<PAGE>   1
                       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 September 30, 2000

                          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 SEPTEMBER 30, 2000

Common                                                   21,540,879
Par value $.01 per share
<PAGE>   2
                            THREE-FIVE SYSTEMS, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2000
                                TABLE OF CONTENTS







                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                  Page
                                                                                  ----
<S>                                                                               <C>
ITEM 1. FINANCIAL STATEMENTS:

        Condensed Consolidated Balance Sheets-
             December 31, 1999 and September 30, 2000...........................     1

        Condensed Consolidated Statements of Income-
             Three Months and Nine Months Ended September 30, 1999 and 2000.....     2

        Condensed Consolidated Statements of Cash Flows-
             Nine Months Ended September 30, 1999 and 2000......................     3

        Notes to Condensed Consolidated Financial Statements....................     4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS...................................................     7


             PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................    14

SIGNATURES......................................................................    14
</TABLE>
<PAGE>   3
ITEM 1     FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,    SEPTEMBER 30,
                                                               ------------    -------------
                                                                   1999            2000
                                                                   ----            ----

                        ASSETS
                        ------
<S>                                                            <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents                                    $  45,363       $  48,343
   Short-term investments                                              --         123,749
   Accounts receivable, net                                        20,886          28,516
   Inventories                                                     12,344          18,783
   Deferred tax asset                                               3,231           3,839
   Other current assets                                             1,047           1,475
                                                                ---------       ---------
      Total current assets                                         82,871         224,705

PROPERTY, PLANT AND EQUIPMENT, net                                 40,546          43,111

OTHER ASSETS                                                        3,513           4,229
                                                                ---------       ---------
                                                                $ 126,930       $ 272,045
                                                                =========       =========

        LIABILITIES AND STOCKHOLDERS' EQUITY
        ------------------------------------

CURRENT LIABILITIES:
   Accounts payable                                             $  13,450       $  15,589
   Accrued liabilities                                              7,526           6,917
   Current taxes payable                                            1,042           1,979
                                                                ---------       ---------
      Total current liabilities                                    22,018          24,485
                                                                ---------       ---------

DEFERRED TAX LIABILITY                                              3,692           4,131
                                                                ---------       ---------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common stock                                                       189             215
   Additional paid-in capital                                      67,388         197,413
   Retained earnings                                               33,639          45,897
   Cumulative translation adjustment                                    7             (95)
   Less - Treasury stock, at cost                                      (3)             (1)
                                                                ---------       ---------
      Total stockholders' equity                                  101,220         243,429
                                                                ---------       ---------

                                                                $ 126,930       $ 272,045
                                                                =========       =========
</TABLE>

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


                                       1
<PAGE>   4
                            THREE-FIVE SYSTEMS, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   THREE MONTHS                    NINE MONTHS
                                                ENDED SEPTEMBER 30,             ENDED SEPTEMBER 30,
                                                -------------------             -------------------
                                               1999            2000            1999            2000
                                               ----            ----            ----            ----

<S>                                         <C>             <C>             <C>             <C>
NET SALES                                   $  42,723       $  40,231       $  97,367       $ 124,319
                                            ---------       ---------       ---------       ---------

COSTS AND EXPENSES:
 Cost of sales                                 33,882          31,115          79,176          94,632
 Selling, general and administrative            2,741           2,453           7,683           7,133
 Research, development and engineering          2,427           3,734           6,256           9,486
                                            ---------       ---------       ---------       ---------
                                               39,050          37,302          93,115         111,251
                                            ---------       ---------       ---------       ---------

  Operating income                              3,673           2,929           4,252          13,068
                                            ---------       ---------       ---------       ---------

OTHER INCOME (EXPENSE):
 Interest, net                                   (152)          2,756            (518)          4,545
 Other, net                                        (8)            (20)            (41)            (64)
                                            ---------       ---------       ---------       ---------
                                                 (160)          2,736            (559)          4,481
                                            ---------       ---------       ---------       ---------
INCOME BEFORE PROVISION FOR
 INCOME TAXES:                                  3,513           5,665           3,693          17,549
  Provision for income taxes                    1,476           1,320           1,258           5,248
                                            ---------       ---------       ---------       ---------

NET INCOME                                  $   2,037       $   4,345       $   2,435       $  12,301
                                            =========       =========       =========       =========

EARNINGS PER COMMON SHARE:
 Basic                                      $    0.14       $    0.20       $    0.17       $    0.61
                                            =========       =========       =========       =========
 Diluted                                    $    0.14       $    0.19       $    0.17       $    0.58
                                            =========       =========       =========       =========

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES:
  Basic                                        14,219          21,528          14,070          20,097
                                            =========       =========       =========       =========
  Diluted                                      14,643          22,595          14,329          21,311
                                            =========       =========       =========       =========
</TABLE>

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


                                       2
<PAGE>   5
                            THREE-FIVE SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,
                                                                                    -------------
                                                                                1999             2000
                                                                                ----             ----
<S>                                                                          <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                 $   2,435        $  12,301
  Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                               4,330            4,655
     Provision for accounts receivable valuation reserves                          174               33
 Change in assets and liabilities:
     (Increase) in accounts receivable                                          (7,324)          (7,663)
     (Increase) in inventories                                                  (2,772)          (6,439)
     (Increase) decrease in other assets                                           626             (656)
      Increase in accounts payable and accrued liabilities                       6,378            1,530
      Increase in taxes payable and deferred taxes, net                            323              767
                                                                             ---------        ---------
        Net cash provided by operating activities                                4,170            4,528
                                                                             ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment, net                               (10,352)          (7,207)
  Purchase of short-term investments                                                --         (123,749)
  Investment in Inviso, Inc.                                                        --             (500)
                                                                             ---------        ---------
        Net cash used in investing activities                                  (10,352)        (131,456)
                                                                             ---------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from notes payable to banks                                       9,000               --
  Stock options exercised                                                           76            1,353
  Expenses paid in connection with equity offering                                (363)              --
  Net proceeds from equity offering                                                 --          128,657
                                                                             ---------        ---------
        Net cash provided by financing activities                                8,713          130,010
                                                                             ---------        ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS                                                                  (3)            (102)
                                                                             ---------        ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                        2,528            2,980
CASH AND CASH EQUIVALENTS, beginning of period                                   4,946           45,363
                                                                             ---------        ---------

CASH AND CASH EQUIVALENTS, end of period                                     $   7,474        $  48,343
                                                                             =========        =========

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
  Value of warrants granted                                                  $     555        $      --
                                                                             =========        =========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>   6
             THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES (THE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 the
                opinion of management, all adjustments (which include only
                normal recurring adjustments) necessary to present fairly the
                financial position, results of operations, and cash flows for
                all periods presented have been made. The results of operations
                for the three and nine-month periods ended September 30, 2000
                are not necessarily indicative of the operating results that
                may be expected for the entire year ending December 31, 2000.
                These financial statements should be read in conjunction with
                the Company's December 31, 1999 financial statements and
                accompanying notes thereto.

Note B          Basic earnings per common share are computed by dividing net
                income by the weighted average number of shares of common stock
                outstanding during the three and nine-month periods. Diluted
                earnings per common share for the three- and nine-month periods
                are determined assuming that the options and warrants were
                exercised at the beginning of the period or at the time of
                issuance, if later. Set forth below are the disclosures for the
                three- and nine-month periods ended September 30, 1999 and 2000.

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED          NINE MONTHS ENDED
                                                              SEPTEMBER 30,              SEPTEMBER 30,
                                                            1999         2000          1999         2000
                                                            ----         ----          ----         ----
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                       <C>          <C>           <C>          <C>
Basic earnings per share:

Income available to common stockholders                   $ 2,037      $ 4,345       $ 2,435      $12,301
                                                          -------      -------       -------      -------
  Weighted average common shares                           14,219       21,528        14,070       20,097
                                                          -------      -------       -------      -------
   Basic per share amount                                 $  0.14      $  0.20       $  0.17      $  0.61
                                                          =======      =======       =======      =======

Diluted earnings per share:

Income available to common stockholders                   $ 2,037      $ 4,345       $ 2,435      $12,301
                                                          -------      -------       -------      -------
  Weighted average common shares                           14,219       21,528        14,070       20,097
  Options and warrants assumed exercised                      424        1,067           259        1,214
                                                          -------      -------       -------      -------
  Total                                                    14,643       22,595        14,329       21,311
                                                          -------      -------       -------      -------
     Diluted per share amount                             $  0.14      $  0.19       $  0.17      $  0.58
                                                          =======      =======       =======      =======
</TABLE>
Note C          Inventories consist of the following at:

<TABLE>
<CAPTION>
                    DECEMBER 31,   SEPTEMBER 30,
                       1999            2000
                       ----            ----
                          (in thousands)
<S>                 <C>            <C>
Raw materials        $ 9,554         $15,053
Work-in-process        1,336           1,583
Finished goods         1,454           2,147
                     -------         -------
                     $12,344         $18,783
                     =======         =======
</TABLE>

                                       4
<PAGE>   7
Note D          Property, plant, and equipment, net consist of the following at:

<TABLE>
<CAPTION>
                                  DECEMBER 31,   SEPTEMBER 30,
                                      1999            2000
                                      ----            ----
                                         (in thousands)
<S>                               <C>            <C>
Building and improvements          $ 16,411        $ 16,424
Furniture and equipment              47,036          54,230
                                   --------        --------
                                     63,447          70,654
Less accumulated depreciation       (22,901)        (27,543)
                                   --------        --------
                                   $ 40,546        $ 43,111
                                   ========        ========
</TABLE>

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.

<TABLE>
<CAPTION>
   THREE MONTHS ENDED               United         United
   SEPTEMBER 30, 1999               States         Kingdom          China        Philippines     Eliminations         Total
   ------------------               ------         -------          -----        -----------     ------------         -----
<S>                                <C>             <C>             <C>           <C>             <C>                <C>
Net sales                          $ 17,073        $ 21,267        $  4,383        $     --        $     --         $ 42,723
Intersegment sales                   22,598              --           5,599             767         (28,964)              --
Income before provision for
   income taxes                       1,916           1,050             515              16              16            3,513
</TABLE>

<TABLE>
<CAPTION>
   THREE MONTHS ENDED               United         United
   SEPTEMBER 30, 2000               States         Kingdom          China        Philippines     Eliminations         Total
   ------------------               ------         -------          -----        -----------     ------------         -----
<S>                                <C>             <C>             <C>           <C>             <C>                <C>
Net sales                          $ 17,577        $ 11,846        $ 10,808        $     --        $     --         $ 40,231
Intersegment sales                   18,196              --             263             686         (19,145)              --
Income before provision for
   income taxes                       3,676             895           1,027              14              53            5,665
</TABLE>

<TABLE>
<CAPTION>
   NINE MONTHS ENDED                United         United
   SEPTEMBER 30, 1999               States         Kingdom          China        Philippines     Eliminations         Total
   ------------------               ------         -------          -----        -----------     ------------         -----
<S>                                <C>             <C>             <C>           <C>             <C>                <C>
Net sales                          $ 34,556        $ 45,843        $ 16,968        $     --        $     --         $ 97,367
Intersegment sales                   56,116              --           9,438           2,362         (67,916)              --
Income before provision for
   income taxes                       1,307           1,432             864              47              43            3,693
</TABLE>

<TABLE>
<CAPTION>
   NINE MONTHS ENDED                United         United
   SEPTEMBER 30, 2000               States         Kingdom          China        Philippines     Eliminations         Total
   ------------------               ------         -------          -----        -----------     ------------         -----
<S>                                <C>             <C>             <C>           <C>             <C>                <C>
Net sales                          $ 51,495        $ 44,324        $ 28,500        $     --        $     --         $124,319
Intersegment sales                   57,760              --           5,591           2,210         (65,561)              --
Income before provision for
   income taxes                       7,694           3,405           6,440              44             (34)          17,549
</TABLE>

                                       5
<PAGE>   8
Note F          Comprehensive income for the periods was as follows:

<TABLE>
<CAPTION>
                                         Three Months Ended              Nine Months Ended
                                            September 30,                   September 30
                                        1999            2000            1999            2000
                                        ----            ----            ----            ----
                                                           (in thousands)
<S>                                  <C>             <C>             <C>             <C>
Net income                           $  2,037        $  4,345        $  2,435        $ 12,301
Other comprehensive income:
  Cumulative foreign currency
   translation adjustment                  (5)            (65)             (3)           (102)
                                     --------        --------        --------        --------
Comprehensive income                 $  2,032        $  4,280        $  2,432        $ 12,199
                                     ========        ========        ========        ========
</TABLE>

Note G          Commitments and Contingencies:

                In March 1995, the Company entered into a non-cancelable
                operating lease for its primary manufacturing facility in
                Manila, the Philippines. The lease has a current term extending
                through December 31, 2000. Also, in April 1995, the Company
                entered into a non-cancelable operating lease for an additional
                manufacturing facility in Manila, the Philippines. This lease
                expired on March 31, 2000 and has been renewed to March 31,
                2001.

                In July 2000, the Company notified the lessor of its primary
                manufacturing facility in Manila that the Company was canceling
                the lease for its primary manufacturing facility effective as of
                December 31, 2000. However, the Company intends to renew the
                lease and is negotiating to do so with the lessor.

                In May 2000, Three-Five Systems Pacific, Inc. signed a lease for
                a build-to-suit factory in Manila. The term of the lease is 120
                months starting upon completion of the factory. In conjunction
                with that lease, Three-Five Systems Pacific, Inc. has made
                security deposits of approximately $650,000, which are included
                in other current assets at September 30, 2000.

Note H          Benefit Plans

                On January 27, 2000, the Board of Directors increased the number
                of shares of the Company's common stock available for issuance
                under the 1997 Stock Option Plan by 150,000 to 350,000 shares.

                On August 3, 2000, the Board of Directors increased the number
                of shares of the Company's common stock available for issuance
                under the 1997 Stock Option Plan by 300,000 to 650,000 shares.

Note I          Stockholders' Equity

                In May 2000, the Company issued 2,150,000 shares of common stock
                at a price of $55.00 per share in a public offering. In June
                2000, the Company issued an additional 322,500 shares of common
                stock at a price of $55.00 per share to cover over-allotments
                pertaining to the offering.

                On April 18, 2000, the Board of Directors approved a
                three-for-two stock split, to be effected in the form of a 50
                percent stock dividend. The Board's approval of the stock split
                was contingent upon the approval by the stockholders of an
                increase in the number of authorized shares of common stock,
                which occurred on April 27, 2000. At that time, the stockholders
                also approved an increase in the number of authorized shares of
                the Company's common stock from 15 million to 60 million. The
                stock dividend was paid on May 12, 2000, to stockholders of
                record at the close of business of May 1, 2000. The increase in
                the authorized shares and the stock split have been given
                retroactive recognition for all periods presented in the
                accompanying condensed consolidated financial statements.


                                       6
<PAGE>   9
Note J          Short-term Investments

                The Company considers all liquid interest-earning investments
                with a maturity of three months or less at the date of purchase
                to be cash equivalents. Short-term investments generally mature
                between three months and one year from the purchase date. All
                short-term investments are classified as available for sale and
                are presented at market value using the specific identification
                method. Unrealized gains and losses are reflected in other
                comprehensive income. Realized and unrealized gains and losses
                were not material at September 30, 2000.

Note K          Recently Issued Accounting Standards

                In June 1998, the Financial Accounting Standards Board (FASB)
                issued SFAS No. 133 (as amended by SFAS No. 138), "Accounting
                for Derivative Instruments and Hedging Activities," which
                requires that an entity recognize all derivatives as either
                assets or liabilities in the statement of financial position
                and measure those instruments at fair value. The issuance of
                SFAS No. 137, "Accounting for Derivative Instruments and
                Hedging Activities - Deferral of the Effective Date of FASB
                Statement No. 133," delayed the required effective date of
                SFAS No. 133 to all fiscal years beginning after June 15, 2000.
                The Company will be required to adopt SFAS No. 133, as amended,
                on January 1, 2001. Management is currently evaluating the
                anticipated impact of the adoption of SFAS No. 133 on its
                results of operations and financial position.

                On December 3, 1999, the Securities and Exchange Commission
                staff (the Staff) issued Staff Accounting Bulletin (SAB) 101,
                "Revenue Recognition in Financial Statements." Subsequent to its
                issuance, the Staff elected to defer the required implementation
                date. The Company will be required to adopt SAB 101 during the
                fourth quarter of 2000. Management believes that the adoption of
                SAB 101 will not have a material impact on the Company's
                financial position or results of operations.

                In July 2000, the Emerging Issues Task Force (EITF) reached a
                final consensus on Issue No. 00-10, "Accounting for Shipping and
                Handling Fees and Costs." When adopted, EITF No. 00-10 requires
                that all amounts billed to customers in sale transactions
                related to shipping and handling be classified as revenue. EITF
                No. 00-10 must be adopted prior to, or concurrent with, the
                adoption of SAB 101. The Company has elected to adopt EITF No.
                00-10 during its quarter ended September 30, 2000. As such, the
                consolidated statements of income for the three and nine month
                periods ended September 30, 2000 reflect the adoption of EITF
                No. 00-10. The impact of the adoption on all prior periods was
                not material for restatement.

                During March 2000, the FASB issued Interpretation 44,
                "Accounting for Certain Transactions involving Stock
                Compensation - an interpretation of APB Opinion No. 25" (FIN
                44), which, among other issues, addresses repricing and other
                modifications made to previously issued stock options. The
                Company adopted FIN 44 during July 2000. The adoption of FIN 44
                did not have a material impact on the Company's financial
                position or results of operations.



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


FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS


           Except for the historical information contained herein, this Report
contains forward-looking statements, including those relating to revenue,
margins, expenses, pricing pressures, quarterly fluctuations, customer
concentration, the impact of our China facility, material shortages, research,
development, and engineering expense, and liquidity and anticipated cash needs
that involve risks and uncertainties that could cause actual results to differ
materially.


                                       7
<PAGE>   10
           We caution that these statements are subject to various factors that
may affect future results, including the following: changes in the market for
our products and the success of our customers' products, our success in moving
products from the design phase to the manufacturing phase, the failure of key
technologies to deliver commercially acceptable performance, our dependence on
one large customer, the absence of long-term purchase commitments, and our
lengthy development periods and product acceptance cycles. This Report should be
read in conjunction with our Report on Form 10-K for the fiscal year ended
December 31, 1999 and our Registration Statement on Form S-3 (Registration No.
333-35788) as declared effective by the Securities and Exchange Commission on
May 5, 2000.

OVERVIEW

           We offer advanced design and manufacturing services to original
equipment manufacturers, commonly referred to as OEMs. We specialize in custom
display modules utilizing liquid crystal display, or LCD, components and
technology. Our LCD modules have varying levels of integration. At a minimum,
each module includes an LCD, a custom LCD driver, and a flexible connector. We
also provide value-added services, which increase our competitiveness, by
assembling additional components onto the module based upon the specific needs
of the customer. These additional components include such items as keypads,
microphones, speakers, light guides, and optics.

           We currently sell substantially all of our LCD modules to major OEMs.
We derived more than 85% of our net sales in 1999 and in the first nine months
of 2000 from the mobile handset market. When we win a design program, our
customer typically pays all or a portion of our nonrecurring engineering
expenses to defray the costs of custom design, as well as the costs of
nonrecurring tooling for custom components. The typical program life cycle of a
custom-designed LCD module is three to twelve months and includes technical
design, prototyping, pilot manufacturing, and high-volume manufacturing. We
typically seek large volume programs from major OEMs. The minimum production
quantity for an LCD module typically approximates 100,000 units per year,
although the production rate for some programs has been as high as 100,000 units
per week. The selling price of our LCD modules usually ranges between $5 and $20
per unit. We recognize revenue upon product shipment.

           We experienced substantial growth from 1993 through 1995, primarily
as a result of sales to OEMs in the wireless communications industry, which grew
substantially during that period. During that period, our primary customer was
Motorola. In 1996, our net sales declined, primarily as a result of the
phase-out by Motorola of a significant family of programs. In 1997, our net
sales returned to pre-1996 levels primarily as a result of several new programs
and customers. Motorola accounted for 65.1% of our net sales in 1996, 34.6% in
1997, and 63.6% in 1998. In 1999, net sales to Motorola increased at a rate
faster than net sales to our other customers and represented 86.1% of our net
sales. In the first nine months of 2000, net sales to Motorola represented 87.6%
of our net sales. Since 1998 no other customer has accounted for more than 10%
of our net sales.

           During the past several years, we have experienced seasonal quarterly
fluctuations in our net sales as our OEM customers developed retail products
with shorter product life cycles and phased out older programs early in the year
following holiday sales. As a result, sales usually peak in the fourth quarter
of a calendar year and are lower in the following quarter.

           Several factors impact our gross margins, including manufacturing
efficiencies, product mix, product differentiation, product uniqueness,
inventory management, and volume pricing. Currently, significant pricing
pressure exists in the LCD module market, especially in higher volume programs
in the wireless communications industry. Accordingly, as the production levels
of some of our new higher volume programs have increased, the lower standard
gross margins on those programs have impacted, and will continue to impact, our
overall margins.

           We vertically integrate our manufacturing facilities. In Arizona, we
own and operate the largest high-volume LCD production line in North America. We
generally use the Arizona facility for the manufacture of more technologically
complex and custom high-volume LCDs. We also purchase LCDs from Asian and
European sources to provide us an alternate source and to ensure available
capacity. In order to take advantage of lower labor costs, we ship our LCDs to
our facilities in Manila, the Philippines, or Beijing, China, for assembly into
modules.

           Historically, we have conducted most of our manufacturing operations
at our facility in Manila. At that facility, we assemble LCDs into modules and
perform certain back-end LCD processing operations. We conduct our operations in
Manila under an agreement with a third-party subcontract manufacturer. Under
this agreement, the


                                       8
<PAGE>   11
subcontractor supplies direct labor and incidental services required to
manufacture our products. We also lease our manufacturing facility from the
subcontractor. All indirect manufacturing employees, primarily technicians,
supervisors, and engineers, are our employees.

           In early 1998, we decided to open a similar display module
manufacturing facility in Beijing. Within six months, we located a temporary
manufacturing facility, equipped the facility, trained our personnel, qualified
the facility for customers, and qualified products manufactured at the facility.
We commenced construction of our permanent Beijing facility in late 1998. This
facility was substantially completed in early July 1999, and we began production
in the new manufacturing facility late in the third quarter of 1999. All
production in Beijing since the fourth quarter of 1999 has been conducted at our
new permanent facility. We own our Beijing facility through a wholly owned
foreign subsidiary.

           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, and our sales force consists of a small number of direct
technical sales persons. As a result, there is no material cost of distribution
in our selling, general, and administrative expense. Selling, general, and
administrative expense has increased as we have expanded our business and
increased our diversification efforts. In addition, we have recently incurred
substantial marketing and administrative expenses in connection with our LCoS
microdisplay business.

           Research, development, and engineering expense consists principally
of salaries and benefits to scientists, design engineers, and other technical
personnel, related facility costs, process development costs, and various
expenses for projects, including new product development. Research, development,
and engineering expense continues to increase as we develop new display products
and technologies, especially LCoS microdisplays.

           Since 1997, we have been working on the development of LCoS
microdisplays. In 1997, we entered into a strategic alliance with National
Semiconductor Corporation for the development of LCoS microdisplay products.
Under that alliance, National focused on the silicon technologies needed for
microdisplays, and we focused on the liquid crystal technologies. In 1999,
National 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 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 total transaction at
approximately $3.6 million. No additional payments are required under the
licenses. We also hired several key technical employees of National to assist in
the implementation of the acquired technologies.

           In April 1998, we entered into a strategic relationship with Inviso,
Inc., formerly Siliscape, 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 provide proprietary manufacturing capabilities and liquid
crystal expertise, and Inviso provides patented and proprietary technologies and
components for the joint development of microdisplay products.

           In August 1999, we licensed the microdisplay technology of S-Vision
Corporation, which had recently ceased operations. This license is an
irrevocable, royalty free, fully paid-up, worldwide license to manufacture and
package certain microdisplay products and patented optical engines.

           In October 1999, we entered into an agreement with Tecdis S.p.A., a
European-based LCD company, to form an ASIC design center in Chatillon, Italy.
The ASIC design center will be known as Dora and will focus on the design of
ASICs necessary to drive the LCDs we and Tecdis design for our respective
customers. STMicroelectronics is also participating in Dora and has agreed to
manufacture the ASICs designed by Dora.

           In August 2000, our wholly owned foreign subsidiary, Three-Five
Systems (Beijing) Co., Ltd., entered into a strategic agreement with Heibei Jiya
Electronics, Co., Ltd. (Jiya), a Chinese-based manufacturer of LCD glass. Under
the terms of the agreement, Jiya will provide glass for LCD modules to us and
will reserve a significant amount of its glass manufacturing capacity for us. In
exchange, we will assist Jiya in further developing its LCD glass


                                       9
<PAGE>   12
manufacturing processes. At the conclusion of 18 months, we have the option to
extend the agreement or to acquire a majority interest in Jiya.

           These acquisitions, investments, and licenses will result in
increased research, development, and engineering expense as we expand our LCoS
microdisplay development efforts in preparation for the commercial introduction
of LCoS microdisplay products. We are also considering licensing other
technologies from other companies that could be optimized on our LCD
manufacturing line as well as entering into further alliances. We expect to
continue to devote substantial resources to research and development, especially
on our LCoS microdisplay technology and related products. As a result, the
actual dollar amount of our research, development, and engineering expense will
continue to increase.

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999

           NET SALES. Net sales decreased 5.8% to $40.2 million in the three
months ended September 30, 2000 from $42.7 million in the three months ended
September 30, 1999. This decrease occurred because of delayed programs and
product mix issues at our largest customer.

           COST OF SALES. Cost of sales decreased to 77.3% of net sales in the
three months ended September 30, 2000 from 79.3% in the three months ended
September 30, 1999. This percentage decrease resulted primarily from accelerated
operating efficiencies and cost reduction efforts undertaken in the last 12
months. The cost of sales increased slightly from the second quarter of 2000, in
part because of new pricing for some high volume programs.

           SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense decreased 7.4% to $2.5 million in the three months ended
September 30, 2000 from $2.7 million in the three months ended September 30,
1999. Selling, general, and administrative expense was 6.1% of net sales in the
three months ended September 30, 2000 compared to 6.4% in the three months ended
September 30, 1999. The decrease in selling, general, and administrative expense
reflected our efforts to hold the costs of SG&A in 2000 to 1999 levels in order
to leverage those expenses as we continued to expand the business.

           RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development
and engineering expense increased 53.9% to $3.7 million in the three months
ended September 30, 2000 from $2.4 million in the three months ended September
30, 1999. Research, development and engineering expense was 9.3% of net sales in
the three months ended September 30, 2000 compared to 5.7% in the three months
ended September 30, 1999. Research, development and engineering expense
increased as the result of the development of new display products and
technologies, including LCoS microdisplays. Expenses also increased in LCD
engineering as a result of the increased number of design wins.

           The selling, general and administrative expense and the research,
development and engineering expense in each quarter include expenses for
microdisplays. We are currently incurring significant operating expenditures in
microdisplays at a time when there is very little microdisplay revenue. In the
third quarter of 2000, we incurred approximately $2.5 million of operating
expenses specifically related to LCoS microdisplays as compared with
approximately $1.8 million in the third quarter of 1999.

           OTHER INCOME (EXPENSE), NET. Other income in the three months ended
September 30, 2000 was $2.7 million compared to other expense of $160,000 in the
three months ended September 30, 1999. The difference was a result of increased
interest income and reduced interest expense. The increase in interest income
was primarily a result of additional cash and short-term investment balances in
the three months ended September 30, 2000 and the elimination of all
indebtedness.

            PROVISION FOR INCOME TAXES. The provision for income taxes was $1.3
million in the three months ended September 30, 2000 compared to a provision for
income taxes of $1.5 million in the three months ended September 30, 1999. The
tax rate decreased to 23.3% in the three months ended September 30, 2000
compared to 42.0% in the three months ended September 30, 1999. The decreased
tax rate in the three months ended September 30, 2000 resulted primarily from
reporting income in Beijing, which is a low tax rate jurisdiction. In addition,
in the second half of 2000, we recorded a tax benefit related to research and
development tax credits, resulting in a reduced tax rate


                                       10
<PAGE>   13
over the first half of 2000. Thus, in the fourth quarter of 2000, we expect our
overall tax rate to be the same as the third quarter.

           NET INCOME. Net income increased 113.1% to $4.3 million, or $0.19 per
diluted share, in the three months ended September 30, 2000 from $2.0 million,
or $0.14 per diluted share, in the three months ended September 30, 1999.
Excluding our LCoS microdisplay business, our net income in the three months
ended September 30, 2000 was approximately $6.2 million, or $0.27 per diluted
share.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.

           NET SALES. Net sales increased 27.7% to $124.3 million in the nine
months ended September 30, 2000 from $97.4 million in the nine months ended
September 30, 1999. This increase occurred because of the increased level of
programs at our largest customer and strong growth in the mobile handset market.

           COST OF SALES. Cost of sales decreased to 76.1% of net sales in the
nine months ended September 30, 2000 from 81.3% in the nine months ended
September 30, 1999. This percentage decrease resulted primarily from accelerated
operating efficiencies and cost reduction efforts as a result of the continued
high levels of production for programs that have been ongoing for several
quarters.

           SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense decreased 7.2% to $7.1 million in the nine months ended
September 30, 2000 from $7.7 million in the nine months ended September 30,
1999. Selling, general, and administrative expense was 5.7% of net sales in the
nine months ended September 30, 2000 compared to 7.9% in the nine months ended
September 30, 1999. The decrease in selling, general, and administrative expense
reflected our efforts to leverage those expenses as we continued to expand the
business.

           RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development
and engineering expense increased 51.6% to $9.5 million in the nine months ended
September 30, 2000 from $6.3 million in the nine months ended September 30,
1999. Research, development and engineering expense was 7.6% of net sales in the
nine months ended September 30, 2000 compared to 6.4% in the nine months ended
September 30, 1999. Research, development and engineering expense increased as
the result of the development of new display products and technologies,
primarily microdisplays.

           The selling, general and administrative expense and the research,
development and engineering expense include expenses for microdisplays. We are
currently incurring significant operating expenditures in microdisplays at a
time when there is very little microdisplay revenue. In the first nine months of
2000, we incurred approximately $6.8 million of operating expenses specifically
related to LCoS microdisplays as compared with approximately $4.4 million in the
first nine months of 1999.

           OTHER INCOME (EXPENSE), NET. Other income in the nine months ended
September 30, 2000 was $4.5 million compared to other expense of $559,000 in the
nine months ended September 30, 1999. The difference was a result of increased
interest income and reduced interest expense. The increase in interest income
was primarily a result of additional cash and short-term investment balances and
the elimination of all indebtedness.

           PROVISION FOR INCOME TAXES. The provision for income taxes was $5.3
million for the nine months ended September 30, 2000 compared to $1.3 million
for the nine months ended September 30, 1999. This change resulted primarily
from higher pre-tax income in the nine months ended September 30, 2000 compared
to the same period in 1999. The tax rate during the nine months ended September
3, 2000 was 30.0%, as compared with 34.0% for the same period of 1999. We had a
reduced tax rate in 2000 as a result of increased income in Beijing, which is a
low tax rate jurisdiction, and a benefit from research and development tax
credits.

           NET INCOME. Net income increased 405.2% to $12.3 million, or $0.58
per diluted share, in the nine months ended September 30, 2000 from $2.4
million, or $0.17 per diluted share, in the nine months ended September 30,
1999. Excluding LCoS microdisplay related expenses, our net income for the nine
months ended September 30, 2000 was approximately $16.6 million, or $0.78 per
diluted share.


                                       11
<PAGE>   14
QUARTERLY RESULTS OF OPERATIONS

           The following table presents unaudited consolidated statement of
operations data for each of the five quarters in the period ended September 30,
2000. We believe that all necessary adjustments have been included to present
fairly the quarterly information when read in conjunction with the Condensed
Consolidated Financial Statements. The operating results for any quarter are not
necessarily indicative of the results for any subsequent quarter.

<TABLE>
<CAPTION>
                                                                        QUARTERS ENDED
                                              -----------------------------------------------------------------
                                                                          (UNAUDITED)
                                                                        (IN THOUSANDS)

                                              SEP 30,         DEC 31,      MAR 31,       JUN 30,        SEP 30,
                                                        1999                               2000
                                              -----------------------      ------------------------------------
<S>                                           <C>            <C>           <C>           <C>           <C>
Net sales                                     $ 42,723       $ 50,041      $ 39,162      $ 44,926      $ 40,231
                                              --------       --------      --------      --------      --------
Cost and expenses:
 Cost of sales                                  33,882         38,407        29,360        34,157        31,115
 Selling, general, and administrative            2,741          3,487         2,262         2,418         2,453
 Research, development, and engineering          2,427          2,489         2,763         2,989         3,734
                                              --------       --------      --------      --------      --------
                                                39,050         44,383        34,385        39,564        37,302
                                              --------       --------      --------      --------      --------
Operating income                                 3,673          5,658         4,777         5,362         2,929
Other income (expense), net .                     (160)           541           580         1,165         2,736
                                              --------       --------      --------      --------      --------
Income before provision for income taxes         3,513          6,199         5,357         6,527         5,665
Provision for income taxes                       1,476          1,710         1,770         2,158         1,320
                                              --------       --------      --------      --------      --------
Net income                                    $  2,037       $  4,489      $  3,587      $  4,369      $  4,345
                                              ========       ========      ========      ========      ========
</TABLE>

           Historically, we have experienced seasonal fluctuations in our net
sales. OEM customers that purchase our products for incorporation into retail
products, such as mobile handsets, typically increase their purchases during the
year-end holiday period and phase out old programs early in the year following
holiday sales. As a result, net sales typically peak in the fourth quarter and
reach a seasonal low point in the first quarter.

           There is significant pricing pressure in higher volume programs in
the wireless communications and office automation industries. In the first
quarter of 1999, we had an unfavorable product mix, shipping principally lower
margin products. In addition, reduced manufacturing yields and under-absorption
of fixed overhead contributed to lower margins. In the second half of 1999,
higher volumes in our manufacturing facilities produced increased operating
efficiencies, resulting in better margins. We continued to improve the margins
in the first quarter of 2000 as we focused on cost-reduction efforts. Since that
quarter, gross margins have declined as pricing pressures in the handset
business have caught up with our cost reduction efforts. We have had a record
number of design wins in 2000, especially with LCD modules to be used in the
high-volume, value-priced, mobile handset markets.

           In 1999, we continued to expand and intensify our research and
development efforts on proprietary display products, such as LCoS microdisplays.
Other expense increased in the first half of 1999 as our cash balances declined
and we increased our borrowings. All borrowings were paid off and cash balances
increased as a result of our equity offering in the third quarter of 1999. As a
result, we had sharply higher interest income in the fourth quarter of 1999. In
the second quarter of 2000, we had another equity offering, which further raised
our cash balances and increased our interest income.

OUTLOOK

           Based on the ordering pattern we are currently seeing from our
customers, we expect sales in the fourth quarter of 2000 to be 10 to 15 percent
higher than the third quarter. In 2001, we expect a 50% revenue growth rate,
with most of that growth coming in the last three quarters. In the first quarter
of 2001, we expect some typical seasonality but it may be less than in prior
years.

           We expect our gross margins in the fourth quarter of 2000 to be in
approximately the same range as the third quarter. For 2001, we expect our gross
margins to move down from current levels as we move into the much larger, but
value-priced, handset market as a result of our recent design wins. Our margins
this year are benefiting from cost reduction efforts we have implemented in
anticipation of penetrating the value-priced wireless handset market. In


                                       12
<PAGE>   15
higher volume, microdisplays should have substantially higher margins and thus
may add a percent or two to our overall gross margin by the second half of 2000.

           Operating expenses in the fourth quarter of 2000 should be at about
the same percentage level as third quarter. In the first quarter of 2001,
operating expenses should start out at about 15% and drop to about 8% or 9% by
the fourth quarter of 2001.


           Our tax rate for 2000 is expected to be 28%, which is reduced from
the originally expected level as a result of research and development tax
credits. In 2001, we expect our tax rate to be around 34%.

LIQUIDITY AND CAPITAL RESOURCES

           At September 30, 2000, we had cash, cash equivalents, and short-term
investments of $172.1 million compared to $45.4 million at December 31, 1999.

           In the quarter ended September 30, 2000, we had $142,000 in net cash
outflow from operations compared to $3.3 million in net cash inflow from
operations in the quarter ended September 30, 1999. Our cash flow was negatively
impacted in the quarter ended September 30, 2000 primarily as a result of
substantially higher accounts receivable and inventories. Accounts receivable
are up because we had stronger sales in September than in July or August.
Inventories are up because our backlog for the fourth quarter is up.

           Depreciation expense decreased slightly to $1.6 million for the third
quarter of 2000 compared to $1.7 million for the third quarter of 1999. This
decrease primarily relates to decreased starts on our LCD line, which is
depreciated on a units-of-production method based on units started. Inventory
turns were 7.3 in the third quarter of 2000 compared to 9.8 in the third quarter
of 1999. Accounts receivable DSOs (Day Sales Outstanding) were 65 days in the
third quarter of 2000 from 55 days in the third quarter of 1999.

           In the first nine months of 2000, we had $4.5 million in net cash
flow from operations compared to $4.1 million in net cash flow from operations
during 1999. Cash flow from operations improved during the first nine months of
2000 primarily as a result of increased net income.

           Our working capital was $200.2 million at September 30, 2000 compared
with $60.9 million at December 31, 1999. Our current ratio increased to 9.2-to-1
at September 30, 2000 from 3.8-to-1 at December 31, 1999. The substantial
increase in our working capital and current ratio during the nine months of 2000
occurred primarily because of the equity offering that was completed during the
second quarter of 2000. In that offering, we raised approximately $128 million
and issued approximately 2.5 million additional shares of common stock.
Including our cash, cash equivalents, short-term investments, and available
credit facilities, we had approximately $197 million in readily available funds
at September 30, 2000 compared to $70.7 million at December 31, 1999.

           In January 2000, we entered into a new credit facility with Imperial
Bank to replace the then existing credit facility. The new credit facility is a
$25.0 million unsecured revolving line of credit that matures in January 2001.
Mellon Bank is a participating lender on that new credit facility. No borrowings
are outstanding under the new credit facility. Advances under the new 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. In addition, we have other
smaller credit facilities in Europe and China.

           Capital expenditures during the first nine months of 2000 were
approximately $7.2 million. These capital expenditures primarily consisted of
equipment for our operations in Manila, Beijing, and Arizona, including
manufacturing equipment for LCoS microdisplays. In the first quarter of 2000, we
also made an additional investment in Inviso, Inc. of $500,000, bringing our
total minority investments in Inviso to $3.8 million. Our total capital budget
for 2000 is approximately $14 to $16 million.

           Capital expenditures during 1999 were approximately $12.5 million.
These capital expenditures consisted of $5.6 million for equipment and
construction costs relating to our manufacturing facility in Beijing; $1.8
million for manufacturing and office equipment for our operations in Manila and
Arizona; and $5.1 million for LCoS


                                       13
<PAGE>   16
microdisplays, including our purchase of assets and licenses from National
Semiconductor and S-Vision. The assets and licensed silicon technologies from
National Semiconductor relating to LCoS microdisplays were acquired for
approximately $3.0 million in cash and warrants to purchase 140,000 shares of
our common stock. Substantially all of the purchase price was allocated to
depreciable assets, tooling and mask rights, and amortizable licenses.

           We believe that our existing balances of cash, cash equivalents,
short term investments, anticipated cash flows from operations, and available
credit lines will provide adequate sources to fund our operations and planned
expenditures through 2001.

EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS

           The results of our operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuations. We
generally sell our products and services and negotiate purchase orders with our
foreign suppliers in U.S. dollars. However, we have certain foreign currency
exchange exposure as a result of our manufacturing operations in the Philippines
and China. The sub-assembly agreement relating to our operations in Manila is
based on a fixed conversion rate, exposing us to exchange rate fluctuations with
the Philippine peso. We have not incurred any material exchange gains or losses
to date.

           In China, we have accounts receivable and cash deposits in the local
currency. Although the Chinese currency currently is stable, its value in
relation to the U.S. dollar is determined by the Chinese government. There has
been general speculation since late 1998 that China may devalue its currency.
Devaluation of the Chinese currency could result in translation adjustments to
our balance sheet as well as reportable losses depending on our monetary
balances and outstanding indebtedness at the time of devaluation. The government
of China historically has made it difficult to convert its local currency into
foreign currencies. Although from time to time we may enter into hedging
transactions in order to minimize our 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 imposed restrictions on Chinese currency
loans to foreign-operated entities in China. Based on the foregoing, we cannot
provide assurance that fluctuations and currency exchange rates in the future
will not have an adverse effect on our financial condition or results of
operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

           There are no material changes in reported market risks since the
Company's most recent filing on Form 10-K for the year ended December 31, 1999.


                           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


                                   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)


                                       14
<PAGE>   17
Dated:  October 20, 2000.              By:    /s/ Jeffrey D. Buchanan
                                              -------------------------------
                                       Name:  Jeffrey D. Buchanan
                                       Its:   Executive Vice President; Chief
                                              Financial Officer


                                       15









<PAGE>   18
                                 EXHIBIT INDEX


Exhibit
Number                      Description of Exhibit
-------                     ----------------------
  27                        Financial Data Schedule