In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein.  Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, Daktronics France SARL; Daktronics Shanghai, Ltd.; Daktronics GmbH; Star Circuits, Inc.; Daktronics Media Holdings, Inc.; MSC Technologies, Inc.; Daktronics UK, Ltd.; Daktronics Hong Kong, Ltd.; Daktronics Canada, Inc.; Daktronics Hoist, Inc.; Daktronics Beijing, Ltd; Daktronics Australia Pty Ltd; Daktronics FZE; and Daktronics FZE.Installation, Inc.  Intercompany balances and transactions have been eliminated in consolidation.

Investments in affiliates over which we have significant influence are accounted for by the equity method. Investments in affiliates over which we do not have the ability to exert significant influence over the affiliate’s operating and financing activities are accounted for under the cost method of accounting.  We have evaluated our relationships with affiliates and have determined that these entities are either not variable interest entities or, in the case of variable interest entities, we are not the primary beneficiary and therefore they are not required to be consolidated in our Consolidated Financial Statements. Accordingly,consolidated financial statements. The equity method requires us to report our share of losses up to our equity investment amount, including any financial support made or committed to.  At such time the equity investment is reduced to zero, we recognize losses to the extent of and as an adjustment to the other investments in the affiliate in order of seniority or priority in liquidation.  Our proportional share of the respective affiliate’s earnings or losses is included in other income (expense) in our consolidated statementstatements of income.operations.

We have a variable interest in OutCastOutcast Media International, Inc. (“OutCast”Outcast”). Outcast operates the largest pumptop display network in the United States.  The results of the variable interest analysis we completed indicated that we are not the primary beneficiary of this variable interest entity and, as a result, we are not required to consolidate it. Our analysis included reviewing the amount of financial support, equity risk, and board influence.  Our interest in OutCastOutcast consists of a 37% equity interest and convertible debt owed by OutCast inof approximately $500.   During fiscal 2010, we had written down our equity investment to zero and began writing down the amountconvertible note based on our ownership level of $1.6 million,the convertible debt compared to all outstanding convertible debt of Outcast.  At May 1, 2010, both the equity interest and a guaranteeconvertible debt had been written down to zero.  During the first quarter of debt infiscal 2011, as described in Note 10. OutCast operates the largest pumptop display network13, we exchanged our remaining debt in the United States. Our maximum exposure to lossOutcast for a note from a third party related to OutCastOutcast.

The aggregate amount of investments accounted for under the cost method was $100 at July 31, 2010.  The fair value of these investments has not been estimated, as there have not been any identified events or changes in circumstances that may have a significant adverse effect on their fair value and it is approximately $3.4 million.not practical to estimate their fair value.

Finished goods subject to deferred revenue arrangements represent inventory provided to customers on a trial basis and contain contractual provisions which make a purchase probable.

Our Commercial segment primarily consists of sales of our PS-X, HD-X,video, Galaxy® and Valo™ product lines to resellers (primarily sign companies), outdoor advertisers, national retailers, quick-serve restaurants, casinos and petroleum retailers.  Our Live Events segment primarily consists of sales of integrated scoring and video display systems to college and professional sports facilities and sales of our mobile PST display technology to video rental organizations and other live events type venues.  Our Schools and Theatres segment primarily consists of sales of scoring systems, sales of Galaxy® and PS-Xvideo display systems to primary and secondary education facilities and sales of our Vortek® automated rigging systems for theatre applications.  Our Transportation segment primarily consists of sales of our Vanguard® and Galaxy® product lines to governmental transportation departments, airlines and other transportation related customers.  Finally, our International segment primarily consists of sales of all product lines to geographies outside the United States and Canada.

Segment reports present results through contribution margin, which is comprised of gross profit less selling costs. Segment profit excludes general and administration expense, product development expense, interest income and expense, non-operating income and income tax expense.  Assets are not allocated to the segments. Depreciation and amortization, excluding that portion related to non-allocated costs, are allocated to each segment based on various financial measures.  In general, segments follow the same accounting policies as those described in Note 1.  Costs of domestic field sales and services infrastructure, including most field administrative staff, are allocated to the Commercial, Live Events and Schools and Theatres segments based on cost of sales.  Shared manufacturing, building anda nd utilities and procurement costs are allocated based on direct hours,payroll dollars, square footage and other various financial measures.  Beginning in fiscal 2010, we ceased allocation of general and administrative and product development expenses to reflect our management approach to these costs. Fiscal 2009 segment results have been retrospectively adjusted to conform to these changes.

We do not maintain information on sales by products and, therefore, disclosure of such information is not practical.

The following table sets forth certain financial information for each of our five functional operating segments:segments for the periods indicated:

The total number of shares of stock reserved and available for distribution under the 2007 Plan is 4,000 shares.

We also have an employee stock purchase plan (“ESPP”), which enables employees to contribute up to 10% of their compensation toward the purchase of our common stock at the end of the participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock on the first or last day of the participation period.

As of OctoberJuly 31, 2009,2010, there was $5,380$5,412 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of our equity compensation plans. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of five years.

       

In connection with our investment in OutCastOutcast, we havehad previously guaranteed outstanding debt of approximately $3,688.$3,705.  This debt maturesmatured at various times through calendar year 2012, at which time our guarantee will expire subject to the debt being repaid by OutCast.  We would be obligated to perform under the terms of the guarantee should OutCast default under the leases.have expired.  Our guarantee obligation iswas generally limited to 50% of the amounts outstanding, and we would havehad recourse back to OutCastOutcast under a reimbursement agreement.   The guarantee was undertaken to support the rollout of LCD displays in connection with the core business of OutCast.  The total amount accrued relatingrelated to the guarantee liability under the provisions of ASC 460 was $80$62 as of October 31, 2009.  In addition toMay 1, 2010.  During the foregoing, OutCast is obligated to pay us on loans maturing during the thirdfirst quarter of fiscal 2010 of approximately $1,600.  OutCast’s ability to pay these debts is contingent on obtaining funding or a renegotiation of the debt.  We have2011, we entered into a non-binding letterbinding arrangement whereby we loaned our share of intent whereby OutCast is obtaining fundingthe guarantee of approximately $1.9 million to pay off thisan investment fund managed by the Chairman of Outcast in exchange for a note, which relieved us of the obligations under the guarantee.  The procee ds of the note were used to purchase the rights in the debt and to release us from the foregoing guarantee and therefore we have not reserved any amounts against these loans or the guarantee.  If OutCast is unable to close on this funding, we may incur losses to the extent of the loans and the guarantees.  Approximately $1,060lender.  This loan is secured by theunderlying assets of OutCast, which we believe adequately secures that debt; however, the ultimate recovery cannot be certain if OutCast cannot satisfy its obligations.investment fund and a guarantee from the general partner of the investment fund.

As of OctoberJuly 31, 2009,2010, we did not have material unrecognized tax benefits that would affect our effective tax rate if recognized. We recognize interest and penalties related to income tax matters in income tax expense. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.

Our company, along with our subsidiaries, isWe are subject to U.S. Federal income tax as well as income taxes of multiple state jurisdictions. As a result of the completion of exams by the Internal Revenue Service on prior years and statutes of limitations, fiscal years 2006, 2007, 2008, 2009 and 20092010 are the only years remaining open under statutes of limitations. Certain subsidiaries are also subject to income tax in foreign jurisdictions which have open tax years varying by jurisdiction extending back to 2003.2004.  We operate under a tax holiday in China that will expire in fiscal 2012.  At this time, we are unable to predict how the expiration of the tax holiday will impact us in the future.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer the liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy within ASC 820 distinguishes between three levels of inputs that may be utilized when measuring fair value, consisting of level 1 inputs (using quoted prices in active markets for identical assets or liabilities), level 2 inputs (using inputs other than level 1 prices, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability), and level 3 inputs (unobservable inputs supportedsupporte d by little or no market activity based on our own assumptions used to measure assets and liabilities). A financial asset or liability’s classification within this hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our financial assets as of OctoberJuly 31, 20092010 and May 1, 2010, measured at fair value on a recurring basis, were $50,300,$63,367 and $58,635, respectively, which consisted of money market funds.  We used level 1 inputs to determine the fair value of our financial assets.  We havehad no other significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to initial recognition except as discussed below and in Note 5 and Note 1 as it relates to goodwill and long-lived assets.

The fair value measurement standard also applies to certain nonfinancial assets and liabilities that are measured at fair value on a recurringnonrecurring basis. For example, certain long-lived assets such as goodwill, intangible assets and property, plant and equipment are measured at fair value in connection with business combinations or when an impairment is recognized and the related assets are written down to fair value.  We did not make any material business combinations during the first three months of fiscal 2011 or fiscal year 2010.   No material impairments of our long-lived assets were recognized during the first three months of fiscal 2011 or fiscal year 2010.

The Company also holds investments in equity securities that are accounted for as cost method investments, which are classified as intangible and other assets and measured at fair value on a nonrecurring basis. The carrying value of these investments approximated $100 at July 31, 2010 and May 1, 2010. The fair value of our cost method investments are not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments. When measured on a nonrecurring basis, that used level 2 or levelour cost method investments are considered Level 3 inputs.in the fair value hierarchy, due to the use of unobservable inputs to measure fair value.

We own a 37.5% interest in Outcast as previously described.  Our equity investment balance in Outcast was $0 as of July 31, 2010 and May 1, 2010.  As of May 1, 2010, we were obligated under a guarantee related to certain third party debt obligations of Outcast.  Our exposure pursuant to that guarantee was $0 and $1,900 as of July 31, 2010 and May 1, 2010, respectively.   In addition, as of May 1, 2010, Outcast owed us approximately $1,060 under a secured note arrangement and approximately $500, plus interest, under a convertible note arrangement as explained in Note 1.  During the secondfourth quarter of fiscal 2009,2010, we closedentered into an agreement which required us at closing, which occurred in May 2010, to loan funds of $1,900 to an investment fund managed by the Chairman of Outcast to be used to s atisfy the Outcast obligations that are subject to our Canadian manufacturing facilities.  This plant was engaged primarily inguarantee.  As a result, subsequent to May 1, 2010, Outcast’s obligations to the manufacture of our portable Vanguard displaysthird party were satisfied and we no longer had an obligation pursuant to the guarantee.  In exchange for roadside traffic management.  We have also discontinued these Vanguard products.  In the second quarter of fiscal 2009, we recorded the costs associated with this closure of approximately $1,100 on a pre-tax basis. This included approximately $700 related to inventory reserves, approximately $200 in severance costs and approximately $100 in lease termination costs, all of which have been included in cost of goods sold within our Transportation market. All costsfunds related to the closure were settled in fiscal year 2009.guarantee and the exchange of the senior note, we received a secured note from the investment fund for the face amount of the obligations.  The note received from the investment partnership matures on the earlier of the receipt of proceeds from the sale of portfolio investments held by the investment fund or December 31, 2010.  As a result of the foregoing agreements and analysis of the value of underlying assets pledged to pay off the notes, we determined that as of July 31, 2010 and May 1, 2010, we did not have any losses to recognize related to the secured note and the guarantee. 

We have evaluated the existence of both recognized and unrecognized subsequent events through November 25, 2009, the filing date of this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future.  These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding our intent, belief or current expectations with respect to, among other things: (i) our financing plans; (ii) trends affecting ouro ur financial condition or results of operations; (iii) our growth strategy and operating strategy; and (iv) the declaration and payment of dividends.dividends; (v) the timing and magnitude of future contracts; (vi) parts shortages and longer lead times; (vii) fluctuations in margins; and (viii) the introduction of new products and technology.  The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements.  Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factorsfacto rs discussed herein, including  those discussed in detail in our filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the fiscal year ended May 2, 20091, 2010 in the section entitled “Item 1A. Risk Factors.”