RISK FACTORS

You should carefully consider the following risk factors, together with the other information contained or incorporated by reference in this prospectus, in evaluating whether to purchase shares of our common stock.

WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE

CYCLES.

Our business model requires us to develop microdisplays that perform better than existing technologies, contract with one or more third-party manufacturers to manufacture our prototypes in bulk, and sell the resulting displays to original equipment manufacturers that will then incorporate it into their products. OEMs make the determination during their product development programs whether or not to incorporate our display modules in their products. This requires us to invest significant amounts of time and capital in designing display modules well before our customers introduce their products incorporating these displays and before we can be sure that we will generate any significant sales to our customers or even recover our investment. Even if a product is successful for a short period, competition from other sellers could limit the length of time it is successful.

WE ARE INCURRING SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS.

We currently have over ten engineers based in California working on prototype microdisplays. This staffing creates significant research and development costs that may not be recouped. We have sold our current prototypes to a number of companies that have indicated they may be willing to incorporate them into products if they could buy such displays in volume. As we begin the process of working with third parties to manufacture our designs in volume, we are continuing to use our engineers to develop subsequent generations of our microdisplays. As a result, our overhead is expected to increase.

THE MICRODISPLAYS WE HAVE DEVELOPED MAY NOT BE MASS-PRODUCED EASILY.

We need to work closely with our manufacturing sources to commence volume production of our current prototype. Problems in implementing volume production or lower than expected manufacturing yields could significantly and adversely affect us because delays could lead our potential customers to seek other sources and because we will have incurred costs for the silicon the company that assembles our displays uses in the microdisplay manufacturing process.

We currently obtain silicon backplanes from the Far East. Some Asian countries are subject to earthquakes and typhoons. Unless we obtain a second source, any disruption or termination of our silicon manufacturing operations in Taiwan or air transportation with the Far East could adversely affect our operations.

We are negotiating a contract with a facility in Hong Kong to assemble the silicon backplanes with electronic components to create microdisplays. Because this relationship is new we anticipate that technical issues in the manufacturing process will need to be resolved. The design and manufacture of LCDs and display modules are highly complex processes that are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing

environment, impurities in the materials used, and the performance of personnel and equipment. Contract manufacturers do not guarantee their manufacturing yields. In addition, the complexity of manufacturing processes will increase along with increases in the sophistication of our display modules. Low manufacturing yields or delivery problems could adversely affect our operating results.

A MARKET FOR OUR PRODUCTS MAY NOT DEVELOP.

Various target markets for our micro-displays, including projectors, monitors, high-definition televisions, and portable micro-displays, are uncertain, may be slow to develop, or could utilize competing technologies. High-definition television has only recently become available to consumers, and widespread market acceptance is uncertain. In addition, the commercial success of the portable micro-display market is uncertain. Gaining acceptance in this market may prove difficult because of the radically different approach of micro-displays to the presentation of information. In order for us to succeed, not only must we sell to those manufacturers that produce end-products micro-displays that are better and cheaper than the alternatives they would otherwise use, but also, the manufacturers themselves must develop products that are successful commercially. Our failure to sell to manufacturers or the failure of the ultimate target markets to develop as we expect will impede our anticipated growth.

OUR DISPLAYS MAY NOT SUCCEED COMMERCIALLY.

Our microdisplays may not be accepted by a widespread market. Even if we successfully mass-produce a display that is used in a retailed product, our customers may determine not to introduce or may terminate products utilizing the technology for a variety of reasons, including the following:

- superior technologies developed by our competitors;

- price considerations;

- lack of anticipated or actual market demand for the products; and

- difficulties in inducing companies to begin using our product.

WE DO NOT HAVE LONG-TERM PURCHASE COMMITMENTS FROM OUR PROSPECTIVE

CUSTOMERS.

Our prospective customers have not yet provided us with firm or long-term volume purchase commitments. Although we have begun to negotiate with our customers, we currently do not have any contracts with our customers. Because we have no firm, long-term volume purchase commitments we do not have clear order lead times or bases for inventory allocations. In addition, our prospective customers can cancel purchase commitments or reduce or delay orders at any time. The cancellation, delay, or reduction of customer commitments could result in our holding excess and obsolete inventory or having unabsorbed manufacturing overhead. Our sales to customers in the electronics industry, which is subject to severe competitive pressures, rapid technological change, and product obsolescence, increases our inventory and overhead risks.

WE DEPEND ON THE MARKET ACCEPTANCE OF THE PRODUCTS OF OUR CUSTOMERS.

We do not sell any products to end-users. Instead, we design and manufacture various product solutions that our customers incorporate into their products. As a result, our success depends almost entirely upon the widespread market acceptance of our customers' products. Any significant slowdown in the demand for our customers' products would adversely affect our business.

Our dependence on the success of the products of our customers exposes us to a variety of risks, including our needs to do the following:

- maintain customer satisfaction with our design and manufacturing services;

- match our design and manufacturing capacity with customer demand and to maintain satisfactory delivery schedules;

- anticipate customer order patterns, changes in order mix, and the level and timing of orders that we can meet; and

- adjust to the cyclical nature of the industries and markets we serve.

Our failure to address these risks may cause us to lose sales or for sales to decline.

WE FACE INTENSE COMPETITION.

We serve intensely competitive industries that are characterized by price erosion, rapid technological change, and competition from major domestic and international companies. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Some of our competitors have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution and other resources than we possess. As a result, they may be able to introduce new products and respond to customer requirements more quickly than we can.

Our competitive position could suffer if one or more of our customers decide to design and manufacture their own display modules, to contract with our competitors, or to use alternative technologies. In addition, our customers typically develop a second source. Second source suppliers may win an increasing share of a program by competing primarily on price rather than on design.

Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:

- our success in designing and manufacturing new display technologies;

- our ability to address the needs of customers;

- the quality, performance, reliability, features, ease of use, pricing, and diversity of our display products;

- foreign currency fluctuations, which may cause a foreign competitor's products to be priced significantly lower than our displays;

- the quality of our customer services;

- the efficiency of our production sources;

- the rate at which customers incorporate our displays into their own products; and

- products or technologies introduced by our competitors.

THE ELECTRONICS INDUSTRY IS CYCLICAL.

The electronics industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices, and production over-capacity. In addition, the electronics industry is cyclical in nature. We may experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.

WE MUST FINANCE THE GROWTH OF OUR BUSINESS AND THE DEVELOPMENT OF NEW

PRODUCTS.

To remain competitive, we must continue to make significant investments in research and development, equipment and facilities. Our failure to generate sales to offset our costs would adversely affect our ability to continue operating.

We anticipate the need for additional equity or debt financing to provide for the capital expenditures required to maintain our research and development and to move to production. We cannot predict the timing or amount of any such capital requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business at the rate desired and our operating results may suffer. Equity financing could result in additional dilution to existing stockholders. Debt financing increases expenses, must be repaid regardless of operating results, and is secured against our assets, potentially leaving fewer resources available for the repayment of equity holders.

OUR OPERATING RESULTS ARE NEGATIVE AND SUBJECT TO FLUCTUATIONS.

We have not achieved profits in the past five years and have experienced cash shortages. As a result, our auditors have noted in past reports that there is doubt about our ability to continue as a going concern. We will need to achieve substantial sales to support our cost structure before we can begin to recoup our operating losses and accumulated deficit. Any progress toward profitability may not be steady and may be subject to significant periodic or seasonal quarterly fluctuations due to factors including the following:

- introductions of displays and market acceptance of new or new generations of displays;

- timing of expenditures in anticipation of future orders;

- changes in our cost structure;

- availability of labor and components;

- pricing and availability of competitive products and services;

- the timing of orders;

- the volume of orders relative to the capacity we can contract to produce;

- evolution in the life cycles of customers' products; and

- changes or anticipated changes in economic conditions.

Accordingly, you should not rely on the results of past periods as an indication of our future performance. It is likely that in some future period, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may drop.

THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

The market price of our common stock has been extremely volatile, reflecting reported losses, receipt of additional financing and changes to management. The trading price of our common stock in the future could continue to be subject to wide fluctuations in response to various factors, including the following:

- quarterly variations in our operating results;

- actual or anticipated announcements of technical innovations or new product developments by us or our competitors;

- changes in analysts' estimates of our financial performance;

- general conditions in the electronics industry; and

- worldwide economic and financial conditions.

In addition the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for many high-technology companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may adversely affect the market price of our common stock.

OUR COMMON STOCK MAY NOT BE LIQUID.

We are currently traded on the over-the-counter bulletin board. Our stockholders may find that it is more difficult to sell our capital stock than shares listed on an exchange or a national market. State securities law qualification exemptions that apply to shares listed on

exchanges and national markets do not apply to shares of our stock. The trading volume of our shares may be limited in part due to the marketability of our stock. Any swing in the price of our stock may be magnified into a material reduction in price because relatively few buyers may be available to purchase our stock.

SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF

OUR COMMON STOCK.

Many of our outstanding shares are freely tradeable without restrictions or further registration. Sales of substantial amounts of common stock by our stockholders, or even the potential for such sales, may affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.

WE DEPEND ON KEY PERSONNEL.

Our development and operations depend substantially on the efforts and abilities of our senior management and technical personnel. The competition for qualified management and technical personnel is intense. The loss of services of one or more of our key employees or the inability to add key personnel could have a material adverse affect on us. We do not have any fixed-term agreements with, or key person life insurance covering, any officer or employee.

WE MUST PROTECT OUR INTELLECTUAL PROPERTY.

We believe that our continued success depends in part on protecting our proprietary technology. Third parties could claim that we are infringing their patents or other intellectual property rights. In the event that a third party alleges that we are infringing its rights, we may not be able to obtain licenses on commercially reasonable terms from the third party, if at all, or the third party may commence litigation against us. The failure to obtain necessary licenses or other rights or the institution of litigation arising out of such claims could materially and adversely affect us.

We rely on a combination of patent law, trade secret law, attempts to limit disclosure of our confidential information and contractual provisions to protect our intellectual property. Trade secret laws and contractual provisions afford only limited protection. We face risks associated with our intellectual property, including the following:

- pending patent applications may not be issued;

- patents issued to us may be challenged, invalidated, or circumvented;

- unauthorized parties may obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights;

- others may independently develop similar technology or design around any patents issued to us;

- intellectual property laws may not protect our intellectual property;

- effective protection of intellectual property rights may be limited or unavailable in some foreign countries, such as China, in which we may operate.

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL TRADE AND CURRENCY

EXCHANGE.

Political and economic conditions abroad may adversely affect the foreign manufacture and sale of our displays. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could adversely affect our ability to manufacture or sell displays in foreign markets and to purchase materials or equipment from foreign suppliers.

SHORTAGES OF COMPONENTS AND MATERIALS MAY DELAY OR REDUCE OUR SALES AND

INCREASE OUR COSTS.

Our inability to obtain sufficient quantities of components and other materials necessary to produce our displays could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. We obtain many of the materials we use in the manufacture of our displays from a limited number of foreign suppliers, particularly suppliers located in the Far East, and we do not have long-term supply contracts with any of them. As a result, we are subject to economic instability and currency fluctuations in these countries as well as to increased costs, supply interruptions, and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining from others the materials necessary to produce their products into which our product solutions are incorporated.

WE MUST EFFECTIVELY MANAGE OUR GROWTH.

The failure to manage our growth effectively could adversely affect our operations. Our ability to manage our planned growth effectively will require us to:

- enhance our operational, financial, and management systems;

- expand our facilities and equipment; and

- successfully hire, train, and motivate additional employees, including technical staff.

As we expand our overhead and selling expenses will increase. We also may be required to increase staffing and purchase capital equipment. Customers, however, generally do not commit to firm production schedules for more than a short time in advance. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability.

OUR BUSINESS MAY BE AFFECTED BY "YEAR 2000" PROBLEMS.

Many existing computer programs and databases use only two digits to identify a year in the date field. For example, 99 would represent 1999. These programs and databases were designed and developed without considering the impact of the upcoming millennium. Consequently, date sensitive computer programs may interpret the date "00" as 1900 rather than 2000. If not corrected, many computer systems could fail or create erroneous results in 2000. Failure of our systems, or in the systems of our vendors or customers, could have a significant adverse effect on our business.

WE COULD BE LIABLE IN CONNECTION WITH PRODUCT LIABILITY CLAIMS.

Product liability claims may be asserted against us in the event that the use of our products, or products which incorporate our products, are alleged to cause injury or other adverse effects. Our product liability insurance may not be adequate to protect us against potential claims. As a result a successful claim against us could materially affect our financial stability. In addition, our reputation may be affected by product liability claims regardless of the merit or eventual outcome of the claim.

WE DO NOT PAY CASH DIVIDENDS.

We have never paid any cash dividends on our common stock and do not anticipate that we will pay cash dividends in the near term. Instead, we intend to apply earnings to the expansion and development of our business.