The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in "Risk Factors" and elsewhere in this Form 10-K. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. We do not have any intention or obligation to update forward-looking statements included in this Form 10-K after the date of this Form 10-K, except as required by law.

Overview of the Company and Recent Developments

Meade Instruments Corp. is engaged in the design, manufacture, marketing and sale of consumer products, primarily telescopes, telescope accessories and sport optics products such as binoculars and spotting scopes. We design our products in-house or with the assistance of external consultants. Most of our products are manufactured overseas by contract manufacturers in Asia, while our high-end telescopes are manufactured and assembled in our Mexico facilities. Sales of our products are driven by an in-house sales force as well as a network of sales representatives throughout the U.S. and through international distributors worldwide. We currently operate out of two primary locations: Irvine, California and Tijuana, Mexico. Our California facility serves as the Company's corporate headquarters and served as our U.S. distribution facility through February 2012, at which time we eliminated the U.S. positions associated with our U.S. distribution activities in order to reduce the Company's costs in reaction to the decline in sales of the Company's low-end telescopes and other imported products. The distribution of the Company's products, including imported products, is now managed at our Mexico facility which contains our manufacturing, assembly, repair, packaging, research and development, distribution and other general and administrative operations. Our business is highly seasonal and our financial results have historically varied significantly on a quarter-by-quarter basis throughout each year.

We believe that the Company holds valuable brand names and intellectual property that provide us with a competitive advantage in the marketplace. The Meade® brand name is ubiquitous in the consumer telescope market, while the Coronado® brand name represents a unique niche in the area of solar astronomy.

Critical Accounting Policies and Estimates

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies which management believes are the most critical to assist users in fully understanding and evaluating the Company's reported financial results include the following:

Revenue Recognition

The Company's revenue recognition policy complies with ASC No. 605, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, typically at the time of shipment, the price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenue is not recognized at the time of shipment if these criteria are not met. Under certain circumstances, the Company accepts product returns or offers markdown incentives. Material management judgments must be made and used in connection with establishing sales returns and allowances estimates. The Company continuously monitors and tracks returns and allowances and records revenues net of provisions for returns and allowances. The Company's estimate of sales returns and allowances is based upon several factors including historical experience, current market and economic conditions, customer demand and acceptance of the Company's products and/or any notification received by the Company of such a return. Historically, sales returns and allowances have been within management's estimates; however, actual returns may differ significantly, either favorably or unfavorably, from management's estimates depending on actual market conditions at the time of the return.

Inventories

Inventories are stated at the lower of cost, as determined using the first-in, first-out ("FIFO") method, or market. Costs include materials, labor and manufacturing overhead. The Company evaluates the carrying value of its inventories taking into account such factors as historical and anticipated future sales compared with quantities on hand and the price the Company expects to obtain for its products in their respective markets. The Company also evaluates the composition of its inventories to identify any slow-moving or obsolete product. These evaluations require material management judgments, including estimates of future sales, continuing market acceptance of the Company's products, and current market and economic conditions. Inventory may be written down based on such judgments for any inventories that are identified as having a net realizable value less than its cost. However, if the Company is not able to meet its sales expectations, or if market conditions deteriorate significantly from management's estimates, reductions in the net realizable value of the Company's inventories could have a material adverse impact on future operating results.

Acquisition-related intangible assets

The Company accounts for acquisition-related intangible assets in accordance with FASB Accounting Standards Codification No. 805-10, Business Combinations, and ASC No. 350-20, Goodwill and Other Intangible Assets. A portion of the remaining difference between the purchase price and the fair value of net tangible assets at the date of acquisition is included in the balance sheet as acquisition-related intangible assets. Amortization periods for the intangible assets subject to amortization range from seven to fifteen years depending on the nature of the assets acquired. The carrying value of acquisition-related intangible assets, including the related amortization period, is evaluated in the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount exceeds the fair value, which is determined based upon estimated discounted future cash flows based upon our estimated cost of capital, an impairment loss is reflected in loss from operations. Such estimates are subject to change and we may be required to recognize an impairment loss in the future.

Income taxes

In accordance with ASC 740, Accounting for Income Taxes, the Company determined that there was sufficient uncertainty surrounding the future realization of its deferred tax assets to warrant the recording of a full valuation allowance. The valuation allowance was recorded based upon the Company's determination that there was insufficient objective evidence, at the time, to recognize those assets for financial reporting purposes. For the fiscal year ended February 29, 2012, the Company has not changed its assessment regarding the recoverability of its deferred tax assets. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating sufficient taxable income in future periods, including periods prior to the expiration of certain underlying tax credits.

As of February 29, 2012 and as of February 28, 2011, the Company has no unrecognized tax benefits. Management does not anticipate that there will be a material change in the balance of unrecognized tax benefits within the next 12 months.

The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. At February 29, 2012, there were no accrued interest and penalties related to uncertain tax positions.

The provision for income taxes consists of minimum tax in various U.S. states and income taxes on the Company's operations in Mexico.

The tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.

Results of Operations

The following table sets forth, for the periods indicated, certain items from the Company's statements of operations as a percentage of net sales for the periods indicated.

                                          0000000              0000000
                                                   Years Ended
                                        February 29,         February 28,
                                            2012                 2011
          Net sales                             100.0 %              100.0 %
          Cost of sales                          75.4                 77.5

          Gross profit                           24.6                 22.5

          Operating expenses:
          Selling                                10.9                  9.3
          General and administrative             15.8                 15.9
          Research and development                4.2                  3.0

          Loss from operations                   (6.3 )               (5.7 )
          Interest income, net                     -                    -

          Loss before income taxes               (6.3 )               (5.7 )
          Provision for income taxes              0.3                 (0.3 )

          Net loss                               (6.6 )%              (5.4 )%

The following table summarizes our net sales by product category (in millions):

                                               0000000             0000000
                                                       Years Ended
                                             February 29,        February 28,
                                                 2012                2011
       Telescopes & related products        $         17.8      $         23.3
       Weather stations & timing products              0.7                 1.0
       Sport Optics                                    1.5                 0.2
       Other                                           1.6                 1.8

       Net sales                            $         21.6      $         26.3

Fiscal 2012 Compared to Fiscal 2011

The Company reported net sales of $21.6 million during the fiscal year ended February 29, 2012, a decrease of $4.7 million or 18% from net sales of $26.3 million during the fiscal year ended February 28, 2011.

Approximately $2.7 million or 57% of this decrease in net sales was due to a decrease in net sales of the Company's imported low-end telescope products to mass-retail customers. This decrease of sales of low-end telescopes to mass-retail customers was partially offset by sales of sport optics products to such customers. Sales of sport optics products to mass retail customers increased approximately $1.3 million compared to the prior year. Sales of nearly all of the Company's other products were down. Declines in the Company's high-end and intermediate telescope and related products were attributed

to increased competition, effects on consumer discretionary spending associated with the general economic conditions and a decrease in order fulfillment attributed primarily to the announcement of the Company's new LX800 and LX80 products in fall 2011. The Company received approximately $1.5 million in orders for these products during the fourth quarter of fiscal 2012 but the Company was not able to begin shipping these products until after the end of fiscal 2012. The LX800 began shipping in April 2012 and the LX80 is expected to ship soon after that.

Approximately 15% of the Company's net sales during the fiscal year ended February 28, 2011 were from one customer. No such concentration existed during the fiscal year ended February 29, 2012. The primary reason for the decline in sales to these customers was a decrease in sales of lower-end telescope products which the Company imported from suppliers located in China.

The gross profit margin during fiscal 2012 increased to 25% of net sales, compared with 23% of net sales in fiscal 2011. This improvement in the gross profit margin was driven primarily by a favorable change in product mix as the Company sold less low-end telescopes and imported products which typically earn a lower margin and are characterized by substantial returns by consumers who purchase those products at mass retail stores which have liberal return policies. Consumers who purchase the Company's high end and intermediate telescopes and related accessories are most often knowledgeable about the product and are less likely to purchase the products impulsively and return the product to the retail store.

Selling expenses decreased from $2.5 million (9% of net sales) in fiscal 2011 to $2.4 million (11% of net sales) in fiscal 2012. This decrease was attributable to reduced net sales, offset partially by increases in discretionary spending such as advertising expenses attributable to new product introductions and related promotions. In order to address the increase in selling expenses as a percentage of net sales, the Company eliminated approximately 10 positions relating to its U.S. sales and distribution operations in January 2012 due to the decline in sales of the Company's low-end telescopes and imported products. These reductions are expected to save the Company approximately $0.7 million annually.

General and administrative expenses for fiscal 2012 were $3.4 million (16% of net sales), a decrease of $0.8 million or 19% compared to $4.2 million (16% of net sales) in fiscal 2011. Approximately $0.2 million or 25% of the decrease was due to lower stock compensation expense. Approximately $0.2 million or 25% was attributable to further reductions in headcount. The remainder of the decrease was comprised of reductions in property and use taxes due to a reduction in the Company's property and equipment located in Orange County, California, and lower insurance, legal fees, and other expenses as part of the Company's continued efforts to minimize its costs.

Research and development expenses increased approximately $0.1 million or 15% from $0.8 million in fiscal 2011 to $0.9 million in fiscal 2012. The Company has been in the process of developing several new products which are intended to capitalize on the Company's competitive advantages and to broaden the Company's product line into areas of the market which the Company has been absent in for several years-such as German equatorial mounted telescopes. The LX800 and LX80 telescopes were announced in Fall 2011 and the LX600 is in the process of being announced. Additional product development projects are planned to be completed in fiscal 2013.

The Company earned interest income in fiscal 2012 and 2011, due to the continued cash balance the Company maintains. The reduction in interest income from $3 thousand in fiscal 2011 to $2 thousand in fiscal 2012 was due to lower rates and average carrying balances.

Liquidity and Capital Resources

Fluctuations in Cash & Working Capital

The Company had cash and cash equivalents of $3.9 million at February 29, 2012, a decrease of $1.2 million or 24% compared to $5.1 million at February 28, 2011 despite no change in the net loss (i.e., a net loss of $1.4 million in both years).

Approximately $0.9 million or 75% of the decrease in cash was due to an increase in cash used by operating activities due to net unfavorable fluctuations in working capital, such as increases in inventories and reductions in accounts payable and accrued liabilities.

In fiscal 2012, inventories increased by approximately $0.6 million primarily due to the fact that the Company's new LX800 and LX80 products were awaiting final development changes prior to their being approved for shipment. In addition, accounts receivable decreased approximately $1.0 million compared to the prior year because of a decrease in net sales in the fourth quarter, not because of an improvement in the Company's cash conversion cycle. The net increase in working capital in fiscal 2012 compared to the prior year resulted in an increase in cash used by operations of $0.2 million in fiscal 2012.

In fiscal 2011, the Company increased cash provided by operating activities by $0.7 million as a result of a reduction in working capital achieved by reducing its inventory as part of a concentrated effort to reduce inventory and reducing its sales backlog in the fourth quarter of fiscal 2011.

The remaining $0.3 million or 25% of the decrease in cash was due to the fact that the loss in fiscal 2012 was comprised of less non-cash expenses such as depreciation and amortization and stock-based compensation compared to fiscal 2011.

Access to Credit

The Company currently has in place an undrawn $10 million secured credit facility with First Capital. The original term of the agreement expired in January 2012, at which time the prepayment penalty provision expired but the expiration of the initial term did not materially affect the lender's ability to restrict, reduce or eliminate the Company's access to credit. The Company continues to assign its invoices to First Capital. Availability of funds under this facility is based on a percentage of eligible accounts receivable and inventory located in the U.S. Availability on this facility amounted to over $0.9 million as of February 29, 2012 (approximately 80% of accounts receivable). While the Company's credit facility does not contain explicit financial covenants, the Company's lender has significant latitude in restricting, reducing or withdrawing the Company's credit facility at its sole discretion with limited notice, as is customary with these types of arrangements. The Company is currently working to reduce its credit facility in order to minimize the costs of the credit facility and right-size the facility according to the Company's needs.

The Company currently anticipates that cash on hand and funds generated from operations will be sufficient to meet the Company's anticipated cash requirements for fiscal 2013.

In the event the Company requires more capital than is presently anticipated due to unforeseen factors, the Company may need to rely on its credit facility. In such an instance, if its lender restricts, reduces or eliminates the Company's access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings or a new debt agreement with other creditors, either of which may contain less favorable terms. The Company cannot assure that such additional sources of capital would be available on reasonable terms, if at all.

Cost Reductions

In February 2012, the Company eliminated all U.S. positions relating to its U.S. distribution operations as well as certain sales positions relating to its low-end telescope sales. This headcount reduction is expected to save the Company approximately $0.7 million per year.

As part of this restructuring, the Company relocated its U.S. inventory to its Mexico facility and is working with a real estate broker to sublease its U.S. warehouse, which is approximately 19,000 square feet of the Company's 25,000 square foot facility in Irvine, California. The Company estimates that it could save an additional $0.1 million per year if it successfully subleases its U.S. warehouse.

In addition, the Company pays approximately $0.4 million annually for its current corporate office and warehouse located in Irvine, California; the lease expires in February 2014. According to discussions with the Company's real estate broker, current market value for office space that is deemed sufficient for the remaining U.S.operations would be approximately $0.1 million annually, which would constitute savings of $0.3 million per year. As a result, the Company is exploring a sublease of all or a portion of its Irvine operations. However, there can be no assurance that the Company will be able to find a sublessee in order to realize the potential savings.

The movement of inventory out of the U.S., as part of the restructuring of the Company's distribution operations, will reduce the Company's ability to borrow on that inventory. However, the Company has not advanced on its credit facility against its inventory since inception of its initial agreement with First Capital in January 2009 and does not anticipate needing to borrow against its inventory in the future. In addition, eliminating the inventory component of the credit facility will reduce the costs of the Company's credit facility. The Company is currently negotiating for a reduced credit facility, which will likely be reduced from $10 million to $5 million as the Company's net sales could not generate a borrowing base of $10 million nor would the Company need to advance such a large amount for short-term working capital needs. The Company paid approximately $0.3 million of fees associated with its credit facility in fiscal 2012. If the Company is able to replace its current credit facility, the Company believes it could achieve potential savings of $0.1 million.

The following table summarizes the effected and potential cost reductions outlined above:

                                                              Cost Reductions
                                                        Effected         Potential
                                                               (In millions)
  Headcount reductions in U.S. sales and distribution   $     0.7       $        -
  Sublease of U.S. warehouse                                   -                0.1
  Sublease of U.S. office, net of rent on new office           -                0.1
  Reduction of credit facility size and scope                  -                0.1

                                                        $     0.7       $       0.3

Capital expenditures, including financed purchases of equipment, aggregated $0.1 million for each of the years ended February 29, 2012 and February 28, 2011. The Company had no material capital expenditure commitments at February 29, 2012.

Inflation

The Company does not believe that inflation has had a material effect on the results of operations during the past two years. However, there can be no assurance that the Company's business will not be affected by inflation in fiscal 2012 and beyond.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-A Replacement of FASB Statement No. 162" ("SFAS 168"). The FASB Accounting Standards Codification ("Codification") became the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Since the new codifications did not change U.S. GAAP, there was no change to our consolidated financial statements other than to update all references to U.S. GAAP to be in conformity with the provisions of the Accounting Standards Codification ("ASC").

Forward-Looking Information

The preceding Management's Discussion and Analysis of Financial Condition and Results of Operations section contains various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, which represent the Company's reasonable judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially, including the following: the Company's ability to expand the markets for telescopes, binoculars, and other optical products; the Company's ability to continue to develop and bring to market new and innovative products that will be accepted by consumers; the Company's ability to increase production of its high-end products and stimulate demand for those products; the Company's ability to overcome intense competition in its low-end products and increase demand for those products; the Company's ability to further develop its wholly-owned manufacturing facility in Mexico in combination with its existing manufacturing capabilities; the Company expanding its distribution network; the Company's ability to further develop its international business; the Company experiencing fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company's expectation that its contingent liabilities will not have a material effect on the Company's financial position or results of operations; the extent to which the

Company will be able to leverage its design and manufacturing expertise into markets outside its core consumer markets; the Company's expectations that certain new accounting pronouncements will not have a material impact on the Company's results of operations or financial position; the Company's expectation that it will have sufficient funds to meet any working capital requirements during the foreseeable future with internally generated cash flow and borrowing ability; and the Company's ability to achieve and sustain profitability.