Microdisplays present high resolution images that are magnified by a lens or projected onto a screen or other surface for viewing. Many consumer electronics products have begun to incorporate microdisplays due to their size and image quality benefits. Rear projection televisions project an image from a microdisplay onto the back of a translucent screen; home theater projectors cast the image which a microdisplay produces onto a remote screen. In near-to-eye applications, such as a digital still camera viewfinder, a lens in the viewfinder magnifies the microdisplay for viewing by the end-user. iSuppli Corporation, a leading provider of consumer electronics industry research, forecasts that the worldwide market for microdisplays will grow from $1.1 billion in 2003 to $1.9 billion in 2007.

Digital still cameras are one of the fastest growing consumer electronic product segments. According to Techno Systems Research, over 47 million digital still cameras were shipped worldwide in 2003, a 74% increase over 2002 shipments. By 2007, Techno Systems Research expects this amount to grow to approximately 94 million digital still cameras shipped. The majority of digital still cameras today use a standard optical viewfinder and include a small flat panel display on the back of the camera. Technology advances are enabling camera manufacturers to increase camera performance, such as higher image sensor resolution (expressed as a number of megapixels), higher optical zoom and longer battery life. Due to these enhanced features, particularly higher optical zoom, standard optical viewfinders have become inadequate for use in many digital still cameras. Therefore, it is believed digital still camera manufacturers are increasingly adopting electronic viewfinders. According to Techno Systems Research and other industry sources it is estimated the percentage of digital still cameras that incorporate electronic viewfinders is expected to increase from 11% in 2003, resulting in a market of approximately $97 million, to over 30% in 2007, representing a $343 million worldwide market.

The Company relies on sophisticated chemical models and extensive laboratory experience to design new molecule structures for its FLC technology. During the Company’s 20-year history, its chemists have synthesized more than 2,200 liquid crystal compounds and have formulated them into over 6,000 novel mixtures. The Company synthesizes novel FLC molecules at the rate of one or two new structures per week, allowing it to continuously enhance its FLC on silicon (FLCOS) products.

The silicon area, or backplane, behind its FLCOS reflective display pixels gives the Company the opportunity to integrate into the FLCOS display all of the memory and control circuits necessary to sample the input video signal and convert it to the pixel drive signals that create the displayed image. The LV311 product that the Company began shipping in February 2004 contains approximately 17 million transistors. Further, the Company relies on state-of-the-art semiconductor design tools and simulators to streamline the design process and reduce the time to build a functional integrated circuit.

Optical systems are the third core component of the Company’s FLCOS technology. The Company applies a combination of commercially available and internally developed tools to design the optical systems, which optimize image quality while minimizing the cost and size of the optics contained in its electronic viewfinders.

In 2003, the Company shipped two products in volume to customers: QVGA, a color electronic viewfinder product for the digital still camera market, and Zebra, a monochrome electronic viewfinder product for the video camcorder market. The Company believes the Zebra product captured approximately 50% of the 2003 worldwide market for monochrome electronic viewfinders used in video camcorders. The Company’s QVGA microdisplay had been less successful in the digital still camera market in part because of a non-standard electrical interface. The Company recently addressed this problem with the introduction of its second generation electronic viewfinder for the digital still camera market, the LV311, which implements its latest FLCOS architecture and is designed to accept industry standard video signals.

Cost of sales increased 54% to $16.6 million, or 89% of revenue, for the six months ended June 30, 2004, from $10.8 million, or 89% of revenue, for the six months ended June 30, 2003.

Gross profit increased 51% to $2.0 million, or 11% of revenue, for the six months ended June 30, 2004, from $1.3 million, or 11% of revenue, for the six months ended June 30, 2003.

Research and development expenses increased 49% to $4.4 million, or 24% of revenue, for the six months ended June 30, 2004, from $2.9 million, or 24% of revenue, for the six months ended June 30, 2003.