SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 --------------

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

                        For Quarter Ended March 31, 1997
                                          --------------

                          Commission File Number 1-4373
                                                 ------

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

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

1600 North Desert Drive, Tempe, Arizona                           85281
---------------------------------------                       ---------
(Address of principal executive offices)                      (Zip Code)

                                  (602)389-8600
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


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

YES  X               NO
   -----               -----


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

CLASS                                           OUTSTANDING AS OF March 31, 1997
-----                                           --------------------------------

Common                                                      7,762,129
Par value $.01 per share
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 1997
                                TABLE OF CONTENTS







                         PART I - FINANCIAL INFORMATION


                                                                            Page
                                                                            ----

ITEM 1.           FINANCIAL STATEMENTS:

                  Consolidated Balance Sheets-
                           March 31, 1997 and December 31, 1996................1

                  Consolidated Statements of Income-
                           Three Months Ended March 31, 1997 and 1996..........2

                  Consolidated Statements of Cash Flows-
                           Three Months Ended March 31, 1997 and 1996..........3

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

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                  OF OPERATIONS AND FINANCIAL CONDITION........................5


                           PART II - OTHER INFORMATION


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K............................10

SIGNATURES....................................................................11
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)


                                                      MARCH 31,     DECEMBER 31,
                                                         1997           1996
                                                       -------         -------
                                                       (Unaudited)
                                     ASSETS
                                     ------

CURRENT ASSETS:
  Cash and cash equivalents                            $12,815        $12,580
  Accounts receivable, net                               7,134          6,830
  Inventories, net                                       5,791          4,606
  Deferred tax asset                                     5,930          5,930
  Other current assets                                     928          1,384
                                                       -------        -------

       Total current assets                             32,598         31,330

PROPERTY, PLANT AND EQUIPMENT, net                      31,345         30,913

COST IN EXCESS OF NET ASSETS ACQUIRED, net                 121            130

OTHER ASSETS                                               195            196
                                                       -------        -------

                                                       $64,259        $62,569
                                                       =======        =======

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

CURRENT LIABILITIES:
  Accounts payable                                     $  5,053       $  4,289
  Accrued liabilities                                     4,820          4,524
  Current maturities of long-term debt                     --             --
  Current taxes payable                                     802          1,004
                                                       --------       --------

       Total current liabilities                         10,675          9,817
                                                       --------       --------


DEFERRED TAX LIABILITY                                    1,568          1,568
                                                       --------       --------


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock                                          --             --
  Common stock                                               78             78
  Additional paid-in capital                             32,359         32,329
  Retained earnings                                      19,817         19,016
  Cumulative translation adjustment                          15             14
  Less - Treasury Stock at cost (22,500 shares)            (253)          (253)
                                                       --------       --------

       Total stockholders' equity                        52,016         51,184
                                                       --------       --------

                                                       $ 64,259       $ 62,569
                                                       ========       ========


                  The accompanying notes are an integral part 
                     of these consolidated balance sheets.
                                        1
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                      (in thousands, except share amounts)


                                                            THREE MONTHS
                                                           ENDED MARCH 31,
                                                     ---------------------------

                                                        1997           1996
                                                     -----------    -----------


NET SALES                                            $    16,129    $    18,082
                                                     -----------    -----------

COSTS AND EXPENSES:
      Cost of sales                                       12,488         14,401
      Selling, general and administrative                  1,466          1,459
      Research and development                             1,130          1,010
                                                     -----------    -----------
                                                          15,084         16,870
                                                     -----------    -----------

          Operating income                                 1,045          1,212


OTHER INCOME (EXPENSE):
      Interest, net                                          157             19
      Other, net                                             (12)           (27)
                                                     -----------    -----------

INCOME BEFORE PROVISION FOR INCOME TAXES                   1,190          1,204
      Provision for income taxes                             389            482
                                                     -----------    -----------


NET INCOME                                           $       801    $       722
                                                     ===========    ===========

EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT                                     $      0.10    $      0.09
                                                     ===========    ===========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING                                            8,047,736      8,039,794
                                                     ===========    ===========

  The accompanying notes are an integral part of these consolidated statements.
                                       2
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                              THREE MONTHS
                                                                             ENDED MARCH 31,
                                                                          --------------------

                                                                            1997        1996
                                                                          --------    --------
<S>                                                                       <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                              $    801    $    722
  Adjustments to reconcile net income to net cash
    provided by operating activities:
        Depreciation and amortization                                          972         861
        Provision (reduction) of accounts receivable valuation reserves         (4)         36
        Provision (reduction) of inventory valuation reserves                 (117)      1,317
        Loss on disposal of assets                                            --             9
  Change in assets and liabilities:
        (Increase) decrease in accounts receivable                            (300)      3,624
        Increase in inventories                                             (1,068)     (3,415)
        Decrease in other assets                                               457         240
        Increase in accounts payable and accrued liabilities                 1,060       1,190
        Increase (decrease) in taxes payable, net                             (202)        440
                                                                          --------    --------

             Net cash provided by operating activities                       1,599       5,024
                                                                          --------    --------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment                                 (1,395)       (284)
                                                                          --------    --------

             Net cash used for investing activities                         (1,395)       (284)
                                                                          --------    --------


CASH FLOWS FROM FINANCING ACTIVITIES:

  Net payments on notes payable to banks                                      --        (3,000)
  Stock options exercised                                                       30           3
                                                                          --------    --------

             Net cash provided by (used for) financing activities               30      (2,997)
                                                                          --------    --------

Effect of exchange rate changes on cash and cash equivalents                     1           1
                                                                          --------    --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                      235       1,744
CASH AND CASH EQUIVALENTS, beginning of period                              12,580       4,551
                                                                          --------    --------

CASH AND CASH EQUIVALENTS, end of period                                  $ 12,815    $  6,295
                                                                          ========    ========
</TABLE>
 The accompanying notes are an integral part of these consolidated statements.
                                        3
<PAGE>
ITEM 1. (continued)


              Three-Five  Systems,  Inc. and Subsidiaries  Notes to Consolidated
              ------------------------------------------------------------------
              Financial Statements
              --------------------


Note A        The accompanying  unaudited Consolidated Financial Statements have
              been prepared in accordance  with  generally  accepted  accounting
              principles for interim financial  information and the instructions
              to Form 10-Q. Accordingly, they do not include all the information
              and footnotes required by generally accepted accounting principles
              for complete financial  statements.  In the opinion of management,
              all adjustments (which include only normal recurring  adjustments)
              necessary to present  fairly the  financial  position,  results of
              operations,  and cash flows for all  periods  presented  have been
              made. The results of operations for the  three-month  period ended
              March 31, 1997 are not  necessarily  indicative  of the  operating
              results that may be expected  for the entire year ending  December
              31, 1997. These financial statements should be read in conjunction
              with the  Company's  December 31, 1996  financial  statements  and
              accompanying notes thereto.

Note B        Earnings  per share is computed by  dividing  net earnings by  the
              weighted   average  number  of  common  shares  and  common  share
              equivalents  assumed  outstanding  during the three-month  period.
              Fully diluted  earnings per share is  considered  equal to primary
              earnings per share in all periods presented.

Note C        Inventories consist of the following at:

                                       March 31, 1997         December 31, 1996
                                       --------------         -----------------
                                         (Unaudited)                           
                                                    (in thousands)             
                                                                               
              Raw Materials                 $3,991                  $3,147     
              Work-in-process                1,034                     780     
              Finished Goods                   766                     679     
                                            ------                  ------     
                                            $5,791                  $4,606     
                                            ------                  ------     
              

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

                                          March 31, 1997       December 31, 1996
                                          --------------       -----------------
                                           (Unaudited)                          
                                                    (in thousands)           
                                                                                
              Building and improvements       $10,431               $10,431     
              Furniture and equipment          30,170                28,776     
                                              -------               -------     
                                               40,601                39,207     
                                                                                
              Less - accumulated depreciation ( 9,256)              ( 8,294)    
                                              --------              -------     
                                              $31,345               $30,913     
                                              -------               -------     
                                       4
<PAGE>
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS

Three  Months  Ended March 31, 1997  Compared  with Three Months Ended March 31,
--------------------------------------------------------------------------------
1996.
-----

         Net sales were $16.1  million for the quarter  ended March 31,  1997, a
decrease  of 11.0  percent  compared  with net  sales of $18.1  million  for the
quarter  ended March 31, 1996.  The Company's net sales have not been subject to
any significant seasonal fluctuations or variations.  In the quarter ended March
31,  1996,  the  Company's  largest  customer  informed  the Company that it had
decided to phase out a family of the Company's  highest volume,  longest running
programs more quickly than originally planned. The unexpected reduction of those
programs caused a severe decline in net sales in 1996, the full effects of which
were felt in the third quarter of 1996. The long product development time in the
custom  business  prevented  the Company from quickly  replacing  the phased out
programs,  although  the Company  has now had two  sequential  increases  in its
quarterly revenue.  In the first quarter of 1997, the Company's largest customer
accounted for net sales of $7.3 million compared with net sales of $13.3 million
to that customer for the quarter ended March 31, 1996,  for an overall  decrease
in net sales to the Company's  largest  customer of 45.1 percent.  The Company's
major customer  accounted for approximately 45.3 percent of the net sales in the
first quarter 1997 compared with  approximately  73.5 percent for the comparable
quarter in 1996. All other customers accounted for net sales of $8.8 million for
the quarter ended March 31, 1997 compared with the net sales of $4.8 million for
the quarter ended March 31, 1996, for an overall increase of 83.3 percent.

         Cost of sales, as a percentage of net sales,  decreased to 77.4 percent
for the  quarter  ended March 31,  1997 as  compared  with 79.6  percent for the
quarter ended March 31, 1996. The corresponding  increase in the gross margin in
the first quarter was primarily the result of sales of higher margin products.

         Selling,  general,  and administrative  expense of $1.5 million for the
quarter  ended March 31,  1997 was equal to the expense of $1.5  million for the
quarter  ended March 31, 1996.  Selling,  general,  and  administrative  expense
increased  as a  percentage  of net sales to 9.3 percent  for the quarter  ended
March 31, 1997 from 8.3 percent for the quarter ended March 31, 1996,  primarily
as a result of decreased sales.

         Research and development  expense totaled $1.1 million,  or 6.8 percent
of net sales, for the quarter ended March 31, 1997 as compared with $1.0 million
or 5.5 percent of net sales, for the quarter ended March 31, 1996.  Research and
development  expenses consist principally of salaries and benefits to scientists
and  other  personnel,  related  facilities  costs,  and  various  expenses  for
projects.  Research  and  development  expense has  increased as the Company has
invested in new technologies and manufacturing  processes and has continued with
its  in-house   process   development   efforts   related  to  the   high-volume
manufacturing  LCD line located in Tempe,  Arizona.  The Company  believes  that
continued  investments  in research and  development  relating to  manufacturing
processes and new display  technologies  are necessary to remain  competitive in
its marketplace as well as providing opportunities for growth.

         Interest  income  (net)  for the  quarter  ended  March  31,  1997  was
$157,000,  up from $19,000 for the quarter ended March 31, 1996. The increase in
interest income was the result of investing  higher average cash balances during
the quarter.  Other  expense  (net) was $12,000 for the quarter  ended March 31,
1997 as  compared  with  $27,000  for the  quarter  ended  March 31,  1996.  The
difference  was primarily due to decreased  closed  facility  expenses and a net
foreign  exchange loss for the quarter ended March 31, 1997 as compared to a net
foreign  exchange  gain and a loss on sale of assets for the quarter ended March
31, 1996.

         The  provision  for income taxes  decreased to $389,000 for the quarter
ended March 31, 1997 from $482,000 for the quarter ended March 31, 1996. The tax
rate for the first  quarter of 1997 was  slightly  lower due to certain  accrual
adjustments.  The  Company  expects  that the  overall  tax  rate for 1997  will
approximate 40%.

         Net income  increased to $801,000,  or $0.10 per share, for the quarter
ended March 31, 1997 from  $722,000,  or $0.09 per share,  for the quarter ended
March 31, 1996.
                                       5
<PAGE>
Liquidity and Capital Resources

         During the first  three  months of 1997,  the  Company  generated  $1.6
million in cash flow from  operations as compared  with $5.0 million  during the
first  three  months of 1996.  The  decrease  in cash flow from  operations  was
primarily  due to (i) having no provision  for  inventory  reserves in the first
quarter  of 1997 and (ii) an  increase  in  accounts  receivable  for the  first
quarter of 1997 versus the  significant  reduction in accounts  receivable  that
occurred in the first three months of 1996. Overall, the Company's  depreciation
expense  has risen  almost 13  percent  since the  first  quarter  of 1996.  The
high-volume  LCD line is  depreciated on a  units-of-production  method based on
units started. It is anticipated that depreciation will continue to rise in 1997
as a result of an  expected  higher  number of starts  for the  high-volume  LCD
manufacturing  line in 1997 versus 1996,  as well as having  additional  capital
expenditures  in 1997. The Company's  working capital was $21.9 million at March
31, 1997,  up slightly  from the $21.5 million that it had at December 31, 1996.
The  Company's  current  ratio at March 31, 1997 was 3.1-to-1 as compared with a
current ratio of 3.2-to-1 at December 31, 1996.

         The Company has a $15 million unsecured revolving line of credit, which
matures May 31, 1997,  with its primary  lender,  Wells Fargo Bank. At March 31,
1997, no borrowings were outstanding under this credit facility.  Advances under
the revolving  line 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.  The
Company's  subsidiary,  Three-Five Systems Limited,  has established an annually
renewable  credit  facility with a United  Kingdom  bank,  Barclays Bank PLC, in
order to fund its working capital  requirements.  The facility provides $350,000
of borrowing  capacity  secured by accounts  receivable  of  Three-Five  Systems
Limited.  Advances are based on accounts receivable,  as defined. Advances under
the credit facility accrue interest,  which is payable quarterly,  at the bank's
base rate plus 200 basis points. The United Kingdom credit facility matures June
20, 1997.  Three-Five  Systems Limited had no borrowings  outstanding under this
line of credit at March 31, 1997.

         The Board of Directors has authorized the repurchase  from time to time
of up to one million shares of the Company's  Common Stock on the open market or
in negotiated transactions, depending on market conditions and other factors. In
October 1996, the Company  entered into a new $5 million  non-revolving  line of
credit/term loan with Wells Fargo Bank to provide  financing for the acquisition
of any treasury shares (the "Treasury Stock Loan"). As of March 31, 1997, 22,500
treasury  shares had been purchased by the Company under the repurchase  program
at a total cost of $253,000, but the Company had no borrowings outstanding under
the Treasury Stock Loan.

         Capital  expenditures  during  the  first  three  months  of 1997  were
approximately  $1.4 million,  as compared  with $284,000  during the first three
months of 1996.  Capital  expenditures for 1997 thus far consisted  primarily of
manufacturing  and office  equipment for the Company's  operations in Manila and
Arizona and  laboratory  equipment  for  research and  development.  Most of the
manufacturing expenditures are for technical or process improvements and not for
capacity increases. The Company anticipates that its capital expenditures during
the  remainder  of 1997 should not have a  significant  effect on the  Company's
liquidity.  The  expenditures  should not be in excess of its 1997  depreciation
expense.  Those  expenditures  will primarily  relate to advanced  manufacturing
processes, the high-volume LCD line, and necessary manufacturing equipment.

         The Company  anticipates  that accounts  receivable  and inventory will
continue to rise in 1997 if revenue  levels  increase as currently  anticipated.
The Company  believes that its existing  capital and anticipated  cash flow from
operations  will  provide  adequate  sources  to  fund  operations  and  planned
expenditures throughout 1997 without any need for borrowings. Should the Company
purchase  a  significant  amount  of  treasury  shares or  encounter  unexpected
additional cash  requirements,  however,  the Company believes that its existing
loan commitments of $20 million will be adequate.  The Company also expects that
its existing capital,  anticipated cash flow from operations,  and existing loan
commitments  will  provide  adequate  sources for its  long-term  liquidity  and
capital  requirements,   such  as  expansion  of  its  manufacturing  facilities
overseas. The Company does not anticipate such expansion for two to three years.
                                       6
<PAGE>
Effects of Inflation and Foreign Currency Exchange Fluctuations

         The results of operations of the Company for the periods discussed have
not been significantly  affected by inflation or foreign currency  fluctuations.
The Company  generally  sells its products and services and negotiates  purchase
orders with its foreign suppliers in United States dollars.  An exception is the
Company's sub-assembly  agreement in the Philippines,  which is based on a fixed
conversion  rate,  exposing the Company to exchange rate  fluctuations  with the
Philippine  peso.  Although the Company has not  incurred any material  exchange
gains or losses to date, there can be no assurance that fluctuations in currency
exchange  rates in the future will not have an adverse  effect on the  Company's
operations. The Company from time to time may enter into hedging transactions in
order to minimize its exposure to currency rate fluctuations.

Business Outlook and Risk Factors

Business Outlook

         This Business Outlook section has numerous forward-looking  statements.
Some of the risk factors  associated with those  forward-looking  statements are
set forth in "Risk Factors" below. Other important risk factors are set forth in
the Company's other filings with the Securities and Exchange Commission.

         The Company intends to continue its efforts to expand and diversify its
sales base in 1997,  an area in which the Company  believes  that it already has
made significant strides. The Company's major customer, which is in the wireless
communication  industry and which had accounted for as much as 80 percent of the
Company's revenue in past years,  accounted for only 45 percent of the Company's
revenue in the first quarter of 1997.  The current  business plan of the Company
targets that  customer to account for no more than 40 percent of its revenue for
all of 1997.  This  percentage  reduction is occurring  for two reasons.  First,
although  the number of programs  that the  Company has with its major  customer
have  continued to increase,  the average  selling price of the products sold to
that customer has declined. Second, the business plan of the Company calls for a
substantial  increase in sales to other customers.  In 1997, the Company expects
that all  communication  products  will  account for less than 50 percent of its
revenue,  with strong growth in office automation products.  Using the last half
of 1996 as a baseline,  the Company is planning for modest revenue growth during
the first half of 1997 and a more rapid growth in the last half of the year.

         The Company's gross margins are impacted by several factors,  including
manufacturing  efficiencies,  product  differentiation,  product mix, and volume
pricing. In addition, many of the Company's competitors are Asian suppliers, and
a strong dollar could give a competitive  pricing  advantage to those suppliers.
It is  the  goal  of the  Company  to  have  its  gross  margins  return  to the
mid-twenties  by the fourth  quarter of this year.  The Company  expects  that a
variety of factors,  including a more diverse product mix, proprietary products,
and greater  manufacturing  efficiencies  as a result of  increased  production,
should enable the Company achieve that goal.

         As the Company  expands and  diversifies its product and customer base,
it will have to  increase  its selling and  administrative  expenses.  Serving a
myriad of  customers  with  complex  and  differing  issues  requires  increased
personnel committed to those customers. As a result, the actual dollar amount of
the selling,  general,  and  administrative  expenses in 1997 should be 10 to 25
percent greater than in 1996, although SG&A expenditures should decrease in 1997
as a percentage of net sales.

         The  Company  believes  that the key to its future is to be a leader in
the research and  development  of new display  technology.  In 1996, the Company
began to expand and intensify its internal  research and development to focus on
proprietary   display   products   rather   than  just   manufacturing   process
improvements.  Use of the LCD manufacturing line in Tempe, Arizona is the key to
the  development of these  products,  some of which will be proprietary  and not
available from other display manufacturers.

         The Company  also  intends to pursue  technologies  being  developed in
related  fields.  Operating the highest volume LCD  manufacturing  line in North
America puts the Company in a unique position.  As a result,  several  companies
have approached the Company about potential alliances. The Company believes that
a strategic alliance with one or more of those companies could minimize the cost
of entry into new markets and new technologies.  The Company is also considering
licensing  technologies  from other companies that could be optimized on the LCD
                                       7
<PAGE>
manufacturing line. This internal and external focus on research and development
will continue  throughout  1997.  As a result,  the actual dollar amount of such
expenditures in 1997 should be 10 to 15 percent  greater than in 1996,  although
R&D expenditures should decrease in 1997 as a percentage of net sales.


Risk Factors

         Forward-looking  statements  in this report  include  revenue,  margin,
expense,  and earnings  analysis for 1997 as well as the Company's  expectations
relating to future  technologies  and future design and production  orders.  The
Company's  future   operating   results  may  be  affected  by  various  trends,
developments,  and factors that the Company must successfully manage in order to
achieve its goals.  In  addition,  there are trends,  developments,  and factors
beyond the  Company's  control that may affect its  operations.  The  cautionary
statements and risk factors set forth below and elsewhere in this document,  and
in the Company's  other  filings with the  Securities  and Exchange  Commission,
identify important trends,  factors, and currently known developments that could
cause  actual  results to differ  materially  from those in any  forward-looking
statements contained in this report and in any written or oral statements of the
Company.

         As noted  previously,  one  customer is  currently  responsible  for 45
percent of the Company's revenue.  Although that customer is expected to account
for only 40  percent  of the  Company's  revenue in 1997,  the  majority  of the
Company's  revenue in 1997 will still likely come from a core customer base. For
example,  it is expected  that one of the Company's  recent new customers  could
account for as much as 20 percent of the Company's  revenue in 1997.  Thus,  any
material delay,  cancellation,  or reduction of orders from one or more of those
core customers could have a material adverse effect on the Company's operations.

         Although  the trend of the Company is to enter into more  manufacturing
contracts with its  customers,  the principal  benefit of these  contracts is to
clarify order lead times, inventory risk allocation, and similar matters and not
to provide firm, long-term volume purchase commitments.  The Company has no firm
long-term  volume  purchase  commitments  from  its  customers.  Thus,  customer
commitments  can be  canceled,  and  expected  volume  levels  can be changed or
delayed.  The timely replacement of canceled,  delayed,  or reduced  commitments
cannot be assured and, among other things,  could result in the Company  holding
excess and obsolete inventory or having unfavorable manufacturing variances as a
result of  under-absorption.  These  risks are  exacerbated  because the Company
expects  that a  majority  of its  sales  will  be to  customers  in the  retail
electronics industry,  which is subject to severe competitive  pressures,  rapid
technological change, and obsolescence.

         Another  risk,  which  is  inherent  in  custom  manufacturing,  is the
satisfactory completion of design services and securing of production orders. It
is expected that a significant portion of the Company's  anticipated revenue for
the last half of 1997 will come from  programs  currently in the design or pilot
production stage. Completion of the design is dependent on a variety of factors,
including the  customer's  changing  needs and not every design is successful in
meeting those needs. In addition, some designs test new theories or applications
and may not meet the desired  results.  Failure of a design order to achieve the
customer's  desired  results  could result in a material  adverse  effect on the
Company's  operations  if the  expected  production  order for that  product was
significant.  Finally,  even  when a design  is  satisfactorily  completed,  the
customer  may  terminate  or delay the program as a result of marketing or other
pressures.

         The Company  designs and  manufactures  products  based on firm quotes.
Thus,  the Company  bears the risk of  component  price  increases,  which could
adversely affect the Company's gross margins.  In addition,  the Company depends
on certain  suppliers,  and the  unavailability  or shortage of materials  could
cause  delays or lost  orders,  either of which  could have a  material  adverse
effect on the Company.

         Finally,  the Company's success,  especially in penetrating new markets
and increasing its OEM customer base, depends to a large extent upon the efforts
and abilities of key managerial and technical employees. The loss of services of
certain key personnel could have a material  adverse effect on the Company.  The
Company's  business  also  depends  upon its  ability to continue to attract and
retain senior managers and skilled  employees.  Failure to do so could adversely
affect the Company's operations.
                                       8
<PAGE>
         As a result of the foregoing  and other  factors,  the Company's  stock
price may be subject to  significant  volatility,  particularly  on a  quarterly
basis.  Any shortfall in revenue or earnings from levels  expected by investors,
analysts,  and brokers could have an immediate and significant adverse effect on
the  trading  price  of  the  Company's   common  stock  in  any  given  period.
Additionally,  the  Company  may not learn of such  shortfalls  until  late in a
fiscal quarter,  which could result in an even more immediate and adverse effect
on the trading price of the  Company's  common stock.  Finally,  other  factors,
which generally affect the market for stocks of high technology companies, could
cause the price of the Company's  common stock to fluctuate  substantially  over
short periods for reasons unrelated to the Company's performance.
                                       9
<PAGE>


                           PART II. OTHER INFORMATION


ITEM 6.       Exhibits and Reports on Form 8-K
              --------------------------------


              (a) EXHIBIT 11: Statement Re:  Computation of Per Share Earnings.

                  EXHIBIT 27: Financial Data Schedule

              (b) Reports on Form 8-K: None
                                       10
<PAGE>
                                   SIGNATURES




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


                            THREE-FIVE SYSTEMS, INC.
                            ------------------------
                                  (Registrant)



Dated:  April 21, 1997                  By:    /s/ Jeffrey D. Buchanan
      -----------------------                -----------------------------------
                                             Jeffrey D. Buchanan

                                        Its: Vice President Finance, 
                                             Administration and Legal; Chief 
                                             Financial Officer
                                       11