**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

**x****Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

**For the Quarterly Period Ended August 31, 2006.**

**or**

**o****Transition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**For the Transition Period From                                   to                                   **

**Commission File Number 0-13394**

**VIDEO DISPLAY CORPORATION**

(Exact name ofregistrant as specified on its charter)

| **GEORGIA**                      |   | **58-1217564**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**1868TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084**(Address of principal executive offices)

**770-938-2080**(Registrant’s telephone number including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bysection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, and acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

As of October 6,2006, the registrant had 9,686,000 shares of Common Stock outstanding.

 

----

**Video Display Corporation andSubsidiaries**

**Index**
| PART I.  | FINANCIAL INFORMATION |                                                                                                                          |   |
|----------|-----------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                  |                                                                                                                          |   |
|     | Item 1.               | Financial Statements                                                                                                          |   |   |
|     |                  |                                                                                                                          |   |   |
|     |                  | Consolidated Balance  Sheets –  August 31, 2006 (unaudited) and February 28, 2006                                        |   |   |
|     |                  |                                                                                                                          |   |   |
|     |                  | Consolidated Statements  of Operations -  Three and six months ended August 31, 2006 and 2005 (unaudited)                     |   |   |
|     |                  |                                                                                                                          |   |   |
|     |                  | Consolidated Statement  of Shareholders’ Equity and Comprehensive  Income - Six months ended August 31, 2006 (unaudited) |   |   |
|     |                  |                                                                                                                          |   |   |
|     |                  | Consolidated  Statements of Cash Flows –   Six months ended August 31, 2006 and 2005 (unaudited)                         |   |   |
|     |                  |                                                                                                                          |   |   |
|     |                  | Notes to  Consolidated Financial Statements -   August 31, 2006 (unaudited)                                                   |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 2.               | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                                  |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 3.               | Quantitative  and Qualitative Disclosure About Market Risk                                                                    |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 4.               | Controls and  Procedures                                                                                                      |   |   |
|     |                  |                                                                                                                          |   |   |
| PART II. | OTHER INFORMATION     |                                                                                                                          |   |
|     |                  |                                                                                                                          |   |
|     | Item 1.               | Legal Proceedings                                                                                                             |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item  1A.             | Risk  Factors                                                                                                                 |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 2.               | Unregistered Sales  of Equity Securities and Use of Proceeds                                                                  |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 3.               | Defaults upon  Senior Securities                                                                                              |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 4.               | Submission of Matters  to a Vote of Security Holders                                                                          |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item 5.               | Other Information                                                                                                             |   |   |
|     |                  |                                                                                                                          |   |   |
|     | Item  6.              | Exhibits                                                                                                                      |   |   |
|     |                  |                                                                                                                          |   |   |
|     | SIGNATURES            |                                                                                                                          |   |

 

2

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** **

**ITEM 1. FINANCIAL STATEMENTS**

** **

**Video Display Corporation andSubsidiaries**

**ConsolidatedBalance Sheets**

**(in thousands)**
|                                                                             | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2006**            | ** ** | **2006**              | ** ** |
| ** **                                                                  | ** ** | **(unaudited)**     | ** ** | ** **            | ** ** |
| **Assets**                                                                  | ** ** | ** **          |       |                  |       |
| Current Assets                                                              | ** ** | ** **          |       |                  |       |
| Cash                                                                        | ** ** | **$**               | **1,235**  |                  | $          | 1,577 |   |
| Accounts  receivable, less allowance for possible losses of $483 and $381   | ** ** | **9,969**           |       | 9,483                 |       |
| Inventories, net                                                            | ** ** | **33,520**          |       | 34,645                |       |
| Cost and  estimated earnings in excess of billings on uncompleted contracts | ** ** | **1,769**           |       | 968                   |       |
| Deferred income  taxes                                                      | ** ** | **3,343**           |       | 3,279                 |       |
| Prepaid expenses  and other                                                 | ** ** | **1,378**           |       | 1,720                 |       |
| Total current  assets                                                       | ** ** | **51,214**          |       | 51,672                |       |
|                                                                        | ** ** | ** **          |       |                  |       |
| Property, plant  and equipment:                                             | ** ** | ** **          |       |                  |       |
| Land                                                                        | ** ** | **585**             |       | 605                   |       |
| Buildings                                                                   | ** ** | **8,291**           |       | 8,454                 |       |
| Machinery and  equipment                                                    | ** ** | **20,002**          |       | 19,970                |       |
|                                                                        | ** ** | **28,878**          |       | 29,029                |       |
| Accumulated  depreciation and amortization                                  | ** ** | **(20,606**         | **)**      | (20,270               | )          |
| Net property,  plant, and equipment                                         | ** ** | **8,272**           |       | 8,759                 |       |
|                                                                        | ** ** | ** **          |       |                  |       |
| Goodwill                                                                    | ** ** | **1,343**           |       | 1,318                 |       |
| Intangible  assets, net                                                     | ** ** | **4,009**           |       | 3,591                 |       |
| Other assets                                                                | ** ** | **581**             |       | 98                    |       |
|                                                                        | ** ** | ** **          |       |                  |       |
| Total assets                                                                | ** ** | **$**               | **65,419** |                  | $          | 65,438 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

3

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|                                                                                                     | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2006**            | ** ** | **2006**              | ** ** |
| ** **                                                                                          | ** ** | **(unaudited)**     | ** ** | ** **            | ** ** |
| **Liabilities and Shareholders’  Equity**                                                      | ** ** | ** **          |       |                  |       |
| Current  liabilities                                                                                | ** ** | ** **          |       |                  |       |
| Accounts payable                                                                                    | ** ** | **$**               | **4,152**  |                  | $          | 6,889 |   |
| Accrued  liabilities                                                                                | ** ** | **3,041**           |       | 2,833                 |       |
| Billings in  excess of cost and estimated earnings on uncompleted contracts                         | ** ** | **1,802**           |       | 965                   |       |
| Lines of credit                                                                                     |       | **—**          |       | 17,567                |       |
| Notes payable to  officers and directors                                                            | ** ** | **402**             |       | 6,948                 |       |
| Current  maturities of long-term debt and financing lease obligations                               | ** ** | **755**             |       | 140                   |       |
| Total current  liabilities                                                                          | ** ** | **10,152**          |       | 35,342                |       |
|                                                                                                | ** ** | ** **          |       |                  |       |
| Lines of credit                                                                                     | ** ** | **16,049**          |       | —                |       |
| Long-term debt,  less current maturities                                                            | ** ** | **3,492**           |       | 808                   |       |
| Financing lease  obligations, less current maturities                                               | ** ** | **306**             |       | 363                   |       |
| Notes payable to  officers and directors, less current maturities                                   | ** ** | **5,900**           |       | —                |       |
| Convertible  notes payable, net of discount of of $25 and $38                                       | ** ** | **225**             |       | 212                   |       |
| Deferred income  taxes                                                                              | ** ** | **415**             |       | 560                   |       |
| Total  liabilities                                                                                  | ** ** | **36,539**          |       | 37,285                |       |
|                                                                                                | ** ** | ** **          |       |                  |       |
| **Minority Interests**                                                                              | ** ** | **123**             |       | 123                   |       |
| **Commitments and Contingencies**                                                                   | ** ** | **—**          |       | —                |       |
|                                                                                                | ** ** | ** **          |       |                  |       |
| **Shareholders’ Equity**                                                                       | ** ** | ** **          |       |                  |       |
| Preferred stock,  no par value – 10,000 shares authorized; none issued and outstanding         | ** ** | **—**          |       | —                |       |
| Common stock, no  par value – 50,000 shares authorized; 9,683 and 9,628 issued and outstanding | ** ** | **7,252**           |       | 7,198                 |       |
| Additional  paid-in capital                                                                         | ** ** | **118**             |       | 92                    |       |
| Retained  earnings                                                                                  | ** ** | **21,903**          |       | 21,771                |       |
| Accumulated  other comprehensive income (loss)                                                      | ** ** | **75**              |       | (172                  | )          |
| Treasury stock,  59 shares at cost                                                                  | ** ** | **(591**            | **)**      | (859                  | )          |
| Total  shareholders’ equity                                                                    | ** ** | **28,757**          |       | 28,030                |       |
| Total liabilities and shareholders’  equity                                                    | ** ** | **$**               | **65,419** |                  | $          | 65,438 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

4

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**Video Display Corporation and Subsidiaries**

**ConsolidatedStatements of Operations (unaudited)**

**(inthousands, except per share data)**
| ** **                                   | ** ** | **Three Months Ended  August 31,** | ** ** | **Six Months Ended  August 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                          | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                              | ** ** |                                            |       | ** ** |   |   |   |
| Net sales                                    | ** ** | **$**                                             | **19,832** | ** **                                      | $          | 23,332 |   | **$** | **38,430** |   | $ | 43,774 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Cost of goods sold                           | ** ** | **13,022**                                        | ** ** | 15,728                                          |       | **26,056** |   | 29,634 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Gross profit                                 | ** ** | **6,810**                                         | ** ** | 7,604                                           | ** ** | **12,374** |   | 14,140 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Operating expenses                           | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Selling and  delivery                        | ** ** | **1,905**                                         | ** ** | 1,883                                           |       | **3,820** |   | 3,597 |   |
| General and  administrative                  | ** ** | **3,629**                                         | ** ** | 3,603                                           |       | **7,180** |   | 7,172 |   |
|                                         | ** ** | **5,534**                                         | ** ** | 5,486                                           |       | **11,000** |   | 10,769 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Operating profit                             | ** ** | **1,276**                                         | ** ** | 2,118                                           |       | **1,374** |   | 3,371 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Other income (expense)                       | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Interest expense                             | ** ** | **(622**                                          | **)**      | (338                                            | )          | **(1,123** | **)** | (675 | ) |
| Other, net                                   | ** ** | **6**                                             | ** ** | 16                                              |       | **49** |   | 80 |   |
|                                         | ** ** | **(616**                                          | **)**      | (322                                            | )          | **(1,074** | **)** | (595 | ) |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Income before  income taxes                  | ** ** | **660**                                           | ** ** | 1,796                                           |       | **300** |   | 2,776 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Income tax expense                           | ** ** | **275**                                           | ** ** | 680                                             |       | **150** |   | 1,054 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Net income                                   | ** ** | **$**                                             | **385**    | ** **                                      | $          | 1,116 |   | **$** | **150** |   | $ | 1,722 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Basic earnings per  share of common stock    | ** ** | **$**                                             | **.04**    | ** **                                      | $          | .12 |   | **$** | **.02** |   | $ | .18 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Diluted earnings per  share of common stock  | ** ** | **$**                                             | **.04**    | ** **                                      | $          | .11 |   | **$** | **.02** |   | $ | .17 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Basic weighted average  shares outstanding   | ** ** | **9,673**                                         | ** ** | 9,690                                           |       | **9,657** |   | 9,696 |   |
|                                         | ** ** | ** **                                        | ** ** |                                            |       | ** ** |   |   |   |
| Diluted weighted  average shares outstanding | ** ** | **9,907**                                         | ** ** | 9,925                                           |       | **9,894** |   | 9,914 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

5

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## **Video Display Corporation and Subsidiaries**

**Consolidated Statements of Shareholders’ Equity and ComprehensiveIncome**

**For the Six Months Ended August 31, 2006 (unaudited)**

**(in thousands)**

|                                                   | ** ** | **Common  Shares** | ** ** | **Share  Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------|------------|---------------------------|------------|
|                                              |       |               |       |              |       |                             |       |                   |       |                                                      |       |                |       |                      |       |
| Balance, February  28, 2006                       |       | 9,628              |       | $                 | 7,198      |                             | $          | 92                     |       | $                                                         | 21,771     |                | $          | (172                      | )          | $ | (859 | ) |   |   |
|                                              |       |               |       |              |       |                             |       |                   |       |                                                      |       |                |       |                      |       |
| Net  income                                       |       | —             |       | —            |       | —                           |       | 150                    |       | —                                                    |       | —              |       | $                         | 150        |   |
| Foreign  currency translation adjustment          |       | —             |       | —            |       | —                           |       | —                 |       | 247                                                       |       | —              |       | 247                       |       |
| Total  comprehensive income                       |       | —             |       | —            |       | —                           |       | —                 |       | —                                                    |       | —              |       | $                         | 397        |   |
| Issuance of common stock  under stock option plan |       | 28                 |       | 54                |       | —                           |       | —                 |       | —                                                    |       | —              |       |                      |       |
| Issuance of common stock  from treasury           |       | 27                 |       | —            |       | —                           |       | (18                    | )          | —                                                    |       | 268                 |       |                      |       |
| Share based compensation                          |       | —             |       | —            |       | 26                               |       | —                 |       | —                                                    |       | —              |       |                      |       |
|                                              |       |               |       |              |       |                             |       |                   |       |                                                      |       |                |       |                      |       |
| Balance, August 31, 2006                          |       | 9,683              |       | $                 | 7,252      |                             | $          | 118                    |       | $                                                         | 21,903     |                | $          | 75                        |       | $ | (591 | ) |   |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

6

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## **Video Display Corporation and Subsidiaries**

**Consolidated Statements of Cash Flows (unaudited)**

**(inthousands)**
| ** **                                                                         | ** ** | **Six Months Ended  August 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
|                                                                               | ** ** | ** **                                      |       |   |   |
| **Operating Activities**                                                           | ** ** | ** **                                      |       |   |   |
| Net income                                                                         | ** ** | **$**                                           | **150**    |   | $ | 1,722 |   |
| **Adjustments to reconcile net  income to net cash used in operating activities:** | ** ** | ** **                                      |       |   |   |
| Depreciation and  amortization                                                     | ** ** | **1,042**                                       |       | 840 |   |
| Provision for  bad debts                                                           | ** ** | **116**                                         |       | 111 |   |
| Provision for  inventory reserve                                                   | ** ** | **711**                                         |       | 694 |   |
| Non-cash charge  for share based compensation                                      | ** ** | **26**                                          |       | — |   |
| Deferred income  taxes                                                             | ** ** | **(209**                                        | **)**      | (237 | ) |
| Interest on  convertible note                                                      | ** ** | **13**                                          |       | — |   |
| **Changes in working capital, net  of effects from acquisitions:**                 | ** ** | ** **                                      |       |   |   |
| Accounts  receivable                                                               | ** ** | **(483**                                        | **)**      | (2,823 | ) |
| Inventories                                                                        | ** ** | **855**                                         |       | (2,381 | ) |
| Prepaid expenses  and other assets                                                 | ** ** | **(215**                                        | **)**      | 161 |   |
| Accounts payable  and accrued liabilities                                          | ** ** | **(2,538**                                      | **)**      | 1,000 |   |
| Net cash used in  operating activities                                             | ** ** | **(532**                                        | **)**      | (913 | ) |
|                                                                               | ** ** | ** **                                      |       |   |   |
| **Investing Activities**                                                           | ** ** | ** **                                      |       |   |   |
| Capital  expenditures                                                              | ** ** | **(113**                                        | **)**      | (595 | ) |
| Cash paid for  acquisition                                                         | ** ** | **(550**                                        | **)**      | (1,377 | ) |
| Proceeds from  the sale of property, plant and equipment                           | ** ** | **151**                                         |       | — |   |
| Net cash used in  investing activities                                             | ** ** | **(512**                                        | **)**      | (1,972 | ) |
|                                                                               | ** ** | ** **                                      |       |   |   |
| **Financing Activities**                                                           | ** ** | ** **                                      |       |   |   |
| Proceeds from  long-term debt, lines of credit and financing lease obligations     | ** ** | **38,376**                                      |       | 17,190 |   |
| Payments on  long-term debt, lines of credit and financing lease obligations       | ** ** | **(37,330**                                     | **)**      | (14,444 | ) |
| Proceeds from  loans from related parties                                          | ** ** | **3,220**                                       |       | 1,000 |   |
| Repayments of  loans from related parties                                          | ** ** | **(3,865**                                      | **)**      | (24 | ) |
| Repurchase of  common stock                                                        | ** ** | **—**                                      |       | (317 | ) |
| Proceeds from  exercise of stock options                                           | ** ** | **54**                                          |       | 22 |   |
| Net cash  provided by financing activities                                         | ** ** | **455**                                         |       | 3,427 |   |
|                                                                               | ** ** | ** **                                      |       |   |   |
| Effect of exchange rate  changes on cash                                           | ** ** | **247**                                         |       | 172 |   |
|                                                                               | ** ** | ** **                                      |       |   |   |
| Net increase (decrease)  in cash                                                   | ** ** | **(342**                                        | **)**      | 714 |   |
|                                                                               | ** ** | ** **                                      |       |   |   |
| Cash, beginning of  period                                                         | ** ** | **1,577**                                       |       | 1,471 |   |
|                                                                               | ** ** | ** **                                      |       |   |   |
| Cash, end of period                                                                | ** ** | **$**                                           | **1,235**  |   | $ | 2,185 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

7

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**Video Display Corporation andSubsidiaries**

**Notes toConsolidated Financial Statements (unaudited)**

**August31, 2006**

Note 1. – Summary ofSignificant Accounting Policies

The consolidated financial statements includethe accounts of the Company and its majority owned subsidiaries (“the Company”)after elimination of all significant intercompany accounts and transactions.Certain prior period balances have been reclassified to conform to the currentperiod presentation.

As contemplated by theSecurities and Exchange Commission (the “Commission”) instructions to Form10-Q, the following footnotes have been condensed and, therefore, do notcontain all disclosures required in connection with annual financialstatements.  Reference should be made tothe Company’s year-end financial statements and notes thereto, including adescription of the accounting policies followed by the Company, contained inits Annual Report on Form 10-K for the fiscal year ended February 28, 2006, asfiled with the Commission. Other than the adoption of Statement of FinancialAccounting Standards No. 123 (Revised 2004), *“Share-BasedPayment”* as described in Note 10, there have been no materialchanges in accounting policy during Fiscal 2007.

The financial informationincluded in this report has been prepared by the Company, without audit.  In the opinion of management, the financialinformation included in this report contains all adjustments (all of which arenormal and recurring) necessary for a fair presentation of the results for theinterim periods.  Nevertheless, theresults shown for interim periods are not necessarily indicative of results tobe expected for the full year.  TheFebruary 28, 2006 consolidated balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.

TheCompany has a subsidiary in the United Kingdom (“U.K.”), which uses the Britishpound as its functional currency. Assets and liabilities of this foreignsubsidiary are translated using the exchange rate in effect at the end of theperiod.  Revenues and expenses aretranslated using the average of the exchange rates in effect during the period.  Translation adjustments and transaction gainsand losses related to long-term intercompany transactions are accumulated as aseparate component of shareholders’ equity.

Note 2. – NewAccounting Pronouncements

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*. Interpretation No. 48 requiresthe use of a two-step approach for recognizing and measuring tax benefits takenor expected to be taken in a tax return and disclosures regarding uncertaintiesin income tax positions. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect of initiallyadopting Interpretation No. 48 is to record an adjustment to openingretained earnings in the year of adoption and should be presented separately.Only tax positions that meet the more likely than not recognition threshold atthe effective date may be recognized upon adoption of InterpretationNo. 48. Management is in the process of evaluating the provisions of theinterpretation, but does not anticipate that the adoption of thisinterpretation will have a material impact on the Company’s consolidatedfinancial statements.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“Statement No.”) 157, *Fair Value Measurements*.Statement No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles and expandsdisclosures about fair value measurements. The statement does not require newfair value measurements, but is applied to the extent that other accountingpronouncements require or permit fair value measurements. The statementemphasizes that fair value is a market-based measurement that should bedetermined based on the assumptions that market participants would use inpricing an asset or liability. Companies will be required to disclose theextent to which fair value is used to measure assets and liabilities, theinputs used to develop the 

8

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measurements, and the effect of certain of the measurements on earnings(or changes in net assets) for the period. Statement No. 157 is effective forfiscal years beginning after November 15, 2007. Management does notanticipate that the adoption of this statement will have a material impact onthe Company’s consolidated financial statements.

In September 2006, the FASB issued Statement No.158,*****Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R)*, which requires an employer to recognize the over-funded orunder-funded status of a defined benefit postretirement plan (other than amultiemployer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income of a business entity or changesin unrestricted net assets of a not-for-profit organization. Statement No. 158also requires an employer to measure the funded status of a plan as of the dateof its year-end statement of financial position, with limited exceptions. Thisstatement is effective for fiscal years ending after December 15, 2006.The Company does not currently provide defined benefit pension or otherpostretirement plans, therefore management has determined that the adoption ofthis interpretation will not have an impact on the Company’s consolidatedfinancial statements.

Note 3. – BusinessAcquisitions

In August 2006, the Company acquired certainassets of Hobson Bros. Inc. of Chicago for the production of various moldedplastic and rubber parts, wire assemblies and stamped metal parts usedprimarily in the display industry. The fair value of these assets, includinginventories of $30,000, equipment of $168,000 and product development designsand drawings of $50,000, were acquired in exchange for 26,830 shares of theCompany’s common stock held as treasury shares. The market value of sharesissued was $9.32 at the date of close for a total acquisition cost of $250,000.The product developmentdesigns and drawings are being amortized over a five year period. These assetswill be integrated into the Company’s Tucker Georgia facilities.

On June 22, 2006, theCompany acquired the business and assets of EDL Displays, Inc. (“EDL”) locatedin Dayton Ohio. EDL is noted for itsspecialized, large-size, ruggedized, high-resolution displays with applicationin air traffic control, shipboard navigation, simulation, homeland security,and command and control. Theassets acquired in this transaction have been recorded based on their fairvalue at the date of acquisition and include accounts receivable of $120,000,inventories of $400,000, equipment of $50,000 and certain intellectual propertyand customer lists of $658,000. Total consideration for the assets acquiredincluded a cash payment of $550,000 and the assumption of a $678,000 bank loan.The purchase agreement provides for an adjustment to the purchase price basedon final collection of accounts receivable and evaluation of the market valueof purchased inventories. Theintellectual property, including product development designs and drawings arebeing amortized over a five year period, while the customer list is beingamortized over a three year period, which the Company estimates to be theuseful life of these assets. TheEDL business will be relocated and merged into the Company’s Pennsylvania based Aydin Displays operation.

In May 2005, the Companyacquired the IDS division of Three Five Systems, Inc.  Three Five Systems specializes in flat panel,touch screen and rack mount systems with custom military, industrial andcommercial requirements.  As part of thistransaction, the Company acquired fixed assets of $74,000, inventories of$773,000, and various other assets of $530,000 in exchange for cash of$1,377,000.  The other assets includeproduct development designs and drawings and a customer list, as well as anon-compete agreement.  The productdevelopment designs and drawings are being amortized over a five year period,while the customer list is being amortized over a three year period, which theCompany estimates to be the useful life of these assets.  The IDS division is a part of the Company’sAydin operations.  The IDS operations ofThree Five Systems, Inc. are not significant to the Company.

9

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Theaggregate purchase price has been allocated based on fair values as of the dateof the completion of the acquisition as follows (in thousands):
| Inventories                                       |   | $   | 773    |   |
|---------------------------------------------------|--------|-----|--------|--------|
| Machinery &  equipment                        |   | 74  |   |
| Product designs,  customer lists and other assets |   | 530 |   |
|                                              |   | $   | 1,377  |   |

 

Note 4. - Inventories

Inventories arestated at the lower of cost (first in, first out) or market and consisted ofthe following (in thousands):
|                            | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
|----------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**            | ** ** | **2006**              | ** ** |
| ** **                 | ** ** | ** **          |       |                  |       |
| Raw materials              | ** ** | **$**               | **17,715** |                  | $          | 18,618 |   |
| Work-in-process            | ** ** | **3,881**           |       | 3,772                 |       |
| Finished goods             | ** ** | **16,760**          |       | 16,688                |       |
|                       | ** ** | **38,356**          |       | 39,078                |       |
| Reserves for  obsolescence | ** ** | **(4,836**          | **)**      | (4,433                | )          |
| ** **                 | ** ** | **$**               | **33,520** |                  | $          | 34,645 |   |

 

Note5. – Costs and Estimated Earnings Related to Billings on Uncompleted Contracts

Information relative to contracts in progress consisted of thefollowing (in thousands):
|                                                                    | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2006**            | ** ** | **2006**              | ** ** |
|                                                               | ** ** | ** **          | ** ** |                  |       |
| Costs incurred  to date on uncompleted contracts                   | ** ** | **$**               | **6,503**  | ** **            | $          | 4,528 |   |
| Estimated  earnings recognized to date on these contracts          | ** ** | **4,127**           | ** ** | 2,585                 |       |
|                                                               | ** ** | **10,630**          | ** ** | 7,113                 |       |
| Billings to date                                                   | ** ** | **(10,663**         | **)**      | (7,110                | )          |
| Costs and  estimated earnings in excess (deficit) of billings, net | ** ** | **$**               | **(33**    | **)**                 | $          | 3 |   |
|                                                               | ** ** | ** **          | ** ** |                  |       |
| Costs and  estimated earnings in excess of billings                | ** ** | **$**               | **1,769**  | ** **            | $          | 968 |   |
| Billings in  excess of costs and estimated earnings                | ** ** | **(1,802**          | **)**      | (965                  | )          |
|                                                               | ** ** | **$**               | **(33**    | **)**                 | $          | 3 |   |

 

Costs and estimatedearnings in excess of billings are the results of contracts in progress (jobs)in completing orders to customers’ specifications on contracts accounted forunder SOP 81-1 “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts”.  Costsincluded are material, labor and overhead. These jobs require design and 

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engineering effort for a specific customerpurchasing a unique product.  The Companyrecords revenue on these fixed-price and cost-plus contracts on the percentageof completion basis using the ratio of costs incurred to estimated total costsat completion as the measurement basis for progress toward completion and revenuerecognition.  Any losses identified oncontracts are recognized immediately. Contract accounting requires significant judgment relative to assessingrisks, estimating contract costs and making related assumptions for scheduleand technical issues.  With respect tocontract change orders, claims or similar items, judgment must be used inestimating related amounts and assessing the potential for realization.  These amounts are only included in contractvalue when they can be reliably estimated and realization is probable.  Billings are generated based on specificcontract terms, which might be a progress payment schedule, specific shipments,etc.  None of the above contracts in progress containpost-shipment obligations.

Changes in job performance,manufacturing efficiency, final contract settlements and other factorsaffecting estimated profitability may result in revisions to costs and incomeand are recognized in the period in which the revisions are determined. Theeffect of changes in the estimated profitability of contracts for the six monthperiod ended August 31, 2006, was to increase net earnings by approximately$0.3 million above the amounts which would have been reported had the precedingyear contract profitability estimates been used.

As of August 31, 2006 andFebruary 28, 2006, there were no production costs which exceeded the aggregateestimated cost of all in process and delivered units relating to long-termcontracts.  Additionally, there were noclaims outstanding that would affect the ultimate realization of full contractvalues.  As of August 31, 2006 andFebruary 28, 2006, there were no progress payments that had been netted againstinventory.

Note 6. – IntangibleAssets

Intangible assets consist primarily of the unamortizedvalue of purchased patents, customer lists, non-compete agreements and otherintangible assets.  Intangible assets areamortized over the period of their expected lives, generally ranging from 5 to15 years.  Amortization expense relatedto intangible assets was $374,000 and $287,000 for the six months ended August31, 2006 and 2005, respectively.

The cost and accumulatedamortization of intangible assets was as follows (in thousands).
|                         | ** ** | **August 31, 2006** | ** ** | **February 28, 2006** | ** ** |
|-------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Cost**                      | ** ** | **Accumulated  Amortization**   | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
|                    |       |                          |       |                            |       |   |   |   |   |
| Customer lists          | ** ** | **$**                         | **3,386**  | ** **                      | **$**      | **841** | ** ** | $ | 2,968 |   | $ | 658 |   |
| Non-compete  agreements | ** ** | **1,245**                     | ** ** | **426**                         | ** ** | 1,230 |   | 301 |   |
| Patents                 | ** ** | **665**                       | ** ** | **100**                         | ** ** | 335 |   | 78 |   |
| Other  intangibles      | ** ** | **148**                       | ** ** | **68**                          | ** ** | 119 |   | 24 |   |
|                    | ** ** | **$**                         | **5,444**  | ** **                      | **$**      | **1,435** | ** ** | $ | 4,652 |   | $ | 1,061 |   |

 

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Note 7. – Long-term Debtand Financing Lease Obligations

Long-term debt and financing lease obligations consisted of thefollowing (in thousands):
|                                                                                                                                                                                                                                                                                                                                   | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                        | ** ** | **2006**            | ** ** | **2006**              | ** ** |
| Note payable to  bank syndicate (RBC Centura and Regions Bank); interest rate at LIBOR plus  applicable margin as defined per the loan agreement, (7.50% combined rate as  of August 31, 2006); monthly principal payments of $50 plus accrued interest,  payable through July 2011; collateralized by all assets of the Company. | ** ** | **$**               | **2,950**  |                  | $          | — |   |
|                                                                                                                                                                                                                                                                                                                              | ** ** | ** **          |       |                  |       |
| Note payable to  bank; interest at the Prime Rate plus 0.50%, (8.25% as of August 31, 2006);  monthly principal and interest payments of $11, payable through February 2013  at current interest rates; collateralized by all assets acquired from EDL  Displays, Inc.                                                            | ** ** | **653**             |       | —                |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | ** **          |       |                  |       |
| Mortgage payable  to bank; interest rate at Federal Home Loan Bank Board Index rate plus 1.95%  (7.35% as of August 31, 2006); monthly principal and interest payments of $5  payable through October 2021; collateralized by land and building of Teltron  Technologies, Inc.                                                    | ** ** | **530**             |       | 540                   |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | ** **          |       |                  |       |
| Mortgage payable  to Pennsylvania Industrial Development Authority; interest rate at 4.25%;  monthly principal and interest payments of $2.8 payable through October 2017;  collateralized by a second priority lien on land and building of Teltron  Technologies, Inc.                                                          |       | —              |       | 308                   |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | ** **          |       |                  |       |
| Other                                                                                                                                                                                                                                                                                                                             | ** ** | **21**              |       | 14                    |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | **4,154**           |       | 862                   |       |
| Financing lease  obligations                                                                                                                                                                                                                                                                                                      | ** ** | **399**             |       | 449                   |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | **4,553**           |       | 1,311                 |       |
| Less current  maturities                                                                                                                                                                                                                                                                                                          | ** ** | **(755**            | **)**      | (140                  | )          |
|                                                                                                                                                                                                                                                                                                                              | ** ** | ** **          |       |                  |       |
|                                                                                                                                                                                                                                                                                                                              | ** ** | **$**               | **3,798**  |                  | $          | 1,171 |   |

 

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Note 8. - Lines ofCredit

OnJune 29, 2006, Video Display Corporation and Subsidiaries executed a Loan andSecurity Agreement with a syndicate including RBC Centura Bank and Regions Bankto provide a $17 million line of credit to the Company and a $3.5 million lineof credit to the Company’s subsidiary Fox International, Inc., both with amaturity of 24 months. As of August 31, 2006, the outstanding balancesof these lines of credit were $12.5 million and $3.5 million, respectively. Theavailable amounts for borrowing were $4.5 million and $0.0 million,respectively. These loans aresecured by all assets and personal property of the Company. The agreementcontains covenants, including requirements related to tangible cash flow, ratioof debt to cash flow and assets coverage. The agreement also includesrestrictions on the incurrence of additional debt or liens, investments(including Company stock), divestitures and certain other changes in thebusiness. The interest rate on these loans is a floating LIBOR rate based on afixed charge coverage ratio, as defined in the loan documents. These new linesof credit replaced two lines of credit outstanding with Bank of America, whichwere terminated in conjunction with this agreement. At the date of termination,the Company was not in compliance with the consolidated Fixed Charge CoverageRatio and the consolidated Senior Funded Debt to EBITDA ratio covenants asdefined by the Bank of America credit line agreements. In conjunction with Loanand Security Agreement, the syndicate also executed a $3.0 million term notewith the Company, and the CEO of the Company provided a $6.0 millionsubordinated term note to the Company.

Prior to its replacementdiscussed above, the Company maintained a $27.5 million credit facility,executed in November 2004, with a bank, collateralized by equipment,inventories and accounts receivable of the Company.  The interest rate on this line was a floatingLIBOR rate based on a ratio of debt to EBITDA, as defined in the loandocuments.  The line of credit agreementcontained covenants, including requirements related to tangible cash flow,ratio of debt to cash flow and asset coverage. Additionally, the bank required that any contemplated acquisitions beaccretive.

The new $3.5 million lineof credit to FoxInternational, Inc. discussed above, replaced a line of credit in thesame amount with another bank which had been outstanding since April 2005. Atthat time, the Company repaid a $2.8 million short term line of credit(collateralized by assets of Fox International, Inc.) with a bank plus thebalance of a mortgage secured by the land and building of Fox International,Inc.  The interest rate on this line wasa floating LIBOR rate based on a ratio of debt to EBITDA, as defined in theloan documents.  The line of creditagreement contained covenants, including requirements related to tangible cashflow, ratio of debt to cash flow and asset coverage.  Additionally, the bank required that anycontemplated acquisitions be accretive.

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Note 9. – SegmentInformation

Condensed segmentinformation is as follows (in thousands):
|                                | ** ** | **Three Months**          | ** ** | **Six Months**            | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **Ended August 31,** | ** ** | **Ended August 31,** | ** ** |
| ** **                     | ** ** | **2006**                       | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   |   |
| Net Sales                      | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   |   |
| Display Segment                | ** ** | **$**                          | **13,838** |                           | $          | 18,321 | ** ** | **$** | **27,819** |   | $ | 34,102 |   |
| Wholesale Distribution Segment | ** ** | **5,994**                      |       | 5,011                          | ** ** | **10,611** |   | 9,672 |   |
|                           | ** ** | **$**                          | **19,832** |                           | $          | 23,332 | ** ** | **$** | **38,430** |   | $ | 43,774 |   |
|                           | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   |   |
| Operating profit               | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   |   |
| Display Segment                | ** ** | **$**                          | **993**    |                           | $          | 1,967 | ** ** | **$** | **1,316** |   | $ | 2,862 |   |
| Wholesale Distribution Segment | ** ** | **283**                        |       | 151                            | ** ** | **58** |   | 509 |   |
| Income from  Operations        | ** ** | **1,276**                      |       | 2,118                          | ** ** | **1,374** |   | 3,371 |   |
|                           | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   |   |
| Interest expense               | ** ** | **(622**                       | **)**      | (338                           | )          | **(1,123** | **)** | (675 | ) |
| Other income,  net             | ** ** | **6**                          |       | 16                             | ** ** | **49** |   | 80 |   |
| Income before income  taxes    | ** ** | **$**                          | **660**    |                           | $          | 1,796 | ** ** | **$** | **300** |   | $ | 2,776 |   |

 

Note 10. –Supplemental Cash Flow Information

Supplemental cashflow information is as follows (in thousands):
|                                                    | ** ** | **Six Months**            | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **Ended August 31,** | ** ** |
| ** **                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash Paid for:                                     |       |                           |       |   |   |
| Interest                                           | ** ** | **$**                          | **1,033**  |   | $ | 631 |   |
| Income taxes, net of refunds                       | ** ** | **$**                          | **58**     |   | $ | 1,152 |   |
|                                               |       |                           |       |   |   |
| Non-cash  Transactions:                            |       |                           |       |   |   |
| Assets acquired in exchange for assumption of debt | ** ** | **$**                          | **678**    |   | $ | — |   |
| Assets acquired in exchange for common stock       | ** ** | **$**                          | **250**    |   | $ | — |   |
| Conversion of  note payable to common stock        | ** ** | **$**                          | **—** |   | $ | 125 |   |

 

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Note 11. – Shareholder’sEquity

**Earnings Per Share**

Basicearnings per share is computed by dividing income available to commonshareholders by the weighted average number of common shares outstanding duringeach period.  Shares issued during theperiod are weighted for the portion of the period that they wereoutstanding.  Diluted earnings per shareis calculated in a manner consistent with that of basic earnings per sharewhile giving effect to all potentially dilutive common shares outstandingduring the period.

Thefollowing table sets forth the computation of basic and diluted earnings pershare for the three and six month periods ended August 31, 2006 and 2005 (inthousands, except per share data):
|                                         | ** ** | ** **          | ** ** | **Weighted**           | ** ** | ** **            | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **          | ** ** | **Average**            | ** ** | ** **            | ** ** |
| ** **                              | ** ** | ** **          | ** ** | **Common Shares** | ** ** | **Earnings Per** | ** ** |
| ** **                              | ** ** | **Net Income** | ** ** | **Outstanding**        | ** ** | **Share**             | ** ** |
| **Three months ended August 31,  2006** | ** ** | ** **          | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Basic**                               | ** ** | **$**               | **385**    | ** **             | **9,673**  | ** **            | **$**      | **0.04** | ** ** |
| **Effect  of dilution:**                | ** ** | ** **          | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Options**                             | ** ** | **—**          | ** ** | **234**                | ** ** | ** **            | ** ** |
| **Diluted**                             | ** ** | **$**               | **385**    | ** **             | **9,907**  | ** **            | **$**      | **0.04** | ** ** |
|                                    |       |                |       |                   |       |                  |       |
| Three months ended August  31, 2005     |       |                |       |                   |       |                  |       |
| Basic                                   |       | $                   | 1,116      |                   | 9,690      |                  | $          | 0.12 |   |
| Effect of dilution:                     |       |                |       |                   |       |                  |       |
| Options                                 |       | —              |       | 235                    |       |                  |       |
| Diluted                                 |       | $                   | 1,116      |                   | 9,925      |                  | $          | 0.11 |   |
|                                    |       |                |       |                   |       |                  |       |
| **Six months ended August 31,  2006**   | ** ** | ** **          | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Basic**                               | ** ** | **$**               | **150**    | ** **             | **9,657**  | ** **            | **$**      | **0.02** | ** ** |
| **Effect of dilution:**                 | ** ** | ** **          | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Options**                             | ** ** | **—**          | ** ** | **237**                | ** ** | ** **            | ** ** |
| **Diluted**                             | ** ** | **$**               | **150**    | ** **             | **9,894**  | ** **            | **$**      | **0.02** | ** ** |
|                                    |       |                |       |                   |       |                  |       |
| Six months ended August  31, 2005       |       |                |       |                   |       |                  |       |
| Basic                                   |       | $                   | 1,722      |                   | 9,696      |                  | $          | 0.18 |   |
| Effect of dilution:                     |       |                |       |                   |       |                  |       |
| Options                                 |       | —              |       | 218                    |       |                  |       |
| Diluted                                 |       | $                   | 1,722      |                   | 9,914      |                  | $          | 0.17 |   |

 

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**Stock-Based Compensation Plans**

On March 1, 2006, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised 2004), *“Share-Based Payment”*(“StatementNo. 123(R)”), which requires employee share-based compensation to beaccounted for under the fair value method and requires the use of an optionpricing model for estimating the fair value of stock options at the date ofgrant. Previously, the Company accounted for stock options under the intrinsicvalue method prescribed by Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees,*”and related interpretations, and provided the required pro forma disclosuresprescribed by SFAS No. 123, “*Accountingfor Stock-Based Compensation,*” (“Statement No. 123”), asamended. Since the exercise price of options equaled the market price of thestock on the date of grant, the stock options had no intrinsic value and,therefore, no expense was recognized for stock options by the Company prior tothe beginning of Fiscal 2007.

The Company elected to adopt Statement No. 123(R)using the modified prospective method, which requires compensation expense tobe recorded for all unvested share-based awards beginning in the first quarterof adoption. Accordingly, prior period information presented in this Report onForm 10-Q has not been restated to reflect the fair value method of expensingstock options.

For the three and six month periods ended August 31,2006, the Company recognized general and administrative expense of $13,500 and$26,000, related to share-based compensation. After the adoption of SFAS No.123(R), the liability for the share-based compensation recognized is presentedin the consolidated balance sheet as part of additional paid in capital. As ofAugust 31, 2006, total unrecognized compensation costs related to stock optionsgranted was $221,000. The unrecognized stock option compensation cost isexpected to be recognized over a period of approximately 5 years.

Upon recommendation of the Board of Directors of theCompany, on August 25, 2006, the Shareholders of the Company approved the VideoDisplay Corporation 2006 Stock Incentive Plan (“Plan”), whereby options topurchase up to 500,000 shares of the Company’s common stock may be granted andup to 100,000 restricted common stock shares may be awarded. Options may not begranted at a price less than the fair market value, determined on the day theoptions are granted. Options granted to a participant who is the owner of tenpercent or more of the common stock of the Company may not be granted at aprice less than 110% of the fair market value, determined on the day theoptions are granted. The exercise price of each option granted is fixed and maynot be re-priced. The life of each option granted is determined by the planadministrator, but may not exceed the lesser of five years from the date theparticipant has the vested right to exercise the option, or seven years fromthe date of the grant. The life of an option granted to a participant who isthe owner of ten percent or more of the common stock of the Company may notexceed five years from the date of grant. All full-time or part-time employees,and Directors of the Company, are eligible for participation in the Plan. Inaddition, any consultant or advisor who renders bona fide services to theCompany, other than in connection with the offer or sale of securities in acapital-raising transaction, is eligible for participation in the plan. Theplan administrator is appointed by the Board of Directors of the Company, andmust include two or more outside, independent Directors of the Company. Theplan may be terminated by action of the Board of Directors, but in any eventwill terminate on the tenth anniversary of its effective date.

Prior to expiration on May 1, 2006 the Companymaintained an incentive stock option plan whereby options to purchase up to 1.2million shares could be granted to directors and key employees at a price notless than fair market value at the time the options were granted. Upon vesting,options granted are exercisable for a period not to exceed ten years.  No further options may be granted pursuant tothe plan after the expiration date; provided however, those options outstandingat that date will remain exercisable in accordance with their respective terms.

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The Company estimates the fair value of stockoptions granted using the Black-Scholes option-pricing model, which requiresthe Company to estimate the expected term of the stock option grants andexpected future stock price volatility over the term. The term represents theexpected period of time the Company believes the options will be outstandingbased on historical information. Estimates of expected future stock pricevolatility are based on the historic volatility of the Company’s common stock.The Company calculates the historic volatility as the standard deviation of thedifferences in the natural logarithms of the weekly stock closing price,adjusted for dividends and stock splits.

No options were granted during the six month period ended August 31,2006.

Had compensation cost been determinedbased upon the fair value at the grant date for awards under the stock optionplan consistent with the methodology prescribed under Statement No. 123, theeffect on the Company’s pro forma net income and net income per share wouldhave been as follows (in thousands, except per share data):
|                                                                                          | ** ** | **Three Months**          | ** ** | **Six Months**            | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **Ended August 31,** | ** ** | **Ended August 31,** | ** ** |
| ** **                                                                               | ** ** | **2005**                       | ** ** | **2005**                       | ** ** |
| Net income, as reported                                                                  |       | $                              | 1,116      |                           | $          | 1,722 |   |
| Stock-based employee  compensation expense, as reported                                  |       | —                         |       | —                         |       |
| Stock-based employee  compensation expense determined under fair value basis, net of tax |       | (8                             | )          | (15                            | )          |
| Pro forma net income                                                                     |       | $                              | 1,108      |                           | $          | 1,707 |   |
|                                                                                     |       |                           |       |                           |       |
| Net earnings per share:                                                                  |       |                           |       |                           |       |
| Basic – as  reported                                                                |       | $                              | 0.12       |                           | $          | 0.18 |   |
| Basic – pro  forma                                                                  |       | $                              | 0.12       |                           | $          | 0.18 |   |
| Diluted – as  reported                                                              |       | $                              | 0.11       |                           | $          | 0.17 |   |
| Diluted – pro  forma                                                                |       | $                              | 0.11       |                           | $          | 0.17 |   |

 

**Stock Repurchase Program**

TheCompany has a stock repurchase program, pursuant to which it was originallyauthorized to repurchase up to 462,500 shares of the Company’s common stock inthe open market.  On January 11, 2006, the Board of Directorsof the Company approved a continuation of the stock repurchase program, andauthorized the Company to repurchase up to 600,000 additional shares of theCompany’s common stock, depending on the market price of the shares. There isno minimum number of shares required to be repurchased under the program. Underthis program, an additional 658,618 shares remain authorized to be repurchasedby the Company at August 31, 2006. As discussed in Note 8. Lines of Credit, theLoan and Security Agreement executed by Company on June, 29, 2006 includesrestrictions on investments which currently restrict further repurchases ofstock under this program.

Note12. – Comprehensive Income

Statement of Financial Accounting Standards No. 130 “ReportingComprehensive Income” establishes standards for reporting and presentation ofnon-owner changes in shareholders’ equity. For the Company, total non-owner changes in shareholders’ equity includenet income and the change in the cumulative foreign exchange translationadjustment component of shareholders’ equity. During the six months ended August 31, 2006 and 2005, totalcomprehensive income was $397,000 and $1.2 million, respectively.

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Note13. – Related Party Transactions

In conjunction with an agreement involvingre-financing of the Company’s lines of credit, on June 29, 2006 the Company’sChief Executive Officer provided a $6.0 million subordinated term note to theCompany with an amortization of 15 years, and a maturity of 60 months. Theinterest rate on this note is equal to the prime rate plus one percent. Thenote is secured by a general lien on all assets of the Company, subordinate tothe lien held by the syndicate of RBC Centura and Regions Bank. The balance outstandingunder this loan agreement was approximately $6.0 million at August 31, 2006.

On February 27, 2006 the Company’s Chief ExecutiveOfficer loaned the Company $6.8 million under a note agreement which providedfor interest at six percent or the prime rate plus 1⁄4 of one percent, whicheverwas higher, paid monthly. Principal payments were due in a series of monthlypayments, with a final payment of $1.0 million due October 1, 2006. The balanceoutstanding under this loan agreement was $3.0 million at June 29, 2006 whenthe balance was re-paid in conjunction with the note agreement discussed above.

The Company has a demand note outstanding fromanother officer, bearing interest at 8%. During the six months ended August 31,2006, an additional $220,000 was advanced on this demand note and $35,000 wasrepaid, resulting in a balance outstanding of $335,000 at August 31, 2006.

Note14. – Disposal of Assets

Effective May 31, 2006, the Company sold the netassets of the Wintron Technology division, primarily accounts receivable,inventory and property, plant and equipment, through a leveraged buyout to agroup, including managers and shareholders of the Company. Total proceeds fromthe sale at book value were approximately $354,000, resulting in no gain or loss.Net sales from the Wintron facility for the three months ended May 31, 2006were $126,000, producing a loss before income taxes of $101,000. Fiscal 2006net sales and loss before income taxes were $500,000 and $649,000,respectively.

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** **

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

Thefollowing discussion should be read in conjunction with the attached interimconsolidated financial statements and with the Company’s 2006 Annual Report toShareholders, which included audited financial statements and notes thereto forthe fiscal year ended February 28, 2006, as well as Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

**Overview**

The Company is a worldwide leader in the manufactureand distribution of a wide range of display devices, encompassing, amongothers, entertainment, military, medical and simulation display solutions.  The Company is comprised of two segments -(1) the manufacture and distribution of monitors, projection systems and CRTdisplays and (2) the wholesale distribution of consumer electronic parts. Thedisplay segment is organized into four interrelated operations aggregated intoone operating segment pursuant to the aggregation criteria of SFAS 131:

·                  **Monitors** – offers a complete range of CRT, flat paneland projection display systems for use in training and simulation, military,medical and industrial applications.

·                  **Data Display** – offers a complete range of CRTs for use indata display screen, including computer terminal monitors and medicalmonitoring equipment.

·                  **Home Entertainment –** offers a wide range of CRTs and projectiontubes for television and home theater equipment.

·                  **Components** – provides replacement electron guns andother components for CRTs primarily for servicing the Company’s internal needs.

During Fiscal 2007,management of the Company is focusing key resources on strategic efforts todispose of unprofitable operations while seeking acquisition opportunities thatenhance the profitability and sales growth of the Company’s more profitableproduct lines. In addition, the Company plans to seek new products throughacquisitions and internal development that complement existing profitableproduct lines. Challenges facing the Company during these efforts include:

***Inventorymanagement*** - theCompany continually monitors historical sales trends as well as projectedfuture needs to ensure adequate on hand supplies of inventory and to ensureagainst overstocking of slower moving, obsolete items.

Certain of the Company’s divisions maintainsignificant inventories of CRTs and component parts in an effort to ensure itscustomers a reliable source of supply. The Company’s inventory turnover averages over 175 days, although inmany cases the Company would anticipate holding 90 to 100 days of inventory inthe normal course of operations.  Thislevel of inventory is higher than some of the Company’s competitors due to thefact that it sells a number of products representing older, or trailing edge,technology that may not be available from other sources. The market for thesetrailing edge technology products is declining and, as manufacturers for theseproducts discontinue production or exit the business, the Company may make lasttime buys. In the monitor operations of the Company’s business, the market forits products is characterized by fairly rapid change as a result of thedevelopment of new technologies, particularly in the flat panel display area.If the Company fails to anticipate the changing needs of its customers andaccurately forecast their requirements, it may accumulate inventories ofproducts which its customers no longer need and which the Company will beunable to sell or return to its vendors. Because of this, the Company’s management monitors the adequacy of itsinventory reserves regularly, and at August 31, 2006, believes its reserves tobe adequate.

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***Interest rate exposure*** – The Company had outstanding debt in excessof $25.0 million as of August 31, 2006, all of which is subject to interest ratefluctuations by the Company’s lenders. Higher rates applied by the Federal Reserve Board over the past fourfiscal quarters and potential continued rate hikes have negatively affected theCompany’s earnings and will continue to negatively impact the Company’searnings.  It is the intent of theCompany to continually monitor interest rates and consider converting portionsof the Company’s debt from floating rates to fixed rates should conditions befavorable for such interest rate swaps or hedges.

**Resultsof Operations**

Thefollowing table sets forth, for the three and six months ended August 31, 2006and 2005, the percentages which selected items in the Statements of Operationsbear to total sales:
|                                 | ** ** | **Three Months**          | ** ** | **Six Months**            | ** ** |
|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Ended August 31,** | ** ** | **Ended August 31,** | ** ** |
| ** **                      | ** ** | **2006**                       | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                           |       |                           |       |                           |       |   |   |   |   |
| Display Segment                 |       |                           |       |                           |       |   |   |   |   |
| Monitors                        | ** ** | **56.2**                       | **%**      | 62.7                           | %          | **56.4** | **%** | 59.9 | % |
| Data Display  CRTs              | ** ** | **10.5**                       |       | 10.7                           | ** ** | **12.0** |   | 12.4 |   |
| Entertainment  CRTs             | ** ** | **2.8**                        |       | 4.0                            | ** ** | **3.4** |   | 4.6 |   |
| Electron Guns  and Components   | ** ** | **0.3**                        |       | 1.1                            | ** ** | **0.6** |   | 0.9 |   |
| Total Display  Segment          | ** ** | **69.8**                       | **%**      | 78.5                           | %          | **72.4** | **%** | 77.9 | % |
| Wholesale  Distribution Segment | ** ** | **30.2**                       |       | 21.5                           | ** ** | **27.6** |   | 22.1 |   |
| ** **                      |       | **100.0**                      | **%**      | 100.0                          | %          | **100.0** | **%** | 100.0 | % |
| Costs and expenses              |       |                           |       |                           |       |   |   |   |   |
| Cost of goods  sold             | ** ** | **65.7**                       | **%**      | 67.4                           | %          | **67.8** | **%** | 67.7 | % |
| Selling and  delivery           | ** ** | **9.6**                        |       | 8.1                            | ** ** | **9.9** |   | 8.2 |   |
| General and  administrative     | ** ** | **18.3**                       |       | 15.4                           | ** ** | **18.7** |   | 16.4 |   |
| ** **                      |       | **93.6**                       | **%**      | 90.9                           | %          | **96.4** | **%** | 92.3 | % |
|                            |       |                           |       |                           |       |   |   |   |   |
| Income from Operations          | ** ** | **6.4**                        | **%**      | 9.1                            | %          | **3.6** | **%** | 7.7 | % |
|                            |       |                           |       |                           |       |   |   |   |   |
| Interest expense                | ** ** | **(3.1**                       | **)%**     | (1.4                           | )%         | **(2.9** | **)%** | (1.5 | )% |
| Other income, net               | ** ** | **0.0**                        |       | 0.1                            | ** ** | **0.1** |   | 0.2 |   |
| Income before income  taxes     | ** ** | **3.3**                        | **%**      | 7.8                            | %          | **0.8** | **%** | 6.4 | % |
| Provision for income  taxes     | ** ** | **1.4**                        |       | 2.9                            | ** ** | **0.4** |   | 2.4 |   |
| Net Income                      | ** ** | **1.9**                        | **%**      | 4.9                            | %          | **0.4** | **%** | 4.0 | % |

 

Net sales

Consolidated net sales decreased $3.5 million forthe three months ended August 31, 2006 and decreased $5.3 million for the sixmonths ended August 31, 2006, as compared to the same periods ended August 31,2005. Display segment sales decreased $4.5 million for the three-monthcomparative period and decreased $6.3 million for the six-month comparativeperiod. Sales within the Wholesale Distribution segment increased $1.0 millionfor the three-month comparative period and increased $0.9 million for thesix-month comparative period.

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The net decrease in Display Segment sales for thethree months ended August 31, 2006 is primarily attributed to declines inMonitor revenues, as compared to the same period ended August 31, 2005.  The Monitor revenues declined $3.5 millionover the three-month period primarily due to the fulfillment of a militarycontract for replacement CRTs early in fiscal 2006, which has not been renewed,and reduced demand for new flight training systems for the commercial airlineindustry. The Data Display CRT revenues declined $0.4 million over thethree-month period primarily due to reduced shipments of lower pricedreplacement CRTs compared to the prior year period. Continuing recenthistorical trends, Entertainment CRTs and Electron Gun and Components revenuesdeclined $0.4 million and $0.2 million, respectively over the comparablethree-month period.

The net decrease in Display Segment sales for thesix months ended August 31, 2006 is primarily attributed to declines inMonitor, Data Display CRT and Entertainment CRT revenues, as compared to thesame period ended August 31, 2005.  TheMonitor revenues declined $4.5 million over the six-month period primarily dueto the fulfillment of a military contract for replacement CRTs early in fiscal2006, which has not been renewed, and reduced demand for new flight trainingsystems for the commercial airline industry. The Data Display CRT revenuesdeclined $0.8 million over the six-month period primarily due to reducedshipments of lower priced replacement CRTs compared to the prior year period.Entertainment CRT revenues declined $0.7 million over the comparable six-monthperiod. A significant portion of the entertainment division’s sales are tomajor television retailers as replacements for products sold under manufacturerand extended warranties.  Due tocontinued lower retail sales prices for mid-size television sets (25” to 30”),fewer extended warranties were sold by retailers, a trend consistent withrecent prior fiscal years.  The Companyremains the primary supplier of product to meet manufacturers’ standardwarranties.  Future revenue trends inthis division will be negatively impacted by the decreasing number of extendedwarranties sold for larger, more expensive sets. Because the Company isin the replacement market, it has the ability to track retail sales trends and,accordingly, can attempt to adjust quantities of certain size CRTs carried instock and reduce exposure to obsolescence.

Electron Gun and Components revenues declined $0.2million over the comparable three-month and six-month periods. ElectronGun and Components revenues have generally declined in recent years due toweaker demand for electron gun and stem sales. Electron gun sales have historically been dependent upon the demand bydomestic and foreign television CRT remanufacturers.  These sales have declined over the past fewyears as consumers move towards purchasing new technology as opposed torepairing existing sets.

###### WholesaleDistribution segment net sales increased $1.0 million for the three-monthperiod ended August 31, 2006  andincreased $0.9 million for the six-month ended August 1, 2006, compared to thesame period a year ago. This growth is attributed to an expansion of the callcenter late in fiscal 2006, which acts as a consumer and dealer support centerfor both in-warranty and out-of-warranty household products, appliances, partsand accessories for Black & Decker, Delonghi, Norelco, Coby and variousother manufacturers.  This call centeralso acts as a technical support center for these same manufacturers.

###### Gross margins

Consolidated gross margins increased from 32.6% forthe three months ended August 31, 2005 to 34.3% for the three months endedAugust 31, 2006.  For the six monthsended August 31, 2006, consolidated gross margins decreased slightly to 32.2%from 32.3% for the comparable prior year period.

Display segment margins increased from 27.1% to28.4% for the comparative three-month period and declined slightly from 26.6%to 26.2% for the comparative six-month period. Gross margins within the Monitordivision increased to 29.7% for the three months ended August 31, 2006 comparedto 26.8% for the same period a year ago and increased to 28.5% from 26.2% forthe six months ended August 31, 2006 compared to the prior year.  This increase is primarily attributable tocontinued streamlining of operational facilities and cost reduction efforts aswell as the one time impact of certain relocation and integration costsincurred in Fiscal 2005. Data display gross margins increased to 34.4% for thethree months ended August 31, 2006 compared to 25.6% for the same period a yearago and decreased from 20.5% to 

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17.5% for the six monthsended August 31, 2006 compared to the prior year. Margins for the three monthsended August 31, 2006 were improved by the impact of cost reduction efforts inthe Company’s UK operations and favorable trends in exchange rates over theperiod. The margin decline for the six months ended August 31, 2006 primarilyreflects the impact of reduced sales volume from the Company’s Tucker Georgiaoperations.  Gross margins in home entertainmentCRTs decreased from 29.2% for the three months ended August 31, 2005 to 3.4%for the three months ended August 31, 2006 and decreased from 43.4% for the sixmonths ended August 31, 2005 to 27.9% for the six months ended August 31, 2006,due to the impact of the reduced sales volume. Gross margins from component parts sold also decreased from 52.4% forthe three months ended August 31, 2005 to (151.5%) for the three months endedAugust 31, 2006 and decreased from 48.5% for the six months ended August 31,2005 to (32.9%) for the six months ended August 31, 2006, due to the impact ofthe reduced sales volume.

The Wholesale Distribution segment gross marginsdecreased from 52.7% to 48.0% for the comparative three-month period anddeclined from 52.5% to 48.0% for the comparative six-month period, primarilydue to the impact of increased sales volume of lower margin call center “servicesales” for the three and six months ended August 31, 2006. Expenses for thecall center are classified as operating expenses.

##### Operating expenses

Operating expenses as a percentage of salesincreased from 23.5% to 27.9% for the three months ended August 31, 2006compared to the three months ended August 31, 2005 and increased from 24.6% to28.6% for the six-month comparative period, primarily reflecting the impact ofreduced sales volume.

Display segment operating expenses decreased $0.1million for the three-month period ended August 31, 2006, and decreased $0.2million for the six-month period ended August 31, 2006, as compared to thecomparable prior year periods.  Thesereductions expenses are primarily due to decreases in corporate legal andprofessional fees.

Wholesale Distribution segment operating expensesincreased $0.1 million and $0.4 million for the three-month and six-monthperiods ended August 31, 2006, compared to the comparable periods a year ago,primarily due to additional expenses associated with the call center which wasexpanded late in fiscal 2006.  Theseexpenses (primarily payroll) are classified in general and administrativeexpense in the consolidated financial statements.

###### Interest expense

Interest expense increased$0.3 million and $0.4 million for the three and six months ended August 31, 2006 as compared to the same periods a year ago.  The Company maintains various debt agreementswith different interest rates, most of which are based on the prime rate orLIBOR.   These increases in interestexpense primarily reflect higher market interest rates in effect during Fiscal2006 compared to Fiscal 2005, and a slightly higher level of averageoutstanding borrowings.

###### Income taxes

Theeffective tax rate for the six months ended August 31, 2006 and August 31, 2005was 50.0% and 38.0%, respectively.  Theserates differ from the Federal statutory rate primarily due to the effect ofstate taxes and the permanent non-deductibility of certain expenses for taxpurposes.

##### Foreign currency translation

Gainsor losses resulting from the transactions with the Company’s UK subsidiary arereported in current operations while currency translation adjustments arerecognized in a separate component of shareholders’ equity.  There were no significant gains or lossesrecognized in either period related to the UK subsidiary.

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**Liquidityand Capital Resources**

Asof August 31, 2006, the Company had total cash of $1.2 million.  The Company’s working capital was $41.1million and $16.3 million at August 31, 2006 and February 28, 2006,respectively.  In recent years, theCompany has financed its growth and cash needs primarily through income fromoperations, borrowings under revolving credit facilities, advances from theCompany’s Chief Executive Officer and long-term debt.  Liquidity provided by operating activities ofthe Company is reduced by working capital requirements, largely inventories andaccounts receivable, debt service, capital expenditures, product line additionsand dividends.

The Company specializes in certain productsrepresenting trailing-edge technology that may not be available from othersources, and may not be currently manufactured. In many instances, the Company’sproducts are components of larger display systems for which immediateavailability is critical for the customer. Accordingly, the Company enjoyshigher gross margins on certain products, but typically has larger investmentsin inventories than those of its competitors.

The Company continues to monitor its cash andfinancing positions, seeking to find ways to lower its interest costs and toproduce positive operating cash flow. The Company examines possibilities to grow its business as opportunitiespresent themselves, such as new sales contracts or niche acquisitions. Therecould be an impact on working capital requirements to fund this growth.  As in the past, the intent is to finance suchprojects with operating cash flows or existing bank lines; however, morepermanent sources of capital may be required in certain circumstances.  

Cashused in operations for the six months ended August 31, 2006 was $0.5 million ascompared to cash used of $1.0 million for the six months ended August 31, 2005.This net decrease in cash used is primarily the result of an increase inaccounts receivable of $0.5 million, a decrease in inventory of $0.9 million,and a decrease in accounts payable and accrued expenses of $2.5 million, inaddition to the impact of the reduced net income of the comparable periods. Thedecrease in accounts receivable reflects normal variations in the timing ofinvoicing and account collection. The decrease in inventory is primarily due toa decreased level of raw material purchases in line with the trend in shipmentsduring the six month period ended August 31, 2006. The decrease in accountpayable and accrued expenses is attributable to the reduced volume of inventorypurchases, the impact of various cost reduction efforts and to normalfluctuations in the timing of purchases and the processing of invoices forpayment.

Investingactivities used cash of $0.5 million, including $0.6 million related to theacquisition of EDL and $0.1 million for the purchase of various equipmentitems, partially offset by proceeds of $0.2 million from the sale of theWintron division during the six months ended August 31, 2006. This compares tocash used of $2.0 million during the six months ended August 31, 2005. This reduction in use of cash primarilyreflects cash of approximately $1.4 million used to acquire the IDS division ofSix Five Systems, Inc. in May 2005.  

Financingactivities provided cash of $0.5 million for the six months ended August 31,2006, reflecting a $1.0 million net increase in advances under outstandinglines of credit and a $0.6 million net repayment of advances from the Company’sChief Executive. Financing activities provided cash of $3.4 million for the sixmonths ended August 31, 2005, primarily due to additional borrowings requiredfor the Company’s general working capital needs and higher level of investingactivities in the prior year period.

The Company’s debt agreements with financial institutionscontain affirmative and negative covenants, including requirements related totangible net worth and debt service coverage and new loans.  Additionally, dividend payments, capitalexpenditures and acquisitions have certain restrictions. Substantially all ofthe Company’s retained earnings are restricted based upon these covenants. 

TheCompany has a stock repurchase program, pursuant to which it was originallyauthorized to repurchase up to 462,500 shares of the Company’s common stock inthe open market.  On January 11, 2006, the Board of Directorsof the 

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Company approved a continuation of the stock repurchase program, andauthorized the Company to repurchase up to 600,000 additional shares of theCompany’s common stock, depending on the market price of the shares. There isno minimum number of shares required to be repurchased under the program. Underthis program, an additional 658,618 shares remain authorized to be repurchasedby the Company at August 31, 2006. As discussed in this Item 2 under thecaption Subsequent Events, the Loan and Security Agreement executed by Companyon June, 29, 2006 includes restrictions on investments which currently restrictfurther repurchases of stock under this program.

##### **Critical Accounting Policies**

Management’s Discussionand Analysis of Financial Condition and Results of Operations are based uponthe Company’s consolidated financial statements.  These financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  These principlesrequire the use of estimates and assumptions that affect amounts reported anddisclosed in the financial statements and related notes.  The accounting policies that may involve ahigher degree of judgments, estimates, and complexity include reserves oninventories, revenue recognition, the allowance for bad debts and warrantyreserves.  The Company uses the followingmethods and assumptions in determining its estimates:

*Reserveson inventories*

Reserves on inventories resultin a charge to operations when the estimated net realizable value declinesbelow cost.  Management regularly reviewsthe Company’s investment in inventories for declines in value and establishesreserves when it is apparent that the expected net realizable value of theinventory falls below its carrying amount. Management considers the projecteddemand for CRTs in this estimate of net realizable value. Management is able toidentify consumer buying trends, such as size and application, well in advanceof supplying replacement CRTs. Thus, the Company is able to adjustinventory-stocking levels according to the projected demand. The average lifeof a CRT is five to seven years, at which time the Company’s replacement marketdevelops. Management reviews inventory levels on a quarterly basis.  Such reviews include observations of productdevelopment trends of the OEMs, new products being marketed, and technologicaladvances relative to the product capabilities of the Company’s existinginventories.  There have been nosignificant changes in management’s estimates in fiscal 2006 and 2005; however,the Company cannot guarantee the accuracy of future forecasts since theseestimates are subject to change based on market conditions.

*RevenueRecognition*

Revenue is recognized onthe sale of products when the products are shipped, all significant contractualobligations have been satisfied, and the collection of the resulting receivableis reasonably assured.  The Company’sdelivery term typically is F.O.B. shipping point.

In accordance withEmerging Issues Task Force (EITF) issue 00-10, shipping and handling feesbilled to customers are classified in net sales in the consolidated statementsof operations.  Shipping and handlingcosts incurred are classified in selling and delivery in the consolidatedstatements of operations.

A portion of the Company’srevenue is derived from contracts to manufacture CRTs to a buyers’specification.  These contracts areaccounted for under the provisions of the American Institute of CertifiedPublic Accountants’ Statement of Position No. 81-1, “Accounting for Performanceof Construction-Type and Certain Production-Type Contracts”.  These contracts are fixed-price and cost-pluscontracts and are recorded on the percentage of completion basis using theratio of costs incurred to estimated total costs at completion as themeasurement basis for progress toward completion and revenue recognition.  Any losses identified on contracts arerecognized immediately.  Contractaccounting requires significant judgment relative to assessing risks,estimating contract costs and making related assumptions for schedule andtechnical issues.  With respect tocontract change orders, claims or similar items, judgment 

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must be used in estimating related amounts andassessing the potential for realization. These amounts are only included in contract value when they can bereliably estimated and realization is probable. 

The WholesaleDistribution segment has several distribution agreements that it accounts forusing the gross revenue basis as prescribed by EITF issue 99-19.  The Company uses the gross method because theCompany has general inventory risk, physical loss inventory risk and creditrisk. The call center service revenue is recognized based on written pricingagreements with each manufacturer, on a per call, per email or per standardmail basis.

*Allowance for bad debts*

The allowance for bad debtsis determined by reviewing all accounts receivable and applying historicalcredit loss experience to the current receivable portfolio with considerationgiven to the current condition of the economy, assessment of the financialposition of the creditors as well as past payment history and overall trends inpast due accounts compared to established thresholds.  The Company monitors credit exposure andassesses the adequacy of the allowance for bad debts on a regular basis.  Historically, the Company’s allowance hasbeen sufficient for any customer write-offs. Although the Company cannot guarantee future results, managementbelieves its policies and procedures relating to customer exposure areadequate.

###### *Warranty reserves*

The warranty reserve isdetermined by recording a specific reserve for known warranty issues and ageneral reserve based on historical claims experience. The Company considersactual warranty claims compared to net sales, then adjusts its reserveliability accordingly.  Actual claimsincurred could differ from the original estimates, requiring adjustments to thereserve.  Management believes thathistorically its procedures have been adequate and does not anticipate that itsassumptions are reasonably likely to change in the future.

###### *Other Accounting Policies*

Other loss contingencies are recorded asliabilities when it is probable that a liability has been incurred and theamount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that theultimate loss will exceed the recorded provision.  Contingent liabilities are often resolvedover long time periods.  Estimatingprobable losses requires analysis of multiple factors that often depend onjudgments about potential actions by third parties.

##### **New Accounting Pronouncements**

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*. Interpretation No. 48 requiresthe use of a two-step approach for recognizing and measuring tax benefits takenor expected to be taken in a tax return and disclosures regarding uncertaintiesin income tax positions. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect of initiallyadopting Interpretation No. 48 is to record an adjustment to openingretained earnings in the year of adoption and should be presented separately.Only tax positions that meet the more likely than not recognition threshold atthe effective date may be recognized upon adoption of InterpretationNo. 48. Management is in the process of evaluating the provisions of theinterpretation, but does not anticipate that the adoption of thisinterpretation will have a material impact on the Company’s consolidatedfinancial statements.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“Statement No.”) 157, *Fair Value Measurements*.Statement No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles and expandsdisclosures about fair value measurements. The statement does not require newfair value measurements, but is applied to the extent that other accountingpronouncements require or permit fair value measurements. The statementemphasizes that fair value is a market-based measurement that should bedetermined 

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based on the assumptions that market participants would use in pricingan asset or liability. Companies will be required to disclose the extent towhich fair value is used to measure assets and liabilities, the inputs used todevelop the measurements, and the effect of certain of the measurements onearnings (or changes in net assets) for the period. Statement No. 157 iseffective for fiscal years beginning after November 15, 2007. Managementdoes not anticipate that the adoption of this statement will have a materialimpact on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement No.158,*****Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R)*, which requires an employer to recognize the over-funded orunder-funded status of a defined benefit postretirement plan (other than amultiemployer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income of a business entity or changesin unrestricted net assets of a not-for-profit organization. Statement No. 158also requires an employer to measure the funded status of a plan as of the dateof its year-end statement of financial position, with limited exceptions. Thisstatement is effective for fiscal years ending after December 15, 2006.The Company does not currently provide defined benefit pension or otherpostretirement plans, therefore management has determined that the adoption ofthis interpretation will not have an impact on the Company’s consolidatedfinancial statements.

**Forward-LookingInformation and Risk Factors**

Thisreport contains forward-looking statements and information that is based on management’sbeliefs, as well as assumptions made by, and information currently available tomanagement.  When used in this document,the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect”and similar expressions are intended to identify forward-lookingstatements.  Such statements involve anumber of risks and uncertainties.  Theserisks and uncertainties, which are included under Part I, Item 1A. Risk Factorsin the Company’s Annual Report of Form 10-K for the year ended February 28,2006 could cause actual results to differ materially.

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** **

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

TheCompany’s primary market risks include fluctuations in interest rates andvariability in interest rate spread relationships, such as prime to LIBORspreads.  Approximately $26.5 million ofoutstanding debt at August 31, 2006 related to long-term indebtedness undervariable rate debt.  Interest on the outstandingbalance of this debt will be charged based on a variable rate related to theprime rate or the LIBOR rate.  Both ratebases are incremented for margins specified in their agreements.  Thus, the Company’s interest rate is subjectto market risk in the form of fluctuations in interest rates. The effect of ahypothetical one percentage point increase across all maturities of variablerate debt would result in a decrease of approximately $0.3 million in pre-taxnet income assuming no further changes in the amount of borrowings subject tovariable rate interest from amounts outstanding at August 31, 2006. The Companydoes not trade in derivative financial instruments.

The Company has a subsidiary in the U.K., which is notmaterial, but uses the British pound as its functional currency. Due to itslimited operations outside of the U.S., the Company’s exposure to changes inforeign currency exchange rates between the U.S. dollar and foreign currenciesor to weakening economic conditions in foreign markets is not expected tosignificantly impact the Company’s financial position.

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** **

**ITEM4.  CONTROLS AND PROCEDURES**

Ourdisclosure controls and procedures (as defined in Exchange ActRule 13a-15(e)) are designed to provide reasonable assurance thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934, such as this quarterly report onForm 10-Q, is recorded, processed, summarized and reported within the timeperiods specified in the SEC rules and forms. Our disclosure controls andprocedures are also designed to ensure that such information is accumulated andcommunicated to our management, including our chief executive officer and chieffinancial officer, to allow timely decisions regarding required disclosure.

Our chief executive officer and chief financialofficer have conducted an evaluation of the effectiveness of our disclosurecontrols and procedures as of August 31, 2006. We perform this evaluation on aquarterly basis so that the conclusions concerning the effectiveness of ourdisclosure controls and procedures can be reported in our annual report onForm 10-K and quarterly reports on Form 10-Q. Based on thisevaluation, our chief executive officer and chief financial officer haveconcluded that our disclosure controls and procedures were effective as ofAugust 31, 2006. 

**Changesin Internal Controls**

During the six months ended August 31, 2006, theCompany initiated changes in its internal control over financial reporting toaddress material weaknesses discussed in the 2006 Annual Report on Form 10-K.Subsequent to the end of the fiscal year, the Company hired replacementfinancial reporting personnel with the requisite skills, who are being trainedin the Company’s reporting procedures and controls. The monthly, quarterly andannual closing processes are being documented and the participating members ofthe financial staff are being cross-trained on upgraded procedures. Managementbelieves that these training procedures and the replacement of financialreporting personnel will ensure that the disclosed material weaknesses will nothave a material effect on financial reporting in current and futureperiods.

There have not been any other changes in the ourinternal controls over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

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** **

**PART II**

Item 1.            LegalProceedings

No new materiallegal proceedings or material changes in existing litigation occurred duringthe quarter ended August 31, 2006.

Item 1A.         RiskFactors

Information  regarding risk factors  appears under thecaption Forward-Looking Statements and Risk Factors in Part I, Item 2 of thisForm 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the  fiscal year ended February 28, 2006. There have been no material changes fromthe risk factors previously disclosed in our Annual Report on Form 10-K.

Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds

In August 2006, the Company acquired certain assets of Hobson Bros.Inc. of Chicago in exchange for 26,830 shares of the Company’s common stockheld as treasury shares. The market value of shares issued was $9.32 at thedate of close for a total acquisition cost of $250,000.

Item 3.            Defaultsupon Senior Securities

None.

Item 4.            Submissionof Matters to a Vote of Security Holders

a)     The Company held its annual meeting of stockholders onAugust 25, 2006 and solicited votes by proxy in conjunction with such meeting.

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b)    Thefollowing matters were approved by the shareholders:

(i)    Theapproval of management’s nominees to the Board of Directors with the nomineesreceiving the following votes:
|                     | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** |
|---------------------|------------|-----------|------------|--------------|------------|-------------|------------|
| Ronald D. Ordway    |       | 9,124,576 |       | 469,224      |       | —      |       |
| Ervin Kuczogi       |       | 8,994,854 |       | 498,946      |       | —      |       |
| Peter Frend         |       | 9,096,847 |       | 496,953      |       | —      |       |
| Carolyn Howard      |       | 9,096,807 |       | 496,953      |       | —      |       |
| Ernest J. Thibeault |       | 8,500,770 |       | 1,093,030    |       | —      |       |

 

(ii)   The2006 Stock Incentive Plan was approved on the basis of the following votes:
| For       | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Non Vote** | ** ** |
|-----------|------------|--------------|------------|-------------|------------|-------------------|------------|
| 9,124,576 |       | 469,224      |       | —      |       | 2,521,356         |       |

 

Item 5.            Otherinformation

None.

Item 6.            Exhibits
| Exhibit Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                   |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                                                                                                                                                      |
| 3(a)           |       | Articles of Incorporation of the Company  (incorporated by reference to Exhibit 3A to the Company’s Registration  Statement on Form S-18 filed January 15, 1985).                                                                                                                                                                    |
| 3(b)           |       | By-Laws of the Company (incorporated by reference to  Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January  15, 1985).                                                                                                                                                                                      |
| 10(d)          |       | $27,500,000 promissory note dated November 10, 2004  between the Company and Bank of America (holder) (incorporated by reference  to Exhibit 10(d) to the Company’s 2005 Annual Report on Form 10-K).                                                                                                                                |
| 10(e)          |       | $6,800,000 term note dated February 27, 2006 between  the Company and Ronald D. Ordway (holder) (incorporated by reference to  Exhibit 10(e) to the Company’s 2006 Annual Report on Form 10-K).                                                                                                                                      |
| 10(h)          |       | Loan and Security Agreement and related documents,  dated June 14, 2006, among Video Display Corporation and Subsidiaries and RBC  Centura Bank and Regions Bank as lenders and RBC Centura Bank as collateral  agent (incorporated by reference to Exhibit 10(h) to the Company’s Current  Report on Form 8-K dated June 29, 2006). |
| 10(i)          |       | $6,000,000 Subordinated Note, dated June 29, 2006,  between Video Display Corporation and Ronald D. Ordway (holder) (incorporated  by reference to Exhibit 10(i) to the Company’s Current Report on Form 8-K dated  June 29, 2006).                                                                                                  |
| 10(j)          |       | Video Display Corporation 2006 Stock Incentive Plan  (incorporated by reference to Appendix A to the Company’s 2006 Proxy  Statement on Schedule 14A).                                                                                                                                                                               |
| 31.1           |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                 |
| 31.2           |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                 |
| 32.1           |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                 |

 

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SIGNATURES

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                  |   |   VIDEO DISPLAY CORPORATION                  |
|------------------|--------|--------------------------------------------------------|
|             |   |                                                   |
|             |   |                                                   |
| October 12, 2006 |   | By:                                                    | /s/ Ronald D. Ordway |   |
|             |   |      Ronald D. Ordway         |   |
|             |   |      Chief Executive  Officer |   |
|             |   |                                                   |   |
|             |   |                                                   |   |
| October 12, 2006 |   | By:                                                    | /s/ Michael D. Boyd |   |
|             |   |      Michael D. Boyd          |   |
|             |   |      Chief Financial  Officer |   |

 

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