##### Table of Contents



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, 2002

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  þ    NO  [ ]

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

|                         |  |                                  |            | 
|------------------------ |  | -------------------------------- | ---------- | 
|CLASS                    |  | OUTSTANDING AS OF MARCH 31, 2002
|                         |  |                                 
|Common                   |  |                                  | 21,513,016 | 
|                        
|                        
|                        
|                        
|Par value $.01 per share |  |                                  |            | 





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TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION       
|CONDENSED CONSOLIDATED BALANCE SHEETS
|                                      | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                      | 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|PART II. OTHER INFORMATION           
|                                      | ITEM 5. OTHER INFORMATION                                                                    
|                                      | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|                                      | SIGNATURES                                                                                   
|EX-10.CC                             



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##### Table of Contents



THREE-FIVE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS




PART I  FINANCIAL INFORMATION

|           |  |                                                                                             |  |     
|---------- |  | ------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                             |  | Page
|           |  |                                                                                             |  |     
|ITEM 1.    |  | FINANCIAL STATEMENTS:                                                                       |  |     
|          
|          
|          
|          
|           |  | Condensed Consolidated Balance Sheets-
December 31, 2001 and March 31, 2002                 |  | 1   
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Income-
Three Months Ended March 31, 2001 and 2002     |  | 2   
|          
|          
|          
|          
|           |  | Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2001 and 2002 |  | 3   
|          
|          
|          
|          
|           |  | Notes to Condensed Consolidated Financial Statements                                        |  | 4   
|          
|          
|          
|          
|ITEM 2.    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS       |  | 8   
|          
|          
|          
|          
|ITEM 3.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                   |  | 14  
|          
|          
|          
|          
|           |  | PART II  OTHER
INFORMATION                                                                 |  |     
|          
|          
|          
|          
|ITEM 5.    |  | OTHER INFORMATION                                                                           |  | 15  
|          
|          
|          
|          
|ITEM 6.    |  | EXHIBITS AND REPORTS ON FORM 8-K                                                            |  | 15  
|          
|          
|          
|          
|SIGNATURES |  |                                                                                             |  | 15  

- i -



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##### Table of Contents









ITEM 1. FINANCIAL STATEMENTS

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

|                                             |                                      |                            |         |              |         |             |         |         |         | 
|-------------------------------------------- | ------------------------------------ | -------------------------- | ------- | ------------ | ------- | ----------- | ------- | ------- | ------- | 
|                                             |                                      |                            |         | DECEMBER 31, |         | MARCH 31,  
|                                             |                                      |                            |         | 2001         |         | 2002       
|                                             |                                      |                            |         |              |         |            
|                                             |                                      |                            |         |              |         | (unaudited)
|ASSETS                                       |                                      |                            |         |              |         |             |         |        
|                                            
|                                            
|                                            
|                                            
|Current Assets:                              |                                      |                            |         |              |         |             |         |        
|                                            
|                                            
|                                            
|                                            
|                                             | Cash and cash equivalents            |                            | $       | 37,003       |         |             | $       | 20,578  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term investments               |                            |         | 110,016      |         |             |         | 122,215 |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts receivable, net             |                            |         | 18,102       |         |             |         | 13,924  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Inventories                          |                            |         | 15,629       |         |             |         | 14,341  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Taxes receivable                     |                            |         | 3,960        |         |             |         | 4,220   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term deferred tax asset        |                            |         | 3,930        |         |             |         | 3,949   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Other current assets                 |                            |         | 2,104        |         |             |         | 1,398   |        
|                                             |                                      |                            |         |              |         |             |         |        
|                                             |                                      | Total current assets       |         |              | 190,744 |             |         |         | 180,625 | 
|                                            
|                                            
|                                            
|                                            
|Long-term Investments                        |                                      |                            | 9,034   |              |         |             | 2,563   |        
|                                            
|                                            
|                                            
|                                            
|Property, Plant and Equipment, net           |                                      |                            | 38,353  |              |         |             | 38,583  |        
|                                            
|                                            
|                                            
|                                            
|Intangibles, net                             |                                      |                            | 5,886   |              |         |             | 8,746   |        
|                                            
|                                            
|                                            
|                                            
|Long-term Deferred Tax Asset, net            |                                      |                            | 219     |              |         |             | 2,477   |        
|                                            
|                                            
|                                            
|                                            
|Other Assets, net                            |                                      |                            | 1,652   |              |         |             | 1,651   |        
|                                             |                                      |                            |         |              |         |             |         |        
|                                             |                                      | $                          | 245,888 |              |         | $           | 234,645 |        
|                                             |                                      |                            |         |              |         |             |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY         |                                      |                            |         |              |         |             |         |        
|                                            
|                                            
|                                            
|                                            
|Current Liabilities:                         |                                      |                            |         |              |         |             |         |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts payable                     |                            | $       | 14,785       |         |             | $       | 9,151   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued liabilities                  |                            |         | 4,130        |         |             |         | 3,170   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Term loan                            |                            |         | 2,706        |         |             |         | 2,706   |        
|                                             |                                      |                            |         |              |         |             |         |        
|                                             |                                      | Total current liabilities  |         |              | 21,621  |             |         |         | 15,027  | 
|                                             |                                      |                            |         |              |         |             |         |        
|Minority Interest in Consolidated Subsidiary |                                      |                            | 323     |              |         |             | 218     |        
|                                             |                                      |                            |         |              |         |             |         |        
|Stockholders Equity:                        |                                      |                            |         |              |         |             |         |        
|                                            
|                                            
|                                            
|                                            
|                                             | Common stock                         |                            |         | 219          |         |             |         | 219     |        
|                                            
|                                            
|                                            
|                                            
|                                             | Additional paid-in capital           |                            |         | 200,395      |         |             |         | 200,445 |        
|                                            
|                                            
|                                            
|                                            
|                                             | Retained earnings                    |                            |         | 30,666       |         |             |         | 26,356  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Stock subscription note receivable   |                            |         | (163         | )       |             |         | (166    | )      
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated other comprehensive loss |                            |         | (21          | )       |             |         | (302    | )      
|                                            
|                                            
|                                            
|                                            
|                                             | Less  treasury stock, at cost       |                            |         | (7,152       | )       |             |         | (7,152  | )      
|                                             |                                      |                            |         |              |         |             |         |        
|                                             |                                      | Total stockholders equity |         |              | 223,944 |             |         |         | 219,400 | 
|                                             |                                      |                            |         |              |         |             |         |        
|                                             |                                      | $                          | 245,888 |              |         | $           | 234,645 |        
|                                             |                                      |                            |         |              |         |             |         |        

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

1



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##### Table of Contents






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

|                                                     |                                           |                |        |                    |        |      |        |        |        |  
|---------------------------------------------------- | ----------------------------------------- | -------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                     |                                           |                |        | THREE MONTHS ENDED
|                                                     |                                           |                |        | MARCH 31,         
|                                                     |                                           |                |        |                   
|                                                     |                                           |                |        | 2001               |        | 2002
|                                                     |                                           |                |        |                    |        |     
|Net Sales                                            |                                           | $              | 35,616 |                    |        | $    | 23,110 |       
|                                                     |                                           |                |        |                    |        |      |        |       
|Costs and Expenses:                                  |                                           |                |        |                    |        |      |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cost of sales                             |                |        | 31,243             |        |      |        | 22,902 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Selling, general, and administrative      |                |        | 2,491              |        |      |        | 3,125  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research, development, and engineering    |                |        | 3,661              |        |      |        | 4,818  |       
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                     |                                           |                | 37,395 |                    |        |      | 30,845 |       
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                     |                                           | Operating loss |        |                    | (1,779 | )    |        |        | (7,735 | )
|                                                     |                                           |                |        |                    |        |      |        |       
|Other Income:                                        |                                           |                |        |                    |        |      |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest, net                             |                |        | 2,128              |        |      |        | 1,062  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                |                |        | 12                 |        |      |        | 136    |       
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                     |                                           |                | 2,140  |                    |        |      | 1,198  |       
|                                                     |                                           |                |        |                    |        |      |        |       
|Minority Interest in Loss of Consolidated Subsidiary |                                           |                |       |                    |        |      | 105    |       
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|Income (Loss) before Income Taxes                    |                                           |                | 361    |                    |        |      | (6,432 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Provision for (benefit from) income taxes |                |        | 119                |        |      |        | (2,122 | )     
|                                                     |                                           |                |        |                    |        |      |        |       
|Net Income (Loss)                                    |                                           | $              | 242    |                    |        | $    | (4,310 | )     
|                                                     |                                           |                |        |                    |        |      |        |       
|Earnings (Loss) per Common Share:                    |                                           |                |        |                    |        |      |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                     |                | $      | 0.01               |        |      | $      | (0.20  | )     
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                     | Diluted                                   |                | $      | 0.01               |        |      | $      | (0.20  | )     
|                                                     |                                           |                |        |                    |        |      |        |       
|Weighted Average Number of Common Shares:            |                                           |                |        |                    |        |      |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                     |                |        | 21,429             |        |      |        | 21,508 |       
|                                                     |                                           |                |        |                    |        |      |        |       
|                                                     | Diluted                                   |                |        | 22,054             |        |      |        | 21,508 |       
|                                                     |                                           |                |        |                    |        |      |        |       

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

2



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

|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |         |        |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------------ | ---------------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | ------ | ------- | ------- | ------ | ------- | -
|                                               |                                                                                      |                                                      |                                                     |         | THREE MONTHS ENDED
|                                               |                                                                                      |                                                      |                                                     |         | MARCH 31,         
|                                               |                                                                                      |                                                      |                                                     |         |                   
|                                               |                                                                                      |                                                      |                                                     |         | 2001               |        | 2002   
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |        
|Cash Flows from Operating Activities:          |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                                                    |                                                      | $                                                   | 242     |                    |        | $       | (4,310  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net income (loss) to net cash
used in operating activities: |                                                      |                                                     |         |                    |        |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Depreciation and amortization                        |                                                     |         | 1,433              |        |         |         | 1,740  |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Minority interest in consolidated subsidiary         |                                                     |         |                   |        |         |         | (105   | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Provision for accounts receivable valuation reserves |                                                     |         | 85                 |        |         |         | 183    |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Benefit from deferred taxes, net                     |                                                     |         |                   |        |         |         | (2,277 | )      
|                                              
|                                              
|                                              
|                                              
|                                               | Changes in assets and liabilities:                                                   |                                                      |                                                     |         |                    |        |         |         |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | (Increase) decrease in accounts receivable           |                                                     |         | (3,249             | )      |         |         | 3,995  |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | (Increase) decrease in inventories                   |                                                     |         | (4,969             | )      |         |         | 1,288  |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | (Increase) decrease in other assets                  |                                                     |         | (627               | )      |         |         | 707    |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Decrease in accounts payable and accrued liabilities |                                                     |         | (151               | )      |         |         | (6,594 | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                      | Increase (decrease) in taxes payable/receivable      |                                                     |         | 56                 |        |         |         | (260   | )      
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                               |                                                                                      |                                                      | Net cash used in operating activities               |         |                    | (7,180 | )       |         |        | (5,633  | )
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|Cash Flows from Investing Activities:          |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of property, plant, and equipment                                          |                                                      |                                                     | (1,596  | )                  |        |         | (1,547  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of intangibles                                                              |                                                      |                                                     |        |                    |        |         | (3,283  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of investments                                                              |                                                      |                                                     | (69,874 | )                  |        |         | (25,808 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from maturities/sales of investments                                        |                                                      |                                                     | 73,610  |                    |        |         | 19,783  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Payments/interest on stock subscription note receivable                              |                                                      |                                                     |        |                    |        |         | (3      | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Other investments                                                                    |                                                      |                                                     | (1,000  | )                  |        |         |        |       
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                               |                                                                                      |                                                      | Net cash provided by (used in) investing activities |         |                    | 1,140  |         |         |        | (10,858 | )
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|Cash Flows from Financing Activities:          |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Stock options exercised                                                              |                                                      |                                                     | 445     |                    |        |         | 50      |       
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of treasury stock                                                           |                                                      |                                                     | (2,526  | )                  |        |         |        |       
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                               |                                                                                      |                                                      | Net cash provided by (used in) financing activities |         |                    | (2,081 | )       |         |        | 50      |  
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|                                               | Effect of exchange rate changes on cash and cash equivalents                         |                                                      |                                                     | 16      |                    |        |         | 16      |       
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|Net decrease in cash and cash equivalents      |                                                                                      |                                                      | (8,105                                              | )       |                    |        | (16,425 | )      
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                                                      |                                                      | 45,645                                              |         |                    |        | 37,003  |        
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        
|Cash and cash equivalents, end of period       |                                                                                      | $                                                    | 37,540                                              |         |                    | $      | 20,578  |        
|                                               |                                                                                      |                                                      |                                                     |         |                    |        |         |        

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

3



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##### Table of Contents






THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES
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 our opinion, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations, and cash flows for all periods presented have been
made. The results of operations for the three-month period ended
March 31, 2002 are not necessarily indicative of the operating
results that may be expected for the entire year ending December
31, 2002. These financial statements should be read in conjunction
with our December 31, 2001 financial statements and the
accompanying notes thereto.
|------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Note B |  |  | Basic earnings per common share are computed by dividing net income
by the weighted average number of shares of common stock
outstanding during the three-month period. Diluted earnings per
common share for the three-month period 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-month
period ended March 31, 2002 as their effect was anti-dilutive. Set
forth below are the disclosures for the three months ended March
31, 2001 and March 31, 2002.
|------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               |                                                   |                          |     |                                       |      |      |        |        |       |  
|---------------------------------------------- | ------------------------------------------------- | ------------------------ | --- | ------------------------------------- | ---- | ---- | ------ | ------ | ----- | -
|                                               |                                                   |                          |     | Three Months Ended March 31,         
|                                               |                                                   |                          |     |                                      
|                                               |                                                   |                          |     | 2001                                  |      | 2002
|                                               |                                                   |                          |     |                                       |      |     
|                                               |                                                   |                          |     | (unaudited)                          
|                                               |                                                   |                          |     | (in thousands, except per share data)
|Basic earnings per share:                      |                                                   |                          |     |                                       |      |      |        |       
|                                              
|                                              
|                                              
|                                              
|Income (loss) available to common
stockholders |                                                   | $                        | 242 |                                       |      | $    | (4,310 | )     
|                                               |                                                   |                          |     |                                       |      |      |        |       
|                                               | Weighted average common shares                    |                          |     | 21,429                                |      |      |        | 21,508 |      
|                                               |                                                   |                          |     |                                       |      |      |        |       
|                                               |                                                   | Basic per share amount   |     |                                       | 0.01 |      |        |        | (0.20 | )
|                                               |                                                   |                          |     |                                       |      |      |        |       
|Diluted earnings (loss) per share:             |                                                   |                          |     |                                       |      |      |        |       
|                                              
|                                              
|                                              
|                                              
|Income (loss) available to common
Stockholders |                                                   | $                        | 242 |                                       |      | $    | (4,310 | )     
|                                               |                                                   |                          |     |                                       |      |      |        |       
|                                               | Weighted average common shares                    |                          |     | 21,429                                |      |      |        | 21,508 |      
|                                              
|                                              
|                                              
|                                              
|                                               | Options and warrants assumed
exercised            |                          |     | 625                                   |      |      |        |       |      
|                                               |                                                   |                          |     |                                       |      |      |        |       
|                                               | Total common shares plus common
stock equivalents |                          |     | 22,054                                |      |      |        | 21,508 |      
|                                               |                                                   |                          |     |                                       |      |      |        |       
|                                               |                                                   | Diluted per share amount |     | $                                     | 0.01 |      |        | $      | (0.20 | )
|                                               |                                                   |                          |     |                                       |      |      |        |       



| |  | Note CInventories consist of the following at:
| |  | ----------------------------------------------

|                |  |                |        |           |  |             |        | 
|--------------- |  | -------------- | ------ | --------- |  | ----------- | ------ | 
|                |  | December 31,   |        | March 31,
|                |  | 2001           |        | 2002     
|                |  |                |        |          
|                |  |                |        |           |  | (unaudited)
|                |  | (in thousands)
|Raw materials   |  | $              | 11,535 |           |  | $           | 11,000 | 
|               
|               
|               
|               
|Work-in-process |  |                | 964    |           |  |             | 1,011  | 
|               
|               
|               
|               
|Finished goods  |  |                | 3,130  |           |  |             | 2,330  | 
|                |  |                |        |           |  |             |        | 
|                |  | $              | 15,629 |           |  | $           | 14,341 | 
|                |  |                |        |           |  |             |        | 

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| |  | Note DProperty, plant, and equipment consist of the following at:
| |  | -----------------------------------------------------------------

|                              |  |                |         |   |  |             |  |           |  |   |         |  
|----------------------------- |  | -------------- | ------- | - |  | ----------- |  | --------- |  | - | ------- | -
|                              |  | December 31,   |         |   |  |             |  | March 31,
|                              |  | 2001           |         |   |  |             |  | 2002     
|                              |  |                |         |   |  |             |  |          
|                              |  |                |         |   |  | (unaudited)
|                              |  | (in thousands)
|Building and improvements     |  | $              | 16,476  |   |  |             |  |           |  | $ | 16,476  |  
|                             
|                             
|                             
|                             
|Furniture and equipment       |  |                | 53,728  |   |  |             |  |           |  |   | 55,275  |  
|                              |  |                |         |   |  |             |  |           |  |   |         |  
|                              |  |                | 70,204  |   |  |             |  |           |  |   | 71,751  |  
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |                | (31,851 | ) |  |             |  |           |  |   | (33,168 | )
|                              |  |                |         |   |  |             |  |           |  |   |         |  
|                              |  | $              | 38,353  |   |  |             |  |           |  | $ | 38,583  |  
|                              |  |                |         |   |  |             |  |           |  |   |         |  



| |  | Note EIntangibles
| |  | -----------------



| |  |  | Intangibles consist of licenses and intellectual property related to our
microdisplay operating segment. Intangibles are recorded at cost and
amortized using the straight-line method over the estimated useful lives
of the respective assets, which range from two to five years. Our policy
is to commence amortization of intangibles when their related benefits
are realized. Amortization for the three months ended March 31, 2002
amounted to $423,000. Accumulated amortization through March 31, 2002
amounted to $1.2 million.
In January 2002, we purchased the intellectual property of Zight
Corporation, a private company focused on microdisplays for personal
display system applications, for $2.0 million.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Note FSegment information:
| |  | --------------------------



| |  |  | We monitor and evaluate the financial performance of our operations by
our two product lines (operating segments): direct view display and
microdisplay. The direct view display operating segment consists of
products that employ an LCD (Liquid Crystal Display) to present
information to the user. The microdisplay operating segment consists of
products that employ a Liquid Crystal on Silicon (LCoS) display to
present information to the user. The accounting policies related to the
operating segments are the same as those described in Note 2, Summary of
Significant Accounting Policies, in our financial statements included in
our Report on Form 10-K for the fiscal year ended December 31, 2001.
Non-specific operating segment expenses were allocated based upon
estimated usage. Interest income was split equally between the direct
view display and microdisplay operating segments. The worldwide average
tax rate was used for both segments. The following includes financial
information, for our two operating segments (in thousands, except share
data):
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          |                                   |   |             |  |              |   |        |   |  |   |        |  | 
|----------------------------------------- | --------------------------------- | - | ----------- |  | ------------ | - | ------ | - |  | - | ------ |  | 
|                                          |                                   |   | Direct View |  |              |   |        |   |  |   |       
|                                          |                                   |   | Display     |  | Microdisplay |   | Total 
|                                          |                                   |   |             |  |              |   |       
|                                          | Three Months Ended
March 31, 2001 |   |             |  |              |   |        |   |  |   |        |  | 
|                                         
|                                         
|                                         
|                                         
|Net sales                                 |                                   | $ | 35,057      |  |              | $ | 559    |   |  | $ | 35,616 | 
|                                         
|                                         
|                                         
|                                         
|Other income                              |                                   |   | 1,070       |  |              |   | 1,070  |   |  |   | 2,140  | 
|                                         
|                                         
|                                         
|                                         
|Provision for (benefit from)
income taxes |                                   |   | 674         |  |              |   | (555   | ) |  |   | 119    | 
|                                         
|                                         
|                                         
|                                         
|Net income (loss)                         |                                   |   | 1,368       |  |              |   | (1,126 | ) |  |   | 242    | 
|                                         
|                                         
|                                         
|                                         
|Earnings (loss) per share                 |                                   |   | 0.06        |  |              |   | (0.05  | ) |  |   | 0.01   | 

|                          |                                   |   |             |   |              |   |        |   |  |   |        |   | 
|------------------------- | --------------------------------- | - | ----------- | - | ------------ | - | ------ | - |  | - | ------ | - | 
|                          |                                   |   | Direct View |   |              |   |        |   |  |   |       
|                          |                                   |   | Display     |   | Microdisplay |   | Total 
|                          |                                   |   |             |   |              |   |       
|                          | Three Months Ended
March 31, 2002 |   |             |   |              |   |        |   |  |   |        |  
|                         
|                         
|                         
|                         
|Net sales                 |                                   | $ | 22,884      |   |              | $ | 226    |   |  | $ | 23,110 |  
|                         
|                         
|                         
|                         
|Other income              |                                   |   | 598         |   |              |   | 600    |   |  |   | 1,198  |  
|                         
|                         
|                         
|                         
|Benefit from income taxes |                                   |   | (227        | ) |              |   | (1,895 | ) |  |   | (2,122 | )
|                         
|                         
|                         
|                         
|Net loss                  |                                   |   | (463        | ) |              |   | (3,847 | ) |  |   | (4,310 | )
|                         
|                         
|                         
|                         
|Loss per share            |                                   |   | (0.02       | ) |              |   | (0.18  | ) |  |   | (0.20  | )

5



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| |  |  | We also track net sales and long-lived assets data by geographic
location. Net sales by geographic area are determined based upon the
location of the end customer, while long-lived assets are based upon the
physical location of our companys assets. The following includes
financial information for our geographic areas (in thousands):
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |                                   |   |         |  |       |   |         |  |       |   |        |  |  |   |        |  | 
|------------------------ | --------------------------------- | - | ------- |  | ----- | - | ------- |  | ----- | - | ------ |  |  | - | ------ |  | 
|                         |                                   |   | North   |  |       |   |         |  | Other |   |        |  | 
|                         |                                   |   | America |  | China |   | Foreign |  | Total
|                         |                                   |   |         |  |       |   |         |  |      
|                         | Three Months Ended
March 31, 2001 |   |         |  |       |   |         |  |       |   |        |  |  |   |        |  | 
|                        
|                        
|                        
|                        
|Net sales                |                                   | $ | 6,197   |  |       | $ | 11,904  |  |       | $ | 17,515 |  |  | $ | 35,616 | 
|                        
|                        
|                        
|                        
|Long-lived assets, gross |                                   |   | 41,596  |  |       |   | 11,619  |  |       |   | 18,569 |  |  |   | 71,784 | 

|                         |                                   |   |         |  |       |   |         |  |       |   |        |  |  |   |        |  | 
|------------------------ | --------------------------------- | - | ------- |  | ----- | - | ------- |  | ----- | - | ------ |  |  | - | ------ |  | 
|                         |                                   |   | North   |  |       |   |         |  | Other |   |        |  | 
|                         |                                   |   | America |  | China |   | Foreign |  | Total
|                         |                                   |   |         |  |       |   |         |  |      
|                         | Three Months Ended
March 31, 2002 |   |         |  |       |   |         |  |       |   |        |  |  |   |        |  | 
|                        
|                        
|                        
|                        
|Net sales                |                                   | $ | 2,504   |  |       | $ | 9,737   |  |       | $ | 10,869 |  |  | $ | 23,110 | 
|                        
|                        
|                        
|                        
|Long-lived assets, gross |                                   |   | 50,465  |  |       |   | 12,860  |  |       |   | 18,344 |  |  |   | 81,669 | 



| |  | Note GComprehensive income (loss) for the periods was as follows:
| |  | -----------------------------------------------------------------

|                            |                                                              |   |                    |     |      |   |        |      |  
|--------------------------- | ------------------------------------------------------------ | - | ------------------ | --- | ---- | - | ------ | ---- | -
|                            |                                                              |   | Three Months Ended
|                            |                                                              |   | March 31,         
|                            |                                                              |   |                   
|                            |                                                              |   | 2001               |     | 2002
|                            |                                                              |   |                    |     |     
|                            |                                                              |   | (unaudited)       
|                            |                                                              |   | (in thousands)    
|Net income (loss)           |                                                              | $ | 242                |     |      | $ | (4,310 | )   
|                           
|                           
|                           
|                           
|Other comprehensive income: |                                                              |   |                    |     |      |   |        |     
|                           
|                           
|                           
|                           
|                            | Foreign currency translation adjustment                      |   |                    | 16  |      |   |        | 16   |  
|                           
|                           
|                           
|                           
|                            | Unrealized gains (loss) on investment securities,
net of tax |   |                    | 118 |      |   |        | (297 | )
|                            |                                                              |   |                    |     |      |   |        |     
|Comprehensive income (loss) |                                                              | $ | 376                |     |      | $ | (4,591 | )   
|                            |                                                              |   |                    |     |      |   |        |     



| |  | Note HDebt
| |  | ----------



| |  |  | In February 2002, we renewed our credit facility with Comerica Bank.
That credit facility is a $15.0 million unsecured revolving line of
credit that matures in January 2003. No borrowings were outstanding under
that credit facility on March 31, 2002. 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. As of
March 31, 2002, our Beijing subsidiary had an outstanding $2.7 million
term loan due May 8, 2002 to the Bank of China, which was secured by a
$3.0 million stand-by letter of credit issued by Comerica Bank.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Note ICommitments and Contingencies:
| |  | ------------------------------------



| |  |  | In 1991, we received a notice of potential liability at the
Barkhamsted-New Hartford Landfill Site (the Landfill) in Barkhamsted,
Connecticut from the U.S. Environmental Protection Agency (EPA).
Fifty-seven other entities received similar letters. In January 1992, we
received a 104(e) questionnaire from the EPA, which was completed and
submitted during 1992. We received verbal notification that we had no
further liability in the matter. According to the EPA, groundwater
contamination at the site, which includes volatile and semi-volatile
organic compounds and low concentrations of metals, constitutes a
low-level threat. As a result of previous actions at the site,
groundwater is the only medium requiring additional cleanup. All source
material and principal threats have been addressed through the landfill
capping and related activity completed in 1999. On February 28, 2002, we
received notification from the EPA that the EPA believes we
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | are an involved party and indicated that the EPA was seeking to negotiate
an agreement with the involved parties to fund the EPAs chosen remedy of
monitored natural attenuation of the groundwater. The EPA indicated that
further notification would be made in the next 60 days, which
notification will include the names of any other involved parties. We are
evaluating our potential liability at the site. The Landfill is a
semi-active waste disposal area consisting of 97.84 acres located in
Barkhamsted and New Hartford, Connecticut. The Landfill is owned and
operated by the Administrative Board of Regional Refuse Disposal and
began operating as a landfill in 1974. Industrial wastes were received
by the Landfill until 1993, and the Landfill was closed in 1995. The EPA
has conducted a Remedial Investigation/Feasibility Study and issued a
Proposed Plan to clean up the site. In our opinion, any ultimate
settlement liability related to the Landfill will not be material to our
final position or results of operations.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have guaranteed up to $493,000 of the debt of a start-up company,
VoiceView Technology, Inc., a private company developing microdisplay
products. We will be required to pay this guarantee to the lender if the
start-up company defaults on its debt obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | We are also involved in certain administrative proceedings arising in the
normal course of business. In our opinion, the ultimate settlement of
these administrative proceedings will not materially impact our financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |  | Note JRecently 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. We adopted SFAS
Nos. 141 and 142 on January 1, 2002, and there was no material impact on
our financial position or results of operations.                                                                                                                                                                                                          
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies
to all entities and legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of the long-lived asset. SFAS
No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the
assets useful life. We will be required to adopt SFAS No. 143 on
January 1, 2003. We have reviewed the requirements of SFAS No. 143 and
do not believe that the adoption of this statement will have a material
impact on our financial position or results of operations.
|
| |  |  | 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 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. We adopted SFAS No. 144 on
January 1, 2002, and there was no material impact on our financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                  



| |  | Note KReclassifications
| |  | -----------------------



| |  |  | Certain amounts in the statements of cash flows for the three-month
period ended March 31, 2001 have been reclassified to conform with the
2002 presentation.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

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 Arizona LCD line, material shortages, research, development, and
engineering expense, selling, general, and administrative expense, 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 Special Considerations in Item 1 of our
Report on Form 10-K for the fiscal year ended December 31, 2001. Therefore,
this Report should be read in conjunction with that 10-K.

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 2001 from the mobile
handset market. When we win a design program, our customers sometimes pay 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 15 months and includes technical design,
prototyping, pilot manufacturing, and high-volume manufacturing. In 2001, our
strategy was to seek large-volume programs from major OEMs. In that situation,
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. Recently, we have re-focused our strategy
on lower-volume programs with potentially higher gross margins. We have
re-focused our strategy because some OEMs with high-volume programs have begun
to expect to purchase LCD modules for less than industry costs. 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. We experienced substantial growth again in 1999 and
2000, but our sales substantially declined in 2001 as a result of the
world-wide economic slowdown. Motorola and its subcontractors accounted for
34.6% of our net sales in 1997, 63.6% in 1998, 86.1% in 1999, 86.9% in 2000,
and 85.4% in 2001. In the first quarter of 2002, Motorola and its
subcontractors accounted for 86.1% of our net sales.

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

8



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Several factors impact our gross margins, including manufacturing
efficiencies, product mix, product differentiation, product uniqueness,
inventory management, and volume pricing. In addition, significant pricing
pressure exists in the LCD module market. Accordingly, those factors have
impacted, and can be expected to continue to impact, our overall margins.

We vertically integrate our manufacturing facilities. We generally have
used our own high-volume LCD production line for the manufacture of more
technologically complex and custom high-volume LCDs. We also purchased LCDs
from third parties to provide us an alternate source and to ensure available
capacity. In order to take advantage of lower labor costs, we have
traditionally shipped 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 of 2001, but the line is now
shut down and in transit. We expect to incur no interruption in our LCD module
production, as we will rely on built inventory stock and third-party sources
during the period that the line is being reinstalled. We currently are
negotiating with a strategic partner to move the line into their Southern China
facility. We expect to finalize that arrangement in the second quarter.

In Manila, we assemble LCDs into modules and perform certain back-end LCD
processing operations. Our back-end LCD processing operations have been and
will continue to be conducted in Manila through a third-party subcontract
manufacturer through April 2002. After April 2002, the Manila back-end LCD
processing will be performed in our facility. 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. We conduct our LCD module operations 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. We conduct our LCD
module operations in Beijing through a wholly owned foreign subsidiary at a
facility we own. We employ our own employees in Beijing.

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. 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.

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

9



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of 2001, we wrote off our investment of $3.8 million in Inviso because we
determined that our investment was impaired, as that term is defined under
generally accepted accounting principles. Subsequent to our write-off, Inviso
was unable to raise funds to operate its business and has since ceased
operations.

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 agreed to provide LCD glass to us and reserve a
significant amount of LCD glass manufacturing capacity for us. In exchange, we
agreed to assist Jiya in further developing its LCD glass manufacturing
processes. At the conclusion in February 2002, we had the option to extend the
agreement or to acquire a majority interest in Jiya. We elected not to extend
the agreement or acquire a majority interest.

In 2001, we invested $1.25 million in Silicon Bandwidth, Inc., a privately
held company providing unique semiconductor and optoelectronic interconnect
solutions based upon multiple, patented, proprietary technologies. We are
working closely with Silicon Bandwidth to design unique, cost-effective,
reconfigurable packaging platforms for 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 owned
51% of this new venture, and DuPont Displays owned 49%. The companies pledged
$3.0 million to the venture. Our share of that obligation was slightly over
$1.5 million. This venture was formed to design, assemble, and market OLED
(Organic Light Emitting Diode) display modules to OEMs worldwide with the focus
on glass substrate, passive matrix OLED displays. We have recently agreed with
DuPont Displays to liquidate Three-D OLED L.L.C. and enter into a non-equity
based Strategic Manufacturing and Supply Agreement. Under that agreement, the
parties will continue to work together in a fashion similar to the venture, but
the relationship will be nonexclusive. Thus, we will have the right to
purchase the glass panel output of a planned high-volume manufacturing plant
located in Taiwan, announced by DuPont and RiTdisplay Technology Corporation.
In addition, we will utilize other OLED glass panel sources. Upon the request
of DuPont Displays, we will also manufacture OLED display modules for them at
our display module assembly facilities in Beijing and Manila.

In January 2002, we purchased the intellectual property of Zight
Corporation, a private company focused on microdisplays for personal display
system applications. In addition, we purchased certain key assets of Zight at
a creditors auction and we hired seven key technical persons formerly employed
by Zight. The total cost of the acquisition was approximately $2.6 million.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles (GAAP) in the United
States. During preparation of these financial statements, we are required to
make estimates and judgements that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to product returns, bad debts, inventories, investments, fixed
assets, intangible assets, income taxes, pensions and other post-retirement
benefits, contingencies, and litigation. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. The results form the basis for making judgements about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgements and estimates used in the preparation of our financial
statements.

We recognize sales when persuasive evidence of a sale exists; that is, a
product is shipped under an agreement with a customer, risk of loss and title
have passed to the customer, the fee is fixed or determinable, and collection
of the resulting receivable is reasonably assured.

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
determine the adequacy of this allowance by regularly evaluating

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individual customer receivables and considering a customers financial
condition, credit history, and current economic conditions. If the financial
condition of our customers were to deteriorate, additional allowances may be
required.

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

We estimate our actual current tax exposure together with the temporary
differences that have resulted from the differing treatment of items dictated
by generally accepted accounting principles versus U.S. tax laws. These
temporary differences result in deferred tax assets and liabilities. On an
on-going basis, we then assess the likelihood that our deferred tax assets will
be recovered from future taxable income. If we were to believe that the
recovery were not more likely than not, we would establish a valuation
allowance against the deferred tax asset and charge the amount as an income tax
expense in the period in which such a determination were made.

Results of Operations

Three months ended March 31, 2002 compared to three months ended March 31,
2001

Net Sales.Net sales decreased 35.1% to $23.1 million in the first
quarter of 2002 from $35.6 million in the first quarter of 2001. The reduction
in revenue was largely the result of two factors associated with the worldwide
economic turndown. First, the number of liquid crystal display (LCD) module
units we shipped in the first quarter of 2002 was approximately 22% lower than
the number of units we shipped in the comparable quarter of 2001. Second, the
average price on the LCD modules we sold in the first quarter was approximately
17% lower than the price of the modules that we sold in the first quarter of
2001.

Cost of Sales.Cost of sales increased to 99.1% of net sales in the first
quarter of 2002 from 87.7% in the first quarter of 2001. Our cost of sales
percentage in the first quarter of 2002 continued to remain high primarily as a
result of reduced selling prices for our display modules. In addition,
under-absorption issues related to decreased production levels also impacted
us. Our cost of sales were also significantly impacted by our continued
investment in LCoS microdisplays. It should be noted that the cost of sales in
the first quarter of 2001 was positively impacted by a one-time favorable
settlement of a contested United Kingdom customs matter for $2.4 million.

Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 24.0% to $3.1 million in the first quarter of
2002 from $2.5 million in the first quarter of 2001. SG&A expense was 13.5% of
net sales in the first quarter of 2002 compared to 7.0% in the first quarter of
2001. The increase in SG&A expense was a result of a variety of factors,
including increased legal fees and an increase of $160,000 to the allowances
for doubtful accounts as a result of the aging of an accounts receivable with a
Chinese customer.

Research, Development, and Engineering Expense.Research, development,
and engineering expense increased 29.7% to $4.8 million in the first quarter of
2002 from $3.7 million in the first quarter of 2001. RD&E expense was 20.8% of
net sales in the first quarter of 2002 compared to 10.3% in the first quarter
of 2001. RD&E expense overall increased almost exclusively as the result of
continued efforts to bring LCoSmicrodisplays into production.

Other Income, Net.Other income was $1.2 million in the first quarter of
2002 compared to $2.1 million in the first quarter of 2001. The primary
difference was a result of decreased interest income because of decreased cash
and investment balances. In addition, the interest rate earned on investments
was lower during the first quarter of 2002 than in the first quarter of 2001.

Provision for (Benefit from) Income Taxes.We recorded a benefit from
income taxes of $2.1 million in the first quarter of 2002 compared to a
provision for income taxes of $119,000 for the first quarter of 2001. This
change resulted from having a loss in the first quarter of 2002 compared to
income for the same period in 2001. The tax rate used to calculate the benefit
was 33.0% for the first quarter of 2002. The benefit from income taxes that we

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recorded has increased our deferred tax asset by $2.3 million. No
valuation allowance has been booked as we believe it is more likely than not
that those deferred tax assets will be fully realized.

Net Income (Loss).Net loss was $4.3 million, or $0.20 per diluted share,
in the first quarter of 2002 compared to net income of $242,000, or $0.01 per
diluted share, in the first quarter of 2001. The net loss resulted from our
continuing investment in our Brillian liquid crystal on silicon (LCoS)
microdisplay product line and from reduced selling prices and volumes in our
direct view display business. We reported a net loss of approximately $3.8
million, or $0.18 per share, in the first quarter 2002 in the LCoS microdisplay
business segment and a net loss of $463,000, or $0.02 per share, in the direct
view display business segment.

Quarterly Results of Operations

The following table presents unaudited consolidated statement of
operations data for each of the five quarters in the period ended March 31,
2002. We believe that all necessary adjustments have been included to present
fairly the quarterly information when read in conjunction with the 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)
|                                             |                                        |   |               
|                                             |                                        |   | Mar 31,        |        | Jun 30, |   | Sept 30, |        | Dec 31, |   | Mar 31,
|                                             |                                        |   | 2001           |        | 2002   
|                                             |                                        |   |                |        |        
|Net sales                                    |                                        | $ | 35,616         |        |         | $ | 25,013   |        |         | $ | 26,594  |        |  | $ | 31,913 |        |  | $ | 23,110 |       
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|Cost and expenses:                           |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of sales                          |   |                | 31,243 |         |   |          | 32,160 |         |   |         | 27,453 |  |   |        | 30,658 |  |   |        | 22,902 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Selling, general, and administrative   |   |                | 2,491  |         |   |          | 2,922  |         |   |         | 2,444  |  |   |        | 2,273  |  |   |        | 3,125  | 
|                                            
|                                            
|                                            
|                                            
|                                             | Research, development, and engineering |   |                | 3,661  |         |   |          | 4,795  |         |   |         | 4,224  |  |   |        | 4,938  |  |   |        | 4,818  | 
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|                                             |                                        |   | 37,395         |        |         |   | 39,877   |        |         |   | 34,121  |        |  |   | 37,869 |        |  |   | 30,845 |       
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|Operating loss                               |                                        |   | (1,779         | )      |         |   | (14,864  | )      |         |   | (7,527  | )      |  |   | (5,956 | )      |  |   | (7,735 | )     
|                                            
|                                            
|                                            
|                                            
|Other income (expense), net                  |                                        |   | 2,140          |        |         |   | (2,073   | )      |         |   | 1,497   |        |  |   | 1,886  |        |  |   | 1,198  |       
|                                            
|                                            
|                                            
|                                            
|Minority interest in consolidated subsidiary |                                        |   |               |        |         |   |         |        |         |   | 62      |        |  |   | 105    |        |  |   | 105    |       
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|Income (loss) before income taxes            |                                        |   | 361            |        |         |   | (16,937  | )      |         |   | (5,968  | )      |  |   | (3,965 | )      |  |   | (6,432 | )     
|                                            
|                                            
|                                            
|                                            
|Provision for (benefit from) income taxes    |                                        |   | 119            |        |         |   | (5,589   | )      |         |   | (1,972  | )      |  |   | (1,303 | )      |  |   | (2,122 | )     
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       
|Net income (loss)                            |                                        | $ | 242            |        |         | $ | (11,348  | )      |         | $ | (3,996  | )      |  | $ | (2,662 | )      |  | $ | (4,310 | )     
|                                             |                                        |   |                |        |         |   |          |        |         |   |         |        |  |   |        |        |  |   |        |       

Business Outlook

Our revenue for the first quarter exceeded our previously announced
expectations, primarily as a result of increased production levels in our
direct view display business. Design-win activity in the direct view display
business continued at a strong pace; we received eight design wins in the first
quarter. In the last six months, we have received 15 design wins, four of which
call for color displays. Nearly all of the design wins secured in the last six
months were either high-end monochrome display applications or custom color
display applications. Six of those design wins were for advanced
telecommunication products; most were with new customers; and none reflected
handset programs with our largest customer. This is one of the highest levels
of design activity we have experienced, and we are planning for this pace,
especially in more advanced products, to continue into the second and third
quarters of 2002.

Looking forward to the second quarter of 2002, we expect conditions in the
second quarter to emulate the first quarter. We expect revenue in the second
quarter of $20 to $23 million and a net loss of approximately $0.20 to $0.23
per share, before a probable one-time charge relating to the LCD line. We
currently are negotiating with a Chinese company to create a cooperative
venture in which we would place our STN LCD line in that companys factory in
Southern China. The transaction would be treated as an asset sale under GAAP.
We believe that this cooperative venture arrangement will yield us many
benefits, including significant cost savings. Other benefits will include the
receipt by us of approximately $3 million in cash upon the close of the
transaction, preferential LCD glass pricing, and flexible, yet assured
manufacturing capacity with this new partner. Due to a continuing global excess
capacity in STN LCDs, however, the value of the benefits we expect to receive
upon the transfer of the LCD

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line is expected to be less than the current book value of the LCD line.
Thus, we will likely incur a one-time charge of between $0.10 and $0.12 per
share when the venture is finalized. This transaction is currently expected to
occur in the second quarter, and the one-time charge would be reported as a
loss on the sale of an asset in other income/expense (which is below the
operating income line).

Liquidity and Capital Resources

At March 31, 2002, we had cash, cash equivalents, and liquid investments
of $145.4 million compared to cash, cash equivalents, and liquid investments of
$156.1 million at December 31, 2001. This decrease was due primarily to our
operating cash outflow and our acquisition of Zight Corporations assets.

In the quarter ended March 31, 2002, we had $5.6 million in net cash
outflow from operations compared to $7.2 million in net cash outflow from
operations in the quarter ended March 31, 2001. This net cash outflow in the
first quarter of 2002 was primarily because of our net loss and our reduced
accounts payable. Inventory turns decreased from 6.6 in the first quarter of
2001 to 5.7 in the first quarter of 2002, and accounts receivable DSOs (Day
Sales Outstanding) increased to 70 days in the first quarter of 2002 from 53
days in the first quarter of 2001. Inventory turns and DSOs changed primarily
because of reduced sales. Depreciation and amortization expense increased to
$1.7 million for the first quarter of 2002 compared to $1.4 million for the
first quarter of 2001. This increase related primarily to increased
amortization of intangibles.

Our working capital was $165.6 million at March 31, 2002 and $169.1
million at December 31, 2001. Our current ratio was 12.0-to-1 at March 31,
2002 compared to 8.8-to-1 at December 31, 2001. Our current ratio increased
primarily as a result of reducing accounts payable.

In February 2002, we renewed our credit facility with Comerica Bank. That
credit facility is a $15.0 million unsecured revolving line of credit that
matures in January 2003. No borrowings were outstanding under that credit
facility on March 31, 2002. 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. As of March 31, 2002, our Beijing
subsidiary had an outstanding $2.7 million term loan due May 8, 2002 to the
Bank of China, which was secured by a $3.0 million stand-by letter of credit
issued by Comerica Bank.

Purchases of intangibles and property, plant, and equipment during the
first quarter of 2002 were approximately $4.8 million, which included $2.6
million associated with the acquisition of selected assets and intellectual
property of Zight Corporation. The remaining amounts were primary for tooling,
production, and test upgrades to our microdisplay equipment in Tempe.

The following tables list our contractual obligations and commercial
commitments:

|                                   |  |           |        |           |  |                        |       |           |  |          |       |  |  |         |       |  |  |   |        | 
|---------------------------------- |  | --------- | ------ | --------- |  | ---------------------- | ----- | --------- |  | -------- | ----- |  |  | ------- | ----- |  |  | - | ------ | 
|                                   |  |           |        |           |  | Payments due by Period
|                                   |  | Total     |        |          
|Contractual Obligations            |  | Amounts   |        | Less than |  |                        |       |           |  |          |       |  |  | 6 Years
|(in thousands)                     |  | Committed |        | 1 Year    |  | 1-3 Years              |       | 4-5 Years |  | and Over
|                                   |  |           |        |           |  |                        |       |           |  |         
|Term Loan                          |  | $         | 2,706  |           |  | $                      | 2,706 |           |  | $        |      |  |  | $       |      |  |  | $ |       | 
|                                  
|                                  
|                                  
|                                  
|Operating Leases                   |  |           | 15,621 |           |  |                        | 1,067 |           |  |          | 1,998 |  |  |         | 2,127 |  |  |   | 10,429 | 
|                                   |  |           |        |           |  |                        |       |           |  |          |       |  |  |         |       |  |  |   |        | 
|Total Contractual Cash Obligations |  | $         | 18,327 |           |  | $                      | 3,773 |           |  | $        | 1,998 |  |  | $       | 2,127 |  |  | $ | 10,429 | 
|                                   |  |           |        |           |  |                        |       |           |  |          |       |  |  |         |       |  |  |   |        | 

|                             |  |           |     |           |  |                                            |    |           |  |          |     |  |  |         |     |  |  |  |   | 
|---------------------------- |  | --------- | --- | --------- |  | ------------------------------------------ | -- | --------- |  | -------- | --- |  |  | ------- | --- |  |  |  | - | 
|                             |  |           |     |           |  | Amount of Commitment Expiration Per Period
|                             |  |           |     |           |  |                                           
|                             |  | Total     |     |           |  |                                            |    |           |  |          |     |  |  |         |     |  |  | 
|Other Commercial
Commitments |  | Amounts   |     | Less than |  |                                            |    |           |  |          |     |  |  | 6 Years
|(in thousands)               |  | Committed |     | 1 Year    |  | 1-3 Years                                  |    | 4-5 Years |  | and Over
|                             |  |           |     |           |  |                                            |    |           |  |         
|Guarantee                    |  | $         | 493 |           |  | $                                          | 87 |           |  | $        | 193 |  |  | $       | 213 |  |  |  |  | 

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The operating leases include a lease for our factory in Manila and our
ground lease in Tempe, Arizona. These leases are described in detail in Note 7
of the Notes to Consolidated Financial Statements for 2001 included in our Form
10-K for 2001. The guarantee relates to our guarantee in connection with a
Small Business Administration loan to VoiceViewer Technology, Inc., a private
company developing microdisplay products. The $3.0 million standby letter of
credit issued by Comerica has not been included in the Other Commercial
Commitments table because it only exists to secure the term loan obligation of
$2.7 million, which is already included in the table for Contractual
Obligations. We have no other long-term debt, capital lease obligations,
unconditional purchase obligations or other long-term obligations, and we do
not have any other commercial commitments. We have no off-balance sheet
arrangements.

We believe that our existing balances of cash, cash equivalents, and
investments will provide adequate sources to fund our operations and planned
expenditures through 2002, as well as to meet our contractual obligations.
Specifically, we have $145.4 million in cash, cash equivalents, and short- and
long-term investments. Our capital expenditures in 2002 are expected to be
approximately $10 million, and we expect operating cash outflow to be minimal
relative to our cash reserves. We continue to seek other alliances or
acquisitions and additional relationships with regard to the strategic
development of various new technologies, especially LCoSmicrodisplays, that
may also require us to make additional capital investments. In such a case, we
may need to expand our loan commitments or pursue alternate methods of
financing or raise capital. We cannot provide assurance that adequate
additional loan commitments or alternative methods of financing will be
available or, if available, that they will be on terms acceptable to us.

Impact of Recently Issued Standards.

In 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. We adopted SFAS Nos. 141 and 142 on January 1, 2002 and there
was no material impact on our financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to all entities
and legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and/or the normal
operation of the long-lived asset. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset and are subsequently allocated to expense over
the assets useful life. We will be required to adopt SFAS No. 143 on January
1, 2003. We have reviewed the requirements of SFAS No. 143 and do not believe
that the adoption of this statement will have a material impact on our
financial position or results of operations.

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 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. We
adopted SFAS No. 144 on January 1, 2002 and there was no material impact on our
financial position or results of operations.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There are no material changes in reported market risks since our most
recent filing on Form 10-K for the year ended December 31, 2001.

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PART II. OTHER INFORMATION




ITEM 5. OTHER INFORMATION

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

The establishment of any trading plan involving our company requires the
pre-clearance by our Chief Executive Officer or Chief Financial Officer. An
individual adopting a trading plan must comply with all requirements of Rule
10b5-1, including the requirement that the individual not possess any material
nonpublic 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. Robert
W. Harrison, Vice President of the Direct View Display Business Unit, has
adopted a trading plan to sell shares due to tax considerations.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibit 10(cc):
|--- |  | ---------------



| |  |  | Modification Agreement dated January 31, 2002, by and among Three-Five
Systems, Inc., its subsidiaries, the Banks named in the Credit
Agreement, and Comerica Bank as administrative agent and as Issuing
Bank.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------



| |  |  | Report on Form 8-K on January 8, 2002, January 30, 2001, and February
19, 2002, furnishing an Item 9 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.

|                      |  |                                                                                                                                                                                                               
|--------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dated: April 19, 2002 |  | THREE-FIVE SYSTEMS, INC.
(Registrant)
By:       /s/ Jeffrey D. Buchanan

Name: Jeffrey D. Buchanan
Its:       Executive Vice President Finance, Administration
             and Legal; Chief Financial Officer

15