##### Table of Contents



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, 2001

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
incorporation or organization) |  | I.R.S. Employer
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   (check box)         NO   (box)

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, 2001
|                         |  |                                     
|Common                   |  |                                      | 21,380,953 | 
|Par value $.01 per share |  |                                      |            | 





---

TABLE OF CONTENTS



|           |                                                                                               |                                                      |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|           | ITEM 1. FINANCIAL STATEMENTS                                                                 
|           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|           |                                                                                               | Notes to Condensed Consolidated Financial Statements
|           | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|           | ITEM 5. OTHER INFORMATION                                                                    
|           | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES



---



##### Table of Contents



THREE-FIVE SYSTEMS, INC.QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001TABLE OF CONTENTS

|                               |  |                                                                |  |  |    |      |  | 
|------------------------------ |  | -------------------------------------------------------------- |  |  | -- | ---- |  | 
|                               |  |                                                                |  |  |    | Page
|                               |  |                                                                |  |  |    |     
|PART I - FINANCIAL INFORMATION
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|ITEM 1.                        |  | FINANCIAL STATEMENTS:                                          |  |  |    |     
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Balance Sheets-                         |  |  |    |     
|                              
|                              
|                              
|                              
|                               |  | December 31, 2000 and September 30, 2001                       |  |  | 1  |     
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Statements of Income-                   |  |  |    |     
|                              
|                              
|                              
|                              
|                               |  | Three Months and Nine Months Ended September 30, 2000 and 2001 |  |  | 2  |     
|                              
|                              
|                              
|                              
|                               |  | Condensed Consolidated Statements of Cash Flows-               |  |  |    |     
|                              
|                              
|                              
|                              
|                               |  | Nine Months Ended September 30, 2000 and 2001                  |  |  | 3  |     
|                              
|                              
|                              
|                              
|                               |  | Notes to Condensed Consolidated Financial Statements           |  |  | 4  |     
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|ITEM 2.                        |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL              |  |  |    |     
|                              
|                              
|                              
|                              
|                               |  | CONDITION AND RESULTS OF OPERATIONS                            |  |  | 7  |     
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|ITEM 5.                        |  | OTHER INFORMATION                                              |  |  | 12 |     
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|PART II - OTHER INFORMATION   
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|ITEM 6.                        |  | EXHIBITS AND REPORTS ON FORM 8-K                               |  |  | 13 |     
|                              
|                              
|                              
|                              
|                               |  |                                                                |  |  |    |      |  | 
|                              
|                              
|                              
|                              
|SIGNATURES                     |  |                                                                |  |  | 13 |     





---



##### Table of Contents






ITEM 1. FINANCIAL STATEMENTS




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

|                                             |                                               |   |                            |         |              |         |               |         |             |         | 
|-------------------------------------------- | --------------------------------------------- | - | -------------------------- | ------- | ------------ | ------- | ------------- | ------- | ----------- | ------- | 
|                                             |                                               |   |                            |         | DECEMBER 31, |         | SEPTEMBER 30,
|                                             |                                               |   |                            |         | 2000         |         | 2001         
|                                             |                                               |   |                            |         |              |         |              
|                                             |                                               |   |                            |         |              |         |               |         | (unaudited)
|ASSETS                                       |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Current Assets:                              |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             | Cash and cash equivalents                     |   | $                          | 98,876  |              |         | $             | 63,866  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term investments                        |   |                            | 66,695  |              |         |               | 85,066  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts receivable, net                      |   |                            | 23,635  |              |         |               | 20,359  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Inventories                                   |   |                            | 20,516  |              |         |               | 17,851  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Deferred tax asset                            |   |                            | 4,346   |              |         |               | 4,346   |            
|                                            
|                                            
|                                            
|                                            
|                                             | Other current assets                          |   |                            | 1,778   |              |         |               | 9,530   |            
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   | Total current assets       |         |              | 215,846 |               |         |             | 201,018 | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Long-term Investments                        |                                               |   | 4,534                      |         |              |         | 1,527         |        
|                                            
|                                            
|                                            
|                                            
|Property, Plant and Equipment, net           |                                               |   | 43,254                     |         |              |         | 45,180        |        
|                                            
|                                            
|                                            
|                                            
|Other Assets                                 |                                               |   | 4,209                      |         |              |         | 1,377         |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               | $ | 267,843                    |         |              | $       | 249,102       |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|LIABILITIES AND STOCKHOLDERS EQUITY         |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Current Liabilities:                         |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts payable                              |   | $                          | 11,404  |              |         | $             | 12,397  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued liabilities                           |   |                            | 7,005   |              |         |               | 3,968   |            
|                                            
|                                            
|                                            
|                                            
|                                             | Current taxes payable                         |   |                            | 239     |              |         |               |        |            
|                                            
|                                            
|                                            
|                                            
|                                             | Term loan                                     |   |                            | 2,706   |              |         |               | 2,706   |            
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   | Total current liabilities  |         |              | 21,354  |               |         |             | 19,071  | 
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Deferred Tax Liability                       |                                               |   | 4,487                      |         |              |         | 4,487         |        
|                                             |                                               |   |                            |         |              |         |               |        
|Minority Interest in Consolidated Subsidiary |                                               |   |                           |         |              |         | 428           |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Commitments and Contingencies                |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|Stockholders Equity:                        |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             | Common stock                                  |   |                            | 217     |              |         |               | 217     |            
|                                            
|                                            
|                                            
|                                            
|                                             | Additional paid-in capital                    |   |                            | 198,215 |              |         |               | 198,956 |            
|                                            
|                                            
|                                            
|                                            
|                                             | Retained earnings                             |   |                            | 48,430  |              |         |               | 33,328  |            
|                                            
|                                            
|                                            
|                                            
|                                             | Stock subscription note receivable            |   |                            |        |              |         |               | (432    | )          
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated other comprehensive income (loss) |   |                            | (234    | )            |         |               | 199     |            
|                                            
|                                            
|                                            
|                                            
|                                             | Less  treasury stock, at cost                |   |                            | (4,626  | )            |         |               | (7,152  | )          
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   | Total stockholders equity |         |              | 242,002 |               |         |             | 225,116 | 
|                                             |                                               |   |                            |         |              |         |               |        
|                                             |                                               |   |                            |         |              |         |               |        
|                                            
|                                            
|                                            
|                                            
|                                             |                                               | $ | 267,843                    |         |              | $       | 249,102       |        
|                                             |                                               |   |                            |         |              |         |               |        

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

1



---



##### Table of Contents






THREE-FIVE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)

|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |        |         |  
|--------------------------------------------------------------- | ----------------------------------------- | ----------------------- | ------ | ------------------- | ----- | ------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------- | -
|                                                                |                                           |                         |        | THREE MONTHS        |       | NINE MONTHS        
|                                                                |                                           |                         |        | ENDED SEPTEMBER 30, |       | ENDED SEPTEMBER 30,
|                                                                |                                           |                         |        |                     |       |                    
|                                                                |                                           |                         |        | 2000                |       | 2001                |        | 2000   |        | 2001
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |     
|Net Sales                                                       |                                           | $                       | 40,231 |                     |       | $                   | 26,594 |        |        | $    | 124,319 |        |        | $ | 87,223  |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Costs and Expenses:                                             |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Cost of sales                             |                         |        | 31,115              |       |                     |        | 27,453 |        |      |         | 94,632 |        |   |         | 90,856 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Selling, general and administrative       |                         |        | 2,453               |       |                     |        | 2,444  |        |      |         | 7,133  |        |   |         | 7,857  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Research, development and engineering     |                         |        | 3,734               |       |                     |        | 4,224  |        |      |         | 9,486  |        |   |         | 12,680 |        
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         | 37,302 |                     |       |                     | 34,121 |        |        |      | 111,251 |        |        |   | 111,393 |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                           | Operating income (loss) |        |                     | 2,929 |                     |        |        | (7,527 | )    |         |        | 13,068 |   |         |        | (24,170 | )
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Other Income (Expense):                                         |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Interest, net                             |                         |        | 2,756               |       |                     |        | 1,500  |        |      |         | 4,545  |        |   |         | 5,439  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Loss on investment in start-up company    |                         |        |                    |       |                     |        |       |        |      |         |       |        |   |         | (3,820 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Other, net                                |                         |        | (20                 | )     |                     |        | (3     | )      |      |         | (64    | )      |   |         | (55    | )      
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         | 2,736  |                     |       |                     | 1,497  |        |        |      | 4,481   |        |        |   | 1,564   |       
|                                                               
|                                                               
|                                                               
|                                                               
|Minority Interest in Loss of Consolidated
Subsidiary            |                                           |                         |       |                     |       |                     | 62     |        |        |      |        |        |        |   | 62      |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Income (Loss) before Provision for (Benefit
from) Income Taxes: |                                           |                         | 5,665  |                     |       |                     | (5,968 | )      |        |      | 17,549  |        |        |   | (22,544 | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Provision for (Benefit from) income taxes |                         |        | 1,320               |       |                     |        | (1,972 | )      |      |         | 5,248  |        |   |         | (7,442 | )      
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Net Income (Loss)                                               |                                           | $                       | 4,345  |                     |       | $                   | (3,996 | )      |        | $    | 12,301  |        |        | $ | (15,102 | )     
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Earnings (Loss) per Common Share:                               |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Basic                                     |                         | $      | 0.20                |       |                     | $      | (0.19  | )      |      | $       | 0.61   |        |   | $       | (0.70  | )      
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                | Diluted                                   |                         | $      | 0.19                |       |                     | $      | (0.19  | )      |      | $       | 0.58   |        |   | $       | (0.70  | )      
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|Weighted Average Number of Common Shares:                       |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Basic                                     |                         | $      | 21,528              |       |                     | $      | 21,363 |        |      | $       | 20,097 |        |   | $       | 21,427 |        
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       
|                                                                | Diluted                                   |                         | $      | 22,595              |       |                     | $      | 21,363 |        |      | $       | 21,311 |        |   | $       | 21,427 |        
|                                                                |                                           |                         |        |                     |       |                     |        |        |        |      |         |        |        |   |         |       

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

2



---



##### Table of Contents






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

|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |         |          |        |         |  
|------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------- | -------- | ------- | -------- | ------ | ------- | -
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          | NINE MONTHS ENDED
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          | SEPTEMBER 30,    
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                  
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          | 2000              |          | 2001   
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|Cash Flows from Operating Activities:                        |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net income (loss)                                                                                  |                                                | $                                                               | 12,301                                              |          |                   | $        | (15,102 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                |                                                                 |                                                     |          |                   |          |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Depreciation and amortization                                   |                                                     |          | 4,655             |          |         |          | 4,356  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Provision for accounts receivable valuation reserves            |                                                     |          | 33                |          |         |          | 191    |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Loss on disposal of assets                                      |                                                     |          |                  |          |         |          | 1,289  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Loss on investment in start-up company                          |                                                     |          |                  |          |         |          | 3,820  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Change in assets and liabilities:                                                                  |                                                |                                                                 |                                                     |          |                   |          |         |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | (Increase) decrease in accounts receivable                      |                                                     |          | (7,663            | )        |         |          | 3,085  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | (Increase) decrease in inventories                              |                                                     |          | (6,439            | )        |         |          | 2,665  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | (Increase) decrease in other assets                             |                                                     |          | (656              | )        |         |          | (7,256 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Increase (decrease) in accounts payable and accrued liabilities |                                                     |          | 1,530             |          |         |          | (1,616 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    |                                                | Increase (decrease) in taxes payable and deferred taxes, net    |                                                     |          | 767               |          |         |          | (239   | )      
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 | Net cash provided by (used in) operating activities |          |                   | 4,528    |         |          |        | (8,803  | )
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|Cash Flows from Investing Activities:                        |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Purchase of property, plant and equipment, net |                                                                 |                                                     | (7,207   | )                 |          |         | (7,571   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Purchase of investments                        |                                                                 |                                                     | (123,749 | )                 |          |         | (181,452 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Proceeds from maturities/sales of investments  |                                                                 |                                                     |         |                   |          |         | 166,539  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Other investments                              |                                                                 |                                                     | (500     | )                 |          |         | (1,510   | )     
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 | Net cash used in investing activities               |          |                   | (131,456 | )       |          |        | (23,994 | )
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|Cash Flows from Financing Activities:                        |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Net proceeds from equity offerings             |                                                                 |                                                     | 128,657  |                   |          |         |         |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Purchase of treasury stock                     |                                                                 |                                                     |         |                   |          |         | (2,526   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                    | Stock options exercised                        |                                                                 |                                                     | 1,353    |                   |          |         | 331      |       
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 | Net cash provided by (used in) financing activities |          |                   | 130,010  |         |          |        | (2,195  | )
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of Exchange Rate Changes on Cash and
Cash Equivalents |                                                                                                    |                                                | (102                                                            | )                                                   |          |                   | (18      | )      
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|Net Increase (Decrease) in Cash and Cash Equivalents         |                                                                                                    |                                                | 2,980                                                           |                                                     |          |                   | (35,010  | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and Cash Equivalents, Beginning of Period               |                                                                                                    |                                                | 45,363                                                          |                                                     |          |                   | 98,876   |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and Cash Equivalents, End of Period                     |                                                                                                    | $                                              | 48,343                                                          |                                                     |          | $                 | 63,866   |        
|                                                             |                                                                                                    |                                                |                                                                 |                                                     |          |                   |          |        

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

3



---



##### Table of Contents






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, 2001 are not necessarily
indicative of the operating results that may be expected for the
entire year ending December 31, 2001. These financial statements
should be read in conjunction with the Companys December 31, 2000
financial statements and accompanying notes thereto.
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|      
|      
|      
|Note B |  | Basic earnings (loss) per common share are computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding during the three- and nine-month month periods
ended September 30, 2000 and 2001. Diluted earnings per common
share for the three- and nine-month periods ended September 30,
2000 are determined assuming that outstanding options and warrants
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 (loss) per
share for the three- and nine-month periods ended September 30,
2001, as their effect was anti-dilutive. Set forth below are the
disclosures for the three- and nine-month periods ended September
30, 2000 and 2001.                                                                                                                                                                                                             

|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |        |       |  
|---------------------------------------------- | ------------------------------------------------- | ------------------------ | ----- | ---------------------------------------- | ---- | ----------------- | ------ | ------ | ----- | ---- | ------ | ------ | ---- | - | ------- | ------ | ----- | -
|                                               |                                                   |                          |       | Three Months Ended                       |      | Nine Months Ended
|                                               |                                                   |                          |       | September 30,                            |      | September 30,    
|                                               |                                                   |                          |       |                                          |      |                  
|                                               |                                                   |                          |       | 2000                                     |      | 2001              |        | 2000   |       | 2001
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |     
|                                               |                                                   |                          |       | (unaudited)                             
|                                               |                                                   |                          |       | (in thousands, except per share amounts)
|Basic earnings (loss) per share:               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                              
|Income (loss) available to common
stockholders |                                                   | $                        | 4,345 |                                          |      | $                 | (3,996 | )      |       | $    | 12,301 |        |      | $ | (15,102 | )     
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               | Weighted average common shares                    |                          |       | 21,528                                   |      |                   |        | 21,363 |       |      |        | 20,097 |      |   |         | 21,427 |      
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               |                                                   | Basic per share amount   |       | $                                        | 0.20 |                   |        | $      | (0.19 | )    |        | $      | 0.61 |   |         | $      | (0.70 | )
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                              
|                                              
|                                              
|                                              
|Diluted earnings (loss) per share:             |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                              
|                                              
|                                              
|                                              
|Income (loss) available to common
stockholders |                                                   | $                        | 4,345 |                                          |      | $                 | (3,996 | )      |       | $    | 12,301 |        |      | $ | (15,102 | )     
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               | Weighted average common shares                    |                          |       | 21,528                                   |      |                   |        | 21,363 |       |      |        | 20,097 |      |   |         | 21,427 |      
|                                              
|                                              
|                                              
|                                              
|                                               | Options and warrants assumed exercised            |                          |       | 1,067                                    |      |                   |        |       |       |      |        | 1,214  |      |   |         |       |      
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               | Total common shares plus common stock equivalents |                          |       | 22,595                                   |      |                   |        | 21,363 |       |      |        | 21,311 |      |   |         | 21,427 |      
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       
|                                               |                                                   | Diluted per share amount |       | $                                        | 0.19 |                   |        | $      | (0.19 | )    |        | $      | 0.58 |   |         | $      | (0.70 | )
|                                               |                                                   |                          |       |                                          |      |                   |        |        |       |      |        |        |      |   |         |       



|       |  |                                         
|------ |  | ----------------------------------------
|Note C |  | Inventories consist of the following at:

|                |  |                |        |               |  |             |        | 
|--------------- |  | -------------- | ------ | ------------- |  | ----------- | ------ | 
|                |  | December 31,   |        | September 30,
|                |  | 2000           |        | 2001         
|                |  |                |        |              
|                |  |                |        |               |  | (unaudited)
|                |  | (in thousands)
|Raw materials   |  | $              | 15,898 |               |  | $           | 14,097 | 
|               
|               
|               
|               
|Work-in-process |  |                | 1,904  |               |  |             | 2,169  | 
|               
|               
|               
|               
|Finished goods  |  |                | 2,714  |               |  |             | 1,585  | 
|                |  |                |        |               |  |             |        | 
|                |  | $              | 20,516 |               |  | $           | 17,851 | 
|                |  |                |        |               |  |             |        | 

4



---



##### Table of Contents



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

|                              |  |                |         |               |  |             |         |  
|----------------------------- |  | -------------- | ------- | ------------- |  | ----------- | ------- | -
|                              |  | December 31,   |         | September 30,
|                              |  | 2000           |         | 2001         
|                              |  |                |         |              
|                              |  |                |         |               |  | (unaudited)
|                              |  | (in thousands)
|Building and improvements     |  | $              | 16,426  |               |  | $           | 16,476  |  
|                             
|                             
|                             
|                             
|Furniture and equipment       |  |                | 53,762  |               |  |             | 59,905  |  
|                              |  |                |         |               |  |             |         |  
|                              |  |                | 70,188  |               |  |             | 76,381  |  
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |                | (26,934 | )             |  |             | (31,201 | )
|                              |  |                |         |               |  |             |         |  
|                              |  | $              | 43,254  |               |  | $           | 45,180  |  
|                              |  |                |         |               |  |             |         |  

|       |  |                                                                                                                                                                                                                                                                                                                                       
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note E |  | Segment information:                                                                                                                                                                                                                                                                                                                  
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                       
|      
|      
|      
|      
|       |  | The company monitors and evaluates the financial performance of its
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.                                                                                                                                                                                           

|                                         |  |               |        |                |  |       |        |             |  |              |        |       |  |   |     |  |  |   |         |   |  |   |        | 
|---------------------------------------- |  | ------------- | ------ | -------------- |  | ----- | ------ | ----------- |  | ------------ | ------ | ----- |  | - | --- |  |  | - | ------- | - |  | - | ------ | 
|Three Months Ended                       |  |               |        |                |  |       |        |             |  |              |        |       |  |   |     |  |  |   |         |   |  |   |        | 
|September 30, 2000                       |  | United States |        | United Kingdom |  | China |        | Philippines |  | Eliminations |        | Total
|                                         |  |               |        |                |  |       |        |             |  |              |        |      
|(unaudited)                              |  |               |        |                |  |       |        |             |  |              |        |       |  |   |     |  |  |   |         |   |  |   |        | 
|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  | 

|                                                               |  |               |        |                |  |       |        |             |  |              |        |       |  |  |       |  |  |  |         |   |  |  |        |  
|-------------------------------------------------------------- |  | ------------- | ------ | -------------- |  | ----- | ------ | ----------- |  | ------------ | ------ | ----- |  |  | ----- |  |  |  | ------- | - |  |  | ------ | -
|Three Months Ended                                             |  |               |        |                |  |       |        |             |  |              |        |       |  |  |       |  |  |  |         |   |  |  |        |  
|September 30, 2001                                             |  | United States |        | United Kingdom |  | China |        | Philippines |  | Eliminations |        | Total
|                                                               |  |               |        |                |  |       |        |             |  |              |        |      
|(unaudited)                                                    |  |               |        |                |  |       |        |             |  |              |        |       |  |  |       |  |  |  |         |   |  |  |        |  
|Net sales                                                      |  |               | 4,654  |                |  |       | 10,243 |             |  |              | 11,697 |       |  |  |      |  |  |  |        |   |  |  | 26,594 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Intersegment sales                                             |  |               | 15,883 |                |  |       |       |             |  |              | 1,014  |       |  |  | 1,899 |  |  |  | (18,796 | ) |  |  |       |  
|                                                              
|                                                              
|                                                              
|                                                              
|Income (loss) before
provision for
(benefit from)
income taxes |  |               | (7,392 | )              |  |       | 673    |             |  |              | 680    |       |  |  | 39    |  |  |  | 32      |   |  |  | (5,968 | )

|                                                               |  |               |        |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------ | -------------- |  | ----- | ------ | ----------- |  | ------------ | ------ | ----- |  | - | ----- |  |  | - | ------- | - |  | - | ------- | 
|Nine Months Ended                                              |  |               |        |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         | 
|September 30, 2000                                             |  | United States |        | United Kingdom |  | China |        | Philippines |  | Eliminations |        | Total
|                                                               |  |               |        |                |  |       |        |             |  |              |        |      
|(unaudited)                                                    |  |               |        |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         | 
|Net sales                                                      |  | $             | 51,495 |                |  | $     | 44,324 |             |  | $            | 28,500 |       |  | $ |      |  |  | $ |        |   |  | $ | 124,319 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Intersegment sales                                             |  |               | 57,760 |                |  |       |       |             |  |              | 5,591  |       |  |   | 2,210 |  |  |   | (65,561 | ) |  |   |        | 
|                                                              
|                                                              
|                                                              
|                                                              
|Income (loss)
before provision
for (benefit from)
income taxes |  |               | 7,694  |                |  |       | 3,405  |             |  |              | 6,440  |       |  |   | 44    |  |  |   | (34     | ) |  |   | 17,549  | 

5



---



##### Table of Contents



|                                                               |  |               |         |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------- | ------- | -------------- |  | ----- | ------ | ----------- |  | ------------ | ------ | ----- |  | - | ----- |  |  | - | ------- | - |  | - | ------- | -
|Nine Months Ended                                              |  |               |         |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         |  
|September 30, 2001                                             |  | United States |         | United Kingdom |  | China |        | Philippines |  | Eliminations |        | Total
|                                                               |  |               |         |                |  |       |        |             |  |              |        |      
|(unaudited)                                                    |  |               |         |                |  |       |        |             |  |              |        |       |  |   |       |  |  |   |         |   |  |   |         |  
|Net sales                                                      |  | $             | 22,275  |                |  | $     | 33,961 |             |  | $            | 30,987 |       |  | $ |      |  |  | $ |        |   |  | $ | 87,223  |  
|                                                              
|                                                              
|                                                              
|                                                              
|Intersegment sales                                             |  |               | 53,674  |                |  |       |       |             |  |              | 2,055  |       |  |   | 5,876 |  |  |   | (61,605 | ) |  |   |        |  
|                                                              
|                                                              
|                                                              
|                                                              
|Income (loss)
before provision
for (benefit from)
income taxes |  |               | (23,758 | )              |  |       | 1,252  |             |  |              | (115   | )     |  |   | 118   |  |  |   | (41     | ) |  |   | (22,544 | )

|       |  |                                                     
|------ |  | ----------------------------------------------------
|Note F |  | Comprehensive income for the periods was as follows:

|                                   |                                                    |   |       |                    |   |                   |        |      |  |      |        |      |   |   |         |     |   | 
|---------------------------------- | -------------------------------------------------- | - | ----- | ------------------ | - | ----------------- | ------ | ---- |  | ---- | ------ | ---- | - | - | ------- | --- | - | 
|                                   |                                                    |   |       | Three Months Ended |   | Nine Months Ended
|                                   |                                                    |   |       | September 30,      |   | September 30,    
|                                   |                                                    |   |       |                    |   |                  
|                                   |                                                    |   |       | 2000               |   | 2001              |        | 2000 |  | 2001
|                                   |                                                    |   |       |                    |   |                   |        |      |  |     
|                                   |                                                    |   |       | (unaudited)       
|                                   |                                                    |   |       | (in thousands)    
|Net income (loss)                  |                                                    | $ | 4,345 |                    |   | $                 | (3,996 | )    |  | $    | 12,301 |      |   | $ | (15,102 | )  
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income
(loss): |                                                    |   |       |                    |   |                   |        |      |  |      |        |      |   |   |         |    
|                                  
|                                  
|                                  
|                                  
|                                   | Cumulative foreign currency translation adjustment |   |       | (65                | ) |                   |        | 67   |  |      |        | (102 | ) |   |         | (18 | )
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains on securities,
net of tax         |   |       |                   |   |                   |        | 199  |  |      |        |     |   |   |         | 451 |  
|                                   |                                                    |   |       |                    |   |                   |        |      |  |      |        |      |   |   |         |    
|Comprehensive income (loss)        |                                                    | $ | 4,280 |                    |   | $                 | (3,730 | )    |  | $    | 12,199 |      |   | $ | (14,669 | )  
|                                   |                                                    |   |       |                    |   |                   |        |      |  |      |        |      |   |   |         |    

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note G |  | Commitments and Contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|      
|      
|      
|       |  | The Company is involved in certain administrative proceedings
arising in the normal course of business. In the opinion of the
Company, the ultimate settlement of these administrative
proceedings will not materially impact the Companys financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|      
|      
|      
|Note H |  | Recently Issued Accounting Standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|      
|      
|      
|       |  | In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires companies to apply the purchase method of accounting for all
business combinations initiated after June 30, 2001 and prohibits the
use of the pooling-of-interest method. SFAS No. 142 changes the method
by which companies may recognize intangible assets in purchase business
combinations and generally requires identifiable intangible assets to
be recognized separately from goodwill. In addition it eliminates the
amortization of all existing and newly acquired goodwill on a
prospective basis and requires companies to assess goodwill for
impairment, at least annually, based on the fair value of the reporting
unit. The Company will be required to adopt SFAS Nos. 141 and 142 on
January 1, 2002. Management has reviewed the requirements of SFAS Nos.
141 and 142 and believes that the adoption of these statements will not
have a material impact on the Companys financial statements.
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|      
|      
|      
|       |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

6



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
|
|
| |  | Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions. SFAS No. 144 modifies the method in which companies account for
certain asset impairment losses. The Company will be required to adopt
SFAS No. 144 on January 1, 2002. Management has not determined whether
the adoption of SFAS No. 144 will have a material impact on the
Companys financial statements.




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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

In addition to the historical information contained herein, this Report
contains forward-looking statements, including those relating to revenue,
earnings margins, pricing pressures, quarterly fluctuations, the impact of
moving our the Arizona LCD line, material shortages, research, development, and
engineering expense, selling, general and administrative expenses, and
liquidity and anticipated cash needs that involve risks and uncertainties that
could cause actual results to differ materially.

We caution that these statements are qualified by 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, 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 may 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 80% of our net sales in 1999, 2000 and in the first nine
months of 2001 from the mobile handset market. When we win a design program,
our customer sometimes pays all or a portion of our nonrecurring engineering
expenses to defray the costs of custom design, as well as all or a portion of
the costs of nonrecurring tooling for custom components. The typical design
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
higher than 100,000 units per week. The selling price of our LCD modules
usually ranges between $3 and $50 per unit. We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectability is probable. Generally, all of these
conditions are met at the time we ship products to customers.

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 and its subcontractors accounted for 34.6% of our net
sales in 1997, 63.6% in 1998, 86.1% in 1999, and 86.9% in 2000. In the first
nine months of 2001, products shipped to Motorola and its subcontractors
accounted for 84.8% of our revenue.

7



---



##### Table of Contents



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. This pattern did not occur in the fourth quarter of
2000 and the first quarter of 2001 as a result of supply interruptions in the
fourth quarter and reduced expectations in the mobile handset market.

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
operate the front-end of our high-volume LCD production line. We generally
have used the Arizona facility for the manufacture of more technologically
complex and custom high-volume LCDs. We also purchase LCDs from second sources
to provide us an alternate source and to ensure available capacity. In order
to take advantage of lower labor costs, we ship LCDs to our facilities in
Manila, the Philippines, or Beijing, China, for assembly into modules.

During the second quarter of 2001, we announced our strategic decision to
move our front-end, high-volume LCD line from Arizona to Asia. The LCD line
was operated in Arizona through the third quarter, but we have now begun the
process of shutting the line down. We expect it will take two to three
quarters to re-install the line in Asia. We expect to incur no interruption in
our LCD module production as we will rely on built inventory stock and second
sources during the period that the line is being moved.

In Manila, we assemble LCDs into modules and perform certain back-end LCD
processing operations. Our back-end LCD processing operations are conducted in
Manila through a third-party subcontract manufacturer. The subcontractor
supplies direct labor and incidental services required to manufacture our
products. All indirect manufacturing employees, primarily technicians,
supervisors, and engineers, are our employees. Our LCD module operations are
conducted at our own factory, where we employ our own employees and do not
employ the services of a third-party subcontractor.

In Beijing, we also assemble LCDs into modules. Our LCD module operations
in Beijing are conducted at a facility we own through a wholly owned foreign
subsidiary. We employ our own employees in Beijing and do not employ the
services of a third-party subcontractor.

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 LCoSmicrodisplay 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 LCoSmicrodisplays.

Since 1997, we have been working on the development of LCoSmicrodisplays.
In 1997, we entered into a strategic alliance with National Semiconductor
Corporation for the development of LCoSmicrodisplay 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 LCoSmicrodisplays. We paid
approximately $3.0 million in cash and issued warrants to purchase 140,000
shares of our common stock in the transaction, which valued the transaction at
approximately $3.6 million. No additional payments are required under the
licenses. We also hired several key technical employees of National to assist
in the implementation of the acquired technologies.

8



---



##### Table of Contents



In April 1998, we entered into a strategic relationship with Inviso, Inc.,
a privately held company with numerous patents and proprietary technology
related to microdisplay development. We acquired a minority equity interest in
Inviso for approximately $3.3 million. In March 2000, we acquired an
additional interest in Inviso for $500,000, raising our total minority equity
interest to $3.8 million. As part of this strategic relationship, we provided
proprietary manufacturing capabilities and liquid crystal expertise, and
Inviso provided patented and proprietary technologies and components for the
joint development of microdisplay products.

In the second quarter of 2001, we wrote off our investment of $3.8 million
in Inviso because we determined that our investment was impaired, as that term
is defined under generally accepted accounting principles. Inviso has been
unable to raise funds to operate its business in a very difficult venture
capital market.

In August 2000, our wholly owned 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 LCD glass to us and reserve a significant
amount of LCD glass manufacturing capacity for us. In exchange, we will assist
Jiya in further developing its LCD glass manufacturing processes. At the
conclusion of 18 months, we have the option to extend the agreement or to
acquire a majority interest in Jiya.

In March 2001, we invested $1 million in Silicon Bandwidth, Inc., a
privately held company providing unique semiconductor and optoelectronic
interconnect solutions based upon multiple, patented, proprietary technologies.
We are working closely with Silicon Bandwidth to design unique, cost-effective,
reconfigurable packaging platforms for LCoSmicrodisplays.

During the second quarter of 2001, we formed a new company, Three-D OLED
L.L.C., with DuPont Displays, a business unit of DuPont Corporation. We own 51%
of this new venture, and DuPont Displays own 49%. The companies have pledged
$3.0 million to the venture. Our share of that obligation is slightly over
$1.5 million. This new venture will design, assemble, and market OLED (Organic
Light Emitting Diode) display modules to OEMs worldwide. The venture will focus
on glass substrate, passive matrix OLED displays. OLED technology utilizes
advanced materials to produce bright, high-contrast, emissive displays. The
venture will be headquartered in Tempe, Arizona, within our existing corporate
headquarters, and controlled by us. The venture will utilize the glass panel
output of a new high-volume manufacturing plant located in Taiwan, recently
announced by DuPont and RiTdisplay Technology Corporation. The venture may also
use other OLED glass panel sources. OLED display modules will be assembled at
our display module assembly facilities in Beijing and Manila.

Three months ended September 30, 2001 compared to three months ended September 30, 2000.

Net Sales.Net sales decreased 33.8% to $26.6 million in the three months
ended September 30, 2001 from $40.2 million in the three months ended September
30, 2000. We shipped nearly the same number of LCD module units in the third
quarter of 2001 as we shipped in the comparable quarter of 2000. Therefore,
reductions in average selling prices (ASPs) account for nearly all of the
decline in revenue. Those reductions have occurred because weak and uncertain
demand in the mobile handset business have led to pricing pressures and excess
capacity in the LCD module industry.

Cost of Sales.Cost of sales increased to 103.4% of net sales in the
three months ended September 30, 2001 from 77.3% in the three months ended
September 30, 2000. The increase in cost of sales was mainly due to reductions
in ASPs of LCD modules because of pricing pressures. The ASP declines leveled
off between the second and third quarters of 2001. Therefore, our focus on
cost reductions in the third quarter resulted in a reduced cost of sales as
compared with the second quarter of 2001. Specifically, the cost of sales on
LCD modules decreased to 97.7% in the third quarter of 2001 compared with
114.6% in the second quarter of 2001, not including special charges. The cost
of sales for microdisplays remained in excess of the sales prices as we
continued our yield enhancement efforts. Reductions in the microdisplay cost
of sales should occur when shipments increase and the yields begin to rise.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense decreased 4.0% to $2.4 million in the three months ended
September 30, 2001 from $2.5 million in the three months ended September 30,
2000. Selling, general, and administrative expense was 9.0% of net sales in
the three months ended September 30, 2001 compared to 6.1% in the three months
ended September 30, 2000. The higher percentage was generally caused by lower
net sales.

9



---



##### Table of Contents



Research, Development and Engineering Expense.Research, development and
engineering expense increased 13.5% to $4.2 million in the three months ended
September 30, 2001 from $3.7 million in the three months ended September 30,
2000. RD&E expense overall increased as the result of the development of new
display products and technologies, including LCoS microdisplays. The increase
in LCoS microdisplay expense was generally a result of the increased initial
production of LCoS microdisplays because many of the production start-up
expenses are included as
RD&E. Research, development and engineering expense was 15.8% of net
sales in the three months ended September 30, 2001 compared to 9.3% in the
three months ended September 30, 2000. The higher percentage was generally
caused by lower net sales.

Other Income (Expense), Net.Other income in the three months ended
September 30, 2001 was $1.5 million compared to $2.7 million in the three
months ended September 30, 2000. The decrease arose primarily due to lower
interest rates earned and lower cash and investment balances.

Provision for (Benefit from) Income Taxes.We had a benefit from income
taxes of $2.0 million in the three months ended September 30, 2001 compared to
a provision for income taxes of $1.3 million in the three months ended
September 30, 2000. The tax benefit rate was 33.0% in the three months ended
September 30, 2001 compared to the tax provision rate of 23.3% in the three
months ended September 30, 2000.

Net Income (Loss).Net loss was $4.0 million, or $0.19 per diluted share,
in the three months ended September 30, 2001 as compared with net income of
$4.3 million, or $0.19 per diluted share, in the three months ended September
30, 2000. If the microdisplay efforts are excluded, the net loss per share
would have been $0.04 per share, which means that our microdisplay losses were
$0.15 per share.

Nine months ended September 30, 2001 compared to nine months ended September 30, 2000.

Net Sales.Net sales decreased 29.8% to $87.2 million in the nine months
ended September 30, 2001 from $124.3 million in the nine months ended September
30, 2000. This decrease was primarily a result of the downturn in the mobile
handset market. We derived more than 80% of our net sales from the mobile
handset market. Since the second half of 2000, weak and uncertain demand in
the mobile handset industry and continued issues with handset inventories has
led to cancellations, delays and push-outs for existing and new customers
programs. In addition, pricing pressures in the LCD module industry have led
to a reduction in average selling prices.

Cost of Sales.Cost of sales increased to 104.2% of net sales in the nine
months ended September 30, 2001 from 76.1% in the nine months ended September
30, 2000. The higher percentage was a result of intense pricing pressure and
operating inefficiencies due to reduced production volumes. In addition, we
had a $2.4 million charge in the second quarter relating to the write-off of
our inventory. The inventory write-off occurred because of cancellations by
customers of various end-of-life programs.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 11.3% to $7.9 million in the nine months ended
September 30, 2001 from $7.1 million in the nine months ended September 30,
2000. The increase in SG&A expense was the result of a variety of factors. In
addition, we wrote off $1.3 million in the second quarter related to our
decision to abandon the implementation of an enterprise resource planning
system. That charge was allocated to all departments, including cost of sales,
SG&A, and RD&E. SG&A expense was 9.1% of net sales in the nine months ended
September 30, 2001 compared to 5.7% in the nine months ended September 30,
2000. The higher percentage was generally caused by the lower net sales.

Research, Development, and Engineering Expense.Research, development,
and engineering expense increased 33.7% to $12.7 million in the nine months
ended September 30, 2001 from $9.5 million in the nine months ended September
30, 2000. RD&E expense overall increased as the result of the development of
new display products and technologies, primarily microdisplays. The increase in
LCoSmicrodisplays was generally as a result of the increased production of
LCoSmicrodisplays because many of the production start-up expenses are
included as RD&E expense. Also included in RD&E are costs associated with our
decision to abandon the ERP implementation described above. RD&E expense was
14.6% of net sales in the nine months ended September 30, 2001 compared to 7.6%
in the nine months ended September 30, 2000. The higher percentage was
generally caused by lower net sales.

10



---



##### Table of Contents



Other Income (Expense), Net.Other income in the nine months ended
September 30, 2001 was $1.6 million compared to other income of $4.5 million in
the nine months ended September 30, 2000. The write-off our $3.8 million Inviso
investment in the second quarter of 2001, described earlier, was the principal
reason for the difference. The write-off was offset by interest income of $5.4
million.

Provision for (Benefit from) Income Taxes.We had a benefit from income
taxes of $7.4 million for the nine months ended September 30, 2001 compared to
a provision for income taxes of $5.2 million for the nine months ended
September 30, 2000.

Net Income (Loss).The net loss was $15.1 million, or $0.70 per diluted
share, in the nine months ended September 30, 2001 compared to net income of
$12.3 million, or $0.58 per diluted share, in the nine months ended September
30, 2000. We had several special charges in the second quarter, including the
write-off of our investment in Inviso, the write-off of certain inventory, and
the write-off of an ERP system implementation. Excluding those special
charges, our net loss for the nine months ended September 30, 2001 was
approximately $10.1 million, or $0.47 per diluted share.

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,
2001. 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.

|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |        | 
|-------------------------------------------------------------- | -------------------------------------- | - | -------------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                                                               |                                        |   | Quarters Ended
|                                                               |                                        |   |               
|                                                               |                                        |   | (unaudited)   
|                                                               |                                        |   | (in thousands)
|                                                               |                                        |   | Sep 30,        |        | Dec 31, |   | Mar 31, |        | Jun 30, |   | Sep 30,
|                                                               |                                        |   |                |        |        
|                                                               |                                        |   | 2000           |        | 2001   
|                                                               |                                        |   |                |        |        
|Net sales                                                      |                                        | $ | 40,231         |        |         | $ | 36,365  |        |         | $ | 35,616  |        |  | $ | 25,013  |        |  | $ | 26,594 |       
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|Cost and expenses:                                             |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Cost of sales                          |   |                | 31,115 |         |   |         | 30,092 |         |   |         | 31,243 |  |   |         | 32,160 |  |   |        | 27,453 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Selling, general, and administrative   |   |                | 2,453  |         |   |         | 2,368  |         |   |         | 2,491  |  |   |         | 2,922  |  |   |        | 2,444  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Research, development, and engineering |   |                | 3,734  |         |   |         | 3,809  |         |   |         | 3,661  |  |   |         | 4,795  |  |   |        | 4,224  | 
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|                                                               |                                        |   | 37,302         |        |         |   | 36,269  |        |         |   | 37,395  |        |  |   | 39,877  |        |  |   | 34,121 |       
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|Operating income (loss)                                        |                                        |   | 2,929          |        |         |   | 96      |        |         |   | (1,779  | )      |  |   | (14,864 | )      |  |   | (7,527 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Other income (expense), net                                    |                                        |   | 2,736          |        |         |   | 2,703   |        |         |   | 2,140   |        |  |   | (2,073  | )      |  |   | 1,497  |       
|                                                              
|                                                              
|                                                              
|                                                              
|Minority interest in loss of
consolidated subsidiary           |                                        |   |               |        |         |   |        |        |         |   |        |        |  |   |        |        |  |   | 62     |       
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|Income (loss) before provision for
(benefit from) income taxes |                                        |   | 5,665          |        |         |   | 2,799   |        |         |   | 361     |        |  |   | (16,937 | )      |  |   | (5,968 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Provision for (benefit from) income taxes                      |                                        |   | 1,320          |        |         |   | 266     |        |         |   | 119     |        |  |   | (5,589  | )      |  |   | (1,972 | )     
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       
|Net income (loss)                                              |                                        | $ | 4,345          |        |         | $ | 2,533   |        |         | $ | 242     |        |  | $ | (11,348 | )      |  | $ | (3,996 | )     
|                                                               |                                        |   |                |        |         |   |         |        |         |   |         |        |  |   |         |        |  |   |        |       

Liquidity and Capital Resources

At September 30, 2001, we had cash, cash equivalents, and liquid
investments of $150.5 million compared to $170.1 million at December 31, 2000.
This decrease was due primarily from our operating cash outflow, the purchase
of capital equipment, and our stock buyback program.

In the quarter ended September 30, 2001, we had about $900,000 in net cash
outflow from operations compared to $142,000 in net cash outflow from
operations in the quarter ended September 30, 2000. If the microdisplay
efforts are excluded, we generated positive operating cash flow of $4.8 million
of which $1.5 million was interest income.

Depreciation expense was $1.5 million for the third quarter of 2001
compared to $1.6 million for the third quarter of 2000. Inventory turns were
6.6 in the third quarter of 2001 compared to 7.8 in the third quarter of 2000.
Accounts receivable DSOs (Day Sales Outstanding) were 72 days in the third
quarter of 2001 compared to 65 days in

11



---



##### Table of Contents



the second quarter of 2001.


In the first nine months of 2001, we had $8.8 million in net cash outflow
from operations compared to $4.5 million in positive net cash flow from
operations during 2000. Our cash flow was negatively impacted during the first
nine months of 2001 primarily as a result of decreased net income.

Our working capital was $181.9 million at September 30, 2001 compared with
$194.5 million at December 31, 2000. Our current ratio increased to 10.5-to-1
at September 30, 2001 from 10.1-to-1 at December 31, 2000. Our working capital
decreased as a result of our cash outflow. Our current ratio improved from
December 2000 due to our lower current liabilities.

In January 2001, we amended and revised our credit facility with Comerica
Bank to reduce it to $15.0 million. There are no other participating lenders
on that facility. Advances under the facility may be made as prime rate
advances, which accrue interest payable monthly at the banks prime lending
rate, or as LIBOR rate advances, which bear interest at 150 basis points in
excess of the LIBOR base rate. Our Three-Five Systems Limited subsidiary has
established an annually renewable credit facility with a United Kingdom bank in
order to fund its working capital requirements. The credit facility, which
expires January 15, 2002, provides $350,000 of borrowing capacity secured by
accounts receivable of Three-Five Systems Limited. No borrowings are
outstanding under this facility. As of September 30, 2001, our Beijing
subsidiary had an outstanding $2.7 million term loan due May 4, 2002 to the
Bank of China, which was secured by a $3.0 million stand-by letter of credit
issued by Imperial Bank.

Capital expenditures during the three months ended September 30, 2001 were
approximately $3.1 million. These capital expenditures primarily consisted of
equipment for our operations in Manila, Beijing, and Arizona, including
manufacturing and test equipment for LCoSmicrodisplays.

Under our $30 million stock buy-back program announced in December 2000,
we purchased almost 150,000 shares of our common stock for a total of $2.5
million in the first quarter of 2001. No shares were purchased in the second
or third quarter of 2001. Since the start of the buy-back program, we have
purchased just over 390,000 shares for $7.2 million.

We believe that our existing balances of cash and 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 2002; however, we may have to expand our loan commitments
or pursue alternate methods of financing or raise capital should we encounter
additional cash requirements. For example, accounts receivable and inventory
could rise faster than anticipated. In addition, we will continue to seek
other alliances or acquisitions and additional relationships with regard to the
strategic development of various new technologies, especially LCoS
microdisplays, which may also require us to make additional capital
investments. We cannot provide assurance that adequate additional loan
commitments or alternative methods of financing will be available or, if
available, that they will be on terms acceptable to us.

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, 2000.




ITEM 5. OTHER INFORMATION

Our Insider Trading Policy permits our directors, officers, and other key
personnel to establish purchase and sale programs in accordance with Rule
10b5-1 adopted by the Securities and Exchange Commission. The rule permits
employees to adopt written plans at a time before becoming aware of material
nonpublic information and to sell shares according to a plan on a regular basis
(for example, weekly or monthly), regardless of any subsequent nonpublic
information they receive. In our view, Rule 10b5-1 plans are beneficial
because systematic, pre-planned sales that take place over an extended period
should have a less disruptive influence on the price of our stock. We also
believe plans of this type are beneficial because they inform the marketplace
about the nature of the trading activities of our directors and officers. In
the absence of such information, the market could mistakenly attribute
transactions as reflecting a lack of confidence in our company or an indication
of an impending event involving our company. We recognize that our

12



---



##### Table of Contents



directors
and officers may have reasons totally apart from the company in determining to
effect transactions in our common stock. These reasons could include the
purchase of a home, tax and estate planning, the payment of college tuition,
the establishment of a trust, the balancing of assets, or other personal
reasons.

The establishment of any trading plan involving our company requires the
pre-clearance by our Chief Executive Officer or Chief Financial Officer. An
individual adopting a trading plan must comply with all requirements of Rule
10b5-1, including the requirement that the individual not possess any material
nonpublic information regarding our
company at the time of the establishment of the plan. In addition, sales under
a trading plan must be made no earlier than thirty days after the plan
establishment date.

Currently, the following officers have adopted trading plans. Mr. Jeffrey
Buchanan, Chief Financial Officer, has adopted a trading plan to sell shares
which were acquired pursuant to expiring options and which must be sold due to
tax considerations. Dr. Carl Derrington, Chief Manufacturing Officer, has
adopted a trading plan in order to make charitable gifts. Mr. Robert Berube,
Principal Accounting Officer, has adopted a trading plan to sell shares monthly
in advance of his pending retirement in 2002.

PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (b) |  | Reports on Form 8-K                                          
| | --- |  | -------------------------------------------------------------
| |     |  | Form 8-K filed July 27, 2001, Item 9 Regulation FD Disclosure




SIGNATURES

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

|                         |  |                                                   |  |                                                       
|------------------------ |  | ------------------------------------------------- |  | ------------------------------------------------------
|                         |  | THREE-FIVE SYSTEMS, INC.
            (Registrant)
|                        
|                        
|                        
|                        
|                        
|                        
|Dated: November 2, 2001. |  | By:                                               |  | /s/ Jeffrey D. Buchanan

Name: Jeffrey D. Buchanan    
|                        
|                        
|                        
|                        
|                         |  |                                                   |  | Its: Executive Vice President; Chief Financial Officer

13