10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2004

Commission file number 0-50289

Brillian Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	05-0567906
(State or Other Jurisdiction	(I.R.S. Employer Identification No.)
of Incorporation or Organization)
1600 North Desert Drive, Tempe, Arizona	85281
(Address of Principal Executive Offices)	(Zip Code)

(602) 389-8888

(Registrant’s telephone number, including area code)

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

YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

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

CLASS	OUTSTANDING AS OF JULY 31, 2004
Common		6,929,123
Par value $.001 per share

BRILLIAN CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Balance Sheets (unaudited) – June 30, 2004 and December 31, 2003		1
Condensed Statements of Operations (unaudited) – Three Months and Six Months Ended June 30, 2004 and 2003		2
Condensed Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2004 and 2003		3
Notes to Condensed Financial Statements		4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		18
ITEM 4. CONTROLS AND PROCEDURES		18
PART II – OTHER INFORMATION
ITEM 2.CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES		19
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		19
ITEM 5.OTHER INFORMATION		20
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K		20
SIGNATURES		21
Exhibit 10.4
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRILLIAN CORPORATION

CONDENSED BALANCE SHEETS
(unaudited)
(in thousands)

	JUNE 30,			DECEMBER 31,
	2004			2003
ASSETS
Current Assets:
Cash and cash equivalents	$	16,462		$	2,417
Short-term investments		12			12,000
Accounts receivable, net		845			447
Inventories		3,896			2,735
Other current assets		475			828
Total current assets		21,690			18,427
Property, plant and equipment, net		7,056			6,267
Intangibles, net		8,412			8,768
Other investments		6,200			6,331
Total Assets	$	43,358		$	39,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	831		$	457
Accrued compensation		377			84
Accrued liabilities		1,084			676
Deferred revenue		189			21
Total current liabilities		2,481			1,238
Commitments and Contingencies
Stockholders’ Equity:
Common stock		7			5
Additional paid-in capital		57,867			45,708
Deferred compensation		(864	)		(1,265	)
Accumulated deficit		(16,133	)		(5,893	)
Total stockholders’ equity		40,877			38,555
Total Liabilities and Stockholders’ Equity	$	43,358		$	39,793

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

1

BRILLIAN CORPORATION

CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
Net product sales	$	1,035		$	516		$	1,375		$	748
Design and engineering services		99			244			237			383
Total net sales		1,134			760			1,612			1,131
Costs and Expenses:
Cost of sales – products		2,586			2,485			4,848			4,478
Cost of sales – design and engineering services		67			201			189			340
Selling, general, and administrative		1,107			1,051			2,193			2,265
Research and development		2,104			1,714			4,558			3,397
		5,864			5,451			11,788			10,480
Operating loss		(4,730	)		(4,691	)		(10,176	)		(9,349	)
Other Income (Expense):
Interest, net		64			—			108			—
Realized loss on short-term investment		(41	)		—			(41	)		—
Loss on investment in start-up company		(131	)		—			(131	)		—
		(108	)		—			(64	)		—
Net Loss	$	(4,838	)	$	(4,691	)	$	(10,240	)	$	(9,349	)
Loss per Common Share:
Basic and diluted	$	(0.78	)	$	(0.88	)	$	(1.77	)	$	(1.75	)
Weighted Average Number of Common Shares:
Basic and diluted		6,188			5,329			5,784			5,329

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

2

BRILLIAN CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

	Six Months Ended
	June 30,
	2004			2003
Cash Flows from Operating Activities:
Net loss	$	(10,240	)	$	(9,349	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,730			1,961
Stock compensation		444			—
Deferred revenue		168			(206	)
Provision for doubtful accounts		10			(12	)
Loss on investment in start-up company		131			—
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(408	)		5
Increase in inventories		(1,161	)		(510	)
(Increase) decrease in other assets		353			(92	)
Increase in accounts payable and accrued liabilities		1,075			243
Net cash used in operating activities		(7,898	)		(7,960	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(1,920	)		(280	)
Proceeds from sale of assets		—			114
Purchase of intangibles		(243	)		(322	)
Purchase of investments		(79	)		—
Proceeds from maturities/sales of short-term investments		12,067			—
Net cash provided by (used in) investing activities.		9,825			(488	)
Cash Flows from Financing Activities:
Net transfers from TFS		—			8,448
Proceeds of public stock offering		11,969			—
Issuance of shares related to Employee Stock Purchase Plan		96			—
Stock options exercised		53			—
Net cash provided by financing activities		12,118			8,448
Net increase in cash and cash equivalents		14,045			—
Cash and cash equivalents, beginning of period		2,417			—
Cash and cash equivalents, end of period	$	16,462		$	—

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

3

BRILLIAN CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note A	Organization and Basis of Presentation
	We design and develop large-screen, rear-projection, high-definition televisions, or HDTVs, utilizing our proprietary liquid crystal on silicon, or LCoS®, microdisplay technology. We market our HDTVs for sale under the brand names of retailers, including consumer electronics retailers, consumer retail stores, personal computer manufacturers, and high-end audio/video manufacturers. We recently received our first order for HDTVs. We have established a virtual manufacturing model utilizing third-party contract manufacturers to produce our HDTVs, which incorporate the LCoS microdisplays that we manufacture. We also offer a broad line of LCoS microdisplay products and subsystems that original equipment manufacturers, or OEMs, can integrate into proprietary HDTV products, home theater projectors, and near-to-eye applications, such as head-mounted monocular or binocular headsets and viewers, for industrial, medical, military, commercial, and consumer applications.
	Historically, we operated as a division of Three-Five Systems, Inc., or TFS. On March 17, 2003, TFS announced that its board of directors had approved a decision to incorporate us as a wholly owned subsidiary of TFS, to transfer our business and assets into this subsidiary, and to distribute the common stock of this subsidiary to its stockholders in a spin-off. We were formed on May 7, 2003 in anticipation of this spin-off. The spin-off was completed on September 15, 2003 as a special dividend to the stockholders of TFS.
	On September 1, 2003, we and TFS entered into a Master Separation and Distribution Agreement under which TFS transferred to us substantially all of the assets of, and we assumed substantially all of the corresponding liabilities of, TFS’ microdisplay business. On September 15, 2003, TFS distributed all outstanding shares of Brillian common stock owned by TFS to TFS stockholders as a dividend (the “spin-off”). Each TFS stockholder of record as of September 4, 2003 received one share of our stock for every four shares of TFS common stock owned. In addition, we entered into ancillary agreements that govern various ongoing relationships between us and TFS. In connection with the spin-off, TFS received a ruling from the Internal Revenue Service, or the IRS, that the spin-off would be tax free. In connection with the spin-off, TFS provided initial cash funding in the amount of $20.9 million, net of $1.1 million of spin-off related costs incurred prior to the spin-off.
	On May 14, 2004, we completed an underwritten public offering of 1.5 million shares of our common stock at a public offering price of $9.00 per share. We received net proceeds from the offering of approximately $12.0 million.
	The accompanying unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In our opinion, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made. The results of operations for the three-month and six-month periods ended June 30, 2004 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2004. These financial statements should be read in conjunction with our December 31, 2003 financial statements included in our Annual Report on Form 10-K and the accompanying notes thereto.
	The financial statements for periods prior to the spin-off have been prepared using TFS’ historical basis in the assets and liabilities and the historical results of operations of Brillian.

4

Note B   Inventories consisted of the following (in thousands):

	June 30,		December 31,
	2004		2003
Raw materials	$	3,121	$	2,473
Work-in-process		387		51
Finished goods		388		211
	$	3,896	$	2,735

Note C   Property, plant, and equipment consisted of the following (in thousands):

	June 30,			December 31,
	2004			2003
Leasehold improvements	$	977		$	971
Equipment		15,399			13,495
Furniture		72			62
		16,448			14,528
Less accumulated depreciation		(9,392	)		(8,261	)
	$	7,056		$	6,267

Note D	Intangibles:
	Intangibles consist of mask works, patents, licenses, and other intangible assets acquired from third parties. Intangibles are recorded at cost and amortized using the straight-line method over the estimated useful lives of the respective assets, which range from two to five years.
	Intangible assets consisted of the following at June 30, 2004 (in thousands):

	Acquisition		Accumulated			Book
	Value		Amortization			Value
Amortized Intangible Assets:
Mask works	$	5,939	$	(2,206	)	$	3,733
Patents, patents pending, and other intangible assets		3,901		(502	)		3,399
Licenses		2,954		(1,674	)		1,280
	$	12,794	$	(4,382	)	$	8,412

Intangible assets consisted of the following at December 31, 2003 (in thousands):

	Acquisition		Accumulated			Book
	Value		Amortization			Value
Amortized Intangible Assets:
Mask works	$	5,839	$	(2,206	)	$	3,633
Patents, patents pending, and other intangible assets		3,758		(198	)		3,560
Licenses		2,954		(1,379	)		1,575
	$	12,551	$	(3,783	)	$	8,768

5

Intangible asset amortization expense for the six months ended June 30, 2004 was $599,000 compared with $869,000 for the six months ended June 30, 2003. Estimated future annual amortization expense through 2008 and thereafter related to intangible assets reported as of June 30, 2004 is as follows (in thousands):

Fiscal Year	Amount
2004	$	598
2005		2,528
2006		2,418
2007		2,014
2008		592
Thereafter		262
	$	8,412

Note E	Loss per Share
	Basic and diluted loss per common share was computed by dividing net loss by the weighted average number of shares of common stock outstanding during the three- and six-month periods ended June 30, 2004. For the three- and six-month periods ended June 30, 2004, the effect of approximately 1.6 million stock options was excluded from the calculation of diluted loss per share as their effect would have been antidilutive and would have decreased the loss per share.
	Per share information presented for the three- and six-month periods ended June 30, 2003 was calculated based on the number of shares issued in the spin-off. The calculation of loss per share for this period assumed that the common shares were outstanding for the entire period.
Note F	Segment Reporting, Sales to Major Customers, and Geographic Information
	SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers.
	Because the products we sell for use in near-to-eye and projection devices share the same underlying technology and have similar economic characteristics, production processes, and customer types, we operate and report internally as one segment in accordance with SFAS No. 131. All of our assets are located in the United States.
	Net sales in the near-to-eye market totaled $879,000, or 55% of total net sales, in the six-month period ended June 30, 2004, and $420,000, or 37% of total net sales, in the six-month period ended June 30, 2003. The remaining net sales were in the projection market.
	For the three months ended June 30, 2004, sales to TQ Systems, I-O Display Systems, and Zhejiang Jincheng accounted for approximately 38%, 20%, and 17%, respectively, of our net sales. For the three months ended June 30, 2003, sales to Kodak, Kaiser, and Brashear accounted for approximately 23%, 19%, and 7%, respectively, of our net sales.
	For the six months ended June 30, 2004, sales to T Q Systems, I-O Display Systems, Kodak, and Zhejiang Jincheng accounted for approximately 28%, 23%, 13%, and 12%, respectively, of our net sales. For the six months ended June 30, 2003, sales to Kodak, Kaiser, and Brashear LP accounted for approximately 18%, 14%, and 14%, respectively, of our net sales.
	We also track net sales by geographic location. Net sales by geographic area are determined based upon the location of the end customer. The following sets forth net sales (in thousands) for our geographic areas:

6

	North
	America		Asia		Europe		Total
Three months ended June 30, 2004
Net sales	$	433	$	242	$	459	$	1,134
Three months ended June 30, 2003
Net sales	$	477	$	120	$	163	$	760
Six months ended June 30, 2004
Net sales	$	747	$	349	$	516	$	1,612
Six months ended June 30, 2003
Net sales	$	690	$	228	$	213	$	1,131

Note G	Transactions with TFS
	Prior to the spin-off, our costs and expenses included allocations from TFS for centralized legal, accounting, treasury, quality assurance, real estate, information technology, engineering, and other TFS corporate services and infrastructure costs. These allocations were determined on the basis that we and TFS considered to be reasonable reflections of the utilization of services provided to, or the benefits received by, us. Allocated costs included in our cost of sales totaled $453,000 and $920,000 for the three and six-month periods ended June 30, 2003. Allocated costs included in selling, general, and administrative expenses totaled $615,000 and $1.3 million for the three and six-month periods ended June 30, 2003. Allocated costs included in our research and development expenses totaled $303,000 and $588,000 for the three and six-month periods ended June 30, 2003. The basis for the amounts allocated to us included the following: legal, accounting, treasury, quality assurance, and other TFS corporate functions, including officers’ salaries, were allocated based on management’s estimation of time devoted to the microdisplay business for these functions; facility costs and information technology services were allocated on the basis of headcount of the microdisplay business, which is most representative of utilization of these resources; and engineering services were allocated to us based on the actual hours of services used. The allocation methodologies utilized represent management’s best estimate of the actual hours utilized by the microdisplay business of TFS.
	On the spin-off date, we and TFS entered into a series of agreements to facilitate our separation from TFS. These agreements included certain transitional services, leases, intellectual property transfers, and tax sharing agreements. These agreements require us to pay a negotiated fee. We paid TFS $200,000 and $434,000 for rent and IT management services in the three and six-month periods ended June 30, 2004, and $76,000 and $108,000 for engineering services in the same periods. In addition, we paid $85,000 and $638,000 for engineering and design services related to the development of printed circuit board assemblies and for purchases of these assemblies for our HDTV product during the three and six-month periods ended June 30, 2004.
	Tax Sharing Agreement
	Under the Tax Sharing Agreement, we have agreed to indemnify TFS against any taxes (other than Separation Taxes) that are attributable to us since our formation, even while we were a member of TFS’ federal consolidated tax group. TFS has indemnified us against any taxes (other than Separation Taxes) that are attributable to the businesses retained by TFS. The Tax Sharing Agreement sets forth rules for determining taxes attributable to us and taxes attributable to the businesses retained by TFS.
	We have agreed not to take any action that would cause the spin-off not to qualify under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”). We have agreed not to take certain actions for two

7

	years following the spin-off unless we obtain an IRS ruling or an opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off. These actions include certain issuances of our stock, a liquidation or merger of our company, and dispositions of assets outside the ordinary course of our business. If any of these transactions were to occur, the spin-off could be deemed to be a taxable distribution to TFS. This would subject TFS to a substantial tax liability. We have agreed to indemnify TFS and its affiliates to the extent that any action we take or fail to take gives rise to a tax incurred by TFS or any of its affiliates with respect to the spin-off. In addition, we have agreed to indemnify TFS for any tax resulting from an acquisition by one or more persons of a 50% or greater interest in our company.
	Transition Services Agreement
	We and TFS have entered into a Transition Services Agreement under which TFS provides to us certain administrative services that may be necessary to our business. The most significant service that TFS provides to us relates to document control. TFS charges us mutually agreed upon hourly rates for these services. This agreement will expire on August 31, 2004 unless the parties mutually agree upon a renewal or unless earlier terminated by mutual consent of the parties.
	Intellectual Property Agreement
	We and TFS have entered into an Intellectual Property Agreement under which we granted to TFS a nonexclusive, royalty-free, worldwide, perpetual, fully paid up license in and to all intellectual property that was assigned to us and that is used in all fields other than in the field of microdisplays. This intellectual property includes all patents, copyrights, trademarks, trade names, trade dress, trade secrets, know how, and show how whether or not legal protection has been sought or obtained. In addition, the license granted to TFS is non-assignable and non-licensable to third parties except that TFS may sublicense its rights to the intellectual property to any party or entity in which TFS owns at least a 50% equity interest.
	Real Property Sublease Agreement
	We and TFS have entered into a Real Property Sublease Agreement under which we lease office and manufacturing space in the TFS headquarters building. The initial term of the sublease expires August 31, 2005, with automatic one-year renewal terms thereafter unless either party elects to terminate the sublease upon notice delivered at least six months prior to the expiration of the then applicable sublease term. The agreement also sets forth certain circumstances under which all or a portion of the sublease may be terminated without penalty. We lease approximately 34,000 square feet of the building from TFS and share certain common areas in the building with TFS. Our fixed monthly rent payable to TFS is approximately $40,000. This amount includes all normal and customary services in connection with the operation and maintenance of the building. This amount, however, does not include water or electrical utilities, which we pay separately based on our use of those items. The sublease also requires that TFS provide us with facilities-related information technology management services, for which we pay a minimum monthly fee of approximately $38,000. The sublease is not assignable by us without the prior written consent of TFS, which consent may be withheld by TFS in its sole discretion.
Note H	Commitments and Contingencies:
	In February 2002, we guaranteed up to $500,000 of the debt of VoiceViewer Technology, Inc., a private start-up company developing microdisplay products. This loan guarantee has a five-year term and matures in January 2007. As of June 30, 2004, our maximum liability under this guarantee was $372,000. We have determined that it is probable that VoiceViewer will be unable to meet its obligations under the loan agreement. Accordingly, we have accrued $372,000 for our estimated obligation under this guarantee. We have a security interest in, and second rights to, the intellectual property of VoiceViewer, while the lending institution has the first rights. We would obtain the VoiceViewer intellectual property if in the future we are required to pay amounts under the guarantee. However, we do not believe that it would be possible to realize any significant value from the intellectual property.

8

Note I	Stock Compensation:
	Our 2003 Incentive Compensation Plan was adopted by our board of directors and approved by our stockholder on August 26, 2003. Under the 2003 Incentive Compensation Plan, an aggregate of 1,650,000 shares of common stock were originally available for issuance pursuant to options granted to acquire common stock, the direct granting of restricted common stock and deferred stock, the granting of stock appreciation rights, and the granting of dividend equivalents. On the first day of each fiscal year, an additional number of shares equal to 4% of the total number of shares then outstanding is added to the number of shares that may be subject to the granting of awards.
	Prior to the spin-off, certain of our employees were granted options to purchase TFS stock under TFS’ stock-based compensation plans. In connection with the spin-off, each outstanding TFS option granted prior to the spin-off was converted into both an adjusted TFS option and a substitute Brillian option. The treatment of such TFS options and the substitute Brillian options is identical for those employees who remained employees of TFS immediately after the spin-off and for those employees who became employees of Brillian in connection with the spin-off. These TFS options were converted in a manner that preserved the aggregate exercise price of each option, which was allocated between the adjusted TFS option and the substitute Brillian option, and each preserved the ratio of the exercise price to the fair market value of the stock subject to the option. For employees who remained employees of TFS after the spin-off, employment with TFS will be taken into account in determining when each substitute Brillian option becomes exercisable and when it terminates, and in all other respects the terms of the substitute option is substantially the same as the original TFS option. Under this arrangement, on September 15, 2003, we issued options to purchase 750,275 shares of Brillian common stock. Of these options, 600,410 were issued to employees who remained employees of TFS after the spin-off. Options granted under TFS’ plans generally vest over a four-year period and are exercisable for a term of 10 years.
	In addition to the Brillian substitute options granted under the terms of the Master Separation and Distribution Agreement, on September 4, 2003, we granted options to our employees to purchase approximately 526,000 shares of our common stock. Options with respect to approximately 300,000 shares have a vesting period of 32 months, and the remaining options have a vesting period of 50 months. Additionally, on September 4, 2003, we granted approximately 56,000 shares of restricted common stock to employees with a vesting period of one year. As of June 30, 2004, approximately 44,900 shares of this restricted common stock had vested and been issued. On September 4, 2003, the spin-off had not been completed and, therefore, no market had developed for our common stock. For purposes of setting the exercise price of the options granted on that date, fair market value was estimated by our board of directors. Based on the initial trading prices of our common stock, we recorded deferred compensation of approximately $1.5 million related to the stock option and restricted stock grants of September 4, 2003. The total amount of deferred compensation will be expensed over the vesting terms of the options and shares of restricted stock. During the six months ended June 30, 2004, we recorded non-cash compensation expense of $401,000 related to these restricted stock and option grants.
	Pursuant to the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, we account for options granted to our employees pursuant to Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure”. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have adopted the disclosure requirements of SFAS No. 148.
	We have computed compensation cost, for pro forma disclosure purposes, based on the fair value of all options awarded on the date of grant, utilizing the Black-Scholes option pricing method with the following weighted assumptions: risk-free interest rates of 2.99% for all scenarios; expected dividend yields of zero for all scenarios; expected lives of 5.0 years for all scenarios; and expected volatility (a measure of the amount by which a price has fluctuated or is expected to fluctuate during a period) of 74% for all scenarios.

9

Had compensation cost for these plans been determined consistent with SFAS No. 123, our net loss and loss per share for the three- and six-month periods ended June 30 would have been as follows (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net loss:
As reported	$	(4,838	)	$	(4,691	)	$	(10,240	)	$	(9,349	)
Total stock-based compensation expenses determined under fair value based method for all awards, net of related tax effects		(306	)		—			(537	)		—
Pro forma net loss	$	(5,144	)	$	(4,691	)	$	(10,777	)	$	(9,349	)
Basic and diluted net loss per share:
As reported	$	(0.78	)	$	(0.88	)	$	(1.77	)	$	(1.75	)
Pro forma	$	(0.83	)	$	(0.88	)	$	(1.86	)	$	(1.75	)

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

          The statements contained in this report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies” regarding the future. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for fiscal 2004 and thereafter; the amounts, prices, timing, or terms under which we sell HDTVs under our agreement with our initial customer; technological innovations; future products or product development; our product development strategies; potential acquisitions or strategic alliances; the success of particular product or marketing programs; the amounts of revenue generated as a result of sales to significant customers; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements.

Overview

          We design and develop large-screen, rear-projection, high-definition televisions, or HDTVs, utilizing our proprietary liquid crystal on silicon, or LCoS^®, microdisplay technology. We market our HDTVs for sale under the brand names of retailers, including consumer electronics retailers, consumer retail stores, personal computer manufacturers, and high-end audio/video manufacturers. We recently received our first order for HDTVs. We have established a virtual manufacturing model utilizing third-party contract manufacturers to produce our HDTVs, which incorporate the LCoS microdisplays that we manufacture. We also offer a broad line of LCoS microdisplay products and subsystems that original equipment manufacturers, or OEMs, can integrate into proprietary HDTV products, home theater projectors, and near-to-eye applications, such as head-mounted monocular or binocular headsets and viewers, for industrial, medical, military, commercial, and consumer applications.

          We derive revenue from the sale of our microdisplay products and from providing design and engineering services. During 2003, we recorded revenue from product sales of $1.6 million, or 74% of net sales, and revenue from design and engineering services of $565,000, or 26% of net sales. We have never been profitable. In 2003, 2002, and 2001, we had net losses of $18.7 million, $23.2 million, and $22.3 million, respectively.

10

          We started the development of LCoS microdisplays in 1997 as a division of Three-Five Systems, Inc., or TFS, under which we operated until our spin-off in September 2003. In anticipation of our spin-off to the stockholders of TFS, TFS organized us as a wholly owned subsidiary. In connection with the spin-off, TFS transferred to us its LCoS microdisplay business, including the related manufacturing and business assets, personnel, and intellectual property. TFS also provided initial cash funding to us in the amount of $20.9 million. The spin-off was completed on September 15, 2003 as a special dividend to the stockholders of TFS.

          We share occupancy with TFS in a building owned by TFS in Tempe, Arizona. We manufacture all of our LCoS microdisplays on our high-volume liquid crystal on silicon manufacturing line in that Tempe facility, where we also maintain our corporate headquarters. In addition, we conduct all testing and assembly of LCoS modules and conduct research and development activities in Tempe. We also operate a facility in Boulder, Colorado. In Boulder, we conduct sales and marketing activities and research and development activities.

          Net Sales. Our sales result from both design and engineering services and product sales. Until early 2002, substantially all of our sales were for use in projection-based applications. After the purchase of certain assets in early 2002, however, we became equally focused on the near-to-eye market. In the fourth quarter of 2003, we announced our intention to develop, manufacture, and sell a complete HDTV product based on our Gen II LCoS microdisplay. Since this announcement, most of our efforts have been focused on the design of this product, the establishment of a supply chain to source the components that we do not manufacture, and the establishment of a selling channel for the marketing and sale of our HDTV product. In April 2004, we announced our first customer contract for the sale of our HDTV product. We currently anticipate that sales of our HDTVs will comprise the majority of our total sales in future periods.

          In addition to manufacturing and selling our own HDTVs, we will continue to seek selective OEM customers for our projection displays. We typically sell three displays and associated electronics for products in the projection market. In the near-to-eye market, we sell either one or two displays and associated electronics. The displays and electronics are sold together as a kit. We also sell optical modules in the near-to-eye market. The selling prices of these products range between $90 and $1,000 per unit.

          Cost of Sales. Our gross margins are influenced by various factors, including manufacturing efficiencies, yields, and absorption issues, product mix, product differentiation, product uniqueness, inventory management, and volume pricing. The manufacturing-related issues have the most significant impact on our gross margins. To date, our manufacturing capacity has exceeded our manufacturing volume, resulting in the inability to absorb fully the cost of our manufacturing infrastructure. As a result, we expect it will be difficult to attain significant improvements in gross margin until we can operate at higher production volumes.

          Selling, General, and Administrative Expense. Selling, general, and administrative expense consists principally of administrative and selling costs; salaries, commissions, and benefits to personnel; and related facilities costs. We make substantially all of our sales directly to OEMs through a very small sales force that consists primarily of direct technical sales persons. Therefore, there is no material cost of distribution in our selling, general, and administrative expense.

          Research and Development Expense. Research and development expense consists principally of salaries and benefits to scientists, engineers, and other technical personnel; related facilities costs; process development costs; and various expenses for projects, including new product development. Research and development expense continues to be very high as we continue to develop our LCoS technology and manufacturing processes, and refine our HDTV products.

11

Critical Accounting Policies and Estimates

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

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

          We recognize revenue from product sales when persuasive evidence of a sale exists; that is, a product is shipped under an agreement with a customer; risk of loss and title have passed to the customer; the fee is fixed and determinable; and collection of the resulting receivable is reasonably assured. Sales allowances are estimated based upon historical experience of sales returns.

          We recognize revenue related to design and engineering services depending on the relevant contractual terms. Under fixed-price contracts that contain project milestones, revenue is recognized as milestones are met. For contracts under which revenue is recognized based on milestones, the fair value of milestones completed equals the fair value of work performed. Under a prior fixed price contract under which we are paid based on performance of tasks, we recognize revenue based on the estimated percentage of completion of the entire project as measured by the costs for man hours and materials. Any anticipated losses on fixed price contracts are recorded in the period they are determinable. Revenue related to design and engineering services is recognized based on these methods and is non-refundable.

          We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the adequacy of this allowance by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. If the financial condition of our customers were to deteriorate, additional allowances could be required.

          We write down our inventory for obsolete inventory. We write down our inventory to estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by us, additional inventory write-downs may be required.

          Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. In determining whether a valuation allowance is required, we take into account all evidence with regard to the utilization of a deferred tax asset, including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Deferred tax assets resulting from net operating losses and tax credits generated by our pre-spin-off operations were retained by TFS in accordance with applicable tax law. In the near term, we do not expect to record a tax benefit on any losses that we incur.

          Long-term assets, such as property, plant, and equipment, and intangibles, are originally recorded at cost. On an on-going basis, we assess these assets to determine if their current recorded value is impaired. When assessing these assets, we consider projected future cash flows to determine if impairment is applicable. These cash flows are evaluated for objectivity by using weighted probability techniques and also comparisons of past

12

performance against projections. We may also identify and consider independent market values of assets that we believe are comparable. If we were to believe that an asset’s value was impaired, we would write down the carrying value of the identified asset and charge the impairment as an expense in the period in which the determination was made.

          Non-marketable equity securities are accounted for at the lower of estimated fair value or historical cost. All of our investments are subject to a periodic impairment review; the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators we use to identify those events and circumstances include the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects; the technological feasibility of the investee’s products and technologies; the general market conditions in the investee’s industry; the investee’s liquidity, debt ratios, and rate at which the investee is using cash; and the valuation of the investee’s most recent financing round. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its impaired value. When an investee is not considered viable from a financial or technological point of view, the entire investment would be written down. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation, and the new funding does not appear imminent, it would be presumed that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise. During the second quarter of 2004, we recorded a write-down of $131,000 due to an impairment in the value of non-marketable equity securities. This impairment occurred when one of our investee companies obtained equity funding at a valuation lower than our carrying amount.

          Our historical financial statements for periods prior to our spin-off from TFS include those assets, liabilities, revenues, and expenses directly attributable to our operations and allocations of certain TFS corporate expenses to us. These amounts have been allocated to us on the basis that we and TFS considered to reflect most fairly or reasonably the utilization of the services provided to, or the benefits received by, us. We believe the methods used to allocate these amounts are reasonable.

          The financial information included herein for periods prior to the spin-off is not necessarily indicative of our future financial position, results of operations, or cash flows, nor is it necessarily indicative of what the financial position, results of operations, and cash flows would have been had we operated as a stand-alone public entity during the periods covered.

          Prior to the spin-off, our costs and expenses included allocations from TFS for centralized legal, accounting, treasury, quality assurance, real estate, information technology, engineering, and other TFS corporate services and infrastructure costs. These allocations were determined on the basis that we and TFS considered to be reasonable reflections of the utilization of services provided to, or the benefits received by, us. Allocated costs included in our cost of sales totaled $453,000 and $920,000 for the three and six-month periods ended June 30, 2003. Allocated costs included in selling, general, and administrative expenses totaled $615,000 and $1.3 million for the three and six-month periods ended June 30, 2003. Allocated costs included in our research and development expenses totaled $303,000 and $588,000 for the three and six-month periods ended June 30, 2003. The basis for the amounts allocated to us included the following: legal, accounting, treasury, quality assurance, and other TFS corporate functions, including officers’ salaries, were allocated based on management’s estimation of time devoted to the microdisplay business for these functions; facility costs and information technology services were allocated on the basis of headcount of the microdisplay business, which is most representative of utilization of these resources; and engineering services were allocated to us based on the actual hours of services used. The allocation methodologies utilized represent management’s best estimate of the actual hours utilized by the microdisplay business of TFS.

          On the spin-off date, we and TFS entered into a series of agreements to facilitate our separation from TFS. These agreements included certain transitional services, leases, intellectual property transfers, and tax sharing agreements. These agreements require us to pay a negotiated fee. We paid TFS $200,000 and $434,000 for rent and IT management services in the three- and six-month periods ended June 30, 2004, and $76,000 and $108,000 for engineering services in the same periods. In addition, we paid $85,000 and $638,000 for engineering and design services related to the development of printed circuit board assemblies and for purchases of these assemblies for our HDTV product during the three- and six-month periods ended June 30, 2004.

13

          Our financial results subsequent to the spin-off may differ materially from those recorded historically. These potential differences are the result of several factors, including the following:

1. actual costs for services needed by our business may differ from amounts historically allocated to us from TFS;

2. certain items, including facilities charges, that were recorded by the TFS combined entity as depreciation will now be recorded as rent expense by us, for which we will need to pay cash; and

3. changes in the way we manage our business as a stand-alone entity as opposed to a division may result in different business decisions.

          Since the spin-off, the actual costs for services needed by our business have not differed materially from amounts historically allocated to us from TFS. However, we are no longer part of a larger organization; therefore, certain expense items may increase more rapidly. If this occurs and we are unable to decrease other expense items or increase revenue to offset this increased expense, our results of operations will be adversely affected.

          We and TFS have entered into a series of agreements to facilitate our separation from TFS. These agreements include certain transitional services, leases, intellectual property transfers, and tax sharing agreements. Certain of these agreements require us to pay a negotiated fee. If we are unable to build an infrastructure to provide these services internally, our operating results could be adversely affected.

          Because our business serves new and developing markets, is based on a relatively new technology, and is expected to be significantly influenced by the introduction of new HDTV products, accurately forecasting revenue for a particular future period is difficult. To date, the majority of our product sales to customers have been for their use in designing their end products or for improving their production processes as opposed to volume production lots. Therefore, the amount of revenue recorded in any given period may fluctuate significantly, and predictable revenue trends have not yet developed. While we anticipate that our revenue will increase, there can be no assurances that this will occur or when it will occur. Because a significant amount of our expenses are fixed in nature and we still experience low manufacturing yields, the amount of revenue recognized during the first half of 2004 did not result in a material impact to our cash consumption rate. We do anticipate, however, that as we move into volume production, we will improve our manufacturing yields and more fully absorb our fixed costs, which will result in improved gross margins and results of operations later in 2004 and beyond. However, as we increase our revenue and shift our product mix predominantly to the HDTVs, we will use cash to finance increases in inventory and accounts receivable.

Results of Operations

  Three months ended June 30, 2004 compared to three months ended June 30, 2003

          Net Sales. Net sales increased 49% to $1,134,000 in the second quarter of 2004 from $760,000 in the second quarter of 2003. Product sales increased to $1,035,000 in the second quarter of 2004 from $516,000 in the second quarter of 2003. Design and engineering services revenue decreased to $99,000 in the second quarter of 2004 from $244,000 in the second quarter of 2003.

          Net sales in the near-to-eye market totaled $699,000, or 62% of total net sales, in the second quarter of 2004 and $171,000, or 23% of total net sales, in the second quarter of 2003. The remaining net sales were in the projection market.

          Net sales in North America totaled $433,000, or 38% of total net sales, in the second quarter of 2004 compared with $477,000, or 63% of total net sales, in the second quarter of 2003. Net sales in Asia totaled $242,000, or 21% of total net sales, in the second quarter of 2004 compared with $120,000, or 16% of total net sales, in the second quarter of 2003. Net sales in Europe totaled $459,000, or 41% of net sales, in the second quarter of 2004 compared with $163,000, or 21% of net sales, in the second quarter of 2003.

          Cost of Sales. Cost of sales was $2.7 million, or 234% of net sales, in the second quarter of 2004 compared with $2.7 million, or 353% of net sales, in the second quarter of 2003. The large negative gross margin in each

14

period resulted primarily from the low volume of shipments and low manufacturing yields in the shipped products. To date, our manufacturing capacity has exceeded our manufacturing volume, resulting in the inability to absorb fully the cost of our manufacturing infrastructure. Cost of sales for design and engineering services decreased to $67,000 in the second quarter of 2004 from $201,000 in the second quarter of 2003.

          As is typical in most segments of the high-technology industry, we anticipate downward pressure on the prices of our products. A significant portion of our manufacturing costs are fixed in nature and consist of items such as utilities, depreciation, and amortization. The amounts of these costs do not vary period to period based on the number of units produced nor can the amounts of these costs be adjusted in the short term. Therefore, in periods of lower production volume, these fixed costs are absorbed by a lower number of units, thus increasing the cost per unit. As a result, we expect it will be difficult to attain significant improvements in gross margins until we can operate at higher production volumes.

          Selling, General, and Administrative Expense. Selling, general, and administrative expense totaled $1.1 million in the second quarter of 2004, approximately the same as in the second quarter of 2003. Selling, general, and administrative expense for the second quarter of 2003 included expenses of $338,000 associated with our spin-off from TFS. No such expenses were incurred in the second quarter of 2004.

          Research and Development Expense. Research and development expense increased 23% to $2.1 million in the second quarter of 2004 from $1.7 million in the second quarter of 2003. Research and development expense in the second quarter of 2004 includes costs totaling approximately $200,000 associated with the development of our HDTV products.

          Loss on Investment in Start-up Company. During the second quarter of 2004, we recorded a write-down of $131,000 due to an impairment in the value of non-marketable equity securities. This impairment occurred when one of our investee companies obtained equity funding at a valuation lower than our carrying amount. No such loss was recorded in the second quarter of 2003.

          Net Loss. Net loss was $4.8 million in the second quarter of 2004 compared with a net loss of $4.7 million in the second quarter of 2003.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

          Net Sales. Net sales increased 43% to $1.6 million in the first half of 2004 from $1.1 million in the first half of 2003. Product sales increased to $1.4 million in the first half of 2004 from $748,000 in the first half of 2003. Design and engineering services revenue decreased to $237,000 in the first half of 2004 from $383,000 in the first half of 2003.

          Net sales in the near-to-eye market totaled $879,000, or 55% of total net sales, in the first half of 2004 and $420,000, or 37% of total net sales, in the first half of 2003. The remaining net sales were in the projection market.

          Net sales in North America totaled $747,000, or 46% of total net sales, in the first half of 2004 compared with $690,000, or 61% of total net sales, in the first half of 2003. Net sales in Asia totaled $349,000, or 22% of total net sales, in the first half of 2004 compared with $228,000, or 20% of total net sales, in the first half of 2003. Net sales in Europe totaled $516,000, or 32% of net sales, in the first half of 2004 compared with $213,000, or 19% of net sales, in the first half of 2003.

          Cost of Sales. Cost of sales was $5.0 million, or 312% of net sales, in the first half of 2004 compared with $4.8 million, or 426% of net sales, in the first half of 2003. The large negative gross margin in each period resulted primarily from the low volume of shipments and low manufacturing yields in the shipped products. To date, our manufacturing capacity has exceeded our manufacturing volume, resulting in the inability to absorb fully the cost of our manufacturing infrastructure. Cost of sales for design and engineering services decreased to $189,000 in the first half of 2004 from $340,000 in the first half of 2003.

          As is typical in most segments of the high-technology industry, we anticipate downward pressure on the prices of our products. A significant portion of our manufacturing costs are fixed in nature and consist of items such

15

as utilities, depreciation, and amortization. The amounts of these costs do not vary period to period based on the number of units produced nor can the amounts of these costs be adjusted in the short term. Therefore, in periods of lower production volume, these fixed costs are absorbed by a lower number of units, thus increasing the cost per unit. As a result, we expect it will be difficult to attain significant improvements in gross margins until we can operate at higher production volumes.

          Selling, General, and Administrative Expense. Selling, general, and administrative expense decreased 3% to $2.2 million in the first half of 2004 from $2.3 million in the first half of 2003. Selling, general, and administrative expense for the first half of 2003 included expenses of $802,000 associated with our spin-off from TFS. No such expenses were incurred in the first half of 2004.

          Research and Development Expense. Research and development expense increased 34% to $4.6 million in the first half of 2004 from $3.4 million in the first half of 2003. Research and development expense in the first half of 2004 includes costs totaling approximately $1.1 million associated with the development of our HDTV products.

          Loss on Investment in Start-up Company. During the first half of 2004, we recorded a write-down of $131,000 due to an impairment in the value of non-marketable equity securities. This impairment occurred when one of our investee companies obtained equity funding at a valuation lower than our carrying amount. No such loss was recorded in the first half of 2003.

          Net Loss. Net loss was $10.2 million in the first half of 2004 compared to a net loss of $9.3 million in the first half of 2003.

Liquidity and Capital Resources

          At June 30, 2004, we had cash, cash equivalents, and short-term investments of $16.5 million compared with $14.4 million at December 31, 2003.

          In the first half of 2004, we used $7.9 million of cash for operating activities compared with $8.0 million in the first half of 2003. Most of the cash outflow in each period related to our losses, since we had little change in our other working capital balances in each period. Our depreciation and amortization expense was $1.7 million in the first half of 2004 and $2.0 million in the first half of 2003. Prior to the spin-off, our entire cash outflow was funded by TFS on an as-needed basis.

          In the first half of 2004, net cash provided by investing activities totaled $9.8 million. During this period, we received proceeds from the sale of short-term investments of $12.1 million. Purchases of property and equipment totaled $1.9 million and purchases of intangibles totaled $243,000 in the first half of 2004.

          During the first half of 2003, net cash used in investing activities totaled $488,000. During the first half of 2003, we used $280,000 for the purchase of property and equipment, received proceeds from the sale of property and equipment of $114,000, and used $322,000 for the purchase of intangibles.

          We have incurred recurring operating losses and negative cash flows since our inception as a division of TFS. Our net loss was $18.7 million, $23.2 million, and $22.3 million in 2003, 2002, and 2001, respectively. At June 30, 2004, we had $19.2 million of working capital, including cash, cash equivalents, and short-term investments of $16.5 million. In May 2004 we completed an underwritten public offering of 1.5 million shares of our common stock and received net proceeds of approximately $12.0 million. We believe that the net proceeds of the offering will be sufficient to fund our operations and planned expenditures through 2005.

          A key element of our business involves the ongoing commercialization of our LCoS microdisplay technology. LCoS microdisplays are an emerging technology with target markets that could be slow to develop or could utilize competing technologies. Therefore, accurately forecasting revenue for any given future period is

16

difficult. We are currently focusing a majority of our resources on penetrating the premium segment of the HDTV market. HDTV has only recently become available to consumers, and widespread market acceptance is uncertain.

          The successful introduction of an HDTV product to market and securing volume orders from consumer electronics retailers for HDTVs represent a key ingredient to our success. If we achieve significant sales volume of our HDTVs, we will use cash in order to finance the working capital associated with increasing sales. In April 2004, we received our first order from a large, U.S.-based, consumer electronics retailer for the purchase of our HDTVs.

Aggregate Contractual Obligations

          The following table lists our commercial commitments (in thousands):

			Amount of Commitment Expiration Per Period
Other Commercial Commitments	Total Amounts
(in thousands)	Committed		Less than 1 Year		1-3 Years		4-5 Years		6 Years and Over
Facilities leases	$	1,092	$	936	$	156	$	—	$	—
Development, maintenance, and minimum royalty agreements	$	1,665	$	1,245	$	310	$	110	$	—
Guarantee	$	372	$	372	$	—	$	—	$	—

          We have contractual commitments for property leases for our Tempe headquarters and for our development center in Boulder, Colorado. In addition, we have contractual commitments for development, software maintenance, and minimum royalties related to the development and production of our HDTV products. The guarantee relates to our guarantee in connection with a Small Business Administration loan to VoiceViewer Technology, Inc., a private company developing microdisplay products.

          We have determined that it is probable that VoiceViewer will be unable to meet its obligations under the loan agreement. Therefore, we have accrued $372,000, which represents our maximum obligation under the guarantee amount. We have a security interest in, and second rights to, the intellectual property of VoiceViewer, while the lending institution has the first rights. We would obtain the VoiceViewer intellectual property if in the future we are required to pay amounts under the guarantee. However, we do not believe we can realize any significant value from VoiceViewer’s intellectual property.

          Under the Tax Sharing Agreement, we have agreed to indemnify TFS against any taxes, other than Separation Taxes, that are attributable to us since our formation, even while we were a member of TFS’ federal consolidated tax group. TFS has agreed to indemnify us against any taxes, other than Separation Taxes, that are attributable to the businesses retained by TFS. The Tax Sharing Agreement sets forth rules for determining taxes attributable to us and taxes attributable to the businesses retained by TFS.

          Pursuant to the Tax Sharing Agreement, we have agreed not to take any action that would cause the spin-off not to qualify under Section 355 of the Internal Revenue Code. We have agreed not to take certain actions for two years following the spin-off, unless we obtain an IRS ruling or an opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off. These actions include certain issuances of our stock, a liquidation or merger of our company, and dispositions of assets outside the ordinary course of our business. If any of these transactions were to occur, the spin-off could be deemed to be a taxable distribution to TFS. This would subject TFS to a substantial tax liability. We have agreed to indemnify TFS and its affiliates to the extent that any action we take or fail to take gives rise to a tax incurred by TFS or any of its affiliates with respect to the spin-off.

17

In addition, we have agreed to indemnify TFS for any tax resulting from an acquisition by one or more persons of a 50% or greater interest in our company.

          We have no debt. In addition, we have no capital lease obligations, unconditional purchase obligations, other long-term obligations, or any other commercial commitments except as noted above.

Off-Balance Sheet Arrangements

          We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

          At June 30, 2004, we did not participate in any derivative financial instruments, or other financial or commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. We hold no investment securities that would require disclosure of market risk.

          Primary Market Risk Exposures

          Our primary market risk exposures are in the areas of foreign currency exchange rate risk. Foreign currency devaluations, especially in Asian currencies, such as the Japanese yen, the Korean won, and the Taiwanese dollar, may cause a foreign competitor’s products to be priced significantly lower than our products.

          Fluctuations in foreign currency exchange rates could affect our cost of goods and operating margins. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded.

          We have not attempted to hedge or otherwise mitigate this risk because our exposure to any given currency is nominal. A change in the currency exchange rate of 10% in any given currency would not have a material impact on our results of operations. If, in the future, our exposure to a given currency increases, we would contemplate hedging at that time. Based on the foregoing, we cannot provide assurance that fluctuations and currency exchange rates in the future will not have an adverse effect on our operations.

ITEM 4. CONTROLS AND PROCEDURES

          As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

18

PART II – OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

          On May 11, 2004, we completed a public offering of our common stock that was effected through a Registration Statement on Form S-1 (File No. 333-113295) declared effective by the Securities and Exchange Commission on May 10, 2004. We sold a total of 1,500,000 shares of our common stock in this offering, which represented all of the shares of common stock we registered other than 225,000 shares subject to the underwriters’ over-allotment option. The underwriters did not utilize their over-allotment option and the offering has terminated. The shares were sold at a public offering price of $9.00 per share, for an aggregate offering price of $13.5 million. The shares were sold through a syndicate of underwriters managed by Friedman, Billings, Ramsey & Co., Inc.; Adams, Harkness & Hill, Inc.; and C.E. Unterberg, Towbin LLC.

          We paid to the underwriters underwriting discounts and commissions totaling $945,000 in connection with the offering. In addition, we estimate that we incurred additional expenses of approximately $586,000 in connection with the offering, which when added to the underwriting discounts and commissions paid by us, amounts to total estimated expenses of approximately $1,531,000. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $11,969,000. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent (10%) or more of any class of our equity securities or to any other affiliates.

          We intend to use the net proceeds of the offering to expand our HDTV business; to expand our sales and marketing efforts; to finance our working capital needs associated with anticipated revenue increases; and for general corporate purposes. Pending these uses, since the time of receipt of the net proceeds, we have invested the net proceeds of this offering in short-term money market and money market equivalent securities. We cannot predict whether the proceeds will be invested to yield a favorable return.

          The amounts that we actually expend for these purposes will vary significantly depending on a number of factors, including future revenue growth and the amount of cash that we generate from operations. As a result, we will retain broad discretion over the allocation of the net proceeds of the offering.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          Our Annual Meeting of Stockholders was held on May 13, 2004. All of the nominees were elected to our Board of Directors as set forth in the Proxy Statement as follows:

Nominees	Votes in Favor		Votes Against
Jack L. Saltich		4,575,855		441,427
Vincent F. Sollitto, Jr.		5,003,449		13,833
David P. Chavoustie		4,850,518		166,764
David N.K. Wang		4,999,313		17,969
John S. Hodgson		5,004,353		12,929

          The ratification of the appointment of Deloitte & Touche LLP as our independent auditors for the fiscal year ending December 31, 2004 was also approved as follows:

Votes in Favor	Opposed		Abstain
5,008,299		4,561		4,422

19

ITEM 5. OTHER INFORMATION

          Our Insider Trading Policy permits our directors, officers, and other key personnel to establish purchase and sale programs in accordance with Rule 10b5-1 adopted by the Securities and Exchange Commission. The rule permits employees to adopt written plans at a time before becoming aware of material nonpublic information and to sell shares according to a plan on a regular basis (for example, weekly or monthly), regardless of any subsequent nonpublic information they receive. In our view, Rule 10b5-1 plans are beneficial because systematic, pre-planned sales that take place over an extended period should have a less disruptive influence on the price of our stock. We also believe plans of this type are beneficial because they inform the marketplace about the nature of the trading activities of our directors and officers. In the absence of such information, the market could mistakenly attribute transactions as reflecting a lack of confidence in our company or an indication of an impending event involving our company. We recognize that our directors and officers may have reasons totally apart from the company in determining to effect transactions in our common stock. These reasons could include the purchase of a home, tax and estate planning, the payment of college tuition, the establishment of a trust, the balancing of assets, or other personal reasons. The establishment of any trading plan involving our company requires the pre-clearance by our Chief Executive Officer or Chief Financial Officer. An individual adopting a trading plan must comply with all requirements of Rule 10b5-1, including the requirement that the individual not possess any material nonpublic information regarding our company at the time of the establishment of the plan. In addition, sales under a trading plan may be made no earlier than 30 days after the plan establishment date. No officers currently maintain trading plans.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits
	10.4 First Amended and Restated Real Property Sublease Agreement
	31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
	31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended
	32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Reports on Form 8-K
	Report on Form 8-K dated April 15, 2004, furnishing Item 12 Results of Operations and Financial Condition disclosure.
	Report on Form 8-K dated May 18, 2004, furnishing Item 9 Regulation FD disclosure.

20

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.

	BRILLIAN CORPORATION
Date: August 12, 2004	By:	/s/ Vincent F. Sollitto Jr.
		Vincent F. Sollitto Jr.
		President and Chief Executive Officer
	By:	/s/ Wayne A. Pratt
		Wayne A. Pratt
		Chief Financial Officer, Secretary, and Treasurer

21

Exhibit Index

10.4 First Amended and Restated Real Property Sublease Agreement

31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended

32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.4

EXHIBIT 10.4

FIRST AMENDED AND RESTATED

REAL PROPERTY SUBLEASE AGREEMENT

BY AND BETWEEN

THREE-FIVE SYSTEMS, INC.

AND

BRILLIAN CORPORATION

EFFECTIVE AS OF

JUNE 1, 2004

TABLE OF CONTENTS

		Page
1.	SUBLET PREMISES; USE		1
2.	TERM		2
3.	RENT		2
4.	FIXTURES AND EQUIPMENT		3
5.	CONSTRUCTION; ACCEPTANCE		3
6.	REPRESENTATIONS		3
7.	MASTER LEASE		4
8.	EVENTS OF DEFAULT		5
9.	REMEDIES OF TFS		5
10.	ACCESS TO SUBLET PREMISES		6
11.	WAIVERS BY BRILLIAN; HOLDOVER		6
12.	LATE PAYMENT		6
13.	INDEMNITY		6
14.	MASTER LEASE DEFAULTS		7
15.	RESTORATION		7
16.	NOTICES		7
17.	BRILLIAN'S INSURANCE		7
18.	ALTERATIONS		8
19.	CONDEMNATION		9
20.	ASSIGNMENT		9
21.	NO BROKER		10
22.	LIABILITY OF TFS		10
23.	EFFECT		11
24.	DAMAGE OR DESTRUCTION		11
25.	NOTICE		11
26.	RELATIONSHIP		11
27.	WAIVERS		11
28.	FORUM		11
29.	JOINT AND SEVERAL LIABILITY; AUTHORITY		11
30.	NO OPTION; CONSENT OF MASTER LANDLORD		12
31.	FORCE MAJEURE		12

i

TABLE OF CONTENTS
(continued)

		Page
32.	WAIVER OF TRIAL BY JURY		12
33.	TFS’S PURCHASE OF BUILDING		12
34.	GROUND SUBLEASE		12

ii

EXHIBIT INDEX

Exhibit A – Copy of Master Lease	A-1
Exhibit B – Copy of Ground Sublease	B-1
Exhibit C – Sublet Premises and Common Areas	C-1
Exhibit D – Building Services	D-1
Exhibit E – MIS Services	E-1
Exhibit F – Variable Services	F-1
Exhibit G – Form of Master Landlord’s Consent	G-1
Exhibit H – Form of Ground Lessor’s Consent	H-1

iii

FIRST AMENDED AND RESTATED
REAL PROPERTY SUBLEASE AGREEMENT

     This First Amended and Restated Real Property Sublease Agreement (this “Sublease”) is entered into as of June 1, 2004, by and between Three-Five Systems, Inc., a Delaware corporation, with offices at 1600 North Desert Drive, Tempe, Arizona 85281, Tempe, Arizona (“TFS”), and Brillian Corporation, having an address at 1600 North Desert Drive, Tempe, Arizona 85281 (“Brillian”).

RECITALS

     WHEREAS, pursuant to that certain Lease Agreement dated July 31, 1995 (as amended from time to time, collectively, the “Master Lease”), by and between The City of Tempe (“Master Landlord”), and TFS, as tenant, TFS leases that certain building located at 1600 North Desert Drive, Tempe, Arizona 85281 (herein the “Premises or the “Building”), which is more particularly described in the Master Lease;

     WHEREAS, a true and correct copy of the Master Lease is attached hereto as Exhibit A and made a part hereof. All capitalized terms not herein defined shall have the meanings given to them in the Master Lease;

     WHEREAS, pursuant to the Ground Sublease TFS subleases the Land from Papago Park Center, Inc., an Arizona corporation (“Ground Lessor”); the Ground Sublease is attached hereto as Exhibit B and made a part hereof; and

     WHEREAS, TFS desires to sublet to Brillian and Brillian desires to sublet from TFS approximately 42,524 square feet of rentable floor area (the “Sublet Premises”) of the Building, which Sublet Premises are indicated on Exhibit C attached hereto and made a part hereof; and

     WHEREAS, TFS and Brillian entered into that certain Real Property Sublease Agreement, dated September 1, 2003 (the “Real Property Sublease Agreement”). This Sublease amends, restates, and supersedes the Real Property Sublease Agreement as of the date hereof.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual promises, covenants, and conditions hereinafter set forth, and intending to be legally bound hereby, it is mutually agreed as follows:

     1. SUBLET PREMISES; USE.

          (a) TFS hereby subleases the Sublet Premises to Brillian and Brillian hereby subleases the Sublet Premises from TFS, subject to the terms and conditions hereof and the Master Lease. Brillian shall not use the Sublet Premises for any illegal or improper purpose which shall constitute a nuisance nor do or suffer anything to be done in or about the Sublet Premises which will violate any term of the Master Lease, this Sublease, or any laws, rules, regulations, or ordinances or increase the rate of fire or other insurance or jeopardize the coverage of the same. Brillian agrees to comply with all of Master Landlord’s rules and regulations relating to the Sublet Premises or the building in which the Sublet Premises is located.

          (b) In the event TFS fails to deliver to Brillian possession of the Sublet Premises or obtain the consent of the Master Landlord, TFS shall not be liable for any damages caused thereby, whether or not such failure is caused by the negligence of TFS or otherwise. In addition, this Sublease shall not be void or voidable if possession is tendered to Brillian within forty-five (45) days after the Commencement Date (as hereinafter defined) and the consent of the Master Landlord is obtained within such forty-five (45) day period. In such event, the Commencement Date shall be the later of (i) the date such possession of the Sublet Premises is so tendered, and (ii) the date TFS obtains the consent of Master Landlord. In the event that such period elapses and TFS shall not have tendered possession to Brillian and obtained the consent of the Master Landlord, this Sublease shall be voidable at Brillian’s option upon written notice to TFS, in which event TFS shall return the Security Deposit, if any, and Brillian shall have no further rights or remedies hereunder. For purposes of this Sublease, possession of the Sublet Premises shall be deemed tendered upon TFS’s providing access to Brillian. Brillian’s failure to take possession of the Sublet Premises for any reason when delivered by TFS shall not delay the Commencement Date (as hereinafter defined).

          (c) Brillian shall also have the right to use in common with TFS (and such other subtenants as from time to time may occupy the Building) the facilities yard, parking areas, improvements (other than the Building) located from time to time on the Land, and the common areas described on Exhibit C attached hereto and made a part hereof (all of the foregoing in this Paragraph 1(c), the “Common Areas”).

     2. TERM.

          (a) Subject to the terms of Paragraph l(b) above, the initial term of this Sublease shall be for a period of two (2) years (the “Initial Sublease Term”) and shall commence on the date of execution hereof by TFS (the “Commencement Date”) and terminate on August 31, 2005. The Initial Sublease Term may be extended for additional one year terms (each, a “Renewal Term”) pursuant to the terms and provisions of Paragraph 2(b) below. The Initial Sublease Term, together with any and all Renewal Terms, is hereinafter collectively referred to as the “Sublease Term”.

          (b) Except as set forth in Paragraph 2(c) below, the Sublease Term shall be automatically extended for successive Renewal Terms unless Brillian shall give to TFS written notice of its election to terminate this Sublease at least 180 days prior to the beginning of the first Renewal Term or any then applicable succeeding Renewal Term.

          (c) In the event that TFS desires to terminate this Sublease as of the expiration of the Sublease Term, or during the Sublease Term, TFS shall give to Brillian written notice of its election to terminate this Sublease at least 180 days prior to the date of such termination.

     3. RENT.

          (a) Base Rent. During the term of this Sublease, Brillian covenants and agrees to pay to TFS, without deduction or setoff of any kind, minimum annual base rent in an amount equal to $202,884.00 (such minimum annual rent hereinafter called the “Base Sublease Rent”), payable in equal monthly installments of $16,907.00. The aforesaid monthly Base Sublease Rent has been calculated as the depreciation amount of the building space leased by Brillian. The Base

2

Sublease Rent shall be paid in advance on the first day of each month during the term of this Sublease.

          (b) Building Services Rent. During the term of this Sublease, Brillian covenants and agrees to pay to TFS, without deduction or setoff of any kind, annual building services rent in an amount equal to $278,964 (“Building Services Rent”) payable in equal monthly installments of $23,247. The particular services that are provided by TFS to Brillian and that are covered under Building Services Rent are enumerated and described in Exhibit D to this Sublease. For purposes of this Sublease, Building Services Rent shall include all Rent other than Base Rent, MIS Services Rent, and Variable Rent. Brillian shall pay to TFS this amount on the first day of each month during the term of this Sublease.

          (c) MIS Services Rent. During the term of this Sublease, Brillian covenants and agrees to pay to TFS, without deduction or setoff of any kind, annual MIS services rent in the amounts set forth in Exhibit E to this Sublease (“MIS Services Rent”). The particular services that are provided by TFS to Brillian and that are covered under MIS Services Rent are enumerated and described in Exhibit E to this Sublease. Brillian shall pay to TFS the MIS Services Rent in accordance with Exhibit E to this Sublease.

          (d) Variable Rent. During the term of this Sublease, Brillian covenants and agrees to pay to TFS, without deduction or setoff of any kind, the monthly costs actually incurred for the items enumerated in Exhibit F to this Sublease (“Variable Services Rent”). Brillian shall pay to TFS this amount within fifteen (15) days from the receipt of an invoice from TFS.

     4. FIXTURES AND EQUIPMENT. In the event that, during the term of this Sublease, a building fixture or piece of maintenance or operating equipment breaks or fails to work properly, and that fixture or piece of maintenance or operating equipment is solely used by Brillian under the terms of this Sublease, then (i) TFS reserves the right to not repair or replace the said fixture or piece of maintenance or operating equipment, or (ii) in the event that TFS chooses to repair or replace such fixture or piece of maintenance or operating equipment, Brillian shall be solely liable for any costs associated with such action.

     5. CONSTRUCTION; ACCEPTANCE. Brillian agrees that TFS has no construction, repair, or replacement obligations hereunder and that Brillian will accept the Sublet Premises in “as-is” condition; provided, however, TFS shall deliver the Sublet Premises in the same arrangement and condition as on the date or the execution of this Sublease. Brillian’s taking possession of the Sublet Premises shall be a conclusive acknowledgement on Brillian’s part that the Sublet Premises are in good and tenantable condition and that Brillian has accepted the Sublet Premises in “as is” condition as of such date.

     6. REPRESENTATIONS. TFS hereby warrants and represents that (i) the Master Lease is presently in full force and effect; (ii) that TFS has the power and authority to enter into this Sublease; (iii) the copy of the Master Lease attached hereto as Exhibit A is true, complete, and correct; (iv) the Master Lease has not been modified or amended and constitutes the full and complete agreement of the parties thereto relative to the subject matter thereof; (v) (a) to the best of TFS’ knowledge, TFS is not in default under any of the provisions of the Master Lease, and to the best of TFS’ knowledge, no event or condition exists which with notice or the passage of time or

3

both, would constitute a default by TFS under the Master Lease, and (b) TFS has received no notice of any such default, event, or condition from Master Landlord which remains uncured; (vi) TFS has received no written notice from any applicable governmental authority of, or alleging any, violation of any applicable law or regulation, including any environmental laws, with respect to the Sublet Premises which remains uncured; (vii) TFS has given no written notices alleging any default which remains uncured by the Master Landlord under the Master Lease, or that any event has occurred which, with the passage of time, or the giving of notice, or both, would constitute an uncured default by the Master Landlord under the Master Lease, nor to the best of TFS’s knowledge, has any event occurred which, with the passage of time, or the giving of notice, or both, would constitute an uncured default by Master Landlord under the Master Lease. TFS makes no other representations or warranties and hereby disclaims same.

     7. MASTER LEASE.

          (a) All the rights and obligations of TFS contained in the Master Lease as they relate to the Sublet Premises are hereby conferred and imposed upon Brillian, except as expressly modified and amended by this Sublease. The rights of TFS in Sections 9, 15, 16, 17, 24(g), and 24(l) of the Master Lease are expressly not conferred upon Brillian and Brillian expressly acknowledges that it shall not be entitled to any of the rights of TFS in Sections 9, 15, 16, 17, 24(g), and 24(l) of the Master Lease. Brillian covenants and agrees fully and faithfully to perform the terms and conditions of the Master Lease as they relate to the Sublet Premises and this Sublease on its part to be performed, including, but not limited to, all maintenance and repair obligations and all compliance with law obligations. Brillian shall not do or cause to be done or suffer or permit any act to be done that would or might cause the Master Lease, or the rights of TFS as tenant under the Master Lease, to be endangered, canceled, terminated, forfeited, or surrendered, or that would or might cause TFS to be in default thereunder or liable for any damage, claim, or penalty. Brillian agrees, as an express inducement for TFS’s executing this Sublease, that if there is any conflict between the provisions of this Sublease and the provisions of the Master Lease that would permit Brillian to do or cause to be done or suffer or permit any act or thing to be done that is prohibited by the Master Lease, then the provisions of the Master Lease shall prevail. All rights, remedies, and indemnifications given to the Master Landlord in the Master Lease are hereby given to TFS under this Sublease.

          (b) If any event occurs that would permit TFS to terminate the Master Lease as it relates to the Sublet Premises, Brillian shall notify TFS of such occurrence and of its recommendations immediately with regard to such termination rights. TFS shall decide in its reasonable discretion whether or not to terminate the Master Lease and shall give Brillian written notice of such decision. If TFS elects to terminate the Master Lease as it relates to the Sublet Premises, this Sublease shall terminate on the earlier of the date of termination of the Master Lease or the date which is (30) days after Brillian’s receipt of such written notice from TFS. In the event that TFS elects to terminate the Master Lease prior to providing notice to the Master Landlord, TFS must provide prior written notice to Brillian of its intent to terminate this Sublease, and within five (5) days after the receipt of such notice from TFS, Brillian may notify TFS in writing that it intends to continue possession of the Sublet Premises under the terms and conditions of this Sublease, in which case, TFS shall not exercise its right of termination under the Master Lease as it relates to the Sublet Premises. In addition, TFS agrees that it shall not exercise its one-time cancellation

4

option granted under the Second Amendment to Lease as it relates to the Sublet Premises without the prior written consent of Brillian.

          (c) TFS shall have no duty to perform any obligations of or provide any services to be provided by the Master Landlord and shall under no circumstances be responsible or liable to Brillian for any default, failure, or delay on the part of the Master Landlord in the performance of any obligations under the Master Lease, nor shall such default of the Master Landlord affect Brillian’s obligations hereunder; provided, that in the event of any such default or failure of performance by Master Landlord, TFS agrees, upon notice from Brillian, to make demand upon Master Landlord to perform its obligations under the Master Lease and to otherwise cooperate reasonably with Brillian as Brillian may reasonably request, in enforcing the remedies provided in the Master Lease.

     8. EVENTS OF DEFAULT. The occurrence of any one of the following events shall constitute an event of default (“Event of Default”) under this Sublease:

          (a) Brillian fails to pay Base Sublease Rent, Building Services Rent, MIS Services Rent, Variable Services Rent, or any other sum of money when due under this Sublease within three (3) business days after receipt by Brillian of written notice from TFS that such amount is due; provided, however, that TFS shall not be required to give more than two written notices in any twelve month period;

          (b) Brillian assigns this Sublease or sublets all or a portion of the Sublet Premises, or attempts to do the aforementioned, in violation of Paragraph 20 hereof;

          (c) Brillian fails to perform any of its other obligations under this Sublease or the Master Lease and such failure continues for ten (10) days after the receipt by Brillian of written notice of default with respect to such failure. Notwithstanding the foregoing, Brillian shall not be in default under this Sublease with respect to any non-monetary breach (other than those listed in subparagraph b above) that may be cured by the performance of affirmative acts if Brillian promptly commences the performance of said affirmative acts and diligently prosecutes the same to completion as soon as possible, and in any event, within not more than the time period prescribed for TFS to cure such default under the Master Lease. Notwithstanding anything to the contrary contained in the foregoing, if Brillian fails to maintain the insurance required in Paragraph 17 hereof, TFS may, in addition to any other remedies herein contained, immediately upon such failure (but TFS shall not be so obligated), at Brillian’s sole cost and expense, procure the insurance coverage required herein, and if Brillian shall fail to reimburse TFS for the costs and expenses it incurred in procuring such coverage, within fifteen (15) days of notice from TFS, an Event of Default shall have occurred hereunder.

     9. REMEDIES OF TFS. Upon the occurrence of an Event of Default, TFS shall have all of the rights and remedies available under the Master Lease and at law or in equity. All remedies shall be cumulative and non-exclusive.

5

     10. ACCESS TO SUBLET PREMISES. Except in the event of an emergency in which case no notice shall be required, TFS or Master Landlord or any of their respective agents, contractors, or employees may enter the Sublet Premises during normal business hours upon 24 hours advance notice (except in the event of an emergency), to inspect the Sublet Premises, or during the last six (6) months of the term of this Sublease to show said property to persons seeking to rent or purchase the Sublet Premises, or to make repairs or improvements to the Sublet Premises. This paragraph is not to be construed as obligating TFS to make any repairs.

     11. WAIVERS BY BRILLIAN; HOLDOVER.

          (a) Except for any notice expressly provided for in this Sublease, Brillian waives to TFS the benefit of all laws now or hereafter in force, in this state or elsewhere, requiring notice to vacate the Sublet Premises at the end of the term or any extensions or renewals thereof. Brillian covenants and agrees to give up quiet and peaceful possession without further notice from TFS or its agent at the end of the term of this Sublease. Brillian also waives to TFS the benefit of all laws now or hereafter in force, in this state or elsewhere, exempting property from liability for rent, or for debt.

          (b) If Brillian shall not immediately surrender the Sublet Premises on the day after the termination or expiration of the term of this Sublease, then Brillian shall, by virtue of this Sublease, become a sublessee at the sufferance of TFS at twice the immediately preceding Base Sublease Rent agreed by Brillian to be paid as aforesaid, and Brillian shall be subject to all of the other conditions and covenants of this Sublease.

     12. LATE PAYMENT. If Brillian shall fail to pay when the same is due and payable, Base Sublease Rent, Building Services Rent, MIS Services Rent, Variable Services Rent, or any other sums due under this Sublease, interest shall be charged on all unpaid amounts at the amount of the late charge provided for in the Master Lease.

     13. INDEMNITY. In addition to the indemnity provided for in the Master Lease, Brillian shall indemnify and hold TFS and Master Landlord harmless from and defend TFS and Master Landlord with counsel reasonably satisfactory to TFS and Master Landlord against any and all claims, liabilities, losses, damages, costs, and expenses, for any injury or damage to any person or property whatsoever, occurring in, on, or about the Sublet Premises or other portions of the Building or when such injury or damage shall be caused in part or in whole by the neglect, fault, or omission of Brillian, its employees, invitees, contractors, subcontractors, licensees, subtenants, or agents.

     TFS shall indemnify and hold Brillian harmless from and defend Brillian with counsel reasonably satisfactory to Brillian against any and all claims, liabilities, losses, damages, costs, and expenses caused by any representation or warranty made by TFS in Paragraph 6 hereof being false or misleading, by any default by TFS under the Master Lease, or by TFS’s exercise of its cancellation rights under the Second Amendment to Lease as it relates to the Sublet Premises.

     Notwithstanding the foregoing, in no event shall either party be liable for consequential, indirect, or special damages to the other party.

6

     14. MASTER LEASE DEFAULTS. TFS will not cause or knowingly allow to be caused any default under the Master Lease which shall remain uncured at the expiration of the applicable cure period set forth therein, unless such default arises out of a failure by Brillian to perform its obligations under this Sublease. TFS will deliver to Brillian a copy of any notice of default by TFS under the Master Lease within five (5) days after receipt thereof by TFS. In addition, in the event TFS is in default under the Master Lease and such default continues beyond the expiration of the applicable grace period set forth therein (a “Master Lease Continuing Default”), Brillian shall thereafter have the right (but not the obligation) to cure such Master Lease Continuing Default, if Brillian’s cure of such Master Lease Continuing Default is acceptable to Master Landlord and provided that Brillian gives TFS prior written notice of such undertaking.

     15. RESTORATION. Brillian shall immediately prior to the expiration or sooner termination of this Sublease, surrender the Sublet Premises in the condition required under the Master Lease and otherwise in broom clean and good condition, normal wear and tear excepted. In the event of termination of this Sublease in any manner whatsoever, Brillian shall forthwith remove Brillian’s goods and effects and those of any other persons claiming under Brillian or subtenancies assigned to it, and quit and deliver the Sublet Premises to TFS peaceably and quietly. Goods and effects not removed by Brillian on or before the date of termination of this Sublease (or within forty-eight (48) hours after a termination by reason of Brillian’s default) shall be considered abandoned. TFS shall give Brillian notice of right to reclaim abandoned property pursuant to applicable local law and may thereafter dispose of the same as it deems expedient, including storage in a public warehouse or elsewhere at the cost and for the account of Brillian, but Brillian shall promptly upon demand reimburse TFS for any expenses incurred by TFS in connection therewith, which obligation shall survive the termination or expiration of this Sublease.

     16. NOTICES. All notices hereunder shall be in writing and will be effective upon receipt if delivered personally, or by nationally recognized overnight courier service to a party’s address set forth below or to such other address as either may give to the other in writing for such purpose:

TFS:	Three-Five Systems, Inc.
	Attn: General Counsel
	1600 North Desert Drive
	Tempe, Arizona 85281
Brillian:	Brillian Corporation
	Attn: Chief Financial Officer
	1600 North Desert Drive
	Tempe, Arizona 85281

     17. BRILLIAN’S INSURANCE.

          (a) Brillian shall, at its sole cost and expense, maintain during the term hereof all insurance coverages required to be maintained by the tenant under the Master Lease. In addition to the above, Brillian shall also separately maintain a $1 million insurance policy to cover catastrophic damage to the building that results from Brillian’s use of the leasehold premises. This policy will specifically name TFS as a beneficiary. Copies of all policies or certificates evidencing

7

said insurance shall be delivered to TFS prior to the Commencement Date and renewals thereof shall be delivered to TFS prior to the expiration of any such policy. If Brillian fails to adhere to the requirements of this Paragraph 16, TFS, in addition to any other remedies it may have, may obtain such insurance and charge the cost thereof to Brillian, which amount shall be payable by Brillian upon demand.

          (b) All insurance required to be carried by Brillian shall be issued in the coverages and amounts required under the Master Lease by responsible insurance companies, qualified to do business in the locality where the Sublet Premises are located and reasonably acceptable to TFS and Master Landlord and shall provide (i) that no change or cancellation of said policies shall be made without thirty (30) days prior written notice to TFS and Brillian; (ii) that any coverage of TFS or sum payable to TFS shall be unaffected by any act or omission of Brillian or any other insured which might otherwise result in forfeiture of said insurance; and (iii) that the insurance company issuing the same shall not have any right of subrogation against TFS or TFS’s insurer. Each policy and renewal shall name TFS, any mortgagee and Master Landlord as an additional insured and, in the case of casualty insurance for other than Brillian’s personal property, shall name TFS as loss payee. Copies of all policies or certificates evidencing the existence and amounts of said insurance shall be delivered to TFS by Brillian upon request. Each policy shall also contain provisions required by any mortgagee of the Sublet Premises or any portion thereof.

          (c) Copies of all policies or certificates evidencing said insurance shall be delivered to TFS prior to the Commencement Date and renewals thereof shall be delivered to TFS prior to the expiration of any such policy. If Brillian fails to adhere to the requirements of this Paragraph 17, TFS, in addition to any other remedies it may have, may order such insurance and charge the cost thereof to Brillian, which amount shall be payable by Brillian upon demand.

          (d) Brillian hereby waives any and all rights of recovery against TFS and its officers, employees, agents, and representatives for loss of or damage to Brillian or its property or the property of others under its control, arising from any cause insured or required to be insured against by Brillian, irrespective of whether such loss or damage is caused by negligence of TFS or any of its employees, invitees, contractors, subcontractors, licensees, subtenants, or agents. Brillian shall obtain and furnish evidence to TFS of the waiver by Brillian’s insurance carriers of any right of subrogation against TFS.

     18. ALTERATIONS.

          (a) Brillian shall not make any building or leasehold alterations or additions, including remodeling or signage, without first obtaining Master Landlord’s and TFS’s consent, which TFS’s and Master Landlord’s consent may be withheld in their sole discretion. If any such alterations or additions are made, Brillian agrees not to permit any mechanics’ liens to be placed on the Sublet Premises or any portion thereof and to cause any contract for work to be done at the Sublet Premises to contain a waiver of the contractor’s right to file a mechanics’ lien. Any alterations of any kind to the Sublet Premises or any part thereof, except Brillian’s trade fixtures which can be removed without damage or defacement to the Sublet Premises or any other portion of the Building, shall be surrendered with the Sublet Premises, as a part thereof, at the end of the Sublease Term; provided, however, that TFS may require at the time TFS and Master Landlord consent to such alteration or fixture Brillian to remove any alterations or fixtures made by Brillian,

8

and to repair any damage to the Sublet Premises caused by such removal, all at Brillian’s sole expense. Any alterations installed by Brillian shall be deemed a part of the Sublet Premises and shall be maintained and repaired by Brillian in the same manner as that required for all other portions of the Sublet Premises.

          (b) Brillian shall have the right to place a sign or signs on the façade of the Building, provided, however: (i) TFS (and the Master Landlord to the extent that such consent from the Master Landlord is required under the Master Lease) shall have the right to consent to the size, style, and location of any such signs, which consent shall not be unreasonably withheld or delayed; (ii) any such signs shall comply with all applicable laws, rules, regulations, and covenants, conditions, and restrictions of record; and (iii) TFS may require that Brillian remove any such signs at the expiration of the Term and repair any damage to the Building caused by such removal, all at Brillian’s sole expense.

     19. CONDEMNATION. All compensation awarded or paid upon a total or partial taking of the Sublet Premises shall belong to and be the property of TFS without any participation by Brillian; provided, however, that nothing contained herein shall be construed to preclude Brillian from prosecuting any claim directly against the condemning authority in such condemnation proceedings for loss of business, and/or depreciation to, damage to, and/or cost of removal of, and/or for the value of stock and/or trade fixtures, furniture, and other personal property belonging to Brillian; provided, however, that no such claim shall diminish or otherwise adversely affect TFS’s and/or Master Landlord’s award or the award(s) of any and all ground and underlying lessor(s) and mortgagee(s).

     20. ASSIGNMENT.

          (a) Without the written consent of TFS, which consent may be withheld in TFS’s sole discretion, and the consent of Master Landlord, Brillian shall not by operation of law or otherwise, assign or mortgage this Sublease, or sublet or license the whole or any part of the Sublet Premises or permit the Sublet Premises or any part thereof to be used or occupied by others. Notwithstanding the foregoing, Brillian may, upon fifteen (15) days prior written notice to TFS but without TFS’s consent, assign or sublet all or any portion of the Sublet Premises to (i) any entity controlled by or under common control with Brillian, or (ii) any successor to Brillian by merger or acquisition of all or substantially of Brillian’s assets or the transferee of more than fifty percent (50%) of Brillian’s capital stock, provided that in each case (i) the proposed assignee or Brillian has a net worth greater than or equal to the greater of (a) Brillian’s net worth on the date of this Sublease, or (b) Brillian’s net worth on the date of such assignment or sublease, and (ii) Brillian obtains the prior written consent of the Master Landlord to such assignment or subletting.

          (b) Regardless of TFS’s consent, no subletting or assignment shall release or alter Brillian’s primary liability to pay Base Sublease Rent, Building Services Rent, MIS Services Rent, Variable Services Rent, and to perform all other obligations to be performed by Brillian hereunder. Upon a default hereunder by any assignee or sublessee of Brillian, TFS may proceed directly against Brillian without the necessity of exhausting remedies against such assignee or sublessee. TFS may consent to any subsequent assignment or subletting of this Sublease and such action shall not relieve Brillian of liability under this Sublease.

9

          (c) Each permitted assignee or transferee shall assume and be deemed to have assumed this Sublease and shall be and remain liable jointly and severally with Brillian for the payment of the Base Sublease Rent, Building Services Rent, MIS Services Rent, Variable Services Rent, and for the due performance of all of the provisions, covenants, conditions, and agreements herein contained on Brillian’s part to be performed for the term of this Sublease. No otherwise permitted assignment or transfer shall be binding on TFS unless such assignee or transferee shall deliver to TFS a counterpart of such assignment and an instrument in recordable form which contains a covenant of assumption by the assignee or transferee, but the failure or refusal of the assignee or transferee to execute such instrument of assumption shall not release or discharge the assignee or transferee from its liability as set forth above.

          (d) Any consent by TFS or Master Landlord to any act of assignment or subletting shall be held to apply only to the specific assignment or subletting thereby authorized. Such consent shall not be construed as a waiver of the duty of Brillian, or the legal representatives or assigns of Brillian, to obtain from TFS or Master Landlord consent to any other or subsequent assignment or subletting, or as modifying or limiting the rights of TFS or Master Landlord under the foregoing covenant by Brillian not to assign or sublet without consent.

          (e) If this Sublease is assigned or transferred, or if the Sublet Premises or any part thereof be underlet or occupied by any person other than Brillian, or if an Event of Default has occurred hereunder, TFS may collect rent from the successor occupant and apply the net amount collected by it to the rent herein reserved. No such collection shall be deemed a waiver of the prohibition against assignment, sublets, and other transfers, or the acceptance of the successor occupant as tenant, or a release of Brillian from the further performance of the covenants herein contained on the part of Brillian.

          (f) TFS may freely assign this Sublease at any time without consent or notice to Brillian provided that the assignee assumes all of the liabilities and obligations of TFS under this Sublease.

     21. NO BROKER. Brillian covenants, warrants, and represents that there was no broker involved in consummating this Sublease, and that no conversations or prior negotiations were had with any broker concerning the renting of the Sublet Premises. Brillian and TFS agree to defend, indemnify, and hold the other party harmless against any claims for brokerage commission arising out of any conversations or negotiations had by the indemnifying party with any broker.

     22. LIABILITY OF TFS. TFS shall not be liable for any injury or damage to any person or to any property at any time on the Sublet Premises from any cause whatsoever that may at any time exist from the use or condition of said Sublet Premises or Building, or from failure of water supply or electric current or from steam, electricity, water, gas, or rain which leak or flow from or into any part of the Sublet Premises, or from breakage, leakage, obstruction or from difficulties to the pipes, lines, appliances, plumbing, or lighting fixtures, awnings, or signs in or upon the Sublet Premises, or from any other cause, during the term of this Sublease or any renewal or extension hereof except to the extent solely caused by the gross negligence or intentional misconduct of TFS or its agents.

10

     23. EFFECT. This Sublease shall be binding upon the parties hereto, their successors and permitted assigns, and may not be altered, amended, terminated, or modified except by written instrument executed by each of the parties hereto.

     24. DAMAGE OR DESTRUCTION. If the Sublet Premises shall be partially damaged by fire or other cause, repairs shall be in accordance with the terms of the Master Lease which shall also determine to what extent, if any, the rent shall be abated. If the Sublet Premises shall be totally destroyed by fire or other cause at any time prior to the end of the term of this Sublease, Brillian agrees to be bound by Master Landlord’s decision made in accordance with the applicable terms of the Master Lease, if any, as to whether or not the Sublet Premises is to be restored and whether or not the Master Lease shall remain in effect. Brillian’s obligation to pay rent under the Sublease shall be governed by the terms of the Master Lease, if any, applicable to abatement of TFS’s rental under the Master Lease as it relates to the Sublet Premises.

     25. NOTICE. Brillian shall notify TFS of any damage to the Sublet Premises by fire or other casualty and also of any dangerous or defective condition within the Sublet Premises immediately upon the occurrence of such fire or other casualty or discovery of such condition. Except as affected by the giving or failure to give such notice, nothing herein contained shall be deemed to limit or enlarge the respective rights and liabilities of either party arising from the negligent acts or conduct of the other.

     26. RELATIONSHIP. It is understood, covenanted, and agreed between the parties hereto that nothing in this Sublease shall constitute TFS an employer, employee, principal, agent, or partner of Brillian and the relationship hereby created between the parties hereto shall be strictly and solely that of sublessor and sublessee.

     27. WAIVERS. No waiver of any covenant or condition by TFS shall be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent or approval by TFS to or of any act by Brillian requiring TFS’s consent or approval shall not be construed to waive or render unnecessary TFS’s consent or approval to or of any subsequent similar act by Brillian.

     28. FORUM. This Sublease shall be governed by the laws of the state of Arizona.

     29. JOINT AND SEVERAL LIABILITY; AUTHORITY. If two or more individuals, corporations, partnerships, or other business associations (or any combination of two or more thereof) shall sign this Sublease as sublessor, the liability of each such individual, corporation, partnership, or other business association to pay rent and perform all other obligations hereunder shall be deemed to be joint and several, and all notices, payments, and agreements given or made by, with, or to any one of such individuals, corporations, partnerships, or other business associations shall be deemed to have been given or made by, with, or to all of them. In like manner, if sublessor shall be a partnership or other business association, the members of which are, by virtue of statute or federal law, subject to personal liability, the liability of each such member shall be joint and several.

11

     30. NO OPTION; CONSENT OF MASTER LANDLORD. This Sublease shall become effective only upon execution and delivery thereof by both parties and upon Master Landlord’s written consent to the terms of this Sublease in substantially the form of consent attached hereto as Exhibit G and made a part hereof. TFS shall use best efforts to obtain Master Landlord’s written consent; provided that in no event shall TFS be obligated to commence any legal proceeding to obtain or attempt to obtain Master Landlord’s consent.

     31. FORCE MAJEURE. Neither Brillian nor TFS shall be deemed in default under this Sublease (excluding, however, monetary defaults) to the extent that any such failure stems from a cause beyond the reasonable control of the respective party, including, without limitation, any act of God, war, insurrection, applicable governmental or judicial law or regulation, zoning ordinance, labor strike, order, or decree.

     32. WAIVER OF TRIAL BY JURY. IT IS MUTUALLY AGREED BY AND BETWEEN TFS AND BRILLIAN THAT THE RESPECTIVE PARTIES HERETO SHALL AND DO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER (EXCEPT FOR PERSONAL INJURY OR PROPERTY DAMAGE) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS SUBLEASE, THE RELATIONSHIP OF TFS AND BRILLIAN, AND BRILLIAN’S USE OR OCCUPANCY OF SAID SUBLET PREMISES.

     33. TFS’S PURCHASE OF BUILDING. Brillian expressly acknowledges that TFS has the right pursuant to Sections 15 and 16 of the Master Lease to purchase the Building. In the event TFS purchases the Building, which event shall be evidenced by a written notice of such purchase from TFS to Brillian, then in such event this Sublease shall be deemed a prime lease by and between TFS, as owner of the Building, and Brillian, as tenant of the Sublet Premises.

     34. GROUND SUBLEASE.

          (a) Brillian hereby expressly acknowledges that the Sublease of the Sublet Premises is subject to the terms and conditions of the Ground Sublease.

          (b) All the obligations of TFS contained in the Ground Sublease as they relate to the Sublet Premises are hereby conferred and imposed upon Brillian, except as expressly modified and amended by this Sublease. Brillian covenants and agrees fully and faithfully to perform the terms and conditions of the Ground Sublease as they relate to the Sublet Premises and this Sublease on its part to be performed, including, but not limited to, all maintenance and repair obligations and all compliance with law obligations. Brillian shall not do or cause to be done or suffer or permit any act to be done that would or might cause the Ground Sublease, or the rights of TFS as tenant under the Ground Sublease, to be endangered, canceled, terminated, forfeited, or surrendered, or that would or might cause TFS to be in default thereunder or liable for any damage, claim, or penalty. Brillian agrees, as an express inducement for TFS’s executing this Sublease, that if there is any conflict between the provisions of this Sublease and the provisions of the Ground Sublease that would permit Brillian to do or cause to be done or suffer or permit any act or thing to be done that is prohibited by the Ground Sublease, then the provisions of the Ground Sublease shall prevail. All

12

rights, remedies, and indemnifications given to the Ground Lessor in the Ground Sublease are hereby given to TFS under this Sublease.

          (c) If any event occurs that would permit TFS to terminate the Ground Sublease as it relates to the Sublet Premises, Brillian shall notify TFS of such occurrence and of its recommendations immediately with regard to such termination rights. TFS shall decide in its reasonable discretion whether or not to terminate the Ground Sublease and shall give Brillian written notice of such decision. If TFS elects to terminate the Ground Sublease as it relates to the Sublet Premises, this Sublease shall terminate on the earlier of the date of termination of the Ground Sublease or the date which is (30) days after Brillian’s receipt of such written notice from TFS. In the event that TFS elects to terminate the Ground Sublease prior to providing notice to the Ground Lessor, TFS must provide prior written notice to Brillian of its intent to terminate this Sublease, and within five (5) days after the receipt of such notice from TFS, Brillian may notify TFS in writing that it intends to continue possession of the Sublet Premises under the terms and conditions of this Sublease, in which case, TFS shall not exercise its right of termination under the Ground Sublease as it relates to the Sublet Premises.

          (d) TFS shall have no duty to perform any obligations of or provide any services to be provided by the Ground Lessor and shall under no circumstances be responsible or liable to Brillian for any default, failure, or delay on the part of the Ground Lessor in the performance of any obligations under the Ground Sublease, nor shall such default of the Ground Lessor affect Brillian’s obligations hereunder; provided, that in the event of any such default or failure of performance by Ground Lessor, TFS agrees, upon notice from Brillian, to make demand upon Ground Lessor to perform its obligations under the Ground Sublease and to otherwise cooperate reasonably with Brillian as Brillian may reasonably request, in enforcing the remedies provided in the Ground Sublease.

          (e) TFS will not cause or knowingly allow to be caused any default under the Ground Sublease which shall remain uncured at the expiration of the applicable cure period set forth therein, unless such default arises out of a failure by Brillian to perform its obligations under this Sublease. TFS will deliver to Brillian a copy of any notice of default by TFS under the Ground Sublease within five (5) days after receipt thereof by TFS. In addition, in the event TFS is in default under the Ground Sublease and such default continues beyond the expiration of the applicable grace period set forth therein (a “Ground Sublease Continuing Default”), Brillian shall thereafter have the right (but not the obligation) to cure such Ground Sublease Continuing Default, if Brillian’s cure of such Ground Sublease Continuing Default is acceptable to Ground Lessor and provided that Brillian gives TFS prior written notice of such undertaking.

          (f) TFS shall use its best efforts to obtain Ground Lessor’s written consent to this Sublease substantially in the form of Exhibit H attached hereto in order that Brillian have the protections of Article 16 of the Ground Sublease as a “Permitted Sublease” (as such term is defined in Section 17.2 of the Ground Sublease); provided, that in no event shall TFS be obligated to commence any legal proceeding to obtain or attempt to obtain Ground Lessor’s consent. Furthermore, Brillian expressly acknowledges that TFS has the right pursuant to Section 3.3 of the Ground Sublease to purchase the Land, in which event the Master Ground Lease (as such term is defined in the Ground Sublease) shall be amended to delete the Land as of the closing of such purchase, as more fully set forth in Section 3.3(B)(3) of the Ground Sublease. In the event TFS

13

purchases the Land, which event shall be evidenced by a written notice of such purchase from TFS to Brillian, then in such event this Sublease shall be deemed a prime lease by and between TFS, as owner of the Land, and Brillian, as tenant of the Sublet Premises.

     35. EXHIBITS. Each of the exhibits attached hereto are made a part hereof. The following is a list of exhibits attached to this Lease:

Exhibit A	–	Copy of Master Lease
Exhibit B	–	Copy of Ground Sublease
Exhibit C	–	Sublet Premises and Common Areas
Exhibit D	–	Building Services
Exhibit E	–	MIS Services
Exhibit F	–	Variable Services
Exhibit G	–	Form of Master Landlord’s Consent
Exhibit H	–	Form of Ground Lessor’s Consent

[Signature Page Follows]

14

     IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written.

TFS:	Brillian:
THREE-FIVE SYSTEMS, INC., a Delaware corporation	BRILLIAN CORPORATION, a Delaware corporation
By: /s/ George A. Pisaruk	By: /s/ Wayne A. Pratt
Name: George A. Pisaruk	Name: Wayne A. Pratt
Title: General Counsel	Title: Vice President and Chief Financial Officer

15

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER

I, Vincent F. Sollitto Jr., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Brillian Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2004

/s/ Vincent F. Sollitto Jr.

Vincent F. Sollitto Jr.

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Wayne A. Pratt, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Brillian Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2004

/s/ Wayne A. Pratt

Wayne A. Pratt

Chief Financial Officer, Secretary, and Treasurer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report on Form 10-Q of Brillian Corporation (the “Company”) for the quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vincent F. Sollitto Jr., President, Chief Executive Officer, and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Vincent F. Sollitto Jr.

Vincent F. Sollitto Jr.

President, Chief Executive Officer, and Director

August 12, 2004

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report on Form 10-Q of Brillian Corporation (the “Company”) for the quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wayne A. Pratt, Vice President, Chief Financial Officer, Secretary, and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Wayne A. Pratt
	Wayne A. Pratt
	Vice President, Chief Financial Officer, Secretary, and Treasurer
August 12, 2004