The following discussion should be read in conjunction with the attached interim consolidated financial statements and with the Company's 2008 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto for the fiscal year ended February 29, 2008, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company is a leader in the manufacture and distribution of a wide range of display devices, encompassing, among others, entertainment, military, medical and simulation display solutions. The Company is comprised of two segments -
(1) the manufacture and distribution of monitors, projection systems and CRT displays and (2) the wholesale distribution of consumer electronic parts. The display segment is organized into four interrelated operations aggregated into one operating segment pursuant to the aggregation criteria of SFAS 131:
• Monitors - offers a complete range of CRT, flat panel and projection display systems for use in training and simulation, military, medical and industrial applications.

• Data Display CRTS - offers a complete range of CRTs for use in data display screen, including computer terminal monitors and medical monitoring equipment.

• Entertainment CRTS - offers a wide range of CRTs and projection tubes for television and home theater equipment.

• Component Parts - provides replacement electron guns and other components for CRTs primarily for servicing the Company's internal needs.

During Fiscal 2009, management of the Company is focusing key resources on strategic efforts to dispose of unprofitable operations and seek acquisition opportunities that enhance the profitability and sales growth of the Company's more profitable product lines. In addition, the Company plans to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:
Inventory management - the Company continually monitors historical sales trends as well as projected future needs to ensure adequate on hand supplies of inventory and to ensure against overstocking of slower moving, obsolete items.
Certain of the Company's divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. The Company's inventory turnover averages over 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations. This level of inventory is higher than some of the Company's competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make last time buys. In the monitor operations of the Company's business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will

Video Display Corporation and Subsidiaries August 31, 2008 be unable to sell or return to its vendors. Because of this, the Company's management monitors the adequacy of its inventory reserves regularly, and at August 31, 2008 and February 29, 2008 believes its reserves to be adequate.
Interest rate exposure - The Company had outstanding bank debt in excess of $18.0 million as of August 31, 2008, all of which is subject to interest rate fluctuations by the Company's lenders. Changes in rates by the Federal Reserve Board have the potential to negatively affect the Company's earnings. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company's debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges. Results of Operations
The following table sets forth, for the three and six months ended August 31, 2008 and 2007, the percentages which selected items in the Statements of Operations bear to total sales:

                                           Three Months                Six Months
                                         Ended August 31,           Ended August 31,
                                         2008         2007          2008         2007
      Sales
      Display Segment
      Monitors                             56.3 %       49.3 %        55.6 %       47.7 %
      Data Display CRTs                    11.1          9.3          12.4         13.8
      Entertainment CRTs                    1.9          2.6           1.9          2.8
      Components Parts                      0.4          0.3           0.3          0.5

      Total Display Segment                69.7 %       61.5 %        70.2 %       64.8 %
      Wholesale Distribution Segment       30.3         38.5          29.8         35.2

                                          100.0 %      100.0 %       100.0 %      100.0 %

      Costs and expenses
      Cost of goods sold                   63.3 %       66.5 %        63.2 %       65.7 %
      Selling and delivery                  9.6          8.6           9.8          8.8
      General and administrative           21.7         16.9          21.6         17.5

                                           94.6 %       92.0 %        94.6 %       92.0 %

      Income from Operations                5.4 %        8.0 %         5.4 %        8.0 %

      Interest expense                     (1.5 )%      (2.0 )%       (1.5 )%      (2.1 )%
      Other income, net                     0.3          0.6            .4           .5

      Income before income taxes            4.2 %        6.6 %         4.3 %        6.4 %
      Provision for income taxes            1.3          1.2           1.4          1.7

      Net Income                            2.9 %        5.4 %         2.9 %        4.7 %

Video Display Corporation and Subsidiaries August 31, 2008 Net sales
Consolidated net sales decreased $3.6 million for the three months ended August 31, 2008 and decreased $5.5 million for the six months ended August 31, 2008 as compared to the three and six months ended August 31, 2007, respectively. Display segment sales decreased $0.6 million for the three month comparative period and decreased $1.5 million for the six-month comparative period. Sales within the Wholesale Distribution segment decreased $3.0 million for the three month comparative period and decreased $4.1 million for the six-month comparative period.
The net decrease in Display Segment sales for the three months ended August 31, 2008 is primarily attributed to the monitor and entertainment divisions, as compared to the same period ended August 31, 2007. The Monitor revenues decreased $0.4 million for the three month comparable period but increased $0.4 million over the six-month period primarily due to the completion of long term contracts. Entertainment CRTs revenues decreased $0.2 to the comparable three month period and $0.5 to the comparable six-month period. A significant portion of the entertainment division's sales are to major television retailers as replacements for products sold under manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets (25" to 30"), fewer extended warranties were sold by retailers, a trend consistent with recent prior fiscal years. The Company remains the primary supplier of product to meet manufacturers' standard warranties. Growth in this division will be negatively impacted by the decreasing number of extended warranties sold for the larger, more expensive sets. Because the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce exposure to obsolescence. Gross margins
Consolidated gross margins increased from 33.5% for the three months ended August 31, 2007 to 36.7% for the three months ended August 31, 2008 and increased from 34.3% for the six months ended August 31, 2007 to 36.8% for the six months ended August 31, 2008.
Display segment margins increased from 30.3% to 31.1% for the comparable three month period ended August 31, 2008 and increased from 30.2% to 30.8% for the comparative six month period ending August 31, 2008 due to holding overhead costs down while increasing sales. Gross margins within the Monitor division increased from 30.6% to 32.0% for the comparable three month period ending August 31, 2008 and increased from 29.0% to 30.8% for the six months ended August 31, 2008. This increase is primarily attributable to the impact of the product mix of sales in the Monitor segment in Fiscal 2008. Display division gross margins increased from 23.5% to 28.6% for the three month comparable period ending August 31, 2008, and decreased from 31.2% for the six months ended August 31, 2007 to 29.8% for the six months ended August 31, 2008, due to the impact of the decreased margins at the UK division as it transitioned the business to the Data division in the US. Gross margins in home entertainment CRTs decreased from 45.1% to 0.8% for the three month comparable period ending August 31, 2008 and decreased from 46.3% for the six months ended August 31, 2007 to 22.8% for the six months ended August 31, 2008, due to the reduction of manufactured tubes at the Chroma division. Gross margins from Component Parts sold increased from 65.9% to 114.9% for the three month comparable period ending August 31, 2008 and increased from 35.6% for the six months ended August 31, 2007 compared to 124.4% for the six months ended August 31, 2008.
The wholesale segment margins increased from 38.6% to 49.4% for the three months comparable period ended August 31, 2008 and increased from 41.7% to 50.8% for the comparable six month period ended August 31, 2008 due to the changes in customer and product mix.

Video Display Corporation and Subsidiaries August 31, 2008 Operating expenses
Operating expenses as a percentage of sales increased from 25.4% to 31.2% for the three month comparable period ending August 31, 2008 and increased from 26.2% for the six months ended August 31, 2007 to 31.3% for the six months ended August 31, 2008, primarily due to increased legal and accounting fees and a reduction in sales.
Display segment operating expenses increased from 12.7% to 17.3% for the three month comparable period ending August 31, 2008 and from 13.2% to 16.8% for the six month period as compared to the comparable prior year period.
Wholesale Distribution segment operating expenses increased from 12.8% to 14.0% for the three month comparable period ending August 31, 2008 and increased from 13.0% to 14.6% compared to the six month period a year ago, primarily due to a reduction in sales while expenses held steady. Interest expense
Interest expense decreased $0.2 million for the three month comparable period ending August 31, 2008 and $0.4 million for the six months ended August 31, 2008 as compared to the same period a year ago. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. These decreases in interest expense reflect lower average borrowings outstanding and lower average interest rates. Income taxes
The effective tax rate for the three month period ended August 31, 2008 and August 31, 2007 was 31.5% and 18.0%, respectively and for the six months ended August 31, 2008 and August 31, 2007 was 33.5% and 26.3%, respectively. The rate for August 31, 2007 differs from the Federal statutory rate primarily due to the tax refund, net of tax of $0.2 million from the state of Kentucky from prior years recognized in the quarter ending August 31, 2007 and the permanent deductibility of certain expenses for tax purposes and the effect of state taxes and the rate for August 31, 2008 differs from the Federal statutory rate primarily due to the effect of state taxes and the permanent non-deductibility of certain expenses for tax purposes.
The company adopted the Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes in the first quarter ending May 31, 2007. See Note 2. Foreign currency translation
Gains or losses resulting from the transactions with the Company's UK subsidiary are reported in current operations while currency translation adjustments are recognized in a separate component of shareholders' equity. There were no significant gains or losses recognized in either period related to the UK subsidiary.
The Company is closing the UK subsidiary and transferring the business to its Data Display division. This process will be completed this calendar year. Liquidity and Capital Resources
As of August 31, 2008, the Company had total cash of $1.7 million. The Company's working capital was $40.2 million and $39.0 million at August 31, 2008 and February 29, 2008, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, advances from the Company's Chief Executive Officer and long-term debt. Liquidity provided by operating activities of the Company is reduced by working capital requirements, largely inventories and accounts receivable, debt service, capital expenditures, product line additions, stock repurchases and dividends.

Video Display Corporation and Subsidiaries August 31, 2008 The Company markets certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many instances, the Company's products are components of larger display systems for which immediate availability is critical for the customer. Accordingly, the Company enjoys higher gross margins on certain products, but typically has larger investments in inventories than those of its competitors.
The Company continues to monitor its cash and financing positions, seeking to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to grow its business as opportunities present themselves, such as new sales contracts or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows or existing bank lines; however, more permanent sources of capital may be required in certain circumstances.
Cash provided by operations for the six months ended August 31, 2008 was $1.1 million as compared to cash provided of $1.4 million for the six months ended August 31, 2007. This net decrease in cash provided is primarily the result of a decrease in net income partially offset by changes in working capital, particularly accounts payable and uncompleted contracts.
Investing activities used cash of $0.4 million related to the purchase of various equipment items during the six months ended August 31, 2008, compared to cash used of $0.4 million during the six months ended August 31, 2007.
Financing activities used cash of $0.6 million for the six months ended August 31, 2008, compared to cash used of $0.1 million for the six months ended August 31, 2007, reflecting the purchases of Treasury stock of $1.4 million offset by borrowings of $0.8 million.
The Company's debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants.
The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company's common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company's common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. Under this program, an additional 187,429 shares remain authorized to be repurchased by the Company at August 31, 2008. The Loan and Security Agreement executed by Company on June 29, 2006 includes restrictions on investments and requires bank approval on further repurchases of stock under this program.

Video Display Corporation and Subsidiaries August 31, 2008 Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's consolidated financial statements. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:
Reserves on inventories
Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management considers the projected demand for CRTs in this estimate of net realizable value. Management is able to identify consumer buying trends, such as size and application, well in advance of supplying replacement CRTs. Thus, the Company is able to adjust inventory-stocking levels according to the projected demand. The average life of a CRT is five to seven years, at which time the Company's replacement market develops. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the OEMs, new products being marketed, and technological advances relative to the product capabilities of the Company's existing inventories. There have been no significant changes in management's estimates in fiscal 2008 and 2007; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.
Revenue Recognition
Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company's delivery term typically is F.O.B. shipping point.
In accordance with Emerging Issues Task Force (EITF) issue 00-10, shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in selling and delivery in the consolidated statements of operations.
A portion of the Company's revenue is derived from contracts to manufacture flat panel and CRTs to a buyers' specification. These contracts are accounted for under the provisions of the American Institute of Certified Public Accountants' Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.
The Wholesale Distribution segment has several distribution agreements that it accounts for using the gross revenue basis as prescribed by EITF issue 99-19. The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk. The call center service revenue is recognized based on written pricing agreements with each manufacturer, on a per call, per email or per standard mail basis.

Video Display Corporation and Subsidiaries August 31, 2008 Allowance for doubtful accounts
The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying historical credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Company's allowance has been sufficient for any customer write-offs. Although the Company cannot guarantee future results, management believes its policies and procedures relating to customer exposure are adequate. Warranty reserves
The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management believes that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future. Other Accounting Policies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Values Measurements.This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for any interim periods within those fiscal years. Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies are required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. The adoption of Statement No. 157 did not have a material impact on the Management's consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Statement No. 159 allows companies to elect to apply fair value accounting for certain financial assets and liabilities. Statement No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. Statement No. 159 is effective for the Company during the fiscal year ended February 28, 2009. The Company has evaluated the effect of the adoption of Statement No. 159 and due to it having no material impact on the Company's consolidated financial statements, elected not to apply it.
In March 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("Interpretation No. 48"), which clarifies the accounting for uncertainty in income taxes recognized in the Companies' consolidated financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.

Video Display Corporation and Subsidiaries August 31, 2008 Interpretation No. 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. In addition, it provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. The adoption of Interpretation No. 48 in fiscal 2008 did not have a material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued Statement No. 141 (R), Business Combinations. This statement replaces SFAS 141, "Business Combinations." This statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in it's financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement No. 141 (R) will apply prospectively to business combinations for which the acquisition date is on or after the Company's fiscal year beginning March 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that Statement No. 141 (R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after February 28, 2010.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements. This Statement amends Accounting Research . . .