Summary of MEADE INSTRUMENTS CORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 in this Form 10-Q. This discussion may contain 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" in the Company's annual report on 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-Q after the date of this Form 10-Q, except as required by law.

Overview of the Company

Meade Instruments Corp. is engaged in the design, manufacture, marketing and sale of consumer optics products, primarily telescopes, telescope accessories and binoculars. We design our products in-house or with the assistance of external consultants. Most of our entry level products are manufactured overseas by contract manufacturers in Asia, while our high-end telescopes are manufactured and assembled at our Mexico facility. 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 distributors internationally. We currently operate out of two primary locations: Irvine, California and Tijuana, Mexico. Our California facility serves as the Company's corporate headquarters, research and development facility and U.S. distribution center; our Mexico facility contains our manufacturing, assembly, repair, packaging, and other general and administrative functions. Our business is highly seasonal and our financial results have historically varied significantly on a quarter-by-quarter basis 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 MeadeŽ brand name is ubiquitous in the consumer telescope market, while the CoronadoŽ brand name represents a unique niche in the area of solar astronomy.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 describes the significant accounting policies and methods used in the preparation of our Condensed Consolidated Financial Statements. Our critical accounting estimates, discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, include revenue recognition, estimates for allowances for doubtful accounts, inventories, property and equipment, intangible assets, accounting for income taxes, shipping and handling costs, advertising, research and development, loss per share, concentration of credit risk, fair value of financial instruments, use of estimates in preparation of consolidated financial statements, product warranties, and stock-based compensation. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of our Consolidated Financial Statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.

Our management discusses the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors at least annually. Our management also internally discusses the adoption of new accounting policies or changes to existing policies at interim dates, as it deems necessary or appropriate.

New Accounting Pronouncements

From time to time, the Financial Accounting Standards Board or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.

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Results of Operations

The Company's business is seasonal. Historically, sales in the second and third quarter ended August 31st and November 30th each year have been higher than sales achieved in each of the other two fiscal quarters of the year. Thus, expenses and, to a greater extent, results from operations vary significantly by quarter. Therefore, caution is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year.

Three Months Ended May 31, 2012 Compared to Three Months Ended May 31, 2011

The Company reported net sales of $4.1 million for the quarter ended May 31, 2012, a decrease of $0.1 million or 2% from net sales of $4.2 million in the same period in the prior year. Sales of solar telescopes were up $0.5 million, offset by declines in other product categories. The decline in net sales of other product categories was attributed primarily to delays in shipment of the Company's new LX800, LX80 and, to a lesser extent, LX600 high-end telescope products which have required a longer design schedule than originally anticipated. The Company anticipates shipping these products soon. The Company has a backlog of orders for approximately $10 million which it expects to work through over the next three quarters. The Company's backlog at the same period in the prior year was approximately $4 million. The Company defines "backlog" as orders received for products with due dates over the next 12 months; such orders can be canceled by the customer(s) prior to shipment but generally have limited rights of return.

Gross profit of $0.5 million during the three months ended May 31, 2012 decreased $0.8 million or 61% compared to the same period in the prior year. Approximately $0.4 million or 50% of this decrease in gross profit was attributable to higher costs of sales due to a net year-over-year reduction in capitalized manufacturing costs caused by a reduction in manufactured finished goods inventories. Approximately $0.3 million or 38% of the decrease in gross profit was attributed to an unfavorable net change in product mix.

Selling expenses for the first quarter ended May 31, 2012 were $0.4 million or 10% of net sales compared to $0.5 million or 11% of net sales during the same quarter in the prior year. The decrease in selling expenses as a percentage of net sales was due to reductions in the headcount attributable to the elimination of the Company's U.S. distribution activities and recovery of bad debt, offset partially by increased discretionary selling expenses such as advertising and marketing expenses.

General and administrative expenses for the first quarter ended May 31, 2012 were $904 thousand or 22% of net sales compared to $944 thousand or 23% of net sales in the same quarter in the prior year. The decrease in general and administrative expenses was mainly due to a reduction in headcount and a reduction in stock compensation expense.

Research and development expenses in the first quarter ended May 31, 2012 were higher by $72 thousand or 36% compared to the same period in the prior year due to increased efforts at new product development and work being done to correct the LX800 telescopes.

Release of warranty liability of $0.3 million during the three months ended May 31, 2012 pertained to a reduction in the Company's warranty accrual which was recorded based upon an agreement which released the Company of its remaining warranty liability associated with those products. No such adjustment applied to the prior year.

No provision for income taxes was recorded in the current or prior period presented due to the significance of the Company's net loss

Seasonality

The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins, working capital requirements and results from operations from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company's products, competitive pricing pressures, the Company's ability to meet fluctuating demand and delivery schedules, the timing and extent of research and development expenses, the timing and extent of product development activities and the timing and extent of advertising expenditures. Historically, a substantial portion of the Company's net sales and results from operations typically occurred in the second and third quarter of the Company's fiscal year primarily due to the higher customer demand for less-expensive telescopes during the holiday season. Mass merchandisers, along with specialty retailers, purchase a considerable amount of their inventories to satisfy seasonal customer demand. These purchasing patterns have caused the Company to increase its level of inventory during its second and third quarters in response to such demand or anticipated demand. As a result, the Company's working capital requirements have correspondingly increased at such times. The Company continues to experience significant sales to mass merchandisers. Accordingly, the Company's net sales, working capital requirements and results from operations are expected to be higher in its second and third quarters than in the first and fourth quarters of its fiscal year.

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Liquidity and Capital Resources

At May 31, 2012 and 2011, the Company had cash and cash equivalents of $2.7 million and $4.0 million, respectively, as compared to $3.9 million and $5.1 million at February 29, 2012 and February 28, 2011, respectively. Net cash used in operating activities was approximately $1.1 million during each of the three months ended May 31, 2012 and 2011.

The Company typically experiences increases in accounts receivable and inventories and a corresponding decrease in cash beginning with the end of its first fiscal quarter and culminating with the end of its third fiscal quarter. Receivables and inventories then typically decrease, and cash increases, at the end of the Company's fiscal year. Cash flows provided by operating activities during the Company's fourth fiscal quarters were $2.7 million and $2.9 million, respectively. Cash flows (used in) provided by operating activities for fiscal 2012 and fiscal 2011 were $(1.1) million and $0.1 million, respectively.

The Company currently has in place an undrawn $10.0 million secured credit facility with First Capital. Availability of funds under this facility is based on a percentage of eligible accounts receivable and inventory. Availability on this facility amounted to approximately $1.2 million as of May 31, 2012 and was based solely on accounts receivable as substantially all of the Company's inventory was deemed ineligible due to it being located in Mexico. 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 initial term of the credit facility with First Capital ended in January 2012. At the expiration of the initial term of the agreement, the Company has continued to factor its receivables with First Capital on a month-to-month basis and sixty days prior notice shall be required for the Company to terminate the agreement. The expiration of the initial term of the agreement does not affect the ability of First Capital to terminate the agreement as described above.

Based upon expected order fulfillment and results from operations, the Company expects that it may need to temporarily rely on its credit facility for working capital. 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. However, the Company cannot assure that such additional sources of capital would be available on reasonable terms, if at all.

Capital expenditures were approximately $82 thousand and $4 thousand for the three months ended May 31, 2012 and 2011, respectively. The increase in capital expenditures related to purchases of tools, molds and dies associated with new products. The Company had no material capital expenditure commitments at May 31, 2012. However, certain of the Company's machinery and equipment is old and fully depreciated. It is possible that certain of the Company's machinery and equipment could require replacement in the near future.

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 the remainder of fiscal 2013 and beyond.

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 being able to see continued progress in its restructuring efforts, the timing of such restructuring efforts, and the fact that the restructuring efforts will result in positive financial results in the future; the Company's expectation that it will continue to experience fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company's expectation that contingent liabilities will not have a material effect on the Company's financial position or results of operations.

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