SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
               Quarterly Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934

                        For Quarter Ended March 31, 1999

                          Commission File Number 1-4373


                            THREE-FIVE SYSTEMS, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


               Delaware                                        86-0654102
    -------------------------------                       ----------------------
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                        Identification Number)

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

CLASS                                           OUTSTANDING AS OF MARCH 31, 1999
-----                                           --------------------------------
Common                                                    7,012,107
Par value $.01 per share
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 1999
                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION

                                                                            Page
                                                                            ----
ITEM 1.FINANCIAL STATEMENTS:

       Consolidated Balance Sheets-
         March 31, 1999 and December 31, 1998................................  1

       Consolidated Statements of Income-
         Three Months Ended March 31, 1999 and 1998..........................  2

       Consolidated Statements of Stockholder's Equity-
         March 31, 1999 and December 31, 1998................................  3

       Consolidated Statements of Cash Flows-
         Three Months Ended March 31, 1999 and 1998..........................  4

       Notes to Consolidated Financial Statements............................  5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS..................................  6

                          PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 13

SIGNATURES................................................................... 14
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                   MARCH 31,        DECEMBER 31,
                                                     1999              1998
                                                   --------         ------------
                                                  (Unaudited)
                                    ASSETS
CURRENT ASSETS:
 Cash and cash equivalents                         $  7,369          $  4,946
 Accounts receivable, net                            17,659            18,601
 Inventories, net                                    13,278            12,493
 Deferred tax asset                                   2,680             2,680
 Other current assets                                 2,641             2,313
                                                   --------          --------
      Total current assets                           43,627            41,033

PROPERTY, PLANT AND EQUIPMENT, net                   34,773            33,314

OTHER ASSETS                                          3,546             3,557
                                                   --------          --------
                                                   $ 81,946          $ 77,904
                                                   ========          ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                  $ 12,414          $ 10,649
 Accrued liabilities                                  4,453             4,673
 Current taxes payable                                  309               235
 Notes payable                                        3,000                --
 Current portion of long-term debt                    1,056               651
                                                   --------          --------
      Total current liabilities                      21,232            16,208
                                                   --------          --------

LONG-TERM DEBT                                        7,039             7,444
                                                   --------          --------
DEFERRED TAX LIABILITY                                3,156             3,156
                                                   --------          --------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
 Common stock                                            80                80
 Additional paid-in capital                          32,549            32,484
 Retained earnings                                   26,207            26,849
 Cumulative translation adjustment                        8                 8
 Less - Treasury stock, at cost                      (8,325)           (8,325)
                                                   --------          --------
      Total stockholders' equity                     50,519            51,096
                                                   --------          --------

                                                   $ 81,946          $ 77,904
                                                   ========          ========

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

                                       1
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                                   (UNAUDITED)
                    (in thousands, except per share amounts)


                                                        THREE MONTHS ENDED
                                                             MARCH 31,
                                                      -------------------------
                                                        1999             1998
                                                      --------         --------
NET SALES                                             $ 23,044         $ 18,479

COSTS AND EXPENSES:
 Cost of sales                                          20,191           13,687
 Selling, general and administrative                     2,449            1,619
 Research and technology                                 1,821            1,689
                                                      --------         --------
                                                        24,461           16,995
                                                      --------         --------

      Operating income (loss)                           (1,417)           1,484
                                                      --------         --------
OTHER INCOME (EXPENSE):
 Interest, net                                            (155)             192
 Other, net                                                (30)             (17)
                                                      --------         --------
INCOME (LOSS) BEFORE PROVISION FOR
 (BENEFIT FROM) INCOME TAXES:                           (1,602)           1,659
 Provision for (benefit from) income taxes                (960)             664
                                                      --------         --------

NET INCOME (LOSS)                                     $   (642)        $    995
                                                      ========         ========
EARNINGS (LOSS) PER COMMON SHARE:
 Basic                                                $   (.09)        $    .13
                                                      ========         ========
 Diluted                                              $   (.09)        $    .12
                                                      ========         ========
 WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
 Basic                                                   7,009            7,907
                                                      ========         ========
 Diluted                                                 7,009            8,165
                                                      ========         ========

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

                                       2
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            FOR THE PERIOD ENDED DECEMBER 31, 1998 AND MARCH 31, 1999
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                         Common Stock
                                      -----------------   Additional
                                      Shares               Paid-in     Retained
                                      Issued      Amount   Capital     Earnings
                                      ------      ------   -------     --------
<S>                                <C>          <C>      <C>         <C>
BALANCE, December 31, 1998           7,974,901    $ 80     $32,484     $ 26,849
 Net Loss                                   --      --          --         (642)
 Other comprehensive income--

  Foreign currency translation
   adjustments                              --      --          --           --

  Comprehensive income                      --      --          --           --

 Stock options exercised                 7,000      --          65           --
                                     ---------    ----     -------     --------
BALANCE, March 31, 1999 (unaudited)  7,981,901    $ 80     $32,549     $ 26,207
                                     =========    ====     =======     ========

                                                 Cumulative       Total
                                      Treasury   Translation   Stockholders'   Comprehensive
                                       Stock     Adjustment       Equity           Income
                                       -----     ----------       ------           ------

BALANCE, December 31, 1998            ($8,325)     $  8         $ 51,096
 Net Loss                                  --        --             (642)           ($642)
 Other comprehensive income--

  Foreign currency translation
   adjustments                             --        --               --               --
                                                                                    -----
  Comprehensive income                     --        --               --            ($642)
                                                                                    =====
 Stock options exercised                   --        --               65
                                      -------      ----         --------
BALANCE, March 31, 1999 (unaudited)   ($8,325)     $  8         $ 50,519
                                      =======      ====         ========
</TABLE>

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

                                       3
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (in thousands)

                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                          ---------------------
                                                            1999         1998
                                                          --------     --------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                        $   (642)    $    995
 Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
  Depreciation and amortization                              1,279        1,078
  Provision for accounts receivable valuation reserves          45            9
  Provision for (reduction of) inventory
   valuation reserves                                           61       (1,114)
 Changes in assets and liabilities:
  (Increase) decrease in accounts receivable                   898         (278)
  (Increase) decrease in inventories                          (845)      (3,496)
  (Increase) decrease in other assets                         (328)        (240)
  Increase (decrease) in accounts payable and
   accrued liabilities                                       1,544        1,128
  Increase (decrease) in taxes payable, net                     73        1,160
                                                          --------     --------
      Net cash provided by (used in) operating
       activities                                            2,085         (758)
                                                          --------     --------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property, plant and equipment                 (2,727)      (1,675)
                                                          --------     --------
      Net cash used in investing activities                 (2,727)      (1,675)
                                                          --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net proceeds from (payments on) notes payable
  to banks                                                   3,000           --
 Stock options exercised                                        65            3
                                                          --------     --------
      Net cash provided by  financing activities             3,065            3
                                                          --------     --------

 Effect of exchange rate changes on cash                        --            2
                                                          --------     --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         2,423       (2,428)
CASH AND CASH EQUIVALENTS, beginning of period               4,946       16,371
                                                          --------     --------

CASH AND CASH EQUIVALENTS, end of period                  $  7,369     $ 13,943
                                                          ========     ========

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

                                       4
<PAGE>
ITEM 1. (continued)

          THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
          FINANCIAL STATEMENTS

Note A    The accompanying  unaudited  Consolidated  Financial Statements have
          been  prepared  in  accordance  with  generally  accepted   accounting
          principles for interim  financial  information and the instructions to
          Form 10-Q.  Accordingly,  they do not include all the  information and
          footnotes  required by generally  accepted  accounting  principles for
          complete  financial  statements.  In the  opinion of  management,  all
          adjustments   (which  include  only  normal   recurring   adjustments)
          necessary  to  present  fairly  the  financial  position,  results  of
          operations,  stockholders'  equity  and  cash  flows  for all  periods
          presented   have  been  made.   The  results  of  operations  for  the
          three-month period ended March 31, 1999 are not necessarily indicative
          of the  operating  results  that may be  expected  for the entire year
          ending December 31, 1999. These financial statements should be read in
          conjunction with the Company's December 31, 1998 financial  statements
          and accompanying notes thereto.

Note B    Basic  earnings per common share are computed by dividing net income
          (loss) by the  weighted  average  number  of  shares  of common  stock
          outstanding during the three-month period. Diluted earnings (loss) per
          common  share for the three  month  period  ended  March 31,  1998 are
          determined  assuming  that options were  exercised at the beginning of
          the  period  or at the time of  issuance,  if  later.  No  outstanding
          options  were  assumed to be  exercised  for  purposes of  calculating
          diluted  earnings per share for the three months ended March 31, 1999,
          as their effect was anti-dilutive.

Note C    Inventories consist of the following at:

                                       March 31, 1999        December 31, 1998
                                       --------------        -----------------
                                         (Unaudited)
                                                  (in thousands)
          Raw materials                   $ 9,354                 $ 9,367
          Work-in-process                   1,456                   1,459
          Finished goods                    2,468                   1,667
                                          -------                 -------
                                          $13,278                 $12,493
                                          =======                 =======

Note D    Property, plant, and equipment consist of the following at:

                                         March 31, 1999       December 31, 1998
                                         --------------       -----------------
                                           (Unaudited)
                                                    (in thousands)
          Building and improvements         $ 14,670               $ 13,031
          Furniture and equipment             38,413                 37,324
                                            --------               --------
                                              53,083                 50,355

          Less - accumulated depreciation    (18,310)               (17,041)
                                            --------               --------
                                            $ 34,773               $ 33,314
                                            ========               ========

Note E    Segment information:

          Management  monitors and evaluates the  financial  performance  of the
          Company's operations by its four operating segments located in various
          parts of the world.  These  segments  consist  of three  manufacturing
          operations,  located in the United States, China, and the Philippines,
          and a sales and distribution operation in the United Kingdom.

          The  following  operating  segment   information   includes  financial
          information  (in  thousands)  for all four of the Company's  operating
          segments.

                                       5
<PAGE>
<TABLE>
<CAPTION>
                          United      United
March 31, 1999            States      Kingdom     China     Philippines   Eliminations    Total
--------------            ------      -------     -----     -----------   ------------    -----
<S>                      <C>          <C>        <C>           <C>          <C>         <C>
Net sales                $  6,948     $ 10,351   $5,745        $  --        $     --    $ 23,044
Intersegment sales         15,091           --    1,145          791         (17,027)         --
Operating income (loss)    (1,954)         137       57           15             143      (1,602)

                          United      United
March 31, 1998            States      Kingdom     China     Philippines   Eliminations    Total
--------------            ------      -------     -----     -----------   ------------    -----

Net sales                $ 13,999     $  4,480   $   --        $  --        $     --    $ 18,479
Intersegment sales          4,114           --       --          598          (4,712)         --
Operating income (loss)     1,644          (26)      --           13              28       1,659
</TABLE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998.

         Net sales were $23.0  million for the quarter  ended March 31, 1999, an
increase  of 24.3  percent  compared  with net  sales of $18.5  million  for the
quarter  ended March 31, 1998.  This  increase was  attributed  primarily to new
business in Asia for the Company's key  customer.  The Company  believes that it
may have some  seasonality  to its sales.  Many of the  Company's  products  are
components in retail products,  such as  telecommunication  products,  for which
sales in the first  calendar  quarter are  historically  slow.  During the first
quarter of 1999, sales to Motorola, Inc. represented 75 percent of the Company's
revenue.

         Cost of sales, as a percentage of net sales,  increased to 87.6 percent
for the  quarter  ended March 31,  1999 as  compared  with 74.1  percent for the
quarter ended March 31, 1998.  Gross margin was lower than the desired range for
three principal reasons:  under-absorption of fixed overhead,  yield issues, and
product mix. With regard to the first issue,  the  Company's  facility in Manila
was  somewhat  under-utilized  during the  quarter and  therefore  did not fully
absorb all of the fixed overhead.  Part of the reason for the  under-utilization
was that the Company's new facility in China produced  approximately  30 percent
of the  Company's  volume during the quarter.  The Company  expects to level the
manufacturing  output from China this year and use the Manila facility to handle
quarterly fluctuations.  The Company expects that it will more fully utilize the
Manila facility as the year progresses.

         With  regard to the  yield  issues,  in late  1998 and  early  1999 the
Company  moved  the  labor-intensive   portion  of  the  LCD  line  and  certain
chip-on-glass  equipment to Manila.  The yields have been lower in Manila due to
learning  curve issues,  but it the Company  expects that in the second  quarter
Manila will achieve comparable yields to those achieved in Tempe.

         The  third  reason  for the  lower-than-desired  gross  margin  was the
Company's  product mix in the first quarter of 1999. As a result of a variety of
issues,  including material shortages,  customer demand, and engineering delays,
the  Company's  product mix for this  quarter had an  unusually  low margin.  In
addition, the competition from Asian-based suppliers has intensified in the last
few months,  keeping  pressure on margins in the Company's  core  business.  The
Company  expects  that its margins  will  improve,  however,  from these  levels
throughout the remainder of 1999.

         The China  facility  reported  a small  profit in the first  quarter on
sales of $6.9  million.  All  expenses  relating  to the  China  operations  are
included  in the  overall  cost of  sales.  Therefore,  even  though  China  was
profitable,  the  small net  margin in China  adversely  affects  the  Company's
overall  gross  margins.  The  Company  expects  that net  margins in China will
increase as it adds more manufacturing lines in China and improves manufacturing
yields.

         Selling,  general,  and administrative  expense of $2.4 million for the
quarter  ended  March  31,  1999 was  higher  than  the  selling,  general,  and
administrative  expense of $1.6  million for the quarter  ended March 31,  1998.

                                       6
<PAGE>
Selling,  general, and administrative expenses have increased as the Company has
expanded its infrastructure to accommodate the international  focus in sales and
marketing,  the  increasing  number of customers,  and the expected  increase in
sales and  production  throughout  the remainder of the year.  In addition,  the
Company had significant executive recruiting expenses in the quarter as a result
of the CEO and CTO searches.

         Research and technology  ("R&T")  expense  totaled $1.8 million for the
quarter ended March 31, 1999 as compared with $1.7 million for the quarter ended
March 31, 1998.  R&T expenses  consist  principally  of salaries and benefits to
design engineers,  research  scientists and other personnel,  related facilities
costs,  and various  expenses for custom  designed  programs and new  technology
development  projects.  The Company generally expects that a significant portion
of R&T will relate to third-party project expenses, and the Company did not have
as  much  of  those  expenses  in  the  first  quarter  of  1999  as  originally
anticipated. During the next several quarters, R&T expenditures may fluctuate as
the Company funds various technology projects.  R&T expense has increased as the
Company has invested in new technologies,  such as LCoS(TM)  microdisplays,  and
manufacturing processes, and has continued with its in-house process development
efforts  related to the  high-volume  manufacturing  LCD line  located in Tempe,
Arizona.  The Company  believes  that  continued  investments  in  research  and
development  relating to  manufacturing  processes and new display  technologies
will be  necessary  to remain  competitive  in its  marketplace  and to  provide
opportunities for growth.

         Interest  expense  (net)  for the  quarter  ended  March  31,  1999 was
$155,000,  as compared  with  interest  income of $192,000 for the quarter ended
March 31, 1998.  The  Company's  interest  expense was primarily a result of its
stock repurchase program  re-introduced in the middle of 1998, which the Company
financed with debt.  Other expense (net) was $30,000 for the quarter ended March
31, 1999 as compared with $17,000 for the quarter ended March 31, 1998.

         The  Company  reported  a loss  before  taxes of $1.6  million  for the
quarter  ended March 31,  1999,  as compared  with income  before  taxes of $1.7
million  dollars  for the  quarter  ended  March  31,  1998.  As a result of the
reported loss,  the Company  recognized a benefit from taxes of $960,000 for the
quarter ended March 31, 1999, as compared with a provision for taxes of $664,000
for the quarter ended March 31, 1998.  Included in the benefit from income taxes
was a  one-time  benefit  of  $295,000  related  to an  expected  tax refund for
previous  years.  The  Company  expects  that the overall tax rate for 1999 will
approximate its historical  rate of 40 percent.  This rate eventually may drop a
few  percentage  points  as  the  Company  increases  the  profitability  of its
manufacturing  operations in the People's Republic of China, where the corporate
tax rate is lower.  The actual  worldwide  tax rate,  however,  will depend on a
variety of factors, including intercompany transfer pricing, the amount of sales
in China, the  profitability of China  operations,  and whether any intercompany
dividends are declared.

         The  Company  reported  a net  loss of  $642,000,  or $0.09  per  share
(diluted),  for the quarter ended March 31, 1999, as compared with net income of
$995,000, or $0.12 per share (diluted), for the quarter ended March 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

         During the first three months of 1999,  the Company had $2.1 million in
positive  cash flow from  operations  as compared with $758,000 in negative cash
flow  during  the  first  three  months  of 1998.  The  positive  cash flow from
operations   was  primarily  due  to  the  increase  in  accounts   payable  and
depreciation  and  decrease  in  accounts  receivable.  Overall,  the  Company's
depreciation  expense  has  risen  approximately  18.6  percent  since the first
quarter   of   1998.   The   high-volume   LCD   line   is   depreciated   on  a
units-of-production  method based on units started. The Company anticipates that
depreciation will continue to increase throughout 1999 as a result of additional
capital expenditures, including the start-up of the new building in China and an
expected higher number of starts for the high-volume LCD  manufacturing  line in
1999 versus 1998. Capital  expenditures  expected in 1999 include the completion
of the new building and equipment for the  permanent  manufacturing  facility in
China and the  installation  of  additional  equipment in the Arizona and Manila
manufacturing locations.

         The  Company's  working  capital was $22.4 million at March 31, 1999, a
decrease from $24.8 million at December 31, 1998. The Company's current ratio at
March 31,  1999 was  2.1-to-1 as  compared  with a current  ratio of 2.5-to-1 at
December 31, 1998. Including its cash and loan commitments, the Company had over
$21.6 million in readily available funds on March 31, 1999.

                                       7
<PAGE>
         In November  1998,  the Company  entered into a $25.0  million  secured
revolving line of credit with Imperial Bank and the National Bank of Canada. The
credit  facility  matures in May 2000 and consists of a $15.0 million  revolving
line of credit,  which will be available  for general  corporate  purposes  (the
"General  Facility"),  and a $10.0 million  long-term  loan,  which will provide
available funds to repurchase the Company's stock (the  "Repurchase  Facility").
At March 31,  1999,  $8.1  million  of  borrowings  were  outstanding  under the
Repurchase  Facility.  Advances  under  the  loans  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 175 basis  points in
excess of the LIBOR Base Rate for the General  Facility  and 225 basis points in
excess of the LIBOR Base Rate for the Repurchase Facility.

         The Company's  subsidiary,  Three-Five Systems Limited, has established
an annually renewable credit facility with a United Kingdom bank,  Barclays Bank
PLC, in order to fund its working capital  requirements.  The facility  provides
$350,000 of borrowing  capacity  secured by accounts  receivable  of  Three-Five
Systems Limited. Advances are based on accounts receivable, as defined. Advances
under the credit facility accrue interest,  which is payable  quarterly,  at the
bank's  base rate plus 200 basis  points.  The United  Kingdom  credit  facility
matures in July 1999.  Three-Five Systems Limited had no borrowings  outstanding
under this line of credit at March 31, 1999.

         Capital   expenditures   during   the  first   quarter   of  1999  were
approximately  $2.7  million,  as compared  with $1.7  million  during the first
quarter of 1998. Capital expenditures for the first quarter of 1999 consisted of
$1.8  million  for  the  new  China  manufacturing  facility  and  $900,000  for
improvements in Arizona.  The Company anticipates that its capital  expenditures
during 1999 will primarily relate to its China facility,  advanced manufacturing
processes,  the high-volume LCD line, and necessary manufacturing equipment. The
Company anticipates  remaining capital  expenditures in 1999 to be approximately
$8.0 to $9.0 million.

         The Company anticipates that accounts receivable and inventory may rise
in 1999 if  revenue  levels  increase  as  currently  anticipated.  The  Company
believes that its existing capital and anticipated cash flow from operations and
credit  lines will  provide  adequate  sources to fund  operations  and  planned
expenditures  throughout  1999.  Should the Company  encounter  additional  cash
requirements,  however,  the Company may have to expand its loan  commitments or
pursue  alternate  methods of financing or raising  capital.  The Company cannot
provide assurance, however, that adequate additional financing will be available
or,  if  available,  that  such  financing  will be on terms  acceptable  to the
Company.

EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS

         The results of operations of the Company for the periods discussed have
not been significantly  affected by inflation or foreign currency  fluctuations.
The Company  generally  sells its products and services and negotiates  purchase
orders with its foreign suppliers in United States dollars.  An exception is the
Sub-Assembly Agreement in the Philippines,  which is based on a fixed conversion
rate,  exposing the Company to exchange rate  fluctuations  with the  Philippine
peso. The Company has not incurred any material exchange gains or losses to date
and there  has been  some  minor  benefit  as a result of the peso  devaluation,
although the Company is now required to pay approximately  one-third of any peso
devaluation gain to its lessor and direct labor subcontractor in Manila.

         The Company has  manufacturing  operations in the People's  Republic of
China.  Although the Chinese currency currently is stable, its value in relation
to the U.S.  dollar is  determined by the Chinese  government.  There is general
speculation that China may devalue its currency in response to the current Asian
economic  situation.  Devaluation  of  the  Chinese  currency  could  result  in
translation  adjustments  to the  Company's  balance sheet as well as reportable
losses depending on accounts  receivable,  monetary  balances,  and loans of the
Company  based on Chinese  currency at the time of  devaluation.  Recently,  the
government  in China has made it  difficult to convert its local  currency  into
foreign  currencies.  Although  the  Company  from time to time may  enter  into
hedging  transactions  in  order to  minimize  its  exposure  to  currency  rate
fluctuations, the Chinese currency is not freely traded and thus is difficult to
hedge. In addition, the government of China has recently imposed restrictions on
Chinese  currency  loans to  foreign-operated  entities  in China.  Based on the
foregoing,  there can be no assurance that  fluctuations  and currency  exchange
rates in the future will not have an adverse affect on the Company's operations.

                                       8
<PAGE>
BUSINESS OUTLOOK AND RISK FACTORS

         This Business Outlook section has numerous forward-looking  statements.
Some of the risk factors  associated with those  forward-looking  statements are
set forth in "Risk Factors" below.

         The  Company  offers  advanced  design and  manufacturing  services  to
original equipment manufacturers. The Company specializes in custom displays and
front  panel  displays   primarily   utilizing   liquid  crystal  display  (LCD)
technology.  Sales in 1998  increased by about 12.3  percent over 1997,  but net
profit declined as the Company  increased R&T expenses  significantly,  incurred
start-up  expenses for China, and experienced  pricing  pressures from its Asian
competitors, partially as a result of the Asian economic situation.

         In 1998, the Company  recorded  almost 57 percent of its revenue in the
third and fourth quarters.  Fourth quarter revenue in 1998 was almost 60 percent
greater than first quarter  revenues in 1998. In 1999,  the Company  anticipates
that this type of revenue pattern will be repeated. The Company believes that it
has a pattern of seasonality to its sales as OEMs with retail  products  develop
shorter  product  life  cycles  and  phase  out old  programs  early in the year
following holiday sales.

         The Company has undertaken  efforts to diversify its business,  broaden
its  customer  base,  and expand its markets.  The  Company's  historical  major
customer,  which accounted for approximately 80 percent of the Company's revenue
in 1995,  accounted for 65 percent of the Company's revenue in 1996 and slightly
less than 35 percent of the Company's revenue in 1997. These reduced percentages
occurred  as a result of the  increased  sales to other  customers  and  reduced
product selling prices and revenues from that major customer. Recently, however,
the  Company's  business  with that customer has increased at a rate faster than
business with other customers.  As a result,  sales to that customer represented
64  percent  of the  Company's  revenue  in 1998  and 75  percent  of the of the
Company's  revenue  in the first  quarter of 1999.  For the full year 1999,  the
Company  expects its business  with that customer to remain in that range during
the entire year. The Company also expects to increase  sales to other  customers
during  the  second  half of 1999 and in  2000.  Currently,  no  other  customer
accounts for more than 10 percent of the Company's revenue.

         Several   factors  impact  the  Company's   gross  margins,   including
manufacturing   efficiencies,   product  differentiation,   product  uniqueness,
billings  for  non-recurring   engineering   services,   inventory   management,
engineering costs, product mix, and volume pricing. Significant pricing pressure
exists in higher volume programs in the  telecommunications  industries.  As the
production  levels of some of the Company's new high-volume  programs  increase,
the lower  standard  gross  margins  on those  programs  continue  to impact the
Company's overall margins. In addition,  in an effort to secure sales to certain
strategic  customers,  the  Company  has in the  past,  and  may in the  future,
aggressively price its products. Depending on the size of the programs achieved,
such pricing strategies will have an effect on overall margins.

         The Company's gross margins on its products also are typically lower at
the start of a program  as a result of yield  and  other  start-up  issues.  The
Company expects to start up several new programs throughout 1999.

         The Company  started  operations  in China in 1998,  and the  Company's
gross  margins  have been  adversely  affected  by the  start-up  of those China
manufacturing  operations. As the Company ramped up its manufacturing operations
in China,  it incurred costs in advance of the receipt of significant  revenues.
All expenses related to the operations in China are included in the overall cost
of sales.  In the fourth  quarter of 1998 and in the first quarter of 1999,  the
Company  had  a  small  profit  in  China  because   significant   increases  in
manufacturing  volumes  resulted in absorption of the existing  costs.  Although
profitable,  the low net margin  adversely  affects the Company's  overall gross
margins.   In  the  next  few   quarters,   profitability   in  China   will  be
volume-dependent.  In the long run, however,  the Company expects the operations
in China to positively impact gross margins because of certain  competitive cost
advantages provided by maintaining operations in China.

         The Company  anticipates  that weakened  Asian  currencies  will have a
continued  impact  on  the  Company's  gross  margins.  Many  of  the  Company's
competitors  are Asian  suppliers,  and a strong U.S. dollar gives a competitive
pricing advantage to those suppliers. Thus, the Company expects to see continued
competitive margin pressure from Asian suppliers.

         Serving a variety  of  customers  with  complex  and  differing  issues
requires  increased  personnel  committed  to those  customers.  As the  Company
expands and  diversifies  its product and customer  base, the Company has had to
increase its selling,  general, and administrative expenses. The Company expects
that the volume  and  complexity  of its  business  will  continue  to grow.  In
addition, the Company has expanded its marketing function as it has expanded the
technologies its offers. As a result,  the Company  anticipates that its selling
and administrative expenses for 1999 will increase significantly over 1998.

                                       9
<PAGE>
         The  Company  believes  that  continued  investments  in  research  and
development  relating to new display technology and manufacturing  processes are
necessary to remain competitive in the marketplace and to provide  opportunities
for growth.  The Company continues to expand and intensify its internal research
and development to focus on proprietary display products as well as continue LCD
manufacturing process improvements.  Use of the LCD manufacturing line in Tempe,
Arizona as a  resource  for  testing  new ideas is key to  development  of these
products, some of which will be proprietary and not available from other display
manufacturers.  Further,  the development of the high-volume  manufacturing  LCD
line has helped  reduce the  Company's  dependence  on foreign  suppliers of LCD
glass.  Some  of  the  Company's  new  display  technologies  also  require  the
development   of  application   specific   integrated   circuits   ("ASICs")  to
electronically drive the displays.  Development of custom ASICs is a lengthy and
expensive process.

         The Company  also  intends to pursue  technologies  being  developed in
related  fields.  The Company  operates the highest  volume fully  automated LCD
manufacturing  line in  North  America.  As a  result,  several  companies  have
approached the Company about potential  alliances.  The Company  believes that a
strategic  alliance with one or more of those  companies could minimize the cost
of entry into new markets and new  technologies.  For example,  in 1997 National
Semiconductor  Corporation  and the Company  entered  into a strategic  supplier
alliance   agreement   for  the   development   and   manufacture   of  LCoS(TM)
microdisplays.  In April  1998,  the  Company  acquired a minority  interest  in
inViso,  Inc.  (formerly  known as  Siliscape,  Inc.),  a start-up  company with
numerous  patents and  proprietary  technology  relating to  microdisplays.  The
Company and inViso also entered into a strategic agreement under which they will
focus on the development of microdisplay  products,  with the Company  providing
certain  proprietary  manufacturing  capabilities and inViso  providing  certain
patented and proprietary technologies and components.

         The  Company  also is  considering  licensing  technologies  from other
companies'  that could be optimized on the LCD  manufacturing  line,  as well as
entering into further  alliances.  The Company intends to continue this internal
and external focus on research and development  indefinitely.  As a result,  the
actual  dollar  amount of such  research and  development  expenditures  in 1999
should increase over 1998.

         In the second  quarter of 1998, the Company  established  manufacturing
operations at a temporary  leased site in Beijing,  China.  From that  temporary
factory, the Company shipped over $5.7 million in products in the fourth quarter
of 1998 and $6.9 million in products in the first  quarter of 1999.  The Company
is currently  constructing  a permanent  factory,  which the Company  expects to
occupy by late summer 1999.

         The Company has established a China-based  manufacturing  operation for
several  reasons.  First,  based upon growth  expectations  in the  European and
United States  marketplaces,  the Company  anticipated a need for  manufacturing
capacity  beyond what is available  at its  Philippine  manufacturing  facility.
China was selected  because of the desire to diversify  manufacturing  locations
and  because of the cost  benefits  that are  expected  to be achieved in China.
China also is expected to be a  synergistic  business  location  for the Company
because many of the components  used by the Company are  manufactured  in China.
Further,  many  of the  Company's  existing  and  potential  customers  maintain
manufacturing  operations near the Company's  operations in China. Under current
Chinese  government  rules,  OEMs in China have a strong  motivation  to utilize
locally manufactured components.

RISK FACTORS

         Forward-looking  statements  in this Report  include  revenue,  margin,
expense,  and earnings  analysis for 1999 as well as the Company's  expectations
relating  to  operations  in China;  future  technologies;  and future  designs,
inventory  balances,  and  production  orders.  The Company's  future  operating
results may be affected by various  trends,  developments,  and factors that the
Company  must  successfully  manage in order to achieve its goals.  In addition,
there are trends,  developments,  and factors beyond the Company's  control that
may affect its operations.  The cautionary statements and risk factors set forth
below and elsewhere in this Report,  and in the Company's other filings with the
Securities and Exchange  Commission,  identify  important trends,  factors,  and
currently  known   developments  that  could  cause  actual  results  to  differ
materially from those in any forward-looking statements contained in this Report
and in any written or oral statements of the Company.

         A few core customers  currently are  responsible  for a majority of the
Company's revenue,  and the Company expects the high  concentration  levels with
its  core  customers  to  continue  through  2000.  Thus,  any  material  delay,
cancellation,  or reduction  of orders from one or more of those core  customers
could have a material adverse effect on the Company's operations.

                                       10
<PAGE>
         Although  the trend of the Company is to enter into more  manufacturing
contracts with its  customers,  the principal  benefit of these  contracts is to
clarify order lead times, inventory risk allocation, and similar matters and not
to provide firm, long-term volume purchase  commitments.  Customers generally do
not provide firm long-term  volume  purchase  commitments to the Company.  Thus,
customers can cancel  purchase  commitments  and change or delay expected volume
levels.  The Company  cannot  provide  assurance that it will be able to replace
canceled,  delayed,  or reduced  commitments  in a timely  manner.  If customers
cancel,  delay, or reduce commitments,  the Company could be left holding excess
and obsolete inventory or having unfavorable manufacturing variances as a result
of  under-absorption.  These risks are  exacerbated  because the Company expects
that a majority  of its sales  will be to  customers  in the retail  electronics
industry, which is subject to severe competitive pressures,  rapid technological
change, and obsolescence.  A few of the Company's  customers have inquired about
inventory hubbing agreements, pursuant to which the Company will maintain stocks
of finished  goods at or near the customer's  factory.  Although the Company has
not yet entered into such agreements with any of its customers,  the use of such
type of  agreements  could result in higher  inventory  balances for the Company
and/or excess inventory.

         Another  risk  inherent  in custom  manufacturing  is the  satisfactory
completion  of design  services and securing of production  orders.  The Company
anticipates  that a significant  portion of its revenue for the future will come
from programs  currently in the design or pilot production stage.  Completion of
the design depends on a variety of factors,  including the  customer's  changing
needs,  and not every design is successful in meeting those needs.  In addition,
some  designs  test new  theories or  applications  and may not meet the desired
results.  Failure of a design order to achieve the  customer's  desired  results
could result in a material  adverse  effect on the  Company's  operations if the
expected production order for that product was significant. Finally, even when a
design is  satisfactorily  completed,  the customer  may  terminate or delay the
program as a result of marketing or other pressures.

         The Company  currently  is investing  in research  and  development  of
several new technologies  that it plans to introduce in the future.  The Company
faces the risk that some or all of those  technologies may not successfully make
the  transition  from  the  research  and  development  lab  to   cost-effective
manufacturability as a result of technology  problems,  competitive cost issues,
yield problems, and other factors. In addition,  even if a new technology proves
to be manufacturable,  the Company's  customers and the customers'  marketplaces
may not accept it because of price or  technology  issues or because it compares
unfavorably with products  introduced by others. The Company will be required to
make  significant  expenditures,  including  development  expenses  and  various
capital expenditures and investments,  for these new technologies.  For example,
the Company estimates that its capital  expenditures for LCoS(TM)  microdisplays
will be  approximately  $3.0 million to $4.0  million.  The Company also made an
equity  investment  of $3.3  million in inViso  during 1998 for the  purposes of
further developing the LCoS(TM) microdisplay product. Significant investments in
one or more of the new technologies,  especially  LCoS(TM)  microdisplays,  that
ultimately prove to be unsuccessful for any reason could have a material adverse
impact on the Company. In addition, if inViso were to encounter technological or
financial  difficulties,  the value of the  Company's  investment  could  become
permanently  impaired, in which case the Company would have to write down all or
a portion of its investment and report a loss equal to such write-down.

         The Company  designs and  manufactures  products  based on firm quotes.
Thus,  the Company  bears the risk of  component  price  increases,  which could
adversely affect the Company's gross margins.  In addition,  the Company depends
on certain  suppliers,  and the  unavailability  or shortage of materials  could
cause delays or lost orders.  Material components of some of the Company's major
programs from time to time have been subject to allocation  because of shortages
by vendors and continued or increased  shortages  could have a material  adverse
effect on the Company in the future.  In fact, the Company could have shipped at
least  $3.0  million  in  additional  product  in the first  quarter  of 1999 if
integrated circuit ("IC") shortages had not existed.  The Company expects the IC
shortage  to  continue  in the next  few  quarters.  In  addition,  the  Company
purchases  many product  components  from vendors in Asian  countries.  Economic
instability in certain Asian  countries could cause supply problems with respect
to these components.

         The Company's primary competitors are located in Asia, including Japan,
Korea,  and Hong Kong, and most of the Company's  customers are U.S.-based.  The
currency  devaluation of several Asian  countries has had, and could continue to
have,  a negative  impact on the  Company's  gross  margins as the  competitors'
products  become less  expensive  to purchase  with a stronger  dollar.  Pricing
competition  intensified  in the  first  quarter  of  1999  and is  expected  to
continue.

                                       11
<PAGE>
         The  Company  has set up  manufacturing  operations  in  Beijing  in an
interim leased facility while construction is completed on a permanent facility.
If there are delays in the completion of the permanent facility, the Company may
run into capacity issues in the interim  facility  because of space  constraints
and/or power  requirements.  In addition,  the Company has a short-term lease on
the  interim  facility  and could be required to move out if there are delays in
the completion of the permanent  facility,  which would  severely  interrupt the
Company's manufacturing  operations in China. Further, moving from the temporary
factory to the  permanent  factory could also  interrupt  the Company's  Chinese
manufacturing  operations.  Over the long term,  the  Company's  operations  and
assets  will be  subject to  significant  political,  economic,  legal and other
uncertainties  in  China.  The  Company's  operations  in  China  also  could be
adversely  affected by the imposition of austerity  measures  intended to reduce
inflation;   the  inadequate   development  or  maintenance  of  infrastructure,
including   the   unavailability   of   adequate   power  and  water   supplies,
transportation,  raw materials,  and parts;  or a  deterioration  of the general
political, economic or social environment in China.

         One of the  reasons  the  Company  started  up  operations  in China is
because the Company believed that its Manila manufacturing  facility would begin
to have capacity  issues in 1999.  Failure to begin  operations in the permanent
China facility on a timely basis could result in capacity restraints and late or
canceled customer  deliveries.  Manufacturing yields and delivery schedules also
may be affected as the Company ramps up its manufacturing capabilities in China.
Other  companies in the industry  have  experienced  difficulty  in expanding or
relocating  manufacturing output and capacity, with such difficulty resulting in
reduced  yields or delays in product  deliveries.  The  Company  cannot  provide
assurance that it will not experience  manufacturing  yield or delivery problems
in the future.  Such problems could  materially  affect the Company's  operating
results.

         Finally,  the Company's success,  especially in penetrating new markets
and increasing its OEM customer base, depends to a large extent upon the efforts
and abilities of key managerial and technical employees. The loss of services of
certain key personnel could have a material  adverse effect on the Company.  The
Company's  business  also  depends  upon its  ability to continue to attract and
retain senior managers and skilled employees.
Failure to do so could adversely affect the Company's operations.

         As a result of the foregoing  and other  factors,  the Company's  stock
price may be subject to  significant  volatility,  particularly  on a  quarterly
basis.  Any shortfall in revenue or earnings from levels  expected by investors,
analysts,  and brokers could have an immediate and significant adverse effect on
the  trading  price  of  the  Company's   Common  Stock  in  any  given  period.
Additionally,  the  Company  may not learn of such  shortfalls  until  late in a
fiscal quarter,  which could result in an even more immediate and adverse effect
on the trading price of the  Company's  Common Stock.  Finally,  other  factors,
which generally affect the market for stocks of high technology companies, could
cause the price of the Company's  Common Stock to fluctuate  substantially  over
short periods for reasons unrelated to the Company's performance.

YEAR 2000 COMPLIANCE DISCLOSURE

         Many  existing  computer  programs and databases use only two digits to
identify  a year in the date  field  (I.E.,  99  would  represent  1999).  These
programs and  databases  were  designed and developed  without  considering  the
impact  of  the  upcoming  millennium.  Consequently,  date  sensitive  computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in 2000.
The following disclosure is as required by SEC Release No. 33-7558.

COMPANY'S STATE OF READINESS

         The Company has  completed  an  assessment  of all of its  internal and
external  systems  and  processes  with  respect to the "Year  2000"  issue.  In
response to this  assessment,  the Company has created a  multi-functional  Year
2000 task force to resolve any non-compliant Year 2000 systems or processes.  To
date,  this group is on schedule to complete this task during 1999.  The Company
plans  to  continuously  test  all of its  internal  and  external  systems  and
processes,  including the associated Year 2000 "fixes," for Year 2000 compliance
during 1999.  As part of this  process,  the Company has assessed the  potential
impact of Year 2000 failures from vendors and outside  parties upon its business
and  currently is taking  steps to minimize  that risk.  Based on the  Company's
current state of readiness and the steps currently being taken (I.E., installing
backup  processes and systems),  the Company does not believe that the Year 2000
problem will have a material adverse effect on the Company's financial position,
liquidity, or operations.

                                       12
<PAGE>
COMPANY'S COSTS OF YEAR 2000 COMPLIANCE

         The Company  estimates that its total cost of Year 2000 compliance will
be less than  $100,000.  Those costs include  updating of computer  software and
hardware manufacturing  equipment, as well as employment and other out-of-pocket
costs.

COMPANY'S RISKS OF YEAR 2000 ISSUES

         The Company procures a significant  amount of raw materials used in its
manufacturing processes from foreign vendors. As a result, the Company may be at
risk from foreign  companies and countries that are not taking adequate measures
to  ensure  Year  2000  compliance  or that  may  not be at the  same  level  of
preparedness as the United States.  For example,  economic  problems in Asia may
affect or divert resources with respect to the Year 2000 issue. Failure of those
foreign countries and companies to be Year 2000 compliant may cause new material
shortages that would adversely impact the Company's manufacturing operations. In
addition,  the Company  currently has  significant  manufacturing  operations in
Manila,  the Philippines and Beijing,  China. As a result, the Company may be at
risk with respect to suppliers of necessary  resources  (such as power or water)
that may not be Year 2000  compliant.  For example,  brownouts or blackouts  may
occur due to lack of Year 2000 compliance.  In addition, the Company's customers
may have catastrophic Year 2000 failures,  including prolonged  interruptions in
factory  productions,  in which  case  they may have a  reduced  demand  for the
Company's products.

COMPANY'S CONTINGENCY PLANS

         The Company is developing contingency plans with respect to significant
Year 2000 issues within its control.  For example, the Company is in the process
of assessing  and verifying the Year 2000  compliance of its  international  and
domestic raw material vendors. Verification will be accomplished through the use
of written certifications and audits. The Company intends to replace any vendors
found not to be Year 2000 compliant  with vendors that are Year 2000  compliant.
In the  construction  of its new  Beijing  facility,  the Company  will  procure
material,  processes,  and equipment that are Year 2000  compliant.  The Company
also is investigating the use of stand-by generators for its plants in the event
of a  local  power  failure.  The  Company  is  investigating  transferring  all
manufacturing  processes  to  alternate  manufacturing  facilities  if  external
factors beyond its control relative to the Year 2000 issue occur and the Company
cannot conduct manufacturing operations at any particular facility.


                           PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)  EXHIBIT 27: Financial Data Schedule

        (b)  Reports on Form 8-K: None

                                       13
<PAGE>
                                   SIGNATURES


              Pursuant to the  requirements  of the  Securities  Exchange Act of
1934,  the  Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.


                            THREE-FIVE SYSTEMS, INC.
                                  (Registrant)



Dated:  April 28, 1999          By:    /s/ Jeffrey D. Buchanan
                                       -----------------------------------------
                                       Jeffrey D. Buchanan
                                Its:   Executive Vice President Finance,
                                       Administration and Legal; Chief Financial
                                       Officer

                                       14