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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10–Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934

For the Quarter Ended December 31, 2004

Commission File No. 0–23018

PLANAR SYSTEMS, INC.

(exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (503) 748-1100

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 such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    x  Yes    ¨  No

Number of common stock outstanding as of February 1, 2005

14,666,701 shares, no par value per share

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PLANAR SYSTEMS, INC.

INDEX

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Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Planar Systems, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Planar Systems, Inc.

Consolidated Balance Sheets

(In thousands)

See accompanying notes to unaudited consolidated financial statements.

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Planar Systems, Inc.

Consolidated Statement of Cash Flows

(In thousands)

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1 - BASIS OF PRESENTATION

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. However, certain information or footnote disclosures normally included in such financial statements has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the periods presented. These financial statements should be read in connection with the Company’s audited financial statements for the year ended September 24, 2004.

Note 2 – STOCK-BASED COMPENSATION PLANS

Stock-based compensation plans

The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

If the Company accounted for its stock-based compensation plans in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), the Company’s net income and net income per share would approximate the following pro forma results:

The effects of applying FAS 123 in this pro forma disclosure are not indicative of future amounts. FAS 123 does not apply to awards prior to January 1, 1995 and additional awards are anticipated in future periods.

On December 16, 2004, the Financial Accounting Standards Board revised FAS 123 with the issuance of Statement of Financial Accounting Standards 123 (revised 2004), “Shares Based Payment” (“FAS 123(R)”). This new standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments that are settled in cash. FAS 123(R) eliminates an enterprise’s ability to account for share-based compensation transactions using APB 25 and requires instead that such transactions be accounted for using a fair-value-based method. FAS 123(R) is effective for any interim or annual period beginning after June 15, 2005, and can be adopted using either a prospective or a retrospective method. Management is currently evaluating the effect the adoption of the standard will have on the financial statements, and the methodology that will be utilized for adoption.

Note 3 - INVENTORIES

Inventories, stated at the lower of cost or market, consist of:

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Note 4 - RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. The Company periodically enters into research and development contracts with certain governmental agencies and private-sector companies. These contracts generally provide for reimbursement of costs. Funding from research and development contracts is recognized as a reduction in operating expenses during the period in which the services are performed and related direct expenses are incurred, as follows:

Note 5 - RESTRUCTURING CHARGES

The restructuring charges previously incurred affected the Company’s financial position as follows:

During the first quarter of fiscal year 2005, the Company paid cash of $18 related to contractual liabilities and lease termination costs. The remaining amounts are expected to be paid primarily by the end of fiscal year 2005.

Note 6 - INCOME TAXES

The provision for income taxes has been recorded based upon the current estimate of the Company’s annual effective tax rate. This rate differs from the federal statutory rate primarily due to the provision for state income taxes and the effects of the Company’s foreign tax rates.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was enacted. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, management is not yet in a position to decide on whether, and to what extent, if any, foreign earnings that have not yet been remitted to the U.S might be repatriated. Based upon the limited analysis performed to date, management has not determined the potential effect of this provision. The Company may elect this one-time deduction in either its fiscal year ending September 30, 2005 or its fiscal year ending September 29, 2006. Management expects to finalize the assessment during 2005.

Note 7 – NET INCOME PER COMMON SHARE

Basic net income per share was computed using the weighted-average number of shares of common stock outstanding during each period. Diluted net income per share was computed using the weighted-average number of shares of common stock plus dilutive common equivalent shares outstanding during each period. Incremental shares of 178 and 540 for the quarters ended December 31, 2004 and December 26, 2003, respectively, were used in the calculations of diluted net income per share. Potential common equivalent shares related to stock options excludes 2,278 and 486 shares from the computation of diluted net income per share because the options’ exercise price was greater than the average market price of the common shares for the periods ended December 31, 2004, and December 26, 2003, respectively.

Note 8 – COMPREHENSIVE INCOME

Comprehensive income was $2,312 and $4,715 for the quarters ended December 31, 2004 and December 26, 2003, respectively.

Note 9 – BUSINESS SEGMENTS

The Company is organized based upon the markets for the products and services that it offers. Under this organizational structure, the Company operates in three main segments: Medical, Industrial and Commercial. The Industrial and Medical segments

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derive revenue primarily through the development and marketing of electroluminescent displays, liquid crystal displays and color active matrix liquid crystal displays. The Commercial segment derives revenue primarily through the marketing of color active matrix liquid crystal displays and plasma displays that are sold through distributors to end users.

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision-maker for the purpose of corporate management. Research and development expenses consist of both research and Quantum program expenses and product development expenses. Research expenses are allocated to the segments based upon a percentage of budgeted sales. Quantum program expenses are recorded in the Industrial segment. Quantum programs are “intrapreneurial” efforts launched with the intent of developing new potential business opportunities. Product development expenses are specifically identified by segment. Marketing expenses are generally allocated based upon a percentage of budgeted sales, while sales costs are specifically identified by segment. General and administrative expenses are allocated based upon a percentage of budgeted sales. Depreciation expense, interest expense, interest income, other non-operating items and income taxes by segment are not included in the internal information provided to the chief operating decision-maker and are therefore not presented separately below. Inter-segment sales are not material and are included in net sales to external customers below.

Note 10 – GUARANTEES

The Company provides a warranty for its products and establishes an allowance at the time of sale which is sufficient to cover costs during the warranty period. The warranty period is generally between 12 and 36 months. This reserve is included in other current liabilities.

Reconciliation of the changes in the warranty reserve is as follows:

NOTE – 11 LONG-TERM DEBT

The Company entered into a $50,000 credit agreement in December 2003, which replaced the Company’s prior credit agreement. The Company had no borrowings outstanding as of December 31, 2004 and September 24, 2004. The agreement expires December 1, 2008 and the borrowings are secured by substantially all assets of the Company. The interest rates can fluctuate quarterly based upon the actual funded debt–to-EBITDA ratio and the LIBOR rate. The agreement includes the following financial covenants: a fixed charge ratio, minimum EBITDA, minimum net worth and a funded-debt-to-EBITDA ratio. The Company was in compliance with these covenants as of December 31, 2004 and September 24, 2004. On December 21, 2004, the credit agreement was amended to provide for increases in the commitment fee payable under the credit agreement if minimum EBITDA for the four fiscal quarters prior to the date of determination falls below $20 million.

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

The following information should be read in conjunction with the consolidated interim financial statements and the notes thereto in Part I, Item I of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended September 24, 2004.

FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain statements that are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Such statements are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “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 that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including the following: domestic and international business and economic conditions, changes in growth in the flat panel monitor industry, changes in customer demand or ordering patterns, changes in the competitive environment including pricing pressures or technological changes, continued success in technological advances, shortages of manufacturing capacities from our third party partners, final settlement of contractual liabilities, future production variables impacting excess inventory and other risk factors described below under “Outlook: Issues and Uncertainties”. 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, intangible asset valuation 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 title transfers and risk of loss has passed to the customer, which is generally upon shipment of our products to our 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 pre-established contractual obligations for price protection under certain conditions within limited time periods. Such return rights are generally limited to contractually defined short-term stock rotation. The Company estimates sales returns and price adjustments based on historical experience and other qualitative factors. The Company estimates expected sales returns and price 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 customers as to the amount of inventory they are holding. The Company’s policies comply with the guidance provided by Staff Accounting Bulletin No. 104, Revenue Recognition, issued by the Securities and Exchange Commission. Judgments are required in evaluating the credit worthiness of our customers. Credit is not extended to customers and revenue is not recognized until the Company has determined that the risk of uncollectibility is minimal.

Allowance for Doubtful Accounts. The Company’s policy is to maintain 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 collectibility 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.

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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 those customers were to deteriorate, resulting in their inability to make payments, the Company may need to record additional allowances which would result in additional general and administrative expenses being recorded for the period in which such determination was made.

Inventory. 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 issues. These factors include, but are not limited to, technological changes in the Company’s markets, the Company’s ability to meet changing customer requirements, competitive pressures in products and prices, new product introductions, product phase-outs 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 there is an actual product failure, or material or service delivery costs differ from the Company’s estimates, its warranty liability would need to be revised accordingly.

Intangible assets. The Company adopted the Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” on accounting for business combinations and goodwill as of the beginning of fiscal year 2002. Accordingly, the Company no longer amortizes goodwill from acquisitions, but continues to amortize other acquisition-related intangibles and costs.

As required by these rules, the Company performs an impairment review of goodwill annually, or earlier if indicators of potential impairment exist. This annual impairment review will be completed during the second quarter of fiscal year 2005, and the results are not yet known. The impairment review is based on a discounted cash flow approach that uses estimates of future market share and revenues and costs for the relevant segments as well as appropriate discount rates. The estimates used are consistent with the plans and estimates that the Company uses to manage the underlying businesses. However, if the Company fails to deliver new products for these groups, if the products fail to gain expected market acceptance, or if market conditions in the related businesses become unfavorable, revenue and cost forecasts may not be achieved and the Company may incur charges for impairment of goodwill.

For identifiable intangible assets, the Company amortizes the cost over the estimated useful life and assesses any impairment by estimating the future cash flow from the associated asset in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. If the estimated cash flow related to these assets decreases in the future or the useful life is shorter than originally estimated, the Company may incur charges for impairment of these assets. The revised value is based on the new estimated discounted cash flow associated with the asset. Impairment could result if the underlying technology fails to gain market acceptance, the Company fails to deliver new products related to these technology assets, the products fail to gain expected market acceptance or if market conditions in the related businesses become unfavorable.

Income Taxes. 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. The Company assesses the need for a valuation allowance based upon its estimate of future taxable income covering a relatively short time horizon given the volatility in the markets the Company serves and its historic operating results. Tax planning strategies to use the Company’s recorded deferred tax assets are also considered. 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 the 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.

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Results Of Operations

Overview

Our results for the first quarter of 2005 were at the low end of our outlook for both sales and net income. Quarterly sales were $63.1 million in the first quarter of 2005 as compared to sales of $62.9 million in the first quarter of 2004. This slight increase was the result of a decrease in sales in the Commercial segment, offset by an increase in sales in the Medical segment. Net income per diluted share was $0.00 in the first quarter of 2005 as compared to $0.21 in the first quarter of 2004. Net income was $28,000 in the first quarter of 2005 as compared to $3.1 million in the first quarter of 2004. Net income in the first quarter of 2005 was negatively impacted by reduced margins in the Company’s Commercial segment, the result of a continued decline in market prices for products in this segment, a $0.5 million charge for bad debt due to the sudden insolvency of a customer, and a $0.2 million reduction in the carrying amount of an equity investment reflecting a further decline in the market value of this investment.

The Commercial segment’s reduction in sales in the first quarter of 2005 as compared to the first quarter of 2004, was primarily the result of a further decline in market prices of products in the Commercial segment. As a consequence of this, and an excess level of inventory at the beginning of the first quarter, many of the Commercial segment’s sales were at poor margins. During the quarter, we reduced inventory in the Commercial segment to levels we feel are appropriate and are at market-competitive costs.

Our Medical segment continues to benefit from our new strategy in digital imaging. Our marketing campaign of “affordable excellence”, launched in the second quarter of 2004, has taken hold in the marketplace and delivered expected results this quarter, including increased volume and penetration through our reseller channel partners. We believe we have gained market share in the digital imaging market through this strategic shift.

In our Industrial segment, business related to components products is currently stable and profitable, but long-term declines are believed to be inevitable for those types of products. Therefore, we have been redirecting our investment focus away from components and toward fully integrated solutions in chosen markets. We have identified front-office applications in retail establishments as a market opportunity with considerable potential growth. We believe digital technology, catalyzed by flat-panel displays, will increasingly be used to inform and interact with customers in retail establishments. We are developing complete hardware, software and system solutions for interactive retailing. Our solution will allow customer-facing devices to attract, interact and transact with customers while maintaining extensive logs of the interactions. We have completed pieces of this solution, engaged customers that are in synch with this future, and have started deployment of products.

Sales

The Company’s sales of $63.1 million in the first quarter of 2005 increased $0.2 million or 0.3% as compared to $62.9 million in the first quarter of 2004. The increase in sales was due to increased sales in the Medical segment, offset by decreased sales in the Commercial segment. Sales in the Medical segment increased $2.9 million or 16.1% to $20.6 million in the first quarter of 2005 from $17.8 million in the same period of 2004. The increase in Medical segment sales was due to increases in unit volume and market share resulting from the Company’s decision to adopt a strategy of “affordable excellence” in the marketplace. Sales in the Commercial segment decreased $2.8 million or 9.0% to $28.2 million in the first quarter of 2005 from $31.0 million in the first quarter of 2004. The decrease in Commercial segment sales was primarily due to continuing declines in market prices for the products in this segment. Industrial segment sales increased slightly with sales of $14.3 million the first quarter of 2005 as compared to sales of $14.1 million in the first quarter of 2004.

International sales increased $1.1 million or 11.4% to $10.7 million in the first quarter of 2005 as compared to $9.6 million recorded in the same quarter of the prior year. The increase in international sales was due to increased sales in both the Medical and Industrial segments. As a percentage of total sales, international sales increased to 16.9% in the first quarter of 2005 as compared to 15.3% in the same quarter for the prior year. The increase in international sales as a percentage of total sales was mainly attributable to the increased sales of Medical and Industrial segment products, and decreased sales of Commercial segment products, which are only sold in North America.

Gross Profit

The Company’s gross margin as a percentage of sales decreased to 21.7% in the first quarter of 2005 from 26.2% in the first quarter of 2004. The gross margin decrease was primarily due to the lower gross margins related to our Commercial segment relative to a year ago, offset by higher volumes and prices related to our EL products.

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Research and Development

Research and development expenses increased $0.3 million or 11.7% to $2.7 million in the first quarter of 2005 from $2.4 million in the same quarter in the prior year. The increase was primarily due to higher spending on research and Quantum Programs as compared to the same period in the prior year. Quantum Programs are “intrapreneurial” efforts launched with the intent of developing new potential business opportunities. As a percentage of sales, research and development expenses increased to 4.3% in the first quarter of 2005 as compared to 3.9% in the same quarter of the prior year. Research and development spending primarily supports the Medical and Industrial segments and will tend to follow the business level of those segments while the Commercial segment incurs essentially no research and development spending.

Sales and Marketing

Sales and marketing expenses increased $1.0 million or 23.2% to $5.5 million in the first quarter of 2005 as compared to $4.5 million in the same quarter of the prior year. This increase was primarily due to additional spending in the Industrial and Medical segments related to increased investments for geographic expansion and the development of the Company’s retailing systems initiative, offset by reduced spending in the Commercial segment. As a percentage of sales, sales and marketing expenses increased to 8.7% in the first quarter of 2005 from 7.1% in the same quarter of the prior year. The Commercial segment sales and marketing expenses as a percentage of sales is far below the other segments. The geographic expansion investments drove the increase as a percentage of sales along with the other items mentioned above.

General and Administrative

General and administrative expenses increased $0.9 million or 25.0% to $4.7 million in the first quarter of 2005 from $3.8 million in the same period from the prior year, primarily due to a $0.5 million charge for bad debt due to the sudden insolvency of a customer, and additional personnel costs that arose due to increased employee count as compared to the prior year. As a percentage of sales, general and administrative expenses increased to 7.5% in the first quarter of 2005 from 6.0% in the same period of the prior year, primarily due to the aforementioned reasons.

Amortization of Intangible Assets

Expenses for the amortization of intangible assets decreased to $648,000 in the first quarter of 2005 from $708,000 in the same period from the prior year, primarily due to certain intangible assets becoming fully amortized.

Total Operating Expenses

Total operating expenses increased $2.2 million or 19.4% to $13.6 million in the first quarter of 2005 from $11.4 million in the same period a year ago. The increase in operating expenses was primarily due to increases in research and development expenses, sales and marketing expenses, and general and administrative expenses for the reasons listed above. As a percentage of sales, operating expenses increased to 21.6% in the first quarter of 2005 from 18.1% in the same quarter of the prior year due to increases in research and development expenses, sales and marketing expenses, and general and administrative expenses.

Non-operating Income and Expense

Non-operating income and expense includes interest income on investments, interest expense, net foreign currency exchange gain or loss and other income or expenses. Net interest expense decreased from $256,000 in the first quarter of 2004 to interest income of $4,000 in the first quarter of 2005 due to lower interest expense on decreased borrowings as compared to the same quarter in the prior year.

Foreign currency exchange gains and losses are related to timing differences in the receipt and payment of funds in various currencies and the conversion of cash, accounts receivable and accounts payable denominated in foreign currencies to the applicable functional currency. Foreign currency exchange gains and losses amounted to a gain of $86,000 in the first quarter of 2005, as compared to a loss of $69,000 in the first quarter of 2004.

Other expense in the first quarter of 2005 includes a $153,000 charge related to the reduction in the carrying value of an investment in a publicly traded Taiwanese company, Topvision Technology, due to a sustained decline in that company’s market value that was determined to be other than temporary. The remaining value of the investment is approximately $760,000 as of December 31, 2004. The Company may incur additional charges in the future if Topvision’s market value continues to decline.

The Company currently realizes less than one-fifth of its sales outside of the United States and expects this to continue in the future. Additionally, the functional currency of the Company’s foreign subsidiary is the Euro, which must be translated to U. S. dollars for consolidation. The Company hedges its Euro exposure with foreign exchange forward contracts. The Company believes that hedging mitigates the risk associated with foreign currency fluctuations.

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Provision for Income Taxes

The Company’s effective tax rate for the quarter ended December 31, 2004 was 34%, which is a 1% decrease from the tax rate of 35% in the first quarter of the prior year. The decrease was caused by a greater portion of our income coming from outside the United States. The difference between the effective tax rate and the federal statutory rate was primarily due to state income taxes and the effects of the Company’s foreign tax rates.

Net Income

In the first quarter of fiscal 2005, net income was $28,000 or zero cents per diluted share. In the same quarter of the prior year, net income was $3.1 million or $0.21 per diluted share.

Liquidity and Capital Resources

Net cash provided by operating activities was $7.2 million in the first quarter of 2005. Net cash provided by operating activities in the same quarter of the prior year was $9.4 million. The net cash provided by operations of $7.2 million in the first quarter of fiscal 2005 primarily related to depreciation and amortization, a decrease in inventories, and increases in accounts payable and accrued compensation, which were offset by increases in account receivable and other current assets, and a decrease in other current liabilities.

Working capital increased $3.4 million to $94.0 million at December 31, 2004 from $90.6 million at September 24, 2004. Total current assets increased $5.5 million in the first quarter of fiscal 2005. Cash and cash equivalents increased $8.6 million due to the reasons noted above. Accounts receivable increased $1.1 million due to timing of shipments and the collection of payments. Inventories decreased $5.0 million due to lower inventory levels associated with the Commercial segment. Current liabilities increased $2.1 million in the first quarter of 2005. Accounts payable increased $1.9 million due to the timing of payments to vendors. Accrued compensation increased $1.8 million due to the timing of payments related to accrued salaries and related benefits and taxes. Other current liabilities decreased $2.2 million primarily due to payments of income taxes.

During the first quarter of 2005, cash of $0.6 million was used to purchase plant, property and equipment. These capital expenditures primarily related to new software applications.

The Company entered into a $50 million credit agreement in December 2003, replacing the Company’s prior credit agreement. The Company had no borrowings outstanding as of December 31, 2004 and September 24, 2004. The agreement expires December 1, 2008 and the borrowings are secured by substantially all assets of the Company. The interest rates can fluctuate quarterly based upon the actual funded debt-to-EBITDA ratio and the LIBOR rate. The agreement includes the following financial covenants: a fixed charge ratio, minimum EBITDA, minimum net worth and a funded-debt-to-EBITDA ratio. The Company was in compliance with these covenants as of December 31, 2004 and September 24, 2004. On December 21, 2004, the credit agreement was amended to provide for increases in the commitment fee payable under the credit agreement if minimum EBITDA for the four fiscal quarters prior to the date of determination falls below $20 million. The Company also has a capital lease for the leasehold improvements in its corporate offices. The total minimum lease payments are $1.1 million, which are payable over the next five years. The Company believes its existing cash and investments together with cash generated from operations and existing borrowing capabilities will be sufficient to meet the Company’s working capital requirements for the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio and short-term and long-term debt obligations. The Company mitigates its risk by diversifying its investments among high-credit-quality securities in accordance with the Company’s investment policy.

The Company believes that its net income and cash flow exposure relating to rate changes for short-term and long-term debt obligations is not material. The Company primarily enters into debt obligations to support acquisitions, capital expenditures and working capital needs. The company does not hedge any interest rate exposures.

Interest expense is affected by the general level of U.S. interest rates and/or LIBOR rates. Increases in interest expense resulting from an increase in interest rates would be at least partially offset by a corresponding increase in interest earned on the Company’s investments.

The Euro is the functional currency of the Company’s subsidiary in Finland. The Company enters into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates.

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The forward exchange contracts are settled and renewed on a monthly basis in order to maintain a balance between the balance sheet exposures and the contract amounts. The Company maintained open contracts of approximately $14.4 million as of December 31, 2004. If rates shifted dramatically, the Company believes it would not be impacted materially. In addition, the Company does maintain cash balances denominated in currencies other than the U.S. Dollar. If foreign exchange rates were to weaken against the U.S. Dollar, the Company believes that the fair value of these foreign currency amounts would not decline by a material amount.

Item 4. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company’s internal controls or in other factors during the quarter ended December 31, 2004 that could significantly affect our internal controls over financial reporting.

Part II. OTHER INFORMATION

Item 5. Other Information

Director Compensation Plan. Nonemployee directors of the Company receive a $20,000 annual retainer plus $2,000 for attendance at each board meeting and $1,500 for attendance at each committee meeting, including telephonic meetings. Audit Committee members receive an additional annual retainer of $2,000. Under certain circumstances, the nonemployee directors of the Company are reimbursed for out-of-pocket and travel expenses incurred in attending Board meetings. Nonemployee directors participate in the Company’s 1993 Stock Option Plan for Nonemployee Directors (the “1993 Nonemployee Director Plan”). Under the 1993 Nonemployee Director Plan, a 10,000 share stock option is granted to each new nonemployee director at the time such person is first elected or appointed to the Board. In addition, each nonemployee director receives a stock option annually after each annual meeting of shareholders. The size of each director’s annual option grant is based on his or her level of service on the Board of Directors. Each nonemployee director receives an option to purchase 5,000 shares of common stock. An additional 2,000 share stock option is granted to the nonemployee director who is then serving as the Chairman of the Board of Directors or as the Lead Director. An additional 1,000 share stock option is granted to each nonemployee director who is then serving as chairman of a committee of the Board. Mr. Stenger receives an additional 1,000 share stock option grant annually for his service as a member of the Board of Directors of the Company’s Finnish subsidiary.

2005 Cash Bonus Plan. The Compensation Committee has established a cash bonus plan for all of the Company’s employees including executive officers. For fiscal 2005, the Compensation Committee established bonus targets for the Chief Executive Officer and the other executive officers based on the Company’s achievement of target levels of operating income and gross profit each quarter and for the fiscal year. If the financial performance criteria are satisfied, the executive officers receive bonuses only to the extent such criteria continue to be met after all other employees of the Company have been paid their targeted incentive compensation. The Chief Executive Officer receives a bonus only to the extent the financial performance criteria continue to be met after the other executive officers have been paid their targeted incentive compensation.

Employee Stock Purchase Plan. On February 3, 2005, the Company’s shareholders approved the adoption of the Planar Systems, Inc. 2004 Employee Stock Purchase Plan (the “ESPP”). The ESPP replaces the 1994 Employee Stock Purchase Plan, under which the final offering period was completed on September 30, 2004. A total of 400,000 shares of Common Stock have been reserved under the ESPP. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. The ESPP is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the power to make and interpret all rules and regulations it deems necessary to administer the ESPP and has broad authority to amend the ESPP, subject to certain amendments requiring shareholder approval.

All regular status employees of the Company and its subsidiaries, including the Company’s officers, are eligible to participate in the ESPP if they: (i) are customarily employed in a position with regular hours of 20 or more hours a week and (ii) are customarily employed more than five months in any calendar year. Eligible employees may elect to contribute from 1% to 10% of their cash compensation during each pay period. The ESPP provides for two annual six-month offering periods, beginning on April 1 and October 1 of each year (the “Enrollment Dates”). During the offering periods, participants accumulate funds in an account via payroll deduction. At the end of each six-month offering period, the purchase price is determined and the accumulated funds are used to automatically purchase shares of Common Stock. The purchase price per share is equal to 85% of the lower of (a) the fair market value of the Common Stock on the Enrollment Date of the offering period or (b) the fair market value on the date of purchase. Unless a participant files a withdrawal notice before the beginning of the next offering period, such participant will automatically be re-enrolled for the next offering period.

The ESPP is filed herewith as Exhibit 10.2. The foregoing description of the ESPP does not purport to be complete and is qualified in its entirety by reference to the ESPP.

The following issues and uncertainties, among others, should be considered in evaluating the Company’s future financial performance and prospects for growth. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7) contained in the Company’s Annual Report on Form 10-K for the year ended September 24, 2004.

OUTLOOK: ISSUES AND UNCERTAINTIES

The medical market and our medical strategy could cause disruptive behaviors in the market.

In February, 2004, the Company announced to its customers, and to the marketplace in general, a significant change in its digital imaging marketing strategy. The Company declared a strategy of maintaining its product leadership position while also establishing a price leadership position. As digital imaging technologies have become more readily available, it has become clear that the Company’s previous strategy of maintaining significant price differentiation for what was becoming decreasing product differentiation would not be successful over the long term. The Company believes that moving to a price leadership strategy, while preserving the brand equity of the Company’s products in the digital imaging marketplace, should allow us to discourage low-cost competitors and derive the most value from our market position.

The Company also believes that a majority of x-ray images are still printed on film, most of which will transition to digital imaging, expanding the Company’s market opportunities. Our strategy is intended to put us in a favorable position for that continuing transformation. With this strategy we are placing increased emphasis on alternative distribution channels for which we intend to leverage the established relationships created by our commercial business. Failure to execute on these strategic changes could have a material adverse affect on our business, financial condition and results of operations.

As more competitors enter the medical market they could erode the gross margin that we currently enjoy in this business. Our strategy of price leadership could contribute to that decline in gross margin. We must compensate for that with increased volumes leveraging our leading brand equity. We must maintain adequate investment in product development and marketing to maintain product leadership. Our ability to maintain those levels of investments might be compromised by gross margin pressures. With price leadership there will be changing dynamics in the procurement channels and processes within our customer base. We must track and follow those changing dynamics and develop new channels for distribution while maintaining good relationships with traditional channels. Customers expect delivery times to be short, and accordingly, we carry very little backlog. Due to both this and the project nature of many sales, our ability to forecast sales is limited.

Our efforts to sell commercial products in the end-user market may not continue to be successful.

The market for commercial products is highly competitive and subject to rapid changes in consumer tastes and demand. Our failure to successfully manage inventory levels or quickly respond to changes in pricing, technology or consumer tastes and demand could result in lower than expected revenue, lower gross margin and excess and obsolete inventories of our commercial products which could adversely affect our business, financial condition and results of operations.

Supply and pricing of LCD panels has been very volatile and will likely be in the future. This volatility, combined with lead times of eight to twelve weeks, may cause us to pay too much for panels or suffer inadequate product supply.

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We do not have long-term agreements with our resellers, who generally may terminate our relationship with 30- to 60-days notice. Such action by our resellers could substantially harm our operating results in this segment. Products sold to two customers comprised 31% and to one customer comprised 19% and 19% of total consolidated sales in fiscal 2004, 2003 and 2002, respectively. Sales to any of those customers, if lost, would have a material, adverse impact on the results of operations.

The Commercial segment has seen tremendous growth since we entered the market in fiscal 2001. Revenue from commercial products grew to $121.8 million in fiscal 2004. This revenue could also quickly decrease due to competition, alternative products, pricing changes in the market place and potential shortages of products which would adversely affect our revenue levels and our results of operations.

Shortages of components and materials may delay or reduce our sales and increase our costs.

Inability to obtain sufficient quantities of components and other materials necessary to produce our displays could result in reduced or delayed sales. Many of our products, including those of our Commercial and Medical segments, operate with little backlog, and therefore, supply issues could adversely impact our operating results. We obtain much of the material we use in the manufacture of our displays from a limited number of suppliers, and we do not have long-term supply contracts with any of them. For some of this material we do not have a guaranteed alternative source of supply. As a result, we are subject to cost fluctuations, 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 displays are incorporated.

For most of our products, vendor lead times significantly exceed our customers’ required delivery time causing us to order to forecast rather than order based on actual demand. Competition in the market continues to reduce the period of time customers will wait for product delivery. Ordering based on our forecast exposes the Company to numerous risks including our inability to service customer demand in an acceptable timeframe, holding excess and obsolete inventory or having unabsorbed manufacturing overhead.

We have increased and are continuing to increase our reliance on Asian manufacturing companies for the manufacture of displays that we sell in all markets that the Company serves. We also rely on certain other contract manufacturing operations in Asia including circuit boards and other components and the manufacture and assembly of certain of our products. We do not have long-term supply contracts with the Asian contract manufacturers on which we rely. If any of these Asian manufacturers were to terminate its arrangements with us or become unable to provide these displays to us on a timely basis, we could be unable to sell our products until alternative manufacturing arrangements are made. Furthermore, there is no assurance that we would be able to establish replacement manufacturing or assembly arrangements and relationships on acceptable terms, which could have a material adverse effect on our business, financial condition and results of operation.

Our reliance on contract manufacturers involves certain risks, including:

Some of the contract manufacturers with which we do business are located in Asia. Asia has experienced several earthquakes, tsunamis and typhoons which resulted in many Asian companies experiencing related business interruptions. Our business could suffer significantly if the operations of vendors there or elsewhere were disrupted for extended periods of time.

We currently have a contract with a software developer in India to develop software on our behalf. We do not have a long-term contract with this developer, and if the developer were to terminate its arrangement with us or become unable to provide software to us on a timely basis we could be unable to sell future products that this software would be integrated into.

The Company must implement Section 404, Internal Controls Over Financial Reporting, of the Sarbanes-Oxley Act.

The fiscal year ending September 30, 2005 will be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Guidance regarding implementation and interpretation of the provisions of Section 404 continues to be issued by the standards-setting community. As a result of the ongoing interpretation of new guidance and the audit testing yet to be completed, our internal controls over financial reporting may include an unidentified material weakness which would result in receiving an adverse opinion on our internal controls over financial reporting from our independent registered public accounting firm. This could result in significant additional expenditures responding to the Section 404 internal control audit, heightened regulatory scrutiny and potentially an adverse effect to the price of our company’s stock.

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We face intense competition.

The market for display products is highly competitive, and we expect this to continue and even intensify. We believe that over time this competition will have the effect of reducing average selling prices of our products. Certain of our competitors have substantially greater name recognition and financial, technical, marketing and other resources than we do. There is no assurance that our competitors will not succeed in developing or marketing products that would render our products obsolete or noncompetitive. To the extent we are unable to compete effectively against our competitors, whether due to such practices or otherwise, our business, financial condition and results of operations would be materially adversely affected.

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

Our continued success depends on the development of new products and technologies.

Future results of operations will partly depend on our ability to improve and market our existing products and to successfully develop and market new products. Failing this, our products or technology could become obsolete or noncompetitive. New products and markets, by their nature, present significant risks and even if we are successful in developing new products, they typically result in pressure on gross margins during the initial phases as start-up activities are spread over lower initial sales volumes. We have experienced lower-than-expected yields with respect to new products and processes in the past negatively impacting gross margins. In addition, customer relationships can be negatively impacted due to production problems and late delivery of shipments.

Future operating results will depend on our ability to continue to provide new product solutions that compare favorably on the basis of cost and performance with competitors. Our success in attracting new customers and developing new business depends on various factors, including the following:

Our efforts to develop new technologies may not result in commercial success.

Our research and development efforts with respect to new technologies may not result in market acceptance. Some or all of those technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, cost issues, yield problems and other factors. Even when we successfully complete a research and development effort with respect to a particular technology, we may fail to gain market acceptance due to:

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We face risks associated with international operations.

Our manufacturing, sales and distribution operations in Europe and Asia create a number of logistical and communications challenges. Our international operations also expose us to various economic, political and other risks, including the following:

Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, limitations on imports or exports, changes in environmental standards or regulations, or the expropriation of private enterprises also could have a materially adverse effect. Any actions by our host countries to curtail or reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers.

Variability of customer requirements may adversely affect our operating results.

We must continue to provide increasingly rapid product turnaround and respond to ever-shorter lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for their products, may cause customers to cancel, reduce, or delay orders. These actions by a significant customer or by a set of customers could adversely affect our business. On occasion, customers require rapid increases in production, which can strain our resources and reduce our margins. We may lack sufficient capacity at any given time to meet our customers’ demands.

Our operating results have significant fluctuations.

In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic quarterly fluctuations in our results of operations. These factors include the following:

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Accordingly, the results of any past periods should not be relied upon 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 decrease.

We must continue to add value to our portfolio of offerings

Traditional display components are subject to increasing competition to the point of commodification. In addition, advances in core LCD technology makes standard displays effective in an increasing breadth of applications. We must add additional value to our products in software and services for which customers are willing to pay. These areas have not been a significant part of our business in the past and we may not execute well in the future. Failure to do so could adversely affect our revenue levels and our results of operations.

We must effectively manage our growth.

The failure to effectively manage our growth could adversely affect our operations. We have increased the number of our marketing and design programs and may expand further the number and diversity of our programs in the future. Our ability to manage our planned growth effectively will require us to:

The expansion and diversification of our product and customer base may result in increases in our overhead and selling expenses. We also may be required to increase staffing and other expenses in order to meet the anticipated demand of our customers. Any increase in expenditures in anticipation of future orders that do not materialize would adversely affect our profitability. Customers also may require rapid increases in design and production services that excessively burden our resources.

We must protect our intellectual property, and others could infringe on or misappropriate our rights.

We believe that our continued success partly depends on protecting our proprietary technology. We rely on a combination of patent, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our intellectual property. We seek to protect our technology under trade secret laws, which afford only limited protection. We face risks associated with our intellectual property, including the following:

We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights or to defend against claims of infringement. Litigation can be very expensive and can distract our management’s time and attention, which could adversely affect our business. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation.

Others could claim that we are infringing their patents or other intellectual property rights. In the event of an allegation that we are infringing on another’s rights, we may not be able to obtain licenses on commercially reasonable terms from that party, if at all, or that 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 our business, financial condition and results of operations.

We currently have a contract with a software developer in India to develop software on our behalf. Any software developed by them on our behalf could be subject to patent infringement by others.

The market price of our common stock may be volatile.

The market price of our common stock has been subject to wide fluctuations. During the past four fiscal quarters, the closing price of our stock ranged from $9.47 to $25.85. The market price of our common stock in the future is likely to continue to be subject to wide fluctuations in response to various factors, including the following:

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In addition, the public stock markets have experienced extreme price and volume fluctuations that have particularly affected the market prices for many 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.

We must finance the growth of our business and the development of new products.

To remain competitive, we may continue to make significant investments in research and development. Some of these projects can result in significant expenditures for materials, labor and overhead, and there are no guarantees that these new technologies or products, including those products aimed at retail establishments and software being developed for us by others, will result in future sales, which would materially adversely affect our operating results. As a result of the increase in operating expenses related to these development expenditures, our failure to increase sufficiently our net sales to offset these increased costs would adversely affect our operating results.

From time to time, we may seek additional equity or debt financing to provide for acquisitions or working capital. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired, and our operating results may be impacted. Debt financing increases expenses and must be repaid regardless of operating results. Debt financing is often subject to financial covenants such as fixed-charge ratio, minimum EBITDA, minimum net worth, and funded debt to EBITDA ratio. As these financial ratios change, they could impact the interest rates on the related debt and failure to meet required financial covenants could cause lenders to demand early repayment of debt with negative consequences for the Company. Equity financing could result in dilution to existing shareholders.

A significant slowdown in the demand for our customers’ products would adversely affect our business.

In portions of our medical and industrial segments, we design and manufacture various display solutions that our customers incorporate into their products. As a result, our success partly depends upon the widespread market acceptance of our customers’ products. Accordingly, we must identify industries that have significant growth potential and establish relationships with customers in those industries. Failure to identify potential growth opportunities or establish relationships with customers in those industries would adversely affect our business. Dependence on the success of our customers’ products exposes us to a variety of risks, including the following:

Failure to address these risks could have a material adverse effect on our business, financial condition and results of operations.

We do not have long-term purchase commitments from our customers.

Our business is generally characterized by short-term purchase orders. We typically plan our production and inventory levels based on internal forecasts of customer demand which rely in part on nonbinding forecasts provided by our customers. As a result, our backlog generally does not exceed three months, which makes forecasting our sales difficult. Inaccuracies in our forecast as a result of changes in customer demand or otherwise may result in our inability to service customer demand in an acceptable timeframe, our holding excess and obsolete inventory or having unabsorbed manufacturing overhead. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements could have a material adverse effect on our business, financial condition and results of operations. We have experienced such problems in the past and may experience such problems in the future.

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We must maintain satisfactory manufacturing yields and capacity.

An inability to maintain sufficient levels of productivity or to satisfy delivery schedules at our manufacturing facilities would adversely affect our operating results. The design and manufacture of our EL displays involves 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. At times we have experienced lower-than-anticipated manufacturing yields and lengthened delivery schedules and may experience such problems in the future, particularly with respect to new products or technologies. Any such problems could have a material adverse effect on our business, financial condition and results of operations.

We cannot provide any assurance that current environmental laws, or any laws enacted in the future, will not have a material adverse effect on our business.

Our operations are subject to environmental regulations in each of the jurisdictions in which we conduct business. Some of our products use substances, such as lead, that are highly regulated or will not be allowed in certain jurisdictions in the future. If we cannot remove such substances from our products, we may be unable to sell our products in such jurisdictions. We are currently working to replace such substances in our products. In addition, regulations have been enacted in certain states which impose restrictions on waste disposal in the future. If we do not comply with applicable rules and regulations in connection with the use and disposal of such substances, we could be subject to significant liability or loss of future sales.

Item 6. Exhibits.

(a)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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