##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



---



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended April 1, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number 0-19882



---

KOPIN CORPORATION

(Exact name of
registrant as specified in its charter)



---



|                                                             |  |                                     
|------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                     |  | 04-2833935                          
|State or other jurisdiction of incorporation or organization |  | (I.R.S. Employer Identification No.)
|                                                             | 
|200 John Hancock Rd., Taunton, MA                            |  | 02780-1042                          
|(Address of principal executive offices)                     |  | (Zip Code)                          

Registrants telephone number, including area code: (508) 824-6696



---

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 filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large Accelerated Filer ̈ |  | Accelerated Filer  x |  | Non-Accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act).    Yes ̈No  x

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



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class                        |  | Outstanding as of May 6, 2006
|Common Stock, par value $.01 |  | 68,353,304                   



---



---

##### Table of Contents

Kopin Corporation

INDEX



|                                                                                                                   |  |         
|------------------------------------------------------------------------------------------------------------------ |  | --------
|                                                                                                                   |  | Page No.
|Part I  Financial Information                                                                                     |  |         
|                                                                                                                   | 
|Item 1. Consolidated Financial Statements (Unaudited):                                                             |  | 3       
|                                                                                                                   | 
|Consolidated Balance Sheets at April 1, 2006 and December 31, 2005                                                 |  | 3       
|                                                                                                                   | 
|Consolidated Statements of Operations for the three months ended April 1, 2006 and March 26, 2005                  |  | 4       
|                                                                                                                   | 
|Consolidated Statements of Comprehensive Income (Loss) for the three months ended April 1, 2006 and March 26, 2005 |  | 4       
|                                                                                                                   | 
|Consolidated Statements of Stockholders Equity for the three months ended April 1, 2006 and March 26, 2005        |  | 5       
|                                                                                                                   | 
|Consolidated Statements of Cash Flows for the three months ended April 1, 2006 and March 26, 2005                  |  | 6       
|                                                                                                                   | 
|Notes to Unaudited Consolidated Financial Statements                                                               |  | 7       
|                                                                                                                   | 
|Item 2. Managements Discussion and Analysis of Financial Condition And Results of Operations                      |  | 12      
|                                                                                                                   | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 19      
|                                                                                                                   | 
|Item 4. Controls and Procedures                                                                                    |  | 19      
|                                                                                                                   | 
|Part II  Other Information                                                                                        |  |         
|                                                                                                                   | 
|Item 1. Legal Proceedings                                                                                          |  | 20      
|                                                                                                                   | 
|Item 1A. Risk Factors                                                                                              |  | 20      
|                                                                                                                   | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 28      
|                                                                                                                   | 
|Item 3. Default Upon Senior Securities                                                                             |  | 28      
|                                                                                                                   | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                        |  | 28      
|                                                                                                                   | 
|Item 5. Other Information                                                                                          |  | 28      
|                                                                                                                   | 
|Item 6. Exhibits                                                                                                   |  | 28      
|                                                                                                                   | 
|Signatures                                                                                                         |  | 29      



2



---

##### Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

KOPIN CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                       |  |               |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                       |  | April 1, 2006 |              |   | December 31, 2005 |  
|                                                                                                                                       |  | (Unaudited)   |              |   |                   |  
|ASSETS                                                                                                                                 |  |               |              |   |                   |   |              |  
|Current assets:                                                                                                                        |  |               |              |   |                   |   |              |  
|Cash and equivalents                                                                                                                   |  | $             | 29,408,105   |   |                   | $ | 31,502,645   |  
|Marketable securities, at fair value                                                                                                   |  |               | 88,113,516   |   |                   |   | 88,254,220   |  
|Accounts receivable, net of allowance of $280,000 and $281,000 in 2006 and 2005                                                        |  |               | 7,145,822    |   |                   |   | 7,937,397    |  
|Accounts receivable from unconsolidated affiliates                                                                                     |  |               | 3,958,042    |   |                   |   | 3,040,012    |  
|Unbilled receivables                                                                                                                   |  |               | 2,201,977    |   |                   |   | 2,037,406    |  
|Inventory                                                                                                                              |  |               | 8,373,985    |   |                   |   | 9,256,739    |  
|Prepaid expenses and other current assets                                                                                              |  |               | 2,121,615    |   |                   |   | 1,900,479    |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current assets                                                                                                                   |  |               | 141,323,062  |   |                   |   | 143,928,898  |  
|Property, plant and equipment, net                                                                                                     |  |               | 13,071,949   |   |                   |   | 11,250,453   |  
|Other assets                                                                                                                           |  |               | 12,284,189   |   |                   |   | 11,152,666   |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total assets                                                                                                                           |  | $             | 166,679,200  |   |                   | $ | 166,332,017  |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                   |  |               |              |   |                   |   |              |  
|Current liabilities:                                                                                                                   |  |               |              |   |                   |   |              |  
|Accounts payable                                                                                                                       |  | $             | 7,212,024    |   |                   | $ | 7,299,696    |  
|Accounts payable to unconsolidated affiliates                                                                                          |  |               | 2,120,130    |   |                   |   | 1,034,586    |  
|Accrued payroll and expenses                                                                                                           |  |               | 2,878,236    |   |                   |   | 2,902,909    |  
|Accrued warranty                                                                                                                       |  |               | 1,030,000    |   |                   |   | 1,030,000    |  
|Billings in excess of revenue earned                                                                                                   |  |               | 1,031,517    |   |                   |   | 1,080,810    |  
|Accrued tax                                                                                                                            |  |               | 107,000      |   |                   |   | 300,000      |  
|Other accrued liabilities                                                                                                              |  |               | 951,029      |   |                   |   | 1,145,731    |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current liabilities                                                                                                              |  |               | 15,329,936   |   |                   |   | 14,793,732   |  
|Asset retirement obligations                                                                                                           |  |               | 748,050      |   |                   |   | 740,000      |  
|Minority interest in subsidiary                                                                                                        |  |               | 4,349,518    |   |                   |   | 4,337,925    |  
|Commitments and contingencies                                                                                                          |  |               |              |   |                   |   |              |  
|Stockholders equity:                                                                                                                  |  |               |              |   |                   |   |              |  
|Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued                                                       |  |               |             |   |                   |   |             |  
|Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 71,270,236 shares in 2006 and 71,235,036 shares in
2005 |  |               | 712,702      |   |                   |   | 712,350      |  
|Additional paid-in capital                                                                                                             |  |               | 265,872,882  |   |                   |   | 267,565,043  |  
|Deferred compensation                                                                                                                  |  |               |             |   |                   |   | (2,458,509   | )
|Treasury stock (2,607,580 shares as of April 1, 2006, at cost)                                                                         |  |               | (9,938,532   | ) |                   |   | (7,398,868   | )
|Accumulated other comprehensive income                                                                                                 |  |               | 3,608,461    |   |                   |   | 2,122,241    |  
|Accumulated deficit                                                                                                                    |  |               | (114,003,817 | ) |                   |   | (114,081,897 | )
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total stockholders equity                                                                                                             |  |               | 146,251,696  |   |                   |   | 146,460,360  |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total liabilities and stockholders equity                                                                                             |  | $             | 166,679,200  |   |                   | $ | 166,332,017  |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  

See notes to consolidated financial statements



3



---

##### Table of Contents

KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                                            |  |                    |            |   |                |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | -------------- | - | ---------- | -
|                                                                                                                            |  | Three Months Ended |           
|                                                                                                                            |  | April 1, 2006      |            |   | March 26, 2005 |  
|Revenues:                                                                                                                   |  |                    |            |   |                |   |            |  
|Net product revenues                                                                                                        |  | $                  | 16,945,935 |   |                | $ | 17,265,298 |  
|Research and development revenues                                                                                           |  |                    | 1,743,927  |   |                |   | 1,638,634  |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|                                                                                                                            |  |                    | 18,689,862 |   |                |   | 18,903,932 |  
|Expenses:                                                                                                                   |  |                    |            |   |                |   |            |  
|Cost of product revenues                                                                                                    |  |                    | 12,916,305 |   |                |   | 10,903,669 |  
|Research and development                                                                                                    |  |                    | 2,897,460  |   |                |   | 3,399,331  |  
|Selling, general, and administration                                                                                        |  |                    | 3,567,437  |   |                |   | 3,263,590  |  
|Impairment                                                                                                                  |  |                    |           |   |                |   | 517,902    |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|                                                                                                                            |  |                    | 19,381,202 |   |                |   | 18,084,492 |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|(Loss) income from operations                                                                                               |  |                    | (691,340   | ) |                |   | 819,440    |  
|Other income and (expense):                                                                                                 |  |                    |            |   |                |   |            |  
|Interest income                                                                                                             |  |                    | 1,179,029  |   |                |   | 777,249    |  
|Other income                                                                                                                |  |                    |           |   |                |   | 2,364      |  
|Foreign currency losses                                                                                                     |  |                    | (337,568   | ) |                |   | (170,174   | )
|Interest and other expense                                                                                                  |  |                    | (11,128    | ) |                |   | (31,994    | )
|                                                                                                                            |  |                    |            |   |                |   |            |  
|                                                                                                                            |  |                    | 830,333    |   |                |   | 577,445    |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Income before minority interest in income (loss) of subsidiary, income taxes and equity losses in unconsolidated affiliates |  |                    | 138,993    |   |                |   | 1,396,885  |  
|Minority interest in loss (income) of subsidiary                                                                            |  |                    | 168,810    |   |                |   | (43,947    | )
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Income before income taxes and equity losses in unconsolidated affiliates                                                   |  |                    | 307,803    |   |                |   | 1,352,938  |  
|Income tax benefit (provision)                                                                                              |  |                    | 42,000     |   |                |   | (32,240    | )
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Income before equity losses in unconsolidated affiliates                                                                    |  |                    | 349,803    |   |                |   | 1,320,698  |  
|Equity loss in unconsolidated affiliates                                                                                    |  |                    | (271,723   | ) |                |   | (149,508   | )
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Net income                                                                                                                  |  | $                  | 78,080     |   |                | $ | 1,171,190  |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Net income per share:                                                                                                       |  |                    |            |   |                |   |            |  
|Basic                                                                                                                       |  | $                  | 0.00       |   |                | $ | 0.02       |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Diluted                                                                                                                     |  | $                  | 0.00       |   |                | $ | 0.02       |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Weighted average number of common shares outstanding:                                                                       |  |                    |            |   |                |   |            |  
|Basic                                                                                                                       |  |                    | 68,783,066 |   |                |   | 70,038,749 |  
|                                                                                                                            |  |                    |            |   |                |   |            |  
|Diluted                                                                                                                     |  |                    | 69,165,103 |   |                |   | 70,244,593 |  
|                                                                                                                            |  |                    |            |   |                |   |            |  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)



|                                                        |  |                    |           |                |   |            |  
|------------------------------------------------------- |  | ------------------ | --------- | -------------- | - | ---------- | -
|                                                        |  | Three Months Ended |          
|                                                        |  | April 1, 2006      |           | March 26, 2005 |  
|Net income                                              |  | $                  | 78,080    |                | $ | 1,171,190  |  
|Foreign currency translation adjustments                |  |                    | 492,742   |                |   | 272,072    |  
|Unrealized holding gain (loss) on marketable securities |  |                    | 993,478   |                |   | (1,588,441 | )
|                                                        |  |                    |           |                |   |            |  
|Comprehensive income (loss)                             |  | $                  | 1,564,300 |                | $ | (145,179   | )
|                                                        |  |                    |           |                |   |            |  

See notes to condensed consolidated financial statements



4



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Three months ended April 1, 2006 and
March 26, 2005

(unaudited)



|                                                     |  |              |   |  |                           |         |   |                      |   |             |               |  |   |                                            |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  
|---------------------------------------------------- |  | ------------ | - |  | ------------------------- | ------- | - | -------------------- | - | ----------- | ------------- |  | - | ------------------------------------------ | - |  | ------------------ | ---------- | - | ----- | - | ---------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                     |  | Common Stock |   |  | AdditionalPaid-in Capital |         |   | DeferredCompensation |   |             | TreasuryStock |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | AccumulatedDeficit |            |   | Total |  
|                                                     |  | Shares       |   |  | Amount                    |         |   |                      |   |             |               | 
|Balance, December 25, 2004                           |  | 70,130,615   |   |  | $                         | 701,306 |   |                      | $ | 263,460,874 |               |  | $ | (922,946                                   | ) |  | $                  | (671,235   | ) |       | $ | 2,370,967  |   |  | $ | (125,753,126 | ) |  | $ | 139,185,840 |  
|Exercise of stock options                            |  | 21,150       |   |  |                           | 211     |   |                      |   | 51,539      |               |  |   |                                           |   |  |                    |           |   |       |   |           |   |  |   |             |   |  |   | 51,750      |  
|Issuance of unvested stock                           |  | 240,000      |   |  |                           | 2,400   |   |                      |   | 897,600     |               |  |   | (900,000                                   | ) |  |                    |           |   |       |   |           |   |  |   |             |   |  |   |            |  
|Compensation expense for nonvested stock             |  |             |   |  |                           |        |   |                      |   |            |               |  |   | 182,997                                    |   |  |                    |           |   |       |   |           |   |  |   |             |   |  |   | 182,997     |  
|Forfeiture of nonvested stock                        |  | (2,125       | ) |  |                           | (21     | ) |                      |   | (11,220     | )             |  |   | 11,241                                     |   |  |                    |           |   |       |   |           |   |  |   |             |   |  |   |            |  
|Net unrealized holding loss on marketable securities |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   | (1,588,441 | ) |  |   |             |   |  |   | (1,588,441  | )
|Foreign currency translation adjustments             |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   | 272,072    |   |  |   |             |   |  |   | 272,072     |  
|Treasury stock purchases                             |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    | (954,891   | ) |       |   |           |   |  |   |             |   |  |   | (954,891    | )
|Net income                                           |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   |           |   |  |   | 1,171,190    |   |  |   | 1,171,190   |  
|                                                     |  |              |   |  |                           |         |   |                      |   |             |               |  |   |                                            |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  
|Balance, March 26, 2005                              |  | 70,389,640   |   |  |                           | 703,896 |   |                      |   | 264,398,793 |               |  |   | (1,628,708                                 | ) |  |                    | (1,626,126 | ) |       |   | 1,054,598  |   |  |   | (124,581,936 | ) |  |   | 138,320,517 |  
|                                                     |  |              |   |  |                           |         |   |                      |   |             |               |  |   |                                            |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  
|Balance, December 31, 2005                           |  | 71,235,036   |   |  |                           | 712,350 |   |                      |   | 267,565,043 |               |  |   | (2,458,509                                 | ) |  |                    | (7,398,868 | ) |       |   | 2,122,241  |   |  |   | (114,081,897 | ) |  |   | 146,460,360 |  
|Change in accounting for stock compensation          |  |              |   |  |                           |         |   |                      |   | (2,458,509  | )             |  |   | 2,458,509                                  |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  
|Exercise of stock options                            |  | 35,200       |   |  |                           | 352     |   |                      |   | 151,118     |               |  |   |                                           |   |  |                    |           |   |       |   |           |   |  |   |             |   |  |   | 151,470     |  
|Stock-based compensation expense                     |  |             |   |  |                           |        |   |                      |   | 615,230     |               |  |   |                                           |   |  |                    |           |   |       |   |           |   |  |   |             |   |  |   | 615,230     |  
|Net unrealized holding gain on marketable securities |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   | 993,478    |   |  |   |             |   |  |   | 993,478     |  
|Foreign currency translation adjustments             |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   | 492,742    |   |  |   |             |   |  |   | 492,742     |  
|Treasury stock purchases                             |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    | (2,539,664 | ) |       |   |           |   |  |   |             |   |  |   | (2,539,664  | )
|Net income                                           |  |             |   |  |                           |        |   |                      |   |            |               |  |   |                                           |   |  |                    |           |   |       |   |           |   |  |   | 78,080       |   |  |   | 78,080      |  
|                                                     |  |              |   |  |                           |         |   |                      |   |             |               |  |   |                                            |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  
|Balance, April 1, 2006                               |  | 71,270,236   |   |  | $                         | 712,702 |   |                      | $ | 265,872,882 |               |  | $ |                                           |   |  | $                  | (9,938,532 | ) |       | $ | 3,608,461  |   |  | $ | (114,003,817 | ) |  | $ | 146,251,696 |  
|                                                     |  |              |   |  |                           |         |   |                      |   |             |               |  |   |                                            |   |  |                    |            |   |       |   |            |   |  |   |              |   |  |   |             |  

See notes to consolidated financial statements.



5



---

##### Table of Contents

KOPIN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                  |  |                    |            |   |                |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | -------------- | - | ---------- | -
|                                                                                  |  | Three Months Ended |           
|                                                                                  |  | April 1, 2006      |            |   | March 26, 2005 |  
|Cash flows from operating activities:                                             |  |                    |            |   |                |   |            |  
|Net income                                                                        |  | $                  | 78,080     |   |                | $ | 1,171,190  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |            |   |                |   |            |  
|Depreciation and amortization                                                     |  |                    | 868,281    |   |                |   | 944,846    |  
|Amortization of interest premium or discount                                      |  |                    | 45,244     |   |                |   | 104,233    |  
|Minority interest in (loss) income of subsidiary                                  |  |                    | (168,810   | ) |                |   | 43,947     |  
|Equity losses in unconsolidated affiliates                                        |  |                    | 271,723    |   |                |   | 149,508    |  
|Stock based compensation                                                          |  |                    | 615,229    |   |                |   | 182,997    |  
|Impairment charge                                                                 |  |                    |           |   |                |   | 517,902    |  
|Changes in assets and liabilities:                                                |  |                    |            |   |                |   |            |  
|Accounts receivable                                                               |  |                    | 16,774     |   |                |   | (1,899,936 | )
|Inventory                                                                         |  |                    | 707,843    |   |                |   | (551,533   | )
|Prepaid expenses and other current assets                                         |  |                    | (111,363   | ) |                |   | 86,664     |  
|Accounts payable and accrued expenses                                             |  |                    | 530,597    |   |                |   | 289,068    |  
|Billings in excess of revenue earned                                              |  |                    | (49,293    | ) |                |   | (299,329   | )
|                                                                                  |  |                    |            |   |                |   |            |  
|Net cash provided by operating activities                                         |  |                    | 2,804,305  |   |                |   | 739,557    |  
|                                                                                  |  |                    |            |   |                |   |            |  
|Cash flows from investing activities:                                             |  |                    |            |   |                |   |            |  
|Proceeds from sale of marketable securities                                       |  |                    | 8,999,968  |   |                |   | 4,567,363  |  
|Purchases of marketable securities                                                |  |                    | (9,209,662 | ) |                |   | (2,659,496 | )
|Other assets                                                                      |  |                    | (98,180    | ) |                |   | (48,947    | )
|Investment in KoBrite and other equity investments                                |  |                    |           |   |                |   | (3,000,000 | )
|Capital expenditures                                                              |  |                    | (2,585,492 | ) |                |   | (61,580    | )
|                                                                                  |  |                    |            |   |                |   |            |  
|Net cash used in investing activities                                             |  |                    | (2,893,366 | ) |                |   | (1,202,660 | )
|                                                                                  |  |                    |            |   |                |   |            |  
|Cash flows from financing activities:                                             |  |                    |            |   |                |   |            |  
|Treasury stock purchases                                                          |  |                    | (2,539,664 | ) |                |   | (954,891   | )
|Proceeds from exercise of stock options                                           |  |                    | 64,471     |   |                |   | 51,750     |  
|                                                                                  |  |                    |            |   |                |   |            |  
|Net cash used in financing activities                                             |  |                    | (2,475,193 | ) |                |   | (903,141   | )
|                                                                                  |  |                    |            |   |                |   |            |  
|Effect of exchange rate changes on cash                                           |  |                    | 469,714    |   |                |   | 213,461    |  
|                                                                                  |  |                    |            |   |                |   |            |  
|Net decrease in cash and equivalents                                              |  |                    | (2,094,540 | ) |                |   | (1,152,783 | )
|Cash and equivalents:                                                             |  |                    |            |   |                |   |            |  
|Beginning of period                                                               |  |                    | 31,502,645 |   |                |   | 17,816,495 |  
|                                                                                  |  |                    |            |   |                |   |            |  
|End of period                                                                     |  | $                  | 29,408,105 |   |                | $ | 16,663,712 |  
|                                                                                  |  |                   
|Supplemental disclosure of cash flow information:                                 |  |                    |            |   |                |   |            |  
|Cash paid during the period for income taxes                                      |  | $                  | 243,000    |   |                |   |           |  

See notes to consolidated financial statements.



6



---

##### Table of Contents

KOPIN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial
statements for the three months ended April 1, 2006 and March 26, 2005 are unaudited and include all adjustments, which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended.
All such adjustments are of a normal recurring nature.

These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Kopin Corporations (the Company) Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 0-19882) for the year ended December 31, 2005.

The results of the Companys operations for any interim period are not necessarily indicative of the results of the Companys
operations for any other interim period or for a full fiscal year.

The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and Kowon Technology Co., Ltd. (Kowon), a majority owned (73%) subsidiary located in Korea. All intercompany transactions and balances have been eliminated.

2. FOREIGN CURRENCY TRANSLATION

Assets and
liabilities of non-U.S. operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses at rates prevailing during the period. Currency translation adjustments are recorded as part of accumulated other
comprehensive income and aggregate $3,007,401 of accumulated other comprehensive income at April 1, 2006. Transaction gains or losses are recognized in income or loss currently.

3. INVENTORY

Inventory is stated at the lower of cost (determined on the first-in, first-out or
specific identification method) or market and consists of the following at April 1, 2006 and December 31, 2005:



|                |  |               |           |                   |   |          
|--------------- |  | ------------- | --------- | ----------------- | - | ---------
|                |  | April 1, 2006 |           | December 31, 2005
|Raw materials   |  | $             | 5,621,630 |                   | $ | 5,434,246
|Work-in-process |  |               | 229,200   |                   |   | 319,325  
|Finished goods  |  |               | 2,523,155 |                   |   | 3,503,168
|                |  |               |           |                   |   |          
|                |  | $             | 8,373,985 |                   | $ | 9,256,739
|                |  |               |           |                   |   |          

4. NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period less any unvested shares. Diluted net loss per share is computed using the weighted
average number of common shares and potential common shares outstanding during the period using the treasury stock method. Potential common shares have not been included in any periods in which the effect would be anti-dilutive. For the three months
ended April 1, 2006 and March 26, 2005, 382,037 and 205,844 common share equivalents, respectively, are included in the diluted earnings per share calculation from the assumed exercise of outstanding stock options and repurchased under the
treasury stock method. For the three months ended April 1, 2006 and March 26, 2005 stock options and unvested shares aggregating 5,881,556 and 8,694,915 shares, respectively, were outstanding but not included in the computation of diluted earnings
per share as the inclusion would be anti-dilutive.

5. STOCK BASED COMPENSATION

The Company has stock-based awards outstanding under several plans. The Companys 1992 Stock Option Plan (the 1992 Plan), which expired on
December 31, 2001, permitted the granting of both nonqualified stock options and incentive stock options and authorized 15,000,000 shares of common stock (including shares issued upon exercise of options granted pursuant the Companys 1985
Stock Option Plan). In 2001 the Company adopted a 2001 Equity Incentive Plan (the Equity Plan) and a 2001 Supplemental Equity Plan (the Supplemental Plan). The Equity Plan was approved by shareholders and the Supplemental Plan was approved by the
Board of Directors of the Company. The Equity Plan as amended permits the granting of both nonqualified and incentive stock options and restricted stock awards. The Equity Plan authorized 5,000,000 shares of common stock, which may be issued to
employees, non-employees, and members of the Board of Directors (the Board). The Supplemental Plan authorized 1,300,000 shares of



7



---

##### Table of Contents

common stock, which may be issued to employees and only permits the issuance of nonqualified stock options and restricted stock awards. The option price of
incentive stock options shall not be less than 100% of the fair market value of the stock at the date of grant, or in the case of certain incentive stock options, at 110% of the fair market value at the time of the grant. Options must be exercised
within a ten-year period or sooner if so specified within the option agreement. The term and vesting period for restricted stock awards and options granted under plans are determined by the Boards compensation committee. Nonvested stock awards
and the options granted generally vest over either two or four year service periods.

Prior to January 1, 2006, the Company accounted
for its equity-based compensation plans under the recognition and measurement provision of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R), using the modified prospective application transition method. Under this transition method, compensation cost recognized includes compensation costs for all share-based payments granted
prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1,
2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Accordingly, prior period amounts have not been restated.

As a result of adopting SFAS 123R, the Companys income before provision for income taxes and net income for the three months ended April 1, 2006 are approximately $436,000 lower than if we had continued to
account for share-based compensation under APB 25. Basic and diluted earnings per share for the three months ended April 1, 2006 would have been $0.01 higher if the Company had not adopted SFAS 123R, and continued to account for stock awards
under APB 25.

The following table illustrates the effect on the net income and net income per share had the Company used the fair-value
recognition provisions of SFAS No. 123, and its amendment to measure employee stock compensation for the comparable period in fiscal 2005.



|                                                                                 |  |                                  |           |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | --------- | -
|                                                                                 |  | Three Months EndedMarch 26, 2005 |          
|Net income, as reported                                                          |  | $                                | 1,171,190 |  
|Plus: Amortization of deferred compensation                                      |  |                                  | 182,997   |  
|Less: Total stock-based employee compensation determined under fair value method |  |                                  | (529,469  | )
|                                                                                 |  |                                  |           |  
|Pro forma net income                                                             |  | $                                | 824,718   |  
|                                                                                 |  |                                  |           |  
|Earning per share:                                                               |  |                                  |           |  
|Basic, as reported                                                               |  | $                                | .02       |  
|                                                                                 |  |                                  |           |  
|Basic, pro forma                                                                 |  | $                                | .01       |  
|                                                                                 |  |                                  |           |  
|Diluted, as reported                                                             |  | $                                | .02       |  
|                                                                                 |  |                                  |           |  
|Diluted, pro forma                                                               |  | $                                | .01       |  
|                                                                                 |  |                                  |           |  

A summary of award activity under the stock option plans as of April 1, 2006 and changes
during the three month period is as follows:



|                           |  |                                 |   |  |                                 |      
|-------------------------- |  | ------------------------------- | - |  | ------------------------------- | -----
|                           |  | Three Months EndedApril 1, 2006
|                           |  | Shares                          |   |  | Weighted Average Exercise Price
|Balance, January 1, 2006   |  | 8,936,918                       |   |  | $                               | 8.75 
|Options granted            |  |                                |   |  |                                 |     
|Options forfeited          |  | (72,552                         | ) |  |                                 | 10.19
|Options exercised          |  | (35,200                         | ) |  |                                 | 4.30 
|                           |  |                                 |   |  |                                 |      
|Balance, April 1, 2006     |  | 8,829,166                       |   |  | $                               | 8.76 
|                           |  |                                 |   |  |                                 |      
|Exercisable, April 1, 2006 |  | 7,674,460                       |   |  |                                 |      
|                           |  |                                 |   |  |                                 |      



8



---

##### Table of Contents

The following table summarizes information about stock options outstanding and exercisable at April 1, 2006:



|                                           |  |                     |           |                                                     |      |                                 |   |                    |  |                                 |           |  |   |      
|------------------------------------------ |  | ------------------- | --------- | --------------------------------------------------- | ---- | ------------------------------- | - | ------------------ |  | ------------------------------- | --------- |  | - | -----
|                                           |  | Options Outstanding |           | Options Exercisable                                
|Range of Exercise prices                   |  | Number Outstanding  |           | Weighted Average Remaining Contractual Life (years) |      | Weighted Average Exercise Price |   | Number Exercisable |  | Weighted Average Exercise Price
|$  0.01$  3.55                            |  |                     | 824,169   |                                                     | 3.76 |                                 | $ | 2.98               |  |                                 | 669,169   |  | $ | 2.86 
|$  3.75$  4.97                            |  |                     | 2,505,941 |                                                     | 5.07 |                                 |   | 4.22               |  |                                 | 2,011,090 |  |   | 4.21 
|$  5.00$  9.95                            |  |                     | 2,362,324 |                                                     | 6.67 |                                 |   | 6.51               |  |                                 | 1,932,469 |  |   | 6.72 
|$10.00$13.00                              |  |                     | 2,040,132 |                                                     | 4.67 |                                 |   | 10.37              |  |                                 | 1,965,132 |  |   | 10.42
|$14.31$44.88                              |  |                     | 1,096,600 |                                                     | 4.97 |                                 |   | 25.33              |  |                                 | 1,096,600 |  |   | 25.33
|                                           |  |                     |           |                                                     |      |                                 |   |                    |  |                                 |           |  |   |      
|                                           |  |                     | 8,829,166 |                                                     | 5.27 |                                 |   | 8.76               |  |                                 | 7,674,460 |  |   | 9.33 
|                                           |  |                     |           |                                                     |      |                                 |   |                    |  |                                 |           |  |   |      
|Aggregate intrinsic value on April 1, 2006 |  | $                   | 3,651,424 |                                                     |      |                                 |   |                    |  | $                               | 3,035,816 |  |   |      
|                                           |  |                     |           |                                                     |      |                                 |   |                    |  |                                 |           |  |   |      

No options were issued during the three months ended April 1, 2006. During the three months
ended March 26, 2005 the Company issued 389,050 stock options at a weighted-average grant date fair value of $2.21. The total intrinsic value of options exercised during the three months ended April 1, 2006 was $28,124. Cash received from
option exercises under all share-based payment arrangements was approximately $151,000 for the three months ended April 1, 2006. No tax benefits were realized during this period due to the existence of tax net operating loss carryforwards.

The Company has issued shares of nonvested common stock to certain employees. Each award requires the employee to fulfill certain
obligations, including remaining employed by the Company for two or four years (the vesting period). However, for 293,000 of the outstanding shares will vest immediately upon the Company achieving profitability in either 2006 and/or 2007.

A summary of the activity for nonvested share awards as of April 1, 2006 and changes during the three month then ended is presented below:



|                         |  |         |  |                                   |     
|------------------------ |  | ------- |  | --------------------------------- | ----
|                         |  | Shares  |  | Weighted Average Grant Fair Value
|Balance, January 1, 2006 |  | 467,750 |  | $                                 | 5.28
|Granted                  |  |        |  |                                   |    
|Forfeited                |  |        |  |                                   |    
|Vested                   |  |        |  |                                   |    
|                         |  |         |  |                                   |     
|Balance, April 1, 2006   |  | 467,750 |  | $                                 | 5.28
|                         |  |         |  |                                   |     

The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model using the assumptions noted in the following table. Expected volatility is based on historical volatility of the Companys common stock. The Company uses historical data to estimate option exercises and
employee terminations used in the model; separate groups of employees who have similar historical exercise behavior are considered separately. The expected term of options granted is derived using the simplified method as allowed under
the provisions of the Securities and Exchange Commissions Staff Accounting Bulletin No. 107 and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



9



---

##### Table of Contents

|                         |  |                    |  |                |  
|------------------------ |  | ------------------ |  | -------------- | -
|                         |  | Three Months Ended | 
|                         |  | April 1, 2006      |  | March 26, 2005 |  
|Dividend yields          |  | N/A                |  | 0              | %
|Expected volatility      |  | N/A                |  | 72.69          | %
|Risk free interest rates |  | N/A                |  | 4.22           | %
|Expected lives in years  |  | N/A                |  | 4              |  

The following table summarizes stock-based compensation expense related to employee stock options
and nonvested stock awards under SFAS123(R) for the three months ended April 1, 2006 (no tax benefits were recognized):



|                                    |  |                                  |        
|----------------------------------- |  | -------------------------------- | -------
|                                    |  | Three Months Ended April 1, 2006
|Cost of product revenues            |  | $                                | 147,000
|Research and development            |  |                                  | 72,000 
|Selling, general and administrative |  |                                  | 396,000
|                                    |  |                                  |        
|                                    |  | $                                | 615,000
|                                    |  |                                  |        

The total unrecognized compensation cost related to nonvested stock awards is expected to be
recognized over a weighted average period of 2 years. The total unrecognized compensation cost is as follows at April 1, 2006:



|                       |  |   |          
|---------------------- |  | - | ---------
|Stock option awards    |  | $ | 2,124,586
|Nonvested stock awards |  |   | 2,239,339
|                       |  |   |          
|                       |  | $ | 4,363,925
|                       |  |   |          

6. OTHER CURRENT AND NON CURRENT ASSETS

Other assets consist primarily of the Companys investment in Micrel, Inc. and non-marketable equity securities in various companies. At April 1,
2006, other current assets also includes a receivable for an insurance recovery.

Insurance Recovery

In January 2006 Kowon experienced a fire at its production facility. Damages, as a result of the destruction of property were approximately $600,000. The
Company believes the property damage is covered by insurance and accordingly has recorded a writedown of equipment and inventory offset by an insurance receivable.

Marketable Equity Security

As of April 1, 2006 the Company held approximately 400,000 shares of
Micrel common stock with a market value of approximately $5,958,000 and an adjusted cost basis of approximately $3,606,000. The fair value of this investment at December 31, 2005 was approximately $4,660,000. On April 4, 2006, the Company
sold 200,000 shares of Micrel common stock for approximately $3,002,000.

Non-Marketable Securities

Related party receivables at April 1, 2006 and December 31, 2005 approximate the following amounts:



|                                |  |               |           |                   |   |          
|------------------------------- |  | ------------- | --------- | ----------------- | - | ---------
|                                |  | April 1, 2006 |           | December 31, 2005
|Advanced Wireless Semiconductor |  | $             | 3,334,000 |                   | $ | 2,530,000
|Kopin Taiwan Corporation        |  |               | 624,000   |                   |   | 510,000  
|                                |  |               |           |                   |   |          
|Total related party receivable  |  | $             | 3,958,000 |                   | $ | 3,040,000
|                                |  |               |           |                   |   |          

At April 1, 2006, the Company had a 40% interest in Kopin Taiwan Corp (KTC), which is
accounted for using the equity method and had a carrying value of $0. The Company has manufactured products for KTC to sell to their customers and KTC manufactures products for the Company to sell to its customers. In addition, the Company provides
technical services to KTC and sells raw substrates. For the three months ended April 1, 2006 the Company had sales to KTC of approximately $29,000, as compared to approximately $150,000 for the three months ended March 26, 2005. For the
three months ended April 1, 2006 the Company had purchases from KTC of approximately $221,000, as compared to approximately $665,000, for the three months ended March 26, 2005. At April 1, 2006 the Company had an investment in Advance
Wireless Semiconductor Company (AWSC), with a carrying value of $0.3 million, which the Company accounts for on the cost basis. One of the Companys Directors is chairman of KTC and owns approximately 1% of the outstanding common stock of KTC.
One of the Companys Directors is a director of AWSC and several directors and officers own amounts ranging from .1% to .5% of the outstanding stock of AWSC.



10



---

##### Table of Contents

In February 2005 the Company contributed its CyberLite LED technology, production know-how, and $3.0
million to a joint venture, KoBrite, formed to manufacture and sell LEDs. For its contribution, the Company received a 23% interest in KoBrite. In addition, KTC contributed $2.0 million for a 15% interest in KoBrite and unrelated investors
contributed an additional $9.0 million. KoBrite was established under the laws of Mauritius for the purpose of constructing manufacturing operations in China and contract manufacturing operations in Taiwan. Subsequent to its establishment, KoBrite
entered into an agreement, which required it to pay the Company a total of $7.5 million for the transfer of certain equipment and the performance of research and training activities. Approximately $6.0 million of the $7.5 million was allocated to
the value of the equipment transferred and $1.5 million was allocated to the performance of research and training activities. This transaction resulted in the Company recording an impairment charge for the fiscal year ended December 25, 2004.
In the three months ended March 26, 2005 the Company recorded an additional impairment charge of approximately $518,000 resulting from additional costs to complete the sale of the equipment. Through December 31, 2005 the Company had earned
and recorded $6.7 million of the $7.5 million due from KoBrite. During the three months ended April 1, 2006, the Company recorded revenue of approximately $850,000 after completing all services and deliverables and achieved acceptance from
KoBrite. At April 1, 2006 all amounts owed to the Company by KoBrite for this transaction have been paid.

The Company accounts for
its ownership interest in KoBrite using the equity method. KoBrites results are recorded one quarter in arrears from the Companys. During the three months ended April 1, 2006 and March 26, 2005, the Company recorded losses of
approximately $272,000 and $150,000, respectively, in Equity losses in unconsolidated affiliates in the statement of operations.

Summarized aggregate financial information for KTC and KoBrite is provided in the table below. The three month period ended April 1, 2006 includes KTC and KoBrite financial information for the three month periods ended March 31,
2006 and December 31, 2005, respectively. The three month period ended March 26, 2005 includes the financial information of KTC for that period.



|                     |  |                    |            |   |                |   |          |  
|-------------------- |  | ------------------ | ---------- | - | -------------- | - | -------- | -
|                     |  | Three Months Ended |           
|                     |  | April 1, 2006      |            |   | March 26, 2005 |  
|Revenue              |  | $                  | 385,000    |   |                | $ | 639,000  |  
|Gross loss           |  |                    | (479,000   | ) |                |   | (266,000 | )
|Loss from operations |  |                    | (1,120,000 | ) |                |   | (732,000 | )
|Net loss             |  |                    | (1,156,000 | ) |                |   | (723,000 | )

At April 1, 2006, the Company had an investment in Kenet, Inc. with a carrying value of
approximately $2,896,000, which is carried under the cost method. The Companys Chief Executive Officer is a founder and board member of this company and owns approximately 4.1% of this company. Certain directors and an officer of the Company
have also invested in this company and their ownership ranges from 0.1% to 1.1%. The Company has entered into a non-binding agreement to invest an additional $2.5 million in Kenet, Inc. in 2006.

Certain officers and directors have invested in some of the Companys investee companies, including Micrel. The Company has a loan to a non-officer
employee for $170,000 which is due in 2006.

7. STOCKHOLDERS EQUITY

The Company has an ongoing authorization, as amended, from the Board of Directors to repurchase the Companys common stock in open market or
negotiated transactions. As of April 1, 2006, the Company had a remaining authorization to repurchase up to $5,339,194 of its common stock. During the three months ended April 1, 2006 and March 26, 2005, the Company repurchased an
aggregate of 480,000 shares of its common stock for an aggregate $2,319,565, an average per share price of $4.83, and 263,400 shares of its common stock for an aggregate $954,891, an average per share price of $3.63, respectively.

At April 1, 2006 the Company has reserved approximately 1,200,000 shares of common stock for issuance under the Companys stock award plans.



11



---

##### Table of Contents

8. ACCRUED WARRANTY

The Company warrants its products against defect for 12 months. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded in the period when product is shipped and
revenue recognized, and is updated as additional information becomes available. The Companys estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential
future product failures.



|                    |  |                    |           |   |                |   |           |  
|------------------- |  | ------------------ | --------- | - | -------------- | - | --------- | -
|                    |  | Three Months Ended |          
|                    |  | April 1, 2006      |           |   | March 26, 2005 |  
|Beginning Balance   |  | $                  | 1,030,000 |   |                | $ | 1,030,000 |  
|Additions           |  |                    | 186,000   |   |                |   | 254,000   |  
|Claim and reversals |  |                    | (186,000  | ) |                |   | (254,000  | )
|                    |  |                    |           |   |                |   |           |  
|Ending Balance      |  | $                  | 1,030,000 |   |                | $ | 1,030,000 |  
|                    |  |                    |           |   |                |   |           |  

9. INCOME TAXES

As of April 1, 2006, the Company has available for tax purposes substantial federal net operating loss carryforwards expiring through the year 2025. The Company has recognized a full valuation allowance for its
net operating loss carryforwards and other net deferred tax assets for entities in the United States tax jurisdictions due to the uncertainty of realization of such assets. The Companys Korean operations have historically been profitable and
have recognized net deferred tax assets of approximately $0.5 million at April 1, 2006. In the event that recovery of the deferred tax assets is no longer more likely than not, the Company would record a valuation allowance against such assets.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, including without limitation statements made relating to our expectation that sales to
Skyworks Solutions, Samsung and JVC will continue to represent a significant portion of our revenues for 2006 and our revenues from Samsung and JVC will decrease over their 2005 levels; our expectation that Sony and Sanyos share of camcorder
business will increase in 2006 and our business will decline; our expectation that sales of our CyberDisplay products to customers who use them in camcorder applications will decline; our expectation that KoBrite will incur additional losses in the
near term; our belief that in 2006 we will commence the process to establish an 8 inch CyberDisplay manufacturing line and phase out our 6 inch manufacturing line; our belief that our material weakness in our internal controls will continue to exist
in our fiscal second quarter 2006 Form 10-Q; our belief that sales of our HBT transistor wafers to Skyworks Solutions will continue to represent a significant portion of our revenues for the near future; our expectation that a significant market for
new wireless communications devices, including personal entertainment systems, will develop; our expectation that our CyberDisplay products will benefit from further general technological advances in the design and production of integrated circuits
and active matrix LCDs, resulting in further improvements in resolution and miniaturization; our expectation that sales into the high speed fiber optic switching equipment market will not be significant in fiscal year 2006; our expectation not to
pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our expectation, based on current negotiations with our customers and certain contractual obligations, that the prices of certain products
will decline in fiscal year 2006; our expectation that the sale prices of our commercial displays will decline, but our military product sales will increase, in fiscal year 2006; our expectation that we will expend between $8.0 and $12.0 million on
capital expenditures over the next twelve months; our expectation that our third quarter would be our strongest sales quarter followed by our second quarter, fourth quarter and first quarter, in that order; our expectation that our revenues from
Samsung and JVC will decrease over their 2005 levels; our expectation that our sales to camcorder manufacturers will decline at a faster rate than the overall decline in the camcorder market; our expectation that prices of our HBT transistor will
decline by approximately 15 to 20 percent during fiscal year 2006; our expectation that competition will increase; our belief that our CyberDisplay products are well suited for new applications such as reading e-mail and browsing the Internet using
digital wireless devices and other consumer electronics devices; our belief that small form factor displays will be a critical component in the development of advanced wireless communications systems; our belief that general technological advances
in the design and fabrication of integrated circuits, LCD technology and LCD manufacturing processes will allow us to continue to enhance our CyberDisplay product manufacturing process; our belief that it would be costly for our HBT transistor wafer
customers to switch to an alternate supplier; our belief that continued introduction of new products in our target markets is essential to our growth; our belief that GAIN HBT transistor wafers provide the performance characterization necessary for
the next generation of wireless handsets and optoelectronic components; our belief that the costs of producing gallium arsenide integrated circuits by our customers will continue to exceed the costs associated with the production of competing
silicon integrated circuits; our belief that we will be able to



12



---

##### Table of Contents

achieve a pixel size of less than 10 microns in commercial production; our belief that our future success will depend
primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership; our belief that the sales of our CyberDisplay product to customers who use them for camcorder
applications will decline in 2006; our belief that our available cash resources will support our operations and capital needs for at least the next twelve months; and our belief that the effect, if any, of reasonably possible near-term changes in
interest rates on our financial position, results of operations, and cash flows should not be material. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we
operate, managements beliefs, and assumptions made by management. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of us. Words such as expects,
anticipates, intends, plans, believes, could, seeks, estimates, variations of such words and similar expressions are intended to identify such forward- looking
statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and results include, but are not limited to, those discussed
below in Item 1A and those set forth in our other periodic filings filed with the Securities and Exchange Commission.

Managements discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories,
investment valuations, valuation of stock compensation awards, recoverability of deferred tax assets and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions.

We believe the following critical accounting policies are most affected by our more significant judgments and estimates used in the preparation of our
consolidated financial statements:

Revenue Recognition

We recognize revenue in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104).
SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and services rendered; (3) the price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on managements judgment regarding the fixed nature of the price to the buyer charged for products delivered and services
rendered and collectibility of the sales price. We do not recognize revenue for products prior to customer acceptance unless we believe the product meets all customer specifications and we have a history of consistently achieving customer acceptance
of the product. Provisions for product returns and allowances are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating
the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the
distributors customers and not for their stocking of inventory. We delay revenue recognition for our estimate of distributor claims of right of return on unsold products based upon our historical experience with our products and specific
analysis of amounts subject to return based upon discussions with our distributors or their customers.

We recognize revenues from
long-term research and development contracts on the percentage-of-completion method of accounting as work is performed, based upon the ratio of costs or hours already incurred to the estimated total cost of completion or hours of work to be
performed. Revenue recognized at any point in time is limited to amounts earned under milestones included in contracts, if such provisions exist. We account for product development and research contracts that have established prices for distinct
phases as if each phase were a separate contract. We classify amounts earned on contracts in progress that are in excess of amounts billed as unbilled receivables and we classify amounts received in excess of amounts earned as billings in excess of
revenues earned. We invoice based on dates specified in the related agreement or in periodic installments based upon our invoicing cycle. We recognize the entire amount of an estimated ultimate loss in our financial statements at the time the loss
on a contract becomes known. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated and profits would be negatively impacted.



13



---

##### Table of Contents

Bad Debt

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This estimate is based on an analysis of specific customer creditworthiness
and historical bad debts experience. If the financial condition of our customers were to deteriorate, resulting in their inability to make future payments, additional allowances may be required. Such additional allowances would adversely impact our
ability to achieve or maintain profitability.

Inventory

We provide a reserve for estimated obsolete or unmarketable inventory based on assumptions about future demand and market conditions. Inventories that are
obsolete or slow moving are generally fully reserved as such information becomes available. Our III-V products are made to each customers unique specifications and are generally produced upon receipt of a customer order. The ending inventory
attributable to the Companys III-V products generally represents products manufactured but either not yet delivered to customers or have been delivered to our customers under a consignment program. Our display products are manufactured based
upon production plans whose critical assumptions include non-binding demand forecasts provided by our customers, lead times for raw materials, lead times for third-party wafer fabs to perform circuit processing and yields. If a customer cancelled an
order, or actual demand were lower than forecasted demand, we could not sell the excess III-V inventory and we may not be able to sell the excess display inventory and additional reserves would be required. If we were unable to sell the excess
inventory we would establish reserves to reduce the inventory to its estimated realizable value (generally zero) which would have an adverse impact on our statement of operations.

Investment Valuation

We hold a
minority investment in Micrel, Incorporated, a publicly traded company whose share prices have been and may continue to be highly volatile. We consider this investment to be available for sale and accordingly account for fluctuations in
the value of this investment in accumulated other comprehensive income. If, however, we were to determine that the fair value of this investment had been other than temporarily impaired, we would be required to charge the loss directly to the
statement of operations. This investment had a fair market value of $6.0 million at April 1, 2006, which was in excess of our carrying value at that date. The determination that a decline is other-than-temporary is subjective and influenced by
many factors. When assessing a publicly-traded investment for an other-than-temporary decline in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the
market value of the investment has been less than its original cost, the performance of the investees stock price in relation to the stock price of its competitors within the industry and the market in general and analyst recommendations. We
also review the financial statements of the investee to determine if the investee is experiencing financial difficulties. In the event our judgments change as to other-than-temporary declines in value, we may record an impairment loss, which could
have an adverse impact on our results of operations.

We periodically make equity investments in private companies, accounted for on the
cost or equity method, whose values are difficult to determine. When assessing investments in private companies for an other-than-temporary decline in value, we consider such factors as, among other things, the share price from the investees
latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investees revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance
of the investees products and services. We provide for an impairment valuation if we believe a decline in the value of an investment is other-than-temporary.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

In accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets to determine if facts and circumstances suggest that they may be impaired or that the
amortization or depreciation period may need to be changed. The carrying value of a long-lived asset is considered impaired when the anticipated identifiable undiscounted cash flows from such asset are less than its carrying value. For assets that
are to be held and used, impairment is measured based upon the amount by which the carrying amount of the asset exceeds its fair value. If our estimates of anticipated future cash flows or market conditions were incorrect, additional impairment
charges may be required. During fiscal years 2005 and 2004, we recognized a $0.5 million and $5.3 million, respectively, impairment charges related to assets held for use or being transferred to the KoBrite joint venture and long-lived assets
supporting the III-V business. The carrying value of our long-lived assets was $13.1 million on April 1, 2006.



14



---

##### Table of Contents

Product Warranty

We generally sell products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringement claims related to our products. We accrue for known warranty
and indemnification issues if a loss is probable and can be reasonably estimated. As of April 1, 2006, we had a warranty reserve of $1,030,000, which represents the estimated liabilities for warranty claims in process, potential warranty issues
customers have notified us about and an estimate based on historical failure rates. For the three months ended April 1, 2006 and March 26, 2005 our warranty expense was approximately $186,000 and $254,000, respectively. If our estimates
for warranty claims are incorrect, our revenue could be overstated and profits would be negatively impacted.

Stock Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified-prospective-transition method. Under this transition method, compensation cost recognized includes compensation costs for all share-based payments
granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Prior period amounts have not been restated.

We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes-Merton option valuation model. The Black-Scholes-Merton option valuation model incorporates assumptions as to stock
price volatility, the expected life of options, a risk-free interest rate and dividend yield. Many of these assumptions are highly subjective and require the exercise of management judgment. Our management must also apply judgment in developing an
estimate of awards that may be forfeited. If our actual experience differs significantly from our estimates and we choose to employ different assumptions in the future, the stock-based compensation expense that we record in future periods may differ
materially from that recorded in the current period.

Income Taxes

The Company has historically incurred domestic operating losses for book and taxable income. We establish valuation allowances if it appears to be more
likely than not that our deferred tax assets will not be realized. These judgments are based on our projections of taxable income and the amount and timing of our tax operating loss carryforwards and other deferred tax assets. Given our federal
operating tax loss carryforwards, we do not expect to pay domestic federal taxes in the near term. It is possible that we could pay domestic alternative minimum taxes and state income taxes. We are also subject to foreign taxes from our Korean
subsidiary operations.

Our income tax provision is based on calculations and assumptions that will be subject to examination by tax
authorities. Despite our history of operating losses there can be exposures for state taxes, federal alternative minimum taxes or foreign tax that may be due. We regularly assess the potential outcomes of these examinations and any future
examinations for the current or prior years in determining the adequacy of our provision for income taxes. Should the actual results differ from our estimates, we would have to adjust the income tax provision in the period in which the facts that
give rise to the revision become known. Such adjustment could have a material impact on our results of operations. We also establish valuation allowances when recovery of such net deferred tax assets is not considered more likely than not. These
judgments consider our historical results and forecasts of future results. Because of our history of operating losses, our net operating loss carryforwards have had a full valuation allowance associated with them.

Business Matters

We are a leading
developer and manufacturer of advanced semiconductor materials and miniature displays. We use our proprietary semiconductor material technology to design, manufacture and market our III-V and display products for use in highly demanding commercial
wireless communications and high-resolution portable consumer electronic applications. Our products enable our customers to develop and market an improved generation of products for these target applications.

We have two principal sources of revenues: product revenues and research and development revenues. Product revenues consist of sales of our CyberDisplay
products and our III-V products, principally gallium arsenide (GaAs) HBT transistor wafers. Research and development revenues consist primarily of development contracts with agencies of the U.S. government and amounts earned under agreements with
KoBrite, discussed below. For the three months ended April 1, 2006, research and development revenues were $1.7 million or 9.3% of total Q1 2006 revenues and $1.6 million, or 8.7% of total revenues for the corresponding period in 2005.

In the fourth quarter of fiscal year 2004, the Company entered into a joint venture, KoBrite, with a Taiwanese-based light emitting diode
(LED) manufacturer, Kopin Taiwan Corporation and financial investors, pursuant to which the Company agreed to transfer its CyberLiteLED technology and production know-how and $3.0 million of cash for a 23% interest in KoBrite. Subsequent to its formation, KoBrite entered into agreements with the Company to purchase certain equipment and have the Company
perform research and training activities with KoBrite employees. Under the agreements, Kopin retains the right to market KoBrites LEDs in the United States of America and to certain Japanese customers.



15



---

##### Table of Contents

KoBrite is required to pay the Company upon achievement of certain milestones. During the three months
ended April 1, 2006 and March 26, 2005, the Company recorded revenues of $850,000 and $650,000, respectively, related to research and development and training services for KoBrite.

Results of Operations

Revenues. Our total revenues for the three month periods ended April 1, 2006 and March 26, 2005 were as follows (in millions):



|              |  |                    |      |                |   |     
|------------- |  | ------------------ | ---- | -------------- | - | ----
|              |  | Three Months Ended
|Revenue:      |  | April 1, 2006      |      | March 26, 2005
|CyberDisplay  |  | $                  | 5.9  |                | $ | 9.5 
|III-V         |  |                    | 12.8 |                |   | 9.4 
|              |  |                    |      |                |   |     
|Total revenue |  | $                  | 18.7 |                | $ | 18.9
|              |  |                    |      |                |   |     

During the three months ended April 1, 2006 and March 26, 2005, we recorded CyberLite
research and development revenues of approximately $850,000 and $650,000, respectively, which are included within our III-V product group revenues, as a result of the performance of certain activities required under the agreements with KoBrite. The
decrease in CyberDisplay revenues in the three months ended April 1, 2006 compared to the three months ended March 26, 2005 resulted from a decrease in sales of our display products to customers who use our display for camcorder
applications. We expect the prices of our consumer display and III-V products to decline in the range of 15 to 20% in fiscal year 2006, relative to fiscal year 2005. The overall increase or decrease in the average sales price of our display will be
dependent on the sales mix of consumer and military display sales. In fiscal year 2006, we expect the sale prices of our consumer displays to decline but we expect an increase in military product sales, as compared to fiscal year 2005, which have
higher unit selling prices. Military display sales accounted for approximately 9% of total revenue for the three months ended April 1, 2006.

For the three months ending July 1, 2006, we expect total sales of approximately $18.5 to $20.5 million. Our military program has been transitioning to two new customers and we have experienced delays in this transition. How successful
this transition is managed by our customers and us, and how successful our customers are in obtaining qualification with the government will impact our second quarter results of operations.

Research and development revenues for the three months ended April 1, 2006 and March 26, 2005 were $1.7 million and $1.6 million, respectively.
During the three months ended April 1, 2006 and March 26, 2005, the Company recorded revenues of $850,000 and $650,000, respectively, related to research and development and training services for KoBrite.

We believe that we have captured a significant share in the markets for applications which currently use HBT transistor wafers, principally wireless
handsets, and we will need to increase sales in other applications to generate revenue growth in this product lines. In addition, we believe that our sale of display products to the camcorder market will continue to decline in the second quarter of
fiscal 2006. Our current analysis and discussions with customers indicate that commercial display pricing for fiscal year 2006 is expected to decline significantly for camcorder applications from fiscal year 2005. As a result we are declining to bid
on certain new programs offered by our customers. If sales of our CyberDisplay products decline significantly we may be required to record an impairment charge, related to the recovery of certain long-lived assets, in the future.

International sales represented 39% and 34% of revenues for the three months ended April 1, 2006 and March 26, 2005, respectively. The increase
in international sales is primarily attributable to the net effect of a decrease in display sales for camcorder and digital still camera applications, which are primarily to foreign customers, and an increase in foreign sales of our HBT products.
The international sales percentage excludes the impact of approximately $850,000 and $650,000, respectively, of revenues from the KoBrite joint venture in the three months ended April 1, 2006 and March 26, 2005, respectively. International
sales are primarily sales of CyberDisplay products to consumer electronic manufacturers primarily located in Japan and Korea, and HBT product sales to customers located in Taiwan. Our international sales are primarily denominated in U.S. currency.
Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in international markets and make our products relatively more expensive than competitors products that are denominated in local
currencies, leading to a reduction in sales or profitability in those international markets. In addition, sales of our CyberDisplay products in Korea are transacted through our Korean subsidiary Kowon Technology Co., LTD. Kowons sales are
primarily denominated in U.S. dollars. However, Kowons local operating costs are primarily denominated in Korean won. As a result, our financial position and results of operations are subject to exchange rate fluctuation. We have not taken any
protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the Japanese yen, Korean won and the U.S. dollar.



16



---

##### Table of Contents

Cost of Product Revenues.



|                                            |  |                    |      |   |                |   |      |  
|------------------------------------------- |  | ------------------ | ---- | - | -------------- | - | ---- | -
|                                            |  | Three Months Ended |     
|                                            |  | April 1, 2006      |      |   | March 26, 2005 |  
|Cost of product revenues                    |  | $                  | 12.9 |   |                | $ | 10.9 |  
|Cost of product revenues as a % of revenues |  |                    | 76   | % |                |   | 63   | %

Cost of product revenues for the three month period ended April 1, 2006 increased
approximately $2.0 million or 18% as compared to the same period in the prior year. The increase in our cost of product revenues as a percentage of revenues is primarily a result of declines in unit sales volume and average selling prices of our
products. Our cost of product revenues is comprised of materials, labor and manufacturing overhead. Material costs generally change in-line with sales volume fluctuations. However our overhead costs and, to a lesser extent, our labor costs are
normally stable and do not fluctuate significantly during a twelve month period. Accordingly our gross margin is sales unit volume dependent as decreases in unit sales volume increase the labor and overhead cost per unit sold which decrease the
gross margin. CyberDisplay product sales declined 39% in the quarter ended April 1, 2006 as compared to the quarter ended March 26, 2005 which resulted in the decline in gross margin. In addition, the average sales prices of our products for the
three month period April 1, 2006 were lower than the same period in the prior year. During the first quarter of fiscal 2006, cost of product revenues included $105,000 in stock compensation expense resulting from our adoption of SFAS 123R.

Research and Development. Research and development (R&D) expenses are incurred in support of internal display and III-V product
development programs or programs funded by agencies of the U.S. government, the KoBrite joint venture and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and
packaging of display products, and overhead. During the first quarter of fiscal 2006, R&D expense also included $45,000 in stock compensation expense resulting from our adoption of SFAS 123R. For the three months ended April 1, 2006 and
March 26, R&D expense was as follows (in millions):



|                                       |  |                    |     |                |   |    
|-------------------------------------- |  | ------------------ | --- | -------------- | - | ---
|                                       |  | Three Months Ended
|Research and Development Expense       |  | April 1, 2006      |     | March 26, 2005
|Funded                                 |  | $                  | 1.2 |                | $ | 2.2
|Internal                               |  |                    | 1.7 |                |   | 1.2
|                                       |  |                    |     |                |   |    
|Total research and development expense |  | $                  | 2.9 |                | $ | 3.4
|                                       |  |                    |     |                |   |    

Funded R&D expenses for the three months ended April 1, 2006 declined when compared
against the same period of the prior year primarily because of the discontinuance of light emitting diode research in 2005 which was partially offset by an increase in R&D expenses for military programs. For the three months ended March 26,
2005 funded R&D included $1.4 million to support the KoBrite joint venture.

Internal R&D expenses were primarily attributed to the
development of our new III-V products, new displays, higher level assembly products and converting and qualifying our display production line to larger diameter wafers.

Selling, General and Administrative. Selling, general and administrative (S,G&A) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, bad debt expense, and
administrative and general corporate expenses. S,G&A expenses were $3.8 million in the three months ended April 1, 2006 compared to $3.3 million for the three months ended March 26, 2005. During the three months ended April 1,
2006, the Company recorded an additional $100,000 in information technology consultants and a stock-based compensation expense of $395,723 and $182,997 for the three month periods ending April 1, 2006 and March 26, 2005, respectively.
Included in the April 1, 2006 stock compensation expense is an incremental $286,000 of expense related to the recognition of stock compensation expense for unvested stock options as of the transition date, recognized over the remaining vesting
period, from the adoption of SFAS 123R.

Impairment Charge. In connection with the KoBrite joint venture agreement discussed above,
we entered into an agreement to sell certain assets of our CyberLite LED product line and discontinued the use of the remaining CyberLite LED product line assets, including equipment. During the three months ended March 26, 2005 we increased
our estimate of costs associated with the sale of the equipment. Accordingly, the net realizable value was estimated to be $5.3 million and we recorded an additional $0.5 million impairment charge in the period ended March 26, 2005.

Other Income and Expense, Net. Other income and expenses, net, was $0.8 million and $0.6 million for the three months ended April 1, 2006
and March 26, 2005, respectively. Other income and expenses is primarily composed of interest



17



---

##### Table of Contents

income offset by foreign currency transaction and remeasurement losses incurred by our Korean subsidiary
Kowon. In the three months ended April 1, 2006 we recorded approximately $338,000 from losses as compared to approximately $170,000 for the same period in the prior year. These losses primarily result from Kowon holding United States dollars to
pay dollar denominated expenses and the remeasurement of such balances into the Korean Won for translation of Kowons financial statements into U.S. dollars. As the dollar weakens against other currencies we may be required to record additional
losses. We anticipate that the dollar will continue to weaken and additional losses will be incurred in fiscal year 2006. We are unable to predict the possible amount the dollar will weaken and the amount of losses that we may have to record.

Benefit (Provision) for Income Taxes. For the three months ended April 1, 2006 we have recorded a benefit of approximately
$42,000 and a provision of approximately $32,000 for the three month period ended March 26, 2005. The benefit recorded for the three months ended April 1, 2006 reflects the expected alternative minimum and certain state taxes in the United
States and deferred tax benefits for international taxes.

Equity Losses in Unconsolidated Affiliates. For the three months ended
April 1, 2006 and March 26, 2005, the equity losses in unconsolidated affiliates represents our 23% interest in the operating results of KoBrite.

Liquidity and Capital Resources

We have financed our operations primarily through public and private placements of our
equity securities, research and development contract revenues, and sales of our III-V and CyberDisplay products. In November 2001, we filed a registration statement using a shelf registration process under which we may, from time to
time, offer shares of common stock or debt securities, the aggregate total of which will not exceed $150.0 million. As of April 1, 2006 we had issued an aggregate of 3,000,000 shares for an aggregate of $42.0 million, under this registration
statement, and reduced the amount available thereunder to $108.0 million. We believe our available cash resources will support our operations and capital needs for at least the next twelve months.

As of April 1, 2006 we had cash and equivalents and marketable securities of $117.5 million and working capital of $126.0 million compared to $119.8
million and $129.1 million, respectively, as of December 31, 2005. The change in cash and equivalents and marketable securities was primarily due to investments in capital equipment and other assets of $2.6 million and stock repurchases of
approximately $2.5 million, offset by cash provided by operating activities of $2.8 million. The $0.8 million received from KoBrite is included in cash from operating activities, related to payments from KoBrite for the transfer of equipment and
payments for services.

In December 2005 we amended a purchase and supply agreement with a significant HBT customer that now expires in
July 2008, excluding a last time buy option contained in the agreement. Under the terms of this agreement we have agreed to maintain capacity levels for manufacturing HBT wafers and we committed to a pricing schedule under certain circumstances. The
agreement also requires us to give prior notice if we exit our HBT product line. In consideration for this agreement the customer agreed to source 100% of its HBT wafer needs from us subject to the customers right to source HBT wafers from
other sources if we are unable to meet their requirements under certain circumstances. We agreed that failure to meet our supply obligations under the agreement would allow our customer to obtain court ordered specific performance and if we do not
perform we could then be liable for monetary damages up to a maximum of $45.0 million.

We lease facilities located in Taunton and
Westborough, Massachusetts, and Scotts Valley, California, under non-cancelable operating leases. We have two Taunton facilities, one whose lease expires in 2007 and the other in 2010. The Taunton lease which expires in 2007 may be extended for one
5 year term and the lease which expires in 2010 may be extended twice for individual 10 year terms. The Westborough lease expires in April 2008. The Scotts Valley lease expires in 2007.

We expect to expend between $8.0 and $12.0 million on capital expenditures over the next twelve months, primarily for the acquisition of equipment
relating to the production of our III-V and CyberDisplay products.

On April 4, 2006, we sold 200,000 shares of Micrel common stock
for approximately $3,002,000.

On October 9, 2002, our Board of Directors authorized the re-purchase of up to $15 million of our
common stock over a two year period. Through September 23, 2004, we repurchased a total of 103,200 shares for an aggregate $378,319 under this program. Our Board of Directors subsequently authorized an extension of this program allowing us to
purchase up to $14,621,681 of our common stock through October 2006. The specific timing and amount of repurchases, if any, will vary based on market conditions, securities law limitations, and other factors. The repurchases will be made using our
cash resources. During the first quarter of fiscal 2006, we repurchased 480,000 shares for $2,319,565 under this program. The transactions occurred in open market purchases. This program may be suspended or discontinued at any time without prior
notice upon approval of our Board of Directors.



18



---

##### Table of Contents

|                                           |  |                                  |  |                              |      |                                                                                  |         |                                                                                            |   |          
|------------------------------------------ |  | -------------------------------- |  | ---------------------------- | ---- | -------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------------ | - | ---------
|Period                                     |  | Total number of Shares Purchased |  | Average Price Paid per
Share |      | Total Number of Shares Purchased as
Part of Publicly Announced Plans or Programs |         | Maximum Approximate Dollar of
Shares that May Yet
Be Purchased Under
the Plans or Programs
|                                           |  | (a)                              |  | (b)                          |      | (c)                                                                              |         | (d)                                                                                       
|January 1, 2006 through January 28, 2006   |  | 80,000                           |  | $                            | 5.48 |                                                                                  | 80,000  |                                                                                            | $ | 7,220,611
|January 29, 2006 through February 25, 2006 |  | 190,000                          |  | $                            | 4.92 |                                                                                  | 190,000 |                                                                                            | $ | 6,285,556
|February 26, 2006 through April 1, 2006    |  | 210,000                          |  | $                            | 4.51 |                                                                                  | 210,000 |                                                                                            | $ | 5,339,194
|                                           |  |                                  |  |                              |      |                                                                                  |         |                                                                                            |   |          
|Total                                      |  | 480,000                          |  | $                            | 4.83 |                                                                                  | 480,000 |                                                                                            |   |          

Seasonality

The markets we sell into are traditionally seasonal and we would expect that as our business matures, our third quarter would be our strongest sales quarter followed by our second quarter then our fourth quarter and
our first quarter would be our lowest sales quarter.

Inflation

We do not believe inflationary forces have materially affected our operations.

Contractual Obligations

The following is a summary of our contractual payment obligations for operating leases as of April 1, 2006:



|                            |  |       |           |                  |   |           |  |           |           |                   |   |        |  |   |  
|--------------------------- |  | ----- | --------- | ---------------- | - | --------- |  | --------- | --------- | ----------------- | - | ------ |  | - | -
|Contractual Obligations     |  | Total |           | Less than 1 year |   | 1-3 Years |  | 3-5 years |           | More than 5 years
|Operating Lease Obligations |  | $     | 3,259,049 |                  | $ | 1,319,359 |  | $         | 1,857,190 |                   | $ | 82,500 |  | $ | 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest our excess cash
in high-quality government, government-backed and corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results
of operations, and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrecognized gain or loss on interest rate securities. Included in other assets is an equity investment
in Micrel, Incorporated (Micrel) totaling approximately $6.0 million which is subject to changes in value because of either specific operating issues at Micrel or overall changes in the stock market. We are exposed to changes in foreign currency
exchange rates primarily through our translation of our foreign subsidiarys financial position, results of operations, and transaction gains and losses as a result of non U.S. dollar denominated cashflows related to business activities in
Asia, and remeasurement of United States dollars to the functional currency of our Kowon subsidiary. We do not currently hedge our foreign currency exchange rate.

Item 4. Controls and Procedures

Under the supervision and with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Act)) as
of April 1, 2006. Based on this evaluation, our CEO and CFO concluded that, as of April 1, 2006, our disclosure controls and procedures were not effective. This conclusion was based on the existence of the material weakness in our internal
control over financial reporting previously disclosed and discussed below.

Other than the events giving rise to the material weakness and
our steps to remediate the material weakness, each as described below, no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
April 1, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

A material weakness (within the meaning of PCAOB Auditing Standard No. 2) is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.



19



---

##### Table of Contents

As previously disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2005 the Company identified a material weakness in its internal controls over financial reporting. Specifically, the Companys resources and level of technical accounting expertise within the accounting function are
insufficient to properly evaluate and account for non-routine or complex transactions, such as the determination of accounting for long-lived asset impairments. Consequently, the Companys controls over the selection and application of complex
accounting policies in accordance with generally accepted accounting principles are inadequate and constitute a material weakness in the design of internal control over financial reporting based on the criteria in the Internal
ControlIntegrated Framework. We believe this material weakness continued to exist at April 1, 2006.

Management has concluded
that we lacked sufficient technical accounting personnel possessing competencies commensurate with our financial reporting requirements, which constitutes a material weakness in our internal control over financial reporting. In response to this
condition originally identified in 2004, we recruited additional experienced accounting professionals and increased the levels of training for our accounting staff in 2005. We are evaluating the effectiveness of the steps taken in 2005 and the need
for additional resources. We anticipate that we may report that this material weakness continues to exist in our fiscal second quarter 2006 Form 10-Q.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

The risk factors set forth below were previously disclosed in our Form 10-K for
the fiscal year ended December 31, 2005. There have not been any material changes from the risk factors previously discussed in our Form 10-K. These risks are not the only ones facing the Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially or adversely affect our financial condition and/or operating results.

Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.    Our management is required to
periodically evaluate the design and effectiveness of our disclosure controls and procedures. During the course of its evaluation for the year ended December 25, 2004, our management identified a material weakness in our application of
generally accepted accounting standards, which continued through December 31, 2005. In addition, we have documented and tested our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, which requires our management to annually assess the effectiveness of our internal control over financial reporting. During the course of our testing we identified the need to increase the accounting staffs overall knowledge and
understanding of Securities and Exchange Commission rules and regulations and generally accepted accounting standards. We plan to increase the staffs knowledge through the hiring of resources and additional training. Any failure to implement
or difficulties experienced in implementing improved controls or any failure to maintain existing effective controls could have a material adverse effect on our business, operating results and stock price. For the three month period ended
April 1, 2006 we have increased our accounting staff and we are evaluating the necessity for additional resources. As a result of the material weakness described above, our disclosure controls and procedures were not effective as of
December 31, 2005 and April 1, 2006, which could result in a material misstatement in our annual and interim financial statements.

We have experienced a history of losses and have a significant accumulated deficit.    Since inception, we have incurred significant net operating losses. As of April 1, 2006 we had an accumulated deficit of
$114.0 million. While we did generate a profit in 2005 and the three month period ended April 1, 2006, there can be no assurance that we will maintain profitability in the future.

Our revenue and cash flow could be negatively affected by the loss of any of the few customers who account for a substantial portion of our
revenues.    A few customers account for a substantial portion of our revenues. The table below indicates what the percentages of our total revenues were from a particular customer in a given year. The symbol *
indicates that sales to that particular customer for the given year were below 10 percent of our total revenues.



20



---

##### Table of Contents

|                                                                   |  |                                     |   |  |      |   |  |      |  
|------------------------------------------------------------------ |  | ----------------------------------- | - |  | ---- | - |  | ---- | -
|                                                                   |  | Sales as a Percent of Total Revenue |  
|Customer                                                           |  | 2005                                |   |  | 2004 |   |  | 2003 |  
|Skyworks Solutions, Inc.                                           |  | 32                                  | % |  | 31   | % |  | 20   | %
|Samsung Electronics                                                |  | 15                                  |   |  | 28   |   |  | 33   |  
|Victor Company of Japan (JVC)                                      |  | 13                                  |   |  | *    |   |  | 12   |  
|United States Government Funded Research and Development Contracts |  | 6                                   |   |  | 2    |   |  | 2    |  

We anticipate that sales to Skyworks Solutions, Samsung and JVC will continue to represent a
significant portion of our revenues for 2006, although we expect that our revenues from Samsung and JVC will decrease from their 2005 levels. We believe that historically we have provided Skyworks Solutions with the vast majority of its HBT
transistor wafers. Our primary competition for display sales to Samsung and JVC are Sony and Sanyo. Based on current negotiations we anticipate that Sony and Sanyos share of camcorder business will increase in 2006 and our business will
decline. A significant reduction or delay in orders from any of our significant customers, particularly Skyworks Solutions, would materially reduce our revenue and cash flow and adversely affect our ability to achieve or maintain profitability in
the future. We believe the reduced sales volume to Samsung and JVC will adversely impact our cash flow and profitability in 2006. Our ability to generate cash flow and profitability in 2006 similar to the levels achieved in 2005 will be dependent on
developing new customers, increasing our market share of customers who use our CyberDisplay products for digital still camera applications and finding new applications for our CyberDisplay products, particularly eyewear devices. We have increased
sales of CyberDisplay products for military applications in the year ended December 31, 2005 from historical levels. Such sales are to government contractors for the United States military. The amount and timing of such orders is dependent upon
the United States military procurement processes, the government contractors ability to successfully manage the program, and our ability to deliver more sophisticated CyberDisplay products.

We may be unable to increase revenues from CyberDisplayproducts if new products and applications are not developed.    CyberDisplay revenues for the fiscal years 2005,
2004 and 2003 were $47.6 million, $49.1 million and $43.6 million, respectively. The decrease in 2005 CyberDisplay revenues from 2004 has resulted primarily from a decrease in sales of our CyberDisplay product to customers for use in camcorders,
offset, in part by an increase in sales of our displays to the military and digital still camera markets. Discussions with our customers indicate that our competition is dramatically reducing their prices and we believe the average sales price of
our displays to consumer product customers will have to decline if we are to remain competitive in the market place. We believe the average sales price of our consumer displays will decrease in the range of 15% to 20% during the fiscal year 2006. We
believe that we have captured significant market share in the camcorder market; however, we believe that the camcorder market will decline over the next few years as new technologies, particularly digital video recorders, enter the market. In
addition we expect our sales to camcorder manufacturers to decline at a faster rate than the overall decline in the camcorder market as we have chosen not to match the lower prices being offered by our competitors for some camcorder models.
Accordingly, if we are unable to expand into new markets, particularly eyewear, revenues from CyberDisplay products will decline, which may impact our ability to achieve or maintain profitability in the future.

In fiscal year 2004 we had initial sales of display products into the military product and digital still camera markets. We are gaining experience in
selling displays into these markets. We believe that our success in penetrating these and other markets, particularly military night vision goggles, will significantly impact our ability to increase sales of CyberDisplays. In addition, our military
products have a higher gross margin than our consumer display products and our success in increasing sales of military products are expected to significantly impact our ability to achieve or maintain profitability. Accordingly, if we are unable to
successfully sell our display products to digital still cameras, eyewear, and military product makers, we may be unable to grow CyberDisplay product revenues and our ability to achieve or maintain profitability will be adversely affected.

The eyewear market segment may not develop or may take longer to develop than we anticipate.    Eyewear is the
term used by the Company to describe a device which is worn in a similar fashion as eye glasses and contains one or two CyberDisplay displays for the viewing of video images. The source of these video images may be storage devices such as video
iPods, DVD players or digital multimedia broadcasting (DMB) tuners. Currently the consumer may view the image through a direct view LCD display which may range in size from one to four inches diagonal. We believe that the consumer will find this
experience unsatisfactory and we believe eyewear will be a preferred solution. We sell to eyewear manufacturers individual displays, backlight and integrated circuits or a binocular display module (BDM), which contains the various components
combined into one unit. We are also investigating selling a complete eyewear solution. The eyewear manufacturing companies which are currently buying our displays for eyewear products tend to be small with limited financial resources and in-house
engineering expertise. We believe that eyewear is a critical product for the long term revenue and cash flow growth of the CyberDisplay product line. If the eyewear market does not develop or we are unable to create and manufacture product(s) which
meet the needs of the eyewear market we may be unable to grow CyberDisplay product revenues and our ability to achieve or maintain profitability will be adversely affected.



21



---

##### Table of Contents

We may not be able to increase our military production capacity.    A critical
part of our business strategy is to expand production capacity to manufacture displays for the military product market. A significant part of this strategy is the implementation of a new manufacturing line which can utilize 8 inch wafers for our
display production. The conversion of our existing 6 inch line to 8 inch will require the investment in new equipment and the redesign of our existing display products. It may also require the re-qualification of our existing display products with
our customers. If we are unable to execute our military product display production facility plan, including the implementation of an 8 inch production line, or we can only manufacture and ship our CyberDisplay products in limited quantities, our
revenues from CyberDisplay products may not grow, which may impact our ability to achieve or maintain profitability in the future.

Our
ability to offer and manufacture higher level CyberDisplay assemblies and modules will impact our ability to increase revenues and achieve or maintain profitability.    An important factor in our ability to expand into new
markets, such as binocular display modules, or BDMs, digital still cameras and military products, will be our ability to design and manufacture higher-level assemblies (HLAs). These HLAs typically consist of one or two CyberDisplay products, a
backlight, lens and housing. Some HLAs also include a set of display driver electronics or a display driver chip. Our goal is to deliver an integrated HLA to our customer which eases integration into their products. These products will require more
complex integration of a greater variety of components than we currently use for our existing display products. They will require us to invest in additional engineering, manufacturing and test capability. Accordingly, if we are unable to develop and
market these new display products or if we are unable to manufacture them in a cost-effective manner, our revenues may not grow and we may not be able to achieve or maintain profitability.

Our competitors can provide integrated solutions.    Many portable consumer electronic devices, including camcorders and
digital still cameras, have two displays for viewing images, an electronic viewfinder (EVF) and a flip-out or group view display. We only provide the display that is used as the electronic viewfinder. Our competitors may offer both EVF and flip-out
displays and both displays may be run by the same interface electronics. A customer who buys our display is required to buy the flip-out display from another vendor who may compete with us. This may require our customer to purchase additional
interface electronics to run our display. Our competitors may be able to offer a bundled solution of both displays and the interface electronics cheaper than the cost of buying our display and the other display and the interface electronics
separately. If we are unable to offer displays with sufficient performance advantages over other displays to justify the additional cost of buying individual components versus a bundled solution or if our customers can not procure cost efficient
interface electronics to run our display products we may lose market share or be unable to grow our business which in turn would adversely affect our ability to achieve or maintain profitability.

Our CyberDisplay products may not be widely accepted by the market.    Our success will in large part depend on the widespread
adoption of the viewing format of our CyberDisplay products in multiple applications. Our success also depends upon the widespread consumer acceptance of our customers products. CyberDisplay products work best when used close to the eye, which
may not be acceptable to consumers. Potential customers may be reluctant to adopt our CyberDisplay products because of concerns surrounding perceived risks relating to:



| |  |  | The introduction of our display technology generally;
| | - |  | -----------------------------------------------------



| |  |  | Consumer acceptance of our CyberDisplay products; and
| | - |  | -----------------------------------------------------



| |  |  | The relative complexity, reliability, usefulness and cost-effectiveness of our display products compared to other display products available in the market or that may be developed
by our competitors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, our customers may be reluctant to rely upon a relatively small company like us for a
critical component. We cannot assure investors that prospective customers will adopt our CyberDisplay products or that consumers will accept our CyberDisplay products in future applications. If we fail to achieve market acceptance of our
CyberDisplay products, our business may not be successful and we may not be able to achieve or maintain profitability.

Our ability to
manufacture and distribute our CyberDisplay products would be severely limited if the third parties that we rely on to manufacture integrated circuits for our CyberDisplay products fail to provide those
services.    We depend on a Taiwanese company and a Korean company for the fabrication of integrated circuits for our CyberDisplay products. We have no long-term contracts with either of these two companies. These two
companies use different methods to manufacture the integrated circuits and a shortage at one company cannot necessarily be supplied by the other company. If either company were to terminate its arrangement with us or become unable to provide the
required capacity and quality on a timely basis, we would be able to manufacture and ship our CyberDisplay products only in limited quantities until replacement foundry services could be obtained. Furthermore, we cannot assure investors that we
would be able to establish alternative manufacturing and packaging relationships on acceptable terms.



22



---

##### Table of Contents

Our reliance on these foundries involves certain risks, including:



| |  |  | Lack of control over production capacity and delivery schedules;
| | - |  | ----------------------------------------------------------------



| |  |  | Limited control over quality assurance, manufacturing yields and production costs;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | The risks associated with international commerce, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies and political and economic
instability; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Natural disasters such as earthquakes, tsunami, mudslides, drought, hurricanes and tornadoes.
| | - |  | ---------------------------------------------------------------------------------------------

One of the foundries and several other third parties with which we do business are located in Taiwan. Due to natural disasters such as earthquakes and
typhoons that have occasionally occurred in Taiwan, many Taiwanese companies, including the Taiwanese foundry we use, have experienced related business interruptions. Our business could suffer significantly if either of the foundries we use had
operations which were disrupted for an extended period of time, due to natural disaster, political unrest or otherwise. In addition, our CyberDisplays are manufactured on 6-inch silicon wafers. State of the art silicon production uses 8-inch wafers.
We cannot be assured that if the 6-inch manufacturing facilities we use were damaged they would be restored. If the 6-inch production facilities were not restored we may be required to redesign our displays so that they can be manufactured on an
8-inch production line. If the displays had to be redesigned we may have to have the displays re-qualified by our customers, which would adversely affect our business until such qualification is complete.

In fiscal year 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS). There were reports that consumer demand was negatively impacted
by the outbreak of SARS. Our sales, manufacturing and distribution processes, and in turn our overall business operations, may be adversely affected if SARS, Avian Flu or similar situations occur.

We depend on third parties to provide integrated circuit chip sets and other critical raw materials for use with our CyberDisplay
products.    We do not manufacture the integrated circuit chip sets necessary for use with our CyberDisplay products. Instead, we rely on third party independent contractors for these integrated circuit chip sets and other
critical raw materials such as special glasses and chemicals. The critical raw materials, including the glasses and chemicals used in manufacturing the CyberDisplay products are used by other display manufacturers, many of which are much larger than
Kopin. In addition, our higher-level CyberDisplay assemblies and modules include lenses, backlights, printed circuit boards and other components, which we purchase from third party suppliers. Some of these third party contractors and suppliers are
small companies with limited financial resources. We believe that one of the suppliers of a critical component for our higher-end CyberDisplay military assemblies may be having financial difficulties. We are currently attempting to find another
source for the manufacture of this component. If any of these third party contractors or suppliers were unable or unwilling to supply these integrated circuit chip sets or other critical raw materials to us, we would be unable to manufacture and
sell our CyberDisplay products until a replacement supplier could be found. We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner. In the past we have experienced
situations when our vendors could not supply the quantity or quality of critical raw materials we needed. As a result, we were unable to meet customer demand and our revenues, manufacturing yield and gross margins were adversely affected. Currently
there is strong worldwide demand for display materials because of the significant growth of display sales over the last few years. Any interruption in our ability to manufacture and distribute our CyberDisplay products could cause our display
business to be unsuccessful and the value of investors investment in us may decline.

If we are unable to significantly increase
our unit sales volume and reduce our production costs, our business will suffer.    Our III-V and CyberDisplay product lines currently have significant fixed costs and our ability to achieve or maintain profitability depends
upon achieving significant sales volumes and higher gross profit margins. Our III-V product group is primarily comprised of heterojunction bipolar transistor (HBT) products. If we are unable to increase our III-V and CyberDisplay production levels
and reduce manufacturing costs, we may lose customer orders and our business may be unprofitable.

We may be unable to increase revenues
from our HBT transistor wafers if the third party foundries we plan on using can not get qualified or are unable to produce the required product.    We have entered into an agreement with Kopin Taiwan Corporation (KTC) to
provide foundry services to manufacture HBT transistor wafers for us. We entered into this agreement to provide us with additional capacity if needed. The ability to use KTC as a foundry is predicated on our ability to have our customers qualify our
products, which utilize KTCs HBT transistor wafers. If we are unable to get the products which utilize KTCs wafers qualified by our customers and we are unable to meet customer demand utilizing only our internal resources we may lose
customer orders and our profitability may be negatively affected.



23



---

##### Table of Contents

We may be unable to increase revenues from HBT transistor wafers if new product applications are not
developed.    A critical market for our HBTs is wireless handsets. The growth rate of the wireless handset market has been very unpredictable over the last several years. We expect prices of our HBT transistor will decline by
approximately 15 to 20 percent during fiscal year 2006. If the wireless handset unit volume grows in the range of 5 to 10 percent for the fiscal year 2006 our HBT revenues may decrease unless we increase our market share or new markets are
developed. Revenues may also decline if we lose any of our customers or such customers reduce their orders from us. Accordingly, if we are unable to find additional applications for our HBT transistor wafers or increase our market share, our HBT
transistor revenue may not grow and such absence of growth may impact our ability to achieve or maintain profitability.

We generally do
not have long-term contracts with our CyberDisplay customers, which makes forecasting our revenues and operating results difficult.    We generally do not enter into long-term agreements with our CyberDisplay customers
obligating them to purchase our products. Our business is characterized by short-term purchase orders and shipment schedules and we generally permit orders to be canceled or rescheduled before shipment without significant penalty. As a result, our
customers may cease purchasing our products at any time, which makes forecasting our revenues difficult. In addition, due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we are continuing to invest in capital equipment and increasing our operating expenses for new
product development. If we fail to accurately forecast our revenues and operating results, our business may not be successful and the value of investors investment in us may decline.



24



---

##### Table of Contents

We may not be able to realize any profits under a multi-year supply agreement with a significant HBT
customer.    In December 2005 we amended a supply agreement with a significant HBT customer that expires in July 2008, excluding a last buy option contained in the agreement. Under the terms of this agreement we have agreed
to maintain capacity levels for manufacturing HBT wafers and we committed to a declining pricing schedule. The agreement also requires us to give prior notice if we exit our HBT product line. In consideration for this agreement the customer agreed
to source 100% of its HBT wafer needs from us subject to the customers right to source HBT wafers from other sources if we are unable to meet its requirements under certain circumstances. We agreed that failure to meet our supply obligations
under the agreement would allow our customer to obtain court ordered specific performance. If we do not perform we could then be liable for monetary damages up to a maximum of $45 million. The agreement obligates us to provide wafers at preset
prices and as a result, our ability to make a profit under this agreement will be subject to fluctuations in the prices of raw materials, meeting customer wafer demand and to any increase in costs of goods or services required for us to perform
under the agreement. If we are unable to manufacture the HBT wafers below these preset prices we may not be able to achieve or maintain profitability.

We may have to record additional impairment losses.    In fiscal year 2004 we entered into an agreement to transfer our CyberLite LED operations into the KoBrite joint venture. Our CyberLite
LED operations were performed in our facility located at 200 John Hancock Road, Taunton, MA. In addition, a portion of our III-V product line operations was performed in our 200 John Hancock Road facility. With the discontinuance of the CyberLite
LED operations the recoverability of the 200 John Hancock Road leasehold improvement assets will be evaluated based on the cash flow from our III-V product line. In fiscal year 2004, based upon forecasted cash flow of our III-V product line, we
recorded an impairment charge of $3.2 million. The forecast also indicated that an impairment charge might be necessary in the future unless the cash flows from our III-V product line continue at current levels. In addition, in fiscal year 2006 we
are anticipating a decline in sales of our CyberDisplay products to customers who use them in camcorder applications. The forecasts used in our impairment analyses are based on certain estimates relating to III-V and CyberDisplay product line cash
flows. If such estimates were too high, we may be required to record an additional impairment charge in the future.

We may record
additional losses from our investment in the KoBrite joint venture, which may impact our ability to achieve or maintain profitability.    We account for our investment in the KoBrite joint venture using the equity method,
which requires us to record our proportional share of their operating results up to the amount we have invested or committed to support, which is our current $3.0 million investment. In the twelve months ended December 31, 2005 we recorded
$209,000 of losses from the KoBrite joint venture (which represented KoBrite operations for a 9 month period as we include KoBrite results one quarter in arrears and the investment in the Company was made in the first quarter of fiscal 2005). We
anticipate that the joint venture will incur additional losses in the near term. If the joint venture generates operating losses in the future we will record additional losses, which will impact our ability to achieve or maintain profitability.

A disruption to our information technology systems could significantly impact our operations and impact our revenue and
profitability.    We maintain proprietary data processing systems and use customized software systems. An interruption to these systems for an extended period may impact our ability to operate the businesses and process
transactions which could result in a decline in sales and affect our ability to achieve or maintain profitability.

Fluctuations in
operating results make financial forecasting difficult and could adversely affect the price of our common stock.    Our quarterly and annual revenues and operating results may fluctuate significantly for several reasons,
including:



| |  |  | The timing and successful introduction of additional manufacturing capacity;
| | - |  | ----------------------------------------------------------------------------



| |  |  | The timing of the initial selection of our III-V and CyberDisplay products as a component in our customers new products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability of interface electronics for our CyberDisplay products supplied;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Competitive pressures on selling prices of our products;
| | - |  | --------------------------------------------------------



| |  |  | The timing and cancellation of customer orders;
| | - |  | -----------------------------------------------



| |  |  | Our ability to introduce new products and technologies on a timely basis;
| | - |  | -------------------------------------------------------------------------



| |  |  | Our ability to successfully reduce costs;
| | - |  | -----------------------------------------



| |  |  | The cancellation of U.S. government contracts; and
| | - |  | --------------------------------------------------



| |  |  | Our ability to secure agreements from our major customers for the purchase of our products.
| | - |  | -------------------------------------------------------------------------------------------



25



---

##### Table of Contents

We typically plan our production and inventory levels based on internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially. Our operating results are difficult to forecast because we are continuing to invest in capital equipment and increasing our operating expenses for new product development.

As a result of these and other factors, investors should not rely on our revenues and our operating results for any one quarter or year as an
indication of our future revenues or operating results. If our quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our common stock could fall substantially.

We may be unable to modify our products to meet regulatory or customer requirements.    From time to time our products are
subject to new domestic and international requirements such as the European Unions Restriction on Hazardous Substances (RoHS) Directive. If we are unable to comply with these regulations we may not be permitted to ship our products, which
would adversely affect our revenue and ability to achieve or maintain profitability.

Increased competition may result in decreased
demand or lower prices for our products.    Competition in the markets for our products is intense and we may not be able to compete successfully. We compete with several companies primarily engaged in the business of
designing, manufacturing and selling integrated circuits or alternative display technologies, as well as the supply of other discrete products. Our competitors could develop new process technologies that may be superior to ours, including
technologies that target markets in which our products are sold. Many of our existing and potential competitors have strong market position, considerable internal manufacturing capacity, established intellectual property rights and substantial
technological capabilities. Furthermore, they also have greater financial, technical, manufacturing, and marketing resources than we do, and we may not be able to compete successfully with them.

In addition, many of our existing and potential customers manufacture or assemble displays and wireless communications devices and have substantial
in-house technological capabilities and substantially greater resources than we do. We may not be able to sell our products to these customers and they may commercialize their internal capabilities to become our competitors. If one of our large
customers establishes internal design and manufacturing capabilities, it could have an adverse effect on our operating results.

We expect
competition to increase. This could mean lower prices or reduced demand for our products. Any of these developments would have an adverse effect on our operating results.

Disruptions of our production of our III-V and CyberDisplay products would adversely affect our operating results.    If we were to experience any significant disruption in the operation of
our facilities, we would be unable to supply III-V and CyberDisplay products to our customers. Our manufacturing processes are highly complex and customer specifications are extremely precise. We periodically modify our processes in an effort to
improve yields and product performance and to meet particular customer requirements. In 2006 we anticipate commencing the process to establish an 8 inch CyberDisplay manufacturing line and phasing out our 6 inch manufacturing line. Converting to an
8 inch line will require changes to our manufacturing processes. Process changes or other problems that occur in the complex manufacturing process can result in interruptions in production or significantly reduced yields. Additionally, as we
introduce new equipment into our manufacturing processes, our III-V and CyberDisplay products could be subject to especially wide variations in manufacturing yields and efficiency. We may experience manufacturing problems that would result in delays
in product introduction and delivery or yield fluctuations. We are also subject to the risks associated with the shortage of raw materials used in the manufacture of our products.

If we fail to keep pace with changing technologies, we may lose customers.    Rapidly changing customer requirements, evolving
technologies and industry standards characterize the wireless communications, semiconductor materials and display industries. To achieve our goals, we need to enhance our existing products and develop and market new products that keep pace with
continuing changes in industry standards, requirements and customer preferences. If we cannot keep pace with these changes, our business could suffer.

We may not be successful in protecting our intellectual property and proprietary rights.    Our success depends in part on our ability to protect our intellectual property and proprietary
rights. We have obtained certain domestic and foreign patents and we intend to continue to seek patents on our inventions when appropriate. We also attempt to protect our proprietary information with contractual arrangements and under trade secret
laws. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and the assignment of rights to inventions made by them while in our employ. These measures may not adequately protect our
intellectual and proprietary rights. Existing trade secret, trademark and copyright laws afford only limited protection and our patents could be invalidated or circumvented. Moreover, the laws of certain foreign countries in which our products are
or may be manufactured or sold may not fully protect our intellectual property rights. Misappropriation of our technology and the costs of defending our intellectual



26



---

##### Table of Contents

property rights from misappropriation could substantially impair our business. If we are unable to protect our
intellectual property and proprietary rights, our business may not be successful and the value of investors investment in us may decline.

Our products could infringe on the intellectual property rights of others.    Companies in the wireless communications, semiconductor and display industries steadfastly pursue and protect intellectual property
rights. This has resulted in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property. Our products, including former products such as our light
emitting diodes (LEDs), could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically companies
inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may face such costly litigation, diversion of technical and
management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or
similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business.

Our business could suffer if we lose the services of, or fail to attract, key personnel.    In order to continue to provide
quality products in our rapidly changing business, we believe it is important to retain personnel with experience and expertise relevant to our business. Our success depends in large part upon a number of key management and technical employees. The
loss of the services of one or more key employees, including Dr. John C.C. Fan, our President and Chief Executive Officer, could seriously impede our success. We do not maintain any key-man insurance policies on Dr. Fan or any
other employees. In addition, due to the level of technical and marketing expertise necessary to support our existing and new customers, our success will depend upon our ability to attract and retain highly skilled management, technical, and sales
and marketing personnel. Competition for highly skilled personnel is intense and there may be only a limited number of persons with the requisite skills to serve in these positions. If the III-V or CyberDisplay markets experience an upturn, we may
need to increase our workforce. Due to the competitive nature of the labor markets in which we operate, we may be unsuccessful in attracting and retaining these personnel. Our inability to attract and retain key personnel could adversely affect our
ability to develop and manufacture our products.

We may pursue acquisitions and investments that could adversely affect our
business.    In the past we have made, and in the future we may make, acquisitions of, and investments in, businesses, products and technologies that could complement or expand our business. If we identify an acquisition
candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products or technologies into our existing business and products. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses and write-downs of acquired assets.

We may incur significant liabilities if we fail to comply with stringent environmental regulations or if we did not comply with these regulations in the past.    We are subject to a variety of federal, state and
local governmental regulations related to the use, storage, discharge and disposal of toxic or otherwise hazardous chemicals used in our manufacturing process. The failure to comply with present or future regulations could result in fines being
imposed on us, suspension of production, or a cessation of operations. Any failure on our part to control the use of, or adequately restrict the discharge of, hazardous substances, or otherwise comply with environmental regulations, could subject us
to significant future liabilities. In addition, we cannot be certain that we have not in the past violated applicable laws or regulations, which violations could result in required remediation or other liabilities. We also cannot be certain that
past use or disposal of environmentally sensitive materials in conformity with then existing environmental laws and regulations will protect us from required remediation or other liabilities under current or future environmental laws or regulations.

Investors should not expect to receive dividends from us.    We have not paid cash dividends in the past, nor
do we expect to pay cash dividends for the foreseeable future. We anticipate that earnings, if any, will be retained for the development of our businesses.

Our stock price may be volatile in the future.    The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of
operations, announcements of technological innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display markets, changes in earnings estimates by analysts or other events or
factors. In addition, the public stock markets recently have experienced extreme price and trading volatility. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated
to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.



27



---

##### Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The information required by this item is reported
in herein in Part 1, Item 2 under Liquidity and Capital Resources.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

On May 3, 2006, the Company held its Annual
Meeting of Stockholders to consider and vote upon the following proposals:



|(1) | A proposal to elect six (6) directors of the Company to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | A proposal to ratify an amendment to the Companys 2001 Equity Incentive Plan to increase the number of shares authorized for issuance under the Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | A proposal to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for the current fiscal year.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Such other business as may properly come before the meeting or any adjournments thereof.
|--- | ----------------------------------------------------------------------------------------

Results with respect to the voting on each of the proposals were as follows:



|            |  |                    |  |            |  |                   
|----------- |  | ------------------ |  | ---------- |  | ------------------
|Proposal 1: |  | Director Nominee   |  | For        |  | Withheld Authority
|            |  | John C.C. Fan      |  | 58,046,882 |  | 1,435,104         
|            |  | David E. Brook     |  | 48,064,902 |  | 11,417,084        
|            |  | Andrew H. Chapman  |  | 56,554,340 |  | 2,927,646         
|            |  | Morton Collins     |  | 56,548,773 |  | 2,993,213         
|            |  | Chi Chia Hsieh     |  | 58,412,997 |  | 1,068,989         
|            |  | Michael J. Landine |  | 56,494,791 |  | 2,987,195         



|            |  |            |  |           |  |             |  |                 
|----------- |  | ---------- |  | --------- |  | ----------- |  | ----------------
|Proposal 2: |  | For        |  | Against   |  | Abstentions |  | Broker Non-Votes
|            |  | 23,979,211 |  | 3,542,238 |  | 194,978     |  | 31,765,559      



|            |  |            |  |         |  |             |  |                 
|----------- |  | ---------- |  | ------- |  | ----------- |  | ----------------
|Proposal 3: |  | For        |  | Against |  | Abstentions |  | Broker Non-Votes
|            |  | 58,950,250 |  | 329,017 |  | 202,719     |  | 0               

Item 5. Other Information

None

Item 6. Exhibits



|            |  |                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                        
|31.1        |  | Certificate of John C.C. Fan, Chief Executive Officer of the Registrant, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).         
|            | 
|31.2        |  | Certificate of Richard A. Sneider, Chief Financial Officer of the Registrant, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).    
|            | 
|32.1        |  | Certificate of John C.C. Fan, Chief Executive Officer of the Registrant, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).     
|            | 
|32.2        |  | Certificate of Richard A. Sneider, Chief Financial Officer of the Registrant, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).



28



---

##### Table of Contents

SIGNATURES

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



|                   |  |                                |  |                                                                                                                      
|------------------ |  | ------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------
|                   |  | KOPIN CORPORATION (Registrant)
|                   |  |                               
|Date: May 11, 2006 |  | By:                            |  | /S/    JOHN C.C.
FAN                                                                                                 
|                   |  |                                |  | John C.C. Fan President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
|                   |  |                               
|Date: May 11, 2006 |  | By:                            |  | /S/    RICHARD A.
SNEIDER                                                                                            
|                   |  |                                |  | Richard A. Sneider Treasurer and Chief Financial Officer (Principal Financial and Accounting
Officer)                



29