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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended September 26, 2003 or

For the transition period from            to            

Commission File Number: 0-23018

PLANAR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

(503) 748-1100

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

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. YES x    NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x    NO ¨

The aggregate market value of voting Common Stock held by non-affiliates of the registrant at December 12, 2003 was approximately $349,249,699. For purposes of this calculation, officers and directors are considered affiliates.

Number of shares of Common Stock outstanding at December 12, 2003: 14,540,611.

Documents Incorporated By Reference

Part I

Item 1.

BUSINESS

Planar Systems, Inc. (Planar) is a leading developer, manufacturer and marketer of high-performance electronic display systems. The Company’s products range from display components to stand-alone display systems produced to address specific market applications in medical, industrial, and commercial market segments. The Company competes on a global basis with development, manufacturing and marketing operations in the United States, Asia and Europe. Major customers include Philips Medical Systems, Siemens Medical, GE Medical Systems, DataScope Corporation, Eastman Kodak Company, Diebold Inc., Allen-Bradley, and Cubic Corporation, and major channel partners include Dell Inc. and CDW Corporation.

Display technologies featured in Planar’s products include electroluminescent (EL) flat-panel displays, active matrix liquid crystal displays (AMLCDs), passive matrix liquid crystal displays (PMLCD), and plasma display panels (PDPs). The Company manufactures EL displays and sources other display components, electronics and most assembly from a global network of suppliers.

Industry Background

The electronic display industry is undergoing significant changes as the proliferation of networked devices is increasing the requirements for the display of text and graphical information. Many devices located in challenging environments, such as outdoors, in vehicles, in portable instruments and in healthcare institutions, require specialized displays with high-performance attributes. Displays designed for benign office and home environments are distinguished by visual performance, ease-of-use and design features, value, warranty and availability within sales channels.

Cathode-ray tube (CRT) displays have been the dominant display technology for decades. But CRTs tend to be bulky, inefficient in use of power, and difficult to dispose of. Various flat-screen technologies feature superior visual performance, greater versatility due to improved form factors and better efficiency, and are displacing CRTs in all markets.

There are several flat-panel display technologies currently in development or commercially available, including various forms of liquid crystal, gas plasma and EL displays. The principal differentiators among flat-panel display technologies are commercial availability, ruggedness, durability, price, size, color capability, design flexibility and power consumption.

Electroluminescent—Planar’s proprietary EL display technology is a monochrome, solid-state device with a thin-film luminescent layer between transparent insulator layers and a matrix of row and column electrodes on a single glass substrate. A circuit board, with control and drive components mounted within the viewing area on the glass panel, is connected to the back of the glass substrate. The result is a flat, compact, reliable and rugged display device.

Passive Matrix LCD—PMLCDs modulate light by reflection or transmission through the application of voltage to a liquid crystal material placed between two glass plates. These are typically monochrome displays.

Active Matrix LCD—AMLCD screens incorporate the PMLCD technology plus add a transistor at every pixel location that allows each pixel to be turned on and off independently. This increases the image quality, response time and side-to-side viewing angle of the display. These are typically full-color displays.

Plasma—Gas plasma displays create a visible image by ionizing a gas contained at each pixel between two glass plates. The ionized gas emits ultra-violet light, which excites adjacent phosphors and emits visible light. PDPs generally have higher power consumption requirements than other display technologies but provide a cost-effective solution for full-color, large-format displays.

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Other—A wide range of new technologies is constantly under development by a variety of companies in the display industry with the objective of bringing viable technologies into commercialization. Some of the more visible efforts include ferroelectric LCDs, electrophoretic displays, organic light emitting diodes (OLEDs) and various forms of projection displays.

Planar manufactures EL displays in its factory in Finland and obtains full-color and LCD display components from a variety of suppliers located primarily in Asia. The company expects to be able to obtain emerging technologies from suppliers and participate in the commercialization of new types of displays once those components achieve viability.

Markets

The Company is currently serving the following market segments:

Medical—An increasing portion of the Company’s medical business is comprised of stand-alone display systems, including digital imaging monitors and software, and monitors and workstations medically certified for use in patient proximity. Additionally, Planar display components are supplied to medical OEMs and embedded in a wide range of diagnostic and therapeutic equipment, such as defibrillators, anesthesia systems and infusion pumps. Planar’s strategy in this segment calls for identifying particular needs in the healthcare environment and applying its industry knowledge and product development versatility to produce targeted solutions. The Company believes that its products provide superior display quality and reliability for crucial medical applications, and that demand for such products in the healthcare industry will steadily grow.

Industrial—Planar displays are used in a wide range of industrial applications in process control equipment, mobile information systems, and kiosk displays such as gas pumps, automatic teller machines and transit ticket dispensers. Reliability, ruggedness, temperature tolerance, optical attributes and custom form factor distinguish the Company’s solutions used in these challenging environments. In this segment, Planar specializes in collaborative relationships to develop designs specific for particular applications. While the industrial segment is closely correlated with overall economic activity, the Company believes there is significant and ongoing demand for specialized, ruggedized displays.

Commercial—The Company markets an extensive product line of Planar-branded AMLCD desktop and PDP monitors and LCD televisions through leading online resellers. The largest category of end-users of these products has been businesses, due to the Company’s focus on serving the particular needs of the commercial sales organizations of its channel partners. Increased penetration in the home/consumer segment is expected as Planar’s brand and products become more widely known and as that market realizes forecasted growth for sales of flat-panel displays. Launched at the beginning of fiscal 2001, this segment has grown faster than the robust market. Planar was ranked in the top 10 suppliers of AMLCD flat-panel displays in the United States by the end of fiscal 2003.

Products

The Company offers a variety of displays and display systems in a wide range of resolutions, formats, viewing areas and technologies. These can be classified in two primary product categories:

Flat-Panel Display Components—This product line includes monochrome EL, AMLCD and PMLCD displays. These displays range from small and simple devices to fully integrated display systems, and are marketed to OEMs for integration into their products.

Value-added Display Solutions—The Company incorporates a variety of display components into systems and sub-systems that include such attributes as enhanced optical performance, special mounting systems, enhanced product design, local computing capability and special packaging. These products are typically designed for specific market applications. The Company differentiates its services through the development of close business relationships with its customers and channel partners.

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Research, Development and Product Engineering

The Company believes that a significant level of investment in research, development and product engineering is required to maintain market leadership. Total expenses were $13.5 million, $15.1 million and $15.1 million for the fiscal years 2003, 2002 and 2001, respectively, for research, development and product engineering. These expenses were partially offset by contract funding from both government agencies and private sector companies of $2.3 million, $2.2 million and $4.0 million in fiscal years 2003, 2002 and 2001, respectively. The Company’s research and development expenses are primarily related to the commercialization of display technologies, new system architectures and fundamental process improvements. Product engineering expenses are directly related to the design, prototyping and release to production of new products. Research, development and product engineering expenses consist primarily of salaries, project materials, outside services, allocation of facility expenses and other costs associated with the Company’s ongoing efforts to develop new products, processes and enhancements.

Manufacturing

The Company operates an EL manufacturing facility in Finland, which produces a wide range of display types and sizes from 1” x 4” to 12” x 14”. In 2003, the Company closed its Oregon EL plant and consolidated all EL production in its Finland plant. The Company believes production volumes and quality necessary to meet forecast demand can be achieved from the single plant.

During fiscal 2003, the Company closed its LCD components and modules production plant. Manufacturing and assembly of those components and modules are now undertaken on our behalf in China and Indonesia. The Company has worked closely with manufacturing partners to transfer process knowledge for the manufacture of these products.

The Company continues to shift manufacturing and assembly capacities to offshore partners, and many of its products are now produced entirely by a closely managed network of suppliers. The company believes that its effective management of its global supply chain is an important competency and competitive advantage.

The Company’s manufacturing operations consist of the procurement and inspection of components, manufacture of EL displays, final assembly of some components and extensive testing of finished products. The Company currently procures all of its raw materials from outside suppliers, including glass substrates, driver integrated circuits, electronic circuit assemblies, power supplies and high-density interconnects.

Quality and reliability are emphasized in the design, manufacture and assembly of the Company’s products. All of Planar’s facilities have active operator training/certification programs and regularly use advanced statistical process control techniques. The Company’s products undergo thorough quality inspection and testing throughout the manufacturing process.

The Company believes that worldwide quality standards are increasing and that many customers now expect vendors to have ISO9001 certification. This certification requires that a company meet a set of criteria established by an independent, international quality organization that measures the quality of systems, procedures and implementation in manufacturing, marketing and development of products and services. All of the Company’s operating units have received and maintain their ISO9001 certification.

Sales and Marketing

The Company’s products are distributed worldwide through both Company-employed sales personnel and through third party channels. Planar’s vertically-integrated Medical segment sales team is headquartered in Waltham, Massachusetts, with additional sales and marketing staff stationed in Beaverton, Oregon and Espoo, Finland. The Company’s Industrial segment manages sales and operations from the Beaverton office, with additional staff in Espoo also managing a network of independent sales representatives and distributors for certain European markets. The Company’s Commercial segment is run from the Beaverton office.

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As of September 26, 2003 and September 27, 2002, the Company’s backlog of domestic and international orders was approximately $43.2 million and $59.9 million, respectively. As of September 26, 2003, the Company included all accepted contracts or purchase orders in its backlog. Backlog includes orders of approximately $14.4 million related to end-of-life products which are scheduled to ship over the next 8 quarters. Variations in the magnitude and duration of contracts and customer delivery requirements may result in substantial fluctuations in backlog from period to period. The Company believes its backlog is of limited utility in predicting future sales because its Commercial segment and a growing portion of its Medical segment operate on a ship-to-order basis with very little backlog. Products sold to Dell comprised 19% of total consolidated sales in both fiscal 2003 and 2002.

Competition

The market for information displays is highly competitive. The Company believes competition will have the effect of reducing average selling prices of flat-panel displays over time. The Company’s ability to maintain operating margins depends, in part, on its ability to increase unit volumes or increase its value-added contribution to each unit; to provide additional value to its customers through peripheral devices and system integration; to reduce material costs in an amount sufficient to compensate for any decreases in selling prices; and to manage expenses in a fiscally disciplined manner.

The Company competes with other display manufacturers based upon commercial availability, price, visual performance (e.g., brightness, color capabilities, contrast and viewing angle), size, design flexibility, power usage, durability, ruggedness and customer service. The Company believes its total quality program, wide range of product offerings, flexibility, responsiveness, technical support and customer satisfaction programs are important to the competitive position.

The principal EL manufacturer against which the Company competes is Sharp Electronics Corporation. In display systems including AMLCD components sourced from manufacturers, Planar’s value-added products compete against those of Barco, Totoku and NDS in the medical market; and Sharp, Sony, NEC, Viewsonic, Dell and others in the commercial market. The Company also competes with some of its customers in the Industrial segment who often develop their own display solutions internally. In addition, other industrial display systems specialists include GDS, Three-Five Systems, White Electronic Designs Corp. and a variety of small, highly specialized producers.

Intellectual Property

The Company relies on a combination of patents, trade secrets, trademarks, copyrights and other elements of intellectual property law, nondisclosure agreements and other measures to protect its proprietary rights. The Company currently owns or has license rights to over 50 patents and several more pending patent applications for its technologies. The expiration dates of the Company’s existing patents range from 2004 to 2022. Features for which the Company has and is seeking patent protection include display glass design, materials, electronics addressing, control functions and process manufacturing.

The Company has received research and development funding from government agencies pursuant to agreements under which the funding entities retain certain rights with respect to technical data developed pursuant to funded research. Generally, these rights restrict the government’s use of the specific data to governmental purposes, performed either directly or by third parties sub-licensed by the government. Rights under the Company’s funding agreements with private-sector companies vary significantly, with the Company and the third party each retaining certain intellectual property rights.

Employees

As of September 26, 2003, the Company had 460 employees worldwide; 285 in the United States and 175 in Europe. Of these, 74 were engaged in marketing and sales, 66 in research, development and product engineering, 61 in finance and administration, and 259 in manufacturing and manufacturing support.

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The Company’s future success will depend largely on its ability to continue to attract, retain and motivate highly skilled and qualified manufacturing, technical, marketing, engineering and management personnel. The Company’s U.S. employees are not represented by any collective bargaining units and the Company has never experienced a work stoppage in the U.S. The Company’s Finnish employees are, for the most part, covered by national union contracts. These contracts are negotiated annually between the various unions and the Employer’s Union and stipulate benefits, wage rates, wage increases, grievance and termination procedures and work conditions.

Available Information

The Company’s Internet website address is www.planar.com. Planar’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, are available through the Internet website as soon as reasonably practicable after it is electronically filed with, or furnished to, the Securities and Exchange Commission. The Company’s Internet website and the information contained therein or connected thereto are not intended to be incorporated into the Annual Report on Form 10-K.

Item 2.    Properties

The Company leases its primary manufacturing facilities and various sales offices in the United States and Europe. The Company leases 37,000 square feet of custom-designed space, including 15,000 square feet of cleanroom in Beaverton, Oregon for assembly operations. The European facility, located in Espoo, Finland, is a custom-designed facility in which Planar leases 85,000 square feet, including approximately 15,000 square feet of cleanroom.

The Company entered into a new lease in August 2001 for approximately 72,000 square feet of class A office space in Beaverton, Oregon. The construction of this facility was completed in June 2002 and it is now used for administrative office space, design engineering and associated lab and research and development activities.

In 1994, the Company acquired a 21,000 square-foot facility, with approximately 6,000 square feet of cleanroom, also located in Beaverton, Oregon. This facility is being used for research and development activities.

The Company’s Lake Mills, Wisconsin, facility, formerly the site of the Company’s PMLCD manufacturing operation, includes a 70,000 square-foot facility with approximately 7,500 square feet of cleanroom. This property has been listed for sale.

In April 2002, the Company acquired DOME imaging systems, inc. located in Waltham, Massachusetts. The Company has retained a lease on approximately 31,000 square feet, formerly leased by DOME, which is used for sales and administration office space, design engineering and associated lab and research and development activities and quality testing.

The Company has field sales offices in key U.S. metropolitan areas and three sales offices in Europe. The offices are located in the Boston, New York, Portland, Helsinki, Munich and Paris metropolitan areas. Lease commitments for most of these facilities are typically six to twelve months. None of these sales offices has significant leasehold improvements nor are any planned.

The Company believes that its facilities are adequate for its immediate and near-term requirements and does not anticipate the need for significant additional expansion in the near future.

Item 3.    Legal Proceedings

There are no pending, material legal proceedings to which the Company is a party or to which any of its property is subject.

Item 4.    Submission of Matter to a Vote of Security Holders

No matters were submitted to stockholders during the fourth quarter of the fiscal year.

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Part II

Item 5.    Market for Registrant’s Common Equity and Related Shareholder Matters

Shares of the Company’s Common Stock commenced trading in the over-the-counter market on the Nasdaq National Market System on December 16, 1993, under the symbol PLNR.

The following table sets forth for the fiscal periods indicated, the range of the high and low closing prices for the Company’s Common Stock on the Nasdaq National Market System.

As of September 26, 2003, there were approximately 129 shareholders of record.

The Company currently intends to retain its earnings to support operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

During the quarter ended September 26, 2003, the Company sold securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) upon the exercise of certain stock options granted under the Company’s stock option plans. An aggregate of 6,670 shares of Common Stock were issued at an exercise price of $6.50. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to authority granted under Section 3 (b) of the Securities Act.

On May 9, 2002, the Company completed the sale of 462,963 shares of newly issued common stock to an accredited investor in a private placement transaction pursuant to section 4 (2) and Regulation D under the Securities Act of 1933, as amended. The purchase price was $21.60 per share and resulted in net proceeds of approximately $9,471,000. The Company has filed a registration statement with the Securities and Exchange Commission covering the resale of the securities issued in the private placement.

Item 6.    Selected Financial Data

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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 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 made by management. 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, investors and others should not conclude 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 transfer 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. The Company estimates expected sales returns and records the amount as a reduction of revenue at the time of shipment. The Company’s policies comply with the guidance provided by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, 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

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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 a bankruptcy filing, 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 and historical collection experience with customers. The Company believes its reported allowances are adequate. If the financial conditions of those customers were to deteriorate, however, 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 Reserves.    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, and the availability of key components from the Company’s suppliers. The Company’s policy is to establish inventory reserves 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 reserves 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 are less favorable than those that the Company projects, additional inventory reserves may be required.

Product Warranties.    The Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of our products 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 believe that its recorded liabilities are adequate to cover its future cost of materials, labor and overhead for the servicing of its products sold through that date. If actual product failures, 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 will perform an impairment review annually, or earlier if indicators of potential impairment exist. This annual impairment review was completed during the second quarter of fiscal year 2003, and no impairment was found. The impairment review is based on a discounted cash flow approach that uses estimates of future market share and revenues and costs for the Company’s 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

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the products fail to gain expected market acceptance, or if market conditions in the related businesses are 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 undiscounted 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 impairment is based on the estimated discounted cash flow associated with the asset. An 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 are unfavorable.

Income Taxes.    In the past, the Company has recorded a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has assessed the 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. The availability of tax planning strategies to utilize the Company’s recorded deferred tax assets is 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 the deferred tax assets would increase earnings in the period such determination was made. Similarly, if the Company should determine that the Company may be unable to realize its net deferred tax assets to the extent reported, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

BUSINESS ACQUISITIONS

In April 2002, the Company completed the acquisition of DOME imaging systems, inc. (“DOME”). DOME designs, manufactures and markets computer graphic imaging boards, flat panel displays and software for original equipment manufacturers in the medical field and other advanced image processing applications. As a result of the acquisition, the Company is able to offer a broader range of medical display solutions, which complements our medical product line. The acquisition was accounted for as a purchase and, accordingly, the operations of DOME have been included in the consolidated financial statements from the date of acquisition. The total consideration paid was $65.7 million which consisted of $52.2 million of cash, stock options assumed which were valued at $11.3 million, cash to be paid for stock options of $1.2 million and closing and related costs of $1.0 million. The Company recorded a non-recurring charge of $2.3 million in the third quarter of fiscal 2002 for in-process research and development costs. See Note 3 – Business Acquisitions in the Notes to Consolidated Financial Statements which is included in Item 8 – Financial Statements and Supplementary Data in this report.

In December 2000, the Company acquired AllBrite Technologies, Inc., by exchanging 941,823 shares of Common Stock for all of the outstanding capital stock of AllBrite. The acquisition qualified as a tax-free reorganization and has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of net 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.

Sales

Sales of $251.9 million in 2003 increased $46.0 million or 22.3% as compared to sales of $205.9 million in 2002. The increase in sales was principally due to higher sales in both the Commercial and Medical segments, offset by lower sales in the Industrial segment. Sales in the Commercial segment increased $42.4 million or 77.3% to $97.3 million in 2003 from $54.9 million in 2002. This increase in the Commercial segment was due to new product introductions, a broader distributor network, increased market penetration, and growth in the overall market. Sales in the Medical segment increased by $9.7 million or 12.2% year over year. This increase in the Medical segment was primarily due to revenues associated with the acquisition of DOME, which were only included in the results of operations for five months in the prior year, offset by decreases in revenues associated with EL and AMLCD products. Increases in the Medical segment were offset by a decrease in sales of $6.1 million or 8.4% in the Industrial segment. Sales in the Industrial segment were lower due to the Company’s streamlining of the product portfolio to increase profitability and support the manufacturing consolidation. The Company’s sales of $205.9 million in 2002 decreased $2.0 million or 1.0% as compared to sales of $208.0 million in 2001. The decrease in sales was principally due to lower sales of $50.2 million within the Industrial segment, which decreased 41.0%. Sales in the Medical segment increased by $7.8 million or 11.0% year over year. Commercial sales increased by $40.3 million or 277.4% due to higher volumes and also due to increasing the number of distributors and resellers from the time the Company entered the market in October 2000. The increase in sales in the Medical segment was due primarily to the acquisition of DOME in the third quarter of fiscal 2002. Sales in the Industrial segment were lower due to the current economic conditions, the Company’s exit from the military business, lower volumes in the vehicle market, and softness across all applications. Sales related to the exited military businesses were $29.9 million in fiscal 2001.

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Sales outside the United States decreased by 1.4% to $47.9 million in 2003 as compared to $48.6 million recorded in 2002, and decreased by 1.6% in 2002 from 2001 sales of $49.4 million. In fiscal 2003, the decrease in international sales was due primarily to decreased sales in the Medical segment. In fiscal 2002, the decrease in international sales was due primarily to decreased sales in the Industrial segment. As a percentage of total sales, international sales decreased to 19.0% in 2003 and decreased to 23.6% in 2002 from 23.8% in 2001. In fiscal 2003, the decline in international sales as a percentage of total sales was mainly attributable to the increased sales of commercial and digital imaging products in the United States. In fiscal 2002, the decline in international sales as a percentage of total sales was mainly attributable to the higher volumes of Commercial segment sales, which almost exclusively are to US customers.

Gross Profit

Gross margin as a percentage of sales increased to 30.3% from 29.3% in 2002. The increase was primarily due to the benefits of the EL plant consolidation, the negative impact related to $1.5 million of non-recurring charges recorded in 2002 and changes in product mix including the incremental impact related to the DOME line of products. These increases were offset by a higher percentage of total sales coming from the commercial market, which have lower gross margins. The Company’s gross margin as a percentage of sales decreased to 29.3% in 2002 from 31.2% in 2001. The decrease was primarily due to $1.5 million of non-recurring charges recorded in 2002 and a higher percentage of total sales attributable to the Commercial segment, which has lower gross margins. This decrease was partially offset by higher gross margins on the new digital imaging products acquired in the acquisition of DOME.

Research and Development

Net research and development expenses of $11.1 million decreased $1.8 million or 13.6% from $12.9 million in the prior year. This decrease was primarily due to lower spending on new projects and lower personnel costs. As a percentage of sales, research and development expenses decreased to 4.4% in 2003 from 6.3% in 2002. Research and development efforts are almost entirely focused on our medical and industrial segments. These changes were primarily due to higher revenues in the Commercial segment in 2003. In 2002, research and development expenses of $12.9 million increased $1.8 million or 16.5% from $11.1 million in 2001. This increase reflected the continued investment in the development of new products and the additional product development expenses related to the DOME acquisition, offset by lower personnel costs and lower contract funding as compared to 2001. As a percentage of sales, research and development expenses increased to 6.3% in 2002 from 5.3% in 2001. This increase was primarily due to the increase in research and development spending.

Sales and Marketing

Sales and marketing expenses increased $4.4 million or 28.6 % to $19.7 million in 2003 from $15.3 million in 2002. This increase was primarily due to higher sales and marketing expenses due to the acquisition of DOME, higher advertising expenses associated with our Commercial segment, higher personnel costs and higher marketing expenses due to a brand development project. As a percentage of sales, sales and marketing expenses increased to 7.8% in 2003 as compared to 7.4% in 2002. These percentage increases were primarily due to higher revenues in 2003. Sales and marketing expenses decreased $1.6 million or 9.5% to $15.3 million in 2002 from $16.9 million in 2001. This decrease was primarily due to lower commissions on lower sales volumes and the savings related to the completion of a strategic change to the Company’s direct sales force offset by increased headcount and higher advertising expenses associated with our commercial business. As a percentage of sales, sales and marketing expenses decreased to 7.4% in 2002 as compared to 8.1% in 2001.

General and Administrative

General and administrative expenses increased $3.5 million or 25.8% to $17.2 million in 2003 from $13.6 million in 2002. The increase in general and administrative expenses was primarily due to higher personnel costs, higher professional services costs, and the inclusion of DOME’s expenses for a full year. As a percentage of

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sales, general and administrative expenses increased to 6.8% in 2003 from 6.6% in 2002. These changes in 2003 as compared to 2002 were primarily due to the acquisition of DOME and higher personnel costs. General and administrative expenses decreased $1.3 million or 8.8% to $13.6 million in 2002 from $15.0 million in 2001. The decreases in general and administrative expenses were primarily due to lower personnel costs and lower acquisition costs which were included in the prior year related to the acquisition of AllBrite Technologies, Inc., offset by increased general and administrative expenses related to the DOME operations. As a percentage of sales, general and administrative expenses decreased to 6.6% in 2002 from 7.2% in 2001.

Amortization of Goodwill and Excess of Fair Market Value of Acquired Net Assets over Purchase Price

In connection with the Company’s acquisition of Standish Industries, Inc. in September 1997, the Company recorded goodwill on its balance sheet for the excess of the purchase price over the fair value of the net assets acquired. The goodwill was being amortized over a ten-year period resulting in operating expenses of $571,000 per year. During fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 142 changed the accounting for goodwill from an amortization method to an impairment only approach and accordingly, the Company had no amortization expense related to goodwill in fiscal 2003 and 2002.

In connection with the Company’s acquisition of its Finnish operation in January 1991, the Company exchanged Common Stock with a fair market value (based upon an independent valuation) equivalent to the value of the business acquired. Due to historical losses of this business and the expectation of future losses, the value of the Common Stock paid was less than the fair market value of the net assets acquired. The Company was, therefore, required to write fixed assets down to zero and to record negative goodwill on its balance sheet for the remaining amount of the excess fair market value of the net assets acquired over the purchase price. Amortization of this negative goodwill created a positive offset to operating expenses in the amount of $120,000 in fiscal 2001. Negative goodwill was amortized over a ten-year period in general and administrative expenses. The amount was fully amortized during fiscal 2001.

Amortization of Intangible Assets

On April 22, 2002, the Company completed the acquisition of DOME. $14.6 million of the purchase price was allocated