The development and modeling of a liquid-crystal phase grating for real-time diffractive three-dimensional displays are discussed. The system being developed, which is called the ICVision system, utilizes a number of ideas that will result in a rugged, low-power three-dimensional display offering both vertical and horizontal parallax and eventually full color. Fringing fields created between interdigitated electrodes formed on top of VLSI die will induce a diffraction pattern in a thin layer of liquid crystal that will cover the die. A detailed electrostatic and diffraction analysis of liquid-crystal phase-grating regions that will make up the final display is given here. The electrostatic analysis is developed by use of the method of moments. The diffraction analysis is developed by use of rigorous coupled-wave diffraction theory. The numerical results obtrained from the mathematical model are compared with experimental diffraction results from preliminary LCD cells that have been assembled as prototype ICVision devices.