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, 2005

Commission file number 0-50289

Brillian Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	05-0567906
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1600 North Desert Drive, Tempe,	Arizona 85281
(Address of Principal Executive Offices)	(Zip Code)

(602) 389-8888

(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 þ 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 þ

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, 2005
Common		7,322,605
Par value $.001 per share

BRILLIAN CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED JUNE 30, 2005

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS:
	Condensed Balance Sheets (unaudited) — June 30, 2005 and December 31, 2004		1
	Condensed Statements of Operations (unaudited) — Three Months and Six Months Ended June 30, 2005 and 2004		2
	Condensed Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2005 and 2004		3
	Notes to Condensed Financial Statements		4
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		12
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		19
ITEM 4.	CONTROLS AND PROCEDURES		19
PART II — OTHER INFORMATION
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		20
ITEM 5.	OTHER INFORMATION		21
ITEM 6.	EXHIBITS		21
SIGNATURES			22
Ex-31.1
Ex-31.2
EX-32.1
Ex-32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRILLIAN CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)

	June 30,			DECEMBER 31,
	2005			2004
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,172		$	8,195
Short-term investments		—			13
Accounts receivable, net		814			339
Inventories		6,103			5,400
Other current assets		535			368
Total current assets		8,624			14,315
Property, plant and equipment, net		5,480			6,082
Other investments		1,119			1,119
Total Assets	$	15,223		$	21,516
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,798		$	1,230
Accrued compensation		183			216
Accrued liabilities		564			1,462
Total current liabilities		3,545			2,908
Long-term debt (net of $2,527 discount)		1,973			—
Stockholders’ Equity:
Common stock		7			7
Additional paid-in capital		60,952			58,007
Deferred compensation		—			(616	)
Accumulated deficit		(51,254	)		(38,790	)
Total stockholders’ equity		9,705			18,608
Total Liabilities and Stockholders’ Equity	$	15,223		$	21,516

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

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

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net product sales	$	1,006		$	1,035		$	1,864		$	1,375
Design and engineering services		—			99			—			237
Total net sales		1,006			1,134			1,864			1,612
Costs and Expenses:
Cost of sales — products		4,007			2,586			7,159			4,848
Cost of sales — design and engineering services		—			67			—			189
Selling, general, and administrative		1,195			1,107			2,191			2,193
Research and development		2,764			2,104			4,757			4,558
		7,966			5,864			14,107			11,788
Operating loss		(6,960	)		(4,730	)		(12,243	)		(10,176	)
Other Income (Expense):
Interest, net		(251	)		64			(221	)		108
Realized loss on short-term investment		—			(41	)		—			(41	)
Loss on investment in start-up company		—			(131	)		—			(131	)
		(251	)		(108	)		(221	)		(64	)
Net Loss	$	(7,211	)	$	(4,838	)	$	(12,464	)	$	(10,240	)
Loss per common share:
Basic and diluted	$	(1.03	)	$	(0.78	)	$	(1.78	)	$	(1.77	)
Weighted average number of common shares:
Basic and diluted		6,992			6,188			6,988			5,784

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

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

	Six Months Ended
	June 30,
	2005			2004
Cash Flows from Operating Activities:
Net loss	$	(12,464	)	$	(10,240	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,232			1,730
Amortization of debenture discount and offering costs		202			—
Stock compensation		536			444
Stock issued to pay interest		35			—
Stock issued for services		138			—
Deferred revenue		—			168
Provision for doubtful accounts		(1	)		10
Loss on investment in start-up company		—			131
Changes in assets and liabilities:
Increase in accounts receivable		(474	)		(408	)
Increase in inventories		(703	)		(1,161	)
(Increase) decrease in other assets		(167	)		353
Increase in accounts payable and accrued liabilities		637			1,075
Net cash used in operating activities		(11,029	)		(7,898	)
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment		(630	)		(1,920	)
Purchase of intangibles		—			(243	)
Purchase of investments		—			(79	)
Proceeds from maturities/sales of short-term investments		13			12,067
Net cash provided by (used in) investing activities		(617	)		9,825
Cash Flows from Financing Activities:
Proceeds of debenture offering		4,500			—
Proceeds of public stock offering		—			11,969
Issuance of shares related to Employee Stock Purchase Plan		123			96
Stock options exercised		—			53
Net cash provided by financing activities		4,623			12,118
Net increase (decrease) in cash and cash equivalents		(7,023	)		14,045
Cash and cash equivalents, beginning of period		8,195			2,417
Cash and cash equivalents, end of period	$	1,172		$	16,462
Supplemental Cash Flow Information:
Cash paid for interest	$	21		$	—

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

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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^TM, microdisplay technology. We market our HDTVs for sale under the brand names of retailers, including high-end audio/video manufacturers, distributors of high-end consumer electronics, and consumer electronics retailers. 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. (“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 they 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 (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.

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- and six-month periods ended June, 2005 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2005. These financial statements should be read in conjunction with our December 31, 2004 financial statements and the accompanying notes thereto.

The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred recurring operating losses and negative cash flows since our inception as a division of TFS. We have never been profitable. Our net loss for the six months ended June 30, 2005, was $12.5 million, and was $32.9 million, $18.7 million, and $23.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Net cash used in operating activities was $11.0 million for the six months ended June 30, 2005, and $18.9 million, $15.9 million, and $20.1 million for the years ended December 31, 2004, 2003, and 2002, respectively. At June 30, 2005, we had $5.1 million of working capital, including cash and cash equivalents of $1.2 million. These factors, among others, may indicate that we will be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be

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unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional capital as may be required, and ultimately to attain successful operations.

The successful introduction of an HDTV product to market and securing volume orders from consumer electronics retailers for HTDVs represent a key ingredient in our success. In the second quarter of 2004, we signed a supply agreement to provide HDTVs to Sears Roebuck and Company. In the third quarter of 2004, we began shipping HDTVs to Sears. Also in the third quarter of 2004, our supplier of light engines, a major sub-assembly of the HDTV, informed us that they were unable to supply us with the volume of light engines necessary to satisfy our requirements. As a result of our not being able to supply the required number of HDTVs, Sears exercised their option to terminate the supply agreement. In the fourth quarter of 2004, our light engine supplier informed us that they would not be able to manufacture the light engine in volume until the second quarter of 2005. In March 2005, we received authorization from our light engine supplier to have the light engine manufactured on our behalf by a third party manufacturer and granted us a perpetual license to the light engine technology. In April 2005, we selected Suntron Corporation to manufacture light engines on our behalf. We currently believe that light engine availability will begin to increase in the fourth quarter of 2005 and that capacity will exceed 1,000 units per month by the end of the fourth quarter of 2005.

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

	June 30,		December 31,
	2005		2004
Raw materials	$	5,152	$	4,479
Work-in-process		614		806
Finished goods		337		115
	$	6,103	$	5,400

We write down inventories for estimated obsolescence and to the lower of cost or market. During the six months ended June 30, 2005, we increased our reserve for obsolescence approximately $250,000, and as a result of reducing the selling price of our 720P HDTV, we wrote down the carrying value of light engine materials in inventory approximately $1.0 million.

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

	June 30,			December 31,
	2005			2004
Leasehold improvements	$	569		$	569
Equipment		16,815			16,185
Furniture		78			78
		17,462			16,832
Less accumulated depreciation		(11,982	)		(10,750	)
	$	5,480		$	6,082

Note D 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, 2005 and 2004. For the three- and six-month periods ended June 30, 2005, and 2004, the effect of approximately 1.5 million and 1.6 million stock options, respectively, 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. In addition, for the three- and six-month periods ended June 30, 2005, approximately 1.8 million warrants and approximately 1.6 million shares of

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stock issuable upon conversion of convertible promissory notes were excluded from the calculation of diluted loss per share as their effect would also have been antidilutive and would have decreased the loss per share.

Note E 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.

Projection device sales, which include HDTV sales, for the three- and six-months ended June 30, 2005, were $840,000 and $1.5 million, or 84% and 82% of sales, respectively, while near-to-eye sales were $166,000 and $334,000, or 16% and 18% of sales, respectively. During the same periods in 2004, projection device sales were $435,000 and $733,000, or 38% and 45% of sales, respectively, while near-to-eye sales were $699,000 and $879,000, or 62% and 55% of sales, respectively. In the three- and six-months ended June 30, 2004, projection device sales included design and engineering services revenue of $99,000 and $237,000. There has been no design and engineering services revenue in 2005.

For the three months ended June 30, 2005, sales to SEOS Ltd, Rockwell Collins, Kaiser Electronics, and I-O Display accounted for approximately 27%, 27%, 15%, and 12%, respectively, of our net sales. 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 six months ended June 30, 2005, sales to SEOS Ltd., Rockwell Collins, and I-O Display Systems accounted for approximately 25%, 14%, and 12%, respectively, of our net sales. For the six months ended June 30, 2004, sales to TQ Systems, I-O Display Systems, Kodak, and Zhejiang Jincheng accounted for approximately 28%, 23%, 13%, and 12%, 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:

	North
	America		Asia		Europe		Total
Three months ended June 30, 2005
Net sales	$	598	$	16	$	392	$	1,006
Three months ended June 30, 2004
Net sales	$	433	$	242	$	459	$	1,134
Six months ended June 30, 2005
Net sales	$	923	$	31	$	910	$	1,864
Six months ended June 30, 2004
Net sales	$	747	$	349	$	516	$	1,612

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Note F Transactions with 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. In the three- and six-month periods ended June 30, 2005, we paid TFS $272,000 and $544,000 for rent and $509,000 and $542,000 for engineering and design services related to the development of printed circuit board assemblies and for purchases of these assemblies for our HDTV product. In the three and six-month periods ended June 30, 2004, we paid TFS $200,000 and $434,000 for rent and IT management services, and $76,000 and $108,000 for engineering services. 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 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.

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

On December 22, 2004, we and TFS amended and restated the Real Property Sublease Agreement under which we lease office and manufacturing space in the TFS headquarters building. The initial term of the sublease now terminates December 16, 2009, 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 sublease approximately 55,780 square feet of the building from TFS and share certain common areas in the building with TFS. Our monthly rent payable to TFS is $61,592 plus $28,963 for normal and customary services in connection with the operation and maintenance of the building. This amount does not, however, include water or electrical utilities, which we pay separately based on our use of those items. 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.

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Note G Commitments and Contingencies:

We made a guarantee in connection with a Small Business Administration loan to VoiceViewer Technology, Inc., a private company developing microdisplay products. VoiceViewer is unable to meet its current obligations under the loan agreement. We and the other guarantors are making payments as they become due. We have determined that it is probable that VoiceViewer will be unable to meet its future obligations under the loan agreement. Therefore, at June 30, 2005, we have accrued $265,000, which represents our maximum remaining obligation under the guarantee. We have a security interest in, and second rights to, the intellectual property of VoiceViewer, while the lending institution has the first rights. However, we do not believe we can realize any significant value from VoiceViewer’s intellectual property.

Note H 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 stock 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 common 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 vesting periods 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 March 31, 2005, all 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 was being expensed over the vesting terms of the options and shares of restricted stock. However, on April 1, 2005, we adopted SFAS 123R and eliminated the remaining deferred compensation against additional paid in capital. The remaining stock-based compensation expense related to these options will be recognized over the requisite service period of the individual grantees, which generally equals the vesting period.

On January 26, 2005, our Board of Directors approved the immediate vesting of certain unvested stock options previously awarded to employees (the “Accelerated Options”), and repriced certain stock options previously awarded to employees (the “Repriced Options”). The Board did not accelerate vesting or reprice

8

any stock options previously awarded to officers and directors. The Accelerated Options and Repriced Options were issued under our 2003 Incentive Compensation Plan. The Board considered the need to retain employees in light of recent stock price declines and that there were no merit increases, nor cash bonuses, paid to employees in 2004. The Board also recognized that the exercise of any Accelerated Options would bring cash into our company. The closing market price per share of our common stock on January 26, 2005 was $2.42 and the exercise prices of the approximately 183,000 Accelerated Options on that date ranged from $3.27 to $67.60. The original exercise prices of the 268,950 Repriced Options ranged from $3.90 to $12.06 and were repriced to $2.42. The original vesting schedules and all other terms of the Repriced Options, except the exercise prices, were not modified.

On February 28, 2005, 100,000 Restricted Stock Units were issued to certain of our officers. The Restricted Stock Units expire on February 28, 2010 and may be exchanged for our common stock on a one-for-one basis providing certain cash flow objectives are attained. At June 30, 2005, we had not recognized any compensation related to these awards.

We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), effective April 1, 2005. SFAS 123R requires the recognition of the fair value of stock-based compensation in net income. Stock-based compensation primarily consists of stock options and performance awards. Stock options are granted to employees at exercise prices equal to the fair market value of our stock at the dates of grant. Generally, options fully vest twelve to fifty months from the grant date and have a term of 10 years. We recognize the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. We provide newly issued shares to satisfy stock option exercises and for the issuance of performance awards.

Prior to April 1, 2005, we followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock-based compensation. Under APB 25, no compensation expense was recognized for stock options since the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant. We have elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS 123, shall be recognized in net income in the periods after the date of adoption. For the three-and six-month periods ended June 30, 2005, we recognized compensation expense in the amount of $366,000 and $451,000. Included in the compensation for the six months was recognition of deferred compensation related to certain stock options granted to our employees on September 4, 2003. Not included was compensation related to options accounted for under APB 25 in the period ended March 31, 2005. For the three- and six-month periods ended June 30, 2004, we recognized compensation expense in the amount of $81,000 and $162,000. The amounts for 2004 relate only to recognition of deferred compensation related to restricted stock and certain stock options granted to our employees on September 4, 2003. No other expense was recognized for stock options under APB 25.

As a result of the adoption of SFAS 123R, the incremental impact on our stock compensation expense caused our net loss for the three- and six-month periods ended June 30, 2005, to be $286,000 ($.04 per share) more than if we had continued to account for our equity compensation programs under APB 25.

FAS 123R requires us to present pro forma information for periods prior to the adoption as if we had accounted for all our employee stock options and performance awards under the fair value method of that statement. For purposes of pro forma disclosure, the estimated fair value of the options and performance awards at the date of the grant is amortized to expense over the requisite service period, which generally equals the vesting period. The following table illustrates the effect on net income and earnings per share for the six-month period ended June 30, 2005 and the three- and six-months ended June 30, 2004, if we had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation.

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	Six Months			Three Months			Six Months
	Ended June 30,			Ended June 30,			Ended June 30,
	2005			2004			2004
Net loss as reported	$	(12,464	)	$	(4,838	)	$	(10,240	)
Add stock-based compensation included in net loss as reported		451			81			162
Deduct total stock-based employee compensation expense determined under fair value based method for all awards		(786	)		(387	)		(699	)
Pro forma net loss	$	(12,799	)	$	(5,144	)	$	(10,777	)
Basic and diluted net loss per share:
As reported	$	(1.78	)	$	(0.78	)	$	(1.77	)
Pro forma	$	(1.83	)	$	(0.83	)	$	(1.86	)

We have computed compensation cost, for reporting and 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.

The weighted-average fair value of the options granted during the six-month period ended June 30, 2005 was $1.61 per option, determined using the following assumptions:

Dividend yield:	N/A
Volatility:	123	%
Risk-free interest rate:	3.81	%
Expected life in years:	10

As of June 30, 2005, the total remaining unrecognized compensation expense related to unvested options amounted to $2.5 million, which will be amortized over the remaining requisite service periods. Estimated future annual compensation expense through 2007 and thereafter related to stock-based compensation as of June 30, 2005 is as follows (in thousands):

Fiscal Year	Amount
2005	$	698
2006		949
2007		673
Thereafter		202
	$	2,522

Note I Recently Issued Accounting Standards:

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment,” that will require compensation costs related to share-based payment transactions with employees to be recognized in our financial statements. With limited exceptions, the amount of compensation expense will be measured based on the grant date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation expense will be recognized over the period that an employee provides service in exchange for the award. Statement 123 (revised 2004) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and is effective as of the first annual reporting period that begins after June 15, 2005. We adopted Statement 123 (revised 2004) on April 1, 2005.

On November 24, 2004, the FASB issued Statement No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We have not completed the process of evaluating the impact that the adoption of Statement 151 will have on our financial position or results of operations.

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Note J     Long-term Debt:

Long term debt consisted of the following (in thousands):

	June 30,		December 31,
	2005		2004
April 2005 7% Convertible Debentures maturing April 20, 2008, convertible at $1.57 per share
	$	2,500	$	—
April 2005 9% Senior Secured Debentures maturing April 20, 2008, secured by a first lien on our assets		2,000		—
		4,500		—
Less:
Discount and beneficial conversion feature on convertible debentures		2,338		—
Discount on secured debentures		189		—
Total	$	1,973	$	—

Future maturities of principal at June 30, 2005 are as follows (in thousands):

2006	$	—
2007		—
2008	$	4,500
Total	$	4,500

Amortization of debt discount and beneficial conversion feature of approximately $175,000 is included in interest expense for the three- and six-month periods ended June 30, 2005. Subject to stockholder approval, interest on the 7% Convertible Debentures is payable, at our option, in either stock or cash. Due to the beneficial conversion feature and the value allocated to warrants issued with the convertible debt, the effective interest rate on the convertible debt is approximately 40%. Due to the value allocated to warrants issued with the secured debt, the effective interest rate on the secured debt is approximately 13%.

Note K     Subsequent Events:

Issuance of additional debentures. On July 12, 2005, we issued $5.0 million of 4% Convertible Debentures and $2.075 million of 9% Senior Secured Debentures, both maturing on July 12, 2008, to institutional investors. The 4% Convertible Debentures are convertible into shares of our common stock at a conversion price of $2.63 per share. Subject to stockholder approval, interest on the 4% Convertible Debentures is payable, at our option, in either stock or cash. The 9% Senior Secured Debentures are secured by a first lien on our assets. The purchasers of both issues have also received five-year warrants to purchase, for an exercise price of $2.63 per share, approximately 1.37 million shares of our common stock beginning 181 days from closing.

Definitive agreement to merge. On July 12, 2005, we announced that we had entered into a definitive agreement with Syntax Groups Corporation to merge. Under the merger agreement, Brillian and Syntax will merge in an all stock, tax free transaction. While Brillian will be the surviving legal entity, the current Syntax shareholders will own a majority of the combined company upon closing. In the event the merger is abandoned as a result of a material breach of the representations or warranties of Brillian or Syntax, or the failure by Brillian or Syntax to comply with any of its agreements or covenants, that party is required to pay the other the sum of $3.5 million as liquidated damages. As part of the agreement, Syntax has agreed to purchase $3.0 million of secured debentures from us over a three-month period starting in August. These notes will bear interest at 7% and be secured by a junior lien on our assets.

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

     The statements contained in this report on Form 10-Q which 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 2005 and thereafter; the amounts, prices, timing, or terms under which we sell HDTVs to our customers; 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 high-end audio/video manufacturers, distributors of high-end consumer electronics products, and consumer electronics retailers. 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 2004, we recorded revenue from product sales of $2.3 million, or 84% of net sales, and revenue from design and engineering services of $426,000, or 16% of net sales. We have never been profitable. Our net loss for the six months ended June 30, 2005, was $12.5 million, and was $32.9 million, $18.7 million, and $23.2 million for the years ended December 31, 2004, 2003, and 2002, respectively.

     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 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 design, develop, 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 and the

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establishment of a supply chain to source the components that we do not manufacture. We currently anticipate that sales of our HDTVs will comprise the majority of our total sales in future periods.

     In addition to designing, developing, 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.

     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.

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 ongoing 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. Under contracts where revenue is recognized based on milestones, the fair value of milestones completed equals the fair value of work performed. Under a fixed price contract whereby we were paid based on performance of tasks, we recognized revenue based on the estimated percentage of completion of the entire project as measured by the costs for man hours and materials incurred to date compared to the total estimated costs for man hours and materials. Any anticipated losses on fixed price contracts are recorded in the period they are determinable. All major design

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and engineering services projects for customers were complete at December 31, 2004, and such work is expected to be minimal in the future.

     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. We do not expect to record a tax benefit on any losses that we incur until we have a history of profitability.

     Long-term assets, such as property, plant, and equipment, intangibles, and other investments, are originally recorded at cost. On an ongoing basis, we assess these assets to determine if their current recorded value is impaired. When assessing these assets, we consider projected future cash flows to determine if impairment is applicable. These cash flows are evaluated for objectivity by using weighted probability techniques and also comparisons of past performance against projections. 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. During the fourth quarter of 2004, we recorded an impairment charge of $10.2 million related to long-lived assets in accordance with this policy.

     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 volumes, we anticipate that the amount of revenue recognized during the second half of 2005 will not result in a material change to our cash consumption rate. We do anticipate, however, that as we continue the move into volume production, we will continue to improve our manufacturing yields and more fully absorb our fixed costs, which will result in improved gross margins and results of operations. However, as we continue to increase our revenue and shift our product mix predominantly to HDTVs, we will use cash to finance increases in working capital.

Results of Operations

  Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Net Sales. Net sales decreased 11% to $1.0 million the second quarter of 2005 from $1.1 million in the second quarter of 2004. Product sales of $1.0 million in the second quarter of 2005 were essentially the same as in

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the second quarter of 2004. There were no design and engineering services revenues in the second quarter of 2005, compared to $99,000 in the second quarter of 2005.

     Projection device sales, which include HDTV sales, in the second quarter were $840,000, or 83% of net sales, while near-to-eye sales were $166,000, or 17% of net sales. During the same period in 2004, projection device sales were $435,000, or 38% of net sales, and near-to-eye sales were $699,000, or 62% of net sales.

     Net sales in North America totaled $598,000, or 59% of total net sales, in the second quarter of 2005 compared with $433,000, or 38% of total net sales, in the second quarter of 2004. Net sales in Asia totaled $17,000, or 2% of total net sales, in the second quarter of 2005 compared with $242,000, or 21% of total net sales, in the second quarter of 2004. Net sales in Europe totaled $391,000, or 39% of net sales, in the second quarter of 2005 compared with $459,000, or 41% of net sales, in the second quarter of 2004.

     Cost of Sales. Cost of sales was $4.0 million, or 398% of net sales, in the second quarter of 2005 compared with $2.7 million, or 234% of net sales, in the second quarter of 2004. Contributing to the increase in costs was a write-down of approximately $1.0 million of our light engine materials inventory to the lower of cost or market, and an increase in our allowance for obsolescence of approximately $250,000. 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.

     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 $1.2 million in the second quarter of 2005, compared with $1.1 million in the corresponding quarter in 2004. The largest contributing factor to the increase was recognition of stock-based compensation expense related to the adoption of SFAS 123(R).

     Research and Development Expense. Research and development expense increased 31% to $2.8 million in the second quarter of 2005 from $2.1 million in the second quarter of 2004. Factors contributing to the increase included recognition of stock-based compensation expense related to the adoption of SFAS 123(R), and the write-off of costs related to the development of an HDTV light engine project.

     Interest Expense. During the second quarter we recorded net interest expense of $251,000 compared with $64,000 of interest income in the second quarter of 2004. The interest expense is related to the convertible and secured debentures and associated warrants we issued in April 2005. Under generally accepted accounting principles, we are required to measure the value of the warrants attached to debentures issued and the conversion feature of the convertible debentures issued. The resulting values are recorded as a discount to the debentures with a corresponding increase in additional paid-in capital. The original discount to the convertible debentures was equal to their face value of $2.5 million and the original discount to the secured debentures was $202,000. The discount, along with amortization of issuance costs, is being accreted to interest expense over the three-year term of the notes.

     Net Loss. Net loss was $7.2 million in the second quarter of 2005 compared with a net loss of $4.8 million in the second quarter of 2004.

Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Net Sales. Net sales increased 16% to $1.9 million in the first half of 2005 from $1.6 million in the first half of 2004. Product sales increased to $1.9 million in the first half of 2005 from $1.4 million in the first half of

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2004. There were no design and engineering services revenue in the first half of 2005 compared with $237,000 in the first half of 2004.

     Net sales in the projection market, which includes HDTV sales, totaled $1.5 million, or 82% of total net sales, in the first half of 2005 and $733,000, or 45% of total net sales, in the first half of 2004. The remaining net sales were in the near-to-eye market.

     Net sales in North America totaled $923,000, or 50% of total net sales, in the first half of 2005 compared with $747,000, or 46% of total net sales, in the first half of 2004. Net sales in Asia totaled $31,000, or 2% of total net sales, in the first half of 2005 compared with $349,000, or 22% of total net sales, in the first half of 2004. Net sales in Europe totaled $910,000, or 48% of net sales, in the first half of 2005 compared with $516,000, or 32% of net sales, in the first half of 2004.

     Cost of Sales. Cost of sales was $7.2 million, or 384% of net sales, in the first half of 2005 compared with $5.0 million, or 312% of net sales, in the first half of 2004. 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.

     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 of $2.2 million in the first half of 2005 was essentially unchanged from the first half of 2004.

     Research and Development Expense. Research and development expense increased 4% to $4.8 million in the first half of 2005 from $4.6 million in the first half of 2004.

     Net Loss. Net loss was $12.5 million in the first half of 2005 compared with a net loss of $10.2 million in the first half of 2004.

Liquidity and Capital Resources

     At June 30, 2005, we had cash, cash equivalents, and short-term investments of $1.2 million compared with $8.2 million at December 31, 2004.

     In the first half of 2005, we used $11.0 million of cash for operating activities compared with $7.9 million in the first half of 2004. Our depreciation and amortization expense was $1.2 million in the first half of 2005 and $1.7 million in the first half of 2004.

     In the first half of 2005, investing activities used $617,000. In the first half of 2004, net cash provided by investing activities totaled $9.8 million, which included proceeds from the sale of short-term investments of $12.1 million. Purchases of property and equipment totaled $630,000 in 2005, while purchases of property and equipment in 2004 were $1.9 million and purchases of intangibles totaled $243,000.

     In the first half of 2005, financing activities provided $4.6 million including $4.5 million from a debenture offering. During the first half of 2004, financing activities provided $12.1 million including $12.0 million from the proceeds of a public offering.

     We have incurred recurring operating losses and negative cash flows since our inception as a division of TFS. Our net loss for the six months ended June 30, 2005, was $12.5 million, and was $32.9 million, $18.7 million,

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and $23.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Net cash used in operating activities was $11.0 million for the six months ended June 30, 2005, and $18.9 million, $15.9 million, and $20.1 million for the years ended December 31, 2004, 2003, and 2002, respectively. At June 30, 2005, we had $5.1 million of working capital, including cash and cash equivalents of $1.2 million.

     The successful introduction of an HDTV product to market and securing volume orders from consumer electronics retailers for HTDVs represent a key ingredient in our success. In the second quarter of 2004, we signed a supply agreement to provide HDTVs to Sears Roebuck and Company. In the third quarter of 2004, we began shipping HDTVs to Sears. Also in the third quarter of 2004, our supplier of light engines, a major sub-assembly of the HDTV, informed us that they were unable to supply us with the volume of light engines necessary to satisfy our requirements and granted us a temporary license to build light engines. As a result of our not being able to supply the required number of HDTVs, Sears exercised their option to terminate the supply agreement. In the fourth quarter of 2004, our light engine supplier informed us that they would not be able to manufacture the light engine in volume until the second quarter of 2005, and granted us a temporary license to build light engines. In March 2005, we received authorization from our light engine supplier to have the light engine manufactured on our behalf by a third party manufacturer and granted us a perpetual license to the light engine technology. In April 2005, we selected Suntron Corporation to manufacture light engines on our behalf. We currently believe that light engine availability will begin to increase in the fourth quarter of 2005 and that capacity will exceed 1,000 units per month by the end of the fourth quarter of 2005.

     We are currently manufacturing a limited quantity of light engines in our manufacturing facility in Tempe, Arizona. This will allow us to manufacture a limited number of HDTVs and support low volume customers until we can obtain a high volume supply of light engines. Until we obtain a high-volume supply of light engines, we will not be able to manufacture and sell a sufficient number of HDTVs to achieve positive cash flow or profitability.

     On July 12, 2005, we sold $5.0 million aggregate principal amount of our 4% convertible debentures, a 9% senior secured debenture in the principal amount of $2.075 million for a purchase price of $2.0 million, and warrants to purchase 1,365,570 shares of our common stock at an exercise price of $2.63 per share in private placements. In addition, we agreed to issue warrants to purchase an aggregate of 45,000 shares of our common stock to placement agents as compensation for services in connection with the financing. The cash proceeds from these transactions, net of estimated offering costs, was approximately $6.4 million. Generally accepted accounting principles require us to record the fair value of the conversion feature of the convertible debt and the warrants issued as a debt discount with the offset being recorded as an increase in additional paid-in capital in the equity section of the balance sheet. The amount of debt discount to be recorded on the convertible debentures is equal to the $5.0 million face value of the debentures. The amount of debt discount to be recorded on the senior secured debentures is $1.2 million. .

     The following table gives pro forma effect to the July 12, 2005 financing transactions described above, as if they had occurred on June 30, 2005 (in thousands):

	June 30, 2005		June 30, 2005
	Actual		Pro Forma
Convertible debentures, net of discount	$	162	$	162
Secured debentures, net of discount		1,811		2,644
Total long-term debt		1,973		2,806
Stockholders’ equity		9,705		15,872
Total capitalization		11,678		18,678

     On July 12, 2005, we announced a definitive agreement to merge with Syntax Groups Corporation (Syntax). Under the merger agreement, Brillian and Syntax will merge in an all stock, tax free transaction. While Brillian will be the surviving legal entity, the current Syntax shareholders will own a majority of the combined company upon closing. Therefore, it is anticipated that for accounting purposes, Syntax will be deemed the acquirer. Once the merger closes, the historical financial statements of Syntax will become the historical financial statements of Syntax-Brillian and the combined company will adopt Syntax’s June 30 fiscal year-end. In conjunction with the definitive agreement to merge, Syntax has agreed to purchase $3.0 million of secured debentures from us. We believe that the proceeds of the July financings and the commitment from Syntax to purchase $3.0 million of

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secured debentures will provide sufficient funding to execute our business plan through the close of the merger with Syntax.

Aggregate Contractual Obligations

     The following table lists our commercial commitments as of June 30, 2005:

			Amount of Commitment Expiration Per Period
	Total Amounts		Less
Other Commercial Commitments	Committed		than 1 Year		1-3 Years		4-5 Years		6 Years and Over
	(in thousands)
Facilities leases	$	4,959	$	1,156	$	2,173	$	1,630	$	—
Purchase orders	$	3,231	$	3,231	$	—	$	—	$	—
Guarantee	$	265	$	265	$	—	$	—	$	—

     We have contractual commitments for property leases for our Tempe headquarters and for our development center in Boulder, Colorado. In addition, we have issued purchase orders to vendors for development, production, and materials for our imager and HDTV products totaling approximately $3.2 million.

     We made a guarantee in connection with a Small Business Administration loan to VoiceViewer Technology, Inc., a private company developing microdisplay products. VoiceViewer is unable to meet its current obligations under the loan agreement. We and the other guarantors are making payments as they become due. We have determined that it is probable that VoiceViewer will be unable to meet its future obligations under the loan agreement. Therefore, at June 30, 2005, we have accrued $265,000, which represents our maximum remaining obligation under the guarantee. We have a security interest in, and second rights to, the intellectual property of VoiceViewer, while the lending institution has the first rights. However, we do not believe we can realize any significant value from VoiceViewer’s intellectual property.

     We believe that the contribution by TFS of the assets related to our business and the assumption by us of the related liabilities in exchange for our common stock, which was part of the spin-off, should be treated as a reorganization within the meaning of Section 368(a)(1)(D) of the Code, and the distribution should qualify as a tax-free distribution under Section 355 of the Code. It should be noted that the application of Section 355 of the Code to the distribution is complex and may be subject to differing interpretation. If the distribution does not qualify as a tax-free distribution under Section 355 of the Code, then (i) TFS would recognize capital gains but not losses equal to the difference between the fair market value of our common stock on the date of the distribution and TFS’ tax basis in such stock; and (ii) the distribution may be taxable to individual stockholders, depending on their individual tax basis. In addition, we have indemnified TFS in the event the distribution is not tax-free to TFS because of actions taken by us or because of failure to take various actions. Certain of the events that could trigger this obligation may be beyond our control. In particular, the transaction may be taxable if the distribution is deemed to be part of a plan in which one or more persons acquire directly or indirectly stock representing a 50% or greater interest in either TFS or our company.

     We have no capital lease obligations, unconditional purchase obligations, other long-term obligations, or any other commercial commitments except as noted above. At December 31, 2004, we had no debt. However, it was determined that is was necessary in fiscal 2005 to obtain debt or equity financing to provide working capital to execute our business plan. The following summarizes our debt at July 31, 2005 as a result of recent financing activities:

     At July 31, 2005 we had $7.5 million of convertible debentures and $4.075 million of senior secured debentures outstanding.

     The $7.5 million of convertible debentures consists of the following:

• $2.5 million principal of 7% convertible debentures due April 20, 2008. Interest is due quarterly and is payable in cash or, if certain conditions have been met, in Brillian common stock. These

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convertible debentures are convertible into common stock at an initial conversion price of $1.57 per share, subject to certain anti-dilution provisions, if approved by our stockholders, and

• $5.0 million principal of 4% convertible debentures due July 12, 2008. Interest is due quarterly and is payable in cash or, if certain conditions have been met, in Brillian common stock. These convertible debentures are convertible into common stock at an initial conversion price of $2.63 per share, subject to certain anti-dilution provisions, if approved by our stockholders.

     The $4.075 million of senior secured debentures consists of the following:

• $2.0 million principal of 9% senior secured debentures due April 20, 2008. Interest is due monthly and is payable in cash, and

• $2.075 million principal of 9% senior secured debentures due July 12, 2008. Interest is due monthly and is payable in cash.

     The senior secured debentures are secured by a first lien on all of our assets.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements.

Impact of Recently Issued Standards

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” that will require compensation costs related to share-based payment transactions with employees to be recognized in our financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123 (revised 2004) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and is effective as of the first annual reporting period that begins after June 15, 2005. We adopted Statement 123 (revised 2004) on April 1, 2005.

On November 24, 2004, the FASB issued Statement No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We have not completed the process of evaluating the impact that the adoption of Statement 151 will have on our financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     At June 30, 2005, 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.

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     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.

PART II — OTHER INFORMATION

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

     Our Annual Meeting of Stockholders was held on May 12, 2005. 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 Withheld
Jack L. Saltich		6,028,176		613,405
Vincent F. Sollitto, Jr.		6,248,639		392,942
David P. Chavoustie		6,166,616		474,965
David N.K. Wang		6,162,213		479,368
John S. Hodgson		6,179,106		462,475

     Our 2003 Incentive Compensation Plan was approved for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, as follows:

Votes in Favor	Opposed		Abstain
5,983,183		589,023		69,375

     An amendment to our 2003 Employee Stock Purchase Plan to increase the number of shares of our common stock reserved for issuance pursuant to the plan from 200,000 to 400,000 was approved as follows:

Votes in Favor	Opposed		Abstain		Broker Non-Votes
1,954,549		740,834		204,226	3,741,972

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     The issuance by us of common stock, or securities convertible into or exchangeable for common stock, that could exceed more than 20% of the voting power of our common stock before the issuance, was approved as follows:

Votes in Favor	Opposed		Abstain		Broker Non-Votes
2,214,544		602,208		78,857	3,741,972

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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

Exhibit
Number	Exhibit
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

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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 15, 2005	By:	/s/ Vincent F. Sollitto Jr.
		Vincent F. Sollitto, Jr.
		President and Chief Executive Officer
	By:	/s/ Wayne A. Pratt
		Wayne A. Pratt
		Vice President, Chief Financial Officer, Secretary, and Treasurer

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INDEX TO EXHIBITS

Exhibit
Number	Exhibit
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

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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 15, 2005

/s/ Vincent F. Sollitto Jr.  

Vincent F. Sollitto Jr. 

President and Chief Executive Officer 

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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 15, 2005

/s/ Wayne A. Pratt  

Wayne A. Pratt 

Chief Financial Officer 

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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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vincent F. Sollitto Jr., President and, Chief Executive Officer 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 and Chief Executive Officer 

August 15, 2005

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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 June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wayne A. Pratt, Vice President, Chief Financial Officer 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
Chief Financial Officer 

August 15, 2005

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