• 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 2010, 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 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 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 makes 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 August 31, 2009 and February 28, 2009 believes its reserves to be adequate.

Video Display Corporation and Subsidiaries August 31, 2009 Interest rate exposure - The Company had outstanding bank debt in excess of $21.6 million as of August 31, 2009, 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, 2009 and 2008, the percentages which selected items in the Statements of Operations bear to total sales:

                                           Three Months                Six Months
                                         Ended August 31,           Ended August 31,
                                         2009         2008          2009         2008
      Sales
      Display Segment Monitors             59.0 %       57.2 %        56.9 %       56.4 %
      Data Display CRTs                    10.0         11.2          12.5         12.6
      Entertainment CRTs                    1.0          1.9           1.0          1.9
      Components Parts                      0.4          0.4           0.2          0.4

      Total Display Segment                70.4 %       70.7 %        70.6 %       71.3 %
      Wholesale Distribution Segment       29.6         29.3          29.4         28.7

                                          100.0 %      100.0 %       100.0 %      100.0 %
      Costs and expenses
      Cost of goods sold                   64.6 %       62.8 %        64.4 %       62.7 %
      Selling and delivery                 10.3          9.7          10.6          9.9
      General and administrative           23.4         22.0          23.8         21.9

                                           98.3 %       94.5 %        98.8 %       94.5 %

      Income from operations                1.7 %        5.5 %         1.2 %        5.5 %

      Interest expense                     (1.8 )%      (1.5 )%       (1.5 )%      (1.5 )%
      Other income, net                     0.2          0.2           1.0           .4

      Income before income taxes            0.1 %        4.2 %         0.7 %        4.4 %
      Provision for income taxes            0.0          1.3           0.2          1.5

      Net income                            0.1 %        2.9 %         0.5 %        2.9 %

Video Display Corporation and Subsidiaries August 31, 2009 Net sales
Consolidated net sales decreased $2.1 million for the three months ended August 31, 2009 and decreased $5.0 million for the six months ended August 31, 2009 as compared to the three and six months ended August 31, 2008, respectively. Display segment sales decreased $1.6 million for the three month comparative period and decreased $3.8 million for the six-month comparative period. Sales within the Wholesale Distribution segment decreased $0.5 million for the three month comparative period and decreased $1.2 million for the six-month comparative period.
The net decrease in Display Segment sales for the three months ended August 31, 2009 is primarily attributed to the monitor and display divisions, as compared to the same period ended August 31, 2008. The Monitor revenues decreased $0.9 million for the three month comparable period and decreased $2.7 million over the six-month period primarily due to delays in releases of long term contracts. The display revenues decreased $0.4 to the comparable three month period and $0.7 to the comparable six-month period primarily due to the shut down of the UK division in June, 2009. Gross margins
Consolidated gross margins decreased from 37.2% for the three months ended August 31, 2008 to 35.4% for the three months ended August 31, 2009 and decreased from 37.3% for the six months ended August 31, 2008 to 35.6% for the six months ended August 31, 2009.
Display segment margins decreased from 31.1% to 30.5% for the comparable three month period ended August 31, 2009 and decreased from 30.8% to 27.7% for the comparative six month period ended August 31, 2009 due to the absorption of the fixed overhead costs on lower sales volume. Gross margins within the Monitor division decreased from 32.0% to 29.7% for the comparable three month period ended August 31, 2009 and decreased from 30.8% to 26.0% for the six months ended August 31, 2009. This decrease is primarily attributable to the impact of lower sales in the Monitor division in Fiscal 2010. Data Display division gross margins increased from 28.6% to 36.7% for the three month comparable period ended August 31, 2009, and increased from 29.7% for the six months ended August 31, 2008 to 36.1% for the six months ended August 31, 2009, due to the impact of the increased margins at the Company's Clinton Displays facility. Gross margins in home entertainment CRTs decreased from 0.5% to (13.6%) for the three month comparable period ended August 31, 2009 and decreased from 22.6% for the six months ended August 31, 2008 to (11.4%) for the six months ended August 31, 2009, due to the reduction of manufactured tubes at the Chroma division. Gross margins from Component Parts sold increased from 114.3% to 128.6% for the three month comparable period ended August 31, 2009 and increased from 124.1% for the six months ended August 31, 2008 compared to 191.2% for the six months ended August 31, 2009.
The Wholesale Distribution segment margins decreased from 52.1% to 47.1% for the three months comparable period ended August 31, 2009 and increased from 53.5% to 54.4% for the comparable six month period ended August 31, 2009 due to the changes in customer and product mix.

Video Display Corporation and Subsidiaries August 31, 2009 Operating expenses
Operating expenses as a percentage of sales increased from 31.7% to 33.7% for the three month comparable period ended August 31, 2009 and increased from 31.8% for the six months ended August 31, 2008 to 34.4% for the six months ended August 31, 2009, due to a reduction in sales from the prior year. Actual operating expenses decreased from the prior year for the six month period ended August 31, 2009.
Display segment operating expenses increased from 23.9% to 26.0% of net sales for the three month comparable period ended August 31, 2009 and from 23.0% to 26.3% for the six month period as compared to the comparable prior year period.
Wholesale Distribution segment operating expenses increased from 50.8% to 52.2% of net sales for the three month comparable period ended August 31, 2009 and were flat at 53.7% against the six month period a year ago, primarily due to a reduction in expenses to offset a decline in sales. Interest expense
Interest expense remained flat for the three month comparable period ended August 31, 2009 and for the six months ended August 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. The interest expense reflects higher average borrowings outstanding and higher average interest rates.
Income taxes
The effective tax rate for the three months ended August 31, 2009 and August 31, 2008 was (36.8%) and 31.5%, respectively and for the six months ended August 31, 2009 and August 31, 2008 was 22.9% and 33.6%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes and research and experimentation tax credits. Liquidity and Capital Resources
As of August 31, 2009, the Company had total cash of $1.1 million. The Company's working capital was $19.9 million and $36.4 million at August 31, 2009 and February 28, 2009, respectively. This fluctuation is due to the line of credit being a short term liability in the current year. 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, 2009 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, 2009 was $1.0 million as compared to cash provided of $1.1 million for the six months ended August 31, 2008. This net decrease in cash provided is primarily the result of a decrease in net income, an increase in uncompleted contracts, and an increase in inventories due to last time buys partially offset by an income tax refund and an increase in accounts payables.
Investing activities used cash of $0.4 million primarily related to license agreements and purchases of equipment offset by changes in outside investments during the six months ended August 31, 2009, compared to cash used of $0.4 million during the six months ended August 31, 2008 for equipment purchases.
Financing activities used cash of $0.2 million for the six months ended August 31, 2009, compared to cash used of $0.6 million for the six months ended August 31, 2008, reflecting net borrowings on the Company's line of credit, and borrowings 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 August 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 judgment, estimation, 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:

Video Display Corporation and Subsidiaries August 31, 2009 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 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 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 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.

Video Display Corporation and Subsidiaries August 31, 2009 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.
Reclassified Revenues
In the current year, the Company classified certain revenues previously reported on a gross basis to the net basis in the statement of operations. For comparative purposes, amounts in the prior years have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings. Recent Accounting Pronouncements
See Note 2 in Notes to Condensed Consolidated Financial Statements (unaudited) for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations and financial conditions, which is incorporated herein by reference. Forward-Looking Information and Risk Factors This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "intends," "will," and "expect" and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company's Annual Report of Form 10-K for the year ended February 28, 2009 could cause actual results to differ materially.

Video Display Corporation and Subsidiaries August 31, 2009