Summary of PLANAR SYSTEMS INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made pursuant to the safe harbor provisions of the federal securities laws. Forward-looking statements, which may be identified by the inclusion of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "goal" and variations of such words and other similar expressions, are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Many factors, including the risk factors included in Part I, Item 1A of this report and the following, could cause actual results to differ materially from the forward-looking statements: poor or further weakened domestic and international business and economic conditions; changes or continued reductions in the demand or order rates for products in the various display markets served by the Company; any delay in the timing of customer orders or the Company's ability to ship product upon receipt of a customer order; the extent and timing of any additional expenditures by the Company to address business growth opportunities; any inability to reduce costs or to do so quickly enough, in either case, in response to reductions in revenue; the ability of the Company to successfully implement any cost reduction initiatives or generally cause ongoing operating expenses to be maintained at levels permitting Company profitability; adverse impacts on the Company or its operations relating to or arising from any inability to fund desired expenditures, including due to difficulties in obtaining necessary financing; changes in the flat-panel monitor industry; changes in customer demand or ordering patterns; changes in the competitive environment including pricing pressures or the ability to keep pace with technological changes; technological advances; shortages of manufacturing capacity from the Company's third-party manufacturing partners or other interruptions in the supply of components the Company incorporates in its finished goods including as a result of natural disasters and future production variables resulting in excess inventory. The forward-looking statements contained in this report speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If the Company does update one or more forward-looking statements, it should not be concluded that the Company will make additional updates with respect thereto or with respect to other forward-looking statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, warranty obligations, goodwill and intangible asset valuation, share based compensation and income taxes. The Company bases its 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 the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies and the related judgments and estimates affect the preparation of the consolidated financial statements.

Revenue Recognition. The Company's policy is to recognize revenue for product sales when evidence of an arrangement exists, sales price is determinable or fixed, title transfers and risk of loss has passed to the

customer, which is generally upon shipment of the Company's products to its customers. The Company defers and recognizes service revenue over the contractual period or as services are rendered. Some distributor agreements allow for potential return of products and provide price protection under certain conditions within limited time periods. Price protection is offered to select distributors for circumstances when there is a decrease in the list price of a product subsequent to the purchase by the distributor. The distributor is entitled to receive a credit equal to the price decrease for all new and unused products held in the distributor's inventory as of the date of the claim, up to a maximum of 45 days from the date of purchase. Such return rights are generally limited to short-term stock rotation. The Company estimates sales returns and price adjustments based upon historical experience and other qualitative factors. The Company estimates expected sales returns and price protection adjustments and records the amounts as a reduction of revenue at the later of the time of shipment or when the pricing decision is made. Each period, price protection is estimated based upon pricing decisions made and information received from distributors as to the amount of inventory they are holding. The Company's policies comply with the guidance provided by the FASB Accounting Standards CodificationTM ("the Codification" or "ASC") Topic 605, "Revenue Recognition" ("ASC Topic 605"). Judgments are required in evaluating the credit worthiness of the Company's customers. Credit is not extended to customers and revenue is not recognized until the Company has determined that the collection risk is minimal.

Allowance for Doubtful Accounts. The Company maintains allowances for estimated losses resulting from the inability of its customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, the Company obtains credit rating reports and financial statements of the customer when determining or modifying their credit limits. The Company regularly evaluates the collectability of its trade receivable balances based on a combination of factors. When a customer's account balance becomes past due, the Company initiates dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to the Company, such as in the case of bankruptcy, deterioration in the customer's operating results or financial position or other material events impacting their business, the Company records a specific allowance to reduce the related receivable to the amount the Company expects to recover.

The Company also records an allowance for all customers based on certain other factors including the length of time the receivables are past due, the amount outstanding, and historical collection experience with customers. The Company believes its reported allowances are adequate. However, if the financial condition of customers were to deteriorate, resulting in their inability to make payments, the Company may need to record additional allowances which would result in additional operating expense being recorded for the period in which such determination was made.

Inventories. The Company is exposed to a number of economic and industry factors that could result in portions of its inventory becoming either obsolete or in excess of anticipated usage, or subject to lower of cost or market adjustments. These factors include, but are not limited to, technological and regulatory changes in the Company's markets, the Company's ability to meet changing customer requirements, competitive pressures in products and prices, changes to forecasts, new product introductions, quality issues with key suppliers, product phase-outs, future customer service and repair requirements, and the availability of key components from the Company's suppliers. The Company's policy is to reduce the value of inventory when conditions exist that suggest that its inventory may be in excess of anticipated demand or is obsolete based upon its assumptions about future demand for its products and market conditions. The Company regularly evaluates its ability to realize the value of its inventory based on a combination of factors including the following:
historical usage rates, forecasted sales or usage, product end-of-life dates, estimated current and future market values and new product introductions. Purchasing practices and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, the Company's adjustments are intended to reduce the carrying value of its inventory to its net realizable value. If actual demand for the Company's products deteriorates or market conditions become less favorable than those that the Company projects, additional inventory adjustments may be required.

Product Warranties. The Company's products are sold with warranty provisions that require it to remedy deficiencies in quality or performance over a specified period of time, generally between 12 and 36 months, at no cost to the Company's customers. The Company's policy is to establish warranty reserves at levels that represent its estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized. The Company believes that its recorded liabilities are adequate to cover its future cost of materials, labor and overhead for the servicing of its products. If product failure rates, or material or service delivery costs differ from the Company's estimates, its warranty liability would need to be revised accordingly.

Intangible Assets. In accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC Topic 350"), the Company does not amortize goodwill from acquisitions, but amortizes other acquisition-related assets.

As required by these rules, the Company performs an impairment review of goodwill annually or earlier if indicators of potential impairment exist. In the first quarter of 2010 the Company determined that a triggering event had occurred and performed an impairment analysis. As discussed in Note 11-Impairment and Restructuring Charges, based on this review, the Company determined that its goodwill was impaired, and therefore recorded a $3,428 charge to write-off this balance.

The Company amortizes the cost of identifiable intangible assets over the estimated useful life of the asset and assesses any impairment by estimating the undiscounted future cash flows from the associated asset in accordance with ASC Topic 350 and ASC Topic 360, "Property, Plant, and Equipment" ("ASC Topic 360"). Impairment charges related to the intangible assets associated with the acquisition of Clarity and Runco were recorded in fiscal 2008 based upon the impairment reviews performed in that year. If the estimated cash flows related to these assets decreases in the future or the useful life is shorter than originally estimated, the Company may incur further charges for impairment of these assets. Additional impairment could result if the associated products do not sell as expected.

Share Based Compensation Expense. The Company accounts for share based compensation in accordance with ASC Topic 718, "Compensation-Stock Compensation," ("ASC Topic 718"), which requires the measurement and recognition of compensation expense for all share based payment awards made to the Company's employees and directors including employee stock options, restricted stock and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. The Company estimates the fair value of employee stock options on the date of grant using the Black-Scholes option pricing model. This model is also used to estimate the fair value of employee stock purchases related to the Employee Stock Purchase Plan. The determination of fair value using an option pricing model is affected by the Company's stock price as well as assumptions regarding the risk-free interest rate, the expected dividend yield, the expected option life, and expected volatility over the term of the awards. The Company estimates volatility based on its historical stock price volatility for a period consistent with the expected life of its options. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company's employee stock options. The dividend yield assumption is based on the Company's history and expectation of dividend payouts. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based on historical experience. As share based compensation expense recognized in the Consolidated Statement of Operations for fiscal 2012 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company values restricted stock awards at the closing price of the Company's shares on the date of grant. U.S. generally accepted accounting principles ("GAAP") requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical and anticipated future experience. If factors change and the Company employs different assumptions in the application of ASC Topic 718 in future periods, the compensation expense recorded may differ significantly from what the Company has recorded in the current period.

Income Taxes. The Company accounts for income taxes using the asset and liability method outlined in ASC Topic 740, "Income Taxes" ("ASC Topic 740"). The Company records a valuation allowance when

necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. If the Company is able to realize the deferred tax assets in an amount in excess of its reported net amounts, an adjustment to decrease the valuation allowance associated with deferred tax assets would increase earnings in the period such a determination was made. Similarly, if the Company should determine that its net deferred tax assets may not be realized to the extent reported, an adjustment to increase the valuation allowance associated with the deferred tax assets would be charged to income in the period such a determination was made.

BUSINESS ACQUISITIONS AND DISPOSITIONS

In September 2006 the Company completed the acquisition of Clarity Visual Systems, Inc. Clarity was engaged in the design, development, manufacturing, marketing, distribution, support, and maintenance of large-screen video cube display systems for entertainment, business, transportation, government, and retail market applications. As a result of the acquisition, the Company was able to broaden its product offerings in the specialized display markets. The acquisition was accounted for as a purchase and, accordingly, the operations of Clarity have been included in the consolidated financial statements from the date of acquisition.

In May 2007 the Company acquired substantially all of the assets and certain liabilities of Runco International, Inc., a supplier of premium video projectors, video processors, plasma screens and LCDs to the home theater market. As a result of the acquisition the Company accelerated its reach into the market for high-end home theater projection systems, large-format thin video displays, and front-projection screens. The acquisition was accounted for as a purchase and, accordingly, the operations of Runco have been included in the consolidated financial statements from the date of acquisition.

In August 2008 the Company sold the stock of DOME imaging systems, inc., a subsidiary of Planar Systems, Inc. to NDS Surgical Imaging for approximately $32.2 million, after closing adjustments. This transaction represented a disposal of the Company's Medical segment. As a result of this transaction, the Company recorded an $11.1 million gain, net of transaction costs of $1.0 million which consisted primarily of legal and brokerage fees. This amount, in addition to after-tax income from the Medical segment operations, for 2008 of $4.3 million were classified as discontinued operations in the statement of operations for that year.

In the first quarter of 2009 the Company sold its digital signage software assets in two transactions. In November 2008 the Company sold certain assets related to digital signage software for gaming applications to Bally Gaming, Inc. In December 2008 the Company sold the remaining digital signage software assets to CS Software Holdings LLC. The sale of these assets did not constitute the disposal of a component of the Company as defined by ASC Topic 205, "Component of an Entity," ("ASC Topic 205") and, accordingly, results related to the sale of digital signage software assets have not been reclassified to discontinued operations.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of sales of certain items in the Consolidated Financial Statements of the Company. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

                                          Sept. 28,        Sept. 30,        Sept. 24,
                                            2012             2011             2010
  Sales                                        100.0 %          100.0 %          100.0 %
  Cost of sales                                 79.8             72.0             74.7

  Gross profit                                  20.2             28.0             25.3
  Operating expenses:
  Research and development, net                  6.2              5.8              6.0
  Sales and marketing                           14.5             13.9             12.6
  General and administrative                     8.2              9.0              9.1
  Amortization of intangible assets              0.4              1.1              1.4
  Impairment and restructuring charges           0.5              0.6              1.9

  Total operating expenses                      29.8             30.4             31.0

  Loss from operations                          (9.6 )           (2.4 )           (5.7 )
  Non-operating income (expense):
  Interest, net                                   -                -                -
  Foreign exchange, net                          0.3             (0.2 )            0.9
  Other, net                                     0.3              0.1              0.2

  Net non-operating income (expense)             0.6             (0.1 )            1.1

  Loss before income taxes                      (9.0 )           (2.5 )           (4.7 )
  Provision (benefit) for income taxes           0.4               -              (1.8 )

  Net loss                                      (9.4 )           (2.5 )           (2.9 )

Overview

The Company recorded sales of $171.4 million in the twelve months ended September 28, 2012 ("2012" or "fiscal 2012"), a decrease of $15.1 million or 8.1% as compared to sales of $186.5 million in the twelve months ended September 30, 2011 ("2011" or "fiscal 2011"). In 2012, sales of commercial and industrial products decreased $19.4 million or 13.2% to $127.6 million from $147.0 million in 2011. This decrease was partially offset by a $4.3 million, or 11.0% increase in sales of digital signage products to $43.8 million in 2012 from $39.5 million in 2011. The decrease in sales of $15.1 million contributed to a $17.5 million decrease in gross profit to $34.6 million in 2012 from $52.1 million in 2011.

The 2012 loss from operations was $16.4 million as compared to $4.4 million in 2011. The increased loss from operations was primarily due to decreases in sales and gross profit. The decrease in gross profit was due in part to the $9.4 million decrease in sales of EL displays, which have higher fixed costs relative to other products. The decreases in sales and gross profit were partially offset by a $5.6 million decrease in operating expenses, including a $2.8 million decrease in general and administrative expenses and a $1.3 million decrease in amortization of intangible assets in 2012 as compared to 2011.

The 2012 net loss was $16.2 million or $0.81 per share as compared to a net loss of $4.7 million or $0.24 per share in 2011. The increased net loss was primarily due to the $17.5 million decrease in gross profit, partially offset by a $5.6 million decrease in operating expenses and $1.2 million increase in non-operating income.

The Company continues to experience strong demand for its digital signage products, as customers adopt its Clarity Matrix ("Matrix") super narrow bezel LCD video wall systems for use in venues requiring large format

viewing, including retail applications, sports arenas, and airports. The Company continues to focus on driving revenue growth in the digital signage market, and believes the overall market for digital signage products is currently growing and will continue to grow in the future. Accordingly, the Company has been and plans to continue focusing resources on building out the product portfolio as well as expanding the sales and marketing reach for its digital signage products.

Sales

Sales for the Year Ended September 28, 2012

The Company's sales of $171.4 million in 2012 decreased $15.1 million or 8.1% from $186.5 million in 2011. The decrease was due to a decrease in sales of commercial and industrial products, which was partially offset by an increase in sales of digital signage products. The decrease in sales of commercial and industrial products was primarily due to decreases in sales of EL displays, rear-projection cubes, and high-end home products, which were partially offset by increases in sales of touch monitors, desktop monitors, and custom commercial and industrial products. The increase in sales of digital signage products was primarily due to increases in sales of tiled LCD video wall systems and LCD commercial flat panels, which were partially offset by a decrease in sales of customized digital signage products. A summary of the major components of sales for the year ended September 28, 2012, including changes in sales from the prior year due to changes in volumes and average selling price (ASP), is as follows:

                                                                                                            % Change in         % Change in
                                           2012             2011          $ Change         % Change         Volumes(1)            ASP(1)
                                            (In millions, except percentages)
Commercial & Industrial Sales
High-end home                          $       15.6      $     21.2      $     (5.6 )          -26.2 %             -24.2 %              -5.2 %
Electroluminescent                             19.8            29.2            (9.4 )          -32.4 %             -38.4 %               9.7 %
Custom commercial & industrial                 11.9            11.1             0.8              6.6 %              -6.9 %              13.7 %
Desktop monitors                               35.1            34.3             0.8              2.5 %               9.3 %              -4.6 %
Rear projection cubes                          26.2            32.7            (6.5 )          -19.8 %             -23.0 %             -13.6 %
Touch monitors                                 16.1            13.7             2.4             17.7 %              29.7 %              -9.6 %
Other                                           2.9             4.8            (1.9 )          -40.3 %                 -                   -

Total Commercial & Industrial sales           127.6           147.0           (19.4 )          -13.2 %                 -                   -
Digital Signage Sales
Tiled LCD video wall systems                   33.7            21.8            11.9             54.3 %              48.1 %               4.1 %
LCD commercial flat panels                      8.7             6.7             2.0             29.4 %              31.7 %              -1.7 %
Customized digital signage                      1.4            11.0            (9.6 )          -86.8 %             -91.6 %              12.6 %

Total Digital Signage sales                    43.8            39.5             4.3             11.0 %                 -                   -

Total sales                            $      171.4      $    186.5      $    (15.1 )           -8.1 %                 -                   -

(1) Due to the significant differences in volumes and ASP for each product category, changes in volumes and ASP have not been included for the "Other" categories or subtotals.

For the year ended September 28, 2012, the decrease in volumes of EL displays sold was due primarily to lower shipments in fiscal 2012 as compared to fiscal 2011 as a result of older design wins nearing end of life which were not replaced with new design wins. The decrease in high-end home product sales volumes and average selling prices was a result of continued market softness for high-end home products. The decrease in volumes sold of rear-projection cubes was a result of large customer orders that shipped in 2011 that were not repeated in 2012. The increase in volumes sold of touch monitors was a result of large orders received in 2012 compared to 2011. The increase in volumes sold of desktop monitors was due primarily to the Company experiencing slightly stronger demand for these product offerings in 2012 as compared to 2011. The decrease in

average selling prices of desktop monitors was largely a result of a change in product mix in 2012 versus 2011. The decrease in volumes sold of custom commercial and industrial products was a result of fewer design wins in 2012 versus 2011 while the increase in average selling prices was due primarily to changes in product mix. The increases in volumes sold and average selling prices for tiled LCD video wall systems, including Matrix, were primarily due to increased demand for indoor videowall systems as a result of the Company's continued sales and marketing efforts to drive growth in this area. The increase in volumes sold of LCD commercial flat panels was due primarily to new product introductions during 2012. The decrease in volumes sold and average selling prices of customized digital signage products was the result of large customer orders fulfilled in 2011 that were not repeated in 2012.

Sales for the Year Ended September 30, 2011

The Company's sales of $186.5 million in 2011 increased $10.8 million or 6.2% from sales of $175.7 million in 2010. The increase was primarily due to an increase in sales of digital signage products, and also due to an increase in . . .