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

• Entertainment CRT - 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 2010, management of the Company is focusing key resources on strategic efforts to dispose of unprofitable operations and seek 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 250 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

Video Display Corporation and Subsidiaries May 31, 2009 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 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 May 31, 2009 and February 28, 2009, believes its reserves to be adequate.
Interest rate exposure - The Company had outstanding bank debt in excess of $22.0 million as of May 31, 2009, all of which is subject to interest rate fluctuations by the Company's lenders. Higher rates applied by the Federal Reserve Board could have a negative affect on 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 months ended May 31, 2009 and 2008, the percentages which selected items in the Statements of Operations bear to total sales:

                                                      Three Months
                                                      Ended May 31,
                                                    2009        2008
                 Sales
                 Display Segment
                 Monitors                            54.7 %      55.6 %
                 Data Display CRT                    15.0        14.0
                 Entertainment CRT                    1.0         2.0
                 Components Parts                     0.1         0.3

                 Total Display Segment               70.8 %      71.9 %
                 Wholesale Distribution Segment      29.2        28.1

                                                    100.0 %     100.0 %
                 Costs and expenses
                 Cost of goods sold                  64.3 %      62.6 %
                 Selling and delivery                10.9        10.1
                 General and administrative          24.1        21.7

                                                     99.3 %      94.4 %

                 Operating Profit                     0.7 %       5.6 %

Video Display Corporation and Subsidiaries

                                  May 31, 2009

                                                    Three Months
                                                    Ended May 31,
                                                  2009        2008
                   Interest expense               (1.2 )%     (1.5 )%

                   Other income, net               1.8         0.6

                   Income before income taxes      1.3 %       4.7 %
                   Income tax expense              0.4         1.7

                   Net income                      0.9 %       3.0 %

Net sales
Consolidated net sales decreased $2.9 million for the three months ended May 31, 2009 compared to the three months ended May 31, 2008. Display segment sales decreased $2.2 million for the three-month comparative period and sales within the Wholesale Distribution segment decreased $0.6 million for the three-month comparative period.
The net decrease in Display Segment sales for the three months ended May 31, 2009 is primarily attributed to the monitor division, as compared to the same period ended May 31, 2008. The Monitor revenues decreased $1.7 million over the three-month period primarily due to the delay in the implementation of long term contracts. The Company expects these contracts to begin shipping in the second and third quarters. The Data Display CRT revenues decreased $0.2 million over the three-month period primarily due to the decline in the replacement CRT market. Entertainment CRTs revenues declined $0.2 million over the comparable three-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.
The net decrease in the Wholesale Segment sales for the three months ended May 31, 2009 is attributable to the decrease in sales for one of the divisions leading customers, Rent-A-Center due to decreased consumer demand. Gross margins
Consolidated gross margins decreased from 37.4% for the three months ended May 31, 2008 to 35.7% for the three months ended May 31, 2009.
Display segment margins decreased from 30.6% to 24.8% for the comparative three month period. Gross margins within the Monitor division decreased to 21.8% for the three months ended May 31, 2009 from 29.5% for the three months ended May 31, 2008. This decrease is primarily attributable to the impact of the delay in the implementation of the new contracts in the Monitor division in Fiscal 2010, fixed costs absorbed on less sales. Data Display CRT gross margins increased from 30.6% for the three months ended May 31, 2008 to 35.7% for the three months ended May 31, 2009, due to the increase of higher margin products to large customers during the three months ended May 31, 2009. Gross margins in Entertainment CRT were negative for the three months ended May 31, 2009 due to reduced volume at both of the division's locations as business winds down at the Chroma television tube plant. Gross margins from Component Parts were 55.0% for the three months ended May 31, 2009 and 41.8% the three months ended May 31, 2008 including intercompany sales. The majority of this division's sales are within the Company.

Video Display Corporation and Subsidiaries May 31, 2009 Operating expenses
Operating expenses as a percentage of sales increased from 31.8% for the three months ended May 31, 2008 to 35.0% for the three months ended May 31, 2009. This increase was primarily due to an increase in display segment research and development costs and legal fees offset by wholesale distribution segment cost reduction programs implemented by management during the fourth quarter of fiscal 2009.
Interest expense
Interest expense decreased $0.1 million for the three months ended May 31, 2009 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 interest rates.
Income taxes
The effective tax rate for the three months ended May 31, 2009 and 2008 was 28.3% and 35.3%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes and the permanent non-deductibility of certain expenses for tax purposes. Liquidity and Capital Resources
As of May 31, 2009, the Company had total cash of $0.7 million. The Company's working capital was $36.6 million and $36.4 million at May 31, 2009 and February 29, 2009, 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 and dividends.
As of May 31, 2009, the Company was in violation of the Consolidated Fixed Charge Cover Ratio, the restriction of purchases of the Company stock and the Company's Fox International, Ltd. Subsidiary's line of credit expired. On August 27, 2009, the Company and RBC Bank executed an amendment to the credit agreements. The amendment includes a waiver for the first quarter Fixed Charge Cover Ratio, annualized covenants for the quarters ended May 31, 2009, August 31, 2009, and November 30, 2009, and thereafter to be calculated on a rolling twelve months, modifications to the Fixed Charge Covenant Ratio, modifying the Adjusted Total Liabilities to Adjusted Tangible Net Worth threshold, extending the subsidiary's line of credit for 90 days while new financing is completed with another financial institution, modifying the existing term loan by increasing the fixed monthly principal from $25,000 monthly to $50,000 monthly, a waiver for the purchases of the Company stock, the addition of a limited guarantee from Ron Ordway, CEO and mortgages on certain properties as additional collateral. Interest will be based on Libor plus the applicable margin as defined in the loan agreement with a minimum interest rate of 4%. The Company is currently working with several banks for the new financing for Fox International, Ltd. Management believes the new loan agreements will be completed before the end of the third quarter. The Company is in compliance with the Consolidated Fixed Charge Cover Ratio under the new agreement and management believes based on their projections, the Company will be able to meet the new covenants and remain in compliance under the new loan agreements.
The Company specializes in 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.

Video Display Corporation and Subsidiaries May 31, 2009 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 used in operations for the three months ended May 31, 2009 was $0.1 million as compared to cash provided by operations of $0.2 million for the three months ended May 31, 2008. This net decrease in cash provided is primarily the result of a decrease in profitability.
Investing activities provided cash of $0.3 million primarily related to changes in outside investments offset by purchases of equipment during the three months ended May 31, 2009, compared to cash used of $0.2 million during the three months ended May 31, 2008.
Financing activities used cash of $0.2 million for the three months ended May 31, 2009, compared to cash provided of $0.2 million for the three months ended May 31, 2008, reflecting borrowings from the line of credit, a repayment against a loan from the Company's Chief Executive Officer and the purchases of Treasury stock.
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 July 8, 2009, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 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 816,418 shares remain authorized to be repurchased by the Company at May 31, 2009. The Loan and Security Agreement executed by the Company on September 26, 2008 includes restrictions on investments which currently restrict 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 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.

Video Display Corporation and Subsidiaries May 31, 2009 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 were no significant changes in management's estimates in the first quarter of fiscal 2010 and 2009; 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 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 and one agreement which uses the net revenue basis as prescribed by EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent". The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk on the majority of its agreements but uses the net method on the one agreement because it does not have those same risks for that agreement. 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. 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 past 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

Video Display Corporation and Subsidiaries May 31, 2009 The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on historical 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 its procedures historically 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.
Reclassified Revenues
In the current period, the Company classified certain revenues on a net basis that had been reported in prior periods on a gross basis in the statement of operations. For comparative purposes, amounts in the prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
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 Company's adoption of Statement No. 157 did not have a material impact on 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 was effective for the Company during the fiscal year ended February 28, 2009. The Company elected not to adopt Statement No. 159.
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.
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, de-recognition, 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 non-controlling 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) applies prospectively to business combinations for which the acquisition date is on or after the Company's fiscal year beginning March 1, 2009. The Company is currently evaluating the impact on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 160, Non-controlling Interest in Consolidated Financial Statements. This Statement amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is . . .