Kopin is a leading developer and manufacturer of advanced semiconductor materials and miniature flat panel displays. We use our proprietary technology to design, manufacture and market products used in highly demanding commercial wireless communications and high resolution portable applications. Our products enable our customers to develop and market an improved generation of products for these target applications.

We have two principal components of revenues: product revenues and research and development revenues. Historically, product revenues have consisted of sales of our Heterojunction Bipolar Transistor ("HBT") transistor wafers. For the six month period ended July 1, 2000, we had product revenues of $43.6 million, or 98.9% of total revenues compared to $13.9 million, or 90.7% of total revenues for the same period in 1999. We began shipping our CyberDisplay product in 1998. This product line represented 17.7% of our product revenues for the six months ended July 1, 2000 compared to 10.2% for the same period in 1999.

Research and development revenues consist primarily of development contracts with agencies of the U.S. government. Management has intensified its efforts on the marketing and sales of its commercial products over the past few years resulting in the decline of research and development revenues as a percentage of total revenues. For the six months ended July 1, 2000, research and development revenues declined to $.5 million, or 1.1% of total revenues compared to $1.4 million, or 9.3% of total revenues for the same period in 1999. We believe that research and development revenues will continue to decline on an annual basis as a percentage of total revenues for the near future.

RESULTS OF OPERATIONS

REVENUES. Our total revenues for the three and six months ended July 1, 2000 were $24.4 million and $44.1 million, respectively, compared to $8.6 million and $15.3 million during the corresponding periods in 1999. This represented increases of approximately $15.8 million or 183.7% and $28.8 million or 188.2% for the three and six months ended July 1, 2000, respectively. Our product revenues were $24.3 million and $43.6 million for the three and six months ended July 1, 2000, respectively, compared to $7.9 million and $13.9 million for the same periods in 1999, increases of approximately $16.4 million or 207.6% and $29.7 million or 213.7%, respectively. Product revenue growth was attributable to an increase in sales of our gallium arsenide products as well as our CyberDisplay products in the three and six months ended July 1, 2000 compared to the same periods in 1999. For the six months ended July 1, 2000, gallium arsenide product sales and CyberDisplay product sales were $35.9 million and $7.7 million, respectively, as compared to $12.5 million and $1.4 million, respectively, for the six months ended July 3, 1999. Research and development revenues for the three and six months ended July 1, 2000 were $.1 million and $.5 million compared to $.7 million and $1.4 million for the same period in 1999, decreases of $.6 million or 85.7% and $.9 million or 64.3%, respectively. Research and development revenues declined primarily due to the expirations of multi-year contracts with the U.S. government.

COST OF PRODUCT REVENUES. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to our products, was $16.8 million and $30.8 million for the three and six months ended July 1, 2000 compared to $5.9 million and $9.8 million during the corresponding periods in 1999. This represented an increase of $10.9 million, or 184.8% for the three months ended July 1, 2000, and an increase of $21.0 million or 214.3% for the six months ended July 1, 2000. For the six months ended July 1, 2000 and July 3, 1999, cost of product revenues as a percentage of sales was 70.5% and 70.6%, respectively.

RESEARCH AND DEVELOPMENT. Research and development expenses (R&D) are incurred under development programs for gallium arsenide and display products in support of internal development programs or programs funded by agencies of the U.S. government. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. Funded R&D was $.2 million and $.6 million for the three and six months ended July 1, 2000 compared to $.8 million and $1.7 million for the same periods in the prior year, decreases of $.6 million and $1.1 million, respectively, due to reduced expenses caused by the expiration of multi-year contracts with agencies of the U.S. government. Internal R&D was $1.2 million and $3.9 million for the three and six months ended July 1, 2000 compared to $.5 million and $1.6 million during the corresponding periods in 1999. The increase in internal R&D was primarily the result of development activities related primarily to higher resolution displays.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses (S,G&A) consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A was $3.4 million for the three months ended July 1, 2000 compared to $1.4 million during the corresponding period in 1999, an increase of $2.0 million, or 142.9%. S,G&A was $5.0 million for the six months ended July 1, 2000 compared to $2.3 million during the corresponding period in 1999, an increase of $2.7 million, or 117.4%. The increase in S,G&A was primarily due to increases in sales and marketing travel expenses, headcount in procurement, management information and accounting staffs. In addition, S,G&A expenses include non-cash charges for compensation expense of $27,510 for both six month periods in 2000 and 1999, relating to the issuance of certain stock options.

OTHER. Other expenses, primarily amortization of patents and licenses, were $.3 million and $.4 million for the three and six month periods ended July 1, 2000 compared to $.1 million and $.2 million during the corresponding periods in 1999.

OTHER INCOME, NET. Other income, net was $1.3 million and $2.7 million for the three and six months ended July 1, 2000 compared to $.3 million and $.7 million during the corresponding period in 1999. Interest income earned during the three and six months ended July 1, 2000 increased $1.0 million and $1.9 million, respectively, due to higher cash balances resulting from the October 1999 equity placement and higher interest rates.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through public and private placements of our equity securities, research and development contract revenues, and sales of our gallium arsenide and display products. We believe our available cash resources will support our operations and capital needs for at least the next twelve months.

As of July 1, 2000, we had cash and equivalents and marketable securities of $95.5 million and working capital of $104.1 million compared to $99.1 million and $106.5 million, respectively, as of December 31, 1999. The decrease in cash and equivalents and marketable securities was primarily due to capital and investment expenditures of $17.9 million and principal payments on long-term obligations of $1.3 million, partially offset by cash provided by operations of $9.5 million and proceeds from the exercise of stock options of $6.2 million. The increase in capital expenditures is primarily for our expansion programs to increase manufacturing capacity for our gallium arsenide and display products.

Our subsidiary, Kowon, issued additional shares of common stock to its existing shareholders which resulted in an increase in cash and equivalents of $.5 million.

We periodically enter into long-term debt arrangements to finance equipment purchases and other activities. As of July 1, 2000, debt obligations totaled $3.4 million, of which $1.6 million is payable in the next twelve months.

Our CyberDisplay products are targeted at large sales volume consumer electronic and wireless communication applications. We believe that in order to obtain customers in these markets, it has been necessary to make significant investments in equipment and infrastructure. We believe that it will be necessary to continue to make significant investments in equipment and development in order to produce current and future CyberDisplay products. As a result of the current cost structure of our CyberDisplay product line, our ability to achieve profitability in that product line depends upon achieving significant sales volumes and higher gross profit margins. We have not yet produced our CyberDisplay products at volumes necessary to achieve profitability. Accordingly, we may not be able to obtain sufficient sales volumes, or if sufficient sales volumes are achieved, we may not be able to produce our CyberDisplay products at a gross margin which will allow the product line to generate a profit.

We lease equipment and our facilities located in Taunton and Westborough, Massachusetts, and Los Gatos, California, under non-cancelable operating leases. The Taunton leases expire through May 2010. The Westborough lease expires in October 2002, with renewable options for up to two additional years at our election. The Los Gatos lease covers a five year period terminating in 2002. We will make lease payments of approximately $1.4 million per year over the remaining terms of these leases.

We expect to expend approximately $30.0 million on capital expenditures over the next twelve months, primarily for the acquisition of equipment relating to the production of our HBT transistors and the manufacturing, packaging and testing

of CyberDisplay products, including the establishment of a second manufacturing product facility for our HBT transistor wafers.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years commencing after June 15, 2000. SFAS No. 133 requires fair value accounting for all stand-alone derivatives and many derivatives embedded in other financial instruments and contracts. The impact of SFAS No. 133 on us has not yet been determined.

The Securities and Exchange Commission ("SEC") has released staff accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", which sets forth their views regarding revenue recognition. The Company believes its revenue recognition practices are substantially in compliance with this bulletin.

Certain of the statements contained in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve a number of risks and uncertainties. In addition to the risks and uncertainties set forth in this Form 10-Q, other factors that could cause actual results to differ materially include the following: general economic and business conditions and growth in the flat panel display and the gallium arsenide integrated circuit and materials industries, the impact of competitive products and pricing, availability of third party components and wafer substrates, availability of integrated circuit fabrication facilities, cost and yields associated with production of the Company's CyberDisplay imaging devices and HBT transistor wafers, loss of significant customers, acceptance of the Company's products, continuation of strategic relationships, changes in foreign currency exchange rates, and the risk factors and cautionary statements listed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission, including but not limited to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.