KOPIN CORP - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended June 28, 2008

OR

Commission file number 0-19882

KOPIN CORPORATION

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨    Accelerated Filer  x    Non-Accelerated Filer  ¨    Smaller Reporting Company  ¨

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

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

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Kopin Corporation

INDEX

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Part 1: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

KOPIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to condensed consolidated financial statements

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KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

See notes to condensed consolidated financial statements

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KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements

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KOPIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The condensed consolidated financial statements for the three and six months ended June 28, 2008 and June 30, 2007 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. All such adjustments are of a normal recurring nature.

These condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto.

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

The condensed consolidated financial statements include the accounts of Kopin Corporation, its wholly owned subsidiaries and Kowon Technology Co., Ltd. (Kowon), a majority owned (78%) subsidiary located in Korea (collectively “the Company”). All intercompany transactions and balances have been eliminated.

2. MARKETABLE SECURITIES

The Company’s marketable securities consist primarily of commercial paper, medium-term corporate notes, and United States government and agency backed securities. The Company classifies marketable equity and debt securities as available-for-sale and accordingly carries them at fair value. The net unrealized holding losses, recorded in accumulated other comprehensive income, for available-for-sale marketable debt securities at June 28, 2008 and December 29, 2007 were $303,537 and $201,715, respectively. The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations.

Investments in available-for-sale marketable debt securities are as follows at June 28, 2008 and December 29, 2007:

The contractual maturity of the Company’s marketable debt securities is as follows at June 28, 2008:

The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses. For the six months ended June 28, 2008 the Company had $38,463 and ($16,231) in gross realized gains and (losses), respectively, on sales of its available-for-sale securities as compared to gross realized gains and (losses) of $4,074 and ($3,598), respectively, for the six months ended June 30, 2007. At June 28, 2008, the Company owned no securities whose cost basis exceeded their fair market value for at least twelve consecutive months. Unrealized losses from fixed income securities are primarily attributable to changes in interest rates.

3. FAIR VALUE MEASUREMENTS

On December 30, 2007, the Company adopted Statement of Financial Accounting Standards “Fair Value Measurements” (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Under SFAS 157 the fair value of investments are categorized by the method by which their fair value is computed. The three categories are defined as Level 1, Level 2 and Level 3. An investment is categorized as Level 1 when its fair value is based

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on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates, yield curves, or derived from or corroborated by observable market data by correlation or other means. An investment is categorized as Level 3 if its fair value is based on assumptions developed by the Company about what a market participant would use in pricing the assets.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets:

In the second quarter of 2008, the Company reviewed the carrying value of one of its cost method investments due to i) the inability of the entity to meet certain milestones; and ii) the entity having less than 12 months of cash-on-hand. As a result of the Company’s review, the Company recorded an impairment charge of $0.7 million to adjust the carrying amount of the investment to fair value, as the Company deemed the decline in the value of the assets to be other-than-temporary. This cost method investment falls within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investment is in a privately held entity without quoted market prices. To determine the fair value of the investment, the Company reviewed both the valuation of companies which sell similar products and, since the Board of Directors of this entity has hired an investment bank and is reviewing strategic alternatives, including the sale of the company, the price paid to acquire companies which sell similar products. Based on this and other data, the Company assigned different probabilities to a range of possible outcomes resulting from the strategic alternative review and computed a fair value. The impairment amount represents the difference between the fair value and the carrying value of the investment. The following table summarizes changes to the carrying amount of this investment during the three months ended June 28, 2008.

4. INVENTORY

Inventory is stated at the lower of cost (determined on the first-in, first-out or specific identification method) or market and consists of the following at June 28, 2008 and December 29, 2007:

5. NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of shares of common stock outstanding during the period less any unvested restricted shares. Diluted earnings per common share is calculated using weighted-average shares outstanding and contingently issuable shares, less weighted-average shares reacquired during the period. The net outstanding shares are adjusted for the dilutive effect of shares issuable upon the assumed conversion of the Company’s common stock equivalents, which consist of outstanding stock options and unvested restricted stock.

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Weighted average common shares outstanding used to calculate earnings per share are as follows:

The following were not included in weighted average common shares outstanding- diluted because they are anti-dilutive.

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6. STOCK BASED COMPENSATION

A summary of award activity under the stock option plans as of June 28, 2008 and changes during the six month period is as follows:

The following table summarizes information about stock options outstanding and exercisable at June 28, 2008:

A summary of options vested and expected to vest at June 28, 2008 is as follows:

No options were issued during the six month periods ended June 28, 2008 or June 30, 2007. No options were exercised during the six month period ended June 28, 2008.

The Company has issued shares of nonvested restricted common stock to certain employees. Each award requires the employee to fulfill certain obligations, including remaining employed by the Company for two or four years (the vesting period).

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A summary of the activity for nonvested restricted common stock awards as of June 28, 2008 and changes during the six months then ended is presented below:

The following table summarizes stock-based compensation expense related to employee stock options and nonvested restricted common stock awards for the six months ended June 28, 2008 and June 30, 2007 (no tax benefits were recognized):

The total unrecognized compensation cost related to nonvested restricted common stock awards is expected to be recognized over a weighted average period of three years. The total unrecognized compensation cost is as follows at June 28, 2008:

7. OTHER ASSETS AND AMOUNTS DUE FROM UNCONSOLIDATED AFFILIATES

Marketable Equity Security

As of June 28, 2008, the Company held approximately 200,000 shares of Micrel Semiconductor, Inc. (Micrel) common stock as available-for-sale with a market value of approximately $1,885,000 and an adjusted cost basis of approximately $1,689,171.

Non-Marketable Securities – Equity Method Investments

At June 28, 2008, the Company had an approximate 40% interest in Kopin Taiwan Corp (KTC), which is accounted for using the equity method and had a carrying value of $0. The Company has manufactured products for KTC to sell to their customers and KTC manufactures products for the Company to sell to its customers. In addition, the Company provides technical services to KTC and sells raw substrates to KTC. For the three and six months ended June 28, 2008, the Company had product sales to KTC of approximately $0 and $1,000 , respectively, as compared to approximately $1,000 and $3,000 for the three and six months ended June 30, 2007, respectively. For the three and six months ended June 28, 2008, the Company had purchases from KTC of approximately $896,000 and $2,283,000 , respectively, as compared to approximately $1,636,000 and $2,470,000 for the three and six months ended June 30, 2007, respectively. One of the Company’s Directors is chairman of KTC and owns approximately 1.0% of the outstanding common stock of KTC.

The Company has accumulated a 24.9% interest in KoBrite. KTC has a 15% interest in KoBrite. The Company accounts for its ownership interest in KoBrite using the equity method and at June 28, 2008, the carrying value of its investment was approximately $4.0 million. KoBrite’s results are recorded one quarter in arrears from the Company’s. During the three and six months ended June 28, 2008, the Company recorded losses of approximately $142,000 and $166,000 , respectively, as compared to the three and six months ended June 30, 2007, when the Company recorded losses of approximately $41,000 and $86,000 , respectively, in “Equity loss in unconsolidated affiliate” in the Condensed Consolidated Statements of Operations. In June 2008, one of the Company’s Directors, who is also the chairman of KTC, was elected to the Board of Directors of Bright LED, one of the principle investors of KoBrite.

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KTC and KoBrite have entered into an agreement to merge the two companies subject to conditions of closing, including governmental approvals. As of June 28, 2008, the government approvals had not been obtained and there is no assurance that the approvals will be obtained. KTC is currently having liquidity problems and if the merger does not take place, KTC may be unable to continue operations. At June 28, 2008 the Company was owed $1,885,000 from KTC and owed KTC approximately $1,196,000 . As a result of KTC’s liquidity issues, the Company provided for an allowance for doubtful accounts for $685,000 which represents the net amount owed by KTC at June 28, 2008. At June 28, 2008, KTC had loans from banks which totaled approximately $2.5 million (NT$76.5 million) which are due in varying installments through 2010. The Company is in negotiations to loan KTC amounts necessary to pay off some or all of its bank debt provided the Company can obtain acceptable terms. In the event KTC is unsuccessful in resolving its liquidity issues, the Company may have to provide additional reserves against its receivables from KTC.

Non-Marketable Securities – Cost Method Investments

At June 28, 2008, the Company had an investment in Advanced Wireless Semiconductor Company (AWSC), with a carrying value of $774,588, which the Company accounts for on the cost basis. One of the Company’s Directors is a director of AWSC and several directors and officers own amounts ranging from 0.1% to 0.5% of the outstanding stock of AWSC.

At June 28, 2008, the Company had an investment in Kenet, Inc. (Kenet) with a carrying value of approximately $4.7 million, which is carried under the cost method. The Company’s Chief Executive Officer is a founder and board member of this company and owns approximately 2.3% of this company. Certain directors and an officer of the Company have also invested in this company and their ownership ranges from 0.1% to 1.0%.

The Board of Directors of Kenet has hired an investment bank and is evaluating strategic alternatives for the company including raising additional financing and / or sale of the company. As of June 28, 2008, based on its current rate of monthly cash usage, Kenet does not have sufficient funds to operate for 12 months. As described in Note 3, the Company recorded an impairment charge of $0.7 million during the three months ended June 28, 2008. As of June 28, 2008, subsequent to recording the impairment charge of $0.7 million, the Company had made equity and debt investments in Kenet totaling $5.7 million. In July 2008, the Company loaned Kenet an additional $0.5 million. If Kenet is unable to raise additional capital or execute other strategic alternatives, the Company may have to write-off some or all of its remaining investment including the Notes Receivables (See Notes receivable from Unconsolidated Affiliate below).

Notes receivable from Unconsolidated Affiliate

As of June 28, 2008, Kenet borrowed $4.0 million under a loan agreement with the Company and three other principal investors of which $1.0 million came from the Company. The loan agreement provides for interest at the rate of ten percent per annum and provides for the issuance of warrants to purchase Kenet’s common stock. In July 2008, the agreement was amended to increase the amount which could be borrowed to $6.0 million. Kenet borrowed the additional $2.0 million of which $500,000 came from the Company.

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Amounts Due from Affiliates

Related party receivables at June 28, 2008 and December 29, 2007 approximate the following amounts:

Amounts Due to Affiliates

Related party payables at June 28, 2008 and December 29, 2007 approximate the following amounts:

Summarized aggregate financial information for KTC for the three and six months ended June 28, 2008 and KoBrite for the three and six months ended March 31, 2008 is provided in the table below. The three and six months ended June 30, 2007, includes the financial information for KTC for that period and the financial information for KoBrite for the three and six months ended March 31, 2007.

Certain officers and directors have invested in some of the Company’s investee companies, including Micrel. The Company has a loan to a non-officer employee for $170,000 which is due in 2008.

8. ACCRUED WARRANTY

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

9. INCOME TAXES

As of June 28, 2008, the Company has available for tax purposes $90.7 million federal net operating loss carryforwards expiring through the year 2027. The Company has recognized a full valuation allowance for its net deferred tax assets for entities in the United States tax jurisdictions due to the uncertainty of realization of such assets.

The Company has unrecognized tax benefits of approximately $200,000 related to uncertainties regarding transfer pricing. These unrecognized tax benefits, if recognized, would affect the effective tax rate prior to the adjustment for the Company’s valuation allowance.

The Company has not been examined by the Internal Revenue Service (the “IRS”) and is subject to examination for all years since 1992. The Company is currently under examination by the Massachusetts Department of Revenue. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

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International jurisdictions have statutes of limitations generally ranging from 3 to 5 years after filing of the respective return. Years still open to examination by tax authorities in major jurisdictions include Korea (2003 onward), Japan (2003 onward) and Hong Kong (2005 onward). The Company is not currently under examination in these jurisdictions.

10. SEGMENTS AND GEOGRAPHICAL INFORMATION

The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker evaluates the operating results of the Company’s reportable segments based on revenues and net income (loss).

The Company operates in two reportable segments, Kopin U.S., which includes the operations in the United States and the Company’s equity method investments, and Kowon. The following table presents the Company’s reportable segment results for the three and six month periods ended June 28, 2008 and June 30, 2007:

The adjustments to reconcile to the consolidated financial statements’ total revenue, net income (loss) and total assets include the elimination of intercompany sales, minority interest in income (loss) of subsidiary and intercompany receivables.

During the three and six months ended June 28, 2008 and June 30, 2007, the Company derived its sales from the following geographies (as a percentage of net sales):

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During the three and six months ended June 28, 2008 and June 30, 2007, revenues by product group consisted of approximately the following:

11. LITIGATION

Class Action—On September 6, 2007, a complaint was filed against the Company and certain of its directors and officers in Superior Court, Bristol County, Massachusetts purportedly on behalf of a class of shareholders who held Kopin stock on September 6, 2007 (the “Securities Law Action”). The plaintiffs in this action asserted claims arising under Delaware General Corporations Law § 211(c), alleging that the Company failed to hold an annual shareholder meeting within the past thirteen months. After the Company held a shareholder meeting on May 20, 2008, the plaintiffs agreed to dismiss their claims. The parties filed a Stipulation of Dismissal With Prejudice on July 25, 2008.

The Company is engaged in other legal proceedings arising in the ordinary course of business. Management believes the ultimate outcome of these proceedings will not have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

12. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements” (SFAS 157) which enhances existing guidance for measuring assets and liabilities at fair value. SFAS 157 defines fair value establishes a framework for measuring fair value and expands disclosure about fair value measurements. The Company adopted SFAS No. 157 on January 1, 2008, as required for our financial assets and financial liabilities. However, the FASB deferred the effective date of SFAS 157 for one year as it relates to fair value measurement requirements for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 for our financial assets and financial liabilities did not have a material impact on the Company’s consolidated financial statements (See Note 2).

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods with those financial years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company did not elect the fair value option for any of its eligible items as of December 30, 2007.

Accounting Pronouncements to be Adopted in the Future

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for the Company on January 1, 2009, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented.

Also in December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141 (R)). SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. It requires acquisition-related costs and restructuring costs that the acquirer expects but is not obligated to incur to be recognized separately from the acquisition. SFAS 141(R) modifies the criteria for the recognition of contingencies as of the acquisition date. It also provides guidance on subsequent accounting for acquired contingencies. SFAS 141(R) is effective for business acquisitions for which the acquisition date is on or after January 1, 2009.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, including without limitation statements made relating to our belief that revenue increases are a result of growth in the wireless cell phone market; our expectation that industry will migrate to six inch wafers over the next several years; our expectation that if we are unable to get our reactors qualified by our largest customer and other customers, or if we can not manufacture on six inch wafers in a cost effective manner, that our revenues and results of operations will decline significantly; our expectation that if we are unable to raise the prices of our fixed focus EVF products, or if we discontinue selling these products, our revenues may decline; our expectation that sales of our products to customers who use them for military applications will increase; our expectation that revenue and our ability to achieve profitability may decline if the military TWS Bridge program is cancelled or a fewer than expected number of units are purchased; our expectation that the price of certain of our products will decline in fiscal year 2008; our expectation that our manufacturing efficiencies typically decline when we introduce a new display product into volume production; our strategy to increase gross margins in 2008 through increased sales of higher margin product, increased prices of certain products, negotiating lower raw material prices, increased manufacturing efficiencies, and possibly discontinue selling certain products; our expectation that if we are unable to implement our strategy that we may not be able to achieve profitability; our expectation that if we do not perform under a certain purchase and supply agreement with a significant HBT customer that we may be liable for monetary damages up to a maximum of $40.0 million, and our expectation that we may not be able to realize any profits from this agreement; our expectation that we may be subject to alternative minimum taxes, foreign taxes and state income taxes depending upon our taxable income and sources of taxable income; our expectation that changes in near-term interest rates should not be material to our cash flows or income; our expectation that any market risk associated with our international operations is unlikely to have a material adverse effect on our business, financial condition or result of operation; our expectation that demand for Gallium Arsenide and Silicon wafers is expected to grow due to new technologies such as solar cells; our expectation that we may pursue acquisitions and investments and that such investments could adversely affect our business; our belief that we may be required to write-off all or some of our investments of $4.7 million and certain notes receivable of $1.0 million in a company in which we have an equity interest; our belief that sales to the US Military will represent a significant portion of our revenues for 2008; our expectation, based on current negotiations with our customers and certain contractual obligations, that the prices of certain products will decline in fiscal year 2008; our expectation that we will expend between $5.0 and $9.0 million on capital expenditures over the next twelve months; our expectation that our third quarter would be our strongest sales quarter followed by our second quarter, fourth quarter and first quarter, in that order; our expectation that prices of our HBT transistors and display products sold for consumer electronic applications will decline by approximately 5 to 10 percent during fiscal year 2008; our expectation that our revenues for 2008 will be between $105 million and $115 million; our expectation that competition will increase; and our belief that our available cash resources will support our operations and capital needs for at least the next twelve months. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management’s beliefs, and assumptions made by management. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of us. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “could”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and results include, but are not limited to, those discussed below in Item 1A and those set forth in our other periodic filings filed with the Securities and Exchange Commission.

Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition under the percentage of completion method, bad debts, inventories, warranty reserves, investment valuations, valuation of stock compensation awards, recoverability of deferred tax assets, liabilities for uncertain tax positions and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions. Further detail regarding our critical accounting policies can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 29, 2007.

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Business Matters

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

We have two principal sources of revenues: those generated from product sales and those generated from research and development activities. Product revenues consist of sales of our CyberDisplay products and our III-V products, principally gallium arsenide (GaAs) HBT transistor wafers. Research and development (R&D) revenues consist primarily of development contracts with agencies of the U.S. government. For the three and six months ended June 28, 2008, research and development revenues were $1.7 million and $3.8 million, respectively. This contrasted with $0.6 million and $0.8 million of total revenues, respectively, for the corresponding period in 2007.

On June 26, 2007 we entered into a $3.0 million state grant agreement with the Commonwealth of Massachusetts wherein they would fund certain plant expansion. We earn the funds under the grant by meeting certain employment levels over the next 10 years. Amounts unearned must be repaid to the Commonwealth of Massachusetts at the end of the term. Accounts receivable increased to $14.7 million at June 28, 2008 from $10.6 million at December 29, 2007. The increase is the primarily the result of i) amounts billed to the Commonwealth of Massachusetts under this grant in the amount of $2.5 million and ii) an increase of approximately $1.0 million in accounts receivables from a military customer which was collected subsequent to June 28, 2008. Billings in excess of revenues earned increased approximately $2.5 million as a result of the amounts billed to the Commonwealth of Massachusetts noted above.

Results of Operations

Revenues. Our total revenues for the three and six month periods ended June 28, 2008 and June 30, 2007 were as follows:

Our principal III-V product is our HBT transistor which is used in wireless handsets. The increase in our III-V revenues for the three and six month periods ended June 28, 2008 as compared to the same periods of the prior year primarily resulted from an increase in demand from our customers which use our HBT products in wireless cell phone applications. We believe the increase resulted from an overall growth in the wireless cell phone market in the second quarter of 2008.

We sell HBT products on both four and six-inch GaAs wafers; however our sales are primarily HBTs on four-inch GaAs wafers. We believe the industry will migrate to six-inch wafers over the next two to three years. Our largest customer, which accounted for approximately 31% of our total fiscal year 2007 revenues, purchases our HBT products on four-inch GaAs wafers and this customer has announced plans to migrate to using six-inch GaAs wafers in its manufacturing process. If we are unable to get our six-inch reactors qualified by our largest customer and other customers or if we are able to get the reactors qualified but can not manufacture the quantity our customers require or can not manufacture on six-inch GaAs wafers in a cost effective manner, our revenues and results of operations could decline significantly.

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The increase in CyberDisplay revenues for the three and six months ended June 28, 2008 as compared to the three and six months ended June 30, 2007 resulted from an increase in sales of our display products in certain of our end-user product applications and development as described below:

In fiscal year 2008, we anticipate an increase in sales of our display products to customers who use them in military applications. The increase in demand is primarily being driven by customers who are supplying the U.S. military’s Thermal Weapon Sights II (TWS II) program. The TWS II program is scheduled to end in mid-2009. The successor program, the TWS Bridge, is scheduled to commence in the fourth quarter of 2008. For the first and second quarters of 2008, sales of our displays for military applications, including revenue from research and development contracts, were $8.3 million and $9.3 million. Revenue from sales of our display products for military applications in the first quarter of 2008 was greater than the second quarter of 2008 because the first quarter included sales of display products for the TWS Bridge program which are being tested and qualified by our customers in the second and third quarters of 2008. We are working with our customers to have our display products qualified into the TWS Bridge program. However, our displays may not get qualified, a competitor may offer a superior solution to our display, the TWS Bridge program may be cancelled or a fewer number of units may be purchased than currently expected. If any of these events, or a combination of these events occurs, our revenue may decline, and we may not be able to achieve profitability.

The growth of our fiscal year 2007 CyberDisplay sales was driven in large part by an increase in sales of our display products for use in digital still camera applications. The large increase in sales of EVF for digital still camera applications in fiscal year 2007 was, in part, driven by an aggressive pricing strategy. In fiscal year 2008 we have been negotiating with customers to raise the prices of our EVFs sold to digital still camera customers. As can be seen above, this has led to a slow-down in our sales of this product since there is a current reluctance of our customers to accept increases in price. Accordingly, we plan on reducing the number of EVFs we sell for use in digital still camera applications.

For 2008, we anticipate revenues will be between $105 million and $115 million.

Based on current discussions with our customers and certain contractual obligations, we expect the prices of certain of our products to decline in fiscal year 2008. We anticipate the average selling price of our HBT transistor wafers and displays sold to customers for consumer electronic applications will decline approximately 5% to 10% during fiscal year 2008 as compared to 2007. The overall increase or decrease in the average sales price of our display products will be dependent on the sales mix of commercial and military display sales.

Revenues by Reportable Segment

Revenues of our Korean subsidiary, Kowon, are included in CyberDisplay revenues and are primarily from sales to us and to Samsung Electronics for camcorder applications. Kowon’s sales to us increase or decrease as a result of demand from us to support our sales of displays to customers who use them for digital still camera applications. Revenues of Kopin U.S. and Kowon were as follows: