We have reclassified management's discussion and analysis for all periods presented to reflect the consolidated financial results of our Fox International Ltd. as discontinued operations. See "Results of Operations-Discontinued Operations" later in this Item 7 for more information. Additionally, as Fox International, Ltd. represented our entire wholesale segment, we have also reflected that change by presenting all periods in one reportable segment. Unless otherwise noted, discussions below pertain to our continuing operations.

Overview

The Company is a worldwide leader in the manufacturing and distribution of a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of FASB ASC Topic 280 "Segment Reporting":

• Monitors - offers a wide range of CRT, flat panel and projection display systems for use in training and simulation, military, medical, and industrial applications.

• Data Display CRTs - offers a wide range of CRTs for use in data display screens, 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 2012, management of the Company focused key resources on strategic efforts to dispose of unprofitable operations and seeking acquisition opportunities that enhance the profitability and sales growth of the Company's more profitable product lines. The Company continues 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 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 averaged 231 days during 2012, 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 because it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The Company also maintains inventory for warranty repairs and replacements for products out in the field which are no longer in its current products. In the monitor operations of the Company's business, the market for its products is characterized by 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 or 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. The Company's management monitors the adequacy of its inventory reserves regularly, and at February 29, 2012, believes its reserves to be adequate.

Interest rate exposure - The Company had outstanding debt of approximately $17 million and $22 million, as of February 29, 2012 and February 28, 2011, respectively, subject to interest rate fluctuations by the Company's lenders. Variable interest rates on the Company's loans and the potential for rate hikes could negatively affect the Company's future 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.

Operations

The following table sets forth, for the fiscal years indicated, the percentages that selected items in the Company's consolidated statements of operations bear to total revenues (amounts in thousands):

(See Item 1. Business - Description of Principal Business and Principal Products for discussion about the Company's Products and Divisions.)

                                                           2012                         2011
                                                   Amount           %           Amount           %
Net Sales

Monitors                                          $ 58,596          91.2 %     $ 51,936          88.0 %
Data Display CRTs                                    5,302           8.3          6,498          11.0
Entertainment CRTs                                     127           0.2            353           0.6
Component Parts                                        206           0.3            252           0.4

Total Company                                       64,231         100.0         59,039         100.0

Costs and expenses
Cost of goods sold                                $ 44,286          69.0 %     $ 43,544          73.8 %
Selling and delivery                                 5,485           8.5          4,387           7.4
General and administrative                           8,437          13.1          6,689          11.3

                                                    58,208          90.6         54,620          92.5

Income from operations                               6,023           9.4          4,419           7.5

Interest expense                                      (793 )        (1.3 )         (946 )        (1.6 )
Other income, net                                      120           0.2            245           0.4

Income before income taxes                           5,350           8.3          3,718           6.3
Provision for income taxes                           1,773           2.8          1,317           2.2

Income from continuing operations                    3,577           5.5          2,401           4.1
Loss from discontinued operations, net of tax           -             -          (1,314 )        (2.2 )

Net Income                                        $  3,577           5.5 %     $  1,087           1.9 %

Fiscal 2012 Compared to Fiscal 2011

Net Sales

Consolidated net sales increased $5.2 million or 8.8% to $64.2 million for fiscal 2012, compared to $59.0 million for fiscal 2011.

The Company's business is more concentrated in the monitor division of the Company where all the new growth is occurring as the market for CRTs declines and moves to newer technologies. The Company is now a video display solutions company, while it still services the existing CRT markets, which overall account for approximately 33% of the Company's revenues. The Monitor revenues increased $6.7 million due to growth of long-term contracts at Aydin Displays and Z-Axis which experienced tremendous growth in its custom manufacturing and power supply sales due to new business. Overall, Aydin Displays revenues increased 37% over the prior fiscal year to $26.7 million and Z-Axis increased 78% in net revenues to $16.9 million over the prior fiscal year. Display Systems business was down 28% from the prior fiscal year as it finished out a multi-year contract for the U.S. Marine Corps at the start of the fiscal year and due to changes in the projector industry which affected the sales of its CRT projectors. Lexel experienced a 20.7% decline in revenues due to a decline in orders for various types of its CRT business. Lexel is expected to rebound in fiscal 2013 due to foreign sales projections which were down in fiscal 2012. Data Display CRT sales in fiscal 2012 declined due to decreased demand in the CRT market including the division's largest customer. Sales are expected to improve with the customer as they were working down their inventory levels in fiscal 2012.

Entertainment CRT and Component Parts net sales declined by a combined 45% in fiscal 2012 compared to fiscal 2011. The two divisions represent only 0.5% of the Company's revenues for fiscal 2012. Due to the continued shift to flat screen televisions, the market for replacement CRTs in the consumer market has diminished. The Company is winding down its business in replacement CRTs for the consumer market and indeed this is a small fraction of the Company's overall business. Component Parts sales have generally declined in recent years due to weaker demand for electron gun and stem sales. This business will continue to decline as the CRT industry moves to the new technologies. The division primarily supplies the other divisions with parts they need to complete the assembly of their products.

Gross Margins

Consolidated gross margins increased to 31.1% for fiscal 2012 from 26.3% for fiscal 2011. Overall gross margin dollars increased by $4.5 million or 28.7% versus the prior fiscal year.

The only division which experienced an increase in gross margin percentage and dollars was the Monitor division. The product mix of the division changed due to increases in flat panel displays and custom manufacturing. The margins for the Monitor division improved as the divisions' revenues increased and better efficiencies were achieved within their operations due to better utilization of capacity and equipment upgrades at Z-Axis. The Monitor division gross margin dollars increased $5.7 million or 39.9% over the prior fiscal year. The gross margin percentages also increased from 27.5% in fiscal 2011 to 34.0% in fiscal 2012.

Data Display CRT gross margin dollars decreased by 77.7% for fiscal 2012 compared to fiscal 2011. This decrease in margin dollars was due to a decrease in market demand for CRT products and costs associated with closing the Company's Clinton Display Systems facility in the fourth quarter of the Company's fiscal year. Gross margins in Entertainment CRTs decreased in fiscal 2012 from the prior year due to the decrease in sales volume of high margin products at the Company's Louisiana facility and the Chroma division. The Chroma division was closed in the Company's second quarter. Gross margins from Component Parts decreased in fiscal 2012 due to low sales volume and the inability to cover fixed costs. The division primarily exists to service and supply parts to other divisions within the Company. Gross margins for these divisions represented less than 1% of the Company's gross margin dollars.

Operating Expenses

Operating expenses as a percentage of sales increased to 21.7% for fiscal 2012 from 18.7% for fiscal 2011 primarily reflecting increases in salaries, legal fees, research and development and professional services. The higher salaries are attributable to increases in commission due to higher sales volumes and additional sales people including the new division, Aydin Visual Solutions. The increased legal fees and professional services are for services in the sale of the Fox subsidiary, the settlement of the Clinton Displays dispute (see Note 11), certain government contract issues, and acquisition issues. Finally, research and development costs increased as the Company increased its work on new products.

Plant Closure

As of February 29, 2012 the Company closed its Clinton Displays facility in Loves Park, Illinois, a manufacturer of CRTs. The remaining inventory and CRT-related operations were moved to the Company's Lexel Imaging Systems subsidiary in Lexington, Ky. where they will continue to be manufactured and its Data Displays distribution facility in Tucker, Ga. The operating losses generated by Clinton Displays for the years ended February 29, 2012 and February 28, 2011 were approximately $1,275 thousand and $446 thousand and are included in the Company's results from operations.

Interest Expense

Interest expense decreased to $0.8 million for fiscal 2012 compared to $0.9 million in fiscal 2011. Overall, interest expense decreased by $0.2 million as the Company reduced debt by nearly $5 million during the current fiscal year. This was achieved by the increased profitability of the Company, better use of its assets and paying off higher interest debt. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR.

Income Taxes

The effective tax rate for fiscal 2012 was 33.1% compared to 35.4% for fiscal 2011. The lower effective rate in 2012 was primarily due to research and experimentation credits, the domestic production activities deduction, and various other permanent items.

Discontinued Operations

On March 1, 2011, the Company sold its Fox International Ltd. subsidiary to FI Acquisitions, a company owned by Video Display's Chief Executive Officer. We accounted for this disposition as discontinued operations, and, accordingly, we have reclassified the consolidated financial results for all periods presented to reflect them as such. The loss from discontinued operations, net of tax, in fiscal 2011 was $1.3 million. (see Note 15 - Discontinued Operations)

Liquidity and Capital Resources

At February 29, 2012 and February 28, 2011, the Company had total cash of $0.1 million and $2.8 million, respectively. Of the $2.8 million on February 28, 2011, $1.4 million was restricted cash. The Company's working capital was $37.3 and $40.4 million at February 29, 2012 and February 28, 2011, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, borrowings from its CEO and long-term debt.

The Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be manufactured currently. 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, but typically has larger investments in inventories than those of its competitors.

The Company continually monitors its cash and financing positions in order to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to grow its business through internal sales growth 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 was $4.2 million in fiscal 2012 and $5.9 million in fiscal 2011. Of this, $7.7 million was due to the operating activities of the Company due primarily to the net income of $3.6 million, the provision for inventory reserves of $1.7 million, depreciation and amortization of $1.1 million, the change in deferred taxes of $0.9 million and other small changes totaling $0.4 million. During fiscal 2012, net working capital items decreased by $3.6 million. The primary changes were accounts payable decrease of $1.3 million that resulted from the Company becoming more current with its vendors as operations improved, an increase of $1.7 million in unbilled costs on uncompleted contracts and $1.6 million increase in inventories. Changes in prepaid expenses accounted for the other decreases of $0.1 million. These were offset by a decrease in accounts receivable of $1.1 million and an increase in taxes refundable of $0.1 million.

Investing activities used cash of $0.2 million in fiscal 2012 and used $2.2 million of cash in fiscal 2011. The use of the letter of credit purchased in fiscal 2011 provided $1.4 million which was offset by capital expenditures of $0.6 million for used equipment by Z-Axis, Aydin Displays and Lexel Imaging, $0.8 million payment for the settlement of Clinton and $0.2 million for the purchase of a note receivable for StingRay 56. In fiscal 2011, the purchase of a letter of credit for $1.4 million and capital expenditures were $0.9 million offset by $0.1 million on the proceeds from the sale of equipment. Capital expenditures in fiscal 2011 were primarily for expansion at the Company's Z-axis facility, which used $0.8 million of the total spent in fiscal 2011. The Company does not anticipate significant investments in capital assets for fiscal 2013 beyond normal maintenance requirements.

Financing activities used cash of $5.2 million in fiscal 2012 primarily for paying down debt. During fiscal 2011, the Company used $2.7 million of cash primarily to pay down debt.

On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community & Southern Bank (collectively, the "Banks") to provide new financing to the Company to replace the existing credit agreement with RBC Bank that terminated in conjunction with this Agreement. The new Agreement provided for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. On May 26, 2011, the Banks amended the Credit Agreement (1st Amendment) to reduce the revolver commitment to $15.0 million, restate the covenants to pertain to only continuing operations of the Company and to adjust the targets for the senior funded debt to EBITDA covenant for the Company's quarters ending May 31, 2011 and August 31, 2011. On July 26, 2011, the Banks again amended the Credit Agreement (2nd Amendment) to include a swing-line promissory note of $1.0 million that is included in the revised $15.0 million revolver commitment. On September 1, 2011, the Banks amended the Credit Agreement (3rd Amendment) to allow the Company to repurchase a limited amount of the Company's common stock, equal to ten percent of the Company's net earnings after taxes, subject to meeting certain share repurchase conditions and revised the definition of the fixed charge coverage ratio and total liabilities to tangible net worth to exclude such repurchases. On January 17, 2012, the Banks amended the Credit Agreement (4th Amendment) to allow the Company to purchase a promissory note, dated July 23, 2010, held by Hetra Secure Solutions Corporation on StingRay56. Additionally, on March 5, 2012, the Banks amended the Credit Agreement (5th Amendment) to allow the Company to acquire StingRay56, Inc.

The outstanding balance of the line of credit at February 29, 2012 was $11.1 million and the balances of the term loans were $2.7 million and $2.8 million, respectively. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3.0 million. The $3.0 million term loan is secured by real estate property of the Company and a building owned by Southeastern Metro Savings, LLC, a company in which the Company's Chief Executive Officer is a minority owner. The building will continue to be in the collateral pool until such time as the note is sufficiently paid down or it is replaced by other collateral.

The agreement contains three covenants, as amended: a fixed charge coverage ratio, ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total liabilities to tangible net worth. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock, as amended), divestitures and certain other changes in the business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents.

The Company is in compliance with the covenants under the new and amended loan agreements as of February 29, 2012. As of February 28, 2011, the Company was not in compliance with the consolidated fixed charge coverage ratio or the senior funded debt to EBITDA ratio as defined by the RBC and Community & Southern Bank credit line agreements. The Company subsequently received a waiver of these covenant violations from RBC Bank and Community & Southern Bank through the July 15, 2011 reporting of the next measurement of these covenants as of the Company's first quarter end. The senior funded debt to EBITDA covenant was deemed to be the most restrictive by the Company and the Banks.

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company's common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time 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. During the fiscal year ended February 29, 2012, the Company repurchased 89,281 shares at an average price of $4.46 per share, which were added to treasury shares on the consolidated balance sheet. Under this program, an additional 727,137 shares remain authorized to be repurchased by the Company at February 29, 2012. In addition, the Company acquired an additional 800,000 shares as part of the sale of its Fox International Ltd, Inc. subsidiary on March 1, 2012. As discussed in Note 5, the Loan and Security Agreement executed by Company on December 23, 2010 included restrictions on investments that restricted further repurchases of stock under this program. On September 1, 2011, the Agreement was amended to allow the Company to repurchase a limited amount of the Company's common stock, equal to ten percent of the Company's net earnings after taxes subject to meeting certain share repurchase conditions.

Transactions with Related Parties, Contractual Obligations, and Commitments

In conjunction with an agreement involving re-financing of the Company's lines of credit and Loan and Security Agreement, on June 29, 2006, the Company's CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33,333 plus interest through July 2021. The interest rate on this note was equal to the prime rate plus one percent. Interest payments of $86.4 thousand and $206.5 thousand were paid on this note in fiscal 2012 and fiscal 2011, respectively. The note was secured by a general lien on all assets of the Company, subordinate to the lien held by the syndicate of RBC Bank and Community & Southern Bank. The Company repaid the remaining balance outstanding under this loan agreement on November 28, 2011 with consent from RBC Bank and Community & Southern Bank. The payoff was approximately $1.0 million.

The Company's CEO provides a portion of the collateral for one of the term loans with the consortium of RBC Bank and Community & Southern Bank. (see Note 5)

On March 1, 2011, the Company sold its Fox International Ltd. subsidiary to FI Acquisitions, a company owned by Video Display's Chief Executive Officer. We accounted for this disposition as discontinued operations, and, accordingly, we have reclassified the consolidated financial results for all periods presented to reflect them as such.

Contractual Obligations

Future maturities of long-term debt, future contractual obligations due under
operating leases, and other obligations at February 29, 2012 are as follows (in
thousands):



                                                                  Payments due by period
                                                           Less than       1 - 3        3 - 5       More than
                                              Total         1 year         years        years        5 years
Long-term debt obligations                   $ 16,880     $       945     $ 13,786     $   506     $     1,643
Interest obligations on long-term debt (a)      1,809             657          750         152             250
Operating lease obligations                     4,123           1,060        2,269         635             159
Purchase obligations                            8,278           8,278           -           -               -
Warranty reserve obligations                      151             151           -           -               -

Total                                        $ 31,241     $    11,091     $ 16,805     $ 1,293     $     2,052

(a) This line item was calculated by utilizing the effective rate on outstanding debt as of February 29, 2012.

Off-Balance Sheet Arrangements

Effective March 1, 2011, the Company has an arrangement with RBC Bank and Community & Southern Bank allowing a building owned by the Chief Executive Officer to be used as part of the collateral on a $3.0 term loan with a consortium between RBC Bank and Community & Southern Bank.

Critical Accounting Estimates

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, the allowance for bad debts, contract revenue recognition as well as profitability or loss recognition estimates 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 attempts to determine by historical usage analysis and numerous other market factors, 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 2012 and 2011; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

The reserve for inventory obsolescence was approximately $3.3 million and $4.9 . . .