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. Sales in the second quarter ended August 31, 2012 were lower than the first quarter ended May 31, 2012, as explained below, but sales are expected to be higher in the third quarter ending November 30, 2012.

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

The Company reported net sales of $4.0 million for the quarter ended August 31, 2012, a decrease of $2.1 million or 35% from net sales of $6.1 million in the same period in the prior year. Approximately $0.7 million or 31% of this decrease in net sales was attributable to a reduction in net sales of high-end telescopes, which was due to the delay in shipment of the Company's new LX800 and LX600 products and the impact that delay has had on sales for the Company's other high-end telescopes. Approximately $0.7 million or 31% and approximately $0.6 million or 27% of this decrease was due to reductions in net sales of low end telescopes and microscopes, respectively, to mass retail customers due to decreased demand. Approximately $0.2 million or 10% of the reduction in net sales was due to reductions in accessories which were attributable to the reduction in sales of high end telescopes. Approximately $0.3 million or 14% of the decrease in net sales was due to a reduction in sales of other products due to decreased demand. These decreases in net sales were partially offset by increases in sales of intermediate telescopes of approximately $0.2 million due to the introduction of new products, such as the LX80.

Gross profit of $0.5 million during the three months ended August 31, 2012 decreased $0.8 million or 60% compared to the same period in the prior year. Approximately $0.2 million or 25% of the decrease in gross profit was attributed to a net unfavorable change in product mix, principally the reduction in sales of high end telescopes and other products, and the remaining decrease of $0.6 million was due to the lower revenue level providing less contribution margin over fixed costs of sales.

Selling expenses for the second quarter ended August 31, 2012 were $0.4 million or 9% of net sales compared to $0.6 million or 10% 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.

General and administrative expenses for the second quarter ended August 31, 2012 were $0.9 million or 22% of net sales compared to $0.8 million or 13% of net sales in the same quarter in the prior year. The increase in general and administrative expenses relative to the prior year was mainly due to the timing of professional fees and a property tax refund of $0.1 million which reduced general and administrative expenses during the three months ended August 31, 2011.

Research and development expenses in the second quarter ended August 31, 2012 increased by $42 thousand or 19% compared to the same period in the prior year due to increased efforts at new product development and work being done to finish the development of new products.

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

Six Months Ended August 31, 2012 Compared to Six Months Ended August 31, 2011

The Company reported net sales of $8.1 million for the six months ended August 31, 2012, a decrease of $2.2 million or 22% from net sales of $10.3 million in the same period in the prior year. Approximately $0.7 million or 30% and $0.5 million or 24% of this decrease was attributable to reduced net sales of low-end telescopes and microscopes, respectively, to mass retail customers due to reduced demand for these products. Approximately $0.2 million or 9% is attributable to a reduction in net sales of high-end telescopes due to delays in shipments of the Company's new LX800 and LX600 products, which are still under development, and the impact that delay has had on net sales of other high-end telescope products. Approximately $0.1 million or 4% of the reduction in net sales was due to reductions in accessories which was attributed to the reduction in sales of high end telescopes. Approximately $0.7 million or 26% of the decrease in net sales was due to a reduction in sales of other products due to decreased demand.

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Gross profit of $1.4 million during the six months ended August 31, 2012 decreased $1.3 million or 48% compared to the same period in the prior year. Approximately $1.2 million or 88% of this decrease in gross profit was attributable to a reduction in net sales and approximately $0.1 million or 12% was attributed to unfavorable fluctuations in indirect manufacturing costs, such as labor and material variances, compared to the prior year.

Selling expenses for the six months ended August 31, 2012 and 2011 were consistent at 10% of net sales. Selling expenses decreased due to reductions in the headcount attributable to the elimination of the Company's U.S. distribution activities and recovery of bad debt, offset by increased discretionary selling expenses such as advertising and marketing expenses.

General and administrative expenses for the six months ended August 31, 2012 and 2011 were $1.8 million in both periods. General and administrative expenses are mostly fixed costs and generally do not vary with net sales as much as selling expenses.

Research and development expenses for the six months ended August 31, 2012 of $0.5 million increased by $0.1 million or 27% compared to the same period in the prior year due to increased efforts to complete product development of the LX800 and LX600 products.

Release of warranty liability of $0.3 million during the six months ended August 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. Sales in the second quarter ended August 31, 2012 were lower than the first quarter ended May 31, 2012, as explained below, but sales are expected to be higher in the third quarter ending November 30, 2012.

Liquidity and Capital Resources

At August 31, 2012, the Company had cash of $0.7 million, as compared to $3.9 million at February 29, 2012 and $2.6 million at August 31, 2011. Net cash used in operating activities was approximately $3.1 million during the six months ended August 31, 2012 and $2.4 million during the six months ended August 31, 2011, an increase in net cash used of approximately $0.7 million compared to the prior year. This increase in cash used in operating activities was attributed primarily to the increase in the Company's net loss of approximately $0.9 million from a loss of approximately $1.4 million during the six months ended August 31, 2012 compared to a loss of approximately $0.5 million during the six months ended August 31, 2011, offset slightly by favorable net fluctuations in working capital.

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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.

The Company currently has in place a 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 $1.0 million as of August 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. The Company expects its availability to be limited to not more than $1.0 million in the foreseeable future. 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 which time, the Company 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 did not affect the ability of First Capital to terminate the agreement as described above.

The Company began advancing on accounts receivable in September 2012 in order to fulfill its working capital requirements. Based upon expected order fulfillment and results from operations, the Company expects that it will need to continue to rely on its credit facility for working capital for at least its third quarter. 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, a new debt agreement with other creditors, or liquidate assets. However, the Company cannot assure that such additional sources of liquidity would be available on reasonable terms, if at all.

Capital expenditures were approximately $115 thousand and $20 thousand for the six months ended August 31, 2012 and 2011, respectively. The increase in capital expenditures related to purchases of tools, molds and dies associated with new product development. The Company had no material capital expenditure commitments at August 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.