• 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 November 30, 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 November 30, 2008 and February 29, 2008 believes its reserves to be adequate.
Interest rate exposure - The Company had outstanding bank debt in excess of $22.0 million as of November 30, 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 nine months ended November 30, 2008 and 2007, the percentages which selected items in the Statements of Operations bear to total sales:

                                                Three Months               Nine Months
                                             Ended November 30,         Ended November 30,
                                              2008         2007          2008         2007
   Sales
   Display Segment
   Monitors                                    54.4 %       51.7 %        55.2 %       49.0 %
   Data Display CRTs                            8.0         12.3          11.0         13.3
   Entertainment CRTs                           1.7          2.4           1.8          2.7
   Components Parts                             0.4          0.5           0.4          0.5

   Total Display Segment                       64.5 %       66.9 %        68.4 %       65.5 %
   Wholesale Distribution Segment              35.5         33.1          31.6         34.5

                                              100.0 %      100.0 %       100.0 %      100.0 %

   Costs and expenses
   Cost of goods sold                          69.6 %       66.9 %        65.3 %       66.1 %
   Selling and delivery                        10.3          8.9           9.9          8.8
   General and administrative                  23.8         19.1          22.3         18.0

                                              103.7 %       94.9 %        97.5 %       92.9 %

   Income (loss) from operations              (3.7) %        5.1 %         2.5 %        7.1 %

   Interest expense                           (1.7) %      (2.1) %       (1.5) %      (2.1) %
   Other income, net                            0.8          1.4           0.5           .8

   Income (loss) before income taxes          (4.6) %        4.4 %         1.5 %        5.8 %
   Provision (benefit) for income taxes        (3.2 )        1.4           0.0          1.6

   Net Income (loss)                          (1.4) %        3.0 %         1.5 %        4.2 %

Video Display Corporation and Subsidiaries November 30, 2008 Net sales
Consolidated net sales decreased $2.8 million for the three months ended November 30, 2008 and decreased $8.3 million for the nine months ended November 30, 2008 as compared to the three and nine months ended November 30, 2007, respectively. Display segment sales decreased $2.3 million for the three month comparative period and decreased $3.8 million for the nine-month comparative period. Sales within the Wholesale Distribution segment decreased $0.5 million for the three month comparative period and decreased $4.5 million for the nine-month comparative period.
The net decrease in Display Segment sales for the three months ended November 30, 2008 is primarily attributed to the monitor and entertainment divisions, as compared to the same period ended November 30, 2007. The net decrease in sales for the nine months ended November 30, 2008 as compared to the same period ending November 30, 2007 is attributable to the Display division which was down due to the closing of the UK subsidiary and slow sales for replacement CRTs. The Monitor revenues decreased $1.0 million for the three month comparable period and $0.5 million over the nine-month period primarily due to the completion of long term contracts. Entertainment CRTs revenues decreased $0.2 to the comparable three month period and $0.7 to the comparable nine-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 decreased by 20.3% for the three months ended November 30, 2008 compared three months ended November 30, 2007 and decreased by 10.6% for the nine months ended November 30, 2008 to the nine months ended November 30, 2007.
Display segment margins decreased by 8.3% for the comparable three month period ended November 30, 2008 and decreased by 4.9% for the comparative nine month period ending November 30, 2008 due to holding overhead costs down while sales decreased at a greater rate. Gross margins within the Monitor division were flat due to the increased margin percentages 31.6% to 29.2% for the comparable three month period ending November 30, 2008 and the increased percentages 31.0% to 29.1% for the nine months ended November 30, 2008 even though sales were down. This increase is primarily attributable to the impact of the product mix of sales in the Monitor segment in Fiscal 2009. Display division gross margins increased from 29.2% to 30.7% for the three month comparable period ending November 30, 2008, and decreased from 30.6% for the nine months ended November 30, 2007 to 30.0% for the nine months ended November 30, 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 increased from 31.5% to 37.6% for the three month comparable period ending November 30, 2008 and decreased from 42.0% for the nine months ended November 30, 2007 to 27.2% for the nine months ended November 30, 2008, due to the reduction of manufactured tubes at the Chroma division. Gross margins from Component Parts sold increased by 82.8% for the three month comparable period ending November 30, 2008 and increased by 98.7% for the nine months ended November 30, 2008.
The wholesale segment margins increased from 41.3% to 42.1% for the nine months comparable period ended November 30, 2008 and decreased from 40.4% to 26.8% for the comparable three month period ended November 30, 2008 due to the changes in customer mix. Fox sales have increased with high volume low margin accounts while decreasing with a high volume account with better margins.

Video Display Corporation and Subsidiaries November 30, 2008 Operating expenses
Operating expenses as a percentage of sales increased from 28.0% to 34.1% for the three month comparable period ending November 30, 2008 and increased from 26.8% for the nine months ended November 30, 2007 to 32.2% for the nine months ended November 30, 2008, primarily due to increased legal and accounting fees and a reduction in sales.
Display segment operating expenses increased from 14.8% to 19.6% for the three month comparable period ending November 30, 2008 and from 13.7% to 17.8% for the nine month period as compared to the comparable prior year period. The expenses have increased primarily due to higher legal fees due to the Barco lawsuit and increased professional fees due to outside help in the IRS audit and in procuring the Research and Experimentation tax credits.
Wholesale Distribution segment operating expenses increased from 13.3% to 14.5% for the three month comparable period ended November 30, 2008 and increased from 13.1% to 14.5% compared to the nine month period a year ago, primarily due to a reduction in sales while expenses held steady. Interest expense
Interest expense decreased $0.1 million for the three month comparable period ending November 30, 2008 and $0.5 million for the nine months ended November 30, 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 November 30, 2008 and November 30, 2007 was (69.0%) and 30.8%, respectively and for the nine months ended November 30, 2008 and November 30, 2007 was (2.0%) and 27.4%, respectively. The rate for the nine months ended November 30, 2008 differs from the Federal statutory rate primarily due to approximately $175,000 of research and development tax credits applied to the fiscal 2008 tax year and approximately $150,000 of research and development tax credits anticipated for the fiscal 2009 tax year. These amounts were offset partially by an increase of approximately $42,000 related to transfer pricing adjustments.
An IRS audit was concluded during the quarter. The results were the above mentioned transfer pricing adjustment, an adjustment of approximately $115,000 for differences in the valuation of the inventory and approximately $23,000 of interest.
The company adopted the Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes in the first quarter ended 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 November 30, 2008, the Company had total cash of $1.1 million. The Company's working capital was $40.8 million and $39.0 million at November 30, 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

Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (unaudited) November 30, 2008 operating activities of the Company is reduced by working capital requirements, largely inventories and accounts receivable, debt service, capital expenditures, investments, product line additions, stock repurchases and dividends.
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 nine months ended November 30, 2008 was $0.9 million as compared to cash provided of $1.6 million for the nine months ended November 30, 2007. This net decrease in cash provided is primarily the result of a decrease in net income.
Investing activities used cash of $1.2 million related to the purchase of various equipment items and the investment in outside securities during the nine months ended November 30, 2008, compared to cash used of $0.6 million during the nine months ended November 30, 2007 for the purchase of various equipment items.
Financing activities used cash of $0.1 million for the nine months ended November 30, 2008, compared to cash used of $1.3 million for the nine months ended November 30, 2007, reflecting the purchases of Treasury stock of $1.9, repayments of loans to related parties of $2.4 million offset by borrowings of $4.3 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's debt agreement with this financial institution contains certain restrictions regarding investments. As of November 30, 2008 the Company was in technical violation of a restriction. The Company received a waiver for the quarter ending November 30, 2008. The Company must divest of these investments by the end of the quarter ending February 28, 2009.
The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,062,500 shares of the Company's common stock in the open market. On December 4, 2008, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 570,000 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 681,315 shares remain authorized to be repurchased by the Company at November 30, 2008. The Loan and Security Agreement executed by the Company on June 29, 2006 and updated on September 26, 2008 includes restrictions on investments and requires bank approval on further repurchases of stock under this program.
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

Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (unaudited) November 30, 2008 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 2009 and 2008; 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 Notes to Consolidated Financial Statements (unaudited) November 30, 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 Notes to Consolidated Financial Statements (unaudited) November 30, 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 . . .