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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-K 
 For the fiscal year ended December 31, 2003 Commission file number 1-4373    THREE-FIVE SYSTEMS, INC. 
  Delaware
    
    86-0654102(State or Other Jurisdiction
of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 1600 North Desert Drive, Tempe, Arizona
    
    85281(Address of Principal Executive Offices)
    
    (Zip Code)
 (602) 389-8600 
  Securities registered pursuant to Section 12(b) of the Exchange Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per share
Preferred Stock Purchase Rights
    
    New York Stock Exchange
New York Stock Exchange
 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [  ] The aggregate market value of Common Stock held by nonaffiliates of the
registrant (16,788,173 shares) based on the closing price of the registrants
Common Stock as reported on the New York Stock Exchange on
June 30, 2003, which was the last business day of the
registrant's most recently completed second fiscal quarter, was
$115,838,394. For purposes of this computation, all officers, directors, and
10% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such officers,
directors, or 10% beneficial owners are, in fact, affiliates of the registrant. As
of March 11, 2004, there
were outstanding 21,321,870 shares of the
registrants Common Stock, par value $.01 per share. Documents Incorporated by Reference Portions of the registrants definitive Proxy Statement for the 2004
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSINDEPENDENT AUDITORS REPORTCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVESEXHIBIT INDEXEX-10.22EX-10.23EX-10.24EX-10.25EX-10.26EX-10.27EX-10.28EX-10.29EX-10.30EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  THREE-FIVE SYSTEMS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 TABLE OF CONTENTS PART IITEM 1.
    
    BUSINESS
    
    
    1ITEM 2.
    
    PROPERTIES
    
    
    19ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    19ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    20ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    20ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    21ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    32ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    33ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    33ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    33PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    34ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    34ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    34ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    35ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    35PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    35SIGNATURES
    
    
    38INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1
    Statement Regarding Forward-Looking Statements The statements contained in this report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
expectations, anticipation, intentions, beliefs, or strategies
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for fiscal 2004 and
thereafter; technological innovations; future products or product development;
our product development strategies; potential acquisitions or strategic
alliances; the success of particular product or marketing programs; the amounts
of revenue generated as a result of sales to significant customers; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this report are based on information available to us as
of the filing date of this report, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially
from the forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors discussed in Item 1, Business -
Risk Factors.




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PART I 
 ITEM 1. BUSINESS Overview We are a global provider of electronics manufacturing services, or EMS. We
design and/or manufacture printed circuit board assemblies, radio frequency, or
RF, modules, display modules and systems, and complete systems for customers in
the automotive, computing, consumer, industrial, medical, and
telecommunications industries. Our services include advanced engineering
support, designed for services, automated printed circuit board assembly,
in-circuit and functional testing, systems level integration and box build,
turn-key packaging, fulfillment services, and turn-key supply chain management
services, all of which enable our customers the ability to outsource various
stages of product engineering, design, development, materials procurement and
management, manufacturing, and testing. Unlike most EMS companies, our design
and manufacturing services include a distinctive competence in display modules
and systems and the integration of display modules and systems into other
products. These display modules and systems include monochrome and color
liquid crystal display, or LCD, components, organic light emitting diodes, or
OLEDs, and flat panel monitors. Our website is located at www.tfsc.com. Through our website, we make
available free of charge our annual report on Form 10-K, our proxy statement,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, any
amendments to those reports filed or furnished under the Securities Exchange
Act, and our earnings press releases. These reports and press releases are
available as soon as reasonably practical after we electronically file them
with the Securities and Exchange Commission. We also post on our website the
charters of our Audit, Compensation, and Nominating/Corporate Governance
Committees; our Corporate Governance Guidelines, Code of Business Conduct
Ethics, and Code of Ethics for the CEO and Senior Financial Officers, and any
amendments of or waiver thereto; and any other corporate governance materials
contemplated by SEC and NYSE regulations. These documents are also available
in print to any stockholder requesting a copy from our corporate secretary at
our principal executive offices. Industry Overview Historically, original equipment manufacturers, or OEMs, have been fully
integrated, performing the engineering and design, new product introduction,
assembly and manufacturing, testing, procurement, distribution and logistics,
and aftermarket support functions for their products. In recent years,
however, OEMs have been under intense pressure to reduce costs, focus on core
competencies, and reduce supply chain investment. In response, OEMs have
increasingly outsourced these functions to EMS companies. By focusing on these
functions, we believe that EMS companies provide OEMs with cost savings,
superior technological know-how, and access to more advanced manufacturing
processes. These services enable OEMs to concentrate on their core
competencies, such as product development, marketing, and sales. As a result
of this outsourcing strategy, many OEMs are divesting a significant portion of
their manufacturing facilities, and many newer OEMs are choosing to outsource
rather than add additional capital equipment and build internal manufacturing
infrastructures. Today, the EMS industry consists of companies that provide a broad range
of services, including engineering and design, new product introduction,
printed circuit board assembly, or PCBA, box build, testing, distribution and
logistics, and aftermarket support services for OEMs in the electronics
industry. The trend toward outsourcing by OEMs has continued in the recent
economic downturn, as OEMs have been under increased pressure to pursue
aggressive cost savings. In addition, OEMs have continued to move manufacturing
programs to lower cost regions and sought EMS providers with global footprints. Although EMS industry revenue declined in recent years as a result of
significant cut backs in customer production requirements, industry revenue
have slowly begun to increase again over the last year as inventories have
declined and customer production requirements generally have begun to
stabilize. We believe further growth opportunities exist for EMS providers to
penetrate the worldwide electronics markets. We also believe that an EMS
provider with a global presence will grow faster than the industry average
because of the ability to offer multinational OEMs a comprehensive set of
outsourced services through a single global manufacturing platform.




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The factors driving OEMs to favor an outsourcing strategy include the
following:  
    
    Reduce Operating Costs and Capital Investment.In the current
economic environment, OEMs are under significant pressure to reduce
manufacturing costs and capital expenditures. EMS companies can
provide OEMs with flexible, cost-efficient manufacturing services.
In addition, as OEM products have become more technologically
advanced, the manufacturing and system test processes have become
increasingly automated and complex, requiring significant capital
investments. EMS companies enable OEMs to access technologically
advanced manufacturing and test equipment and facilities without
additional capital expenditures.
    
    Access Global Manufacturing Services.OEMs seek to reduce
their manufacturing costs by having EMS companies manufacture their
products in the lowest cost locations that are appropriate for their
products and end customers. OEMs also are increasingly requiring
particular products to be manufactured simultaneously in multiple
locations, often near end users, to bring products to market more
quickly, reduce shipping and logistics costs, and meet local product
content requirements. Global EMS companies are able to satisfy these
requirements by capitalizing on their geographically dispersed
manufacturing facilities, including those in lower cost regions.
    
    Accelerate Time to Market.OEMs face increasingly short
product life cycles resulting from increased competition and rapid
technological changes. As a result, OEMs must reduce the time
required to bring their products to market. OEMs can bring a product
to market faster by using EMS companies expertise in new product
introduction, including manufacturing design, engineering support,
and prototype production. OEMs can more quickly achieve volume
production of their products by capitalizing on EMS companies
manufacturing expertise and global presence and infrastructure.
    
    Ability to Focus on Core Competencies. By shifting design,
manufacturing, testing, logistics and distribution, and aftermarket
support functions to EMS companies, OEMs can focus their resources
on their core competencies, including product development,
marketing, and sales.
    
    Access to Engineering and Manufacturing Technologies. OEMs
continually seek access to engineering expertise and manufacturing
technologies necessary to build their increasingly complex products,
such as displays, as described below. OEMs are motivated to work
with EMS companies to gain access to their expertise in product
design, assembly, manufacturing, and testing technologies.
    
    Reduced Supply Chain Investment. Outsourcing to EMS
companies allows OEMs to enter into short-term manufacturing
contracts and lower their investment in inventory and long-term
manufacturing assets , enabling them to increase their return on
assets. As a result, OEMs can react more quickly to changing market
conditions and allocate capital to other core activities. As part of our suite of electronics manufacturing services, our expertise
in display systems differentiates us from competitors. Displays are a
prevalent feature in most OEM products. OEMs increasingly believe that a
display interface is important because it makes products more useful and easier
to operate. Custom liquid crystal displays, or LCDs, including both monochrome
and color displays, address requirements for high performance, increased
information content, low power, and low cost. In addition, organic light
emitting displays, or OLEDs, which are a relatively new technology, are making
advances in technology development, cost reduction, and power consumption and
are beginning to be used in mobile and other applications. Custom-designed display modules provide OEMs a cost-effective means to
differentiate their products from the products of their competitors. In
designing a product, an OEM must determine whether to use standard
off-the-shelf display modules or a custom display module. OEMs recognize
that standard off-the-shelf displays may be more cost-effective, but make it
more difficult to differentiate their products from those of their competitors. Our EMS services include custom display solutions and standard display
products. Our focus is on LCD and OLED display technologies. Historically,
our emphasis was on small form factor displays, but we now offer our customers
monitors with large-format displays for use in industrial and governmental
applications. Strategy Our objective is to be a leading provider of electronics manufacturing
services to OEMs. We have a global footprint, with operations in the United
States, Europe, and several locations in Asia. We offer an increasingly 2




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broad range of engineering and manufacturing capabilities, with a special
emphasis and expertise in display subsystems. Key elements of our strategy to
achieve our objective include the following: Target Strong Customers in High-Growth Industries We identify and target markets that we believe have the greatest long-term
potential for growth. Our current target markets are the automotive,
computing, industrial, medical, telecom, and consumer markets. We recognize
that our growth and development is closely aligned with the growth and
development of the customers and markets we serve. Our broad range of services
enables us to benefit from cross-marketing on a global and market segment
basis. Within each market, we target companies that we believe would benefit
from our global design and manufacturing services and our unique expertise in
display technologies. Targeted customers include mid-level manufacturing
companies. Our sales and engineering staffs then attempt to demonstrate the
benefits that the potential customer would derive by outsourcing to us the
design and production of their products. Once we establish a relationship with a new customer, we endeavor to
develop new programs for other product groups within the customers business.
For this reason, we specifically target customers with multiple divisions or
product lines. Establish Close Relationships with Customers We seek to establish strong and long-lasting customer relationships
through our fundamental business practice, which we refer to as customer
partnering. Customer partnering involves aligning our prospects with those of
our customers and seeking to make our engineering and production staffs
seamless extensions of the product design and production departments of our
customers. This includes our engineers spending a significant portion of their
time assisting customers engineering efforts. In addition, our customers
engineers sometimes spend time in our facilities. We stress complete product life-cycle solutions to our customers beginning
with early involvement in their product engineering, design, and new product
introduction cycles and continuing through manufacturing, testing, logistics
and distribution, and aftermarket support services. We view each customers
new product as our own and take pride in creating and implementing innovative
engineering solutions that differentiate the customers product from
competitive products. In connection with this philosophy, we have positioned
ourselves to provide a rapid response to our customers and their worldwide
operations. We continually attempt to enhance the competitive position of our
customers by offering innovative, distinctive, and high-quality services on a
timely and cost-effective basis. To do so, we work continually to improve our
productivity, lower our costs, and speed the delivery of our product solutions.
We endeavor to streamline the entire design through delivery process by
maintaining an ongoing engineering and manufacturing improvement effort. We continue to provide customer support after product design has been
completed and production has been commenced. Through such follow-on activity,
we conduct quality enhancement and cost-reduction efforts to maintain the
competitiveness of our customers products. We intend to continue our efforts to expand our customer base. We
actively pursue new customers, particularly those in growing and emerging
markets that have volume requirements and require complex solutions. We also
evaluate the requirements of our customers and seek to provide them with
additional services. Leverage Display Capabilities We leverage our traditional strength in designing and manufacturing
display subsystems to offer customers advanced solutions for their primary
products. We provide this display expertise through our design centers located
in Tempe, Arizona, Beijing, China, Manila, the Philippines, and Marlborough,
Massachusetts, and through our manufacturing facilities in Beijing and
Marlborough. We believe our display capabilities help our customers improve
product performance and reduce costs. Exceed Customer Requirements through Speed and Efficiency We emphasize innovative design and manufacturing techniques to improve the
speed, efficiency, and performance of our design and manufacturing services.
These services enable our customers to address the pressure to reduce the lead
times for market introduction of their products. As part of our development
process, we 3




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continually improve and modify our design and manufacturing processes,
controls, and methodology in an effort to support our customers requirements. Pursue Strategic Acquisitions and Alliances We intend to pursue strategic acquisitions, including OEM manufacturing
divestitures, and alliances to expand our customer base, to expand service
offerings and geographic presence, to address new markets, to enhance our
technological capabilities, and to participate in other growth opportunities.
We continuously review acquisition opportunities. Products and Services We provide integrated design, manufacturing, and supply chain solutions
that address all stages of our customers product life cycles, including
advanced engineering and design, new product introduction and prototyping,
global supply chain management, printed circuit board assembly, display module
assembly, RF module assembly, box build, testing, logistics and distribution,
and aftermarket services. We also provide a wide range of aftermarket support,
such as repairs, refurbishment, systems upgrades, and spare part manufacturing.
By providing these design, engineering, manufacturing, and logistics services,
we enable our customers to focus on their core competencies and to enhance
their competitiveness by reducing the cost of their products, increasing
product performance and functionality, and shortening the time from product
conception to product introduction in the marketplace. Engineering and Design. We offer engineering, design, and related
services for new products and assist our customers in designing products for
optimal manufacturing and testing. We have a full-service engineering function
in Penang. Our design for manufacturability services seeks to achieve
defect-free and cost-effective product designs, reduce product development
cycles, create high production yields, and establish superior product quality.
Our design for testability service focuses on achieving the highest level of
in-circuit and functional test coverage prior to product shipment. Our
engineering and development activities also focus on display products intended
to meet the requirements of our target markets. We add value for our customers
through our ability to integrate the design and production process, which
reduces the time between product conception and market introduction. Our
emphasis on engineering and manufacturing services has positioned us to develop
unique product solutions for our customers as they seek displays with more
information content at lower cost. New Product Introduction and Prototyping. We offer technical services
that shorten the time it takes our customers to introduce their products into
the market and that helps them to optimize the commercial manufacturing of
their products. Our integrated approach draws on our engineering, design,
supply chain management, prototyping and production manufacturing, quality, and
test engineering experience to enable a fast, cost-effective ramp to volume
production. We are able to assist our customers with component selection,
materials strategies, supply chain development, manufacturing process
development, reliability modeling, quality plan development, and test plan
implementation. Supply Chain Management. Our global supply chain services include
materials, logistics, and storage of materials for the manufacturing of custom
products and deliveries of those products to our customers. Our supply chain
process starts by selecting suppliers that provide high levels of quality,
flexibility, competitive prices, and value added delivery programs, all on a
global basis to service those needs. We communicate demand to these suppliers
in the most automated process available so that we can meet the needs of our
customers for swift reaction to change, maximize our inventory velocity and
utilization, and create a valued customer-supplier relationship. We have
established with our suppliers various delivery mechanisms from supplier
delivery vehicles to consolidated shipping containers. These methods vary
based on cost and proximity. These suppliers must also meet ongoing reviews
for total cost reduction, flexibility, and quality. Our global supply chain
provides value to our customers by increasing flexibility, reducing risk,
improving time-to-market, and lowering cost. Assembly and Manufacturing. We provide turnkey and consigned
manufacturing and assembly services. These services include printed circuit
board and subsystems assembly, display modules and systems, RF modules, box
build, system and subsystem integration, downloading software, and building and
configuring the final product. We conduct our manufacturing in Redmond,
Penang, Manila, and Beijing. We customize and ruggedize monitors in
Marlborough. Display Products.Our EMS services include a line of standard display
products incorporating both monochrome and color LCDs and OLEDs, and a line of
large format monitor products. These standard displays are 4




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typically used for lower volume customers that do not have the resources
to fund the development of a custom display. We utilize inquiries from
customers for standard display products to offer a manufacturing solution for
the customers entire product. In addition, volume increases for a customers
product often lead to the customer seeking a custom designed display to provide
additional functionality and differentiation. Our large-format monitor products
offer customized solutions for the industrial, human machine interface, and
kiosk markets and integrate various levels of system solutions, including
innovative features like wireless interfaces. Product Testing. We offer in-circuit testing of printed circuit boards
and functional testing of subsystems and systems, which contributes
significantly to our ability to deliver high-quality products on a consistent
basis. We work with our customers to develop product-specific test strategies.
Our test capabilities include design for test and manufacturing defect
analysis, in-circuit development and implementation, and functional tests. We
either custom design test equipment and software ourselves or use test
equipment and software provided by our customers. In addition, we provide
environmental stress tests to assure reliability. Logistics and Distribution. We offer flexible services related to the
configuration and shipment of our customers products. We perform final
product packaging, out-of-box audit, and distribution services for completed
products as well as direct order fulfillment. We can deliver final products
directly into our customers distribution channels and to our customers
end-users. We believe that these services compliment our comprehensive
manufacturing solutions, enabling our customers to be more responsive to
changing market demands and to get their products to market more quickly with
less total cost. Aftermarket Service. We provide a wide range of aftermarket services,
including repair, refurbishment, remanufacturing, system upgrades, and spare
part manufacturing. These services are supported by specific information
systems and testing technologies and can be tailored to meet specific customer
requirements. Other Business Factors Sales and Marketing We achieve worldwide sales coverage through a direct sales force, and
direct sale representives, which focuses on generating new accounts. Program
managers are responsible for managing relationships with existing customers and
making follow-on sales. Application engineers work with their engineering
counterparts at customers to insure all technical details are addressed. In
addition to our sales force, program managers, and application engineers, our
executive staff plays an integral role in our sales efforts. Our sales to customers in North America represented approximately 14.0% of
net sales in 2002 and 54.0% of net sales in 2003. Our sales to customers in
Asia represented approximately 58.4% of net sales in 2002 and 20.5% of net
sales in 2003. Our sales to customers in Europe represented approximately
27.6% of net sales in 2002 and 25.5% of net sales in 2003. Customers Customers include large multinational and smaller OEMs that have chosen
outsourcing as a core manufacturing strategy. We service a diverse range of
industries, including automotive, medical, industrial, telecommunications,
consumer, and computing. We believe we are able to offer customers an
outsourcing solution that involves lower costs than typically would be provided
by their internal operations. We seek to differentiate ourselves from our
competitors by providing advanced methodologies and capabilities and
exceptional customer focus by integrating our services into our customers
operations. Additionally, we also offer unique expertise in designing and
manufacturing display systems and RF modules. We believe that providing
display modules as part of our EMS offering provides us with a unique value
proposition in our target markets. The printed circuit board assembly and the
display represent a large portion of an OEMs bill of materials, thus allowing
us to offer one-stop shopping. In fiscal 2003, our ten largest customers accounted for approximately 79%
of our net sales. Our largest customers during fiscal 2003 were Avocent and
Vitelcom, accounting for approximately 23% and 13% of net sales, respectively.
No other customer accounted for more than 10% of net sales in fiscal 2003. 5




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The following table lists in alphabetical order a representative sample of
our largest customers in fiscal 2003 and the products of those customers for
which we provide manufacturing services: Customer
    
    End ProductsAvocent
    
    KVM (keyboard, video, mouse) server switchesHypercom
    
    POS (point of sale) terminalsDatex-Ohmeda
    
    Medical equipmentGeneral Electric
    
    White goodsMotorola
    
    Cellular phones; telematicsMicrotune
    
    RF modulesVitelcom
    
    Wireless handsetsWatchguard
    
    VPN (virtual private network) boxes
 Backlog As of December 31, 2003, we had a backlog of orders of approximately $46.7
million. The backlog of orders as of December 31, 2002 was approximately $32.0
million. Our backlog consists of product orders for which confirmed purchase
orders or fixed forecasts have been received and which are scheduled for
shipment within 12 months. Orders are now given with only a six to eight week
lead time. Some of our largest customers provide purchase orders of only one
week. Most orders are subject to rescheduling or cancellation by the customer
with limited penalties. Because of the possibility of customer changes in
delivery schedules or cancellations and potential delays in product shipments,
our backlog as of a particular date may not be indicative of net sales for any
succeeding period. Components and Raw Materials We purchase raw materials and electronic components from manufacturers and
distribution companies. The key electronic components we purchase include
printed circuit boards, specialized components, such as application-specific
integrated circuits, LCD and OLED glass, semiconductors, interconnect products,
electronic subassemblies (including memory modules, power supply modules, and
cable and wire harnesses), inductors, resistors and capacitors. Along with
these electronic components, we also purchase components for use in
higher-level assembly and manufacturing. These components include
injection-molded plastic, pressure-formed plastics, vacuum-formed plastics,
sheet metal fabrications, aluminum extrusions, die castings, and various other
hardware and fastener components. These components range from standard to
highly customized, and they vary widely in terms of market volatility and
price. From time to time, allocation of components by suppliers becomes an
integral part of the electronics industry, and component shortages can occur
with respect to particular components. In response, we actively manage our
business in a way to minimize our exposure to materials and component
shortages. We create strong supplier alliances to ensure, to the extent
possible, a steady flow of components at competitive prices. We have also
established and continue to expand our strategic relationships with
international purchasing offices, and we attempt to leverage our design
position with suppliers. Some of these components and raw materials are standard and others are
highly customized and vary widely in terms of market availability and price.
Our procurement strategy is to secure alternative sources of supplies for the
majority of these materials. Many of these materials, however, must be
obtained from foreign suppliers, which subjects us to the risks inherent in
obtaining materials from foreign sources, including supply interruptions and
currency fluctuations. Our suppliers generally are meeting our requirements,
and we believe our strategic supplier alliances have further strengthened our
relations with offshore suppliers. We have experienced material shortages in
the past. Those shortages prevented us from meeting customer demand for
certain services. Similar shortages in the future could have a material
adverse effect on our business. We attempt to procure components and other raw materials only when a
purchase order or forecast is received from a customer. We experience
component shortages and longer lead times for various components and 6




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raw materials from time to time. We generally have been able to reduce
the impact of shortages by working with customers to reschedule deliveries and
by working with suppliers to provide the needed components using just-in-time
vendor managed or consigned inventory programs. Intellectual Property We own various service marks, including Three-Five Systems, and its
logo. Although we own certain patents, they are not currently material to our
business. We do not have any material copyrights. Information Technology We plan to implement in 2005 a new enterprise resource planning, or ERP,
platform for certain of our locations. This ERP platform is intended to augment
our management information systems and includes software from SAP and several
other vendors. The ERP platform is intended to enhance and standardize our
ability to translate information globally from production facilities into
operational and financial information and to create a consistent set of core
business applications at our worldwide facilities, although we will not
necessarily convert all of our facilities to the same system. We believe that
the related licenses are of a general commercial character on terms customary
for these types of agreements. During fiscal 2005, we plan to convert two
manufacturing facilities to the new ERP platform. We anticipate converting
additional facilities to the new ERP platform in 2006 and 2007. Our conversion
timetable and project scope remain subject to change based upon our evolving
needs and sales levels. Employees Our employees are one of our primary strengths, and we make considerable
efforts to maintain a well-qualified staff. We have been able to offer enhanced
career opportunities to many of our employees. Our human resources department
identifies career objectives and monitors specific skill development for
employees with potential for advancement. We invest at all levels of the
organization to ensure that employees are well trained. We
currently employ approximately 1,500 full-time employees. Given the
quick response time required by our customers, we seek to maintain flexibility
to scale our operations as necessary to maximize efficiency. To do so, we use
skilled temporary labor in addition to our full-time employees. None of our
employees are covered by union agreements. We have no history of labor
disputes at any of our facilities. We believe that our employee relationships
are good. Competition We believe Benchmark Electronics, Plexus, Pemstar, Suntron, and other
smaller, proximity-based domestic EMS providers constitute our principal
competitors. In addition, we believe that Philips, Samsung, Seiko-Epson,
Hosiden, Optrex, Seiko Instruments, Wintek, and Sharp constitute the principal
competitors for our EMS services involving display solutions. We compete
primarily on the basis of engineering, testing, and production capabilities;
technological know-how; the responsiveness, quality, flexibility, and price of
our services; and geographical location. Many of our competitors have
substantially greater manufacturing, financial, and research and development
resources than we possess and offer broader geographic operations and a greater
range of services than we do. We also face competition from the manufacturing
operations of current and potential customers, which continually evaluate the
benefits of internal manufacturing versus outsourcing. Acquisitions and Strategic Ventures In September 2002, we purchased the assets and ongoing business of AVT,
located in Marlborough, Massachusetts, a privately held company that
specialized in the design and integration of complex, high-resolution display
systems. As a result, we now design and provide customized and ruggedized flat
panel, touchscreen, and rackmount systems for OEMs in the industrial and
medical markets. We outsource display components from a variety of companies
including Sony, Sharp, NEC, LG, and Samsung. The purchase price of the
acquisition was $12.0 million, which we paid entirely in cash. 7




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In December 2002, we purchased the stock of ETMA Corporation, located in
Redmond, Washington, a privately held electronics manufacturer for OEM
customers in the computer peripheral, medical, and Internet/Network security
industries. As a result, we now offer the manufacturing capabilities of five
surface mount manufacturing lines, including one dedicated to new product
introduction and prototyping activity. We also provide engineering support,
automated printed circuit board assembly, in-circuit and functional testing,
systems integration and box build, complete supply chain management, and
turnkey packaging and fulfillment services. The purchase price of the ETMA
acquisition was $38.1 million, which we paid entirely in cash. In January 2003, we signed licensing and manufacturing agreements with
Data International Co., Ltd. of Taiwan. Under those agreements, we became the
exclusive channel in the Americas for standard and custom LCD products
manufactured by Data International. We also have the right to sell those
products through our worldwide channels. The agreements provide us with access
to a full suite of standard display products that round out our existing
standard product portfolio. In conjunction with the agreement, we established a
sales office in Orlando, Florida, and hired sales and applications engineering
personnel from a distributor that had previously supported Data Internationals
products. The cost of the license was $3.9 million, of which $1.0 million was
paid upon signing and $1.5 million was paid in the first quarter of 2004. The
remaining $1.4 million is due in January 2005. The remaining balance due is
subject to reduction if certain margin targets are not met. In March 2003, we signed an agreement with Microtune, Inc. in which we
agreed to manufacture, assemble, and test Microtunes radio frequency, or RF,
tuner modules and wireless module products in our manufacturing facility in
Manila, the Philippines. As part of the agreement, Microtune sold to us certain
of its own equipment and inventory for $8.2 million, of which $2.7 million was
a note payable due in September 2003, and contracted with us to provide 100% of
Microtunes current demand for fully assembled RF subsystems. We also hired
approximately 500 Microtune employees in Manila. In October 2003, we paid off
approximately $300,000 of the $2.7 million note payable to Microtune and
entered into an agreement to cancel the remaining $2.4 million balance on that
note in exchange for the return of certain excess inventory to Microtune. As a
result of this transaction, we now provide 100% of the manufacturing
outsourcing for Microtunes RF module products. In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang. Unico
was an electronic manufacturer for OEM customers in the computer, computer
peripheral, and communications industries. The Unico business was acquired by
TFS Electronics Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a joint
venture owned 60% by an overseas TFS subsidiary and 40% by Unico Holdings Bhd.,
the former parent of Unico. Unico Holdings is the investment arm of the Chinese
Chamber of Commerce of Malaysia. Our share of the initial cost of capitalizing
TFS-Malaysia was $3.8 million and Unico Holdings share was $2.5 million, most
of which will be used for working capital. TFS-Malaysia purchased $4.1 million
in inventory from Unico, of which $2.7 million was paid at the time of the
purchase and $1.4 million was subsequently paid. No advance payment was
required for the acquisition of the property, plant, and equipment of Unico,
all of which is leased from the seller. The equipment lease is accounted for as
a capital lease payable by TFS-Malaysia. The principal balance on that lease
was $8.1 million as of December 31, 2003. In February 2004, we entered into a transaction with Integrex, a
Seattle-based electronics manufacturing services company liquidating their
business. Under that transaction, we bought the raw materials inventory of
Integrex and hired certain of their employees. We also obtained the rights to
most of their customers and agreed with those customers that we would
manufacture those customers products in our Redmond manufacturing facility.
In exchange for those customer rights, we agreed to pay a license fee for
between 15 and 24 months based on revenue actually received by us from the sale
of products to the former Integrex customers. A portion of that license fee
was paid in advance at closing. Government Regulation Our operations are subject to certain federal, state, and local regulatory
requirements relating to environmental, waste management, health, and safety
matters. We believe we operate in substantial compliance with all applicable
requirements. There can be no assurance, however, that material costs and
liabilities will not arise from complying with these or from complying with
new, modified, or more stringent requirements. In addition, our past, current,
or future operations may give rise to claims of exposure by employees or the
public or to other claims or liabilities relating to environmental, waste
management, or health and safety concerns. 8




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Our operations create a small amount of hazardous waste, including various
epoxies, gases, inks, solvents, and other wastes. The amount of hazardous
waste we produce may increase in the future depending on changes in our
operations. The general issue of the disposal of hazardous waste has received
increasing focus from federal, state, local, and international governments and
agencies and has been subject to increasing regulation. Executive Officers The following table sets forth certain information regarding our executive
officers: Name
    
    Age
    
    PositionJack L. Saltich
    
    
    60
    
    
    President, Chief Executive Officer, and DirectorJeffrey D. Buchanan
    
    
    48
    
    
    Executive Vice President, Chief Financial Officer, Secretary,
Treasurer, and DirectorCarl E. Derrington
    
    
    53
    
    
    Senior Vice President, Chief Manufacturing OfficerJoe D. Tanner
    
    
    57
    
    
    Senior Vice President, Electronics Manufacturing ServicesVan H. Potter
    
    
    45
    
    
    Senior Vice President-Display Products
 Jack L. Saltichhas served as a director and the President and Chief
Executive Officer of our company since July 1999. Mr. Saltich served as Vice
President of Advanced Micro Devices from May 1993 until July 1999; as Executive
Vice President of Applied Micro Circuits Corp. from January 1991 until March
1993; and as Vice President of VLSI from July 1988 until January 1991. Mr.
Saltich held a variety of executive positions for Motorola from July 1971 until
June 1988. These positions included serving as an Engineering Manager from May
1974 until January 1980, an Operation Manager from January 1980 until May 1982,
a Vice President and Director of the Bipolar Technology Center from May 1982
until June 1986, and a Vice President and Director of the Advanced Product
Research and Development Laboratory from June 1986 until June 1988. Mr.
Saltich serves as the Chairman of the Board of Brillian Corporation; as a
member of the board of directors of Immersion Corporation, a public company
that develops, licenses, and markets haptic technology and products; and as a
member of the board of directors of Vitex Systems, Inc., a private company that
commercializes transparent ultra-barrier films for use in flat panel displays. Jeffrey D. Buchananhas served as a director and Executive Vice President
of our company since June 1998; as Chief Financial Officer and Treasurer since
June 1996; and as Secretary since May 1996. Mr. Buchanan served as our Vice
President  Finance, Administration, and Legal from June 1996 until July 1998
and as our Vice President  Legal and Administration from May 1996 to June
1996. Mr. Buchanan served from June 1986 until May 1996 as a business lawyer
with OConnor, Cavanagh, Anderson, Killingsworth & Beshears. Mr. Buchanan was
associated with the international law firm of Davis Wright Tremaine from 1984
to 1986, and he was a senior staff person at Deloitte & Touche from 1982 to
1984. Carl E. Derringtonhas served as our Chief Manufacturing Officer since May
1999. Dr. Derrington joined our company in 1986 as a Director of Research and
Development. Since that time, Dr. Derrington has served as a Plant Manager
from January 1986 until September 1987, a Director of Engineering from
September 1987 until August 1989, a Director of Manufacturing from August 1989
until April 1996, and a Director of Manufacturing Engineering from April 1996
until April 1999. Joe D. Tannerhas served as Senior Vice President, Electronic
Manufacturing Services, since December 2002. From 2001 until 2002, he served as
Vice President of ETMA Corporation. From 1992 until 2001, Mr. Tanner was
President-International and Chief Operating Officer of the Drypers Corporation,
and was Managing Director/CEO of Drypers manufacturing companies in Malaysia,
Brazil, Puerto Rico, and Argentina. Mr. Tanner was an executive officer of
Drypers Corporation at the time that it filed for Chapter 11 under the U.S.
bankruptcy laws. That company filed for bankruptcy protection as a result of
patent litigation filed against it, which litigation was subsequently settled in
connection with the sale of the operating companies and liquidation of Drypers.
From 1988 until 1992, he was Managing Partner in the Vancouver Office of
Williams Kastner & Gibbs law firm. Mr. Tanner 9




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was President, Colombia River Economic Development Council from 1983 until
1988 and President and CEO of U-Cart Concrete Systems, Inc. from 1978 until
1983. Van H. Potterhas served as Senior Vice President-Display Products since
February 2003. Mr. Potter was Market Development Manager and Project Manager
for Rogers Corporation, a manufacturer of specialty polymer composite
materials, from February 2002 until February 2003. From April 1994 until
February 2002, Mr. Potter held a variety of management, marketing, and new
business development positions with Durel Corp., a joint venture between Rogers
Corporation and 3M Corporation. DISCONTINUED OPERATIONS On September 1, 2003, we transferred all of the net assets of our
microdisplay division, plus approximately $20.9 million in cash, to a newly
created Delaware corporation called Brillian Corporation. On September 15,
2003, we spun off Brillian by distributing all of the outstanding common stock
of Brillian to our stockholders on a pro rata basis, with each of our
stockholders receiving one share of Brillian common stock for each four shares
of our common stock. Brillian is now traded on the Nasdaq National Market under
the symbol BRLC. Brillian had $44.1 million of net assets on the spin-off
date. For more information on the reason for the spin-off, as well as the
description of business and risks associated with the spin-off, please refer to
the Form 10 and the related amendments and associated documents filed by
Brillian with the Securities and Exchange Commission. The microdisplay
business that we transferred to Brillian is now reported in our consolidated
financial statements as Discontinued Operations. RISK FACTORS You should carefully consider the following factors, in addition to those
discussed elsewhere in this report, in evaluating our company and our business. We substantially expanded our electronics manufacturing services business. We recently expanded our electronics manufacturing services business
through our acquisitions of ETMA Corporation and Unico. Among other things, we
will be required to integrate the operations of those companies with our
high-volume manufacturing operations in Manila and Beijing. Substantially expanding our electronics manufacturing services has
resulted in various risks, including the following:  
    
    the integration of worldwide operations;
    
    the information technology challenges relating to the integration of disparate worldwide systems.
    
    the ability to procure and install necessary additional equipment;
    
    the ability to hire, train, and manage additional manufacturing personnel;
    
    production delays, unfavorable manufacturing yields, and lengthening delivery schedules;
    
    the ability to service widespread customers in varied industries;
    
    the need to satisfy increasingly rapid product turnaround
time and rapid increases in production levels;
    
    the volume of customer orders relative to our capacity;
    
    the typically short life cycle of our customers products;
    
    changes in our sales mix to our customers;
    
    the timing of our expenditures in anticipation of future orders;
    
    our effectiveness in managing manufacturing processes;
    
    changes in cost and availability of labor and components; 10




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
    
    changes in economic conditions; and
    
    local events that affect our production volume. The electronics manufacturing services industry is impacted by the state
of the electronics industry, general U.S. and global economic conditions, and
worldwide events. A continued slowdown in the U.S. or global economies or the
particular industries served by us may result in customers reducing orders.
Our revenue may be adversely impacted by the slowdown in the worldwide
electronics markets, which have been subject to reduced end-market demand and
reduced capital spending. We face intense competition. We serve intensely competitive industries that are characterized by price
erosion, rapid technological change, and competition from major domestic and
international companies. As a result of the expansion of our electronic
manufacturing services business, we are now competing more directly against
large EMS companies, which have greater market recognition, larger customer
bases, and substantially greater financial, technical, marketing, distribution,
and other resources than we possess. We compete primarily on the basis of our
engineering, design, testing, and production capabilities; our technological
know-how, especially in display and RF modules; the responsiveness, quality,
flexibility, and price of our services; and our geographic locations. Certain
sectors of the EMS industry are currently experiencing increased price
competition, and a continuation of this increased level of competition would
adversely affect our revenue and gross margin. In some cases, our smaller size
may mean that we are required to accept less than favorable contractual
obligations with larger vendors and customers. We also face competition from
the manufacturing operations of current and potential customers, which
continually evaluate the benefits of internal manufacturing versus outsourcing. Prior to the recent current economic downturn, many participants in the
EMS industry, including us, substantially expanded their manufacturing
capacity. In the last few years, however, the overall demand for electronics
manufacturing services has decreased, resulting in increased capacity and
substantial pricing pressures, which has harmed our operating results. Our ability to compete successfully depends on a number of factors, both
within and outside our control. These factors include the following:  
    
    our success in providing design and manufacturing services,
and in incorporating new technologies, processes, and product
solutions;
    
    our ability to address the needs of our customers;
    
    foreign currency devaluations, especially in Asian
currencies, such as the Japanese yen, the Korean won and the
Taiwanese dollar, which may cause foreign competitors products to
be priced significantly lower than our product solutions;
    
    the quality of our customer services;
    
    our efficiency of production;
    
    product or technology introductions by our competitors; and
    
    the pricing, quality, performance, reliability, timeliness,
technological sophistication, geographic location, and efficiency of
our design and manufacturing services. The majority of our sales come from a small number of customers and our sales
could decline significantly if we lose any of these customers. Sales to our ten largest customers have represented a significant
percentage of our net sales in recent periods. Our ten largest customers
accounted for approximately 79% and 92% of net sales in fiscal 2003 and fiscal
2002, respectively. Our largest customers during fiscal 2003 were Avocent and
Vitelcom, accounting for approximately 23% and 13% of net sales, respectively.
Our largest customer during fiscal 2002 was Motorola, accounting for
approximately 78% of net sales. No other customer accounted for more than 10%
of net sales in fiscal 2003 or fiscal 2002. 11




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Our principal customers have varied from year to year, and our principal
customers may not continue to purchase services from us at current levels, if
at all. Significant reductions in sales to any of these customers, or the loss
of major customers, would seriously harm our business. If we are not able to
timely replace expired, canceled or reduced contracts with new business, our
revenue could be harmed. We are subject to lengthy development periods and product acceptance cycles. OEMs make the determination during their product development programs
whether to utilize our services or pursue other alternatives. This requires us
to make significant investments of time and capital well before our customers
introduce their products utilizing our services and before we can be sure that
we will generate any significant revenue from our customers or even recover our
investment. During a customers entire product development process, we face the risk
that our services will fail to meet our customers technical, performance, or
cost requirements or will be replaced by an alternative solution. Even if we
provide our services in a manner satisfactory to our customer, the customer may
delay or terminate its product development efforts. The occurrence of any of
these events would adversely affect our operating results. The lengthy
development period also means that it is difficult to immediately replace an
unexpected loss of existing business. We do not have long-term commitments from our customers. Our customers generally do not provide us with firm, long-term volume
commitments. In addition, the worldwide adverse economic slowdown that started
in 2001 has led to substantially shortened lead times on purchase orders.
Although we sometimes enter into manufacturing contracts with our customers,
these contracts clarify order lead times, inventory risk allocation, and
similar matters rather than provide firm, long-term volume commitments. As a
result, customers can generally cancel commitments or reduce or delay orders at
any time. The cancellation, delay, or reduction of customer commitments could
result in reduced revenue and in our holding excess and obsolete inventory or
having unabsorbed manufacturing capacity. The large percentage of our revenue
from customers in the electronics industry, which is subject to severe
competitive pressures, rapid technological change, and product obsolescence,
increases our inventory and overhead risks. In addition, we make significant decisions, including determining the
levels of business that we will seek or accept, production schedules,
component procurement commitments, facility requirements, personnel needs, and
other resource requirements, based on our estimates of customer requirements.
The short-term nature of our customers commitments and the possibility of
rapid changes in demand for their products reduce our ability to estimate
accurately the future requirements of those customers. Because many of our
costs and operating expenses are relatively fixed, a reduction in customer
demand can harm our gross margins and operating results. On occasion, customers may require rapid increases in production, which
can stress our resources and reduce operating margins. Although we have
increased our manufacturing capacity over the past few years, we may not have
sufficient capacity at any given time to meet all of our customers demands or
to meet the requirements of a specific project. Our operating results have been materially and adversely affected in the
past as a result of the failure to obtain anticipated orders and deferrals or
cancellations of purchase commitments because of changes in customer
requirements. For example, we have made announcements in the past that sales
would not meet our expectations because of delays in customer programs. We depend on the market acceptance of the products of our customers. In most instances, we do not provide services to end users. As a result,
our success depends almost entirely upon the widespread market acceptance of
our customers products. Any significant slowdown in the demand for our
customers products would adversely affect our business. Because our success depends on the widespread market acceptance of our
customers products, we must identify industries that have significant growth
potential and establish relationships with OEMs in those industries. Our
failure to identify potential growth opportunities or establish relationships
with OEMs in those industries would adversely affect our business. 12




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Our dependence on the success of the products of our customers exposes us
to a variety of risks, including the following:  
    
    our ability to provide significant design and manufacturing
services for customers on a timely and cost-effective basis;
    
    our success in maintaining customer satisfaction with our
design and manufacturing services;
    
    our ability to match our design and manufacturing capacity
with customer demand and to maintain satisfactory delivery
schedules;
    
    customer order patterns, changes in order mix, and the level
and timing of orders placed by customers that we can complete in a
quarter; and
    
    the cyclical nature of the industries and markets we serve. Our failure to address these risks may cause our sales to decline. Shortages of components and materials may delay or reduce our sales and
increase our costs. We rely on a limited number of suppliers for many components used in our
manufacturing and assembly processes. We especially depend on a small number
of strategic suppliers for key components such as LCD glass and drivers. We do
not have any long-term supply agreements. At various times, there have been
shortages of some of the key electronic components. Our inability to obtain
sufficient quantities of components and other materials to provide our
electronics manufacturing services could result in reduced, delayed, or lost
orders, increased inventory, and underutilized manufacturing capacity. Any
reduction, delay, or loss of customer orders could adversely impact our
operating results. In addition, we may not be able to pass on component and
materials price increases to our customers, particularly in the case of turnkey
manufacturing agreements. We obtain many of the materials we use from a
limited number of foreign suppliers, particularly suppliers located in Asia.
As a result, we are subject to increased costs, supply interruptions, and
difficulties in obtaining materials. Our customers also may encounter
difficulties or increased costs in obtaining from others the materials
necessary to produce their products into which our product solutions are
incorporated. Our operating results may be adversely affected by excess inventory. We typically purchase components and other materials in anticipation of
customer orders based on customer forecasts. For a variety of reasons, such as
decreased OEM customer or end-user demand, we may not be able to utilize
various components or other supplies that we have purchased in anticipation of
customer demand. In such event, we could attempt to recoup our materials and
manufacturing costs by various means, including returning components to our
suppliers, disposing of excess inventory through other channels, or attempting
to require our OEM customers to purchase or otherwise compensate us for such
excess inventory. These efforts, however, may not be successful. To the
extent we are unsuccessful in recouping our materials and manufacturing costs,
our operating results would be adversely affected and excess inventory would
reduce our working capital. Our revenue and gross margins depend upon our ability to utilize our
manufacturing capacity. Our revenue and gross margins depend to a great extent upon our ability to
utilize our manufacturing capacity. We must balance the need to maintain
manufacturing capacity to fulfill new customers orders while maintaining
sufficient utilization of our manufacturing capacity to cover our fixed
overhead expenses. Like most EMS companies under current market conditions, we
have recently suffered from underutilized manufacturing capacity. As a result,
we are consolidating our display module manufacturing operations in Beijing and
closing those operations in Manila. There is no assurance that this
consolidation will resolve our overcapacity issues or that we will not
experience difficulties in satisfying any significant additional customer
demand for our manufacturing services. We must maintain satisfactory manufacturing yields and capacity. Our inability to maintain high levels of productivity or satisfactory
delivery schedules at our manufacturing facilities in Manila, Beijing, Penang,
Redmond, or Marlborough would adversely affect our operating results. The 13




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design and manufacture of electronic devices are highly complex processes
that are sensitive to a wide variety of factors, including the level of
contaminants in the manufacturing environment, impurities in the materials
used, and the performance of personnel and equipment. These problems could be
heightened by moving the manufacturing of products to different facilities. As
is typical in the EMS industry, at times we have experienced lower than
anticipated manufacturing yields and lengthening of delivery schedules. Any problems with our manufacturing operations could result in the
lengthening of our delivery schedules, reductions in the quality or performance
of our design and manufacturing services, and reduced customer satisfaction. Products we manufacture may contain design or manufacturing defects, which
could result in reduced demand for our services and liability claims against
us. We manufacture products to our customers specifications, which are highly
complex and may at times contain design or manufacturing errors or failures.
Any defects in the products we manufacture, or in the products we purchase,
whether caused by a design, manufacturing, or component failure or error, may
result in delayed services to customers or reduced or cancelled customer
orders. If these defects occur in large quantities or too frequently, our
business reputation also may be impaired. In addition, these defects may
result in liability claims against us. Our inability to maintain our technological expertise in design and
manufacturing processes would adversely affect our competitive condition. Our success depends on our ability to develop and provide design and
manufacturing services that meet the changing needs of our customers. This
requires us to anticipate and respond to technological changes in design and
manufacturing processes in a cost-effective and timely manner. To achieve this
goal, we continually evaluate the advantages and feasibility of new product
design and manufacturing processes. We cannot assure you that we will be
successful. We are exposed to intangible asset impairment. We have a substantial amount of intangible assets. These intangible assets
are generally attributable to acquisitions and represent the difference between
the purchase price paid for the acquired businesses and the fair value of net
tangible assets of the acquired businesses. We are required to evaluate
goodwill for impairment on at least an annual basis, and other intangibles
whenever changes in circumstances indicate that the carrying amount may not be
recoverable from estimated future cash flows. As a result of our annual and
other periodic evaluations, we may determine that the intangible asset values
should be written down to their fair values, which could result in material
charges that could be adverse to our operating results and financial position. We face risks associated with international operations. Our manufacturing operations in Manila, Penang, and Beijing, and our sales
and distribution operations in Europe and Asia, create a number of logistical
and communications challenges. Our international operations also expose us to
various economic, political, and other risks, including the following:  
    
    management of a multi-national organization;
    
    compliance with local laws and regulatory requirements as
well as changes in those laws and requirements;
    
    imposition of restrictions on currency conversion or the transfer of funds;
    
    the possibility of appropriation of our assets without just compensation;
    
    transportation delays or interruptions and other effects of less developed infrastructures;
    
    foreign exchange rate fluctuations;
    
    limitations on imports and exports; 14




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
    
    difficulties in staffing and managing foreign personnel and diverse cultures;
    
    employment and severance issues;
    
    overlap of tax issues;
    
    tariffs and duties;
    
    possible employee turnover or labor unrest;
    
    the burdens and costs of compliance with a variety of foreign laws; and
    
    political or economic instability in countries in which we
conduct business, includes possible terrorist acts. Changes in policies by the United States or foreign governments resulting
in, among other things, increased duties, higher taxation, currency conversion
limitations, restrictions on the transfer or repatriation of funds, limitations
on imports or exports, or the expropriation of private enterprises also could
have a material adverse effect on us. Any actions by our host countries to
reverse policies that encourage foreign investment or foreign trade also could
adversely affect our operating results. In addition, U.S. trade policies, such
as most favored nation status and trade preferences for certain Asian
nations, could affect the attractiveness of our services to our U.S. customers. We face risks associated with international trade and currency exchange. Political and economic conditions abroad may adversely affect our foreign
manufacturing and sales operations. Protectionist trade legislation in either
the United States or foreign countries, such as a change in the current tariff
structures, export or import compliance laws, or other trade policies, could
adversely affect our ability to provide design and manufacturing services in
foreign markets or for foreign customers and to purchase materials or equipment
from foreign suppliers. While we transact business predominantly in U.S. Dollars and bill and
collect most of our sales in U.S. Dollars, we collect a portion of our revenue
in non-U.S. currencies, such as the Chinese Renminbi. In the future, customers
increasingly may make payments in non-U.S. currencies, such as the Euro. In
addition, we account for a portion of our costs, such as payroll, rent, and
indirect operating costs, in non-U.S. currencies, including Philippine Pesos,
British Pounds Sterling, Malaysian Ringgit, and Chinese Renminbi. Fluctuations in foreign currency exchange rates could affect our cost of
goods and operating margins and could result in exchange losses. In addition,
currency devaluation can result in a loss to us if we hold deposits of that
currency. Hedging foreign currencies can be difficult, especially if the
currency is not freely traded. We cannot predict the impact of future exchange
rate fluctuations on our operating results. The risks described above are particularly important since sales outside
North America represented 46% of our net sales in 2003 and 86% of our net sales
in 2002. Sales in foreign markets, primarily Europe and Asia, to OEMs based in
the United States accounted for almost all of our international sales in both
of these periods. Our operating results have significant fluctuations. In addition to the variability resulting from the short-term nature of our
customers commitments, other factors contribute to significant periodic and
seasonal quarterly fluctuations in our results of operations. These factors
include the following:  
    
    the timing of customer orders;
    
    the volume of customer orders relative to our capacity;
    
    changes in economic conditions generally or in our customers markets;
    
    product introductions and market acceptance of new products
or new generations of products by customers and their competitors;
    
    evolution in the life cycles of customers products; 15




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
    
    timing of expenditures in anticipation of future customer orders;
    
    ability to manage inventory and inventory obsolescence;
    
    effectiveness in managing manufacturing processes and costs;
    
    changes in cost and availability of labor and components;
    
    product mix or our customers orders;
    
    pricing and other competitive pressures; and
    
    changes or anticipated changes in economic conditions. Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may decline. We must effectively manage our growth. To remain competitive, we must continue to make significant investments in
systems, equipment, and facilities. In addition, we must commit additional
significant sales and marketing resources to maintain our growth rates. As a
result of the increase in fixed costs and operating expenses, our failure to
increase sufficiently our net sales to offset these increased costs would
adversely affect our operating results. The failure to manage our growth effectively could adversely affect our
operations. We have substantially increased the number of our manufacturing
and design programs and plan to expand further the number and diversity of our
programs in the future. Our ability to manage our planned growth effectively
will require us to:  
    
    enhance our operational, financial, and management systems;
    
    expand our facilities and equipment; and
    
    successfully hire, train, and motivate additional employees,
including the technical personnel necessary to operate our
production facilities in Redmond, Marlborough, Manila, Penang, and
Beijing. The expansion and diversification of our service and customer base may
result in increases in our overhead and selling expenses. We also may be
required to increase staffing and other expenses as well as our expenditures on
capital equipment and leasehold improvements in order to meet the anticipated
demand of our customers. Customers, however, generally do not commit to firm
production schedules for more than a short time in advance. Any increase in
expenditures in anticipation of future orders that do not materialize would
adversely affect our profitability. Customers also may require rapid increases
in design and production services that place an excessive short-term burden on
our resources. From time to time, we may seek additional equity or debt financing to
provide for the capital expenditures required to maintain or expand our design
and production facilities and equipment. We cannot predict the timing or
amount of any such capital requirements at this time. If such financing is not
available on satisfactory terms, we may be unable to expand our business or to
develop new business at the rate desired and our operating results may suffer.
Debt financing increases expenses and must be repaid regardless of operating
results. Equity financing could result in additional dilution to existing
stockholders. We depend on key personnel. Our development and operations depend substantially on the efforts and
abilities of our senior management and technical personnel. The competition
for qualified management and technical personnel is intense. The loss of
services of one or more of our key employees or the inability to add key
personnel could have a material adverse effect on us. Although we maintain
non-competition and nondisclosure covenants with certain key personnel, we do
not have any fixed-term agreements with, or key person life insurance covering,
any officer or employee. 16




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Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value, and harm our operating results. We plan to continue to review opportunities to buy other businesses or
technologies that would complement our current manufacturing services, expand
the breadth of our markets, enhance our technical capabilities, or otherwise
offer other growth opportunities. In the past 18 months, we have acquired
businesses, technologies, assets, and goodwill from five companies, and we will
likely buy businesses, assets, or technologies in the future. If we make any
future acquisitions, we could issue stock that would dilute existing
stockholders percentage ownership, incur substantial debt, or assume
contingent liabilities. Our recent acquisitions, as well as potential future
potential acquisitions, involve numerous risks, including the following:  
    
    problems integrating the purchased operations, technologies,
products, systems or services with our own;
    
    unanticipated costs or hidden liabilities associated with the acquisition;
    
    diversion of managements attention from our existing businesses;
    
    potential compliance issues with regard to acquired companies
that did not have adequate internal controls;
    
    adverse effects on existing business relationships with suppliers and customers;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    potential loss of key employees and customers of purchased organizations. Our acquisition strategy entails reviewing and potentially reorganizing
acquired business operations, corporate infrastructure and systems, and
financial controls. Unforeseen expenses, difficulties, and delays frequently
encountered in connection with rapid expansion through acquisitions could
inhibit our growth and negatively impact our profitability. We may be unable
to identify suitable acquisition candidates or to complete the acquisitions of
candidates that we identify. Increased competition for acquisition candidates
may increase purchase prices for acquisitions to levels beyond our financial
capability or to levels that would not result in the returns required by our
acquisition criteria. In addition, we may encounter difficulties in
integrating the operations of acquired businesses with our own operations or
managing acquired businesses profitably without substantial costs, delays, or
other operational or financial problems. We may issue common or preferred stock and incur substantial indebtedness
in making future acquisitions. The size, timing, and integration of any future
acquisitions may cause substantial fluctuations in operating results from
quarter to quarter. Consequently, operating results for any quarter may not be
indicative of the results that may be achieved for any subsequent quarter or
for a full fiscal year. These fluctuations could adversely affect the market
price of our common stock. Our ability to grow through acquisitions will depend upon various factors, including the following:  
    
    the availability of suitable acquisition candidates at attractive purchase prices,
    
    the ability to compete effectively for available acquisition opportunities, and
    
    the availability of funds or common stock with a sufficient
market price to complete the acquisitions. As a part of our acquisition strategy, we frequently engage in discussions
with various companies regarding their potential acquisition by us. In
connection with these discussions, we and each potential acquisition candidate
exchange confidential operational and financial information, conduct due
diligence inquiries, and consider the structure, terms, and conditions of the
potential acquisition. In certain cases, the prospective acquisition candidate
agrees not to discuss a potential acquisition with any other party for a
specific period of time, grants us an option to purchase the prospective
business for a designated price during a specific time, and agrees to take
other actions designed to enhance the possibility of the acquisition, such as
preparing audited financial information. Potential acquisition discussions
frequently take place over a long period of time and involve difficult business
integration and other issues, including in some cases, management succession
and related matters. As a result of these and 17




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other factors, a number of potential acquisitions that from time to time
appear likely to occur do not result in binding legal agreements and are not
consummated. We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could adversely affect our business. Potential strategic alliances may not achieve their objectives. We have entered into various strategic alliances, such as our alliances
with OSRAM Opto Semiconductors for OLEDs, and we plan on entering into other
similar types of alliances in the future. Among other matters, we will explore
strategic alliances designed to enhance or complement our technology or to work
in conjunction with our technology; to increase our manufacturing capacity; to
provide necessary know-how, components, or supplies; and to develop, introduce,
and distribute products and services utilizing our technology and know-how.
Any strategic alliances may not achieve their strategic objectives, and parties
to our strategic alliances may not perform as contemplated. The market price of our common stock may be volatile. The market price of our common stock has been extremely volatile. Our
stock price increased dramatically during the three-year period ended December
31, 1994, but declined significantly during 1995 and 1996. Our stock price
increased again during 1997, but declined significantly in 1998. Our stock
price again increased significantly during 1999 and in early 2000, but suffered
a major decline in the second half of 2000 and again in 2001 and 2002. The
trading price of our common stock in the future could continue to be subject to
wide fluctuations in response to various factors, including the following:  
    
    variations in our quarterly operating results;
    
    announcements about the prospects or financial performance of
the industries or customers we serve;
    
    changes in analysts estimates of our financial performance;
    
    failure to meet performance estimates of securities analysts;
    
    general conditions in the electronics industry; and
    
    worldwide economic and financial conditions. In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many
technology-related companies and that often have been unrelated to the
operating performance of these companies. These broad market fluctuations and
other factors may adversely affect the market price of our common stock. Adverse trends in the electronics industry may adversely affect our operating
results. Our business depends on the electronics industry, which is subject to
rapid technological change, short product life cycles, and margin pressures.
In addition, the electronics industry historically has been cyclical and
subject to significant downturns characterized by diminished product demand,
accelerated erosion of average selling prices, and production over-capacity.
We seek to reduce our exposure to industry downturns and cyclicality by
providing design and production services for leading companies in a variety of
rapidly expanding segments of the electronics industry. Despite these efforts,
economic conditions affecting the electronics industry in general or our major
customers may adversely affect our operating results. We could be required to expend substantive resources to comply with
governmental regulations. Our operations are subject to certain federal, state, and local regulatory
requirements relating to environmental, waste management, health, and safety
matters. As a publicly traded company in the United States, we are also
subject to federal and state governance and internal control requirements as
well as to the New York Stock Exchange listing requirements. We believe we
operate in substantial compliance with all applicable requirements. There can
be no assurance, however, that material costs and liabilities will not arise
from complying 18




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with these or from new, modified, or more stringent requirements. In
addition, our past, current, or future operations, including any operation we
have acquired, may give rise to claims of exposure by employees or the public
or to other claims or liabilities relating to environmental, waste management,
or health and safety concerns. The costs of complying with all regulatory
requirements may be material when compared to our revenue. Change in control provisions may adversely affect existing stockholders. Our restated certificate of incorporation and the Delaware General
Corporation Law contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of our company, even
when these attempts may be in the best interests of stockholders. Our restated
certificate also authorizes the board of directors, without stockholder
approval, to issue one or more series of preferred stock, which could have
voting and conversion rights that adversely affect or dilute the voting power
of the holders of common stock. Delaware law also imposes conditions on
certain business combination transactions with interested stockholders. We have also adopted a stockholders rights plan intended to encourage
anyone seeking to acquire our company to negotiate with our board of directors
prior to attempting a takeover. While the plan was designed to guard against
coercive or unfair tactics to gain control of our company, the plan may have
the effect of making more difficult or delaying any attempts by others to
obtain control of our company. We do not pay cash dividends. We have never paid any cash dividends on our common stock and do not
anticipate that we will pay cash dividends in the foreseeable future. Instead,
we intend to apply earnings to the expansion and development of our business. 
 ITEM 2. PROPERTIES Location
    
    Type
    
    Leased or Owned
    
    Square FeetTempe, Arizona, USA
    
    Administrative; sales; design
    
    Owned1
    
    97,0002Redmond, Washington, USA
    
    Manufacturing; sales (3
separate locations)
    
    Leased
    
    
    95,600Marlborough,Massachusetts, USA
    
    Manufacturing; sales
    
    Leased
    
    
    20,000Orlando, Florida, USA
    
    Sales
    
    Leased
    
    
    26,800Manila, Philippines
    
    Manufacturing
    
    Leased
    
    
    71,000Penang, Malaysia
    
    Manufacturing; design; sales
    
    Leased
    
    
    120,000Beijing, Republic of China
    
    Manufacturing; design sales
    
    Owned
    
    
    54,900Swindon, England
    
    Sales
    
    Leased
    
    
    3,100
 1 Held for sale 2 We lease approximately 42,500 square feet of space to Brillian Corporation. 
 ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which we are a party or to which any of
our properties are subject, other than routine litigation incident to our
business that is covered by insurance or an indemnity or that we do not expect
to have a material adverse effect on our company. It is possible, however,
that we could incur claims for which we are not insured or that exceed the
amount of our insurance coverage. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 19




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been listed on the New York Stock Exchange under the
symbol TFS since December 29, 1994. The following table sets forth the
quarterly high and low sales prices of our common stock as reported on the New
York Stock Exchange for the periods indicated: High
    
    Low2002:First Quarter
    
    $
    17.80
    
    
    $
    12.19Second Quarter
    
    
    15.85
    
    
    
    9.05Third Quarter
    
    
    10.73
    
    
    
    4.55Fourth Quarter
    
    
    7.45
    
    
    
    3.622003:First Quarter
    
    $
    6.34
    
    
    $
    3.67Second Quarter
    
    
    6.94
    
    
    
    4.89Third Quarter
    
    
    9.76
    
    
    
    5.51Fourth Quarter
    
    
    6.77
    
    
    
    4.642004:First Quarter (through March 8, 2004)
    
    $
    6.26
    
    
    $
    4.19
 As of March 8, 2004, there were approximately 603 holders of record of our
common stock. The closing sale price of our common stock on the New York Stock
Exchange on March 8, 2004 was $6.26 per share. Our policy is to retain earnings to provide funds for the operation and
expansion of our business. We have never paid cash dividends on our common
stock and do not anticipate that we will do so in the foreseeable future. The
payment of dividends in the future will depend on our growth, profitability,
financial condition, covenants in loan documents, if any, and other factors
that our board of directors may deem relevant. 
 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data presented below are derived from
our consolidated financial statements. The balance sheet data as of December
31, 2002, and 2003 and statements of operations data for the fiscal years ended
December 31, 2001, 2002, and 2003 were derived from the consolidated financial
statements and notes included elsewhere in this report hereto that have been
audited by Deloitte & Touche LLP, independent auditors. The selected financial
data should be read in conjunction with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and the Notes thereto included elsewhere in this report. Years Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands, except per share data)Consolidated Statements of Operations Data:Net sales
    
    $
    147,210
    
    
    $
    159,329
    
    
    $
    117,200
    
    
    $
    86,587
    
    
    
    159,018Costs and expenses:Cost of sales
    
    
    117,536
    
    
    
    124,284
    
    
    
    115,820
    
    
    
    78,718
    
    
    
    155,125Selling, general, and administrative
    
    
    10,544
    
    
    
    8,460
    
    
    
    8,828
    
    
    
    10,382
    
    
    
    17,524Research, development, and engineering
    
    
    5,400
    
    
    
    7,053
    
    
    
    8,623
    
    
    
    4,913
    
    
    
    4,742Loss (gain) on sale of assets
    
    
    
    
    
    
    63
    
    
    
    1,371
    
    
    
    4,545
    
    
    
    (25
    )Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    256
    
    
    
    2,043133,480
    
    
    
    139,860
    
    
    
    134,642
    
    
    
    98,814
    
    
    
    179,409Operating income (loss)
    
    
    13,730
    
    
    
    19,469
    
    
    
    (17,442
    )
    
    
    (12,227
    )
    
    
    (20,391
    )Other income (expense), net
    
    
    (18
    )
    
    
    7,258
    
    
    
    7,270
    
    
    
    3,492
    
    
    
    864Minority interest in loss (income) of
consolidated subsidiary
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    84
    
    
    
    (36
    )
 20




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Years Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands, except per share data)Income (loss) from continuing operations
before income taxes
    
    
    13,712
    
    
    
    26,727
    
    
    
    (10,005
    )
    
    
    (8,651
    )
    
    
    (19,563
    )Provision for (benefit from) income taxes
    
    
    4,619
    
    
    
    7,968
    
    
    
    (4,172
    )
    
    
    (3,921
    )
    
    
    14,338Income (loss) from continuing operations
    
    
    9,093
    
    
    
    18,759
    
    
    
    (5,833
    )
    
    
    (4,730
    )
    
    
    (33,901
    )Loss from discontinued operations
    
    
    (2,169
    )
    
    
    (3,925
    )
    
    
    (11,931
    )
    
    
    (12,241
    )
    
    
    (10,552
    )Net income (loss)
    
    $
    6,924
    
    
    $
    14,834
    
    
    $
    (17,764
    )
    
    $
    (16,971
    )
    
    $
    (44,453
    )Earnings (loss) per common share:Basic:Net income (loss) from continuing operations
    
    $
    0.58
    
    
    $
    0.92
    
    
    $
    (0.27
    )
    
    $
    (0.22
    )
    
    $
    (1.59
    )Net income (loss)
    
    $
    0.44
    
    
    $
    0.73
    
    
    $
    (0.83
    )
    
    $
    (0.79
    )
    
    $
    (2.09
    )Diluted:Net income (loss) from continuing operations
    
    $
    0.57
    
    
    $
    0.87
    
    
    $
    (0.27
    )
    
    $
    (0.22
    )
    
    $
    (1.59
    )Net income (loss)
    
    $
    0.43
    
    
    $
    0.69
    
    
    $
    (0.83
    )
    
    $
    (0.79
    )
    
    $
    (2.09
    )Weighted average number of common shares:Basic
    
    
    15,563
    
    
    
    20,457
    
    
    
    21,401
    
    
    
    21,465
    
    
    
    21,301Diluted
    
    
    16,005
    
    
    
    21,636
    
    
    
    21,401
    
    
    
    21,465
    
    
    
    21,301
 December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands)Consolidated Balance Sheet Data:Working capital
    
    $
    60,853
    
    
    $
    194,492
    
    
    $
    169,123
    
    
    $
    107,885
    
    
    $
    59,640Total assets
    
    
    126,930
    
    
    
    267,843
    
    
    
    245,888
    
    
    
    222,694
    
    
    
    167,237Debt and capital leases
    
    
    
    
    
    
    2,706
    
    
    
    2,706
    
    
    
    2,734
    
    
    
    11,851Stockholders equity
    
    
    101,220
    
    
    
    242,002
    
    
    
    223,944
    
    
    
    205,668
    
    
    
    117,032
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview Current Operations We are a global provider of electronics manufacturing services, or EMS. We
design and/or manufacture printed circuit board assemblies, radio frequency, or
RF, modules, display modules and systems, and complete systems for customers in
the automotive, computing, consumer, industrial, medical, and
telecommunications industries. Our services include advanced engineering
support, designed for services, automated printed circuit board assembly,
in-circuit and functional testing, systems level integration and box build,
turnkey packaging, fulfillment services, and turnkey supply chain management
services, all of which enable our customers the ability to outsource all stages
of product engineering, design, development, materials procurement and
management, manufacturing, and testing. Unlike most EMS companies, our design
and manufacturing services include a distinctive competence in display modules
and systems and the integration of display modules and systems into other
products. These display module and systems include monochrome and color liquid
crystal display, or LCD, components, organic light emitting diodes, or OLEDs,
and flat panel monitors. The products we manufacture for customers are of varying sizes and have
varying levels of integration. The typical design program life cycle of a
custom-designed product is three to 15 months and includes technical design,
prototyping, pilot manufacturing, and high-volume manufacturing. The cycle is
shorter in products where no display is involved and/or where the customer has
already completed the design. Several factors impact our gross margins, including manufacturing
efficiencies, product mix, product differentiation, product uniqueness,
inventory management, and volume pricing. We have factories in Washington and
Massachusetts in the United States and in the Philippines, Malaysia, and China.
In Washington and in Malaysia, we provide engineering support, automated
printed circuit board assembly, in-circuit and functional testing, systems
integration and box build, complete supply chain management, and turnkey
packaging and fulfillment services. In Massachusetts, we provide aftermarket
customization of flat panel displays. In the Philippines and China, we assemble
displays into modules and are adding some of the manufacturing services 21




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offered in Washington and Malaysia. We also assemble RF modules in the
Philippines. In the first quarter of 2004, we announced that we are
consolidating our overseas LCD module operations in China. We estimated the
cost of that reorganization at $1.2 million, most of which will occur in the
first quarter of 2004. Once that consolidation has occurred, the Philippines
facility will focus only on RF modules. Selling, general, and administrative expense consists principally of
administrative and selling costs; salaries, commissions, and benefits to
personnel; and related facility costs. In general, these costs have risen as a
result of the acquisitions we have completed in the last fifteen months. We
make substantially all of our sales directly to OEMs through a sales force that
consists mainly of direct technical sales persons but also includes a small
representative network. As a result, there is no material cost of distribution
in our selling, general, and administrative expense. Research, development, and engineering expense consists principally of
salaries and benefits to design engineers and other technical personnel,
related facility costs, process development costs, and various expenses for
projects, including new product development. In general, these costs have
declined in the last few years because we no longer do any pure research work.
Thus, most of our expense relates to the development engineering costs
associated with preproduction design and prototyping of custom products and the
conceptual formulation and design of potential standard display products. We also have expenses relating to the amortization of intangibles. Those
expenses relate to amortizable intangibles acquired in acquisitions as
described below. Future Operations Our long-term model is to have gross margins of 12 percent to 15 percent
and operating costs of between 6 percent and 8 percent of revenue. Our goal is
to achieve an interim model within 18 months of 10 percent to 12 percent gross
margins with operating costs of between 8 percent and 11 percent of revenue.
The drivers to achieving our long-term and interim models are improving the
utilization of our off-shore factories through increased revenue and improving
our gross margins by focusing on markets, like gaming and medical, which value
our unique combination of global EMS capabilities and display expertise. Historic Operations Prior to 2002, our business strategy was to seek large-volume display
programs from major original equipment manufacturers, or OEMs, typically
100,000 units per year or higher, with selling prices of approximately $7 per
unit. From 1998 to 2002, substantially all of our large volume business was in
providing display modules for Motorola handsets. In 2001, new monochrome design
wins in that business became unprofitable; thus, we began to refocus our
strategy to expand our customer base and our product and service offering. As
a result of our change in strategy, none of our design wins in the last several
years have been with the handset group at Motorola. Consequently, Motorola
business declined sharply, accounting for 78% of our revenue in 2002 and less
than 10% of our revenue in 2003. We further modified our strategy in late 2002
to also begin focusing on providing manufacturing services for products that do
not need displays. The substantial shift in our business strategy has resulted in increased
selling and administrative costs. By previously focusing on one market and one
customer, we were able to be very efficient in the utilization of our selling
and administrative groups. By contrast, we now have many more customers
requiring more sales interface. In addition, administrative costs have
increased as we have increased the number of satellite operations in the United
States and around the world. In addition, the shift in sales strategy from a
high-volume focus to a more value-add focus has resulted in reduced volumes at
higher selling prices. The reduced volumes have resulted in some excess
capacity at our factories overseas. Prior to 2001, we used our own front-end LCD production line in the
Phoenix area 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 traditionally shipped LCDs to our facilities in the
Philippines and China for assembly into modules. During 2001, we decided to
move our front-end LCD manufacturing line to Asia. During 2002, we signed a
Cooperative Agreement with a Chinese company under which we agreed to sell the
equipment used in our front-end LCD line 22




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and establish a supply agreement. Under the terms of the Cooperative
Agreement, in exchange for our front-end LCD equipment, we received a total of
$3.0 million in cash. In the second quarter of 2002, as a result of signing
the Cooperative Agreement, we realized a charge of $4.5 million for the
write-down on the LCD equipment sold to the Chinese company. This charge was
reported as a separate line item in operating expense. In connection with the
Cooperative Agreement, we received $2.1 million in 2002, all of which was
applied against the $3.0 million sales price and recorded as a reduction in the
carrying value of the LCD equipment held for sale. The sale of the equipment
is now complete, and we received the remaining $900,000 payment in 2003. As a result of the foregoing, we have substantially changed our business
since late in 2002. We have reduced our concentration in Motorola revenue. The
selling price of the products we manufacture and sell now range up to $4,000
per unit. We have numerous customers in six principal markets. We have expanded
our business both through organic growth and through the acquisitions of AVT,
ETMA, Unico, and Integrex. We have also expanded through the license
arrangement with Data International and through our manufacturing agreement
with Microtune. Acquisitions and Strategic Transactions In September 2002, we purchased the assets and ongoing business of AVT,
located in Marlborough, Massachusetts, a privately held company that
specializes in the design and integration of complex, high-resolution display
systems. As a result, we now design and provide customized and ruggedized flat
panel, touchscreen, and rackmount systems for OEMs in the industrial and
medical markets. We outsource display components from a variety of companies,
including Sony, Sharp, NEC, LG, and Samsung. The purchase price of the
acquisition was $12.0 million, which we paid entirely in cash. In December 2002, we purchased the stock of ETMA Corporation, located in
Redmond, Washington, a privately held electronic manufacturer for OEM customers
in the computer peripheral, medical monitoring, and Internet security
industries. As a result, we now offer the manufacturing capabilities of five
surface mount manufacturing lines, including one dedicated to new product
introduction and prototyping activity. We also provide engineering support,
automated printed circuit board assembly, in-circuit and functional testing,
systems integration and box build, complete supply chain management, and
turnkey packaging and fulfillment services. The purchase price of the ETMA
acquisition was $38.1 million, which we paid entirely in cash. In January 2003, we signed licensing and manufacturing agreements with
Data International Co., Ltd. of Taiwan. Under those agreements, we became the
exclusive channel in the Americas for standard and custom LCD products
manufactured by Data International. We also have the right to sell those
products through our worldwide channels. The agreements provide us with access
to a full suite of standard display products that round out our existing
standard product portfolio. In conjunction with the agreement, we established a
sales office in Orlando, Florida, and hired sales and applications engineering
personnel from a distributor that had previously supported Data Internationals
products. The cost of the license was $3.9 million, of which $1.0 million was
paid upon signing and approximately $1.5 million was paid in the first quarter
of 2004. The remaining $1.4 million is due in January 2005. The remaining
balance due is subject to reduction if certain margin targets are not met. In March 2003, we signed an agreement with Microtune, Inc. in which we
agreed to manufacture, assemble, and test Microtunes radio frequency, or RF,
tuner modules and wireless module products in our manufacturing facility in
Manila, the Philippines. As part of the agreement, Microtune sold to us certain
of its own equipment and inventory for $8.2 million, of which $2.7 million was
a note payable due in September 2003, and contracted with us to provide 100% of
Microtunes current demand for fully assembled RF subsystems. We also hired
approximately 500 Microtune employees in Manila. In October 2003, we paid off
approximately $300,000 of the $2.7 million note payable to Microtune and
entered into an agreement to cancel the remaining $2.4 million balance on that
note in exchange for the return of certain excess inventory to Microtune. As a
result of this transaction, we now provide 100% of the manufacturing
outsourcing for Microtunes RF module products. In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang. Unico
was an electronic manufacturer for OEM customers in the computer, computer
peripheral, and communications industries. The Unico business was acquired by
TFS Electronics Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a joint
venture owned 60% by an overseas TFS subsidiary and 40% by Unico Holdings Bhd.,
the former parent of Unico. Unico Holdings is the investment arm of the Chinese
Chamber of Commerce of Malaysia. Our share of the initial cost of capitalizing
TFS-Malaysia was $3.8 million and 23




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Unico Holdings share was $2.5 million, most of which will be used for working
capital. TFS-Malaysia purchased $4.1 million in inventory from Unico, of which
$2.7 million was paid at the time of the purchase and $1.4 million was
subsequently paid. No advance payment was required for the acquisition of the
property, plant, and equipment of Unico, all of which is leased from the
seller. The equipment lease is accounted for as a capital lease payable by
TFS-Malaysia. The principal balance on that lease was $8.1 million as of
December 31, 2003. In February 2004, we entered into a transaction with Integrex, a
Seattle-based electronics manufacturing services company liquidating its
business. Under that transaction, we bought the raw materials inventory of
Integrex and hired certain of its employees. We also obtained the rights to
most of its customers and agreed with those customers that we would manufacture
those customers products in our Redmond manufacturing facility. In exchange
for those customer rights, we agreed to pay a license fee for between 15 and 24
months based on revenue actually received by us from the sale of products to
the former Integrex customers. A portion of that license fee was paid in
advance at closing. Discontinued Operations On September 1, 2003, we transferred all of the net assets of our
microdisplay division, plus approximately $20.9 million in cash, into a newly
created Delaware corporation called Brillian Corporation. On September 15,
2003, we spun off Brillian by distributing all of the outstanding common stock
of Brillian to our stockholders on a pro rata basis, with each of our
stockholder receiving one share of Brillian common stock for each four shares
of our common stock held. Brillian is now traded on the Nasdaq National Market
under the symbol BRLC. Brillian had $44.1 million of net assets on the
spin-off date. For more information on the reason for the spin-off, as well as
the description of business and risks associated with the spin-off, please
refer to the Form 10 and other filings by Brillian with the Securities and
Exchange Commission. The microdisplay business that we transferred to Brillian
is now reported in our consolidated financial statements as Discontinued
Operations. 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 judgments 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 and judgments,
including those related to sales returns, bad debts, inventories, fixed assets,
intangible assets, income taxes, and contingencies. 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
judgments 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 judgments and estimates used in the preparation of our financial
statements. We recognize revenue from product 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 has passed to the customer; the fee is fixed or determinable;
and collection of the resulting receivable is reasonably assured. This means
that when a product is shipped from one of our factories under the terms FOB
Factory then the risk of loss passes to the customer when the product leaves
our factory and we recognize revenue at that time. On the other hand, when a
product is shipped FOB Destination then the risk of loss during transit is
maintained by us. Thus, we recognize revenue when the product is accepted by
the customer. Shipping terms with one of our major customers is FOB
Destination, and many of those products are shipped by water taking four to six
weeks to reach their destination. As a result, we had $3.6 million of product
in transit at the end of the year and in our finished goods inventory. Sales allowances are estimated based upon historical experience of sales
returns. To establish our allowance for doubtful accounts, we perform credit
evaluations of our customers financial condition, along with analyzing past
experience, and make provisions for doubtful accounts based on the outcome of
our credit valuations and analysis. We evaluate the collectability of our
accounts receivable based on specific customer circumstances, 24




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current economic trends, historical experience with collections and the
age of past due receivables. We believe the allowances that we have
established are adequate under the circumstances; however, a change in the
economic environment or a customers financial condition could cause our
estimates of allowances, and consequently the provision for doubtful accounts
to change. We recognize revenue related to engineering and tooling services after
service has been rendered, which is determined based upon completion of
agreed-upon milestones or deliverables. We write down our inventory for estimated obsolescence or unmarketable
inventory. We write down our inventory to estimated market value based upon
assumptions and estimates about future demand and market conditions. If actual
market conditions are less favorable than those projected by us, additional
inventory write-downs may be required. We made two significant estimates
regarding inventory at the end of 2003. First, we are holding approximately
$778,000 of inventory relating to a program cancelled by a customer.
Approximately 47% of that inventory related to material that we had purchased
to fulfill purchase orders issued to us by that customer and 53% of that
inventory related to material that we purchased in connection with a general
business agreement entered into with respect to that customer regarding
long-lead time parts. As a result of initial discussions with the customer, we
have not established a reserve for any of this inventory. Second, we learned
from another customer prior to the end of the year that a product shipped by
us to them contained potentially defective parts. Those potentially defective
parts came from a component supplied to us by a vendor specified by our
customer. We are investigating whether those parts can be repaired or whether
they are unrepairable. If they are unrepairable, then approximately $1.2
million of inventory that we are holding would be worthless. It is our belief
that such parts can be repaired. It is also our belief that if such parts
cannot be repaired, then the liability for such worthless inventory would lie
with the vendor of the defective component. As a result, we did not record a
reserve for any potentially bad inventory relating to this second issue. Pursuant to Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
income taxes are recorded based on current year amounts payable or refundable,
as well as the consequences of events that give rise to deferred tax assets and
liabilities. We base our estimate of current and deferred taxes on the tax
laws and rates that are currently in effect in the appropriate jurisdiction.
Changes in tax laws or rates may affect the current amounts payable or
refundable as well as the amount of deferred tax assets or liabilities. At the end of the second quarter of 2003, we had $19.8 million of net
deferred tax assets, resulting primarily from net operating loss and tax credit
carryforwards. SFAS No. 109 requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset
will not be realized. In determining whether a valuation allowance is
required, we are required to take into account all positive and negative
evidence with regard to the utilization of a deferred tax asset, including our
past earnings history, market conditions, management forecasts of future
profitability, the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization
of a deferred tax asset, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset. SFAS No. 109 further states that it is difficult to conclude that a
valuation allowance is not needed when there is negative evidence such as
cumulative losses in recent years. Therefore, despite the fact that a major
portion of the losses came from our spun-off microdisplay division, the
expectation in the third quarter of 2003 was that we would have three years of
cumulative losses. Those cumulative losses weighed heavily in the overall
required assessment and outweighed our forecasted future profitability and
expectation that we will be able to utilize all of our net operating loss
carryforwards. As a result, in the third quarter of 2003, we recorded a charge
to establish a full valuation allowance against our deferred tax asset. We
expect to continue to record a full valuation allowance on future tax benefits
until we return to sustained profitability. During 2003, our income tax
expense was $14.3 million as a result of our full valuation allowance. Long-term assets, such as property, plant, and equipment, intangibles,
goodwill, and other investments, are originally recorded at cost. On an
on-going basis, we assess these assets to determine if their current recorded
value is impaired. When assessing these assets, we consider projected future
cash flows to determine if impairment is applicable. These cash flows are
evaluated for objectivity by using weighted probability techniques and also
comparisons of past performance against projections. Assets may also be
evaluated by identifying independent market values of assets that we believe to
be comparable. If we believe that an assets value was impaired, we would 25




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write down the carrying value of the identified asset and charge the impairment
as an expense in the period in which the determination was made. Results of Operations The following table sets forth, for the periods indicated, the percentage
of net sales of certain items in our Consolidated Financial Statements. Years Ended December 31,2001
    
    2002
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    98.8
    
    
    
    90.9
    
    
    
    97.6Selling, general, and administrative
    
    
    7.5
    
    
    
    12.0
    
    
    
    11.0Research, development and engineering
    
    
    7.4
    
    
    
    5.7
    
    
    
    3.0Loss (gain) on sale of assets
    
    
    1.2
    
    
    
    5.2
    
    
    
    Amortization of customer lists
    
    
    
    
    
    
    0.3
    
    
    
    1.3114.9
    
    
    
    114.1
    
    
    
    112.9Operating loss
    
    
    (14.9
    )
    
    
    (14.1
    )
    
    
    (12.9
    )Other income, net
    
    
    6.2
    
    
    
    4.0
    
    
    
    0.6Minority interest in loss of
consolidated subsidiary
    
    
    0.1
    
    
    
    0.1
    
    
    
    Loss from continuing operations
before income taxes
    
    
    (8.6
    )
    
    
    (10.0
    )
    
    
    (12.3
    )Provision for (benefit from) income taxes
    
    
    (3.6
    )
    
    
    (4.5
    )
    
    
    9.0Loss from continuing operations
    
    
    (5.0
    )
    
    
    (5.5
    )
    
    
    (21.3
    )Loss from discontinued operations
    
    
    (10.2
    )
    
    
    (14.1
    )
    
    
    (6.7
    )Net loss
    
    
    (15.2
    )%
    
    
    (19.6
    )%
    
    
    (28.0
    )%
 Year ended December 31, 2003 compared to year ended December 31, 2002 Overview of 2003.This was a year of transition for us. Prior to late
2002, we were a monochrome custom LCD module supplier servicing primarily
Motorola in the handset market. Beginning in the second half of 2002, we
expanded our capabilities to include standard, color and large-format display
products. More importantly, as a result of several acquisitions, we became a
broad-based electronics manufacturing services company offering services such
as advanced printed circuit board assembly, RF module assembly, and box build.
In addition, we made the decision in 2003 to spin-off our research-intensive
microdisplay business to Brillian. Finally, we ceased manufacturing display
modules for Motorolas handset business in the second half of 2003. This rapid
change resulted in several issues during the year, including integration issues
with the RF module business, excess capacity at the display module factories,
and negative margins on new color display products. In the fourth quarter of
2003, we remedied the initial negative margin issues on the color display
products. We also made improvements in the manufacturing issues we had with the
RF modules. In addition, in the first quarter of 2004, we announced that we are
consolidating our display module operations in China by closing the display
module operations in the Philippines. It is anticipated that the consolidation
will help, but not completely remedy, our excess capacity issue in display
modules. Among our principal focuses in 2004 is successfully transitioning the
LCD display operations to China, increasing the utilization of our Asian
factories, and increasing our gross margins. Net Sales.Net sales increased 83.6% to $159.0 million in 2003 from $86.6
million in 2002. The increase in revenue was primarily as a result of
additional manufacturing business in Redmond and Malaysia of $66.4 million,
growth of our RF module business of $10.3 million, the addition of our standard
product displays from Data International of $15.9 million, and sales
of color display modules of $24.7 million. Conversely, our sales to Motorola
declined, both in dollars and as a percentage of our net sales. Motorola
accounted for less than 10% of our net sales in 2003 compared to 78% in 2002.
We had two customers that each exceeded more than 10% of our net sales in 2003.
Avocent, which is in the computer peripherals business, accounted for 23% of
our net sales, and Vitelcom, a European telecom company, accounted for 13% of
our net sales. 26




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In 2003, our sales were distributed over six major markets: automotive,
computing, consumer, industrial, medical/instrumentation, and
telecommunications. By contrast, in 2002, we were highly concentrated with
82.0% of our sales coming from a single market, telecommunications. Our net
sales distributed by industry were as follows: Industry
    
    2002
    
    2003Computing
    
    
    7
    %
    
    
    38
    %Telecom
    
    
    82
    %
    
    
    28
    %Medical
    
    
    4
    %
    
    
    13
    %Industrial
    
    
    5
    %
    
    
    10
    %Consumer
    
    
    1
    %
    
    
    6
    %Automotive
    
    
    1
    %
    
    
    5
    %
 Geographically, in 2003, 54.0% of our sales were in the United States;
20.5% of our sales were in Asia; and 25.5% of our sales were in Europe. Our
recent trend has shown increased sales in the United States and Europe. Our
increased sales in the United States were primarily a result of several
recently acquired businesses and because of increased display-oriented
manufacturing business. Our increased sales in Europe were primarily as a
result of the increased sales of color LCD modules to a European handset
manufacturing company. Asia sales have declined because of the reduced sales
to Motorola, most of which were in China. Not including Motorola, however, the
trend has been that our sales in Asia are increasing. Most of our Asian sales
are to U.S.-based, multinational companies with factories located in Asia. Cost of Sales.Cost of sales increased to 97.6% of net sales in 2003 from
90.9% in 2002. Our gross margin is equal to the difference between our revenue
and our cost of sales. Consequently, our company-wide gross margin in 2003 was
$3.9 million, or 2.4% of net sales. For products manufactured in Redmond,
Marlborough, and Penang, our gross margin was higher than this aggregate gross
margin. For products manufactured in Beijing and Manila, the gross margins were
lower than the aggregate gross margin for three reasons. First, the unit volume
of our sales in Beijing and Manila was lower because of the reduced sales to
Motorola and because the replacement sales to other customers have lower
volumes but higher selling prices. These reduced manufacturing volumes
resulted in under-absorption of our fixed manufacturing costs. Second, in
Manila the gross margins on our color display products were negative because of
introductory pricing on new products and because we had not obtained expected
pricing reductions from vendors of color panels. Third, we were still in the
process of ramping up our RF module manufacturing in Manila and moving those
processes from Microtunes factory to ours. As a result, those products sold
at below breakeven during the ramp-up phase. We expect over capacity to
continue in the next year at some of our Asian factories. We are partially
addressing this under utilization by consolidating our display module assembly
operations in Beijing, which will result in reorganization costs in Manila as
we right-size that organization to focus on RF. Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 68.3% to $17.5 million in 2003 from $10.4
million in 2002. As a percentage of net sales, however, SG&A expense decreased
from 12.0% of net sales in 2002 to 11.0% of net sales in 2003. This change in
SG&A expense occurred primarily because of four factors: (1) the additional
SG&A costs associated with the acquired EMS business in Redmond of $2.9
million, (2) the additional SG&A costs associated with the acquired EMS
business in Penang of $1.5 million, (3) increased sales expenses as a result of
increased display sales of $1.2 million, and (4) the recording of expenses of
approximately $1.2 million associated with an arbitration claim we pursued
against J.D. Edwards, which has been settled. Research, Development, and Engineering Expense.Research, development,
and engineering expense decreased slightly to $4.7 million in 2003 from $4.9
million in 2002. Research, development, and engineering expense decreased as a
percentage of net sales, declining to 3.0% of net sales in 2003 from 5.7% of
net sales in 2002. Loss (Gain) on Sale of Assets.In 2003, we realized a gain of $25,000 for
the sale of certain assets compared to a loss of $4.5 million in 2002. The loss
in 2002 related to the sale of our front-end manufacturing LCD equipment,
described above in Overview. 27




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Amortization of Intangibles.During 2003, we had $2.0 million of
amortization relating to customer lists and distribution rights compared to
$256,000 amortization expense during 2002. The amortization in 2003 relates to
the acquisitions of AVT and ETMA and to the license agreement with Data
International, all described above in Overview. The amortizable asset
associated with AVT is $3.0 million and is being amortized over five years. The
amortizable asset associated with ETMA is $2.0 million and is being amortized
over three years. The amortizable asset associated with Data International is
$3.9 million and is being amortized over five years. Other Income (Expense), Net.Other income in 2003 was $864,000 compared
to $3.5 million in 2002. The primary difference was that interest income
decreased $2.6 million because of decreased cash and investments balances and
because the interest rate earned on investments was lower in 2003 than 2002.
The interest expense increased $886,000 and was primarily associated with the
capital leases for our equipment acquired in Malaysia and Redmond in the Unico
and ETMA acquisitions described above in Overview. In 2003, we reached a
settlement of our legal claim against J.D. Edwards and recorded the settlement
as other income of approximately $700,000. Minority Interest.We control and own 60% of the business in Malaysia.
Since that business had losses in 2003, we recorded a benefit of $36,000 to
account for the losses allocated to the minority interest holder compared to a
charge of $84,000 in 2002 relating to the winding-up of another investment with
a different minority partner. Provision for (Benefit from) Income Taxes.We recorded a provision for
income taxes of $14.3 million in 2003 compared to a benefit for income taxes of
$3.9 million for 2002. We recorded a charge in 2003 to establish a valuation
allowance against our deferred tax asset, which consists primarily of net
operating loss carryforwards, or NOLs. A further description of that allowance
in described above in Critical Accounting Policies and Estimates. The loss
from discontinued operation was net of a tax benefit of $6.7 million for the
year ended December 31, 2002. There was no tax benefit in 2003 for discontinued
operations. Net Loss.We had a net loss of $44.5 million, or $2.09 per diluted share,
in 2003 compared to a net loss of $17.0 million, or $0.79 per diluted share, in
2002. The net loss in 2003 included $10.6 million, or $0.50 per share, from
discontinued operations relating to our former microdisplay business. As
described above in Discontinued Operations, our microdisplay division was
spun off as a separate public company as of September 15, 2003, as Brillian
Corporation. The net loss for the Brillian discontinued operations in 2002 was
$12.3 million, or $0.57 per share. Although we are forecasting a per share
loss of between $0.55 and $0.59 in 2004, we do expect a return to profitability
in the fourth quarter of 2004 as we increase our production volume and mitigate
our excess capacity. We anticipate we will realize the benefit of
consolidating our display module assembly operations from Manila to Beijing in
the third quarter of 2004. Year
ended December 31, 2002 compared to year ended December 31, 2001 Net
Sales.Net sales decreased 26.1% to $86.6 million in
2002 from $117.2 million in 2001. The reduction was primarily
because of our reduced volume of business with our major customer,
Motorola. We shipped 9.5 million units to
Motorola in 2002 compared to 11.7 million units in 2001. In addition, the
average selling price of those Motorola units shipped in 2002 was substantially
lower than in 2001 because of pricing pressures in the high-volume, monochrome
LCD market. Shipments were lower to Motorola because of our strategic decision
not to seek business from customers that would produce very low or negative
gross margins. Cost of Sales.Cost of sales decreased to 90.9% of net sales in 2002 from
98.8% in 2001. This percentage decrease resulted primarily from cost-reduction
efforts undertaken throughout 2002. The cost of sales continued to be higher
than our long-range expectations because our fixed costs were under absorbed at
our overseas factories as a result of excess capacity. Selling, General, and Administrative Expense.Selling, general, and
administrative expense increased 18.1% to $10.4 million in 2002 from $8.8
million in 2001. In 2002, SG&A consisted primarily of fixed costs because we
had no distribution costs and a small sales force that focused on custom
products. Thus, SG&A increased in 2002, primarily as a result of our
acquisitions of AVT and ETMA. Research, Development, and Engineering Expense.Research, development,
and engineering expense decreased to $4.9 million in 2002 from $8.6 million in
2001 as we shifted resources into our microdisplay division, which is now
reported as discontinued operations. 28




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Loss (Gain) on sale of Assets.During the second quarter of 2002, we
signed a Cooperative Agreement with a Chinese company under which we agreed to
sell the equipment of our front-end manufacturing LCD line and establish a
supply agreement. We realized a charge of $4.5 million for the write-down on
the LCD equipment. This charge was reported as a separate line item in
operating expense. During 2001, we wrote off $1.4 million of costs relating to
the cancellation of our J.D. Edwards Enterprise Resource Planning System
implementation. Amortization of Intangibles.As a result of the acquisitions of AVT and
ETMA, we added a new line item in 2002 for operating costs related to the
amortization of intangible assets of customer lists that have definable lives.
We had no such expense in 2001 and $256,000 for 2002. Most of that expense
related to the acquisition of AVT. The initial total amount of amortizable
assets associated with AVT was $3.0 million. We also acquired ETMA Corporation
in the fourth quarter of 2002, and the initial total amount of amortizable
assets associated with ETMA was $2.0 million. The AVT-related assets will be
amortized over five years while the ETMA assets will be amortized over three
years. Other Income (Expense), Net.Other income in 2002 was $164,000, slightly
higher than other income of $4,000 in 2001. Net interest income in 2002 was
$3.3 million compared to $7.3 million in 2001. Benefit from Income Taxes.We recorded a benefit from income taxes of
$3.9 million in 2002 compared to a benefit for income taxes of $4.2 million in
2001. The Company had an effective tax rate of 45.3% in 2002 compared to an
effective tax rate of 41.7% in 2001. The difference was primarily a change in
relative operational results between U.S. and foreign jurisdictions and the
impact of recording a valuation allowance on foreign tax credits carry forwards
in 2002. In other words, a greater portion of our net loss in 2002 related to
higher tax rate jurisdictions, thereby causing the accrued tax benefit to be a
greater percentage of our net loss. Net Loss.In 2002, we recorded a net loss of $17.0 million, or $0.79 per
diluted share, compared to a net loss of $17.8 million, or $0.83 per diluted
share, in 2001. Continuing operations recorded a loss of $4.7 million, or
$0.22 per share, in 2002 compared to a loss of $5.8 million, or $0.27 per
share, in 2001. Discontinued operations recorded a net loss of $12.3 million,
or $0.57 per diluted share, in 2002 compared to a net loss of $12.0 million, or
$0.56 per diluted share, in 2001. Liquidity and Capital Resources At December 31, 2003, we had cash, cash equivalents, and short-term
investments of $33.1 million compared to $80.6 million at December 31, 2002.
The primary components of reduced cash, cash equivalents, and short-term
investments balances can be summarized for 2003 as follows: Operating Cash Flow
    
    $
    (1,994
    )Capital Expenditures and Acquisitions (a)
    
    $
    (13,499
    )Debt and Capital Lease Repayments
    
    $
    (4,456
    )Cash Used In and Contributed To Discontinued Operations
    
    $
    (30,092
    )
 (a) Includes the following lines from the cash flows: purchases of
property, plant, and equipment, proceeds from sale of assets, purchase of
intangibles, and acquisitions In
2003, we had $2.0 million in net cash outflow from operations compared
to $5.6 million in net cash inflow from operations in 2002. Our inventory turns
were 7.2 and day sales outstanding, or DSOs, were 51 days in 2003 compared with
5.5 inventory turns and 73 DSOs in 2002. Our depreciation and amortization
expense was $7.6 million in 2003 and $4.0 million in 2002. Our working capital was $59.6 million at December 31, 2003, down from
$107.9 million at December 31, 2002. Our current ratio at December 31, 2003 was
2.5-to-1 compared to 7.3-to-1 at December 31, 2002. The decrease in working
capital was primarily because of reduced cash balances. While we transact business predominantly in U.S. dollars and bill and
collect most of our sales in U.S. dollars, we collect a portion of our revenue
in non-U.S. currencies, such as the Chinese renminbi. In the future, customers
increasingly may make payments in non-U.S. currencies, such as the Euro. In
addition, we account for a 29




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portion of our costs, such as payroll, rent, and indirect operating costs,
in non-U.S. currencies, including Philippine Pesos, British Pounds Sterling,
Malaysian Ringgit, and Chinese Renminbi. Thus, fluctuations in foreign currency
exchange rates could affect our cost of goods and operating margins and could
result in exchange losses. In addition, currency devaluation can result in a
loss to us if we hold deposits of that currency. Hedging foreign currencies
can be difficult, especially if the currency is not freely traded. We cannot
predict the impact of future exchange rate fluctuations on our operating
results. These currency risks are particularly important since sales outside
North America represented 46% of our net sales in 2003 and 86% of our net sales
in 2002. Sales in foreign markets, primarily Europe and Asia, to OEMs based in
the United States accounted for almost all of our international sales in both
of these periods. We currently have no credit facility outstanding in the United States. We
expect to negotiate one or more credit facilities in 2004, although we do not
expect to need any such facility in the near future. Any such facility would
likely be secured by our working capital assets, our unencumbered building in
Tempe, Arizona, or both. In September 2003, we paid off our unsecured $2.7
million term loan to the Bank of China, but we have initiated discussions to
re-open that credit facility. The following tables list our contractual
obligations and commercial commitments: Payments due by PeriodContractual Obligations
    
    Total
    
    Less
    
    
    
    
    
    
    
    
    
    6 Years(in thousands)
    
    Obligations
    
    than 1 Year
    
    1-3 Years
    
    4-5 Years
    
    and OverNotes Payable
    
    
    2,956
    
    
    
    1,515
    
    
    
    1,441
    
    
    
    
    
    
    
    Operating Leases
    
    
    20,805
    
    
    
    3,778
    
    
    
    6,888
    
    
    
    2,493
    
    
    
    7,646Capital Leases
    
    
    8,895
    
    
    
    2,352
    
    
    
    6,543
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    $
    32,656
    
    
    $
    7,645
    
    
    $
    14,872
    
    
    $
    2,493
    
    
    $
    7,646
 Amount of Commitment Expiration Per PeriodOther Commercial Commitments
    
    Total
    
    Less
    
    
    
    
    
    
    
    
    
    6 Years(in thousands)
    
    Commitments
    
    than 1 Year
    
    1-3 Years
    
    4-5 Years
    
    and OverGuarantee
    
    $
    425
    
    
    $
    
    
    
    $
    
    
    
    $
    425
    
    
    
    
 The operating leases include leases for our factories in Manila, Penang,
Washington, Massachusetts, our ground lease in Arizona, and our sales office in
Florida. These leases are described in detail in item 2 of this report. The
capital leases are for our equipment in Malaysia and Washington. The guarantee
relates to our guarantee in connection with a Small Business Administration
loan to VoiceViewer Technology, Inc., a privately held company developing
microdisplay products. Brillian assumed this guarantee on the spin-off. If the
lending institution were to declare VoiceViewer to be in default under the
loan, however, and if Brillian Corporation were unable to satisfy its
obligation as primary guarantor, then we would be required to pay the
guaranteed amount. As previously noted, the microdisplay division of our company, now
reported as discontinued operations, was spun off as a separate public
company, Brillian Corporation, as of September 15, 2003. We distributed
approximately $20.9 million in cash in connection with the spin off of Brillian
Corporation. 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 or other 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 2004, as well as to meet our contractual obligations.
Specifically, we have over $33.1 million in cash, cash equivalents, and
short-term investments. Our currently planned cash outflows for 2004 include
capital expenditures of less than $3.0 million, the potential purchase of our
Manila facility for $4.4 million, and an estimated $2.5 million for inventory
and prepaid amounts in the Integrex transaction. We expect operating cash
outflow to consume only a small portion of our cash reserves, but based on our
revenue forecast, we will need substantial working capital in the second half
of 2004. We expect to 30




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close on one or more credit facilities in 2004 to fund those working
capital needs, although we expect that such a facility will not be required
because the expected total cash outflows for 2004 are substantially less than
our existing cash balances. We expect to continue our acquisition strategy.
New acquisitions or alliances may result in our needing 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 November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This Interpretation addresses
the disclosures to be made by a guarantor in its financial statements and its
obligations under guarantees. The Interpretation also clarifies the
requirements related to the recognition of a liability by the guarantor at the
inception of a guarantee. Per the Interpretation, initial recognition of a
liability shall be applied only on a prospective basis to guarantees issued or
modified after December 31, 2002. We adopted the requirements of FIN 45 as of
January 1, 2003, and there was no impact on our financial position or results
of operations. In January 2003, the Emerging Issues Task Force (EITF) issued EITF
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF
00-21 addresses the issues of how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. EITF 00-21 does not change otherwise
applicable revenue recognition criteria. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
application of EITF 00-21 did not have a material effect on our financial
statements. In November 2002, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. This interpretation was
subsequently revised by FIN 46 (Revised 2003) in December 2003. This
interpretation states that consolidation of variable interest entities will be
required by the primary beneficiary if the entities do not effectively disperse
risk among the parties involved. The requirements are effective for fiscal
years ending after December 15, 2003. We have no variable interest entities
and do not believe that FIN No. 46® will pact our future financial results. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 requires the classification of certain
financial instruments, previously classified within the equity section of the
balance sheet, to be included in liabilities. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and June 15,
2003 for all other instruments. The adoption of SFAS No. 150 did not have an
impact on our financial statements. Rule 10b5-1 Trading Plans 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 31




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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 may be
made no earlier than 30 days after the plan establishment date. No officers currently maintain trading plans. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments At December 31, 2003, we did not participate in any derivative financial
instruments, or other financial and commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. We hold no investment securities that would require disclosure of
market risk. We
have certain receivables denominated in Chinese Renminbi and certain
payables denominated in Japanese Yen. To eliminate our exposure to changes in
the U.S. Dollar exchange rate with Chinese Renminbi and Japanese Yen, we may
enter into forward contracts to protect future cash flows. We have designated
the forward contracts as cash flow hedges. Accordingly, we account for changes
in the fair value of our forward contracts, based on changes in the forward
exchange rate, with all changes in fair value reported in other comprehensive
income. Amounts in other comprehensive income will be reclassified into
earnings upon settlement of the forward contract. As of December 31, 2003, we
had no forward contracts outstanding. Primary Market Risk Exposures Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We have no credit facility
outstanding in the United States. We generally sell our products and services and negotiate purchase orders
with our foreign suppliers in U.S. Dollars. However, we have certain foreign
currency exchange exposure as a result of our manufacturing operations in the
Philippines, Malaysia, and China and our sales and distribution facility in the
United Kingdom. We have not incurred any material exchange gains or losses to
date. Some of the expenses of these foreign operations are denominated in the
Philippine Peso, Malaysian Ringgit, Chinese Renminbi, and British Pound
Sterling, respectively. These expenses include local salaries and wages,
utilities, and some operating supplies. As a result of these sales and
expenses, we do have accounts receivable and cash deposits in local currencies.
We believe, however, that the operating expenses currently incurred in foreign
currencies other than the Chinese Renminbi are immaterial, and therefore any
associated market risk is unlikely to have a material adverse effect on our
business, results of operations, or financial condition. Although the Chinese
currency currently is stable, its value in relation to the U.S. Dollar is
determined by the Chinese government. There is general speculation that China
may devalue its currency. Devaluation of the Chinese currency could result in
translation adjustments to our balance sheet as well as reportable losses
depending on our monetary balances and outstanding indebtedness at the time of
devaluation. The government of China historically has made it difficult to
convert its local currency into foreign currencies. Although we from time to
time may enter into hedging transactions in order to minimize our exposure to
currency rate fluctuations, the Chinese currency is not freely traded and thus
is difficult to hedge. In addition, the government of China has imposed
restrictions on Chinese currency loans to foreign-operated entities in China.
Based on the foregoing, we cannot provide assurance that fluctuations and
currency exchange rates in the future will not have an adverse effect on our
operations. We are exposed to risks from fluctuations in foreign currency exchange
rates, primarily U.S. Dollar/Japanese Yen, U.S. Dollar/Malaysian Ringgit and
U.S. Dollar/Chinese Renminbi. At December 31, 2003, one U.S. Dollar was worth 107 Japanese Yen. For the
year ended December 31, 2003, the U.S. Dollar/Japanese Yen exchange rate
fluctuated between 1:121 and 1:107. If there were a 10% change in the U.S.
Dollar/Japanese Yen exchange rate, the foreign currency gain/loss would be
immaterial. At December 31, 2003, one U.S. Dollar was worth 55 Philippine Pesos. For
the year ended December 31, 2003, the U.S. Dollar/Philippine Pesos exchange
rate fluctuated between 1:55 and 1:53. If there were a 10% change in the U.S.
Dollar/Philippine Pesos exchange rate, the foreign currency gain/loss would be
immaterial. 32




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Both the U.S. Dollar/Malaysian Ringgit and U.S. Dollar/Chinese Renminbi
exchange rates have been pegged by the respective governments, and remained so
throughout the year ended December 31, 2003. However, there is the possibility
that the respective governments may decide to revalue their exchange rate
against the U.S. Dollar. If there were a 10% change in the U.S.
Dollar/Malaysian Ringgit and U.S. Dollar/Chinese Renminbi exchange rates, the
foreign currency gain/loss would be immaterial. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements, the reports thereon, the
notes thereto, and the supplementary data commencing at page F-1 of this
report, which financial statements, reports, notes, and data are incorporated
herein by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES Controls Evaluation and Related CEO and CFO Certifications We conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (Disclosure Controls) as
of the end of the period covered by this Annual Report. The controls evaluation
was done under the supervision and with the participation of management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Annual Report are certifications of the CEO and
the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act.
This Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications, and it should be read in
conjunction with the certifications for a more complete understanding of the
topics presented. Definition of Disclosure Controls Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure Controls are also designed to
reasonably assure that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Limitations on the Effectiveness of Controls The companys management, including the CEO and CFO, does not expect that
our Disclosure Controls will prevent all error. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent limitations in
a cost-effective control system, misstatements due to error may occur and not
be detected. 33




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Scope of the Controls Evaluation The evaluation of our Disclosure Controls included a review of the
controls objectives and design, the companys implementation of the controls
and the effect of the controls on the information generated for use in this
Annual Report. In the course of the controls evaluation, we sought to identify
issues and confirm that appropriate corrective action, including process
improvements, were being undertaken. Many of the components of our Disclosure
Controls are also evaluated on an ongoing basis by our independent auditors,
who evaluate them in connection with determining their auditing procedures
related to their report on our annual financial statements and not to provide
assurance on our controls. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls, and to modify them as
necessary. Among other matters, we also considered whether our evaluation identified
any significant deficiencies or material weaknesses in our internal control
over financial reporting, and whether the company had identified any acts of
fraud involving personnel with a significant role in our internal control over
financial reporting. This information was important both for the controls
evaluation generally, and because item 5 in the certifications of the CEO and
CFO requires that the CEO and CFO disclose that information to our Boards
Audit Committee and to our independent auditors. In the professional auditing
literature, significant deficiencies are referred to as reportable
conditions, which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize and report
financial data in the financial statements. Auditing literature defines
material weakness as a particularly serious reportable condition in which the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to address
other controls matters in the controls evaluation, and in each case if a
problem was identified, we considered what revision, improvement and/or
correction to make in accordance with our ongoing procedures. Conclusions Based upon the controls evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, as of the end of the period covered by
this Annual Report, our Disclosure Controls were effective to provide
reasonable assurance that material information relating to us and our
consolidated subsidiaries is accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
financial disclosure. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item relating to our directors is
incorporated herein by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for our 2004 Annual Meeting of
Stockholders. The information required by this Item relating to our executive
officers is included in Item 1, Business  Executive Officers of this report. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2004 Annual Meeting of Stockholders. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2004 Annual Meeting of Stockholders. 34




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2004 Annual Meeting of Stockholders. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2004 Annual Meeting of Stockholders. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (a)
    
    Financial Statements and Financial Statement Schedule  (1)
    
    Financial Statements are listed in the Index to Financial
Statements on page F-1 of this report.(2)
    
    Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts and Reserves is set forth on
page S-1 of this report. Other schedules are omitted because they are not applicable, not required,
or because the required information is included in the consolidated financial
statements or notes thereto.  (b)
    
    Reports on Form 8-K We filed a current report on Form 8-K, dated November 4, 2003, furnishing
Item 9 Regulation FD disclosure in connection with a presentation. We filed a current report on Form 8-K, dated October 23, 2003, reporting
that we issued a press release announcing our third quarter fiscal year 2003
results.  (c)
    
    Exhibits Exhibit Number
    
    Exhibits2
    
    Amended and Restated Agreement and Plan of Reorganization(1)2.2
    
    Master Separation and Distribution Agreement between the Registrant and Brillian Corporation(18)3(i)(a)
    
    Amended and Restated Certificate of Incorporation of the Company(2)3(i)(b)
    
    Certificate of Amendment of Restated Certificate of Incorporation(3)3(i)(c)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock(4)3(ii)
    
    Amended and Restated Bylaws of the Company(5)4.1
    
    Form of Certificate of Common Stock(16)4.2
    
    Rights Agreement, dated as of April 26, 2001, between Three-Five Systems, Inc. and
Bank of New York, as Rights Agent(6)10.2
    
    Ground Sublease dated April 1, 1994, between Papago Park Center, Inc. and Three-Five
Systems, Inc.(8)10.3
    
    Amended and Restated 1990 Incentive Stock Option Plan (as Amended and Restated
through March 7, 2003)(16)10.4
    
    Amended and Restated 1993 Stock Option Plan (as Amended and Restated through March
7, 2003)(16)10.5
    
    Amended and Restated 1994 Stock Option Plan for Non-Employee Directors (as Amended
and Restated through February 12, 2001)(9)10.6
    
    Amended and Restated 1997 Employee Stock Option Plan (as Amended and Restated
through November 27, 2002) (as corrected)(17)10.7
    
    Form of Notice and Acceptance of Stock Option Grant for Amended and Restated 1997
Employee Stock Option Plan(10)
 35




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Exhibit Number
    
    Exhibits10.8
    
    Amended and Restated 1998 Stock Option Plan (as Amended and Restated through
February 8, 2002)(16)10.9
    
    Amended and Restated Directors Stock Plan (amended as of January 27, 2000)(11)10.10
    
    401(k) Profit Sharing Plan(12)10.15
    
    Technology License Agreement between Data International, Ltd. and TFS-DI dated
January 13, 2003(16)10.16
    
    Supply Agreement between Data International, Ltd. and TFS-DI dated January 13,
2003(16)10.17
    
    Term Promissory Note dated January 13, 2003 executed by TFS-DI in favor of Data
International, Ltd.(16)10.18
    
    Assignment and Assumption Agreement between the Registrant and Brillian
Corporation(18)10.19
    
    Intellectual Property Agreement between the Registrant and Brillian Corporation(18)10.20
    
    Tax Sharing Agreement between the Registrant and Brillian Corporation(18)10.21
    
    Real Property Sublease Agreement between the Registrant and Brillian Corporation(18)10.22
    
    Manufacturing Agreement between the Registrant and Microtune, Inc., dated March 27,
2003*10.23
    
    Joint Venture Agreement regarding the establishment and operation of TFS Electronic
Manufacturing Services Sdn Bhd, dated April 1, 2003*10.24
    
    Equipment Lease Agreement between Unico Technology Berhad and Mattline Industries
Sdn Bhd, dated April 1, 2003*10.25
    
    Tenancy Agreement between Fortune Century Sdn Bhd, Jantron Sdn Bhd, and Mattline
Industries Sdn Bhd, dated April 1, 2003*10.26
    
    Tenancy Agreement between Geok Hong Sdn Bhd and Mattline Industries Sdn Bhd, dated
April 1, 2003*10.27
    
    License Agreement between the Registrant and Integrex, Inc., dated February 19, 2004*10.28
    
    Lease Agreement between SFERS Real Estate Corp. V and ETMA Corporation, dated July
21, 1999*10.29
    
    Lease Agreement between Therriault-Cogan, L.L.C. and ETMA Corporation, dated January
17, 2001*10.30
    
    Lease Agreement between Rapp/Rise L.L.C. and ETMA Corporation, dated December 13,
2002*21
    
    List of Subsidiaries*23.1
    
    Consent of Deloitte & Touche LLP*23.2
    
    Notice Regarding Consent of Arthur Andersen LLP(16)31.1
    
    Certification of Chief Executive Officer of the Registrant pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended.*31.2
    
    Certification of Chief Financial Officer of the Registrant pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended.*32.1
    
    Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of the Chief Financial Officer of the Registrant, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
   *Filed herein.  (1)
    
    Incorporated by reference to Exhibit 2 to the Registration Statement on
Form S-4 of TF Consolidation, Inc. (Registration No. 33-33944) as filed on
March 27, 1990.(2)
    
    Incorporated by reference to Exhibit 3(a) to the Registrants Form 10-QSB
for the quarter ended March 31, 1994, as filed on or about May 12, 1994.(3)
    
    Incorporated by reference to Exhibit 3(b) to the Registration Statement
on Form S-3 (Registration No. 333-35788) as filed on April 27, 2000, as
amended by Form S-3/A as filed on May 5, 2000.(4)
    
    Incorporated by reference to Exhibit 3(d) to the Registrants Form 8-A as
filed on May 10, 2001.(5)
    
    Incorporated by reference to Exhibit 3(b) to the Registration Statement
on Form S-3 (Registration No. 333-84083) as filed on July 30, 1999, as
amended by Form S-3/A as filed on August 26, 1999.(6)
    
    Incorporated by reference to Exhibit 4(b) to the Registrants Form 8-A as
filed on May 10, 2001. 36




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(7)
    
    Incorporated by reference to Exhibit 10(c) to the Registration Statement
on Form S-4 of TF Consolidation, Inc. (Registration No. 33-33944) as filed
on March 27, 1990.(8)
    
    Incorporated by reference to Exhibit 10(o) to the Registrants Form 10-K
for the fiscal year ended December 31, 1996, as filed on March 14, 1997.(9)
    
    Incorporated by reference to Exhibit 10(x) to the Registrants Form 10-Q
for the quarter ended June 30, 2001, as filed on July 27, 2001.(10)
    
    Incorporated by reference to Exhibit 10.5(b) to the Registration
Statement on Form S-8 (Registration No. 333-59234) as filed on April 19,
2001.(11)
    
    Incorporated by reference to Exhibit 10(y) to the Registration Station
Statement on Form S-8 (Registration No. 333-50689) as filed on November 3,
2000.(12)
    
    Incorporated by reference to Exhibit 10(z) to the Registration Statement
on Form S-8 (Registration No. 333-57933) as filed on June 26, 1998.(13)
    
    Incorporated by reference to Exhibit 10(aa) to the Registrants Form 10-Q
for the quarter ended June 30, 2000, as filed on July 27, 2000.(14)
    
    Incorporated by reference to Exhibit 10(cc) to the Registrants Form 10-K
for the fiscal year ended December 31, 2000, as filed on March 13, 2001.(15)
    
    Incorporated by reference to Exhibit 10(cc) to the Registrants Form 10-Q
for the quarter ended March 31, 2002, as filed on April 19, 2002.(16)
    
    Incorporated by reference to the Registrants Form 10-K for the fiscal
year ended December 31, 2002, as filed on March 28, 2003.(17)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended June 30, 2003, as filed on July 31, 2003.(18)
    
    Incorporated by reference to the Registrants Form 10/A (Amendment No. 4)
(Registration No. 000-50289) as filed with the SEC by Brillian Corporation
on September 3, 2003. 37




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. THREE-FIVE SYSTEMS, INC.Date: March 15, 2004
    
    By:
    
    /s/ Jack L. SaltichJack L. SaltichPresident and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Name
    
    Title
    
    Date/s/ Jack L. Saltich

Jack L. Saltich
    
    President, Chief Executive
Officer (Principal Executive
Officer), and Director
    
    March 15, 2004/s/ Jeffrey D. Buchanan

Jeffrey D. Buchanan
    
    Executive Vice President, Chief
Financial Officer, Secretary,
Treasurer (Principal Financial
and Accounting Officer), and
Director
    
    March 15, 2004/s/ David C. Malmberg

David C. Malmberg
    
    Chairman of the Board of Directors
    
    March 15, 2004/s/ David P. Chavoustie

David P. Chavoustie
    
    Director
    
    March 15, 2004/s/ Murray A. Goldman

Murray A. Goldman
    
    Director
    
    March 15, 2004/s/ Henry L. Hirvela

Henry L. Hirvela
    
    Director
    
    March 15, 2004/s/ Thomas H. Werner

Thomas H. Werner
    
    Director
    
    March 15, 2004
 38




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THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                  |  |      |     | 
|----------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                  |  | Page
|                                                                                                                  |  |     
|Independent Auditors Reports                                                                                     |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                                      |  |      | F-3 | 
|Consolidated Statements of Operations for the years ended
December 31, 2001, 2002 and 2003                        |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity for the years
ended December 31, 2001, 2002 and 2003              |  |      | F-5 | 
|Consolidated Statements of Comprehensive Loss for the years
ended December 31, 2001, 2002 and 2003                |  |      | F-6 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 2003                        |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                        |  |      | F-8 | 
|Schedule II  Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 2001, 2002 and 2003 |  |      | S-1 | 

F-1



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INDEPENDENT AUDITORS REPORT

To the Stockholders and Board of Directors of Three-Five Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Three-Five
Systems, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders equity,
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also included the financial statement
schedule listed in the Index. These financial statements and the financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Three-Five
Systems, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona
March 10, 2004

F-2



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##### Table of Contents






THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                                                                |  |                                               |                            |   |              |         |         |   |        |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | -------------------------- | - | ------------ | ------- | ------- | - | ------ | ------- | 
|                                                                                                                                                |  |                                               |                            |   | December 31,
|                                                                                                                                                |  |                                               |                            |   |             
|                                                                                                                                                |  |                                               |                            |   | 2002         |         | 2003   
|                                                                                                                                                |  |                                               |                            |   |              |         |        
|ASSETS                                                                                                                                          |  |                                               |                            |   |              |         |         |  
|Current Assets:                                                                                                                                 |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  | Cash and cash equivalents                     |                            | $ | 18,389       |         |         | $ | 27,976 |        
|                                                                                                                                                |  | Short-term investments                        |                            |   | 62,178       |         |         |   | 5,130  |        
|                                                                                                                                                |  | Accounts receivable, net                      |                            |   | 16,606       |         |         |   | 28,133 |        
|                                                                                                                                                |  | Inventories                                   |                            |   | 17,292       |         |         |   | 25,854 |        
|                                                                                                                                                |  | Income Taxes receivable                       |                            |   | 561          |         |         |   | 678    |        
|                                                                                                                                                |  | Deferred tax asset                            |                            |   | 2,357        |         |         |   | 130    |        
|                                                                                                                                                |  | Assets held for sale                          |                            |   | 841          |         |         |   | 8,615  |        
|                                                                                                                                                |  | Other current assets                          |                            |   | 2,204        |         |         |   | 2,782  |        
|                                                                                                                                                |  | Short-term assets of discontinued operation   |                            |   | 4,455        |         |         |   |       |        
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  |                                               | Total current assets       |   |              | 124,883 |         |   |        | 99,298  | 
|                                                                                                                                               
|Property, Plant and Equipment, net                                                                                                              |  |                                               | 23,345                     |   |              |         | 25,323  |  
|Intangibles, net                                                                                                                                |  |                                               | 5,292                      |   |              |         | 7,574   |  
|Goodwill                                                                                                                                        |  |                                               | 34,901                     |   |              |         | 34,606  |  
|Long-term Deferred Tax Asset                                                                                                                    |  |                                               | 11,544                     |   |              |         |        |  
|Other Assets                                                                                                                                    |  |                                               | 455                        |   |              |         | 436     |  
|Long-term Assets of Discontinued Operation                                                                                                      |  |                                               | 22,274                     |   |              |         |        |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  |                                               | Total Assets               |   | $            | 222,694 |         |   | $      | 167,237 | 
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |                                               |                            |   |              |         |         |  
|Current Liabilities:                                                                                                                            |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  | Accounts payable                              |                            | $ | 8,244        |         |         | $ | 30,826 |        
|                                                                                                                                                |  | Accrued liabilities                           |                            |   | 4,491        |         |         |   | 4,917  |        
|                                                                                                                                                |  | Deferred revenue                              |                            |   | 23           |         |         |   | 48     |        
|                                                                                                                                                |  | Current portion of long-term debt             |                            |   | 2,714        |         |         |   | 1,515  |        
|                                                                                                                                                |  | Current portion of capital leases             |                            |   |             |         |         |   | 2,352  |        
|                                                                                                                                                |  | Current liabilities of discontinued operation |                            |   | 1,526        |         |         |   |       |        
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  |                                               | Total Current Liabilities  |   |              | 16,998  |         |   |        | 39,658  | 
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|Long-term Debt                                                                                                                                  |  |                                               | 20                         |   |              |         | 1,441   |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|Capital Leases                                                                                                                                  |  |                                               |                           |   |              |         | 6,543   |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|Other Long-term Liabilities                                                                                                                     |  |                                               | 8                          |   |              |         |        |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|Commitments and Contingencies (Note 9)                                                                                                          |  |                                               |                            |   |              |         |         |  
|Minority Interest in Consolidated Subsidiary                                                                                                    |  |                                               |                           |   |              |         | 2,563   |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|Preferred stock, $.01 par value; 1,000,000 shares authorized,
No shares issued or outstanding                                                   |  |                                               |                           |   |              |         |        |  
|Common stock, $.01 par value; 60,000,000 shares authorized,
21,937,356 and 21,972,020 shares issued at December 31, 2002
and 2003, respectively |  |                                               | 219                        |   |              |         | 220     |  
|Additional paid-in capital                                                                                                                      |  |                                               | 200,763                    |   |              |         | 200,930 |  
|Retained earnings                                                                                                                               |  |                                               | 13,695                     |   |              |         | (74,915 | )
|Stock subscription note receivable                                                                                                              |  |                                               | (174                       | ) |              |         | (185    | )
|Accumulated other comprehensive loss                                                                                                            |  |                                               | (332                       | ) |              |         | (515    | )
|Less  Treasury stock, at cost, 651,317 shares at December 31, 2002
and 2003                                                                    |  |                                               | (8,503                     | ) |              |         | (8,503  | )
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  |                                               | Total stockholders equity |   |              | 205,668 |         |   |        | 117,032 | 
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  
|                                                                                                                                                |  | $                                             | 222,694                    |   |              | $       | 167,237 |  
|                                                                                                                                                |  |                                               |                            |   |              |         |         |  

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

F-3



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##### Table of Contents






THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |         |         |         |  
|------------------------------------------------------------- | -------- | ----------------------------------------- | -------------- | ------- | ------------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                              |          |                                           |                |         | Years Ended 
|                                                              |          |                                           |                |         | December 31,
|                                                              |          |                                           |                |         |             
|                                                              |          |                                           |                |         | 2001         |         | 2002    |         | 2003  
|                                                              |          |                                           |                |         |              |         |         |         |       
|Net Sales                                                     |          | $                                         | 117,200        |         |              | $       | 86,587  |         |        | $       | 159,018 |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Costs and Expenses:                                           |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          | Cost of sales                             |                |         | 115,820      |         |         |         | 78,718 |         |         |         | 155,125 |        
|                                                              |          | Selling, general and administrative       |                |         | 8,828        |         |         |         | 10,382 |         |         |         | 17,524  |        
|                                                              |          | Research, development and engineering     |                |         | 8,623        |         |         |         | 4,913  |         |         |         | 4,742   |        
|                                                              |          | Loss (gain) on sale of assets             |                |         | 1,371        |         |         |         | 4,545  |         |         |         | (25     | )      
|                                                              |          | Amortization of intangibles               |                |         |             |         |         |         | 256    |         |         |         | 2,043   |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          |                                           | 134,642        |         |              |         | 98,814  |         |        |         | 179,409 |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          |                                           | Operating loss |         |              | (17,442 | )       |         |        | (12,227 | )       |         |         | (20,391 | )
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Other Income (Expense):                                       |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          | Interest, net                             |                |         | 7,266        |         |         |         | 3,328  |         |         |         | (179    | )      
|                                                              |          | Other, net                                |                |         | 4            |         |         |         | 164    |         |         |         | 1,043   |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          |                                           | 7,270          |         |              |         | 3,492   |         |        |         | 864     |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Minority Interest in Loss (Income) of Consolidated Subsidiary |          |                                           | 167            |         |              |         | 84      |         |        |         | (36     | )      
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Loss From Continuing Operations Before Income Taxes           |          |                                           | (10,005        | )       |              |         | (8,651  | )       |        |         | (19,563 | )      
|                                                              |          | Provision for (benefit from) income taxes |                |         | (4,172       | )       |         |         | (3,921 | )       |         |         | 14,338  |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Loss From Continuing Operations                               |          |                                           | (5,833         | )       |              |         | (4,730  | )       |        |         | (33,901 | )      
|Loss From Discontinued Operation, net of taxes                |          |                                           | (11,931        | )       |              |         | (12,241 | )       |        |         | (10,552 | )      
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              | Net Loss |                                           | $              | (17,764 | )            |         | $       | (16,971 | )      |         | $       | (44,453 | )      
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Loss Per Common Share  Basic and Diluted:                    |          |                                           |                |         |              |         |         |         |        |         |         |        
|Loss From Continuing Operations                               |          | $                                         | (0.27          | )       |              |         | (0.22   | )       |        |         | (1.59   | )      
|Loss From Discontinued Operation                              |          |                                           | (0.56          | )       |              |         | (0.57   | )       |        |         | (0.50   | )      
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              | Net Loss |                                           | $              | (0.83   | )            |         | $       | (0.79   | )      |         | $       | (2.09   | )      
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        
|Weighted Average Number of Common Shares:                     |          |                                           |                |         |              |         |         |         |        |         |         |        
|                                                              |          | Basic and Diluted                         |                |         | 21,401       |         |         |         | 21,465 |         |         |         | 21,301  |        
|                                                              |          |                                           |                |         |              |         |         |         |        |         |         |        

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

F-4



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##### Table of Contents






THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands, except share data)

|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  |         |      |   |  |   |        |   |  |   |         |  
|---------------------------------------------- |  | ------------- | ---------- | ---------- |  | -------- | --- | -------- |  | ------------ | ------- | ---------- |  | ------------- | ------- | ------ |  | ----- | ---- | ----------- |  | ------- | ---- | - |  | - | ------ | - |  | - | ------- | -
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  | Accumu- |      |   |  |   |        |   |  |  
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  | Stock |      | lated Other |  |         |      |   |  |   |        |  
|                                               |  | Common Stock  |            | Additional |  |          |     |          |  | Subscription |         | Comprehen- |  |               |         |        |  | Total
|                                               |  |               |            | Paid-in    |  | Retained |     | Note     |  | sive Income  |         | Treasury   |  | Stockholders
|                                               |  | Shares Issued |            | Amount     |  | Capital  |     | Earnings |  | Receivable   |         | (Loss)     |  | Stock         |         | Equity
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |       
|Balance, December 31, 2000                     |  |               | 21,655,778 |            |  | $        | 217 |          |  | $            | 198,215 |            |  | $             | 48,430  |        |  | $     |     |             |  | $       | (234 | ) |  | $ | (4,626 | ) |  | $ | 242,002 |  
|Net loss                                       |  |               |           |            |  |          |    |          |  |              |        |            |  |               | (17,764 | )      |  |       |     |             |  |         |     |   |  |   |       |   |  |   | (17,764 | )
|Unrealized gains on investments                |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         | 260  |   |  |   |       |   |  |   | 260     |  
|Foreign currency translation
adjustments       |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         | (47  | ) |  |   |       |   |  |   | (47     | )
|Stock subscription note receivable             |  |               |           |            |  |          |    |          |  |              | 410     |            |  |               |        |        |  |       | (163 | )           |  |         |     |   |  |   |       |   |  |   | 247     |  
|Stock options exercised and other              |  |               | 238,850    |            |  |          | 2   |          |  |              | 1,182   |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   |       |   |  |   | 1,184   |  
|Tax benefit on stock option
exercises          |  |               |           |            |  |          |    |          |  |              | 588     |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   |       |   |  |   | 588     |  
|Purchase of treasury stock                     |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   | (2,526 | ) |  |   | (2,526  | )
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  |         |      |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2001                     |  |               | 21,894,628 |            |  |          | 219 |          |  |              | 200,395 |            |  |               | 30,666  |        |  |       | (163 | )           |  |         | (21  | ) |  |   | (7,152 | ) |  |   | 223,944 |  
|Net loss                                       |  |               |           |            |  |          |    |          |  |              |        |            |  |               | (16,971 | )      |  |       |     |             |  |         |      |   |  |   |       |   |  |   | (16,971 | )
|Unrealized losses on investments               |  |               |           |            |  |          |    |          |  |              |        |            |  |               |         |        |  |       |     |             |  |         | (197 | ) |  |   |       |   |  |   | (197    | )
|Foreign currency translation
adjustments       |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         | (114 | ) |  |   |       |   |  |   | (114    | )
|Stock subscription note receivable             |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       | (11  | )           |  |         |     |   |  |   |       |   |  |   | (11     | )
|Stock options exercised and other              |  |               | 42,728     |            |  |          |    |          |  |              | 323     |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   |       |   |  |   | 323     |  
|Tax benefit on stock option
exercises          |  |               |           |            |  |          |    |          |  |              | 45      |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   |       |   |  |   | 45      |  
|Purchase of treasury stock                     |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   | (1,351 | ) |  |   | (1,351  | )
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  |         |      |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2002                     |  |               | 21,937,356 |            |  |          | 219 |          |  |              | 200,763 |            |  |               | 13,695  |        |  |       | (174 | )           |  |         | (332 | ) |  |   | (8,503 | ) |  |   | 205,668 |  
|Net loss                                       |  |               |           |            |  |          |    |          |  |              |        |            |  |               | (44,453 | )      |  |       |     |             |  |         |     |   |  |   |       |   |  |   | (44,453 | )
|Unrealized losses on investments               |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         | (65  | ) |  |   |       |   |  |   | (65     | )
|Foreign currency translation
adjustments       |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       |     |             |  |         | (118 | ) |  |   |       |   |  |   | (118    | )
|Stock subscription note receivable             |  |               |           |            |  |          |    |          |  |              |        |            |  |               |        |        |  |       | (11  | )           |  |         |     |   |  |   |       |   |  |   | (11     | )
|Stock options exercised and other              |  |               | 34,664     |            |  |          | 1   |          |  |              | 167     |            |  |               |        |        |  |       |     |             |  |         |     |   |  |   |       |   |  |   | 168     |  
|Distribution related to discontinued
operation |  |               |           |            |  |          |    |          |  |              |        |            |  |               | (44,157 | )      |  |       |     |             |  |         |     |   |  |   |       |   |  |   | (44,157 | )
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  |         |      |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2003                     |  |               | 21,972,020 |            |  | $        | 220 |          |  | $            | 200,930 |            |  | $             | (74,915 | )      |  | $     | (185 | )           |  | $       | (515 | ) |  | $ | (8,503 | ) |  | $ | 117,032 |  
|                                               |  |               |            |            |  |          |     |          |  |              |         |            |  |               |         |        |  |       |      |             |  |         |      |   |  |   |        |   |  |   |         |  

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

F-5



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##### Table of Contents






CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands)

|                                        |                                                                                                           |                    |         |                          |         |      |         |      |         |   |         |      |         |  
|--------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------------------------ | ------- | ---- | ------- | ---- | ------- | - | ------- | ---- | ------- | -
|                                        |                                                                                                           |                    |         | Years Ended December 31,
|                                        |                                                                                                           |                    |         |                         
|                                        |                                                                                                           |                    |         | 2001                     |         | 2002 |         | 2003
|                                        |                                                                                                           |                    |         |                          |         |      |         |     
|Net Loss                                |                                                                                                           | $                  | (17,764 | )                        |         | $    | (16,971 | )    |         | $ | (44,453 | )   
|Other Comprehensive Loss, net of taxes: |                                                                                                           |                    |         |                          |         |      |         |      |         |   |         |     
|                                        | Unrealized gains (losses), net of tax expense
(benefit) of $129 and ($96) as of
years ended 2001 and 2002 |                    |         | 260                      |         |      |         | (197 | )       |   |         | (65  | )      
|                                        | Foreign currency translation adjustment                                                                   |                    |         | (47                      | )       |      |         | (114 | )       |   |         | (118 | )      
|                                        |                                                                                                           |                    |         |                          |         |      |         |      |         |   |         |     
|                                        |                                                                                                           | Comprehensive loss |         | $                        | (17,551 | )    |         | $    | (17,282 | ) |         | $    | (44,636 | )
|                                        |                                                                                                           |                    |         |                          |         |      |         |      |         |   |         |     

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

F-6



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##### Table of Contents






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

|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |         |         |        |  
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------- | -------- | ------------------------ | ----- | ------- | -------- | ------- | ----- | ------- | ------- | ------- | ------ | -
|                                                                  |                                                                                           |                                                                     |                                                     |          | Years Ended December 31,
|                                                                  |                                                                                           |                                                                     |                                                     |          |                         
|                                                                  |                                                                                           |                                                                     |                                                     |          | 2001                     |       | 2002    |          | 2003   
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                             |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  | Net loss                                                                                  |                                                                     | $                                                   | (17,764  | )                        |       | $       | (16,971  | )       |       | $       | (44,453 | )      
|                                                                  | Less loss  discontinued operations                                                       |                                                                     |                                                     | (11,931  | )                        |       |         | (12,241  | )       |       |         | (10,552 | )      
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  |                                                                                           | Loss  continuing operations                                        |                                                     |          | (5,833                   | )     |         |          | (4,730  | )     |         |         | (33,901 | )     
|                                                                  | Adjustments to reconcile net loss to net cash (used in) provided by operating
activities: |                                                                     |                                                     |          |                          |       |         |          |         |       |         |         |        
|                                                                  |                                                                                           | Depreciation and amortization                                       |                                                     |          | 4,085                    |       |         |          | 3,950   |       |         |         | 7,588   |       
|                                                                  |                                                                                           | Stock compensation                                                  |                                                     |          |                         |       |         |          | 104     |       |         |         | 50      |       
|                                                                  |                                                                                           | Minority interest in consolidated subsidiary                        |                                                     |          | (167                     | )     |         |          | (84     | )     |         |         | 36      |       
|                                                                  |                                                                                           | Deferred revenue                                                    |                                                     |          |                         |       |         |          | 23      |       |         |         | 25      |       
|                                                                  |                                                                                           | Provision for (reduction of) accounts receivable valuation reserves |                                                     |          | (211                     | )     |         |          | 323     |       |         |         | 271     |       
|                                                                  |                                                                                           | Loss (gain) on disposal of assets                                   |                                                     |          | 1,371                    |       |         |          | 4,545   |       |         |         | (25     | )     
|                                                                  |                                                                                           | Tax benefit on stock options exercised                              |                                                     |          | 588                      |       |         |          | 45      |       |         |         |        |       
|                                                                  |                                                                                           | Provision for (benefit from) deferred taxes, net                    |                                                     |          | (4,138                   | )     |         |          | (2,289  | )     |         |         | 14,164  |       
|                                                                  |                                                                                           | Foreign currency translation adjustments                            |                                                     |          | (47                      | )     |         |          | (114    | )     |         |         | (118    | )     
|                                                                  |                                                                                           | Interest on notes payable                                           |                                                     |          |                         |       |         |          |        |       |         |         | 74      |       
|                                                                  |                                                                                           | Interest on employee loan                                           |                                                     |          | (10                      | )     |         |          | (11     | )     |         |         | (11     | )     
|CHANGES IN ASSETS AND LIABILITIES:                                |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  |                                                                                           | (Increase) decrease in accounts receivable                          |                                                     |          | 5,457                    |       |         |          | 6,961   |       |         |         | (12,077 | )     
|                                                                  |                                                                                           | (Increase) decrease in inventories                                  |                                                     |          | 7,733                    |       |         |          | 7,010   |       |         |         | (593    | )     
|                                                                  |                                                                                           | (Increase) decrease in other assets                                 |                                                     |          | (349                     | )     |         |          | 452     |       |         |         | (360    | )     
|                                                                  |                                                                                           | Increase (decrease) in accounts payable and accrued liabilities     |                                                     |          | (939                     | )     |         |          | (13,959 | )     |         |         | 23,000  |       
|                                                                  |                                                                                           | Increase (decrease) in taxes payable/receivable                     |                                                     |          | (4,199                   | )     |         |          | 3,399   |       |         |         | (117    | )     
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  |                                                                                           |                                                                     | Net cash (used in) provided by operating activities |          |                          | 3,341 |         |          |         | 5,625 |         |         |         | (1,994 | )
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                             |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  | Purchases of property, plant, and equipment                                               |                                                                     |                                                     | (3,021   | )                        |       |         | (1,211   | )       |       |         | (2,644  | )      
|                                                                  | Proceeds from sale of assets                                                              |                                                                     |                                                     |         |                          |       |         | 2,100    |         |       |         | 1,030   |        
|                                                                  | Purchase of intangibles                                                                   |                                                                     |                                                     |         |                          |       |         | (547     | )       |       |         | (1,444  | )      
|                                                                  | Purchase of short-term investments                                                        |                                                                     |                                                     | (222,619 | )                        |       |         | (102,591 | )       |       |         | (13,262 | )      
|                                                                  | Proceeds from maturities/sales of short-term investments                                  |                                                                     |                                                     | 228,289  |                          |       |         | 159,233  |         |       |         | 70,245  |        
|                                                                  | Payments on stock subscription note receivable                                            |                                                                     |                                                     | 257      |                          |       |         |         |         |       |         |        |        
|                                                                  | Acquisitions                                                                              |                                                                     |                                                     |         |                          |       |         | (50,089  | )       |       |         | (10,441 | )      
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  |                                                                                           | Net cash provided by investing activities                           |                                                     |          | 2,906                    |       |         |          | 6,895   |       |         |         | 43,484  |       
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                             |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  | Payments on notes payable                                                                 |                                                                     |                                                     |         |                          |       |         |         |         |       |         | (2,734  | )      
|                                                                  | Stock options exercised                                                                   |                                                                     |                                                     | 1,184    |                          |       |         | 210      |         |       |         | 118     |        
|                                                                  | Payments on capital leases                                                                |                                                                     |                                                     |         |                          |       |         |         |         |       |         | (1,722  | )      
|                                                                  | (Distribution to) receipt from minority interest                                          |                                                                     |                                                     | 490      |                          |       |         | (239     | )       |       |         | 2,527   |        
|                                                                  | Purchase of treasury stock                                                                |                                                                     |                                                     | (2,526   | )                        |       |         | (1,351   | )       |       |         |        |        
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  |                                                                                           | Net cash used in financing activities                               |                                                     |          | (852                     | )     |         |          | (1,380  | )     |         |         | (1,811  | )     
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|NET INCREASE IN CASH AND CASH EQUIVALENTS 
CONTINUING OPERATIONS |                                                                                           |                                                                     | 5,395                                               |          |                          |       | 11,140  |          |         |       | 39,679  |        
|NET CASH USED IN AND CONTRIBUTED TO DISCONTINUED
OPERATIONS       |                                                                                           |                                                                     | (14,037                                             | )        |                          |       | (29,754 | )        |         |       | (30,092 | )      
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              |                                                                                           |                                                                     | (8,642                                              | )        |                          |       | (18,614 | )        |         |       | 9,587   |        
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      |                                                                                           |                                                                     | 45,645                                              |          |                          |       | 37,003  |          |         |       | 18,389  |        
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|CASH AND CASH EQUIVALENTS, END OF YEAR                            |                                                                                           | $                                                                   | 37,003                                              |          |                          | $     | 18,389  |          |         |       | 27,976  |        
|                                                                  |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|NONCASH INVESTING AND FINANCING ACTIVITIES:                       |                                                                                           |                                                                     |                                                     |          |                          |       |         |          |         |       |         |        
|                                                                  | Interest paid                                                                             |                                                                     | $                                                   | 201      |                          |       | $       | 178      |         |       | $       | 1,007   |        
|                                                                  | Income taxes paid (refunded)                                                              |                                                                     |                                                     | (808     | )                        |       |         | (5,088   | )       |       |         | 387     |        
|                                                                  | Note payable due on purchase of distribution rights license                               |                                                                     |                                                     |         |                          |       |         |         |         |       |         | 2,956   |        
|                                                                  | Capital leases due on purchase of equipment                                               |                                                                     |                                                     |         |                          |       |         |         |         |       |         | 8,895   |        

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

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THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2002 and 2003

(1) Organization and Operations:

Three-Five Systems, Inc. (together with its subsidiaries, herein referred
to as we, us, or the Company) is a global provider of electronics
manufacturing services, or EMS. We design and manufacture electronic circuit
board assemblies, radio frequency, or RF, modules, display sub-systems, and
complete systems for major original equipment manufacturers (OEMs) in the
automotive, computing, consumer, industrial, medical, and telecommunications
industries. Our services to OEMs specifically include advanced engineering
support, designed for services, automated printed circuit board assembly,
in-circuit and functional testing, systems level integration and box build,
turn-key packaging, fulfillment services, and turn-key supply chain management
services, all of which enable our customers the ability to outsource all stages
of product engineering, design, development, materials procurement and
management, manufacturing, and testing. As a subset of our EMS business, we
specialize in design and manufacturing display module sub-systems and
integrating those sub-systems into other products. The display module
sub-systems we design and manufacture include monochrome and color liquid
crystal display, or LCD, components, organic light emitting diodes, or OLEDs,
cathode ray tubes, or CRTs, and flat panel monitors.

On September 1, 2003, we transferred all of the net assets of our
microdisplay division, plus approximately $20.9 million in cash, into a newly
created Delaware corporation called Brillian Corporation. On September 15,
2003, we spun off Brillian by distributing all of the outstanding common stock
of Brillian to our stockholders on a pro rata basis, with each stockholder of
Three-Five Systems, Inc., or TFS, receiving one share of Brillian common stock
for each four shares of our common stock. Brillian is now traded on the Nasdaq
National Market under the symbol BRLC. Brillian had $44.1 million of net
assets on the spin-off date. The microdisplay business that we transferred to
Brillian is now reported in these consolidated financial statements as
Discontinued Operations.

Net loss from discontinued operation before income taxes was $16.5
million, $19.0 million and $10.6 for 2001, 2002, and 2003, respectively. The
income tax benefit for discontinued operation was $4.5 million and $6.7 million
for 2001 and 2002. There was no tax benefit in 2003 for the discontinued
operation. Net loss from discontinued operations was $12.0 million, $12.3
million and $10.6 for 2001, 2002, and 2003, respectively. Sales from
discontinued operations were $1.9 million, $1.4 million and $1.6 million for
2001, 2002, and 2003 respectively. The major classes of discontinued assets
and liabilities included in the Consolidated Balance Sheet as of December 31,
2002 and the day of spin-off are as follows (in thousands):

|             |                                          |                                                |   |              |        |               |   |        |        | 
|------------ | ---------------------------------------- | ---------------------------------------------- | - | ------------ | ------ | ------------- | - | ------ | ------ | 
|             |                                          |                                                |   | December 31, |        | September 15,
|             |                                          |                                                |   | 2002         |        | 2003         
|             |                                          |                                                |   |              |        |              
|Assets:      |                                          |                                                |   |              |        |               |   |       
|             | Cash                                     |                                                | $ |             |        |               | $ | 20,453 |       
|             | Accounts receivable                      |                                                |   | 364          |        |               |   | 473    |       
|             | Inventories                              |                                                |   | 2,584        |        |               |   | 2,937  |       
|             | Other current assets                     |                                                |   | 1,507        |        |               |   | 961    |       
|             | Property, plant and equipment, net       |                                                |   | 8,218        |        |               |   | 6,884  |       
|             | Intangibles, net                         |                                                |   | 9,627        |        |               |   | 8,894  |       
|             | Other long-term assets                   |                                                |   | 4,429        |        |               |   | 4,730  |       
|             |                                          |                                                |   |              |        |               |   |       
|             |                                          | Total assets from discontinued operations      |   | $            | 26,729 |               |   | $      | 45,332 | 
|             |                                          |                                                |   |              |        |               |   |        |       
|Liabilities: |                                          |                                                |   |              |        |               |   |       
|             | Accounts payable and accrued liabilities |                                                | $ | 1,191        |        |               | $ | 1,063  |       
|             | Deferred revenue                         |                                                |   | 335          |        |               |   | 112    |       
|             |                                          |                                                |   |              |        |               |   |       
|             |                                          | Total liabilities from discontinued operations |   | $            | 1,526  |               |   | $      | 1,175  | 
|             |                                          |                                                |   |              |        |               |   |        |       

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(2) Summary of Significant Accounting Policies:

Principles of Consolidation and Preparation of Financial Statements

The consolidated financial statements include the accounts of Three-Five
Systems, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.

The accompanying financial statements have been prepared to reflect our
historical financial position and results of operations and cash flows as
adjusted for the reclassification of our microdisplay division as a
discontinued operation. Historical results of operations of the microdisplay
division are reported as a discontinued operation in the accompanying
consolidated financial statements.

Use of Accounting Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates
and judgments, including those related to sales returns, bad debts,
inventories, fixed assets, intangible assets, income taxes, and contingencies.
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 judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates.

Customer Concentration

Our strategy involves concentrating our efforts on providing design and
electronics manufacturing services to leading companies in a limited number of
fast-growing industries. We have been undertaking substantial efforts to
diversify our business, broaden our customer base, and expand our markets.
Product sales for our historical major customer, Motorola, accounted for
approximately 87%, 78%, and less than 10% of our net sales in 2001, 2002, and
2003, respectively. In 2003, we had two customers exceed 10% of our net sales,
Avocent and Vitelcom, accounting for 23% and 13% of our net sales,
respectively. No other customer accounted for more than 10% of net sales in
fiscal 2001, 2002, or 2003.

Fair Value of Financial Instruments

We have determined the estimated fair value of financial instruments using
available market information and valuation methodologies. Estimating fair
values requires considerable judgment. Accordingly, the estimates may not be
indicative of amounts that would be realized in a current market exchange. The
carrying values of cash, short-term investments, accounts receivable, and
accounts payable approximate fair value due to the short maturities of these
instruments. In addition, at December 31, 2002, and 2003 the carrying amount
of the term loan payable is estimated to approximate fair value as the actual
interest rate is consistent with rates estimated to be currently available for
debt with similar terms and remaining maturities.

Cash and Cash Equivalents

For purposes of the statements of cash flows, all highly liquid
investments with an original maturity of three months or less are considered to
be cash equivalents. Cash equivalents consist of investments in money market
mutual funds. A portion of our funds held in money market mutual funds are
invested in repurchase agreements. These repurchase agreements are
collateralized by U.S. Treasury and Government obligations. Cash and cash
equivalents at December 31 consisted of the following (in thousands):

|                           |              |   |              |        |      |   |        |        | 
|-------------------------- | ------------ | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                           |              |   | December 31,
|                           |              |   |             
|                           |              |   | 2002         |        | 2003
|                           |              |   |              |        |     
|Cash and cash equivalents: |              |   |              |        |      |   |        |       
|                           | Cash         |   | $            | 12,513 |      |   | $      | 19,568 | 
|                           | Money market |   |              | 5,876  |      |   |        | 8,408  | 
|                           |              |   |              |        |      |   |        |       
|                           |              | $ | 18,389       |        |      | $ | 27,976 |       
|                           |              |   |              |        |      |   |        |       

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Accounts Receivable, net

Allowance for doubtful accounts was $446,000 and $509,000, as of December
31, 2002 and 2003, respectively. Allowance for sales returns was $41,000 and
$227,000 as of December 31, 2002 and 2003, respectively.

Investments

Short-term investments have original maturities greater than three months
and remaining maturities of less than one year. All investments are classified
as available for sale and are presented at market value using the specific
identification method based on quoted market prices. Unrealized gains and
losses are reflected in other comprehensive income. Realized gains and losses
are included in results of operations. Short-term and long-term investments
consisted of the following at (in thousands):

|                        |                                   |   |              |        |      |   |       |       | 
|----------------------- | --------------------------------- | - | ------------ | ------ | ---- | - | ----- | ----- | 
|                        |                                   |   | December 31,
|                        |                                   |   |             
|                        |                                   |   | 2002         |        | 2003
|                        |                                   |   |              |        |     
|Short-term investments: |                                   |   |              |        |      |   |       |      
|                        | Certificates of deposit           |   | $            | 11,498 |      |   | $     |      | 
|                        | Corporate notes and bonds         |   |              | 40,056 |      |   |       | 5,130 | 
|                        | U.S. government agency securities |   |              | 10,624 |      |   |       |      | 
|                        |                                   |   |              |        |      |   |       |       | 
|                        |                                   | $ | 62,178       |        |      | $ | 5,130 |      
|                        |                                   |   |              |        |      |   |       |      

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value and consisted of the following at (in thousands):

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  | December 31,
|                |  |             
|                |  | 2002         |        | 2003
|                |  |              |        |     
|Raw materials   |  | $            | 10,915 |      |  | $ | 14,188 | 
|Work-in-process |  |              | 2,868  |      |  |   | 5,321  | 
|Finished goods  |  |              | 3,509  |      |  |   | 6,345  | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 17,292 |      |  | $ | 25,854 | 
|                |  |              |        |      |  |   |        | 

Shipping terms with one of our major customers is FOB destination, and
many of those products are shipped by water taking four to six weeks to reach
their destination. As a result, we had $3.6 million of product in transit at
the end of 2003 and in our finished goods inventory. We made two significant
estimates regarding inventory at the end of 2003. First, we are holding
approximately $778,000 of inventory relating to a program cancelled by a
customer. Approximately 47% of that inventory related to material that we had
purchased to fulfill purchase orders issued to us by that customer and 53% of
that inventory related to material that we purchased in connection with a
general business agreement entered into with respect to that customer regarding
long-lead time parts. As a result of initial discussions with the customer, we
have not established a reserve for any of this inventory. Second, we learned
from another customer prior to the end of the year that a product shipped by us
to them contained potentially defective parts. Those potentially defective
parts came from a component supplied to us by a vendor specified by our
customer. We are investigating whether those parts can be repaired or whether
they are unrepairable. If they are unrepairable, then approximately $1.2
million of inventory that we are holding would be worthless. It is our belief
that such parts can be repaired. It is also our belief that if such parts
cannot be repaired, then the liability for such worthless inventory would lie
with the vendor of the defective component. As a result, we did not record a
reserve for any potentially bad inventory relating to this second issue.

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Property, Plant, and Equipment

Property, plant, and equipment is recorded at cost and is depreciated
using the straight-line method over the estimated useful lives of the
respective assets. Lives for the major asset categories are:

|                      |  |               |  | 
|--------------------- |  | ------------- |  | 
|                      |  | Lives        
|                      |  |              
|Buildings             |  | 39 years     
|Building Improvements |  | 15  38 years
|Equipment             |  | 3  7 years  
|Furniture             |  | 5  10 years 

Major additions and betterments are capitalized, while replacements,
maintenance, and repairs that do not extend the useful lives of the assets are
charged to operations as incurred. Depreciation expense totaled $4.1 million,
$3.7 million, and $5.5 million for the years ended December 31, 2001, 2002,
and 2003, respectively. Property, plant, and equipment consisted of the
following at (in thousands):

|                              |  |              |         |      |  |   |         |  
|----------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                              |  | December 31,
|                              |  |             
|                              |  | 2002         |         | 2003
|                              |  |              |         |     
|Land and building             |  | $            | 16,476  |      |  | $ | 6,122   |  
|Furniture and equipment       |  |              | 32,472  |      |  |   | 40,907  |  
|                              |  |              |         |      |  |   |         |  
|                              |  |              | 48,948  |      |  |   | 47,029  |  
|Less accumulated depreciation |  |              | (25,603 | )    |  |   | (21,706 | )
|                              |  |              |         |      |  |   |         |  
|                              |  | $            | 23,345  |      |  | $ | 25,323  |  
|                              |  |              |         |      |  |   |         |  

In 1994, we conveyed our Tempe, Arizona facility and certain improvements
to the city of Tempe as consideration for a rent-free 75-year lease. We have
the option to repurchase the facility for $1,000 after ten years; therefore,
the building lease is accounted for as a capital lease.

Assets Held for Sale

During the fourth quarter of 2003, we formalized plans to sell our Tempe,
Arizona corporate facility; therefore, we reclassified $8.6 million of our
building and improvements to assets held for sale. The building was listed and
actively marketed for sale at the beginning of October 2003; therefore, no
depreciation expense has occurred during the fourth quarter of 2003. We also
formalized plans to sell $52,000 of idle equipment in Manila. The equipment
has been transferred out of our production area and is actively being marketed
for sale.

Intangibles

In January 2003, we signed licensing and manufacturing agreements with
Data International Co., Ltd. of Taiwan. Under those agreements, we became the
exclusive channel in the Americas for standard and custom LCD products
manufactured by Data International. We also have the right to sell those
products through our worldwide channels. The agreements provide us with access
to a full suite of standard display products that round out our existing
standard product portfolio. The cost of the license was $3.9 million, of which
$1.0 million was paid upon signing and we entered into a $2.9 million term
loan, which will be due over the next two years. The unpaid $2.9 million is
subject to reduction if certain margin targets are not met.

Intangibles consist of mask works, trademarks, customer lists and
distribution rights. SFAS 142, Goodwill and Other Intangible Assets, requires
purchased intangible assets with definitive lives to be amortized over their
useful lives. Purchased intangibles are recorded at cost and amortized using
the straight-line method over the estimated useful lives of the respective
assets, which range from three to five years. Our policy is to commence
amortization of intangibles when their related benefits begin to be realized.
Intangible assets consisted of the following (in thousands):

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|                             |                |       |             |              |             |       |      |          |          |   |       |       |  |  |     |     | 
|---------------------------- | -------------- | ----- | ----------- | ------------ | ----------- | ----- | ---- | -------- | -------- | - | ----- | ----- |  |  | --- | --- | 
|                             |                |       | Acquisition |              | Accumulated |       | Book |          | Weighted
|December 31, 2002            |                | Value |             | Amortization |             | Value |      | Avg Life
|                             |                |       |             |              |             |       |      |         
|Amortized Intangible Assets: |                |       |             |              |             |       |      |          |          |   |       |       |  |  |     |    
|                             | Mask works     |       | $           | 548          |             |       | $    |         |          |   | $     | 548   |  |  |     | 3.0 | 
|                             | Customer lists |       |             | 5,000        |             |       |      | (256     | )        |   |       | 4,744 |  |  |     | 4.2 | 
|                             | License        |       |             |             |             |       |      |         |          |   |       |      |  |  |     |    | 
|                             |                |       |             |              |             |       |      |          |          |   |       |       |  |  |     |    
|                             |                | $     | 5,548       |              |             | $     | (256 | )        |          | $ | 5,292 |       |  |  | 4.1 |    
|                             |                |       |             |              |             |       |      |          |          |   |       |       |  |  |     |    

|                             |                |       |             |              |             |       |        |          |          |   |       |       |  |  |     |     | 
|---------------------------- | -------------- | ----- | ----------- | ------------ | ----------- | ----- | ------ | -------- | -------- | - | ----- | ----- |  |  | --- | --- | 
|                             |                |       | Acquisition |              | Accumulated |       | Book   |          | Weighted
|December 31, 2003            |                | Value |             | Amortization |             | Value |        | Avg Life
|                             |                |       |             |              |             |       |        |         
|Amortized Intangible Assets: |                |       |             |              |             |       |        |          |          |   |       |       |  |  |     |    
|                             | Mask works     |       | $           | 991          |             |       | $      |         |          |   | $     | 991   |  |  |     | 3.0 | 
|                             | Customer lists |       |             | 5,000        |             |       |        | (1,523   | )        |   |       | 3,477 |  |  |     | 4.2 | 
|                             | License        |       |             | 3,882        |             |       |        | (776     | )        |   |       | 3,106 |  |  |     | 5.0 | 
|                             |                |       |             |              |             |       |        |          |          |   |       |       |  |  |     |    
|                             |                | $     | 9,873       |              |             | $     | (2,299 | )        |          | $ | 7,574 |       |  |  | 4.4 |    
|                             |                |       |             |              |             |       |        |          |          |   |       |       |  |  |     |    

Intangible asset amortization expense for the year ended December 31, 2002
was $256,000. Intangible asset amortization expense for the year ended
December 31, 2003 was $2.0 million.

Estimated annual amortization expense through 2008 and thereafter related
to intangible assets reported as of December 31, 2003 was as follows (in
thousands):

|            |  |   |       | 
|----------- |  | - | ----- | 
|Fiscal Year |  |   |       | 
|            |  |   |       | 
|2004        |  | $ | 2,323 | 
|2005        |  |   | 2,315 | 
|2006        |  |   | 1,704 | 
|2007        |  |   | 1,226 | 
|2008        |  |   | 4     | 
|Thereafter  |  |   | 2     | 
|            |  |   |       | 
|            |  | $ | 7,574 | 
|            |  |   |       | 

Evaluation of Long-Lived Assets with Definite Lives

In accordance with Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we evaluate the recoverability
of property, plant and equipment and intangibles with definite lives not held
for sale. Whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable, we evaluate
recoverability by comparing the carrying amount of the asset or group of
assets against the estimated undiscounted future cash flows expected to result
from the use of the asset or group of assets and their eventual disposition. If
the undiscounted cash flows are less than the carrying value of the asset or
group of assets being evaluated, an impairment loss is recorded. These cash
flows are evaluated for objectivity by using weighted probability techniques
and also comparisons of past performance against projections. Assets may also
be evaluated by identifying independent market values. The loss is measured as
the difference between the fair value and carrying value of the asset or group
of assets being evaluated. Assets held for sale are reported at the lower of
the carrying amount or the fair value less cost to sell. The estimated fair
value is based on the best information available under the circumstances,
including prices for similar assets or the results of valuation techniques,
including the present value of expected future cash flows using a discount rate
commensurate with the risks involved.

Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill is analyzed for impairment, on at least an annual basis, or more
frequently under certain circumstances, and written down when impaired rather
than being amortized.

Goodwill decreased $295,000 due to a $610,000 reduction of the ETMA
Corporation purchase price and the addition of $315,000 of capitalized
acquisition costs related to the Unico acquisition.

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Changes in goodwill from December 31, 2002 to December 31, 2003 (in thousands)
were as follows:

|                             |  |       |        |  
|---------------------------- |  | ----- | ------ | -
|                             |  | Total
|                             |  |      
|Balance at December 31, 2002 |  | $     | 34,901 |  
|Change                       |  |       | (295   | )
|                             |  |       |        |  
|Balance at December 31, 2003 |  | $     | 34,606 |  
|                             |  |       |        |  

Accrued Liabilities

Accrued liabilities included, among other things, accrued compensation of
approximately $1.8 million and $1.9 million at December 31, 2002 and 2003,
respectively.

Income Taxes

Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,requires the
use of an asset and liability approach in accounting for income taxes. Deferred
tax assets and liabilities are recorded based on the differences between the
financial statement and tax bases of assets and liabilities and the tax rates
in effect when these differences are expected to reverse.

Foreign Currency Translation

For foreign subsidiaries that use currency other than the U.S. dollar as
their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet date, and revenue and expenses are
translated at the weighted average exchange rate for the period. The effects
of these translation adjustments are reported in other comprehensive income and
as a separate component of stockholders equity.

Derivatives

On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards requiring us to recognize derivatives as either assets or liabilities
on the balance sheet and to measure those instruments at fair value. The
adoption of SFAS No. 133 did not have a material impact on our financial
position or results of operation.

We may use derivatives to manage exposures to foreign currency
fluctuations. The only type of derivative we use is foreign currency forward
contracts. Our objectives for holding these forward contracts are to decrease
the potential volatility of earnings and cash flows associated with changes in
foreign currency exchange rates (see Note 9).

Revenue Recognition

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. This means that when a
product is shipped from one of our factories under the terms of FOB Factory,
then the risk of loss passes to the customer when the product leaves our
factory and we recognize revenue at that time. One the other hand, when a
product is shipped FOB Destination, then risk of loss during transit is
maintained by us. Thus, we recognize revenue when the product is accepted by
the customer. Sales allowances are estimated based upon historical experience
of sales returns. We recognize revenue related to engineering and tooling
services after service has been rendered, which is determined based upon
completion of agreed upon milestones or deliverables.

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 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.

Sales allowances are estimated based upon historical experience of sales
returns.

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Research, Development, and Engineering

Research, development, and engineering costs are expensed as incurred.

Stock Compensation

Pursuant to the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, we account for options granted to our employees pursuant to
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees, under which no compensation cost has been recognized. However, we
have computed compensation cost, for pro forma disclosure purposes, based on
the fair value of all options awarded on the date of grant, utilizing the
Black-Scholes option pricing method with the following weighted assumptions:
risk-free interest rates of 4.42%, 2.74%, and 3.25% for 2001, 2002, and 2003;
expected dividend yields of zero for all scenarios; expected lives of 6.1 years
for 2001 and 2002 and 5.7 years for 2003; and expected volatility (a measure of
the amount by which a price has fluctuated or is expected to fluctuate during a
period) of 74.5%, 74.4%, and 79.6% for 2001, 2002, and 2003, respectively. The
compensation costs for 2001 and 2002 are tax-effected and the compensation
costs for 2003 are not tax-effected. Had compensation cost for these plans
been determined consistent with SFAS No. 123, our net loss and loss per share
would have been as follows (in thousands, except per share data):

|                                      |                                                                                                                             |  |   |                          |   |      |   |         |   |  |   |         |   | 
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------------ | - | ---- | - | ------- | - |  | - | ------- | - | 
|                                      |                                                                                                                             |  |   | Years Ended December 31,
|                                      |                                                                                                                             |  |   |                         
|                                      |                                                                                                                             |  |   | 2001                     |   | 2002 |   | 2003   
|                                      |                                                                                                                             |  |   |                          |   |      |   |        
|Net loss:                             |                                                                                                                             |  |   |                          |   |      |   |         |   |  |   |        
|                                      | As reported                                                                                                                 |  | $ | (17,764                  | ) |      | $ | (16,971 | ) |  | $ | (44,453 | )
|                                      | Total stock-based compensation
expenses determined under fair
value based method for all
awards, net of related tax
effects |  |   | (3,223                   | ) |      |   | (4,378  | ) |  |   | (5,035  | )
|                                      |                                                                                                                             |  |   |                          |   |      |   |         |   |  |   |         |  
|                                      | Pro forma net loss                                                                                                          |  | $ | (20,987                  | ) |      | $ | (21,349 | ) |  | $ | (49,488 | )
|                                      |                                                                                                                             |  |   |                          |   |      |   |         |   |  |   |        
|Basic and diluted net loss per share: |                                                                                                                             |  |   |                          |   |      |   |         |   |  |   |        
|                                      | As reported                                                                                                                 |  | $ | (0.83                    | ) |      | $ | (0.79   | ) |  | $ | (2.09   | )
|                                      | Pro forma                                                                                                                   |  |   | (0.98                    | ) |      |   | (0.99   | ) |  |   | (2.32   | )

Earnings Per Share

Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during the year before giving effect to stock options and warrants considered
to be dilutive common stock equivalents. Diluted net income (loss) per common
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the year after giving effect to stock
options and warrants considered to be dilutive common stock equivalents. Set
forth below are the disclosures required pursuant to SFAS No. 128  Earnings
per Share:

|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |        |       |  
|---------------------------------- | ------------------------------------------------- | ---------------------------------------- | ------- | ------------------------ | ----- | ---- | ------- | ------ | ----- | - | ------- | ------ | ----- | -
|                                   |                                                   |                                          |         | Years Ended December 31,
|                                   |                                                   |                                          |         |                         
|                                   |                                                   |                                          |         | 2001                     |       | 2002 |         | 2003  
|                                   |                                                   |                                          |         |                          |       |      |         |       
|Basic earnings (loss) per share:   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|Net income (loss)                  |                                                   | $                                        | (17,764 | )                        |       | $    | (16,971 | )      |       | $ | (44,453 | )     
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|                                   | Weighted average common shares                    |                                          |         | 21,401                   |       |      |         | 21,465 |       |   |         | 21,301 |      
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|                                   |                                                   | Basic earnings (loss) per share amount   |         | $                        | (0.83 | )    |         | $      | (0.79 | ) |         | $      | (2.09 | )
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|Diluted earnings (loss) per share: |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|Net income (loss)                  |                                                   | $                                        | (17,764 | )                        |       | $    | (16,971 | )      |       | $ | (44,453 | )     
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|                                   | Weighted average common shares                    |                                          |         | 21,401                   |       |      |         | 21,465 |       |   |         | 21,301 |      
|                                   | Options and warrants assumed exercised            |                                          |         |                         |       |      |         |       |       |   |         |       |      
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|                                   | Total common shares plus common stock equivalents |                                          |         | 21,401                   |       |      |         | 21,465 |       |   |         | 21,301 |      
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       
|                                   |                                                   | Diluted earnings (loss) per share amount |         | $                        | (0.83 | )    |         | $      | (0.79 | ) |         | $      | (2.09 | )
|                                   |                                                   |                                          |         |                          |       |      |         |        |       |   |         |       

For the years ended December 31, 2001, 2002 and 2003, the effect of 577,431,
314,569 and 348,030 shares, respectively, were excluded from the calculation of
loss per share as their effect would have been antidilutive and decreased the
loss per share.

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Recently Issued Accounting Standards

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This Interpretation addresses
the disclosures to be made by a guarantor in its financial statements and its
obligations under guarantees. The Interpretation also clarifies the
requirements related to the recognition of a liability by the guarantor at the
inception of a guarantee. Per the Interpretation, initial recognition of a
liability are to be applied only on a prospective basis to guarantees issued or
modified after December 31, 2002. We adopted the requirements of FIN 45 as of
January 1, 2003, and there was no impact on our financial position or results
of operations.

In January 2003, the Emerging Issues Task Force (EITF) issued EITF
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF
00-21 addresses the issues of how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. EITF 00-21 does not change otherwise
applicable revenue recognition criteria. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
application of EITF 00-21 did not have a material effect on our financial
statements.

In November 2002, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. This interpretation was
subsequently revised by FIN 46 (Revised 2003) in December 2003. This
interpretation states that consolidation of variable interest entities will be
required by the primary beneficiary if the entities do not effectively disperse
risk among the parties involved. The requirements are effective for fiscal
years ending after December 15, 2003. We have no variable interest entities
and do not believe that FIN No. 46 ® will impact our future financial
results.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 requires the classification of certain
financial instruments, previously classified within the equity section of the
balance sheet, to be included in liabilities. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and June 15,
2003 for all other instruments. The adoption of SFAS No. 150 did not have an
impact effect on our financial statements.

Minority Interest

In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang. Unico
was an electronic manufacturer for OEM customers in the computer, computer
peripheral, and communications industries. The Unico business was acquired by
TFS Electronic Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a joint
venture owned 60% by an overseas TFS subsidiary and 40% by Unico Holdings Bhd.,
the former parent of Unico. We control TFS-Malaysia and consolidate this
subsidiary with Unico Holdings Bhds ownership accounted for as a minority
interest. Unico Holdings is the investment arm of the Chinese Chamber of
Commerce of Malaysia. Our share of the initial cost of capitalizing
TFS-Malaysia was $3.8 million, and Unico Holdings share was $2.5 million, most
of which will be used for working capital. TFS-Malaysia purchased $4.1 million
in inventory from Unico, of which $2.7 million was paid at the time of the
purchase and $1.4 million was subsequently paid. No advance payment was
required for the acquisition of the property, plant, and equipment of Unico,
all of which is leased from the seller. The equipment lease is accounted for as
a capital lease. The principal balance on that lease was $8.1 million as of
December 31, 2003.

The minority interest for 2001 and 2002 relate to our subsidiary, Three-D
OLED L.L.C., that was partially owned by Dupont Displays, which was
subsequently liquidated in 2002.

Loss (Gain) on Sale of Assets

During 2002, we signed a Cooperative Agreement with a Chinese company
under which we agreed to sell the equipment used in our front-end LCD equipment
and establish a supply agreement. Under the terms of the Cooperative Agreement,
in exchange for our front-end LCD line, we received a total of $3.0 million in
cash during 2002 and 2003. In the second quarter of 2002, as a result of
signing the Cooperative Agreement, we realized a charge of $4.5 million for the
write-down on the LCD equipment sold to the Chinese company. This charge was
reported as a separate line item in operating expense. In connection with the
Cooperative Agreement, we received $2.1 million in 2002, all of which was

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applied against the $3.0 million sales price and recorded as a reduction in the
carrying value of the LCD equipment held for sale. The sale of the equipment
is now complete, and we received $900,000 in 2003.

During 2001, we wrote off $1.4 million of costs relating to the
cancellation of our J.D. Edwards Enterprise Resource Planning System
implementation. During 2003, we reached a settlement of our legal claim against
J.D. Edwards and recorded the settlement as other income of approximately
$700,000.

(3)  Acquisitions and Strategic Transactions:

In March 2003, we signed an agreement with Microtune, Inc. under which we
agreed to manufacture, assemble, and test Microtunes radio frequency, or RF,
tuner modules and wireless module products in our manufacturing facility in
Manila, the Philippines. As part of the agreement, Microtune sold to us certain
of its own equipment and inventory for $8.2 million, of which $2.7 million was
a note payable due in September 2003, and contracted with us to provide 100% of
Microtunes current demand for fully assembled RF subsystems. We also hired
approximately 500 Microtune employees in Manila. In October 2003, we paid off
approximately $300,000 of the $2.7 million note payable to Microtune and
entered into an agreement to cancel the remaining $2.4 million balance on that
note payable in exchange for the return of inventory to Microtune.

In April 2003, we acquired the business and certain assets of Unico
Technology Bhd., a privately held Malaysian company located in Penang. Unico
was an electronic manufacturer for OEM customers in the computer, computer
peripheral, and communications industries. The Unico business was acquired by
TFS Electronic Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a joint
venture owned 60% by an overseas TFS subsidiary and 40% by Unico Holdings Bhd.,
the former parent of Unico. Unico Holdings is the investment arm of the Chinese
Chamber of Commerce of Malaysia. Our share of the initial cost of capitalizing
TFS-Malaysia was $3.8 million and Unico Holdings share was $2.5 million, most
of which will be used for working capital. TFS-Malaysia purchased $4.1 million
in inventory from Unico, of which $2.7 million was paid at the time of the
purchase and $1.4 million was subsequently paid. No advance payment was
required for the acquisition of the property, plant, and equipment of Unico,
all of which is leased from the seller. The equipment lease is accounted for as
a capital lease that is payable by TFS-Malaysia. The principal balance on that
lease was $8.1 million as of December 31, 2003.

In September 2002, we purchased the assets and ongoing business of AVT,
located in Marlborough, Massachusetts, a privately held company that
specializes in the design and integration of complex, high-resolution display
systems. AVT designs and provides customized and ruggedized flat panel,
touchscreen and rackmount systems for original equipment manufacturers. The
purchase price of the acquisition was $12.0 million, which we paid entirely in
cash.

The purchase price was allocated as follows (in thousands):

|                              |                       |   |        |        | 
|----------------------------- | --------------------- | - | ------ | ------ | 
|Current assets                |                       | $ | 2,115  |       
|Property, plant and equipment |                       |   | 105    |       
|Customer list intangibles     |                       |   | 3,000  |       
|Goodwill                      |                       |   | 7,774  |       
|Other long-term assets        |                       |   | 40     |       
|Current liabilities           |                       |   | (1,045 | )     
|                              |                       |   |        |       
|                              | Net Acquisition price |   | $      | 11,989 | 
|                              |                       |   |        |       

In December 2002, we purchased the stock of ETMA Corporation, located in
Redmond, Washington, a privately held electronics services manufacturer for OEM
customers in the automotive, computer/server, medical monitoring, and Internet
security industries. ETMA offers the manufacturing capabilities of five
surface mount manufacturing lines, including one dedicated to new product
introduction and prototyping activity. ETMA provides engineering support,
automated printed circuit board assembly, in-circuit and functional testing,
systems integration and box build, complete supply chain management, and
turnkey packaging and fulfillment services. The purchase price of the
acquisition was $38.1 million, which we paid entirely in cash.

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The purchase price was allocated as follows (in thousands):

|                              |                       |   |        |        | 
|----------------------------- | --------------------- | - | ------ | ------ | 
|Current assets                |                       | $ | 17,389 |       
|Property, plant and equipment |                       |   | 1,454  |       
|Customer list intangibles     |                       |   | 2,000  |       
|Goodwill                      |                       |   | 27,127 |       
|Current liabilities           |                       |   | (9,842 | )     
|Long-term liabilities         |                       |   | (28    | )     
|                              |                       |   |        |       
|                              | Net Acquisition price |   | $      | 38,100 | 
|                              |                       |   |        |       

Total intangible assets from the acquisition of AVT and ETMA related to
customer lists of $5.0 million will be amortized over their weighted averaged
useful lives of approximately four years.

The results of operations of AVT and ETMA have been included in the
accompanying financial statements since their respective acquisition dates.
The acquisition of AVT was considered immaterial and pro forma results are
therefore not presented. Unaudited pro forma Consolidated Statements of
Operations for 2001 and 2002, presented as if ETMA had been acquired at the
beginning of each year, are as follows (in thousands, except per share data):

|                                   |  |                          |         |      |  |   |         |  
|---------------------------------- |  | ------------------------ | ------- | ---- |  | - | ------- | -
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2001                     |         | 2002
|                                   |  |                          |         |     
|                                   |  | (unaudited)             
|Net sales                          |  | $                        | 170,597 |      |  | $ | 150,108 |  
|Net loss                           |  |                          | (21,044 | )    |  |   | (17,065 | )
|Loss per share (basic and diluted) |  |                          | (0.98   | )    |  |   | (0.80   | )

The pro forma amounts include a reduction in interest income related to the
presumption that the acquisition occurred as of January 1, 2001 and 2002 and
investments were therefore reduced by $38.1 million. ETMA incurred an unusual
item of $3.6 million in 2001 for the write-off of accounts receivable.

Goodwill decreased $295,000 due to a $610,000 reduction of ETMA Corporation
purchase price and the addition of $315,000 of capitalized costs related to the
Unico acquisition.

Changes in goodwill from December 31, 2002 to December 31, 2003 (in thousands)
were as follows:

|                             |  |       |        |  
|---------------------------- |  | ----- | ------ | -
|                             |  | Total
|                             |  |      
|Balance at December 31, 2002 |  | $     | 34,901 |  
|Change                       |  |       | (295   | )
|                             |  |       |        |  
|Balance at December 31, 2003 |  | $     | 34,606 |  
|                             |  |       |        |  

(4)  Long-Term Debt:

Long-Term balances were as follows at (in thousands):

|                                                                                                                                                                                            |  |              |       |      |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                                                                                                                                                            |  | December 31,
|                                                                                                                                                                                            |  |             
|                                                                                                                                                                                            |  | 2002         |       | 2003
|                                                                                                                                                                                            |  |              |       |     
|Loan due to Bank of China, interest due
quarterly at 5.85%, due April 30, 2003, secured
by a $3.0 million stand-by letter of credit
issued under the $15.0 million revolving line
of credit |  |              | 2,706 |      |  |   |      | 
|Term loan due to Data International, interest
rate of 2.6% due January 2005                                                                                                                 |  |              |      |      |  |   | 2,956 | 
|Other loan                                                                                                                                                                                  |  | $            | 28    |      |  | $ |      | 
|                                                                                                                                                                                            |  |              |       |      |  |   |       | 
|                                                                                                                                                                                            |  |              | 2,734 |      |  |   | 2,956 | 
|Less current portion                                                                                                                                                                        |  |              | 2,714 |      |  |   | 1,515 | 
|                                                                                                                                                                                            |  |              |       |      |  |   |       | 
|Long-term portion                                                                                                                                                                           |  | $            | 20    |      |  | $ | 1,441 | 
|                                                                                                                                                                                            |  |              |       |      |  |   |       | 

In September 2003, we paid off our unsecured $2.7 million term loan to the
Bank of China.

Interest expense was $101,000, $186,000, and $204,000, respectively, for
2001, 2002, and 2003.

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The
following table lists our note payable payments relating to long-term
debt reported as of December 31, 2003 (in thousands):

|            |  |   |       | 
|----------- |  | - | ----- | 
|Fiscal Year
|           
|2004        |  | $ | 1,515 | 
|2005        |  |   | 1,441 | 
|            |  |   |       | 
|Total       |  | $ | 2,956 | 
|            |  |   |       | 

(5)  Capital Leases:

Capital leases were as follows at (in thousands):

|                                                                                                               |  |              |   |      |  |   |       | 
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | - | ---- |  | - | ----- | 
|                                                                                                               |  | December 31,
|                                                                                                               |  |             
|                                                                                                               |  | 2002         |   | 2003
|                                                                                                               |  |              |   |     
|Capital lease due on purchase of Unico equipment,
interest rate 13.3%, payable through April 2007              |  | $            |  |      |  | $ | 8,135 | 
|Other capital leases with interest rate ranges from 1.9% to 14.2%,
payable through December 2003 and July 2007 |  |              |  |      |  |   | 760   | 
|                                                                                                               |  |              |   |      |  |   |       | 
|                                                                                                               |  |              |   |      |  |   | 8,895 | 
|                                                                                                               |  |              |   |      |  |   |       | 
|Less current portion                                                                                           |  |              |  |      |  |   | 2,352 | 
|                                                                                                               |  |              |   |      |  |   |       | 
|Long-term portion                                                                                              |  | $            |  |      |  | $ | 6,543 | 
|                                                                                                               |  |              |   |      |  |   |       | 

Interest
expense related to capital leases was $868,000 in 2003.

The
following table lists our capital lease payments reported as of
December 31, 2003 (in thousands):

|            |  |   |       | 
|----------- |  | - | ----- | 
|Fiscal Year
|           
|2004        |  | $ | 2,352 | 
|2005        |  |   | 2,617 | 
|2006        |  |   | 2,909 | 
|2007        |  |   | 1,017 | 
|            |  |   |       | 
|Total       |  | $ | 8,895 | 
|            |  |   |       | 

(6)  Stockholders Equity:

On December 7, 2000, our Board of Directors authorized a stock repurchase
program whereby our company, at the discretion of management, could buy back up
to $30.0 million of our common stock in the open market. During the year ended
December 31, 2000, we purchased 241,381 shares at a cost of $4,623,000. During
the year ended December 31, 2001, we purchased 149,197 shares at a cost of
$2,526,000. During the year ended December 31, 2002, we purchased 260,600
shares at a cost of $1,351,000. There were no stock repurchases in 2003.

During the second quarter of 2001, our Board of Directors adopted a
stockholder rights plan (the Rights Plan). Under the Rights Plan, we issued
a dividend of one Preferred Share Purchase Right (the Right) for each share
of common stock of our company held by stockholders of record as of the close
of business on May 14, 2001. Each Right entitles stockholders to buy one
one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred
Stock of our company at an exercise price of $120.00 (subject to adjustment).
The Rights Plan was not adopted in response to any specific takeover threat.
The Rights Plan, however, was designed to assure that all of our stockholders
receive fair and equal treatment in the event of any proposed takeover of our
company, and to guard against coercive or unfair tactics to gain control of our
company without paying all stockholders a premium for that control.

(7) Benefit Plans:

We have five stock option plans: the 1990 Stock Option Plan (1990 Plan),
the 1993 Stock Option Plan (1993 Plan), the 1994 Non-Employee Directors Stock
Option Plan (1994 Plan), the 1997 Stock Option Plan (1997 Plan), and 1998 Stock
Option Plan (1998 Plan).

1990 Stock Option Plan

Under the 1990 Plan, there were options issued but unexercised to purchase
76,520 shares of our companys common stock as of December 31, 2003. The 1990
Plan expired on May 1, 2001, at which time all unissued options expired.

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The expiration date, maximum number of shares purchasable, and the other
provisions of the options granted under the 1990 Plan were established at the
time of grant. Options were granted for terms of up to ten years and became
exercisable in whole or in one or more installments at such times as were
determined by the Board of Directors upon grant of the options.

1993 Stock Option Plan

Under the 1993 Plan, there were options outstanding to acquire 275,367
shares of our companys common stock under the 1993 Plan at December 31, 2003.
The 1993 Plan expired on February 24, 2003, at which time all unissued options
expired.

1994 Non-Employee Directors Stock Option Plan

The 1994 Plan provides for the automatic grant of stock options to
non-employee directors to purchase up to 100,000 shares of our common stock. On
April 26, 2001, the stockholders approved a proposal to amend our 1994
Automatic Stock Option Plan for Non-Employee Directors (the 1994 Plan). Now,
under the 1994 Plan, options to acquire 2,000 shares of common stock will be
automatically granted to each non-employee director at the meeting of our Board
of Directors held immediately after each annual meeting of stockholders, with
such options to vest in a series of 12 equal and successive monthly
installments commencing one month after the annual automatic grant date. In
addition, each non-employee director serving on our Board of Directors on the
date the 1994 Plan was approved by our stockholders received an automatic grant
of options to acquire 5,000 shares of common stock and each subsequent newly
elected non-employee member of our Board of Directors receives an automatic
grant of options to acquire 5,000 shares of common stock on the date of their
first appointment or election to our Board of Directors. Those options become
exercisable and vest in a series of three equal and successive annual
installments, with the first such installment becoming exercisable immediately
after the directors second successive election to our Board of Directors (the
First Vesting Date), the second installment becoming exercisable 10 months
after the First Vesting Date, and the third installment becoming exercisable 22
months after the First Vesting Date (provided that the director has not ceased
serving as a director prior to a vesting date). A non-employee member of our
Board of Directors is not eligible to receive the 2,000 share automatic option
grant if that option grant date is within 30 days of such non-employee member
receiving the 5,000 share automatic option grant. The exercise price per share
of common stock subject to options granted under the 1994 Plan will be equal to
100% of the fair market value of our common stock on the date such options are
granted. There were outstanding options to acquire 55,093 shares of our common
stock under the 1994 Plan at December 31, 2003. The plan remains in force
until April 12, 2004, at which time all unissued options will expire.

1997 Stock Option Plan

The 1997 Plan provides for the granting of nonqualified options to
purchase up to 2,100,000 shares of our common stock. Under the 1997 Plan,
options may be issued to key personnel and others providing valuable services
to our company. Any option that expires or terminates without having been
exercised in full will again be available for grant pursuant to the 1997 Plan.
There were options outstanding to acquire 1,205,532 shares of our common stock
under the 1997 Plan at December 31, 2003.

The expiration date, maximum number of shares purchasable, and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of the options are
determined by the plan administrator, but may not be less than 100% of the fair
market value of the common stock at the time of the grant. The 1997 Plan will
remain in force until May 12, 2007.

1998 Stock Option Plan

The 1998 Plan provides for the granting of incentive stock options and
nonqualified options to purchase up to 1,600,000 shares of our common stock.
Under the 1998 Plan, options may be issued to key personnel and others
providing valuable services to our company. The options issued will be
incentive stock options or nonqualified stock options as defined in Section 422
of the Code. Any option that expires or terminates without having been
exercised in full will again be available for grant pursuant to the 1998 Plan.
There were options outstanding to acquire 1,420,962 shares of our common stock
under the 1998 Plan at December 31, 2003.

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The expiration date, maximum number of shares purchasable, and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of the options are
determined by the plan administrator, but may not be less than 100% of the fair
market value of the common stock at the time of the grant (110% if the option
is an incentive stock option granted to a stockholder who at the time the
option is granted owns stock representing more than 10% of the total combined
voting power of all classes of stock of our company). The 1998 Plan will remain
in force until January 28, 2008.

Tax benefits from option exercises are credited to additional paid-in
capital.

The following table and narrative summarizes the status of our five stock
option plans at December 31, 2001, 2002, and 2003, and changes during the years
then ended:

|                                               |  |         |           |       |  |          |       |       |  |         |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|---------------------------------------------- |  | ------- | --------- | ----- |  | -------- | ----- | ----- |  | ------- | --------- | -------- |  | - | ----- |  |  | -------- | --------- | - |  | - | ----- | 
|                                               |  | 2001    |           | 2002  |  | 2003    
|                                               |  |         |           |       |  |         
|                                               |  |         |           |       |  | Weighted |       |       |  |         |           | Weighted |  |   |       |  |  | Weighted
|                                               |  |         |           |       |  | Average  |       |       |  |         |           | Average  |  |   |       |  |  | Average 
|                                               |  |         |           |       |  | Exercise |       |       |  |         |           | Exercise |  |   |       |  |  | Exercise
|                                               |  | Options |           | Price |  | Options  |       | Price |  | Options |           | Price   
|                                               |  |         |           |       |  |          |       |       |  |         |           |         
|Outstanding at beginning
of year               |  |         | 1,974,668 |       |  | $        | 14.75 |       |  |         | 2,086,969 |          |  | $ | 14.97 |  |  |          | 2,890,728 |   |  | $ | 12.59 | 
|Granted                                        |  |         | 535,295   |       |  |          | 19.44 |       |  |         | 1,153,699 |          |  |   | 9.21  |  |  |          | 497,402   |   |  |   | 4.65  | 
|Exercised                                      |  |         | (235,665  | )     |  |          | 6.55  |       |  |         | (39,183   | )        |  |   | 5.35  |  |  |          | (24,684   | ) |  |   | 4.79  | 
|Expired or canceled                            |  |         | (187,329  | )     |  |          | 35.97 |       |  |         | (310,757  | )        |  |   | 16.94 |  |  |          | (329,972  | ) |  |   | 35.40 | 
|                                               |  |         |           |       |  |          |       |       |  |         |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding at end of year                     |  |         | 2,086,969 |       |  |          | 14.97 |       |  |         | 2,890,728 |          |  |   | 12.59 |  |  |          | 3,033,474 |   |  |   | 8.87  | 
|                                               |  |         |           |       |  |          |       |       |  |         |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Exercisable at end of year                     |  |         | 617,906   |       |  | $        | 9.81  |       |  |         | 1,042,169 |          |  | $ | 11.48 |  |  |          | 1,648,170 |   |  | $ | 9.57  | 
|                                               |  |         |           |       |  |          |       |       |  |         |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Weighted average fair value of
options granted |  |         |           |       |  | $        | 16.13 |       |  |         |           |          |  | $ | 7.29  |  |  |          |           |   |  | $ | 5.05  | 
|                                               |  |         |           |       |  |          |       |       |  |         |           |          |  |   |       |  |  |          |           |   |  |   |       | 

The following table summarizes information about stock options outstanding at
December 31, 2003:

|                    |  |                     |             |             |          |          |          |              |             |          |          |  |  |  |           |  |  |   |       |  | 
|------------------- |  | ------------------- | ----------- | ----------- | -------- | -------- | -------- | ------------ | ----------- | -------- | -------- |  |  |  | --------- |  |  | - | ----- |  | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     | Number      |             | Weighted |          |          |              |             |          | Number   |  |  |  |          
|                    |  |                     | Outstanding |             | Average  |          | Weighted |              | Exercisable |          | Weighted
|Range of            |  | at                  |             | Remaining   |          | Average  |          | at           |             | Average 
|Exercise            |  | December 31,        |             | Contractual |          | Exercise |          | December 31, |             | Exercise
|Prices              |  | 2003                |             | Life        |          | Price    |          | 2003         |             | Price   
|                    |  |                     |             |             |          |          |          |              |             |         
|$0.32
 $7.46       |  |                     | 1,814,114   |             |          |          | 7.0      |              |             | $        | 5.01     |  |  |  | 1,005,296 |  |  | $ | 5.50  | 
|7.47  14.92        |  |                     | 608,244     |             |          |          | 7.4      |              |             |          | 9.98     |  |  |  | 291,933   |  |  |   | 9.88  | 
|14.93  74.63       |  |                     | 611,116     |             |          |          | 6.8      |              |             |          | 19.20    |  |  |  | 350,941   |  |  |   | 20.95 | 
|                    |  |                     |             |             |          |          |          |              |             |          |          |  |  |  |           |  |  |   |       | 
|                    |  |                     | 3,033,474   |             |          |          | 7.0      |              |             | $        | 8.87     |  |  |  | 1,648,170 |  |  | $ | 9.57  | 
|                    |  |                     |             |             |          |          |          |              |             |          |          |  |  |  |           |  |  |   |       | 

In connection with the spin-off, each outstanding TFS option granted prior
to the spin-off was converted into both an adjusted TFS option and a substitute
Brillian option. The treatment of such TFS options and the substitute Brillian
options is identical for those employees who remained employees of TFS
immediately after the spin-off and for those employees who became employees of
Brillian in connection with the spin-off. These TFS options were converted in
a manner that preserved the aggregate exercise price of each option, which was
allocated between the adjusted TFS option and the substitute Brillian options,
and each preserved the ratio of the exercise price to the fair market value of
the stock subject to the option.

401(k) Profit Sharing Plan

We have adopted a profit sharing plan (401(k) Plan). The 401(k) Plan
covers substantially all full-time employees who meet the eligibility
requirements and provides for a discretionary profit sharing contribution by us
and an employee elective contribution with a discretionary matching provision
by our company. We expensed discretionary contributions pursuant to the 401(k)
Plan in the amount of $262,000, $200,000, and $187,000 for the years ended
December 31, 2001, 2002, and 2003, respectively.

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Pension Plan

On June 1, 2001, Manila adopted a defined benefit pension plan (the
Pension Plan) for its employees. The Pension Plan covers most regular Manila
employees. The Pension Plan benefits were retroactive to an employees date of
hire, resulting in a pension benefit obligation as of January 1, 2001 of
$249,000. The pension benefit obligation at December 31, 2001, 2002, and 2003
was $349,000 and $210,000, and $327,000, respectively.

(8) Income Taxes:



| |  | The following table presents the U.S. and international components of income
(loss) from continuing operations before income taxes for the years ended
December 31 (in thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Operations Before Income Taxes                                                                                                                                                    

|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                             |  | December 31,
|                                             |  |             
|                                             |  | 2001         |         | 2002 |  | 2003
|                                             |  |              |         |      |  |     
|United States                                |  | $            | (13,248 | )    |  | $    | (12,116 | ) |  | $ | (18,866 | )
|International                                |  |              | 3,243   |      |  |      | 3,465   |   |  |   | (697    | )
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Total Pretax Loss from Continuing Operations |  | $            | (10,005 | )    |  | $    | (8,651  | ) |  | $ | (19,563 | )
|                                             |  |              |         |      |  |      |         |   |  |   |         |  

The provision (benefit) for income taxes for the years ended December 31
consists of the following (in thousands):

|                                                          |                              |                                           |     |        |        |      |        |        |        |   |     |        |        | 
|--------------------------------------------------------- | ---------------------------- | ----------------------------------------- | --- | ------ | ------ | ---- | ------ | ------ | ------ | - | --- | ------ | ------ | 
|                                                          |                              |                                           |     | 2001   |        | 2002 |        | 2003  
|                                                          |                              |                                           |     |        |        |      |        |       
|Current provision (benefit), net of tax credits utilized: |                              |                                           |     |        |        |      |        |        |        |   |     |       
|                                                          | Federal                      |                                           | $   | (831   | )      |      | $      | (2,118 | )      |   | $   | 15     |       
|                                                          | States                       |                                           |     |       |        |      |        |       |        |   |     |       |       
|                                                          | Foreign                      |                                           |     | 797    |        |      |        | 486    |        |   |     | 159    |       
|                                                          |                              |                                           |     |        |        |      |        |        |        |   |     |       
|                                                          |                              |                                           | (34 | )      |        |      | (1,632 | )      |        |   | 174 |       
|                                                          | Deferred provision (benefit) |                                           |     | (4,138 | )      |      |        | (2,289 | )      |   |     | 14,164 |       
|                                                          |                              |                                           |     |        |        |      |        |        |        |   |     |        |       
|                                                          |                              | Provision for (benefit from) income taxes |     | $      | (4,172 | )    |        | $      | (3,921 | ) |     | $      | 14,338 | 
|                                                          |                              |                                           |     |        |        |      |        |        |        |   |     |       

The components of deferred taxes at December 31 are as follows (in
thousands):

|                                                 |                                                           |                              |        |        |     |      |     |         |     | 
|------------------------------------------------ | --------------------------------------------------------- | ---------------------------- | ------ | ------ | --- | ---- | --- | ------- | --- | 
|                                                 |                                                           |                              |        | 2002   |     | 2003
|                                                 |                                                           |                              |        |        |     |     
|Net current deferred tax assets:                 |                                                           |                              |        |        |     |      |     |        
|                                                 | Uniform capitalization                                    |                              | $      | 985    |     |      | $   | 261     |    
|                                                 | Accrued liabilities and reserves not currently deductible |                              |        | 1,105  |     |      |     | 952     |    
|                                                 | Allowance for doubtful accounts                           |                              |        | 56     |     |      |     | 77      |    
|                                                 | Valuation allowance                                       |                              |        |       |     |      |     | (1,294  | )  
|                                                 | Other                                                     |                              |        | 211    |     |      |     | 134     |    
|                                                 |                                                           |                              |        |        |     |      |     |        
|                                                 |                                                           | $                            | 2,357  |        |     | $    | 130 |        
|                                                 |                                                           |                              |        |        |     |      |     |        
|Net long-term deferred tax (liabilities)/assets: |                                                           |                              |        |        |     |      |     |        
|                                                 |                                                           | Accelerated tax depreciation |        | $      | (42 | )    |     | $       | 797 | 
|                                                 | Net operating loss and tax credit carryforward            |                              |        | 12,745 |     |      |     | 23,303  |    
|                                                 | Capital loss carryforward                                 |                              |        | 1,288  |     |      |     | 1,288   |    
|                                                 | Valuation allowance                                       |                              |        | (2,064 | )   |      |     | (25,064 | )  
|                                                 | Investments in foreign affiliates                         |                              |        | (383   | )   |      |     | (324    | )  
|                                                 |                                                           |                              |        |        |     |      |     |        
|                                                 |                                                           | $                            | 11,544 |        |     | $    |    |        
|                                                 |                                                           |                              |        |        |     |      |     |        

We currently have $130,000 of short-term deferred tax assets resulting
from operations in foreign jurisdictions. At the end of the second quarter of
2003, we had $19.8 million of net deferred tax assets resulting primarily from
net operating loss and tax credit carryforwards. SFAS No. 109 requires that a
valuation allowance be established when it is more likely than not that all or
a portion of a deferred tax asset will not be realized. In determining whether
a valuation allowance is required, we must take into account all positive and
negative evidence with regard to the utilization of a deferred tax asset,
including our past earnings history, market conditions, management forecasts of
future profitability, the character and jurisdiction of such earnings,
unsettled circumstances that, if unfavorably resolved, would adversely affect
utilization of a deferred tax asset, carryback and carryforward periods, and
tax strategies that could potentially enhance the likelihood of realization of
a deferred tax asset. SFAS No. 109 further states that it is difficult to
conclude that a valuation allowance is not needed when there is negative
evidence such as cumulative losses in recent years.

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Therefore, despite the fact that a major portion of the losses came from our
spun-off microdisplay division, the expectation of reporting a loss in the
fourth quarter from our continuing operations means that we will have three
years of cumulative losses. Those cumulative losses weigh heavily in the
overall required assessment and outweigh our forecasted future profitability
and expectation that we will be able to utilize all of our net operating loss
carryforwards. As a result, in the third quarter, we recorded a charge to
establish a full valuation allowance against our deferred tax asset. We expect
to continue to record a full valuation allowance on future tax benefits until
we return to profitability. During 2003, our tax expense was $14.3 million as
a result of our full valuation allowance.

Our capital loss carryforward expires in 2006. We have $60.6 million of
federal net operating loss carryforwards that begin to expire in 2022. We have
other general business credit carryforwards that expire 2017.

In connection with the formation and spin-off of Brillian, Brillian
assumed a net deferred tax liability of approximately $1.1 million. This net
deferred tax liability is the result of differences between the book and tax
basis of assets transferred to Brillian. We retained the net operating losses
that were generated by Brillian operations before the spin-off.

A reconciliation of the U.S. federal statutory rate to our effective tax
rate is as follows:

|                                          |  |      |     |      |  |      |     |    |  |  |     |   
|----------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                          |  | 2001 |     | 2002 |  | 2003
|                                          |  |      |     |      |  |     
|Statutory federal rate                    |  |      | (34 | %)   |  |      | (34 | %) |  |  | (34 | %)
|Effect of state taxes                     |  |      |    |      |  |      |    |    |  |  |    |   
|Foreign earnings taxed at different rates |  |      | (8  | )    |  |      | (16 | )  |  |  | 2   |   
|Other, net                                |  |      |    |      |  |      | (4  | )  |  |  |    |   
|Valuation Allowance                       |  |      |    |      |  |      | 9   |    |  |  | 105 |   
|                                          |  |      |     |      |  |      |     |    |  |  |     |   
|                                          |  |      | (42 | %)   |  |      | (45 | %) |  |  | 73  | % 
|                                          |  |      |     |      |  |      |     |    |  |  |     |   

A deferred U.S. tax liability has not been provided on the undistributed
earnings of certain foreign subsidiaries because it is our intent to
permanently reinvest such earnings. Undistributed earnings of foreign
subsidiaries, which have been, or are intended to be, permanently invested in
accordance with APB No. 23, Accounting for Income Taxes  Special Areas,
aggregated approximately $7.9 million at December 31, 2003.

(9) Commitments and Contingencies:

Rent and Lease

In April 2001, Manila began its lease of a build-to-suit factory in
Manila. The term of the lease is 125 months.

We lease our manufacturing and warehouse facilities in Redmond,
Washington, which extends through December 2007. We lease our manufacturing
facility in Penang, Malaysia, which extends through April 2006. We lease our
manufacturing facility in Marlbourgh, Massachusetts, which extends through
March 2004. We lease our sales offices in Swindon and Florida, which extend
through January 2005 and April 2006, respectively.

We own and occupy an approximately 97,000 square foot facility in Tempe,
Arizona, which houses our U.S.-based manufacturing operations and our research,
development, engineering, design, and corporate functions. We entered into a
ground lease for this facility that extends through March 31, 2069, subject to
renewal and purchase options as well as early termination provisions. The
annual lease payments on the related land are approximately $100,000, subject
to certain escalation provisions.

Our future lease commitments under all non-cancelable operating leases as
of December 31, 2003 are as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 3,778  | 
|2005       |  |   | 3,181  | 
|2006       |  |   | 2,134  | 
|2007       |  |   | 1,573  | 
|2008       |  |   | 1,247  | 
|Thereafter |  |   | 8,892  | 
|           |  |   |        | 
|           |  | $ | 20,805 | 
|           |  |   |        | 

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Rent expense was approximately $712,000, $1,783,000, and $3,806,000 for
the years ended December 31, 2001, 2002, and 2003, respectively. We lease part
of our Tempe facility to Brillian and have received $68,000 for 2003.

Guarantee

In February 2002, we guaranteed up to $500,000 of the debt of a private
start-up company, VoiceViewer Technology, Inc., which is developing
microdisplay products. This guarantee was assumed by Brillian Corporation in
the spin-off. We have not yet been released from our obligation on the
guarantee, so if Brillian becomes required to pay on the guarantee and is
unable to satisfy its obligation, then we are secondarily liable and will be
required to pay this guarantee to the lender. As of December 31, 2003, our
maximum liability under this guarantee was $425,000. This loan guarantee has a
five-year term and matures in January 2007.

Legal Proceedings

During the fourth quarter of 2003, we reached a settlement of our legal
claim against J.D. Edwards for $700,000, which has been recorded as other
income.

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.

Derivative Instruments

We have certain receivables denominated in Chinese Renminibi and certain
payable denominations in Japanese Yen. To eliminate our exposure to changes in
the U.S. Dollar exchange rate with Chinese Renminibi and Japanese Yen, we may
enter into forward contracts to protect our future cash flows. Our forward
contracts generally range from one to six months in original maturity.

In accordance with SFAS No. 133, we designate such forward contracts as
cash flow hedges. We account for changes in the fair value of our forward
contracts based on changes in the forward exchange rate, with all such changes
in fair value reported in other comprehensive income. Amounts in other
comprehensive income are reclassified into earnings upon settlement of the
forward contract at an amount that will offset the related transaction gain or
loss arising from the re-measurement and adjust earnings for the cost of the
forward contracts. During 2003, there were no significant gains or losses
recognized in earnings for hedge ineffectiveness and we did not discontinue any
hedges because it was probable that the original forecasted transaction would
not occur. As of December 31, 2003, there were no forward contracts
outstanding.

(10) Segment Information:

We offer advanced design and manufacturing services and display products
to OEMs. Historically, we focused on display-oriented products, although we
have always performed extended manufacturing in conjunction with the display
module. In the past 15 months, we expanded the value-added manufacturing
services we provide through several acquisitions. As a result, we now provide
printed circuit board assembly, or PCBA, radio frequency, or RF, module
assembly, new product introduction, or NPI, box build, and order fulfillment,
even in products that do not need displays. In products that do include
displays, we specialize in custom and standard display solutions utilizing
various display technologies, including liquid crystal displays, or LCDs,
organic light emitting diodes, or OLEDs, and cathode ray tubes, or CRTs. The
products we manufacture for OEMs are of varying sizes and have varying levels
of integration.

As a result of the spin-off of our microdisplay division into Brillian, we
now report only one operating segment, although we also track net sales and
certain property, plant, equipment and intangibles 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 physical location of the
companys assets. The following includes net sales (in
thousands) for our
designated geographic areas:

F-23



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|                                            |  |         |        |      |  |        |        |       |  |   |        |  |  |   |         | 
|------------------------------------------- |  | ------- | ------ | ---- |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                            |  | North   |        |      |  |        |        |       |  |   |        |  |  |  
|                                            |  | America |        | Asia |  | Europe |        | Total
|                                            |  |         |        |      |  |        |        |      
|December 31, 2001                           |  |         |        |      |  |        |        |       |  |   |        |  |  |   |         | 
|Net sales                                   |  | $       | 18,305 |      |  | $      | 55,243 |       |  | $ | 43,652 |  |  | $ | 117,200 | 
|Property, plant, equipment, and intangibles |  |         | 18,267 |      |  |        | 13,731 |       |  |   | 21     |  |  |   | 32,019  | 
|Goodwill                                    |  |         |       |      |  |        |       |       |  |   |       |  |  |   |        | 
|December 31, 2002                           |  |         |        |      |  |        |        |       |  |   |        |  |  |   |         | 
|Net sales                                   |  | $       | 12,128 |      |  | $      | 50,591 |       |  | $ | 23,868 |  |  | $ | 86,587  | 
|Property, plant, equipment, and intangibles |  |         | 16,933 |      |  |        | 11,697 |       |  |   | 7      |  |  |   | 28,637  | 
|Goodwill                                    |  |         | 34,901 |      |  |        |       |       |  |   |       |  |  |   | 34,901  | 
|December 31, 2003                           |  |         |        |      |  |        |        |       |  |   |        |  |  |   |         | 
|Net sales                                   |  | $       | 85,813 |      |  | $      | 32,632 |       |  | $ | 40,573 |  |  | $ | 159,018 | 
|Property, plant, equipment, and intangibles |  |         | 11,051 |      |  |        | 21,842 |       |  |   | 4      |  |  |   | 32,897  | 
|Goodwill                                    |  |         | 34,291 |      |  |        | 315    |       |  |   |       |  |  |   | 34,606  | 

In 2003, our sales were distributed over six major markets: automotive,
computing, consumer, industrial, medical/instrumentation, and
telecommunications. In 2002, we were highly concentrated with 82.0% of our
sales coming from a single market, telecommunications. Our net sales
distributed by market was as follows:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|Markets    |  | 2002 |    | 2003
|           |  |      |    |     
|Computing  |  |      | 7  | %    |  |  | 38 | %
|Telecom    |  |      | 82 | %    |  |  | 28 | %
|Medical    |  |      | 4  | %    |  |  | 13 | %
|Industrial |  |      | 5  | %    |  |  | 10 | %
|Consumer   |  |      | 1  | %    |  |  | 6  | %
|Automotive |  |      | 1  | %    |  |  | 5  | %

(11) Selected Quarterly Financial Data (Unaudited)

The following table summarizes the unaudited consolidated quarterly
results of operations as reported for 2002 and 2003 (in thousands, except per
share amounts):

|                                                    |                                       |   |                |       |        |   |        |       |        |   |        |       |        |   |        |       |        |  |        |       |   |  |        |       |   |  |         |       |   |  |        |       |  
|--------------------------------------------------- | ------------------------------------- | - | -------------- | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ |  | ------ | ----- | - |  | ------ | ----- | - |  | ------- | ----- | - |  | ------ | ----- | -
|                                                    |                                       |   | Quarters Ended
|                                                    |                                       |   |               
|                                                    |                                       |   | 2002           |       | 2003  
|                                                    |                                       |   |                |       |       
|                                                    |                                       |   | Mar 31         |       | Jun 30 |   | Sep 30 |       | Dec 31 |   | Mar 31 |       | Jun 30 |   | Sep 30 |       | Dec 31
|                                                    |                                       |   |                |       |        |   |        |       |        |   |        |       |        |   |        |       |       
|Net sales                                           |                                       | $ | 22,884         |       |        | $ | 23,864 |       |        | $ | 18,239 |       |        | $ | 21,600 |       |        |  | 25,324 |       |   |  | 45,992 |       |   |  | 41,778  |       |   |  | 45,924 |      
|Gross profit (loss)                                 |                                       |   | 1,788          |       |        |   | 2,384  |       |        |   | 1,216  |       |        |   | 2,481  |       |        |  | 175    |       |   |  | 1,894  |       |   |  | (272    | )     |   |  | 2,096  |      
|Loss from
continuing
operations                     |                                       |   | (843           | )     |        |   | (3,091 | )     |        |   | (755   | )     |        |   | (41    | )     |        |  | (3,197 | )     |   |  | (2,533 | )     |   |  | (24,949 | )     |   |  | (3,222 | )    
|Loss from
discontinued
operations                   |                                       |   | (3,467         | )     |        |   | (3,549 | )     |        |   | (2,625 | )     |        |   | (2,600 | )     |        |  | (2,278 | )     |   |  | (2,343 | )     |   |  | (5,931  | )     |   |  |       |      
|Net loss                                            |                                       |   | (4,310         | )     |        |   | (6,640 | )     |        |   | (3,380 | )     |        |   | (2,641 | )     |        |  | (5,475 | )     |   |  | (4,876 | )     |   |  | (30,880 | )     |   |  | (3,222 | )    
|Earnings (loss) per
common share
basic and
diluted: |                                       |   |                |       |        |   |        |       |        |   |        |       |        |   |        |       |        |  |        |       |   |  |        |       |   |  |         |       |   |  |        |      
|                                                    | Net loss from continuing
operations   |   | $              | (0.04 | )      |   | $      | (0.14 | )      |   | $      | (0.04 | )      |   | $      | 0.00  |        |  | $      | (0.15 | ) |  | $      | (0.12 | ) |  | $       | (1.17 | ) |  | $      | (0.15 | )
|                                                    | Net loss from
discontinued
operations |   | $              | (0.16 | )      |   | $      | (0.17 | )      |   | $      | (0.12 | )      |   | $      | (0.12 | )      |  | $      | (0.11 | ) |  | $      | (0.11 | ) |  | $       | (0.28 | ) |  | $      | 0.00  |  
|                                                    | Net loss                              |   | $              | (0.20 | )      |   | $      | (0.31 | )      |   | $      | (0.16 | )      |   | $      | (0.12 | )      |  | $      | (0.26 | ) |  | $      | (0.23 | ) |  | $       | (1.45 | ) |  | $      | (0.15 | )

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##### Table of Contents



The quarter ended June 30, 2002 included the $4.5 million charge related to the
LCD equipment sale. The quarter ended December 31, 2003 included $700,000 in
other income relating to the J.D. Edwards settlement.

(12) Subsequent Events

We recently announced that our Board of Directors has approved a decision
to enter into a transaction with Integrex, a Seattle-based electronics
manufacturing services company that is liquidating business. Under that
transaction, we bought the raw materials inventory of Integrex and hired
certain of their employees. We also obtained the rights to most of their
customers and agreed with those customers that we would manufacture those
customers products in our Redmond manufacturing facility. In exchange for
those customer rights, we agreed to pay a license fee for between 15 and 24
months based on revenue actually received by us from the sale of products to
the former Integrex customers. A portion of that license fee was paid in
advance at closing.

We recently announced our Board of Directors has approved a decision to
close our display module manufacturing operations in Manila and consolidate
those operations in China, resulting in an anticipated decrease of our
worldwide work force of nearly 25%. Manila will continue as a specialized RF
module manufacturing center. We anticipate a substantial portion of this cost
to occur in the first quarter of 2004.

F-25



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##### Table of Contents






THREE-FIVE SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands)

|                                                    |                       |  |              |       |            |  |              |        |               |  |            |     |   |  |   |        | 
|--------------------------------------------------- | --------------------- |  | ------------ | ----- | ---------- |  | ------------ | ------ | ------------- |  | ---------- | --- | - |  | - | ------ | 
|                                                    |                       |  |              |       |            |  | Increases    |        |               |  |            |     |   |  |  
|                                                    |                       |  |              |       |            |  | (Reductions) |        |               |  |            |     |   |  |  
|                                                    |                       |  | Balance at   |       | Charged to |  |              |        |               |  |            |     |  
|                                                    |                       |  | beginning of |       | Costs and  |  |              |        |               |  | Balance at
|                                                    |                       |  | Period       |       | Expenses   |  | Write-offs   |        | End of Period
|                                                    |                       |  |              |       |            |  |              |        |              
|Allowance for doubtful accounts
and sales returns : |                       |  |              |       |            |  |              |        |               |  |            |     |   |  |   |       
|                                                    | Year ended 12/31/2001 |  | $            | 439   |            |  | $            | (211   | )             |  | $          |    |   |  | $ | 228    | 
|                                                    | Year ended 12/31/2002 |  | $            | 228   |            |  | $            | 323    |               |  | $          | (64 | ) |  | $ | 487    | 
|                                                    | Year ended 12/31/2003 |  | $            | 487   |            |  | $            | 271    |               |  | $          | (22 | ) |  | $ | 736    | 
|Valuation allowance for
deferred taxes :            |                       |  |              |       |            |  |              |        |               |  |            |     |   |  |   |       
|                                                    | Year ended 12/31/2001 |  | $            |      |            |  | $            | 1,299  |               |  | $          |    |   |  | $ | 1,299  | 
|                                                    | Year ended 12/31/2002 |  | $            | 1,299 |            |  | $            | 765    |               |  | $          |    |   |  | $ | 2,064  | 
|                                                    | Year ended 12/31/2003 |  | $            | 2,064 |            |  | $            | 24,294 |               |  | $          |    |   |  | $ | 26,358 | 

S-1



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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Exhibits2
    
    Amended and Restated Agreement and Plan of Reorganization(1)2.2
    
    Master Separation and Distribution Agreement between the Registrant and Brillian3(i)(a)
    
    Corporation(18)Amended and Restated Certificate of Incorporation of the Company(2)3(i)(b)
    
    Certificate of Amendment of Restated Certificate of Incorporation(3)3(i)(c)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock(4)3(ii)
    
    Amended and Restated Bylaws of the Company(5)4.1
    
    Form of Certificate of Common Stock(16)4.2
    
    Rights Agreement, dated as of April 26, 2001, between Three-Five Systems, Inc. and
Bank of New York, as Rights Agent(6)10.2
    
    Ground Sublease dated April 1, 1994, between Papago Park Center, Inc. and Three-Five
Systems, Inc.(8)10.3
    
    Amended and Restated 1990 Incentive Stock Option Plan (as Amended and Restated
through March 7, 2003)(16)10.4
    
    Amended and Restated 1993 Stock Option Plan (as Amended and Restated through March
7, 2003)(16)10.5
    
    Amended and Restated 1994 Stock Option Plan for Non-Employee Directors (as Amended
and Restated through February 12, 2001)(9)10.6
    
    Amended and Restated 1997 Employee Stock Option Plan (as Amended and Restated
through November 27, 2002) (as corrected)(17)10.7
    
    Form of Notice and Acceptance of
Stock Option Grant for Amended and Restated 1997 Employee Stock Option Plan(10)10.8
    
    Amended and Restated 1998 Stock Option Plan (as Amended and Restated through
February 8, 2002)(16)10.9
    
    Amended and Restated Directors Stock Plan (amended as of January 27, 2000)(11)10.10
    
    401(k) Profit Sharing Plan(12)10.15
    
    Technology License Agreement between Data International, Ltd. and TFS-DI dated
January 13, 2003(16)10.16
    
    Supply Agreement between Data International, Ltd. and TFS-DI dated January 13,
2003(16)10.17
    
    Term Promissory Note dated January 13, 2003 executed by TFS-DI in favor of Data
International, Ltd.(16)10.18
    
    Assignment and Assumption Agreement between the Registrant and Brillian
Corporation(18)10.19
    
    Intellectual Property Agreement between the Registrant and Brillian Corporation(18)10.20
    
    Tax Sharing Agreement between the Registrant and Brillian Corporation(18)10.21
    
    Real Property Sublease Agreement between the Registrant and Brillian Corporation(18)10.22
    
    Manufacturing Agreement between the Registrant and Microtune, Inc., dated March 27,
2003*10.23
    
    Joint Venture Agreement regarding the establishment and operation of TFS Electronic
Manufacturing Services Sdn Bhd, dated April 1, 2003*10.24
    
    Equipment Lease Agreement between Unico Technology Berhad and Mattline Industries
Sdn Bhd, dated April 1, 2003*10.25
    
    Tenancy Agreement between Fortune Century Sdn Bhd, Jantron Sdn Bhd, and Mattline
Industries Sdn Bhd, dated April 1, 2003*10.26
    
    Tenancy Agreement between Geok Hong Sdn Bhd and Mattline Industries Sdn Bhd, dated
April 1, 2003*10.27
    
    License Agreement between the Registrant and Integrex, Inc., dated February 19, 2004*10.28
    
    Lease Agreement between SFERS Real Estate Corp. V and ETMA Corporation, dated July
21, 1999*10.29
    
    Lease Agreement between Therriault-Cogan, L.L.C. and ETMA Corporation, dated January
17, 2001*10.30
    
    Lease Agreement between Rapp/Rise L.L.C. and ETMA Corporation, dated December 13,
2002*21
    
    List of Subsidiaries*23.1
    
    Consent of Deloitte & Touche LLP*23.2
    
    Notice Regarding Consent of Arthur Andersen LLP(16)31.1
    
    Certification of Chief Executive Officer of the Registrant pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended.*31.2
    
    Certification of Chief Financial Officer of the Registrant pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended.*32.1
    
    Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of the Chief Financial Officer of the Registrant, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
   *Filed herein.  (1)
    
    Incorporated by reference to Exhibit 2 to the Registration Statement on
Form S-4 of TF Consolidation, Inc. (Registration No. 33-33944) as filed on
March 27, 1990.(2)
    
    Incorporated by reference to Exhibit 3(a) to the Registrants Form 10-QSB
for the quarter ended March 31, 1994, as filed on or about May 12, 1994.(3)
    
    Incorporated by reference to Exhibit 3(b) to the Registration Statement
on Form S-3 (Registration No. 333-35788) as filed on April 27, 2000, as
amended by Form S-3/A as filed on May 5, 2000.(4)
    
    Incorporated by reference to Exhibit 3(d) to the Registrants Form 8-A as
filed on May 10, 2001.(5)
    
    Incorporated by reference to Exhibit 3(b) to the Registration Statement
on Form S-3 (Registration No. 333-84083) as filed on July 30, 1999, as
amended by Form S-3/A as filed on August 26, 1999.(6)
    
    Incorporated by reference to Exhibit 4(b) to the Registrants Form 8-A as
filed on May 10, 2001.(7)
    
    Incorporated by reference to Exhibit 10(c) to the Registration Statement
on Form S-4 of TF Consolidation, Inc. (Registration No. 33-33944) as filed
on March 27, 1990.(8)
    
    Incorporated by reference to Exhibit 10(o) to the Registrants Form 10-K
for the fiscal year ended December 31, 1996, as filed on March 14, 1997.(9)
    
    Incorporated by reference to Exhibit 10(x) to the Registrants Form 10-Q
for the quarter ended June 30, 2001, as filed on July 27, 2001.(10)
    
    Incorporated by reference to Exhibit 10.5(b) to the Registration
Statement on Form S-8 (Registration No. 333-59234) as filed on April 19,
2001.(11)
    
    Incorporated by reference to Exhibit 10(y) to the Registration Station
Statement on Form S-8 (Registration No. 333-50689) as filed on November 3,
2000.(12)
    
    Incorporated by reference to Exhibit 10(z) to the Registration Statement
on Form S-8 (Registration No. 333-57933) as filed on June 26, 1998.(13)
    
    Incorporated by reference to Exhibit 10(aa) to the Registrants Form 10-Q
for the quarter ended June 30, 2000, as filed on July 27, 2000.(14)
    
    Incorporated by reference to Exhibit 10(cc) to the Registrants Form 10-K
for the fiscal year ended December 31, 2000, as filed on March 13, 2001.(15)
    
    Incorporated by reference to Exhibit 10(cc) to the Registrants Form 10-Q
for the quarter ended March 31, 2002, as filed on April 19, 2002.(16)
    
    Incorporated by reference to the Registrants Form 10-K for the fiscal
year ended December 31, 2002, as filed on March 28, 2003.(17)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended June 30, 2003, as filed on July 31, 2003.(18)
    
    Incorporated by reference to the Registrants Form 10/A (Amendment No. 4)
(Registration No. 000-50289) as filed with the SEC by Brillian Corporation
on September 3, 2003.