Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion highlights the principal factors affecting changes in financial condition and results of operations. This discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and notes to the unaudited consolidated financial statements.

OVERVIEW

        We design, manufacture and sell a wide range of display systems to customers in a variety of markets throughout the world. We focus our sales and marketing efforts on geographical regions, markets and products. The primary categories of markets include sport, commercial and transportation.

        Our net sales and profitability historically have fluctuated due to the impact of large product orders, such as display systems for professional sport facilities and colleges and universities, as well as the seasonality of the sports market. Net sales and gross profit percentages also have fluctuated due to other seasonality factors, including the impact of holidays, which primarily impact our third fiscal quarter. Our gross margins on large product orders tend to fluctuate more than those for smaller standard orders. Large product orders that involve competitive bidding and substantial subcontract work for product installation generally have lower gross margins. Although we follow the percentage of completion method of recognizing revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect that our future results of operations may be subject to similar fluctuations.

        Orders are booked only upon receipt of a firm contract and, depending on terms, only after receipt of any required deposits related to the order. As a result, certain orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and deposits are received. In addition, order bookings can vary significantly as a result of the timing of large orders.

        We operate on a 52-53 week fiscal year, with fiscal years ending on the Saturday closest to April 30 of each year. Fiscal years 2007 and 2006 each contains 52 weeks.

        For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to Note 3 of the notes to our consolidated financial statements, which are included elsewhere in this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us 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 a regular basis, we evaluate our estimates, including those related to estimated total costs on long-term contracts, estimated costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory and contingencies. Our estimates are based 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 values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements:

         Revenue recognition on long-term contracts. Earnings on long-term contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are capable of being estimated. Generally, contracts we enter into have fixed prices established and, to the extent the actual costs to complete contracts are higher than the amounts estimated as of the date of the financial statements, the resulting gross margin would be negatively affected in future quarters when we revise our estimates. Our practice is to revise estimates as soon as such changes in estimates are known. We do not believe there is a reasonable likelihood that there will be a material change in future estimates or assumptions we use to determine these estimates.

         Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To identify impairment in the customer’s ability to pay, we review aging reports, contact customers in connection with collection efforts and review other available information. Although we consider our allowance for doubtful accounts adequate, if the financial condition of our customers were to deteriorate and impair their ability to make payments to us, additional allowances may be required in future periods. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine the allowance for doubtful accounts. As of January 27, 2007 and April 29, 2006, we had an allowance for doubtful accounts balance of approximately $1.5 million and $1.4 million, respectively.

         Warranties. We have created a reserve for warranties on our products equal to our estimate of the actual costs to be incurred in connection with our performance under the warranties. Generally, estimates are based on historical experience taking into account known or expected changes. If we would become aware of an increase in our warranty reserves, additional reserves may become necessary, resulting in an increase in costs of goods sold. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine our reserve for warranties. As of January 27, 2007 and April 29, 2006, we had approximately $11.2 million and $8.1 million reserved for these costs, respectively.

         Extended warranty and product maintenance. We have deferred revenue related to separately priced extended warranty and product maintenance agreements. The deferred revenue is recognized ratably over the contractual term. If we would become aware of an increase in our estimated costs under these agreements in excess of our deferred revenue, additional reserves may be necessary, resulting in an increase in costs of goods sold. In determining if additional reserves are necessary, we examine cost trends and other information on the contracts and compare that to the deferred revenue. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine estimated costs under these agreements. As of January 27, 2007 and April 29, 2006, we had $4.9 million and $3.8 million of deferred revenue related to extended warranty and product maintenance, respectively.

         Inventory. Inventories are stated at the lower of cost or market. Market refers to the current replacement cost, except that market may not exceed the net realizable value (that is, estimated selling price in the ordinary course of business less reasonable predictable costs of completion and disposal); and market is not less than the net realizable value reduced by an allowance for normal profit margins. In valuing inventory, we estimate market value where it is believed to be the lower of cost or market, and any necessary charges are charged to costs of goods sold in the period in which it occurs. In determining market value, we review various factors such as current inventory levels, forecasted demand and technological obsolescence. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate the estimated market value of inventory. However, if market conditions change, including changes in technology, product components used in our products or in expected sales, we may be exposed to losses or gains that could be material.

         Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense as well as assessing temporary differences in the treatment of items for tax and accounting purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income in each jurisdiction, and to the extent we believe that recovery is not likely, a valuation allowance must be established. We review deferred tax assets, including net operating losses, and for those not expecting to be realized, we have created a valuation allowance. If our estimates of future taxable income are not met, a valuation allowance for some of these deferred tax assets would be required.

        We operate within multiple taxing jurisdictions, both domestic and international, and are subject to audits in these jurisdictions. These audits can involve complex issues, including challenges regarding the timing and amount of deductions and the allocation of income amounts to various tax jurisdictions. At any one time, multiple tax years are subject to audit by various tax authorities. The United States Internal Revenue Service (IRS) recently completed the process of examining our U.S. federal tax returns for fiscal years 2002 through 2005.

        We record our income tax provision based on our knowledge of all relevant facts and circumstances, including the existing tax laws, the status of current IRS examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters. In evaluating the exposures associated with our various tax filing positions, we record reserves for probable exposures. A number of years may elapse before a particular matter for which we have established a reserve is audited and fully resolved or clarified. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, when the statue of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposure associated with our various filing positions. We believe that any potential tax assessments from various tax authorities that are not covered by our income tax provision will not have a material adverse impact on our consolidated financial position or cash flow.

NET SALES

        Net sales increased 47.1% to $322.4 million for the nine months ended January 27, 2007 as compared to $219.2 million for the same period in fiscal year 2006. Net sales increased 50.2% to $106.7 million for the three months ended January 27, 2007 as compared to $71.1 million for the same period in fiscal year 2006.

        For the nine months and three months ended January 27, 2007, net sales increased in all our markets, with the commercial market experiencing growth rates in excess of 65% for the nine-month period, the sports market growing more than 35% year-to-date and the transportation market up approximately 25%. For the three months ended January 27, 2007, commercial, sports and transportation markets net sales increased approximately 70%, 41% and 3%, respectively. Net sales for the three months ended January 27, 2007 increased domestically and on an international basis. On an international basis, net sales increased over 250% for the quarter and are up more than 50% year-to-date primarily as a result of performance in Asian markets. As a percent of overall net sales, small product orders as opposed to large custom orders were approximately 24% of net sales for the third quarter of fiscal 2007 and 22% year-to-date.

        Overall, the level of net sales generated through the first two quarters of fiscal year 2007 and to some lesser extent in the third quarter of fiscal year 2007 in all markets was limited as a result of capacity constraints within our manufacturing facilities, both in terms of space and personnel. This trend began in the second quarter of fiscal year 2006 and diminished to a large degree in the third quarter as a result of the ramping up of facilities in Brookings and Sioux Falls, South Dakota. We will continue to develop increased manufacturing capabilities, including in Asia (which is not expected to be significant in the near term). During the third quarter of fiscal year 2007, these constraints became less of a factor, and based on the current outlook for the rest of the fiscal year, we do not expect to have significant capacity constraints; however, this is dependent on the timing of orders versus the expected delivery dates. At this point, other than the completion of our addition in Brookings, South Dakota, and the addition of a facility in Redwood Falls, Minnesota we do not expect to make any significant investments in buildings or land over the next 12 months for the purpose of meeting customer demand.

        As we have reported in prior filings, we have made two investments in two media companies, one that owns and controls the nation’s largest network of digital LCD and plasma screens in professional sports facilities and the other company that owns and controls the nation’s largest gas pump digital display network. Both of these transactions are expected to help us generate more recurring revenue opportunities and expand our services businesses. Also, these companies are non-consolidated entities, and therefore their sales are not included in our net sales. During the second quarter of fiscal year 2007, we acquired certain operating assets of Hoffend & Sons, Inc., a leader in the automated hoist business for sporting and theater applications. Sales related to this business have exceeded $4 million year-to-date, and we expect that for the fiscal year, it will exceed our previous estimates of $5 million.

         Commercial Market. Net sales in the commercial market grew during the third quarter and first nine months of fiscal year 2007 as compared to the same periods of fiscal year 2006. For the first nine months of fiscal year 2007, net sales increased more than 65%, and for the quarter, they increased more than 70% as compared to the same periods of last fiscal year. This increase is attributable to increases in both standard and custom orders. The increase in custom projects for both the quarter and year-to-date is due primarily to an increase in orders from outdoor advertising companies, while the increase in standard products is due to the growth in our Galaxy display business within the national account portion of our business and through resellers. On an international basis, net sales increased over 50% year-to-date as compared to the same periods of last fiscal year, due in part to the increase in business in Asian markets, especially gaming opportunities in Macau. We continue to believe that we are gaining traction in our efforts to build our international business and are seeing a greater potential for higher sales overseas. However, as a result of the significant growth rates domestically, we would not expect international business in the commercial market to outpace our domestic growth in the near term.

        Overall, the commercial market continues to benefit from increasing product acceptance, lower cost of displays, our expanding distribution network and a better understanding by our customers of the product as a revenue generation tool. The most significant factor for increasing sales has been the order volume of digital displays for outdoor advertising companies. This industry continues to increase its demand for digital displays in place of traditional billboards due to the enhanced margins and cash flow that they achieve. Our rate of growth could increase depending on our success in capturing and retaining the business of the major billboard companies. It is important to note that the same constraints that exist in the sign business overall with the regulatory environment apply to a greater degree to digital displays, although it appears that the outdoor advertising companies have been very successful in working through these constraints.

        We expect that the growth in the commercial market will continue throughout fiscal year 2007 due to increased order volume in the billboard market, our expanded distribution network, greater product acceptance, our international expansion, the development of our resellers and our integrated product offerings. Net sales in the commercial market should also expand at rates faster than our other markets, and our national account business and billboard business within the commercial market could grow faster depending on our success in booking major accounts. We also expect to see growth generated through sales of our new ProTour™ line of mobile and modular displays, which we believe will drive improvements in profitability internationally.

        Our growth in the commercial market depends to some degree on the state of the economy, which we do not believe had any adverse effects in the first nine months of fiscal year 2007 as opposed to the same period in fiscal year 2006.

        Order bookings in the commercial market were up 9% for the third quarter of fiscal year 2007 and more than 53% year-to-date as compared to the same periods of fiscal year 2006. The smaller than expected increase for the quarter was due to a decline in orders in the outdoor advertising portion of our business, which we attribute more to the timing of orders, as we had an extensive backlog of orders in this niche as we entered the quarter. Increases overall were the result of the same factors as mentioned above in connection with net sales.

         Sports Market. Within the sports markets, the increase in net sales in the third quarter of fiscal year 2007 as compared to the third quarter of fiscal year 2006 was the result of increases in large and small sports facilities, with the majority of the growth on a dollar basis occurring in the larger venues. In addition, most of the growth in net sales both for the quarter and on a year-to-date basis as compared to the prior fiscal year was in large contracts as opposed to standard orders. Included in our smaller sports venues sales are sales of hoists, a business we acquired in October of 2006 as described above. This has added in excess of $4 million to our net sales since the acquisition date. Our sports market is subject to volatility based on the timing of large orders, especially orders for professional facilities, which can cause net sales to fluctuate year-to-year. The mid-sized and small facilities experience more consistency in growth rates due to the greater number of facilities. The increase in net sales to large sports venues for the year was attributable to increases at both college and professional sports facilities and included the benefit of the unusually large amount of orders booked in the first half of fiscal year 2007.

        The growth in net sales for large and small sports venues was due to a number of factors, including the expanding market, with facilities spending more on larger display systems; our product and services offering, which remains the most integrated and comprehensive offering in the industry; and our network of sales and service offices, which is important to support our customers. We believe that the effects of the economy have a lesser impact on our sports market as compared to our other markets, since our products are generally revenue generation tools (through advertising) for facilities and the sports business in general is more resistant to negative factors in the economy as a whole.

        An important trend that continues to gain momentum in large professional and college facilities is the demand for high definition video displays as well as more square footage of video equipment overall at facilities, both of which should have the effect of increasing order sizes on large projects. We believe that this could be an important factor in our growth for the future, along with the development of video systems for larger high school and smaller college facilities.

        The dollar amount of orders (as opposed to net sales) in the sports market decreased in the third quarter of fiscal year 2007 as compared to the third quarter of fiscal year 2006. Orders are up approximately 30% year-to-date. This improved performance is due to the same reasons indicated for the increase in net sales in the sports market. The growth in orders was in the same niches as net sales. Orders on an international basis within the sports market were not significant.

        For the rest of fiscal year 2007, we expect that net sales and orders in the sports market will continue to outpace the prior periods of fiscal year 2006. We believe that the growth in the sports market over the long-term is driven by new product development, new uses for existing products, an expanding market as our products become more affordable to more institutions, growth internationally, and our overall product offerings, which we believe are the most complete systems in the marketplace.

         Transportation Market . Net sales in the transportation market for the third quarter of fiscal year 2007, as compared to the third quarter of fiscal 2006, were flat, and for the year to date are up more than 24% as compared to fiscal year 2006, fueled by order bookings in the second quarter of fiscal 2006. Order bookings for the third quarter of fiscal year 2007 were up over 90%, creating a year-to-date growth of more than 30%. For the rest of fiscal year 2007 and into the fiscal year 2008, we believe that we will benefit from legislation passed during calendar year 2005 by Congress that provided for increased spending on transportation projects, including large increases associated with intelligent transportation systems, and that sales and orders will outpace fiscal year 2006.

         Other Markets. We occasionally sell products in exchange for the advertising revenues generated from use of products. These sales represented less than 1% of net sales for the third quarter and nine months ended January 27, 2007, respectively. The gross profit percents on these transactions should typically be higher than the gross profit percents on other transactions of similar size, although the selling expenses associated with these transactions are typically higher.

        Historically, our sales have declined in our third quarter on a sequential basis, primarily as a result of the time between the start of major sports seasons and the effects of the holidays. As our commercial market has developed, we have seen this decline on sales on a sequential basis generally diminish. However, as a result of our significant efforts during the second quarter of fiscal year 2007, which included numerous extra shifts and various other tactics to decrease backlog which were not sustainable, net sales declined sequentially as a percentage in the third quarter of fiscal 2007 more than in the third quarter of fiscal 2006. We expect that in the future, this decline will not be as great as it was in this fiscal year.

        The order backlog as of January 27, 2007 was approximately $98 million as compared to $83 million as of January 28, 2006 and $123 million at the beginning of the third quarter of fiscal year 2007. Historically, our backlog varies due to the timing of large orders. Our order backlog as of January 27, 2007 was higher in the commercial and transportation markets when compared to the backlog as of January 28, 2006 and January 27, 2007. The changes in the backlog were the result of the combination of the changes in orders and net sales discussed above as well as the constraints in capacity as mentioned above.

GROSS PROFIT

        Gross profit increased 46.9% to $32.4 million for the third quarter of fiscal 2007 as compared to $22.0 million for the third quarter of fiscal year 2006. For the nine months ended January 27, 2007, gross profit increased 41.6% to $94.2 million compared to $66.5 million for the nine months ended January 28, 2006. As a percent of net sales, gross profit was 30.3% and 29.2% for three and nine months ended January 27, 2007 as compared to 31.0% and 30.4% for the three and nine months ended January 28, 2006.

        The gross profit percentage decrease for both the quarter and nine months ended January 27, 2007 as compared to the same periods in fiscal year 2006 relate to a number of factors, including the lower margins on a few of larger projects described in our Quarterly Report on Form 10-Q for the quarter ended July 29, 2006 which effected primarily the first and second quarter of fiscal year 2007, the increased costs of expanding facilities, higher warranty costs, the mix between small orders versus large custom product orders and various other factors.

        We strive towards higher gross margins as a percent of net sales, although depending on the actual mix, performance on larger projects, our ability to execute on the business and level of future sales, margin percentages may not increase and are likely to remain below the levels of the last fiscal year in the upcoming quarter due to the continuation of efforts to expand facilities.

        We believe a gross profit margin of 30% is achievable for the fourth quarter of fiscal year 2007. There are a number of factors that could affect this expectation, including our actual mix of sales and performance on the orders, the level at which we book orders during the quarter and our ability to execute the rollout of the new facilities. Finally, our ability to estimate gross profit margin is subject at all times to the inherent volatility that comes with long-term contracts like our custom orders.

OPERATING EXPENSES

         Operating expenses. Operating expenses, which are comprised of selling, general and administrative expenses and product design and development costs, increased by approximately 42.7% from $15.8 million in the third quarter of fiscal year 2006 to $22.5 million in the third quarter of fiscal year 2007. As a percent of net sales, operating expenses decreased from 21.1% of net sales to 19.7% of net sales. For the nine months ended January 27, 2007, operating expenses increased 40.0% from $45.3 million for the nine months ended January 28, 2006 to $63.4 million for the nine months ended January 27, 2007. All areas of operating costs were impacted by the costs of stock option expensing under SFAS No. 123(R) which became effective in fiscal year 2007, as well as by much higher than expected health insurance costs for the first and third quarters of fiscal year 2007.

         Selling Expenses. Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expense, facilities-related costs for sales and service offices, and expenditures for marketing efforts, including collateral materials, conventions and trade shows, product demos and supplies.

        Selling expenses increased 31.4% to $13.7 million for the three months ended January 27, 2007 as compared to $10.4 million for the same period in fiscal year 2006. Selling expenses increased 31.5% to $38.7 million for the nine months ended January 27, 2007 from $29.4 million for the same period in fiscal year 2006. Selling expenses decreased to 12.8% of net sales for the third quarter of fiscal year 2007 from 14.7% of net sales for the third quarter of fiscal year 2006. For the nine months ended January 27, 2007, selling expenses were 12.0% of net sales as compared to 13.4% of net sales for the nine months ended January 28, 2006.

        Selling expenses for the quarter and the nine months ended January 27, 2007 were higher as a result of an increase in personnel costs, as we continued to build our sales infrastructure in all markets and internationally. This includes increases in initiatives such as support for sales of extended services, geographical expansion, and sales efforts related to new products and market niches. In addition, selling expenses increased due to the increasing investment in demonstration equipment and travel costs associated with the higher level of order bookings. Finally, selling expenses were impacted by the acquisition of the hoist business at the end of the second quarter of fiscal year 2007. We expect selling expense to increase slightly in the fourth quarter as compared to the third quarter of fiscal 2007.

         General and Administrative. General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations fees, facilities and equipment-related costs for administration departments, amortization of intangibles and supplies.

        General and administrative expenses increased 111.0% to $5.2 million for the third quarter of fiscal year 2007 as compared to $2.5 million for the third quarter of fiscal year 2006. General and administrative expenses increased 74.6% to $13.6 million for the nine months ended January 27, 2007 as compared to $7.8 million for the nine months ended January 28, 2006. General and administrative expenses increased to 4.9% as a percent of net sales for the third quarter of fiscal year 2007 from 3.5% of net sales for the third quarter of fiscal year 2006. For the nine months ended January 27, 2007, general and administrative expenses increased to 4.2% of net sales as compared to 3.6% of net sales for the nine months ended January 28, 2006.

        The increase in general and administrative expenses for the first nine months of fiscal year 2007 as compared to the first nine months of fiscal year 2006 was due to the implementation of SFAS No. 123(R) relating to stock option expense; increases in personnel-related costs within general and administration, primarily information systems staff due to our growth and additions to human resources to support our growth overall; professional fees associated with the completion of the IRS audit, which are partially offset through a lower effective tax rate; information systems maintenance and support costs; international expansion; and higher recruiting and training costs of our expanding work force. We expect that general and administrative costs will increase slightly in the fourth quarter of fiscal year 2007.

         Product Design and Development. Product design and development expenses consist primarily of salaries, other employee-related costs, facilities and equipment-related costs, and costs of supplies.

        Product design and development expenses increased 24.9% to $3.6 million for the three months ended January 27, 2007 compared to $2.9 million for the same period in fiscal year 2006. Product design and development expenses increased 37.4% to $11.2 million for the nine months ended January 27, 2007 as compared to $8.1 million for the nine months ended January 28, 2006. Product design and development expense was 3.4% of net sales for the third quarter of fiscal year 2007 and 4.1% of net sales for third quarter of fiscal 2006. Product design and development expenses were 3.5% and 3.7% of net sales for the nine months ended January 27, 2007 and January 28, 2006, respectively.

        Generally, product design and development expenses increase when our engineering resources are not dedicated to long-term contracts, as the same personnel who work on research and development also work on long-term contracts. During the third quarter of fiscal 2007, we continued to invest in a number of critical initiatives. We expect that product design and development expenses will be less than 4% of net sales for all of fiscal year 2007.

INTEREST INCOME AND EXPENSE

        We occasionally generate interest income through product sales on an installment basis, under lease arrangements or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables. We also invest excess cash in short-term temporary cash investments and marketable securities that generate interest income. Interest expense is comprised primarily of interest costs on our notes payable and long-term debt. Interest income (expense), net, resulting from these items decreased 82.7% to $0.07 million for the three months ended January 27, 2007 as compared to $0.4 million for the third quarter of fiscal year 2006. For the nine months ended January 27, 2007, interest income (expense), net, decreased 5.0% to $1.1 million from $1.2 million for the nine months ended January 28, 2006. The change for the nine months as a whole was the result of lower average levels of temporary cash investments, marketable securities and long-term receivables outstanding during the respective periods as well as the higher level of debt outstanding, primarily in the third quarter of fiscal year 2007. The decline for the third quarter of fiscal 2007 was attributable to the significant investments we made in building our facilities and equipment, which caused the amounts of average cash, temporary cash investments and marketable securities to decline and the amount of debt to increase. We expect that during the rest of fiscal year 2007, our cash balances will increase and we will trend towards higher net interest income.

OTHER INCOME (EXPENSE), NET

        Other income (expense) did not significantly change from the third quarter of fiscal year 2007 as compared to the third quarter of fiscal year 2006. For the first nine months of fiscal year 2007, other income (expense), net decreased to ($0.6) million from ($0.1) million for the same period in fiscal year 2006. The change results from the effects of earnings attributable to unconsolidated affiliates and from currency gains and losses.

INCOME TAX EXPENSE

        Income taxes were approximately $2.8 million in the third quarter of fiscal year 2007 and $2.6 million for the third quarter of fiscal year 2006. For the first nine months of fiscal year 2007, income taxes increased to $10.4 million as compared to $8.5 million for the first nine months of fiscal year 2006. The effective tax rate for the nine months ended January 27, 2007 was 33.3% as compared to 37.9% for the first nine months of fiscal year 2006. The effective rate was lower in fiscal year 2007 as a result of the utilization of net operating losses in Europe, which had previously been offset by valuation allowances; benefits relating to transfer pricing assumptions; and the conclusion of an IRS audit, which examined tax returns from fiscal years 2002 through 2005. In addition, during the third quarter of fiscal year 2007, Congress passed legislation which was signed into law by the President reinstating the credit for qualified research and development expenses, retroactive to January 1, 2006. This allowed us to recognize the benefit of the credit for a 13-month period in the third quarter. We expect that the effective tax rate for the fourth quarter will approximate 34% and will increase to more than 36% in fiscal year 2008.

        In the second quarter of fiscal year 2007, we completed an examination by the IRS primarily related to research and development credits we utilized in the past. The net result was a benefit to income tax expense. We also continue to be optimistic that as a result of perceived improvements in our international business, we will begin generating taxable income in foreign jurisdictions, which would allow us to recognize the benefits related to net operating loss carryforwards that have been offset by a valuation reserve.

LIQUIDITY AND CAPITAL RESOURCES

        Working capital, consisting of current assets less current liabilities, was $48.7 million at January 27, 2007 and $74.9 million at April 30, 2006. We have historically financed working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements.

        Cash provided by operations for the nine months ended January 27, 2007 was $9.9 million. Net income of $20.9 million, plus depreciation and amortization of $9.2 million, plus increases in accounts payable, billings in excess of costs and estimated earnings, deferred revenue, and income taxes payable, were offset by increases in inventory, accounts receivable, restricted cash, costs and estimated earnings in excess of billings, prepaid insurance and other assets and advertising rights and the effects of changes in various other operating assets and liabilities.

        The changes overall in operating assets and liabilities are generally due to the impact of the timing of cash flows on large projects, which can cause significant fluctuations in the short term. We expect that as a result of various initiatives underway, including changes being made in manufacturing, purchasing, collections and payment processes, we expect to continue to improve our cash flow from operations and our balance sheet as a whole, relative to the sales level.

        Cash used by investing activities was $52.0 million for the nine months ended January 27, 2007. This included $46.9 million for purchases of property and equipment. During the first nine months of fiscal year 2007, we invested approximately $12.9 million in facilities additions, primarily related to manufacturing facilities in Brookings, South Dakota, Sioux Falls, South Dakota and Redwood Falls, Minnesota; $1.6 million in transportation equipment; $18.3 million in manufacturing equipment; $8.1 million in information systems infrastructure, including software; $2.5 million for rental equipment; $2.0 in land; and $1.2 million in product demonstration equipment. These investments were made to support our continued growth and to replace obsolete equipment. During the first nine months of fiscal 2007, we made investments in two different entities and purchased assets from another entity, as described previously, which approximated $13.8 million in cash. These investments are not expected to have significant impact on cash from operations. During the nine months ended January 27, 2007, we sold $8.3 of marketable securities.

        In early fiscal 2007, we began construction of another addition to our facilities in Brookings, South Dakota. The majority of the addition is designed to be used for administrative and manufacturing space and is expected to be complete in early fiscal 2008. The total cost of the building and related equipment is approximately $14 million. We expect that total capital equipment investments for all of fiscal 2007 will exceed $50 million.

        Cash provided by financing activities in the first nine months of fiscal year 2007 consisted of $18.8 million, including advances on our line credit of $19.2 million and proceeds from stock options of $1.1 offset by the dividend paid to shareholders on June 23, 2006, of $2.3 million, which were partially offset by option exercises and excess tax benefits from stock-based compensation. We expect that the bank debt will be repaid in the short term. Because we have funded the majority of the intended capital investments already through the first three quarters of the 2007 fiscal year, it is unlikely that we will need to incur any additional debt to fund the expansion plans over the rest of the fiscal year. During the second quarter of fiscal year 2007, we purchased a land parcel in Sioux Falls, South Dakota for long-term development and financed it through a note from the seller.

        Included in receivables as of January 27, 2007 was approximately $0.5 million of retainage on long-term contracts, all of which is expected to be collected in one year.

        We have used and expect to continue to use cash reserves and bank borrowings to meet our short-term working capital requirements. On large product orders, the time between order acceptance and project completion may extend up to and exceed 18 months depending on the amount of custom work and the customer’s delivery needs. We often receive a down payment or progress payments on these product orders. To the extent that these payments are not sufficient to fund the costs and other expenses associated with these orders, we use working capital and bank borrowings to finance these cash requirements.

        Our product development activities include the enhancement of existing products and the development of new products from existing technologies. Product design and development expenses were $3.6 million for the quarter ended January 27, 2007 and $11.2 million for the nine months ended January 27, 2007. We intend to continue to incur these expenditures to develop new display products using various display technologies to offer higher resolution and more cost effective and energy efficient displays. We also intend to continue developing software applications for our display controllers to enable these products to continue to meet the needs and expectations of the marketplace.

        We have a credit agreement with a bank that provides for a $45.0 million line of credit, which includes up to $10.0 million for standby letters of credit. The interest rate on the line of credit is equal to LIBOR plus 0.75% (5.3% at January 27, 2007) and is due on November 15, 2008. As of January 27, 2007, approximately $19.2 million was outstanding under the line of credit. In addition, standby letters of credit were issued and outstanding for approximately $1.0 million as of January 27, 2007. The credit agreement is unsecured and requires us to meet certain covenants, including a minimum interest bearing debt to earnings before interest taxes depreciation and amortization ratio, a limit on dividends and distributions, and a minimum adjusted fixed charge coverage ratio. Daktronics Canada, Inc., our subsidiary, has various credit agreements that provide up to $0.2 million in borrowings under lines of credit. The interest rate on the lines of credit is equal to 1.0% above the prime rate of interest (6.0% at January 27, 2007). As of January 27, 2007, no advances under the line of credit were outstanding. The lines are secured primarily by accounts receivables, inventory and other assets of the subsidiary. Finally, as mentioned above, we incurred approximately $1.1 million of debt secured by land purchased in Sioux Falls, South Dakota. The note bears no interest and matures on September 1, 2008.

        On May 25, 2006, our Board of Directors approved a two-for-one stock split of our common stock in the form of a stock dividend. Stockholders of record at the close of business on June 8, 2006 received one additional share for each share of common stock held on that date of record. Our stock began trading on the split-adjusted basis on June 23, 2006. On that same date, our Board also declared an annual dividend payment of $.06 per share (as adjusted for the two-for-one stock split declared by the Board of Directors on May 25, 2006) on our common stock for the year ended April 29, 2006. Although we intend to pay regular annual dividends for the foreseeable future, all subsequent dividends will be reviewed annually and declared by our Board of Directors at its discretion.

        We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company that provides for an aggregate of $100 million in bonded work outstanding. At January 27, 2007, we had approximately $18.9 million of bonded work outstanding against this line.

        We believe that based on our current growth estimates over the next 12 months, we have sufficient capacity under our lines of credit. Beyond that time, we may need to increase the amount of our credit facilities depending on various factors. We anticipate that we will be able to obtain any needed funds under commercially reasonable terms from our current lender. We believe that cash from operations from our existing or increased credit facility and from our current working capital will be adequate to meet the cash requirements of our operations in the foreseeable future.