |                                            |    |           |  |         
|Guarantee                    |  | $         | 382 |             |  | $                                          | 70 |           |  | $        | 228 |  |  | $       | 84 |  |  | $ |  | 

The term loan includes a $2.7 million loan from the Bank of China.

The operating leases include a lease for our factory in Manila and our
ground lease in Tempe, Arizona. We have a note payable to Microtune for $2.7
million due within six months and a note payable to Data International for $2.9
million due over a period of two years. The capital lease is for our equipment
and facilities in Malaysia. 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.

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

Not included in the discussion above is the decision by our Board of
Directors to fund the spun-off Brillian Corporation with approximately $22
million in cash. The spin-off is expected to be completed by the end of the
third quarter of 2003.

We believe that our existing balances of cash, cash equivalents, and
investments will provide adequate sources to fund our operations and planned
expenditures through the remainder of 2003 and all of 2004, as well as to meet
our contractual obligations. Specifically, we have over $63.3 million in
cash, cash equivalents, and short-term investments. Although we have committed
approximately $22 million to Brillian Corporation, the spin-off of Brillian
will reduce our outflow of cash to fund the operations of the Microdisplay
division. Our capital expenditures for the remainder of 2003 and 2004 in our
ISD division are expected to be less than $5.0 million, and we expect operating
cash outflow in 2004 may consume only a small portion of our cash reserves, if
any. We continue to seek other alliances or acquisitions and additional
relationships with regard to the strategic development of both business
segments that may also require us to make additional capital investments. New
acquisitions or alliances may result in our needing to expand our loan
commitments, pursue alternate methods of financing, or raise capital. We
cannot provide assurance that adequate additional loan commitments or
alternative methods of financing will be available or, if available, that they
will be on terms acceptable to us.

Impact of Recently Issued Standards

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -Transition and Disclosure. This Statement amends
SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We have
adopted the disclosure requirements of SFAS No. 148.

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




ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes in reported market risks since our most
recent filing on Form 10-K for the year ended December 31, 2002.




ITEM 4.      CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive
Officer and 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

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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 fiscal quarter covered by this report, there have not been any
changes in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




PART II




ITEM 4.      SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on May 2, 2003. All of the
nominees were elected to our Board of Directors as set forth in the Proxy
Statement as follows:

|                    |  |                |            |               |  |  |           | 
|------------------- |  | -------------- | ---------- | ------------- |  |  | --------- | 
|Nominees            |  | Votes in Favor |            | Votes Against
|                    |  |                |            |              
|David C. Malmberg   |  |                | 18,984,935 |               |  |  | 1,185,463 | 
|Jack L. Saltich     |  |                | 19,595,070 |               |  |  | 575,328   | 
|Jeffrey D. Buchanan |  |                | 19,593,081 |               |  |  | 577,317   | 
|Thomas H. Werner    |  |                | 19,580,050 |               |  |  | 590,348   | 
|David P. Chavoustie |  |                | 19,580,541 |               |  |  | 589,857   | 
|Murray A. Goldman   |  |                | 18,992,871 |               |  |  | 1,177,527 | 
|Henry L. Hirvela    |  |                | 19,589,280 |               |  |  | 581,118   | 

The following items were also voted upon and approved by the stockholders:

(a)  To approve an amendment to our amended and restated 1993 stock option
plan.

|               |  |         |           |         |  |  |         | 
|-------------- |  | ------- | --------- | ------- |  |  | ------- | 
|Votes in Favor |  | Opposed |           | Abstain
|               |  |         |           |        
|18,532,481     |  |         | 1,514,302 |         |  |  | 123,615 | 

(b)  To ratify the appointment of Deloitte & Touche LLP as our independent
auditors for the fiscal year ending December 31, 2003.

|               |  |         |         |         |  |  |        | 
|-------------- |  | ------- | ------- | ------- |  |  | ------ | 
|Votes in Favor |  | Opposed |         | Abstain
|               |  |         |         |        
|19,999,850     |  |         | 151,447 |         |  |  | 19,101 | 




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

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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

| |  |  |      |  |  |                                                                                                                                                                         
| |  |  | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.6 |  |  | Amended and Restated 1997 Employee Stock Option Plan (as
Amended and Restated through November 27, 2002) (as corrected)                                                 
| |  |  |      |  |  |                                                                                                                                                                         
| |  |  | 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
Exchange 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 of Form 8-K dated April 22, 2003 furnishing Item 12 Results of
Operation and Financial Condition disclosure.
| |  | -------------------------------------------------------------------------------------------------------------------




SIGNATURES

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

|                    |  |                          |  |                                                   
|------------------- |  | ------------------------ |  | --------------------------------------------------
|                    |  | THREE-FIVE SYSTEMS, INC.
|                    |  |                          |  |                                                   
|Date: July 31, 2003 |  | By:                      |  | /s/ Jeffrey D. Buchanan                           
|                    |  |                          |  | Jeffrey D. Buchanan                               
|                    |  |                          |  | Executive Vice President, Chief Financial Officer,
|                    |  |                          |  | Secretary, and Treasurer                          

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EXHIBIT INDEX

| |  |  |      |  |  |                                                                                                                                                                         
| |  |  | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.6 |  |  | Amended and Restated 1997 Employee Stock Option Plan (as
Amended and Restated through November 27, 2002) (as corrected)                                                 
| |  |  |      |  |  |                                                                                                                                                                         
| |  |  | 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
Exchange 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