**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,DC 20549

**FORM 10-K**

| **(Mark One)**                                       | ** **                                                                                               |
|------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| x                                                    | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended February 28, 2006** |
| **OR**                                               |
| o                                                    | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                           | **For the transition period from  _____________to______________**                                        |

 

Commission file number**0-13394**

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**VIDEO DISPLAY CORPORATION**

(Exact name of registrantas specified in its charter)

| **Georgia**                                     |   | **58-1217564**                     |
|-------------------------------------------------|--------|------------------------------------|
| (State of  Incorporation)                       |   | (IRS Employer  Identification No.) |
| **1868 Tucker Industrial Road, Tucker Georgia** |   | **30084**                          |
| (Address of  principal executive offices)       |   | (Zip code)                         |

 

Registrant’s telephonenumber, including area code: **(770) 938-2080**

Securities RegisteredPursuant to Section 12(b) of the Act:

| Title of each class             |   | Name of each  exchange on which registered |
|---------------------------------|--------|--------------------------------------------|
| **Common  Stock, no par value** |   | **NASDAQ/NMS**                             |

 

Securities registered pursuant to Section 12(g) ofthe Act: **Common stock (no par value)**

Indicate by check mark whether the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act.YES   o   NO   x

Indicate by check mark whether the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.YES   o   NO   x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. YES   x   NO   o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is alarge accelerated filer, and accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large accelerated filer   o         Accelerated filer   o         Non-accelerated filer   x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Securities ExchangeAct of1934). YES   o   NO   x

As of August 31, 2005, the aggregate market valueof the voting and non-voting common equity held by non-affiliates based uponthe closing sales price for the Registrant’s common stock as reported in theNASDAQ National Market System was $56,500,000.

The number of shares outstanding of the registrant’sCommon Stock as of May 15, 2006 was 9,622,000.

**DOCUMENTSINCORPORATED BY REFERENCE**

The following documents (or parts thereof) areincorporated by reference into the following parts of this Form 10-K:

Portions of the Definitive Proxy statement related tothe 2006 Annual Meeting of Stockholders in Part III.

 

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**VIDEODISPLAY CORPORATIONTABLE OF CONTENTS**

| ITEM  NUMBER | ** ** | ** **                                                                                                              | ** ** | ** ** | ** ** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **   |       | PART I                                                                                                             | ** ** |       | ** ** | ** ** |   |
| Item  1.     |       | Business.                                                                                                               |       |       |       | ** ** |   |
| Item  1A.    |       | Risk  Factors.                                                                                                          |       |       |       | ** ** |   |
| Item 1B.     |       | Unresolved Staff  Comments.                                                                                             |       |       |       | ** ** |   |
| Item  2.     |       | Properties.                                                                                                             |       |       |       | ** ** |   |
| Item 3.      |       | Legal Proceedings.                                                                                                      |       |       |       | ** ** |   |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders.                                                                   |       |       |       | ** ** |   |
|         |       | PART II                                                                                                            |       |       |       | ** ** |   |
| Item 5.      |       | Market for the  Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases  of Equity Securities. |       |       |       | ** ** |   |
| Item 6.      |       | Selected Financial  Data.                                                                                               |       |       |       | ** ** |   |
| Item 7.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operation.                             |       |       |       | ** ** |   |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures About Market Risk.                                                            |       |       |       | ** ** |   |
| Item 8.      |       | Financial  Statements and Supplementary Data.                                                                           |       |       |       | ** ** |   |
| Item 9.      |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure.                                  |       |       |       | ** ** |   |
| Item 9A.     |       | Controls and  Procedures.                                                                                               |       |       |       | ** ** |   |
| Item 9B.     |       | Other Information.                                                                                                      |       |       |       | ** ** |   |
|         |       | PART III                                                                                                           |       |       |       | ** ** |   |
| Item 10.     |       | Directors and  Executive Officers of the Registrant.                                                                    |       |       |       | ** ** |   |
| Item 11.     |       | Executive  Compensation.                                                                                                |       |       |       | ** ** |   |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters.                       |       |       |       | ** ** |   |
| Item 13.     |       | Certain  Relationships and Related Transactions.                                                                        |       |       |       | ** ** |   |
| Item 14.     |       | Principal  Accountant Fees and Services.                                                                                |       |       |       | ** ** |   |
|         |       | PART IV                                                                                                            |       |       |       | ** ** |   |
| Item 15.     |       | Exhibits,  Financial Statement Schedules.                                                                               |       |       |       | ** ** |   |

 

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**PART I**

**ITEM 1.**                BUSINESS.

**General**

Video Display Corporation(the “Company”) is a leading designer, manufacturer and supplier of a widerange of display devices and component parts for military, medical, industrialand consumer display applications. The Company’s product line encompasses bothcathode ray tube displays and flat panel displays with major emphasis onhigh-end niche market displays for specialty applications. The Company alsoacts as a facilitator and wholesale distributor of parts and accessories forvarious original equipment manufacturers (“OEMs”) of consumer products. Infiscal 2005, the Company added a call center, which was relocated and enlargedduring fiscal 2006, and which acts as a consumer and dealer support center forin-warranty and out-of-warranty household products, appliances, parts andaccessories for various electronics manufacturers. This call center also actsas a technical support center for the same manufacturers. The Company marketsits products worldwide primarily from facilities located in the United Statesand one subsidiary operation in the United Kingdom. Refer to comments under thecaption “Forward looking statements and risk factors” in Item 1A. Risk Factorsof this Annual Report on Form 10-K.

**Description ofPrincipal Business**

The Company generates revenues from four relateddisplay oriented businesses (78% of consolidated sales in fiscal 2006) as wellas distribution of parts and accessories for consumer products (22% ofconsolidated sales in fiscal 2006). Substantially all of the Company’s earningswere derived from the display segment of the business in fiscal 2006. Revenues,by category, from the display segment for fiscal 2006 were as follows:

Monitorrevenue (76.7%)

HomeEntertainment CRT revenue (5.6%)

DataDisplay CRT (16.6%)

Components (1.1%)

See Note 15. “Segment Information” to the ConsolidatedFinancial Statements.

Manufacturing and distribution facilities are locatedin Georgia, Florida, Louisiana, Pennsylvania, New York, Kentucky and Lye, U.K.,in addition to several sales and service agents located worldwide.

The consumer parts and accessories distributionbusiness is operated under the Fox International name, headquartered in BedfordHeights, Ohio with one additional distribution center in Richardson, Texas.

The Company continues toexplore opportunities to expand its product offerings in the display industry. TheCompany anticipates that this expansion will be achieved by adding new productsor by acquiring existing companies that would enhance the Company’s position inthe display industry. Management continually evaluates product trends in theindustry and divisions in which the Company operates. Overall trends arediscussed herein under “Flat Panel and Other Technology”. Research anddevelopment prior to 2003 consisted primarily of establishing theinterchangeability of products from various manufacturers and, whenadvantageous, manufacturing products to replace original electronic parts. Subsequentto that period, the Company has expended significant research and developmentfunds (approximately $1.3 million in fiscal 2006) in both high resolutionprojection displays and active matrix liquid crystal display (“AMLCD”)technologies.

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**Segment Information**

This information isprovided in Note 15. Segment Information to the Consolidated FinancialStatements.

**Principal Products**

***Monitor Displays***

The Company’s monitor operations are conducted atPhelps, New York (Z-Axis); Birdsboro, Pennsylvania (Teltron and Aydin); CapeCanaveral, Florida (Display Systems); and Lexington, Kentucky (Lexel).

This portion of the Company’s operations involves thedesign, engineer and manufacture of complete monochrome and color monitor andprojector display units using new CRTs or flat panel displays. The Company willcustomize these units for specific applications, including ruggedization formilitary uses or size reduction due to space limitations in industrial andmedical applications. Because of the Company’s flexible and cost efficientmanufacturing, it is able to handle low volume orders that generate highermargins. In its efforts to solidify its position in the display industry, whilereducing its dependence on CRT replacement markets, the Company has developedthis high end display during the past five years from a zero revenue base torepresent approximately 59.5% of fiscal 2006 consolidated net revenues.

This portion of the Company’s operations targets nichemarkets where competition from major multinational electronics companies tendsnot to be a significant factor. The prime customers for this product includedefense, security, training and simulation areas of the U.S. and foreignmilitaries as well as the major defense contractors such as the Boeing Co., L-3Communications, Lockheed Martin and others. These defense contractors utilizethe Company’s products for ruggedized mission critical applications such asshipboard and nuclear submarines. Flight simulator displays are also producedto provide a full range of flight training simulations for militaryapplications. The Company’s acquisition of the ESCP® CRT line of calligraphicprojectors from Evans & Sutherland, Inc. in the third quarter offiscal 2005 allowed the Company to expand into the commercial flight trainingsimulation market. The primary components for the ruggedized product lineconsist of projection systems, CRT and flat panel displays, circuit boards andmachine parts.

Although most monitors arecustomized to meet a customer’s specifications, all monitors sold include thefollowing general components: CRT or flat panel displays, circuit boards, andmachine parts. Most of the Company’s monitors are then ruggedized, which allowsthem to better withstand adverse conditions, such as extreme temperature,depth, altitude and vibration.

***Cathode Ray Tubes (“CRTs”)***

Since its organization in 1975, Video DisplayCorporation has been engaged in the distribution and manufacture of CRTs usingnew and recycled CRT glass bulbs, primarily in the replacement market, for usein data display screens, including computer terminal monitors, medicalmonitoring equipment and various other data display applications and intelevision sets. The Company currently markets CRTs in over 3,000 types andsizes.

The Company’s CRT manufacturing operations of new andrecycled CRTs are conducted at facilities located in White Mills, Pennsylvania(Chroma); Bossier City, Louisiana (Novatron); Lexington, Kentucky (Lexel); andBirdsboro, Pennsylvania (Teltron). With the Company’s closure of the Mexicomanufacturing facility in fiscal 2003, the Tucker, Georgia location now acts asthe Company’s sole distribution point of data display CRTs purchased fromoutside sources. The Lye, U.K. location is a sales and distribution facilityfor the Tucker, GA products.

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The Company maintains the capability of manufacturinga full range of monochrome CRTs as well as remanufacturing color CRTs fromrecycled glass. Also, our Teltron and Lexel operations manufacture a wide rangeof radar, infrared, camera and direct-view storage tubes for military andsecurity applications. All CRTs manufactured by the Company are tested forquality in accordance with standards approved by United Laboratories.

The Company also distributes new CRTs and otherelectronic tubes purchased from original manufacturers, both domestic andinternational. The Company forecasts its inventory requirements for six monthsto one year. Occasionally, manufacturers offer large quantities of overstockedoriginal manufactured tubes at significant price reductions. The Companyacquires these tubes when the existing replacement market appears todemonstrate adequate future demand and the purchase price allows a reasonableprofit for the risk. Due to the extended time frame for the replacement marketto develop (five to seven years), these purchased inventories sometimes do notsell as quickly as other inventories. Bulk CRT purchases have declined over thepast few years as the Company is managing current inventory levels against theanticipated reduction in future CRT demand due to the growth of flat paneltechnology.

The Company maintains an internal sales organizationto sell directly to OEMs and their service organizations and markets itsproducts through approximately 150 independent wholesale electronicsdistributors located throughout the U.S. The Company also supplies, underprivate-brand labeling, many of the replacement tubes marketed by severalnational brand name television manufacturers.

In addition to factorsaffecting the overall market for such products, the Company’s sales volume inthe CRT replacement markets is dependent upon the Company’s ability to provideprompt response to customers’ orders, while maintaining quality control andcompetitive pricing. The Company’s manufacturing activities are scheduledprimarily around orders received.

***Electron Guns and Components***

The Company, through its Tucker, GA based electron gunmanufacturing subsidiary, Southwest Vacuum, manufactures electron gunassemblies comprised of small metal, glass and ceramic parts. The assemblyprocess is highly labor intensive. While the particular electron guns beingsold are of the Company’s own design, most are replacements for electron gunspreviously designed for original equipment CRTs used in television sets andcomputer monitors. Raw materials consist of glass and metal stamped parts.

Although Southwest Vacuum markets its products toindependent customers, the majority of electron guns produced by the Companyare consumed internally among the Company’s own CRT manufacturing facilities. Salesto these related divisions, which have been eliminated in the consolidatedfinancial statements, amounted to approximately $221,000, $297,000 and $835,000for fiscal 2006, 2005 and 2004, respectively.

The remaining operation inthe component division, Wintron, located in Howard, Pennsylvania, producesflyback transformers, coils and power transformers. Intercompany salestransactions were $48,000, $287,000 and $105,000 for fiscal 2006, 2005 and2004, respectively.

***Flat Panel and Other Technology***

The Company anticipatesthat AMLCD and Plasma Display products, due to their lower space and powerrequirements, will eventually become the display of choice in many displayapplications. The significance of this continuing trend has had an effect onthe Display divisions of the Company. In anticipation of long-term trendstoward flat panel display usage, the Company has focused its efforts as well asits acquisition strategy toward flat panel technologies for niche marketapplications in the medical, simulation, training and military markets. Othertypes of technology, including high-definition television 

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(“HDTV”),have not had a significant impact on the Company’s business. HDTV utilizes bothCRT and flat panel technology and, therefore, has potential positive effects onthe Company due to anticipated higher margin CRT replacements. There may belong-term negative effects should the HDTV market move toward greater flatpanel utilization, but HDTV is expected to have a positive impact on theCompany’s CRT business in the near term, although there can be no assurancethat this will be the case. The Company will continue to monitor these trendsand make adjustments to its CRT inventory levels and operating facilities toreflect changes in demand.

***Electronic Parts***

Fox Internationaldistributes consumer electronic parts of most major consumer electronicsmanufacturers, both foreign and domestic. This subsidiary resells theseproducts to major electronic distributors, retail electronic repair facilities,third-party contractual repair shops, and directly to consumers. In itsrelationship with consumer electronic manufacturers, Fox International receivesthe right, often exclusively, to ship parts to authorized dealers. Many of themanufacturers also direct inquiries for replacement parts to Fox International.Manufacturers require a distributor to stock their most popular parts andmonitor the order fill ratio to ensure that their customers have access tosufficient replacement parts. Fox International attempts to maintain high fillratios in order to secure favored distributor status from the manufacturers,requiring a significant investment in inventories. Fox International added acall center that was fully operational in the fourth quarter of fiscal 2005,and was relocated and significantly enlarged during fiscal 2006. This callcenter is a consumer and dealer support center for both in-warranty andout-of-warranty household products, appliances, parts and electronics for Black &Decker, Delonghi, Norelco, Coby, and numerous other manufacturers. This callcenter also performs as a technical support center for the same manufacturersand processes all orders for distribution of the consumer electronic parts.

**Patents andTrademarks**

The Company is currentlyin the process of applying for patents on newly developed products andtechnology and holds patents with respect to certain products and services. TheCompany also sells products under various trademarks and tradenames.Additionally, the Company licenses certain electronic technology to othermanufacturing companies, which generated royalty revenues of approximately$104,000, $92,000 and $114,000 in fiscal 2006, 2005 and 2004, respectively. TheCompany believes that its patents and trademarks owned are of value, andintends to protect its rights when, in its view, these rights are infringedupon. The Company’s key patents expire in 2014. The Company had several patentsthat had no significant value that were allowed to expire in 2004. The Companybelieves that success in its industry primarily will be dependent upon incorporatingemerging technology into new product line introductions, frequent productenhancements, and customer support and service.

**Seasonal Variationsin Business**

Historically, there hasnot been seasonal variability in the Company’s Display segment.

**Working CapitalPractices**

The Company has a $27.5million line of credit with Bank of America, and a $3.5 million secondary lineof credit with Bank of America for Fox International. These lines are usedprimarily for the purchases of inventory and payments of accounts payable. Seerelated comments under the caption “Management’s Discussion of Liquidity andCapital Resources” and “Subsequent Event” in Part II, Item 7. in thisAnnual Report of Form 10-K.

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**Concentration ofCustomers**

The Company sells to avariety of domestic and international customers on an open-unsecured accountbasis. These customers principally operate in the medical, military, televisionand avionics industries. The Company’s Display segment had direct and indirectnet sales to the U.S. government, primarily the Department of Defense fortraining and simulation programs that comprised approximately 41%, 37% and 21%of Display segment net sales and 32%, 29% and 16% of consolidated net sales infiscal 2006, 2005 and 2004, respectively. Sales to foreign customers were 14%,11% and 14% of consolidated net sales for fiscal 2006, 2005 and 2004,respectively. The Company’s wholesale electronic parts distributor, FoxInternational, had net sales to one customer, National Parts, Inc., thatcomprised approximately 25%, 24% and 19% of that subsidiary’s net sales infiscal 2006, 2005 and 2004, respectively. The Company attempts to minimizecredit risk by reviewing customers’ credit history before extending credit, andby monitoring customers’ credit exposure on a daily basis. The Companyestablishes an allowance for doubtful accounts receivable based upon factorssurrounding the credit risk of specific customers, historical trends and otherinformation.

**Backlog**

The Company’s backlog iscomprised of undelivered, firm customer orders, which are scheduled to shipwithin eighteen months. The Company’s backlog was approximately $21.7 millionat February 28, 2006 and $29.9 million at February 28, 2005. TheCompany’s Lexel division comprised $7.8 million or 36% and $9.3 million or 31%of the 2006 and 2005 backlog, respectively. It is anticipated that more than95% of the February 28, 2006 backlog will ship during fiscal 2006.

**GovernmentContracts**

The Company, primarilythrough its Aydin, Teltron, Lexel and Display Systems subsidiaries, hadcontracts with the U.S. government (principally the Department of Defense andDepartment of Defense subcontractors) which generated revenues of approximately$26.9 million, $23.8 million and $17.0 million for the fiscal years ended 2006,2005 and 2004, respectively. The Company’s costs and earnings in excess ofbillings on these contracts were approximately $1.0 million at February 28,2006 and $0.7 million at February 28, 2005. The Company had billings inexcess of costs and earnings on these contracts of approximately $1.0 millionat February 28, 2006 and $0.5 million at February 28, 2005. Thesecontracts are typically less than twelve months in duration and specify adelivery schedule for units ordered. Most of these government contracts specifya designated number of units to be delivered at a specified price, rather thanon a cost plus basis. These contracts are subject to government audit to ensureconformity with design specifications.

**EnvironmentalMatters**

The Company’s operationsare subject to federal, state and local laws and regulations relating to thegeneration, storage, handling, emission, transportation and discharge ofmaterials into the environment. The costs of complying with environmentalprotection laws and regulations have not had a material adverse impact on theCompany’s financial condition or results of operations in the past and are notexpected to have a material adverse impact in the foreseeable future.

**Research andDevelopment**

The objectives of theCompany’s research and development activities are to increase efficiency andquality in its manufacturing and assembly operations and to enhance itsexisting product line by developing alternative product applications toexisting cathode ray and electron optic technology. The Company continues itsresearch and development in advanced infrared imaging (“IR”) for commercial andmilitary 

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applications.The Company has funded additional IR research in partnership with theUniversity of Rhode Island. The Company believes that potential future marketsfor IR include military and security surveillance, target acquisition, firefighting, and industrial and medical thermography. The Company includesresearch and development expenditures in the consolidated financial statementsas a part of general and administrative costs. Research and development costswere approximately $1.3 million, $0.7 million and $0.2 million in fiscal 2006,2005 and 2004, respectively.

**Employees**

As of February 28,2006, the Company employed a total of 462 persons on a full time basis. Ofthese, 125 were employed in executive, administrative, and clerical positions,122 were employed in sales and distribution, and 215 were employed inmanufacturing operations. A union represents 2 employees at the Wintron locationin Howard, Pennsylvania. The Company believes its employee relations to besatisfactory.

**Competition**

Although the Company believes that it is the largestdomestic recycler and distributor of recycled television CRTs in the UnitedStates CRT replacement market, it competes with other CRT manufacturers, aswell as OEMs, many of which have greater financial resources than the Company. TheCompany believes it is the only company that offers complete service inreplacement markets with its manufacturing and recycling capabilities. As awholesale distributor of original equipment CRTs purchased from othermanufacturers, the Company also competes with numerous other distributors, andthe manufacturers’ own distribution centers, many of which are larger and havesubstantially greater financial resources than the Company. The Company’sability to compete effectively in this market is dependent upon its continuedability to respond promptly to customer orders and to offer competitive pricing.The Company expects that competition may increase, especially in the computerand other display replacement markets, should domestic and foreign competitorsexpand their presence in the domestic replacement markets.

Compared to domestic manufacturing prices on new CRTs,the Company’s prices are competitive due to lower manufacturing costsassociated with recycling the glass portion of previously used tubes, which theCompany obtains at a fraction of the cost of new glass. The Company has to datebeen able to maintain competitive pricing with respect to imported CRTsbecause, generally, the CRT replacement market is characterized by customersrequiring a variety of types of CRTs in quantities not large enough to absorbthe additional transportation costs incurred by foreign CRT manufacturers.

The Company believes it has a competitive advantageand is a sole source in providing many of its CRTs to the customer base of itsTeltron and Lexel subsidiaries as these operations have been providing reliableproducts and services to these customers for more than 30 years. Lexelmanufactures a broad range of CRT and direct view storage tube (“DVST”)solutions used in military, industrial and commercial applications, includingAvionics, Projection, Medical and general purpose displays. Teltron offers awide range of high performance imaging devices and high resolution CRTs formedical, X-ray, infrared, military and aerospace applications.

The Company believes that it has a competitiveadvantage in the monitor industry due to its ability to handle lower volumeorders and its ability to provide internally produced component parts. As aresult, the Company can offer more customization in the design and engineeringof new products.

With the operations of Lexel and Display Systems, theCompany has become one of the leading suppliers within the specialty displaymarkets, especially in the military and medical imaging industries.

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The Company utilizes flatpanel displays in many of its monitor units. These flat panels are purchasedfrom OEMs. The revenue generated in fiscal 2006 from products utilizingflat panel technology was $13.1 million as compared to $8.9 million in Fiscal2005. Being in the replacement market, the Company has the opportunity to seetrends in OEM sales, and while the growth in flat panel products is outpacinggrowth in CRT products, on a percentage basis, the CRT market remains moredominant. Because of this, the Company considers the replacement CRT market tobe a viable market for its products. As trends continue to define themselves,and replacement of these products occur in five to seven years, the Companyforesees a bigger impact and utilization of flat panel products in its business.There is competition in the area of flat panel technology and the Company willstrive to rely on its ability to adapt and incorporate designs into its futureproducts so that it may compete in a profitable nature. Currently, the flatpanel market is made up of many competitors of various sizes, none holding adominant position in the flat panel marketplace.

The Company’s competitionin the consumer electronics parts segment comes primarily from other partsdistributors. Many of these distributors are smaller than Fox International buta few are of equal or greater revenue size. Prices for major manufacturers’products can be directly affected by the manufacturers’ suggested resale price.The Company believes that its service to customers and warehousing and shippingnetwork give it a competitive advantage. Fox International sells a wide varietyof electronic parts and accessories, including semiconductors, resistors,audio/video parts and batteries. In addition, Fox International operates a callcenter that serves as both a consumer and dealer support center for householdproducts, parts and accessories, as well as serving as a technical supportcenter for these products.

**ITEM1A.**        RISK FACTORS.

**Forward looking statements and risk factors**

All statements other thanstatements of historical facts included in this report, including, withoutlimitation, those statements contained in Item 1., are statements thatconstitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act and Section 21E of the Securities Exchange Act of1934. The words “expect”, “estimate”, “anticipate”, “predict”, “believe” andsimilar expressions and variations thereof are intended to identifyforward-looking statements. Such statements appear in a number of places inthis report and include statements regarding the intent, belief or currentexpectations of the Company, its directors or its officers with respect to,among other things: (i) trends affecting the Company’s financial conditionor results of operations; (ii) the Company’s financing plans; (iii) theCompany’s business and growth strategies, including potential acquisitions; and(iv) other plans and objectives for future operations. Investors arecautioned that any such forward-looking statements are not guarantees of futureperformance and involve risks and uncertainties and that actual results maydiffer materially from those predicted in the forward-looking statements orwhich may be anticipated from historical results or trends.

Our Company operates intechnology based markets that involve a number of risks, some of which arebeyond our control. The following discussion highlights some risks anduncertainties that investors should consider, in conjunction with all otherinformation in this Annual Report on Form 10-K. Additional risks anduncertainties not presently known to the Company may also impair the Company’sbusiness and operations. If any of the following risks actually occur, theCompany’s business, financial condition, cash flows or results of operationscould be materially affected.

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**Our industry is highly competitive and competitiveconditions may adversely affect our business.**

Our success depends on ourability to compete in markets that are highly competitive, with rapidtechnological advances and products that require constant improvement in bothprice and performance. In most of our markets we are experiencing increasedcompetition, and we expect this trend to continue. This environment may resultin changes in relationships with customers or vendors, the ability to developnew relationships or the business failure of customers or vendors, which maynegatively impact our business. If our competitors are more successful than weare in developing new technology and products, our business may be adverselyaffected.

Competitive pressures mayincrease or change through industry consolidation, entry of new competitors,marketing changes or otherwise. There can be no assurance that the Company willbe able to continue to compete effectively with existing or potentialcompetitors.

**Competitors or third parties may infringe ourintellectual property.**

The Company holds patentswith respect to certain products and services. The Company also sells productsunder various trademarks and tradenames. Should competitors or third partiesinfringe these rights, costly legal processes may be required to defend ourintellectual property rights, which could adversely affect our business.

**Migration to flat panel and other technologymay negatively impact our CRT business.**

The Company acquires CRTtubes when the replacement market appears to demonstrate adequate future demandand the purchase price allows a reasonable profit for the risk. Due to theextended time frame for the replacement market to develop (five to sevenyears), these purchased inventories may not sell as quickly as otherinventories. If the Company is unable to manage CRT inventory levels incoordination with reduced future CRT demand due to the growth of flat paneltechnology, the marketability of inventory on hand may be affected and the Companymay incur significant costs in the disposal of excess inventory.

The Company anticipatesthat flat panel and other technology products, due to their lower space andpower requirements, will eventually become the display of choice in manydisplay applications. In anticipation of long-term trends toward flat paneldisplay usage, the Company has focused its efforts and its acquisition strategytoward flat panel technologies. If the Company is unable to successfullyreplace any future declines in CRT sales with products based on othertechnologies, our business may be adversely affected.

**Future acquisitions may not provide benefits to theCompany.**

The Company’s growthstrategy includes expansion through acquisitions. There can be no assurancethat the Company will be able to successfully complete further acquisitions orthat past or future acquisitions will not have an adverse impact on the Company’soperations.

**Changesin government priorities may impact military spending, and our financialcondition and results ofoperations could suffer if their purchases decline.**

We currently derive asignificant portion of our net sales (41% in fiscal 2006) from direct andindirect sales to the U.S. government. If we are unable to replace expiringcontracts, which are typically less then twelve months in duration, withcontacts for new business, our sales could decline and have a material adverseeffect on our business, financial condition and results of operations. Weexpect that direct and indirect sales to the U.S. government will continue toaccount for a substantial portion of our sales in the 

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foreseeablefuture. We have no assurance that these government-related sales will continueto reach or exceed historical levels in future periods.

**If weare unable to retain certain key personnel and hire new highly skilledpersonnel, we may not beable to execute our business plan.**

Our future success dependson the skills, experience and efforts of our senior managers. The loss ofservices of any of these individuals, or our inability to attract and retainqualified individuals for key management positions, could negatively impact ourbusiness.

**Ourbusiness operations could be disrupted if our information technology systemsfail to performadequately.**

We depend upon ourinformation technology systems in the conduct of our operations and financialreporting. If our major information systems fail to perform as anticipated, wecould experience difficulties in maintaining normal business operations. Suchsystems related problems could adversely affect product development, sales andprofitability.

**Changes to accounting rules or regulations mayadversely affect our results of operations.**

New accounting rules orregulations and varying interpretations of existing accounting rules orregulations have occurred and may occur in the future. Future changes toaccounting rules or regulations or the questioning of current accountingpractices, may adversely affect our results of operations.

**The Company’s stock price may be negatively affectedby a variety of factors.**

In addition to any impactthe Company’s operating performance, potential future Company sales of commonstock, the Company’s dividend policies or possible anti-takeover measuresavailable to the Company may have, changes in securities markets caused bygeneral foreign or domestic economic, consumer or business trends, the impactof interest rate policies by the federal reserve board, and other factorsoutside the Company’s control may negatively affect our stock price.

**Changesto estimates related to long term assets, or operating results that are lowerthan our currentestimates, may cause us to incur impairment charges.**

We make certain estimatesand projections in connection with impairment analyses for goodwill and otherlong term assets in accordance with Financial Accounting Standards Board (FASB)Statements No. 142 “Goodwill and Other Intangible Assets” and No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.” Thesecalculations require us to make a number of estimates and projections of longterm future results. If these estimates or projections change or proveincorrect, we may be required to record impairment charges. If these impairmentcharges are significant, our results of operations would be adversely affected.

**International factors could negatively affect ourbusiness.**

Asignificant portion of our net sales (14% in fiscal 2006) are made to foreigncustomers. We are subject to the risks inherent in conducting our businessacross national boundaries, many of which are outside of our control. Theserisks include the following:

·       Economicdownturns; 

·       Currencyexchange rate and interest rate fluctuations; 

10

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·       Changesin governmental policy, including, among others, those relating to taxation; 

·       Internationalmilitary, political, diplomatic and terrorist incidents; 

·       Governmentinstability; 

·       Nationalizationof foreign assets; and 

·       Tariffsand governmental trade policies. 

We cannot ensure that oneor more of these factors will not negatively affect our international customersand, as a result, our business and financial performance.

**Thecost and management resources required to implement Section 404  of the Sarbanes Oxley Act may adversely affectour results of operations; failure to implement controls timely may adverselyaffect our stock price.**

Management of the Companyhas identified that as a small public company, we may not have a sufficientnumber of personnel with clearly delineated and fully documentedresponsibilities, and with the appropriate level of accounting expertise, underguidelines established by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”).In addition, certain of the Company’s information systems which support theCompany’s financial reporting may not meet current recommended standards. TheSOX guidelines, as implemented based on rules promulgated by the PublicCompany Accounting Oversight Board (United States), may require the Company toimplement significant changes to internal control procedures and incursubstantial implementation costs. These costs may have a significant impact onour future results of operations. If the Company is not able to make changesnecessary to meet these rules and guidelines in a timely manner, investorscould lose confidence in the Company’s financial reporting, which maynegatively affect our stock price.

**Our level of indebtedness could adversely affect thefuture operation of our business.**

Ourlevel of indebtedness could have important consequences, including:

·       makingit more difficult for us to make payments on the debt, as our business may notbe able to generate sufficient cash flows from operating activities to meet ourdebt service obligations; 

·       increasingour vulnerability to general economic and industry conditions; 

·       requiringa substantial portion of cash flow from operating activities to be dedicated tothe payment of our outstanding lines of credit and long-term debt, and as aresult reducing our ability to use our cash flow to fund our operations andcapital expenditures, capitalize on future business opportunities and expandour business and execute our strategy; 

·       exposingus to the risk of increased interest rates as much of our borrowings are atvariable rates of interest; 

·       causingus to make non-strategic divestitures; 

·       limitingour ability to obtain additional financing for working capital, capitalexpenditures, debt service requirements and other general corporate purposes;and 

·       limiting our ability toadjust to changing market conditions and to react to competitive pressure andplacing us at a competitive disadvantage compared to our competitors who mayhave lower debt leverage.

11

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**Our debt agreements contain covenants that limit ourflexibility in operating our business.**

Theagreements governing our indebtedness contain various covenants that limit ourability to engage in specified types of transactions, and which may adverselyaffect our ability to operate our business. Among other things, these covenantslimit our ability to:

·       incuradditional indebtedness; 

·       makecertain investments, loans or advances; 

·       transferand sell certain assets; 

·       createor permit liens on assets; 

·       consolidate,merge, sell or otherwise dispose of all or substantially all of our assets; 

·       engagein any business activity substantially different from our current businesses; 

·       makesubstantial changes in present executive management; and 

·       cause,permit or suffer a change greater than 25% in direct or indirect capitalownership by the Company’s chief executive officer.

A breach of any of thesecovenants could result in default under our debt agreements, which could promptthe lenders to declare all amounts outstanding under the debt agreements to beimmediately due and payable and terminate all commitments to extend furthercredit. If we were unable to repay those amounts, the lenders could proceedagainst the collateral granted to them to secure that indebtedness. If thelenders under the debt agreements accelerate the repayment of borrowings, wecannot assure you that we will have sufficient assets and funds to repay theborrowings under our debt agreements. See related comments under the caption “Management’sDiscussion of Liquidity and Capital Resources” and “Subsequent Event” in Part II,Item 7. in this Annual Report of Form 10-K.

**ITEM1B.**       UNRESOLVED STAFF COMMENTS.

None.

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**ITEM 2.**                PROPERTIES.

TheCompany leases its corporate headquarters at 1868 Tucker Industrial Road inTucker, Georgia (within the Atlanta metropolitan area). Its headquarters occupyapproximately 10,000 square feet of the total 59,000 square feet at thislocation. The remainder is utilized as warehouse and assembly facilities. Thislocation, as well as one other, is leased from a related party at currentmarket rates. See Part II, Item 13. Certain Relationships and RelatedTransactions in this Annual Report on Form 10-K. Management believesthe facilities to be adequate for its needs. The following table detailsmanufacturing, warehouse, and administrative facilities:

| Location                                                                    | ** ** | ** ** | ** ** | **Square Feet**        | ** ** | **Lease Expires** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|-------------------|
| **CRT,  Monitor and Electron Gun - Manufacturing and Warehouse Facilities** |
| Tucker, Georgia                                                             |       | 59,000     |       | October 31, 2008  |
| Stone Mountain, Georgia                                                     |       | 45,000     |       | December 31, 2007 |
| White Mills,  Pennsylvania                                                  |       | 110,000    |       | Company Owned          |
| Bossier City, Louisiana                                                     |       | 26,000     |       | Company Owned          |
| Lye, England                                                                |       | 1,500      |       | October 1, 2008   |
| Birdsboro, Pennsylvania                                                     |       | 40,000     |       | Company Owned(a)       |
| Phelps, New York                                                            |       | 32,000     |       | Company Owned          |
| Howard, Pennsylvania                                                        |       | 19,000     |       | Company Owned          |
| Cape Canaveral, Florida                                                     |       | 30,000     |       | January 17, 2008  |
| Lexington, Kentucky                                                         |       | 80,000     |       | March 31, 2010    |
| **Wholesale  Electronic Parts Distribution**                                |
| Bedford Heights, Ohio                                                       |       | 60,000     |       | Company Owned          |
| Bedford Heights, Ohio                                                       |       | 40,000     |       | January 31, 2008  |
| Beachwood, Ohio                                                             |       | 16,000     |       | July 31, 2010     |
| Richardson, Texas                                                           |       | 13,000     |       | April 30, 2007    |
| Buffalo, New York                                                           |       | 30,000     |       | August 31, 2006   |

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(a)           TheBirdsboro, Pennsylvania property secures mortgage loans from a bank and thePennsylvania Industrial Development Authority with combined principal balancesof $0.8 million as of February 28, 2006. These mortgage loans bear ablended average interest rate of approximately 5.4%. Monthly principal andinterest payments of approximately $7,700 are payable through November 2017with further payments of $4,900 through October 2021.

**ITEM 3.**                LEGALPROCEEDINGS.

The Company is involved invarious legal proceedings relating to claims arising in the ordinary course ofbusiness. There are no material proceedings to which the Company is a party andmanagement is unaware of any significant contemplated actions against theCompany.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this AnnualReport.

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**PART II**

**ITEM5.**                MARKET FORREGISTRANT’S COMMON STOCK, RELATED STOCK-HOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stockis traded on the National Association of Securities Dealers Automated QuotationSystem (“NASDAQ”) national market system under the symbol VIDE.

Thefollowing table shows the range of prices for the Company’s common stock asreported (and as adjusted for the stock dividend discussed below) by NASDAQ foreach quarterly period beginning on March 1, 2004. The prices reflectinter-dealer prices, without mark-up, mark-down, or commission, and may notnecessarily represent actual transactions.  These prices have been adjusted to reflect the100% stock dividend paid in November 2004.

| ** **             | ** ** | **For Fiscal Years Ended** | ** ** |
|------------------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **February 28, 2006**           | ** ** | **February 28, 2005** | ** ** |
| **Quarter Ended** | ** ** | ** **                                | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| May                    |       | $                                         | 14.65      |   | $ | 11.45 |   | $ | 9.65 |   | $ | 7.25 |   |
| August                 |       | 13.97                                     |       | 11.00 |   | 18.45 |   | 9.13 |   |
| November               |       | 14.01                                     |       | 12.89 |   | 18.39 |   | 11.55 |   |
| February               |       | 13.82                                     |       | 8.04 |   | 15.77 |   | 11.02 |   |
|                        |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

There were approximately2,000 holders of record of the Company’s common stock as of May 15, 2006.

The Company paid a cashdividend of $0.04 per share or $392,000 in January 2005 and $0.025 pershare or $245,000 in January 2004. Payment of cash dividends in the futurewill be dependent upon the earnings and financial condition of the Company andother factors which the Board of Directors may deem appropriate. The Company isrestricted by certain loan agreements regarding the payout of cash dividends.

**Securities Authorized for Issuance Under EquityCompensation Plans**

Thefollowing table provides information as of February 28, 2006 regardingcompensation plans (including individual compensation arrangements) under whichCommon Stock of the Company is authorized for issuance.

| **Stock Option Plan**                             | ** ** | ** ** | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  first column)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 310,000    |                                                                                                                                         |       |                                                                                                        | $          | 4.57                                                                                                                                                                                                           |       |   |   | 419,000 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                         |       |                                                                                                        | —     |                                                                                                                                                                                                           |       |   | — |   |   |
| Total                                                       |       |       | 310,000    |                                                                                                                                         |       |                                                                                                        | $          | 4.57                                                                                                                                                                                                           |       |   |   | 419,000 |   |   |

 

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**Recent Sales ofUnregistered Securities**

In August 2003, the Company sold 8,000 shares ofits common stock for $51,000 in cash to three individuals in an arm’s lengthtransaction. There was no underwriter involved with this transaction. Inissuing these shares the Company relied on Section 4(2) of theSecurities Act of 1933, based upon the limited offering to three individuals,one of whom was an officer of the Company. The common stock issued is notconvertible into any other form of securities.

In October 2003, the Company issued 240,000shares of its common stock upon the surrender of $1,000,000 in principal amountof its convertible debentures. There was no underwriter involved with thistransaction. In issuing these shares the Company relied on Section 4(2) ofthe Securities Act of 1933 and applicable state securities exemptions, basedupon the limited offering to three individuals, one of whom was an officer ofthe Company. The common stock issued is not convertible into any other form ofsecurities.

During the fourth quarterof fiscal 2005, theCompany issued 10,000 shares ofits common stock in conversion of a $125,000 note payable related to theacquisition of XKD Corporation. During the first quarter of fiscal 2006,another of the $125,000 notes was converted into 10,000 shares of the Company’scommon stock. There was no underwriterinvolved with these transactions. In issuing these shares the Company relied onSection 4(2) of the Securities Act of 1933 and applicable state securitiesexemptions, based upon the limited offering to four owners of XKD Corporation.

**Issuer Purchases ofEquity Securities**

The Company has a stock repurchase program, pursuantto which it was originally authorized to repurchase up to 462,500 shares of theCompany’s common stock in the open market. On January 11, 2006, the Board ofDirectors of the Company approved a continuation of the stock repurchaseprogram, and authorized the Company to repurchase up to 600,000 additionalshares of the Company’s common stock, depending on the market price of theshares. There is no minimum number of shares required to be repurchased underthe program. During the fourth quarter of Fiscal 2006, the Company repurchased85,982 shares at an average price of $9.98 per share. Shares repurchased by theCompany in the fourth quarter of fiscal 2006 are held by the Company astreasury shares at February 28, 2006. An additional 25,621 shares ofcommon stock, repurchased at an average price of $12.37 in May 2005, wereretired. No shares were repurchased in fiscal 2005. In fiscal 2004 231,000shares were repurchased for at an average cost of $6.81 per share, and retired.Under this program, an additional 658,618 shares remain authorized to berepurchased by the Company at February 28, 2006.

Thefollowing table summarizes repurchases of our stock in the fourth quarter endedFebruary 28, 2006 (in thousands):

| **Fiscal Period**                                  | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that  May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| December 1,  2005 through December 31, 2005   |       |       | —     |                                             |       |                                         | $          | —                                                                                                                           |       |                                                                                                                            |       | — |   |   |   | 744,600 |   |   |
| January 1,  2006 through   January 31, 2006   |       |       | 39,499     |                                             |       |                                         | 10.72      |                                                                                                                             |       |                                                                                                                            | 39,499     |   |   |   | 705,101 |   |   |
| February 1,  2006 through   February 28, 2006 |       |       | 46,483     |                                             |       |                                         | 9.36       |                                                                                                                             |       |                                                                                                                            | 46,483     |   |   |   | 658,618 |   |   |
| Total Fourth Quarter  Fiscal 2006                       |       |       | 85,982     |                                             |       |                                         | $          | 9.98                                                                                                                             |       |                                                                                                                            |       | 85,982 |   |   |   | 658,618 |   |   |

 

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**ITEM 6.**                SELECTEDFINANCIAL DATA.

The following table sets forth certain selectedfinancial data with respect to the Company’s last five fiscal years.

Datarelating to the five fiscal years ended February 28, 2006 are derived fromthe Consolidated Financial Statements appearing elsewhere in this Report or inprevious reports. The selected consolidated financial data should be read inconjunction with, and is qualified in its entirety by reference to, Management’sDiscussion and Analysis, the consolidated financial statements of the Companyand the notes thereto included elsewhere in this Annual Report.

| ** **                                            | ** ** | **For Fiscal Years Ended**                          | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Feb. 28,  2006**                                            | ** ** | **Feb. 28,  2005(c)** | ** ** | **Feb. 29,  2004(c)** | ** ** | **Feb. 28,  2003(b)(c)** | ** ** | **Feb. 28,  2002(c)** | ** ** |
| ** **                                            | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| ** **                                            | ** ** | ** **                                                         | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Statement  of Operations Data**                     | ** ** | ** **                                                         | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                             | ** ** | **$**                                                              | **83,878** | ** ** |   | $ | 82,740 |   |   |   | $ | 76,592 |   |   |   | $ | 76,582 |   |   |   | $ | 72,366 |   |   |
| Gross profit                                          | ** ** | **24,502**                                                         | ** ** |   | 27,011 |   |   |   | 24,988 |   |   |   | 19,540 |   |   |   | 22,912 |   |   |
| Goodwill  amortization expense                        | ** ** | **—**                                                         | ** ** |   | — |   |   |   | — |   |   |   | — |   |   |   | 320 |   |   |
| Operating profit  (loss)(c)                           | ** ** | **2,142**                                                          | ** ** |   | 6,653 |   |   |   | 6,184 |   |   |   | (2,684 | ) |   |   | 3,609 |   |   |
| Net income (loss)(c)                                  | ** ** | **445**                                                            | ** ** |   | 3,507 |   |   |   | 3,112 |   |   |   | (3,333 | ) |   |   | 1,156 |   |   |
| Net income (loss) per share—basic(a)(c)          | ** ** | **$**                                                              | **0.05**   | ** ** |   | $ | 0.36 |   |   |   | $ | 0.33 |   |   |   | $ | (0.35 | ) |   |   | $ | 0.12 |   |   |
| Net income (loss)  per share—diluted(a)(c)       | ** ** | **$**                                                              | **0.04**   | ** ** |   | $ | 0.36 |   |   |   | $ | 0.32 |   |   |   | $ | (0.35 | ) |   |   | $ | 0.11 |   |   |
| Average number of  shares outstanding—  basic(a) | ** ** | **9,684**                                                          | ** ** |   | 9,673 |   |   |   | 9,348 |   |   |   | 9,516 |   |   |   | 9,402 |   |   |
| Average number of  shares outstanding—diluted(a) | ** ** | **9,964**                                                          | ** ** |   | 9,903 |   |   |   | 9,800 |   |   |   | 9,516 |   |   |   | 10,146 |   |   |
| Cash dividends  per share                             |       | **$**                                                              | **—** | ** ** |   | $ | 0.04 |   |   |   | $ | 0.03 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| **Balance Sheet Data (at year end)**                  | ** ** | ** **                                                         | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets(c)                                       | ** ** | **$**                                                              | **65,438** | ** ** |   | $ | 62,184 |   |   |   | $ | 54,234 |   |   |   | $ | 57,350 |   |   |   | $ | 61,857 |   |   |
| Working capital(c)(d)                                 | ** ** | **16,330**                                                         | ** ** |   | 37,175 |   |   |   | 31,767 |   |   |   | 26,754 |   |   |   | 27,585 |   |   |
| Long-term  obligations(d)                             | ** ** | **1,383**                                                          | ** ** |   | 20,571 |   |   |   | 16,489 |   |   |   | 14,466 |   |   |   | 14,957 |   |   |
| Redeemable common stock                               | ** ** | **—**                                                         | ** ** |   | — |   |   |   | — |   |   |   | 100 |   |   |   | — |   |   |

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(a)           Includes the effects ofa 20% stock dividend declared in March 2001 and issued on April 16,2001 for all periods presented, and the effects of a 2 for 1 stock spliteffected in the form of a 100% stock dividend in November 2004.

(b)          In connection with thewinding up of its manufacturing operations in Mexico and three domesticfacilities, the Company recorded impairment charges of $7,163,000, includingthe write-off of its related foreign currency cumulative translation accountbalance of $1,296,000.

(c)           See related commentsunder the caption “Prior Period Restatement” related to corrections in theprovision for income taxes and accrual for franchise taxes in Part II,Item 7. in this Annual Report on Form 10-K.

(d)          Seecomments regarding the refinance of the Company’s $17.6 million inoutstanding lines of credit, classified as short-term debt at February 28,2006, under the caption “Subsequent Event” in Part II, Item 7. inthis Annual Report on Form 10-K.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATION.

**Overview**

The Company is aworldwide leader in the manufacture and distribution of a wide range of displaydevices, encompassing, among others, entertainment, military, medical andsimulation display solutions. The Company is comprised of two segments—(1) themanufacture and distribution of monitors, projection systems and CRT displaysand (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 wide range of CRT, flat panel andprojection display systems for use in training and simulation, military,medical and industrial applications.

·       **Data Display**—offers a wide range of CRTs for use in data displayscreens, including computer terminal monitors and medical monitoring equipment.

·       **Home Entertainment**—offers a wide range of CRTs andprojection tubes for television and home theater equipment.

·       **Components**—providesreplacement electron guns and other components for CRTs primarily for servicingthe Company’s internal needs.

***Fiscal 2006 Highlights***

·       ***Monitor division revenue****—*The Company continues to focus its growth efforts onvarious niche markets within the defense, medical and projection display industries.Net sales within this division decreased $0.8 million or 1.6% in fiscal2006 compared to fiscal 2005 primarily due to the fulfillment of a militarycontract for replacement DVSTs at the Lexel facility earlier in fiscal 2006,which has not been renewed. This decline was partially offset by sales of theEvans & Sutherland product line acquired in November 2004, whichwas consolidated with the Company’s Display Systems operations in CapeCanaveral, FL.

·       ***Data Display division revenue****—*the Company’s Data Display division sales increased$2.3 million or 21.1% in fiscal 2006 compared to fiscal 2005. Salesearlier in fiscal 2006 included a larger concentration of lower pricedreplacement CRTs compared to the prior year period. Late in fiscal 2006, theCompany began distributing projection tubes from its Data Display location inTucker, GA. These projection units carry a higher sales price per unit than theCompany’s normal inventory.

·       ***Acquisition***—during the first quarterof fiscal 2006, the Company acquired the IDS division of Three Five Systems, Inc.,consisting of inventory and certain assets. This newly acquired businessoperates from leased facilities in Marlboro, Massachusetts as a division of theCompany’s Aydin Display Systems operations.

·       ***Newcredit facility***—in April 2005, the Company finalized a newline of credit at Fox International, Ltd (“Fox”) to replace a prior facility. Underthe terms of this new facility, the Company paid off the existing line ofcredit as well as a mortgage securing the land and building of Fox. The maximumamount available for borrowings under this new line is $3.5 millioncompared to approximately $2.8 million under the prior facility. Proceedsfrom this line are available for working capital needs of the Company. Seerelated comments under the caption “Management’s Discussion of Liquidity andCapital Resources” and “Subsequent Event” in Part II, Item 7. in thisAnnual Report of Form 10-K.

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***Fiscal 2006Challenges***

***Inventory management***—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’sdivisions maintain significant inventories of CRTs and component parts in aneffort to ensure its customers a reliable source of supply. The Company’sinventory turnover averages over 175 days, although in many cases the Companywould anticipate holding 90 to 100 days of inventory in the normal course ofoperations. This level of inventory is higher than some of the Company’scompetitors due to the fact that it sells a number of products representingolder, or trailing edge, technology that may not be available from othersources. The market for these trailing edge technology products is decliningand, as manufacturers for these products discontinue production or exit thebusiness, the Company may make last time buys. In the monitor operations of theCompany’s business, the market for its products is characterized by fairlyrapid change as a result of the development of new technologies, particularlyin the flat panel display area. If the Company fails to anticipate the changingneeds of its customers or accurately forecast their requirements, it mayaccumulate inventories of products which its customers no longer need and whichthe Company will be unable to sell or return to its vendors. Because of this,the Company’s management monitors the adequacy of its inventory reservesregularly, and at February 28, 2006, believes its reserves to be adequate.

***Interest rate exposure******—The***Companyhad outstanding debt of approximately $25 million as of February 28,2006 which is subject to interest rate fluctuations by the Company’s lenders.Higher rates applied by the Federal Reserve Board during fiscal 2006 havenegatively affected the Company’s earnings and the potential for continued ratehikes may negatively impact the Company’s future earnings. It is the intent ofthe Company to continually monitor interest rates and consider convertingportions of the Company’s debt from floating rates to fixed rates shouldconditions be favorable for such interest rate swaps or hedges.

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**Prior PeriodRestatement**

During preparation of thethird quarter Fiscal 2006 financial statements, the Company discovered an errorin its accounting for the treatment of foreign subsidiary losses for income taxpurposes in the fiscal year ended February 28, 2005 and certain non-incometax-based franchise taxes in the fiscal year ended February 28, 2005 andseveral prior fiscal years. A clerical error in the calculation of the taxeffects of foreign losses resulted in an understatement of the Company’s fiscal2005 consolidated provision for income taxes by approximately $129,000. Inaddition, for several years, the Company has applied the payment of non-incomebased franchise taxes against income taxes payable. Due to improper incometaxes payable account reconciliation procedures, this error was not detected.The Company did not recognize general and administrative expense when thefranchise taxes were paid. Proper recognition of these franchise taxes ingeneral and administrative expenses reduces reported net income byapproximately $86,000 in fiscal 2005, $53,000 in fiscal 2004, $47,000 in fiscal2003, $26,000 in fiscal 2002 and approximately $53,000 in fiscal 2001 and yearsprior. These adjustments did not have a material impact on reported cash flows.The effect of these errors on reported net income is summarized as follows (inthousands):

| ** **                                                       | ** ** | **Fiscal Year** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **2005**             | ** ** | **2004** | ** ** | **Prior** | ** ** |
| Net income,  previously reported                                 |       | $                    | 3,722      |   | $ | 3,165 |   |   |   |
| General and Administrative expense, net of income  taxes         |       | (86                  | )          | (53 | ) | $ | (126 | ) |
| Provision for income taxes                                       |       | (129                 | )          | — |   | — |   |
| Net effect of adjustments                                        |       | (215                 | )          | (53 | ) | $ | (126 | ) |
| Net income, as restated                                          |       | $                    | 3,507      |   | $ | 3,112 |   |   |   |
| Diluted earnings per share of common stock,  previously reported |       | $                    | .38        |   | $ | .33 |   |   |   |
| Diluted earnings  per share of common stock, as restated         |       | $                    | .36        |   | $ | .32 |   |   |   |

 

Management has determined that the error was theresult of a control deficiency with respect to the Company’s procedures incalculating and reporting its franchise tax and the treatment of foreign lossesin the provision for income taxes under FASB Statement No. 109, and theproper reconciliation of those items to related consolidated balance sheetaccounts. Management believes that this control deficiency constituted amaterial weakness. A material weakness is a control deficiency, or acombination of control deficiencies, that results in a more than remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The Company has recently employedadditional experienced financial staff, as reported in its Form 8-Kfiled December 20, 2005, to address this weakness and has amended itsprocedures for the preparation and review of recorded income tax amountsincluded in the Company’s consolidated financial statements.

Management has reviewedthe impact of these errors on reported results of operations for the yearsaffected, utilizing criteria set forth in Staff Accounting Bulletin 99,including the qualitative and quantitative elements outlined in that statement.Management has determined that the impact of this adjustment in each of theyears affected is not material to reported results of operations on either aqualitative or quantitative basis in the respective years. Based on thisdetermination, the Company does not plan to re-file its Annual Report on Form 10-Kfor fiscal 2005.

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***Operations***

The following table sets forth, for the fiscal yearsindicated, the percentages which selected items in the Company’s consolidatedstatements of operations bear to total revenues (amounts in thousands):

(SeeItem 1. Business—Description of Principal Business and Principal Products fordiscussion about the Company’s Products and Divisions. See also Note 15.Segment Information to the Consolidated Financial Statements.)

| ** **                      | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ** **                      | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Sales                           |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Display Segment                 |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Monitors                        |       | $          | 49,868     |     | 59.5       | %          | $          | 50,806 |   | 61.4 | % | $ | 45,900 |   | 59.9 | % |
| Data Display CRTs               |       | 10,820     |       | 12.8     |       | 8,510      |       | 10.3 |   | 7,801 |   | 10.2 |   |
| Entertainment CRTs              |       | 3,661      |       | 4.4      |       | 4,281      |       | 5.2 |   | 5,574 |   | 7.3 |   |
| Electron Guns andComponents     |       | 730        |       | 0.9      |       | 813        |       | 1.0 |   | 1,122 |   | 1.5 |   |
| Total Display Segment           |       | 65,079     |       | 77.6     |       | 64,410     |       | 77.9 |   | 60,397 |   | 78.9 |   |
| Wholesale  Distribution Segment |       | 18,799     |       | 22.4     |       | 18,330     |       | 22.1 |   | 16,195 |   | 21.1 |   |
|                            |       | $          | 83,878     |     | 100.0      | %          | $          | 82,740 |   | 100.0 | % | $ | 76,592 |   | 100.0 | % |
| Costs and expenses              |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Cost of goods sold              |       | $          | 59,376     |     | 70.8       | %          | $          | 55,729 |   | 67.4 | % | $ | 51,604 |   | 67.4 | % |
| Selling and delivery            |       | 7,235      |       | 8.6      |       | 7,035      |       | 8.5 |   | 6,930 |   | 9.0 |   |
| General and administrative      |       | 15,125     |       | 18.0     |       | 13,323     |       | 16.1 |   | 11,874 |   | 15.5 |   |
|                            |       | 81,736     |       | 97.4     |       | 76,087     |       | 92.0 |   | 70,408 |   | 91.9 |   |
| Income from  Operations         |       | 2,142      |       | 2.6      |       | 6,653      |       | 8.0 |   | 6,184 |   | 8.1 |   |
| Interest expense                |       | (1,474     | )          | (1.8     | )          | (1,060     | )          | (1.3 | ) | (1,182 | ) | (1.5 | ) |
| Other income, net               |       | 82         |       | 0.1      |       | 176        |       | 0.2 |   | (50 | ) | (0.1 | ) |
| Income before  income taxes     |       | 750        |       | 0.9      |       | 5,769      |       | 6.9 |   | 4,952 |   | 6.5 |   |
| Provision for  income taxes     |       | 305        |       | 0.4      |       | 2,262      |       | 2.7 |   | 1,840 |   | 2.4 |   |
| Net Income                      |       | $          | 445        |     | 0.5        | %          | $          | 3,507 |   | 4.2 | % | $ | 3,112 |   | 4.1 | % |

 

**Fiscal 2006Compared to Fiscal 2005**

*Net Sales*

Consolidated net sales increased $1.1 million forfiscal 2006 or 1.3% compared to fiscal 2005 net sales. This includes a Displaysegment sales increase of $0.6 million or 0.9% and a Wholesale Distributionsegment sales increase of $0.5 million or 2.7% for the comparative periods.

The net increase in Display segment sales in fiscal2006 represents a $0.9 million decline in monitor revenues, a $0.6 milliondecline in home entertainment CRT revenues and a $0.1 million decline incomponent Distribution revenues, offset by an increase in data display CRTrevenues of $2.2 million compared to fiscal 2005.

Decreases in monitor revenues primarily reflect areduction in CRT and DVST sales at Lexel, Teltron and XKD of $5.7 millionduring fiscal 2006 compared to fiscal 2005 as contracts were fulfilled, buthave not been replaced. The timing of orders for these contracts, many whichare military related, are affected by a number of factors, includingcompetitive bidding, government budgetary issues, the phase-out and replacementof military field units and the life cycle of individual display units. Salesof other CRT products from Lexel are supported by a backlog of $7.8 million at February 28,2006. (During fiscal 2006, the Teltron and XKD operations were consolidatedwith the Aydin Displays operation. The Company plans to further consolidate theCRT related portion of Aydin Displays into the Lexel operation during 

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fiscal 2007.) Thisdecrease in CRT and DVST sales was partially offset by a net increase in salesof flat panel and projector display units at Display Systems and Aydin Displaysof $4.8 million during fiscal 2006, compared to fiscal 2005, through contractswith Boeing Co., Lockheed Martin and various other customers.

Increases in data display revenues are attributedprimarily to management’s decision in late fiscal 2004 to begin distributingcommercial and military projection tube displays from its Data Display locationin Tucker, Georgia. These projection tube displays carry a higher sales priceper unit than the units historically distributed from this facility.

The decline in entertainment CRT sales reflectsmanagement’s decision in late fiscal 2004 to move the distribution ofprojection tube displays from the Novatron operation to its Data Displaydistribution facility, which is a part of the data display division, andreduced sales at the Novatron and Chroma operations due to weaker demand in thetelevision tube replacement market. During fiscal 2005, the Magnaview operationwas relocated and merged into the Chroma facility. The Company is the primarysupplier of replacement television CRTs to the domestic entertainment market. Asignificant portion of the entertainment division’s sales (39%) are to majortelevision retailers as replacements for products sold under manufacturer andextended warranties. Due to continued lower retail sales prices for mid-sizetelevision sets (25” to 30”), fewer extended warranties were sold by retailers,a trend consistent with recent prior fiscal years. The Company remains theprimary supplier of product to meet manufacturers’ standard warranties. Growthin this division will be negatively impacted by the decreasing number ofextended warranties sold for the larger, more expensive sets.

The decline in component parts sales reflects weakerdemand for electron gun and stem sales at the Southwest Vacuum and Wintronoperations. Electron gun sales have historically been dependent upon the demandby domestic and foreign television CRT remanufacturers. These sales havedeclined over the past few years as consumers move towards purchasing new technologyas opposed to repairing existing sets. The Company’s Wintron location iscontinuing its transition, focusing growth efforts on the distribution of twonewer camera technologies, which is expected to reduce dependence on sales ofcomponents for CRTs. One such technology will assist border guards with undercar inspections and another will assist correctional facilities with thesupervision of inmates. If successful, the Company believes these newtechnologies will have a positive impact on the component division sales.

The modest increase inanticipated Wholesale Distribution segment sales are attributed to growth incall center sales. The call center operations of Fox International wererelocated and expanded during fiscal 2006 to provide the capacity to seekadditional call center business in future periods.

*GrossMargins*

Consolidated gross profitmargins declined from 32.6% for the year ended February 28, 2005 to 29.2%for the fiscal year ended February 28, 2006. Display segment marginsdecreased from 29.3% in fiscal 2005 to 22.7% in fiscal 2006. The WholesaleDistribution segment margins (before call center expenses) improved from 44.4%for the year ended February 28, 2005 to 51.9% for the year ended February 28,2006.

Within the Displaysegment, monitor gross margins decreased from 30.4% for fiscal 2005 to 25.4%for fiscal 2006. This decrease is primarily attributed to higher thananticipated costs to complete certain product contracts acquired in theThree-Five Acquisition, costs to relocate and combine the XKD operation intoAydin Displays, and lower margins generated and lower absorption of fixedoverhead costs in the Lexel and Teltron operations at their reduced level ofsales. Data display gross margins decreased from 16.2% for fiscal 2005 to 8.2%for fiscal 2006, due to price competition and reduced demand for non-projectionCRT tubes and an increase in the provision for obsolete inventory over theprior year. Gross margins in home entertainment CRTs decreased from 36.7% forfiscal 2005 to 34.7% for fiscal 2006 due to lower absorption of fixed overheadcosts at their reduced level of sales. Gross margins from component 

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partssold also decreased from 56.1% for fiscal 2005 to (8.3%) for fiscal 2006 due tothe impact of lower sales volume and charges for inventory obsolescence.

*OperatingExpenses*

Consolidated operatingexpenses as a percentage of net sales increased from 24.6% for fiscal 2005 to26.7% for fiscal 2006.

Display segment operatingexpenses increased $0.7 million or 5.7% during fiscal 2006 compared to fiscal2005, while operating expenses for the Wholesale Distribution segment increased$1.3 million or 16.3% for the comparable periods. Within the Display segment,which includes the majority of corporate level expenses for the consolidatedgroup, the increase is primarily due to increased accounting and legal feesassociated with financial/regulatory reporting and work on potentialacquisition projects, which have subsequently been abandoned. Wholesaledistribution segment operating expenses increased due to added labor andoverhead costs associated with the expansion of the call center in the secondhalf of fiscal 2006. Sales growth for services provided by the expanded callcenter was slower than anticipated, consequently staffing was reduced near theend of fiscal 2006 to correspond with projected near term call center needs andreduce operating costs.

*InterestExpense*

Interest expense increased$0.4 million or 36.4% for fiscal 2006 as compared to fiscal 2005, due to ahigher level of average outstanding borrowings and higher market interestrates. The Company maintains various debt agreements with variable interestrates, most of which are based on LIBOR or the prime rate.

*IncomeTaxes*

The effective tax rate forfiscal 2006 was 40.7% compared to 39.2% for fiscal 2005, reflecting the impactof permanent differences in taxable income at the lower level of earnings.

**Fiscal 2005 Compared to Fiscal 2004**

*NetSales*

Consolidated net salesincreased $6.2 million for fiscal 2005 or 8.0% compared to fiscal 2004 netsales. The Display segment increased $4.0 million or 6.6% while the WholesaleDistribution segment increased $2.1 million or 13.2% for the comparativeperiods.

The net increase inDisplay segment sales in fiscal 2005 is attributed to continued growth inmonitor revenues of $4.9 million, as well as increases within the data displayrevenues of $0.8 million compared to the prior fiscal year. There wereoffsetting declines within the home entertainment and component parts revenuesof $1.3 million and $0.3 million, respectively.

Increases in monitorrevenues reflect new contracts with Boeing Co., Lockheed Martin, and others,which began in fiscal 2004. Specifically, Display Systems and Aydin Displaysposted increases of $5.4 million and $3.1 million, respectively, compared tofiscal 2004. There were offsetting declines of $3.5 million at Lexel during theyear due to the fact that Lexel completed one of its major contracts duringfiscal 2004. Lexel’s other product lines, however, maintained backlogs of $9.3million at February 28, 2005.

Increasesin data display revenues are attributed primarily to management’sdecision in late fiscal 2004 to distribute commercial and military projectiontube displays from its Data Display location in Tucker, Georgia. Theseprojection tube displays carry a higher price per unit than its’ normalinventory.

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Within the entertainmentdivision, sales declined $1.3 million compared to fiscal 2004. There weredeclines of $0.2 million at the Novatron location, which is a result ofmanagement’s decision in late fiscal 2004 to distribute projection tubedisplays from its Data Display location, which is a part of the data displaydivision. The Magnaview location showed decreases of $0.1 million compared tolast fiscal year. Management closed this location in January 2005 andmerged its operations with its Chroma location in White Mills, PA as of February 1,2005. The Chroma location showed decreases of $0.9 million compared to fiscal2004, which is a result of weaker demand in the television tube replacementmarket. The Company is the primary supplier of replacement television CRTs tothe domestic entertainment market. A majority of the entertainment division’ssales (37%) are to major television retailers as replacements for products soldunder manufacturer and extended warranties. Due to continued lower retail salesprices for mid-size television sets (25” to 30”), fewer extended warrantieswere sold by retailers, a trend consistent with the prior two fiscal years. TheCompany remains the primary supplier of product to meet manufacturers’ standardwarranties. Growth in this division will be negatively impacted by thedecreasing number of extended warranties sold for the larger, more expensivesets.

Sales of component partsdeclined $0.3 million compared to the fiscal year ended February 29, 2004.Sales of these parts declined over the prior two fiscal years due to weakerdemand for electron gun and stem sales. Electron gun sales have historicallybeen dependent upon the demand by domestic and foreign television CRTremanufacturers. These sales have declined over the past few years as consumersmove towards purchasing new technology as opposed to repairing existing sets.The Company’s Wintron location is in the process of transitioning to two newercamera technologies. One such technology will assist border guards with undercar inspections and another will assist correctional facilities with thesupervision of inmates. If successful, the Company believes these newtechnologies will have a positive impact on the component division sales.

Within the wholesale partssegments, sales were positively impacted by the addition of a new call centerin fiscal 2005. This call center added approximately $3.2 million in new salesfor the fiscal year, which was offset by declines in other areas of thatsegment’s business of $1.0 million.

*GrossMargins*

Consolidated gross profitmargins remained unchanged at 32.6% for the year ended February 28, 2005as compared to the fiscal year ended February 29, 2004. Display marginsdecreased slightly to 29.3% from 29.6% and the wholesale electronic partsmargins remained relatively unchanged at 44.4% for the year ended February 28,2005 as compared to 44.0% at February 29, 2004.

Within the Displaysegment, data display gross margins decreased from 19.1% for the fiscal yearended February 29, 2004 to 16.2% for the fiscal year ended February 28,2005. During the fourth quarter of fiscal 2005, management decided to increaseits reserve for inventory obsolescence within this division. Excluding theeffects of this adjustment, gross margins for data display would’ve been 20.9%for the year ended February 28, 2005, which reflects the positive impactof management’s decision to distribute higher margin projection tubes from itsData Display location in Tucker, GA. Gross margins in home entertainment CRTsdecreased from 42.6% at February 29, 2004 to 36.7% at February 28,2005. This reflects lower sales volume for the comparable periods. Revenuesdecreased $1.3 million for the comparable periods. In monitors/projectors,gross margins increased from 29.1% to 30.4% for the comparable periods. Thisincrease is attributable to increases in revenues of $4.9 million. Revenuesincreased without a corresponding increase in costs by improving productionefficiency as fixed costs were absorbed by greater production. Gross marginsfrom component parts sold decreased from 58.4% to 56.1% for the comparableperiods. This decrease was due to decreases in sales within this division of$0.3 million for the comparable periods.

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Operating Expenses

Consolidated operating expenses as a percentage ofsales remained flat at approximately 24.6% for the year ended February 28,2005 as compared to the year ended February 29, 2004.

Display segment operating expenses increased $0.4million, while operating expenses for the consumer parts distribution segmentincreased $1.2 million. Within the Display segment, most of this increase wasposted within the monitor operations as increased growth has requiredadditional administrative support. The Company’s Cape Canaveral operationsadded 20 people during the fiscal year ended February 28, 2005. Within theconsumer parts distribution segment, these increases reflect additional laborand overhead associated with its new call center that was opened in fiscal2005.

Interest Expense

Interest expense decreased $122,000 for the year endedFebruary 28, 2005 as compared to the year ended February 29, 2004. TheCompany maintains various debt agreements with different interest rates, mostof which are based on the prime rate or LIBOR. LIBOR and prime rates wereslightly lower during the comparable periods.

Income Taxes

The effective tax rate forfiscal 2005 was 39.2% compared to 37.6% for fiscal 2004 largely due to statetaxes.

***Management’sDiscussion of Liquidity and Capital Resources***

At February 28, 2006 and February 28, 2005,the Company had total cash and cash equivalents of $1.6 million and $1.5million, respectively. The Company’s working capital was $16.3 million and$37.2 million at February 28, 2006 and February 28, 2005,respectively. See comments regarding the refinance of the Company’s $17.6million in outstanding lines of credit, classified as short-term debt at February 28,2006, under the caption “Subsequent Event” in this Item 7. In recent years, theCompany has financed its growth and cash needs primarily through income fromoperations, borrowings under revolving credit facilities, borrowings from itsCEO and long-term debt.

The Company specializes in certain products representingtrailing-edge technology that may not be available from other sources, and maynot be currently manufactured. In many instances, the Company’s products arecomponents of larger display systems for which immediate availability iscritical for the customer. Accordingly, the Company enjoys higher grossmargins, but typically has larger investments in inventories than those of itscompetitors.

The Company continually monitors its cash andfinancing positions in order to find ways to lower its interest costs and toproduce positive operating cash flow. The Company examines possibilities togrow its business as opportunities present themselves, such as new salescontracts or niche acquisitions. There could be an impact on working capitalrequirements 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. In May 2005,the Company acquired the assets of the IDS Division of Three-Five Systems, Inc.(“Three-Five Systems”) for cash of $1.4 million. In the first quarter of fiscal2005, the Company acquired the assets of Colorado based Data-Ray Corporation’sCRT monitor operations. The asset purchase included the issuance of the Company’scommon stock and cash paid to the seller for a total purchase price of $0.6million. In November 2004, the Company purchased inventories, fixed assetsand intangible assets of Evans & Sutherland for $5.3 million cash.

Cash provided by operations was $2.9 million in fiscal2006, $2.4 million in fiscal 2005 and $7.1 million in fiscal 2004. Net workingcapital, excluding acquisitions, decreased $20.9 million in fiscal 2006, due toa $3.7 million increase in inventory and an increase of $1.2 million inrefundable income taxes, a decline of 

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$2.2 million in accountsreceivable and an increase in short term lines of credit of $17.6 million. Seecomments regarding the refinance of the Company’s $17.6 million in outstandinglines of credit, classified as short-term debt at February 28, 2006, underthe caption “Subsequent Event” in Part II, Item 7. in this Annual Reporton Form 10-K. The increase in inventory primarily related toincreased inventory in the Wholesale distribution segment and increasedprojection tube inventory in the monitor operations. The average daysoutstanding for accounts receivable decreased from 53 days in fiscal 2005 to 44days in fiscal 2006, reflecting improved collections over this period. Networking capital, excluding acquisitions, increased $3.5 million in fiscal 2005due primarily to greater investments in inventory within the Company’s monitoroperations related to contracts begun in fiscal 2004. Working capital decreased$1.0 million in fiscal 2004 due primarily to improved inventory managementresulting in a $1.0 million decrease in inventories, net of reserves. Comparedto prior years, inventory turnover has remained flat and the Company hasreduced its bulk purchases of last time buys of CRTs as it anticipates futurereduced demand for these products in the replacement market.

Investing activities used cash of $3.2 million, $6.2million and $0.7 million in fiscal 2006, fiscal 2005 and fiscal 2004,respectively. In fiscal 2006, the Company acquired the IDS division of ThreeFive Systems, Inc. in exchange for cash of $1.4 million. In fiscal 2005,the primary use of cash was related to the acquisition of inventories andrelated assets of Evans & Sutherland’s ESCP® CRT projector productline. This asset acquisition of $5.3 million was integrated into the Company’sCape Canaveral, Florida facility. Capital expenditures exclusive ofacquisitions were $1.9 million, $0.8 million and $0.7 million in fiscal 2006,fiscal 2005 and fiscal 2004, respectively. In fiscal 2006, capital expendituresprimarily related to manufacturing equipment purchased at the Phelps, New Yorkfacility and expansion of the call center at Fox International, Inc.Capital expenditures in fiscal 2005 and fiscal 2004 were primarily for buildingimprovements and computer hardware. The Company does not anticipate significantinvestments in capital assets for fiscal 2007 beyond normal maintenancerequirements.

Financing activities provided cash of $0.6 million infiscal 2006 and $2.3 million in fiscal 2005 and used cash of $5.9 million infiscal 2004. During fiscal 2006, the Company used cash to repay loans fromrelated parties of $1.2 million and for the repurchase of common stock of $1.2million. Primarily near the end of fiscal 2006, the Company received cashproceeds of $7.9 million from related parties. During 2005, the Company usedcash of $14.4 million from its new line of credit to pay off its original lineof credit, plus a term note and a note to an officer of the Company. Cash of$5.3 million was also used to fund the purchase of assets of Evans andSutherland, Inc. The Company also paid a cash dividend during 2005 of $0.4million or $0.04 per share. During fiscal 2005, the Company used cash of $0.6million to retire debt, with a substantial portion of this reduction providedby the conversion of a $2.8 million bank line of credit at Fox International toa new $3.5 million line with another bank. During fiscal 2004, the Company usedcash of $0.6 million to retire long term debt. The Company paid a cash dividendin fiscal 2004 of $245,000 or $0.05 per share.

The Company maintains a $27.5 million credit facilitywith a bank, collateralized by equipment, inventories and accounts receivableof the Company. The interest rate on this line is a floating LIBOR rate basedon a ratio of debt to EBITDA, as defined in the loan documents. As of February 28,2006, the outstanding balance of this line of credit was $14.1 million and theavailable amount for borrowing was $13.0 million, including the impact of $400,000in outstanding letters of credit. The line of credit agreement containscovenants, including requirements related to tangible cash flow, ratio of debtto cash flow and asset coverage. Additionally, the bank requires that anycontemplated acquisitions be accretive. The Company was not in compliance with the consolidated Fixed ChargeCoverage Ratio and the consolidated Senior Funded Debt to EBITDA ratiocovenants at February 28, 2006. To provide additional flexibility infunding for working capital requirements, and to cure the covenant violationsexisting under this line, on June 9, 2006 the Company negotiated a newline of credit with a syndication of two banks as discussed below under thecaption Subsequent Event.

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Additionally, in April 2005, the Companyconverted a $2.8 million line of credit (collateralized by assets of FoxInternational, Inc.) with a bank to a $3.5 million line of credit withanother bank. As part of the new financing, the lender paid off the balance ofthe previous line as well as a mortgage secured by the land and building of FoxInternational, Inc. The interest rate on this line is a floating LIBORrated based on a ratio of debt to EBITDA, as defined in the loan documents. Asof February 28, 2006, the outstanding balance of this line of credit was$3.5 million with no remaining borrowing availability. The line of creditagreement contains covenants, including requirements related to tangible cashflow, ratio of debt to cash flow and asset coverage. Additionally, the bankrequires that any contemplated acquisitions be accretive. The Company was not in compliance with theconsolidated Fixed Charge Coverage Ratio and the consolidated Senior FundedDebt to EBITDA ratio covenants at February 28, 2006. To provide additionalflexibility in funding for working capital requirements, and to cure thecovenant violations existing under this line, on June 9, 2006 the Companynegotiated a new line of credit with a syndication of two banks as discussedbelow under the caption Subsequent Event.

The Company has a stock repurchase program, pursuantto which it was originally authorized to repurchase up to 462,500 shares of theCompany’s common stock in the open market. On January 11, 2006, the Board ofDirectors of the Company approved a continuation of the stock repurchaseprogram, and authorized the repurchase of up to 600,000 additional shares ofthe Company’s common stock, depending on the market price of the shares. Thereis no minimum number of shares required to be repurchased under the program.During the fourth quarter of fiscal 2006, the Company repurchased 85,982 sharesat an average cost of $9.98 per share. These shares are held by the Company astreasury shares at February 28, 2006. An additional 25,621 shares ofcommon stock, repurchased at an average cost of $12.37 in May 2005, wereretired. No shares were repurchased in fiscal 2005. In fiscal 2004 231,000shares were repurchased at an average cost of $6.81 per share, and retired.Under this program, an additional 658,618 shares remain authorized to berepurchased by the Company at February 28, 2006.

In 2004, the Companyredeemed $100,000 of common stock previously issued for the purchase ofinventory. Issuances of common stock, primarily through stock option exercises,provided cash of $363,000 in 2004. Dividend payments in 2004 amounted to$245,000, which were the first dividends declared and paid by the Company inits history. The policy regarding future payments of dividends will be reviewedperiodically by the Board of Directors and will be based on the earnings andfinancial position of the Company and other factors which the Board ofDirectors deems appropriate.

***Transactionswith Related Parties, Contractual Obligations and Commitments***

On February 27, 2006 the Company’s Chief ExecutiveOfficer loaned the Company $6.8 million under a note agreement providing forinterest at the higher of six percent or the prime rate plus 1⁄4 of one percent,paid monthly. Principal payments are due in a series of monthly payments, witha final payment of $1.0 million due October 1, 2006. The note is securedby a general lien on all assets of the Company, subordinate to the lien held byBank of America. See related comments in under the caption “Subsequent Event”in Part II Item 7. of this Annual Report on Form 10-K.

In August 2005, the Company’s Chief ExecutiveOfficer loaned the Company $1.0 million on a non-interest bearing and due ondemand basis, which was repaid in September 2005.

At February 29, 2004, the Company had outstandingborrowings from its CEO in the amount of $8,216,000, with principal due in 2006and monthly interest due at the higher rate of 6% or prime (4.25% at February 29,2004) plus 1%. During November 2004, the Company negotiated a creditfacility with a new lender. As part of the new agreement, the bank agreed topay off the amount due to the Company’s CEO, and accordingly, at February 28,2005, the balance due to him was $0.

During fiscal 2004, theCompany repaid $80,000 to an Officer and Director, resulting in a balance of$75,000 at February 29, 2004. Principal payments of $120,000 were made infiscal 2005, while an additional 

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$240,000was borrowed during the fiscal year, resulting in a balance of $195,000 at February 28,2005. Principal payments of $218,000 were made in fiscal 2006, while anadditional $171,000 was borrowed during the fiscal year, resulting in a balanceof $148,000 at February 28, 2006. These borrowings bear interest at 6%.

**ContractualObligations**

Future maturities of long-term debt and futurecontractual obligations due under operating leases are as follows (in thousands):

 

| ** **                                                                | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ****                                                                      | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1—3  years** | ** ** | **3—5  years** | ** ** | **More than  5 years** | ** ** |
| Long-term debt  obligations                                               |       | $                                         | 25,377     |   |   | $ | 24,562 |   |   | $ | 93 |   | $ | 98 |   |   | $ | 624 |   |   |
| Capital lease  obligations                                                |       | 449                                       |       |   | 93 |   |   | 187 |   | 169 |   |   | — |   |   |
| Interest  obligations on long-term debt and capital lease obligations (a) |       | 1,925                                     |       |   | 1,420 |   |   | 194 |   | 87 |   |   | 224 |   |   |
| Operating lease  obligations                                              |       | 5,180                                     |       |   | 1,798 |   |   | 2,605 |   | 777 |   |   | — |   |   |
| Purchase  obligations                                                     |       | 2,859                                     |       |   | 2,802 |   |   | 57 |   | — |   |   | — |   |   |
| Total                                                                     |       | $                                         | 35,790     |   |   | $ | 30,675 |   |   | $ | 3,136 |   | $ | 1,131 |   |   | $ | 848 |   |   |

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(a)           Thisline item was calculated by utilizing the effective rate on outstanding debt asof February 28, 2006.

**Off-Balance SheetArrangements**

Except for operatingleases, the Company historically has not relied upon off-balance sheetarrangements (such as sale-leasebacks), transactions or relationships thatwould materially affect liquidity or the availability of, or requirements for,capital resources.

**Critical AccountingPolicies**

Management’s Discussionand Analysis of Financial Condition and Results of Operations are based uponthe Company’s consolidated financial statements. These financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America. These principles require the use of estimatesand assumptions that affect amounts reported and disclosed in the financialstatements and related notes. The accounting policies that may involve a higherdegree of judgments, estimates, and complexity include reserves on inventories,the allowance for bad debts and warranty reserves. The Company uses thefollowing methods and assumptions in determining its estimates:

*Reserves oninventories*

Reserves on inventories result in a charge to operationswhen the estimated net realizable value declines below cost. Managementregularly reviews the Company’s investment in inventories for declines in valueand establishes reserves when it is apparent that the expected net realizablevalue of the inventory falls below its carrying amount. Management attempts todetermine by historical usage analysis and interchangeability of CRT typesalong with repair contracts currently maintained by its customers, as well asnumerous other market factors, the projected demand for CRTs in this estimateof net realizable value. Management is able to identify consumer buying trends,such as size and application, well in advance of supplying replacement CRTs.Thus, the Company is able to adjust inventory-stocking levels according to theprojected demand. The average life of a CRT is five to seven years, at whichtime the Company’s replacement market develops. Management reviews inventorylevels on a quarterly basis. Such reviews 

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include observations ofproduct development trends of the OEM’s, new products being marketed andtechnological advances relative to the product capabilities of the Company’sexisting inventories. There have been no significant changes in management’sestimates in fiscal 2006 and 2005; however, the Company cannot guarantee theaccuracy of future forecasts since these estimates are subject to change basedon market conditions.

During fiscal 2006, fiscal2005 and fiscal 2004, the Company deducted inventory against the reserve forobsolescence in the amount of $1.0 million, $0.8 million and $1.4 million,respectively. The reserve for inventory obsolescence was approximately $4.0million and $3.1 million at February 28, 2006 and February 28, 2005,respectively.

*Revenue Recognition*

Revenue is recognized on the sale of products when theproducts are shipped, all significant contractual obligations have beensatisfied, and the collection of the resulting receivable is reasonably assured.The Company’s delivery term typically is F.O.B. shipping point.

In accordance with Emerging Issues Task Force (EITF)issue 00-10, shipping and handling fees billed to customers areclassified in net sales in the consolidated statements of operations. Shippingand handling costs incurred for the delivery of product to customers are classifiedin selling and delivery in the consolidated statements of operations.

A portion of the Company’s revenue is derived fromcontracts 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 forPerformance of Construction-Type and Certain Production-Type Contracts”. Thesecontracts are fixed-price and cost-plus contracts and are recorded on thepercentage of completion basis using the ratio of costs incurred to estimatedtotal costs at completion as the measurement basis for progress towardcompletion and revenue recognition. Any losses identified on contracts arerecognized immediately. Contract accounting requires significant judgmentrelative to assessing risks, estimating contract costs and making relatedassumptions for schedule and technical issues. With respect to contract changeorders, claims or similar items, judgment must be used in estimating relatedamounts and assessing the potential for realization. These amounts are onlyincluded in contract value when they can be reliably estimated and realizationis probable.

The Wholesale Partssegment has several distribution agreements that it accounts for using thegross revenue basis as prescribed by EITF issue 99-19. The Company usesthe gross method because the Company has general inventory risk, physical lossinventory risk and credit risk. The call center service revenue is recognizedbased on written pricing agreements with each manufacturer, on a per-call,per-email or per-standard mail basis.

*Allowance for baddebts*

The allowance for baddebts is determined by reviewing all accounts receivable and applyinghistorical credit loss experience to the current receivable portfolio withconsideration given to the current condition of the economy, assessment of thefinancial position of the creditors as well as past payment history and overalltrends in past due accounts compared to established thresholds. The Companymonitors credit exposure and assesses the adequacy of the allowance for baddebts on a regular basis. Historically, the Company’s allowance has beensufficient for any customer write-offs. Although the Company cannot guaranteefuture results, management believes its policies and procedures relating tocustomer exposure are adequate.

28

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*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 claims incurred could differ from the originalestimates, requiring adjustments to the reserve. Management feels that historicallyits procedures have been adequate and does not anticipate that its assumptionsare reasonably likely to change in the future.

*Other AccountingPolicies*

Other loss contingenciesare recorded as liabilities when it is probable that a liability has beenincurred and the amount of the loss is reasonably estimable. Disclosure isrequired when there is a reasonable possibility that the ultimate loss willexceed the recorded provision. Contingent liabilities are often resolved overlong time periods. Estimating probable losses requires analysis of multiplefactors that often depend on judgments about potential actions by thirdparties.

**Recent AccountingPronouncements**

In December 2004,the Financial Accounting Standards Board (FASB) issued of Financial AccountingStandards Statement (“Statement No.”) 123 (R) (revised 2004) *Share-Based Payment*, which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation*.Statement No. 123 (R) supersedes Accounting Principles Board Opinion(APB) No. 25, *Accounting for StockIssued to Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*. Generally, the approach toaccounting in Statement No. 123 (R) requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values. Currently the Companyaccounts for these payments under the intrinsic value provisions of APB No. 25with no expense recognition in the financial statements. Statement No. 123(R) is effective for the Company beginning March 1, 2006. TheStatement offers several alternatives for implementation. Management iscurrently in the process of making the detailed calculations necessary todetermine which of the alternatives the Company will use; however, managementdoes not anticipate that the adoption of this statement will have a materialimpact on the consolidated financial statements.

In November 2004,the FASB issued Statement No. 151, *Inventory Costs*,an amendment of APB No. 43, Chapter 4. The amendments made by Statement No. 151will improve financial reporting by requiring that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage) berecognized as current-period charges and by requiring the allocation of fixedproduction overheads to inventory based on the normal capacity of productionfacilities. Statement No. 151 is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Management does notanticipate that the adoption of this statement will have a material impact onthe consolidated financial statements.

In December 2004,the FASB issued Statement No. 153, “*Exchanges of NonmonetaryAssets*”*.*This statement explains thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. This statement is effective for fiscal years beginningafter June 15, 2005. Management does not anticipate that the adoption ofthis statement will have a material impact on the consolidated financialstatements.

In June 2005,the FASB issued Statement No. 154, “*Accounting Changes andError Corrections*”. This statement revises the reportingrequirements related to changes in accounting principles or adoption of newaccounting pronouncements. This statement is effective for fiscal yearsbeginning after December 15, 2005. Management does not anticipate that theadoption of this statement will have a material impact on the consolidatedfinancial statements.

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In February 2006, theFASB issued StatementNo. 155, “*Accounting for Certain HybridFinancial Instruments*—an amendment of FASB Statements No. 133and 140.” Statement No. 155permits fair value measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation. Thisstatement is effective for all financial instruments acquired or issued afterthe beginning of an entity’s fiscal year that begins after September 15,2006. Management does notanticipate that the adoption of this statement will have a material impact onthe consolidated financial statements.

**Impact of Inflation**

Inflation has not had amaterial effect on the Company’s results of operations to date.

**Subsequent Event**

On June 9, 2006, theCompany secured a commitment from a syndicate including RBC Centura Bank andRegions Bank to provide a $17 million line of credit to the Company and a $3.5million line of credit to the Company’s subsidiary Fox International, Inc.,both with a maturity of 24 months from closing. These new lines of creditreplace two lines of credit outstanding with Bank of America. In addition, theagreement provides for an equipment term loan of $3.0 million with paymentsamortized over 60 months. The interest rate on these loans is a floating LIBORrated based on a fixed charge coverage ratio, as defined in the loan documents.Also as a part of this agreement, the CEO of the Company will provide a $6.0million term note with an amortization of 15 years, and a maturity of 60months. The remaining balance of the note provided by the CEO on February 27,2006 will be repaid effective with the issue of the new note. The Companyexpects to execute a closing on these new loan facilities effective on orbefore June 28, 2006.

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

The Company’s primary market risks includefluctuations in interest rates and variability in interest rate spreadrelationships, such as prime to LIBOR spreads. Approximately $24.9 million ofoutstanding debt at February 28, 2006 related to long-term indebtednessunder variable rate debt. Interest on the outstanding balance of this debt willbe charged based on a variable rate related to the prime rate or the LIBOR rate.Both rate bases are incremented for margins specified in their agreements. Thus,the Company’s interest rate is subject to market risk in the form offluctuations in interest rates. The effect of a hypothetical one percentagepoint increase across all maturities of variable rate debt would result in adecrease of approximately $250,000 in pre-tax net income assuming no furtherchanges in the amount of borrowings subject to variable rate interest fromamounts outstanding at February 28, 2006. The Company does not trade inderivative 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 affect the Company’s financial position.

30

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**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

**Video Display Corporation and Subsidiaries**

**Index to Consolidated FinancialStatements**

| Reports of Independent  Registered Public Accounting Firms                                                                                                                       |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Balance Sheets as of February 28,  2006 and February 28, 2005                                                                                             |   |   |
| Consolidated  Statements of Operations for the years ended February 28, 2006 and  February 28, 2005 and February 29, 2004                                         |   |   |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for the Years ended February 28, 2006 and  February 28, 2005 and February 29, 2004 |   |   |
| Consolidated Statements of Cash Flows for the years  ended February 28, 2006 and February 28, 2005 and February 29,  2004                                         |   |   |
| Notes to Consolidated Financial Statements                                                                                                                                       |   |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Shareholders ofVideo Display CorporationTucker, Georgia

We have audited the accompanying consolidated balancesheet of Video Display Corporation and subsidiaries (the “Company”) as of February 28,2006, and the related consolidated statements of operations, shareholders’equity and comprehensive income and cash flows for the year then ended. Theseconsolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidated financialstatements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of their internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Video Display Corporation andsubsidiaries as of February 28, 2006 and the results of their operationsand their cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

/s/  Tauber &Balser, P.C.Atlanta, GeorgiaMay 26, 2006, except for Note 21, asto which the date is June 9, 2006

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**Reportof Independent Registered Public Accounting Firm**

Board of Directors and Shareholders ofVideo Display CorporationTucker, Georgia

We have audited the accompanying consolidated balancesheets of Video Display Corporation and subsidiaries as of February 28,2005 and the related consolidated statements of operations, shareholders’equity and comprehensive income (loss) and cash flows for each of the two yearsin the period ended February 28, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of their internal control over financial reporting. Ouraudits include consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness on theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financial positionof Video Display Corporation and subsidiaries as of February 28, 2005 andthe results of their operations and their cash flows for each of the two yearsin the period ended February 28, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

Asdiscussed in Note 2 to the accompanying consolidated financial statements, theCompany has restated its 2004 and 2005 financial statements.
| Atlanta, Georgia                          |   | /s/ BDO Seidman, LLP |
|-------------------------------------------|--------|----------------------|
| June 14,  2005, except as to Note 2, |   |                 |
| which is as of  June 8, 2006         |   |                 |

 

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**VideoDisplay Corporation and SubsidiariesConsolidated Balance Sheets(in thousands)**

| ** **                                                                    | ** ** | **February 28,  2006** | ** **  | **February 28,  2005**      | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------|-------------|----------------------------------|------------|
| ** **                                                                    | ** ** | ** **                  | ** **  | **(restated, Note 2)** | ** ** |
| Assets                                                                        |       |                        |        |                             |       |   |   |   |   |
| Current Assets                                                                |       |                        |        |                             |       |   |   |   |   |
| Cash                                                                          | ** ** | ** **                  | **$**       | **1,577**                        |       |   |   | $ | 1,471 |   |   |
| Accounts receivable, less allowance for possible  losses of   $381 and $339   | ** ** | ** **                  | **9,483**   |                             |       |   | 11,929 |   |   |
| Inventories, net                                                              | ** ** | ** **                  | **34,645**  |                             |       |   | 32,105 |   |   |
| Cost and estimated earnings in excess of billings on    uncompleted contracts | ** ** | ** **                  | **968**     |                             |       |   | 738 |   |   |
| Deferred income taxes                                                         | ** ** | ** **                  | **3,279**   |                             |       |   | 2,855 |   |   |
| Prepaid expenses and other                                                    | ** ** | ** **                  | **1,720**   |                             |       |   | 460 |   |   |
| Total current assets                                                          | ** ** | ** **                  | **51,672**  |                             |       |   | 49,558 |   |   |
| Property, plant  and equipment:                                               |       |                        |        |                             |       |   |   |   |   |
| Land                                                                          | ** ** | ** **                  | **605**     |                             |       |   | 605 |   |   |
| Buildings                                                                     | ** ** | ** **                  | **8,454**   |                             |       |   | 7,886 |   |   |
| Machinery and equipment                                                       | ** ** | ** **                  | **19,970**  |                             |       |   | 18,689 |   |   |
|                                                                          | ** ** | ** **                  | **29,029**  |                             |       |   | 27,180 |   |   |
| Accumulated depreciation                                                      | ** ** | ** **                  | **(20,270** | **)**                            |       |   | (19,543 | ) |   |
| Net property, plant, and equipment                                            | ** ** | ** **                  | **8,759**   |                             |       |   | 7,637 |   |   |
| Goodwill                                                                      | ** ** | ** **                  | **1,318**   |                             |       |   | 1,318 |   |   |
| Intangible  assets, net                                                       | ** ** | ** **                  | **3,591**   |                             |       |   | 3,448 |   |   |
| Other assets                                                                  | ** ** | ** **                  | **98**      |                             |       |   | 223 |   |   |
| Total assets                                                                  | ** ** | ** **                  | **$**       | **65,438**                       |       |   |   | $ | 62,184 |   |   |

 

The accompanying notes are an integral part of these statements.

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**VideoDisplay Corporation and SubsidiariesConsolidated Balance Sheets (Continued)(in thousands)**

| ** **                                                                                                                                                                           | ** ** | **February 28,  2006** | ** ** | **February 28,  2005**      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | ** **                  | ** ** | **(restated, Note 2)** | ** ** |
| Liabilities and  Shareholders’ Equity                                                                                                                                           |       |                        |       |                             |       |   |   |   |   |
| Current  liabilities                                                                                                                                                                 |       |                        |       |                             |       |   |   |   |   |
| Accounts payable                                                                                                                                                                     | ** ** | ** **                  | **$**      | **6,889**                        |       |   |   | $ | 5,190 |   |   |
| Accrued liabilities                                                                                                                                                                  | ** ** | ** **                  | **2,833**  |                             |       |   | 3,425 |   |   |
| Billings in excess of cost and estimated earnings on   uncompleted contracts                                                                                                         | ** ** | ** **                  | **965**    |                             |       |   | 454 |   |   |
| Line of credit                                                                                                                                                                       | ** ** | ** **                  | **17,567** |                             |       |   | 2,688 |   |   |
| Notes payable to officers and directors                                                                                                                                              | ** ** | ** **                  | **6,948**  |                             |       |   | 49 |   |   |
| Current maturities of long-term debt and financing   lease obligations                                                                                                               | ** ** | ** **                  | **140**    |                             |       |   | 577 |   |   |
| Total current liabilities                                                                                                                                                            | ** ** | ** **                  | **35,342** |                             |       |   | 12,383 |   |   |
| Lines of credit                                                                                                                                                                      | ** ** | ** **                  | **—** |                             |       |   | 19,296 |   |   |
| Long-term debt, less current maturities                                                                                                                                              | ** ** | ** **                  | **808**    |                             |       |   | 848 |   |   |
| Financing lease obligations, less current maturities                                                                                                                                 | ** ** | ** **                  | **363**    |                             | ** ** | ** ** | **—** |   |   |
| Notes payable to officers and directors, less  current maturities                                                                                                                    | ** ** | ** **                  | **—** |                             |       |   | 146 |   |   |
| Convertible notes payable, net of discount of $38  and $44                                                                                                                           | ** ** | ** **                  | **212**    |                             |       |   | 281 |   |   |
| Deferred income taxes                                                                                                                                                                | ** ** | ** **                  | **560**    |                             |       |   | 434 |   |   |
| Total liabilities                                                                                                                                                                    | ** ** | ** **                  | **37,285** |                             |       |   | 33,388 |   |   |
| Minority Interests                                                                                                                                                                   | ** ** | ** **                  | **123**    |                             |       |   | 123 |   |   |
| Commitments                                                                                                                                                                          | ** ** | ** **                  | **—** |                             | ** ** | ** ** | **—** |   |   |
| Shareholders’ Equity                                                                                                                                                            |       |                        |       |                             |       |   |   |   |   |
| Preferred stock, no par value—10,000 shares  authorized; none issued and outstanding                                                                                            | ** ** | ** **                  | **—** |                             | ** ** | ** ** | **—** |   |   |
| Common stock, no par value—50,000 shares authorized;  9,707 issued and 9,628 outstanding at February 28, 2006, and 9,704  issued and outstanding at February 28, 2005 | ** ** | ** **                  | **7,198**  |                             |       |   | 7,026 |   |   |
| Additional paid-in capital                                                                                                                                                           | ** ** | ** **                  | **92**     |                             |       |   | 92 |   |   |
| Retained earnings                                                                                                                                                                    | ** ** | ** **                  | **21,771** |                             |       |   | 21,624 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                 | ** ** | ** **                  | **(172**   | **)**                            |       |   | (69 | ) |   |
| Treasury stock, 86 shares at cost                                                                                                                                                    | ** ** | ** **                  | **(859**   | **)**                            | ** ** | ** ** | **—** |   |   |
| Total shareholders’ equity                                                                                                                                                      | ** ** | ** **                  | **28,030** |                             |       |   | 28,673 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                     | ** ** | ** **                  | **$**      | **65,438**                       |       |   |   | $ | 62,184 |   |   |

 

The accompanying notes are an integral part of these statements.

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**VideoDisplay Corporation and SubsidiariesConsolidated Statements of Operations(in thousands, except per share data)**

| ** **                                         | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **February 28,  2006**     | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| ** **                                         | ** ** | ** **                      | ** ** | **(restated, Note 2)** | ** ** | **(restated, Note 2)** | ** ** |
| Net sales                                          | ** ** |                            | **$**      | **83,878** |   |   |   | $ | 82,740 |   |   |   | $ | 76,592 |   |   |
| Cost of goods  sold                                | ** ** |                            | **59,376** |   |   |   | 55,729 |   |   |   | 51,604 |   |   |
| Gross profit                                       | ** ** |                            | **24,502** |   |   |   | 27,011 |   |   |   | 24,988 |   |   |
| Operating  expenses                                |       |                            | ** ** |   |   |   |   |   |   |   |   |   |   |
| Selling and delivery                               | ** ** |                            | **7,235**  |   |   |   | 7,035 |   |   |   | 6,930 |   |   |
| General and administrative                         | ** ** |                            | **15,125** |   |   |   | 13,323 |   |   |   | 11,874 |   |   |
|                                               | ** ** |                            | **22,360** |   |   |   | 20,358 |   |   |   | 18,804 |   |   |
| Operating profit                                   | ** ** |                            | **2,142**  |   |   |   | 6,653 |   |   |   | 6,184 |   |   |
| Other income  (expense)                            |       |                            | ** ** |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                   | ** ** |                            | **(1,474** | **)** |   |   | (1,060 | ) |   |   | (1,182 | ) |   |
| Other, net                                         | ** ** |                            | **82**     |   |   |   | 176 |   |   |   | (103 | ) |   |
|                                               | ** ** |                            | **(1,392** | **)** |   |   | (884 | ) |   |   | (1,285 | ) |   |
| Income before  income taxes and minority interests | ** ** |                            | **750**    |   |   |   | 5,769 |   |   |   | 4,899 |   |   |
| Provision for  income taxes                        | ** ** |                            | **305**    |   |   |   | 2,262 |   |   |   | 1,840 |   |   |
| Income before  minority interests                  | ** ** |                            | **445**    |   |   |   | 3,507 |   |   |   | 3,059 |   |   |
| Minority interests                                 | ** ** |                            | **—** |   |   |   | **—** |   |   |   | 53 |   |   |
| Net income                                         | ** ** |                            | **$**      | **445** |   |   |   | $ | 3,507 |   |   |   | $ | 3,112 |   |   |
| Net income per share—basic                    | ** ** |                            | **$**      | **0.05** |   |   |   | $ | 0.36 |   |   |   | $ | 0.33 |   |   |
| Net income per share—diluted                  | ** ** |                            | **$**      | **0.04** |   |   |   | $ | 0.36 |   |   |   | $ | 0.32 |   |   |
| Average shares outstanding—basic              | ** ** |                            | **9,684**  |   |   |   | 9,673 |   |   |   | 9,348 |   |   |
| Average shares  outstanding—diluted           | ** ** |                            | **9,964**  |   |   |   | 9,903 |   |   |   | 9,800 |   |   |

 

The accompanyingnotes are an integral part of these statements.

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**Video Display Corporation and SubsidiariesConsolidated Statements of Shareholders’ Equity and Comprehensive Income(in thousands)**

| ** **                                                                         | ** ** | **Common  Shares** | ** ** | **Share  Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings**       | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Current  Year  Compre-  hensive  Income** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                       | ** ** | **(restated,  Note 2)** | ** ** | ** **                                                | ** ** | ** **          | ** ** | ** **                                  | ** ** |
| Balance,  February 28, 2003                                                   |       |               | 4,700      |              |       |                             | $          | 5,293                        |       |                                                      |       | $                   | 92         |                                        |       |   | $ | 16,878 |   |   |   | $ | (233 | ) |   |   | $ | — |   |   |   |   |   |   |
| Net income                                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | 3,112      |   |   |   | — |   |   |   | — |   |   |   | $ | 3,112 |   |   |
| Unrealized gain on marketable equity securities                                    |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | 25 |   |   |   | — |   |   |   | 25 |   |   |
| Reclassification adjustment onthe sale of marketable  equity securities for a loss |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | 126 |   |   |   | — |   |   |   | 126 |   |   |
| Foreign currency translation adjustment                                            |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | 62 |   |   |   | — |   |   |   | 62 |   |   |
| Total comprehensive income                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | $ | 3,325 |   |   |
| Conversion of convertible debentures                                               |       |               | 240        |              |       |                             | 1,000      |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Issuance of common stock under stock option plan                                   |       |               | 75         |              |       |                             | 312        |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Issuance of common stock                                                           |       |               | 8          |              |       |                             | 51         |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Repurchase of common stock                                                         |       |               | (231       | )                 |       |                             | (338       | )                            |       |                                                      | —     |                |       |                                        | (1,236     | ) |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Dividend paid on common stock                                                      |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | (245       | ) |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Balance, February 29, 2004                                                    |       |               | 4,792      |              |       |                             | 6,318      |                         |       |                                                      | 92         |                |       |                                        | 18,509     |   |   |   | (20 | ) |   |   | — |   |   |   |   |   |   |
| Net income                                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | 3,507      |   |   |   | — |   |   |   | — |   |   |   | $ | 3,507 |   |   |
| Foreign currency translation adjustment                                            |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | (49 | ) |   |   | — |   |   |   | (49 | ) |   |
| Total comprehensive income                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | $ | 3,458 |   |   |
| Issuance of common stock under stock option plan                                   |       |               | 28         |              |       |                             | 183        |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Issuance of common stock                                                           |       |               | 33         |              |       |                             | 400        |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Issuance of 100% stock dividend                                                    |       |               | 4,841      |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Conversion of debt to common stock                                            |       |               | 10         |              |       |                             | 125        |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Dividend paid on common stock                                                      |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | (392       | ) |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Balance, February 28, 2005                                                    |       |               | 9,704      |              |       |                             | 7,026      |                         |       |                                                      | 92         |                |       |                                        | 21,624     |   |   |   | (69 | ) |   |   | — |   |   |   |   |   |   |
| Net income                                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | 445        |   |   |   | — |   |   |   | — |   |   |   | $ | 445 |   |   |
| Foreign currency translation adjustment                                            |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | (103 | ) |   |   | — |   |   |   | (103 | ) |   |
| Total comprehensive income                                                         |       |               | —     |              |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | $ | 342 |   |   |
| Issuance of common  stock under stock option plan                                  |       |               | 26         |              |       |                             | 66         |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Repurchase of common  stock                                                        |       |               | (26        | )                 |       |                             | (19        | )                            |       |                                                      | —     |                |       |                                        | (298       | ) |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Repurchase of  treasury stock                                                      |       |               | (86        | )                 |       |                             | —     |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | (859 | ) |   |   |   |   |   |
| Conversion of debt  to common stock                                           |       |               | 10         |              |       |                             | 125        |                         |       |                                                      | —     |                |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Balance, February 28, 2006                                                    |       |               | 9,628      |              |       |                             | $          | 7,198                        |       |                                                      |       | $                   | 92         |                                        |       |   | $ | 21,771 |   |   |   | $ | (172 | ) |   |   | $ | (859 | ) |   |   |   |   |   |

 

The accompanyingnotes are an integral part of these statements.

37

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**Video Display Corporation and SubsidiariesConsolidated Statements of Cash Flows(in thousands)**

| ** **                                                                        | ** ** | **Fiscal year ended** | ** **  |
|-----------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                        | ** ** | **February 28,  2006**     | ** **  | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
| ** **                                                                        | ** ** | ** **                      | ** **  | **(restated, Note 2)** | ** ** | **(restated, Note 2)** | ** ** |
| **Operating Activities**                                                          | ** ** |                            | ** **  |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                        | ** ** |                            | **$**       | **445** |   |   |   | $ | 3,507 |   |   |   | $ | 3,112 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities | ** ** |                            | ** **  |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                     | ** ** |                            | **1,929**   |   |   |   | 1,449 |   |   |   | 1,322 |   |   |
| Provision for losses on accounts receivable                                       | ** ** |                            | **216**     |   |   |   | 186 |   |   |   | 85 |   |   |
| Provision for inventory reserves                                                  | ** ** |                            | **1,900**   |   |   |   | 1,386 |   |   |   | 1,540 |   |   |
| Deferred income taxes                                                             | ** ** |                            | **(298**    | **)** |   |   | (752 | ) |   |   | 37 |   |   |
| Interest on convertible note                                                      | ** ** |                            | **56**      |   |   |   | 56 |   |   |   |   |   |   |
| Net loss allocated to minority interests                                          | ** ** |                            | **—**  |   |   |   | — |   |   |   | (53 | ) |   |
| Loss on disposal of fixed assets                                                  | ** ** |                            | **9**       |   |   |   | — |   |   |   | 1 |   |   |
| Loss on sale of marketable equity securities                                      | ** ** |                            | **—**  |   |   |   | — |   |   |   | 126 |   |   |
| Changes  in working capital items, net of effect of acquisitions:                 | ** ** |                            | ** **  |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                               | ** ** |                            | **2,230**   |   |   |   | (1,205 | ) |   |   | 125 |   |   |
| Inventories                                                                       | ** ** |                            | **(3,666**  | **)** |   |   | (4,693 | ) |   |   | 1,006 |   |   |
| Prepaid expenses and other assets                                                 | ** ** |                            | **(1,075**  | **)** |   |   | 923 |   |   |   | 436 |   |   |
| Accounts payable and accrued liabilities                                          | ** ** |                            | **1,106**   |   |   |   | 1,493 |   |   |   | (589 | ) |   |
| Net cash provided by operating activities                                         | ** ** |                            | **2,852**   |   |   |   | 2,350 |   |   |   | 7,148 |   |   |
| **Investing  Activities**                                                         | ** ** |                            | ** **  |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                              | ** ** |                            | **(1,928**  | **)** |   |   | (769 | ) |   |   | (727 | ) |   |
| Cash paid for acquisition                                                         | ** ** |                            | **(1,377**  | **)** |   |   | (150 | ) |   |   | — |   |   |
| Cash paid for product acquisition and other assets                                | ** ** |                            | **—**  |   |   |   | (5,250 | ) |   |   | — |   |   |
| Proceeds from sale of marketable equity securities                                | ** ** |                            | **—**  |   |   |   | — |   |   |   | 30 |   |   |
| Net cash used in investing activities                                             | ** ** |                            | **(3,305**  | **)** |   |   | (6,169 | ) |   |   | (697 | ) |   |
| **Financing  Activities**                                                         | ** ** |                            | ** **  |   |   |   |   |   |   |   |   |   |   |
| Proceeds from long-term debt and lines of credit                                  | ** ** |                            | **29,651**  |   |   |   | 48,173 |   |   |   | 19,350 |   |   |
| Repayments of long-term debt and lines of credit                                  | ** ** |                            | **(34,632** | **)** |   |   | (37,550 | ) |   |   | (23,656 | ) |   |
| Proceeds from loans from related parties                                          | ** ** |                            | **7,971**   |   |   |   | 3,240 |   |   |   | 175 |   |   |
| Repayments of loans from related parties                                          | ** ** |                            | **(1,218**  | **)** |   |   | (11,336 | ) |   |   | (255 | ) |   |
| Proceeds from stock option exercises                                              | ** ** |                            | **66**      |   |   |   | 183 |   |   |   | 312 |   |   |
| Proceeds from issuance of common stock                                            | ** ** |                            | **—**  |   |   |   | — |   |   |   | 51 |   |   |
| Redemption of redeemable common stock                                             | ** ** |                            | **—**  |   |   |   | — |   |   |   | (100 | ) |   |
| Dividend paid on common stock                                                     | ** ** |                            | **—**  |   |   |   | (392 | ) |   |   | (245 | ) |   |
| Purchases and retirements of common stock and  purchases of treasury stock        | ** ** |                            | **(1,176**  | **)** |   |   | — |   |   |   | (1,574 | ) |   |
| Net cash provided by (used in) financing activities                               | ** ** |                            | **662**     |   |   |   | 2,318 |   |   |   | (5,942 | ) |   |
| Effect of exchange rates on cash                                                  | ** ** |                            | **(103**    | **)** |   |   | (49 | ) |   |   | 120 |   |   |
| Net change in cash and cash equivalents                                           | ** ** |                            | **106**     |   |   |   | (1,550 | ) |   |   | 629 |   |   |
| Cash, beginning of year                                                           | ** ** |                            | **1,471**   |   |   |   | 3,021 |   |   |   | 2,392 |   |   |
| Cash, end of year                                                                 | ** ** |                            | **$**       | **1,577** |   |   |   | $ | 1,471 |   |   |   | $ | 3,021 |   |   |

 

The accompanying notes are an integral part of these statements.See Note 19 for supplemental cash flow information.

38

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**Note 1.**        Summaryof Significant Accounting Policies

**Nature of Business**

Video Display Corporation(the “Company”) principally manufactures and distributes cathode ray tubes (“CRTs”)in the worldwide replacement market for use in television sets and data displayscreens for medical, military and industrial monitoring systems as well asmanufacturing and distributing electron optic parts, which are significantcomponents in new and recycled CRTs and monitors. The Company also manufactureslow and high-end monochrome and color CRT and active matrix liquid crystalmonitor displays for use in specialty high performance and ruggedizedapplications. The Company also acts as a wholesale distributor of electronicparts and CRTs purchased from domestic and foreign manufacturers. In addition,the Company operates a call center which acts as a consumer and dealer supportcenter for both in-warranty and out-of-warranty household products, appliances,parts and accessories for Black & Decker, Delonghi, Norelco, Coby andvarious other manufacturers. This call center also acts as a technical supportcenter for these same manufacturers. The Company’s operations are principallylocated in the U.S.; however, the Company does have a subsidiary operationlocated in the United Kingdom.

**Principles ofConsolidation**

The consolidated financialstatements include the accounts of the Company and its subsidiaries afterelimination of all intercompany accounts and transactions.

**Reclassifications**

Certain amounts in theprior years’ financial statements have been reclassified to conform to thecurrent year presentation.

**Use of Estimates**

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period. Examples includeprovisions for returns, bad debts, inventory reserves, valuations on deferredtax assets, goodwill and other intangible assets, accounting for percentage ofcompletion contracts and the length of product life cycles and fixed assetlives. Actual results could vary from these estimates.

**Revenue Recognition**

In accordance with SEC Staff Accounting Bulletin Topic13A, revenue is recognized on the sale of products when the products areshipped, all significant contractual obligations have been satisfied, and thecollection of the resulting receivable is reasonably assured. The Company’sdelivery term typically is F.O.B. shipping point. The Company offers one-yearand two-year limited warranties on certain products. The Company records aliability for estimated warranty obligations at the date products are sold. Adjustmentsare made as new information becomes available. The provisions of FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness to Others”,require disclosures about the guarantees that an entity has issued, including areconciliation of changes in the entity’s product warranty liabilities.

39

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

In accordance with Emerging Issues Task Force issue (“EITF”)00-10, shipping and handling fees billed to customers are classified innet sales in the consolidated statements of operations. Shipping and handlingcosts incurred are classified in selling and delivery in the consolidatedstatements of operations. Shipping costs of $2.2 million, $2.0 million and $2.0million were included in the three fiscal years ended 2006, 2005 and 2004,respectively.

A portion of the Company’s revenue is derived fromcontracts to manufacture CRTs to a buyer’s specification. These contracts areaccounted for under the provisions of the American Institute of CertifiedPublic Accountants’ Statement of Position No. 81-1, “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts”. The Companyutilizes the percentage of completion method as contemplated by this Statementto recognize revenue on all contracts to design, develop, manufacture, ormodify complex electronic equipment to a buyer’s specification. Percentage ofcompletion is measured using the ratio of costs incurred to estimated totalcosts at completion. Any losses identified on contracts are recognizedimmediately.

The Wholesale Partssegment has several distribution agreements that it accounts for using thegross revenue basis as prescribed by EITF 99-19. The Company uses thegross method because the Company has general inventory risk, physical lossinventory risk and credit risk. The call center service revenue is recognizedbased on written pricing agreements with each manufacturer, on a per call, peremail or per standard mail basis.

**Research andDevelopment**

The Company includesresearch and development expenditures in the consolidated financial statementsas a part of general and administrative costs. Research and development costswere approximately $1.3 million, $0.7 million and $0.2 million in fiscal 2006,2005 and 2004, respectively.

**FinancialInstruments**

Fair values of cash,accounts receivable and short-term liabilities and debt approximate cost due tothe short period of time to maturity. The recorded amounts of long-term debtand convertible debentures are considered to approximate fair value due toeither rates which fluctuate with the market or are otherwise commensurate withthe current market.

**Accounts Receivableand Allowance for Doubtful Accounts**

Accounts receivable arecustomer obligations due under normal trade terms. The Company sells itsproducts primarily to manufacturers and consumers of CRTs and to consumers ofelectronic products. Management performs continuing credit evaluations of itscustomers’ financial condition and although the Company generally does notrequire collateral, letters of credit may be required from its customers incertain circumstances, such as foreign sales. The allowance for bad debts is determined byreviewing all accounts receivable and applying historical credit lossexperience to the current receivable portfolio with consideration given to thecurrent condition of the economy, assessment of the financial position of thecreditors as well as past payment history and overall trends in past due accountscompared 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 has been sufficient for any customer write-offs. Althoughthe Company cannot guarantee future results, management believes accountsreceivable are stated at amounts expected to be collected.

40

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**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 claims incurred could differ from the originalestimates, requiring adjustments to the reserve. Management feels thathistorically its procedures have been adequate and does not anticipate that itsassumptions are reasonably likely to change in the future.

**Inventories**

Inventories consist primarily of CRTs, electron guns,monitors and electronic parts. Inventories are stated at the lower of cost(first-in, first-out) or market.

Reserves on inventoriesresult in a charge to operations when the estimated net realizable valuedeclines below cost. Management regularly reviews the Company’s investment ininventories for declines in value and establishes reserves when it is apparentthat the expected net realizable value of the inventory falls below itscarrying amount. Management considers the projected demand for CRTs in thisestimate of net realizable value. Management is able to identify consumerbuying trends, such as size and application, well in advance of supplyingreplacement CRTs. Thus, the Company is able to adjust inventory-stocking levelsaccording to the projected demand. The average life of a CRT is five to sevenyears, at which time the Company’s replacement market develops. Managementreviews inventory levels on a quarterly basis. Such reviews includeobservations of product development trends of the OEM’s, new products beingmarketed, and technological advances relative to the product capabilities ofthe Company’s existing inventories. There have been no significant changes inmanagement’s estimates in fiscal 2006 and 2005; however, the Company cannotguarantee the accuracy of future forecasts since these estimates are subject tochange based on market conditions.

**Property, Plant andEquipment**

Property, plant andequipment are stated at cost. Depreciation is computed principally by thestraight-line method for financial reporting purposes over the followingestimated useful lives: Buildings—ten to twenty-five years; Machinery andEquipment—five to ten years. Depreciation expense totaled approximately $1.3million, $1.2 million and $1.2 million for the three years ended 2006, 2005 and2004, respectively. Substantial betterments to property, plant and equipmentare capitalized and routine repairs and maintenance are expensed as incurred.

Management reviews andassesses long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Inperforming the review for recoverability, management estimates the future cashflows expected to result from the use of the asset. If the sum of theundiscounted expected cash flows is less than the carrying amount of the asset,an impairment loss is recognized based upon the estimated fair value of theasset.

**Goodwill and OtherIntangibles**

Goodwill is tested for impairment annually on December 1unless events or circumstances exist that would significantly alter amountsused in the calculation. The Company used a multiple of EBITDA (earnings beforeinterest, tax, depreciation and amortization expenses) in evaluating the fairvalue of the 

41

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

monitor operations. As aresult of such testing in December 2005 and 2004, the Company determinedthere was no impairment of goodwill that should be included in the accompanyingfinancial statements.

Intangible assets consistprimarily of customer lists and non-competition agreements related to acquisitions.Intangible assets are amortized using the straight-line method over theirestimated period of benefit. The Company identifies and records impairmentlosses on intangible assets when events and circumstances indicate that suchassets might be impaired. The Company considers factors such as significantchanges in the regulatory or business climate and projected future cash flowsfrom the respective asset. No impairment of intangible assets has beenidentified during any of the periods presented.

**Stock-BasedCompensation Plans**

The Companyadopted the disclosure provisions of Statement of Financial AccountingStandards Statement No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”, which amends Statement No. 123, “Accountingfor Stock-Based Compensation.” Statement No. 148 provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation, which was originally providedunder Statement No. 123. The Statement also improves the timeliness ofdisclosures by requiring the information be included in interim, as well asannual, financial statements.

Statement No. 123encourages, but does not require companies to record compensation cost forstock-based employee compensation plans at fair value. The Company has chosento continue to account for stock-based compensation using the intrinsic valuemethod prescribed in Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations. Accordingly,compensation cost for stock options is measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock. The exercise price of all theCompany’s stock options is equal to the market value of the stock at the grantdate. As such, no compensation expense is recorded in the accompanyingconsolidated financial statements.

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,the Company’s pro forma net income and net income per share would have differedfrom the amounts reported as follows (in thousands, except per share data):

| ** **                                                                               | ** ** | **February 28,  2006** | ** ** | **February 28,  2005** | ** ** | **February 29,  2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net income, as reported                                                                  | ** ** |                        | **$**      | **445**                     |       |                        |       | $ | 3,507 |   |   |   | $ | 3,112 |   |   |
| Stock-based employee compensation expense, as reported                                   |       |                        | —     |                        |       |                        | —     |   |   |   | — |   |   |
| Stock-based employee compensation expense determined  under fair value basis, net of tax | ** ** |                        | **(87**    | **)**                       |       |                        | (49        | ) |   |   | (35 | ) |   |
| Pro forma  net income                                                                    | ** ** |                        | **$**      | **358**                     |       |                        |       | $ | 3,458 |   |   |   | $ | 3,077 |   |   |
| Net  income per share:                                                                   |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Basic—as  reported                                                                  | ** ** |                        | **$**      | **0.05**                    |       |                        |       | $ | 0.36 |   |   |   | $ | 0.33 |   |   |
| Basic—pro  forma                                                                    | ** ** |                        | **$**      | **0.04**                    |       |                        |       | $ | 0.36 |   |   |   | $ | 0.33 |   |   |
| Diluted—as  reported                                                                | ** ** |                        | **$**      | **0.04**                    |       |                        |       | $ | 0.36 |   |   |   | $ | 0.32 |   |   |
| Diluted—pro forma                                                                   | ** ** |                        | **$**      | **0.04**                    |       |                        |       | $ | 0.35 |   |   |   | $ | 0.31 |   |   |

 

42

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

The weighted average fair value of options, calculatedusing the Black-Scholes option pricing model, granted during the years 2006, 2005and 2004 was $6.19, $3.81 and $4.77, respectively. The weighted averageremaining life of options outstanding at February 28, 2006, February 28,2005 and February 29, 2004 was 4.0, 3.1 and 5.4 years, respectively.

Prior year basic and diluted net earnings per sharehave been recast to reflect the November 1, 2004 stock split disclosedunder the Earnings Per Share heading of this footnote.

The fair value of stockoptions used to compute pro forma net income applicable to common shareholdersand earnings per share disclosures is the estimated present value at grant dateusing the Black-Scholes option-pricing model with the following weightedaverage assumptions for 2006, 2005 and 2004, respectively: expected volatilityof 42%, 43% and 75%; a risk-free interest rate of 4.35%, 2.5% and 3.5%;expected lives of 6.4, 2.0 and 3.0 years; and a dividend yield of 0.00% for allyears.

**Taxes on Income**

The Company accounts forincome taxes under the asset and liability method which requires therecognition of deferred tax assets and liabilities for the expected future taxconsequences of events that have been recognized in the Company’s financialstatements or tax returns. In estimating future tax consequences, the Companygenerally considers all expected future events other than possible enactmentsof changes in the tax laws or rates. The effect on deferred tax assets andliabilities of a change in tax rates are recognized as income or expense in theperiod that includes the enactment date.

**Investments**

The Company’s investmentin marketable equity securities was recorded at fair value based upon quotedmarket prices and was classified as available-for-sale securities. Changes infair value of these marketable equity securities are reflected in theaccompanying statements of shareholders’ equity. The Company sold its remaininginvestment in marketable equity securities in 2004, recognizing a loss of$151,000, which is included within the caption “Other income” in theaccompanying statements of operations.

**Foreign CurrencyTranslations**

Assets and liabilities offoreign subsidiaries are translated using the exchange rate in effect at theend of the year. Revenues and expenses are translated using the average of theexchange rates in effect during the year. Translation adjustments andtransaction gains and losses related to long-term intercompany transactions areaccumulated as a separate component of shareholders’ equity. The Company has asubsidiary in the U.K., which is not material, and uses the British pound asits functional currency.

**Earnings Per Share**

Basic earnings per share is computed by dividingincome available to common shareholders by the weighted average number ofshares outstanding during each year. Shares issued or repurchased during theyear are weighted for the portion of the year that they were outstanding. Dilutedearnings per share is calculated in a manner consistent with that of basicearnings per share while giving effect to all dilutive potential common sharesthat were outstanding during the period.

43

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

Thefollowing is a reconciliation of basic earnings per share to diluted earningsper share for each of the last three years. Prior year amounts have beenrestated to reflect 100% stock dividend in November 2004.

| ** **           | ** ** | **Net Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Earnings Per  Share** | ** ** |
|----------------------|------------|---------------------|------------|--------------------------------------------|------------|------------------------------|------------|
| 2006                 |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Basic                |       |                | $          | 445                                        |       |                         |       | 9,684 |   |   |   | $ | 0.05 |   |   |
| Effect of  dilution: |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Options              |       |                | —     |                                       |       |                         | 239        |   |   |   |   |   |   |
| Diluted              |       |                | $          | 445                                        |       |                         |       | 9,923 |   |   |   | $ | 0.04 |   |   |
| 2005                 |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Basic                |       |                | $          | 3,507                                      |       |                         |       | 9,673 |   |   |   | $ | 0.36 |   |   |
| Effect of dilution:  |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Options              |       |                | —     |                                       |       |                         | 200        |   |   |   |   |   |   |
| Convertible debt     |       |                | 35         |                                       |       |                         | 30         |   |   |   |   |   |   |
| Diluted              |       |                | $          | 3,542                                      |       |                         |       | 9,903 |   |   |   | $ | 0.36 |   |   |
| 2004                 |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Basic                |       |                | $          | 3,112                                      |       |                         |       | 9,348 |   |   |   | $ | 0.33 |   |   |
| Effect of  dilution: |       |                |       |                                       |       |                         |       |   |   |   |   |   |   |
| Options              |       |                | —     |                                       |       |                         | 172        |   |   |   |   |   |   |
| Convertible debt     |       |                | 26         |                                       |       |                         | 280        |   |   |   |   |   |   |
| Diluted              |       |                | $          | 3,138                                      |       |                         |       | 9,800 |   |   |   | $ | 0.32 |   |   |

 

Stock options and debentures convertible into 91,000shares were anti-dilutive and were excluded from the fiscal 2006 dilutedearnings per share calculation.

On September 8, 2004,the Company announced a two for one stock split of its common stock, payable asa stock dividend on November 1, 2004, to shareholders of record at theclose of business on September 23, 2004. Shareholders received one shareof common stock for every one share of the Company’s stock held on the recorddate. On November 1, 2004, approximately 4,841,000 shares of the Company’scommon stock were distributed to shareholders as a result of this dividend.

**Segment Reporting**

The Company applies SFAS Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” to report informationabout operating segments in annual and interim financial reports. An operatingsegment is defined as a component that engages in business activities, whoseoperating results are reviewed by the executive officers in order to makedecisions about allocating resources, and for which discrete financialinformation is available (see Note 15. Segment Reporting). The Company’svarious display-related operations meet the aggregation criteria established inStatement No. 131 for inclusion in the Display segment. The Company’s callcenter is an integral part of the distribution of electronic consumer parts,consumer and dealer support and technical support functions, with call activityfor all of these functions being routed to call employees cross-trained toprovide appropriate service. Accordingly the call center is included within theWholesale Distribution segment.

44

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Recent AccountingPronouncements**

In December 2004,the Financial Accounting Standards Board (FASB) issued Financial AccountingStandards Statement (“Statement No.”) 123 (R) (revised 2004) *Share-Based payment*, which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation*.Statement No. 123 (R) supersedes Accounting Principles Board Opinion(APB) No. 25, *Accounting for StockIssued to Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*. Generally, the approach to accountingin Statement No. 123 (R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. Currently the Company accountsfor these payments under the intrinsic value provisions of APB No. 25 withno expense recognition in the financial statements. Statement No. 123 (R) iseffective for the Company beginning March 1, 2006. The Statement offersseveral alternatives for implementation. Management is currently in the processof making the detailed calculations necessary to determine which of thealternatives the Company will use, however, management does not anticipate thatthe adoption of this statement will have a material impact on the consolidatedfinancial statements.

In November 2004,the FASB issued Statement No. 151, *Inventory Costs*,an amendment of APB No. 43, Chapter 4. The amendments made by Statement No. 151will improve financial reporting by requiring that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage) berecognized as current-period charges and by requiring the allocation of fixedproduction overheads to inventory based on the normal capacity of productionfacilities. Statement No. 151 is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Management does notanticipate that the adoption of this statement will have a material impact onthe consolidated financial statements.

In December 2004,the FASB issued Statement No. 153, “*Exchanges of NonmonetaryAssets*”*.*This statement explains thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. This statement is effective for fiscal years beginningafter June 15, 2005. Management does not anticipate that the adoption ofthis statement will have a material impact on the consolidated financialstatements.

In June 2005,the FASB issued Statement No. 154, “*Accounting Changes andError Corrections*”. This statement revises the reportingrequirements related to changes in accounting principles or adoption of newaccounting pronouncements. This statement is effective for fiscal yearsbeginning after December 15, 2005. Management does not anticipate that theadoption of this statement will have a material impact on the consolidatedfinancial statements.

In February 2006, theFASB issued StatementNo. 155, “*Accounting for Certain HybridFinancial Instruments*—an amendment of FASB Statements No. 133and 140.” Statement No. 155permits fair value measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation. Thisstatement is effective for all financial instruments acquired or issued afterthe beginning of an entity’s fiscal year that begins after September 15,2006. Management does notanticipate that the adoption of this statement will have a material impact onthe consolidated financial statements.

**Fiscal Year**

All references herein to “2006”,“2005” and “2004” mean the fiscal years ended February 28, 2006, February 28,2005 and February 29, 2004, respectively.

45

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 2. PriorPeriod Restatement**

Certain prior year amounts have been restated tocorrect errors discovered by the Company during preparation of the 3rd quarter Fiscal 2006 financial statements. TheCompany discovered errors in its accounting for the treatment of foreignsubsidiary losses for income tax purposes in fiscal 2005 and in certainnon-income tax-based franchise taxes in fiscal 2005 and prior fiscal years.These errors resulted primarily from clerical mathematical error, as well asthe improper recording of non-income based franchise taxes against an incometax accrual rather than as an expense on the consolidated statements ofoperations.

Thefollowing tables summarize the impact of the restatements on the affected itemsas originally reported on the consolidated balance sheet at February 28,2005 and as originally reported on the consolidated statements of operationsfor fiscal 2005 and fiscal 2004 (in thousands except per share data).

| ** **                                                | ** ** | **2005**                     | ** ** | **2004**         | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|------------------|------------|
| ** **                                                | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| **Selected Consolidated  Statements of Operations items** |       |                         |       |             |       |   |   |   |   |   |   |   |   |
| General and administrative expenses                       |       |                         | $          | 13,197           |       |   | $ | 13,323 |   |   | $ | 11,789 |   |   | $ | 11,874 |   |
| Operating profit                                          |       |                         | 6,779      |             |       | 6,653 |   |   | 6,269 |   |   | 6,184 |   |
| Income before income taxes and minority interests         |       |                         | 5,895      |             |       | 5,769 |   |   | 4,984 |   |   | 4,899 |   |
| Provision for income taxes                                |       |                         | 2,173      |             |       | 2,262 |   |   | 1,872 |   |   | 1,840 |   |
| Income before minority interests                          |       |                         | 3,722      |             |       | 3,507 |   |   | 3,112 |   |   | 3,059 |   |
| Minority interests                                        |       |                         | —     |             |       | — |   |   | 53 |   |   | 53 |   |
| Net income                                                |       |                         | 3,722      |             |       | 3,507 |   |   | 3,165 |   |   | 3,112 |   |
| Basic earnings per share of common stock                  |       |                         | $          | .38              |       |   | $ | .36 |   |   | $ | .34 |   |   | $ | .33 |   |
| Diluted earnings  per share of common stock               |       |                         | $          | .38              |       |   | $ | .36 |   |   | $ | .33 |   |   | $ | .32 |   |

 

| ** **                                     | ** ** | **February 28, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **As  Previously  Reported**    | ** ** | **As  Restated** | ** ** |
| **Selected Consolidated Balance  Sheet items** | ** ** |                            | ** ** | ** ** |   | ** ** | ** ** |
| Deferred income tax assets                     |       |                            | $          | 2,555 | ** ** |   | $ | 2,855 |   |
| Intangibles and other assets                   |       |                            | 4,020      | ** ** |   | 3,671 |   |
| Accrued liabilities                            |       |                            | 3,080      | ** ** |   | 3,425 |   |
| Retained earnings                              |       |                            | 22,018     | ** ** |   | 21,624 |   |
| Total  shareholders equity                     |       |                            | 29,067     | ** ** |   | 28,673 |   |
|                                                |            |                                 |            |  |  |  |  |  |  |

 

46

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 3. Costs andEstimated Earnings Related to Billings on Uncompleted Contracts**

Information relative to contracts in progressconsisted of the following (in thousands):

| ** **                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|
| Costs incurred to  date on uncompleted contracts          | ** ** | **$**      | **4,528**  | ** ** | $          | 1,006 |   |
| Estimated  earnings recognized to date on these contracts | ** ** | **2,585**  | ** ** | 220        |       |
|                                                      | ** ** | **7,113**  | ** ** | 1,226      |       |
| Billings to date                                          | ** ** | **(7,110** | **)**      | (942       | )          |
| Costs and  estimated earnings in excess of billings, net  | ** ** | **$**      | **3**      | ** ** | $          | 284 |   |
| Costs and estimated earnings in excess of billings        | ** ** | **$**      | **968**    | ** ** | $          | 738 |   |
| Billings in  excess of costs and estimated earnings       | ** ** | **(965**   | **)**      | (454       | )          |
|                                                      | ** ** | **$**      | **3**      | ** ** | $          | 284 |   |

 

Costs and estimated earnings in excess of billings arethe results of contracts in progress (jobs) in completing orders to customers’specifications on contracts accounted for under SOP 81-1 “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”. Costsincluded are material, labor and overhead. These jobs require design andengineering effort for a specific customer purchasing a unique product. TheCompany records revenue on these fixed-price and cost-plus contracts on thepercentage of completion basis using the ratio of costs incurred to estimatedtotal costs at completion as the measurement basis for progress towardcompletion and revenue recognition. Any losses identified on contracts arerecognized immediately. Contract accounting requires significant judgmentrelative to assessing risks, estimating contract costs and making relatedassumptions for schedule and technical issues. With respect to contract changeorders, claims or similar items, judgment must be used in estimating relatedamounts and assessing the potential for realization. These amounts are onlyincluded in contract value when they can be reliably estimated and realizationis probable. Billings are generated based on specific contract terms, whichmight be a progress payment schedule, specific shipments, etc. None of the abovecontracts in progress contain post-shipment obligations.

As of February 28,2006 and February 28, 2005, there were no production costs which exceededthe aggregate estimated cost of all in-process and delivered units relating tolong-term contracts. Additionally, there were no claims outstanding that wouldaffect the ultimate realization of full contract values. As of February 28,2006 and February 28, 2005, there were no progress payments that had beennetted against inventory.

47

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 4. IntangibleAssets**

Intangibleassets consist primarily of the unamortized value of purchased patents,customer lists, non-compete agreements and other intangible assets. Intangibleassets are amortized over the period of their expected lives. Expectedamortization expense for the next five years is as follows (in thousands):

| **Year**   | ** ** | ** ** | ** ** | **Amortization  expense** | ** ** |
|------------|------------|------------|------------|---------------------------|------------|
| 2007       |       |       | $          | 641                       |       |   |
| 2008       |       |       | 635        |                      |       |
| 2009       |       |       | 577        |                      |       |
| 2010       |       |       | 462        |                      |       |
| 2011       |       |       | 152        |                      |       |
| Thereafter |       |       | 1,124      |                      |       |

 

As of February 28, 2006, the cost and accumulatedamortization of intangible assets was as follows (in thousands).

| ** **              | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
|-------------------------|------------|----------|------------|-------------------------------|------------|
| Customer lists          |       | $        | 2,968      |                          |       | $ | 658 |   |   |
| Non-compete  agreements |       | 1,230    |       |                          | 301        |   |   |
| Patents                 |       | 335      |       |                          | 78         |   |   |
| Other intangibles       |       | 119      |       |                          | 24         |   |   |
|                    |       | $        | 4,652      |                          |       | $ | 1,061 |   |   |

 

**Note 5.Acquisitions**

In May 2005, the Company acquired the IDSdivision of Three Five-Systems, Inc. (“Three-Five Systems”). Three-FiveSystems specializes in flat panel, touch screen and rack mount systems withcustom military, industrial and commercial 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 include product development designs and drawingsand a customer list, as well as a non-compete agreement. The productdevelopment designs and drawings and non-compete agreement will be amortizedover a five-year period, while the customer list will be amortized over a threeyear period, which the Company estimates to be the useful life of these assets.Three-Five Systems has moved to new facilities, known as Aydin North, and is apart of the Company’s Pennsylvania based Aydin operations. The operations ofThree-Five Systems are not significant to the Company.

48

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

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  |   |

 

In March 2004, the Company acquired the monitoroperations of Colorado based Data Ray, Inc. The Company acquiredinventory, fixed assets and various other assets of $459,000 in exchange forcash of $150,000 and $400,000 of the Company’s common stock, resulting ingoodwill of approximately $91,000. These operations were consolidated into theCompany’s Z-Axis, Inc. operations located in Phelps, NY, since the date ofacquisition. The $400,000 of common stock was issued at $6 per share, themarket value of the stock at the date of purchase. The common stock had a putfeature whereby Data Ray could redeem the stock for $5.50 per share if theprice per share of the Company’s stock was below $6.00 after the one yearanniversary date of the purchase agreement. The price of the stock was inexcess of $6.00 at the one year anniversary date of the agreement. The monitoroperations of Data Ray are not significant to the Company.

Thefollowing table presents the total purchase price of the acquisition (in thousands):

| Cash                                        |   | $   | 150    |   |
|---------------------------------------------|--------|-----|--------|--------|
| Value of Video  Display common stock issued |   | 400 |   |
| Total Purchase Price  Consideration         |   | $   | 550    |   |

 

Theaggregate purchase price has been allocated based on fair values as of the dateof the completion of the acquisition as follows (in thousands):

| Finished goods                  |   | $   | 279    |   |
|---------------------------------|--------|-----|--------|--------|
| Machinery &  equipment |   | 80  |   |
| Goodwill                        |   | 91  |   |
| Other assets                    |   | 100 |   |
|                            |   | $   | 550    |   |

 

**Note 6. Purchase of Assets**

In October 2004, the Company entered into anagreement with Evans & Sutherland, Inc. to purchase certainassets. Under this agreement, the Company paid a total of $5.3 million for thefollowing assets related to Evans & Sutherland’s ESCP® CRT projectorproduct line: inventory valued at $2.2 million, fixed assets valued at $248,000and intangible assets valued at $2.8 million, consistent with SFAS 142 “Goodwilland Other Intangible Assets”. The intangible assets consist of a non-competeagreement valued at $1,000,000 and amortizable over 5 years, and a customerlist valued at $1,758,000 amortizable over a 15 year period. Amortizationexpense related to the intangible assets acquired was $317,000 and $93,000 forthe years ended February 28, 2006 and February 28, 2005, respectively.The purchase was financed initially by a loan from the Chief Executive Officer,which subsequently was refinanced under the Company’s new line of credit. Followingthis acquisition, the Company began the process of moving the acquired assetsand 

49

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

integrating them with theexisting MarqueeTM projector operations in Cape Canaveral, Florida.  The integration process was substantiallycompleted by the end of December 2004. The Company has a presence in themilitary flight training and simulation market, and with this acquisition hasbeen able to expand into the commercial flight training and simulation market.

Fixed assets and rawmaterials were valued at current replacement costs, which was consistent withthe book value of the assets acquired. The non-compete agreement was valued at$1,000,000 as this was the amount of revenue the Company could reasonablyexpect to lose should Evans & Sutherland violate this agreement. Thecustomer list was valued at $1,758,000, being the expected average annual grossprofit that could be reasonably expected to be generated from that list overits expected useful life of approximately 15 years.

**Note 7. Inventories**

Inventoriesconsisted of the following (in thousands):

| ** **                | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
| Raw materials             | ** ** | **$**      | **18,618** |     | $          | 14,529 |   |
| Work-in-process           | ** ** | **3,772**  |       | 3,800    |       |
| Finished goods            | ** ** | **16,688** |       | 16,833   |       |
|                      | ** ** | **39,078** |       | 35,162   |       |
| Reserves for obsolescence | ** ** | **(4,433** | **)**      | (3,057   | )          |
|                      | ** ** | **$**      | **34,645** |     | $          | 32,105 |   |

 

**Note 8. Long-Term Debt**

Long-termdebt consisted of the following (in thousands):

| ** **                                                                                                                                                                                                                                                                                               | ** ** | **2006**  | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Mortgage payable  to bank; variable interest rate; monthly principal and interest payments of  $6 payable until December 2008 with a final principal payment of $350 in  December 2008; collateralized by land and building of Fox  International, Inc.; paid in full in April 2005. | ** ** | **$**     | **—** |     | $          | 479 |   |
| Mortgage payable  to bank; interest rate at Federal Home Loan Bank Board Index rate plus 1.95%  (7.35% as of February 28, 2006); monthly principal and interest payments  of $5 payable through October 2021; collateralized by land and building  of Teltron Technologies, Inc.          | ** ** | **540**   |       | 557      |       |
| 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**   |       | 329      |       |
| Other                                                                                                                                                                                                                                                                                                    | ** ** | **14**    |       | 60       |       |
|                                                                                                                                                                                                                                                                                                     | ** ** | **862**   |       | 1,425    |       |
| Financing lease  obligations                                                                                                                                                                                                                                                                             | ** ** | **449**   |       | —   |       |
|                                                                                                                                                                                                                                                                                                     | ** ** | **1,311** |       | 1,425    |       |
| Less current  maturities                                                                                                                                                                                                                                                                                 | ** ** | **(140**  | **)**      | (577     | )          |
|                                                                                                                                                                                                                                                                                                     | ** ** | **$**     | **1,171**  |     | $          | 848 |   |

 

50

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

Futurematurities of long-term debt and capitalized lease obligations are as follows(in thousands):

| **Year**   | ** ** | ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|------------|------------|
| 2007       |       |       | $          | 140        |       |   |
| 2008       |       |       | 142        |       |       |
| 2009       |       |       | 138        |       |       |
| 2010       |       |       | 142        |       |       |
| 2011       |       |       | 125        |       |       |
| Thereafter |       |       | 624        |       |       |
|       |       |       | $          | 1,311      |       |   |

 

**Note 9. Lines of Credit**

The Company maintains 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 thisline is a floating LIBOR rate based on a ratio of debt to EBITDA, as defined inthe loan documents. As of February 28, 2006, the outstanding balance ofthis line of credit was $14.1 million and the available amount for borrowingwas $13.0 million, including the impact of $400,000 in outstanding letters ofcredit. The line of credit agreement contains covenants, including requirementsrelated to tangible cash flow, ratio of debt to cash flow and asset coverage. Additionally,the bank requires that any contemplated acquisitions be accretive. The Company was not in compliance with theconsolidated Fixed Charge Coverage Ratio and the consolidated Senior FundedDebt to EBITDA ratio covenants at February 28, 2006. To provide additionalflexibility in funding for working capital requirements, and to cure thecovenant violations existing under this line, on June 9, 2006 the Companynegotiated a new line of credit with a syndicate of two banks as discussed inNote. 21 Subsequent Event.

Additionally, in April 2005, the Companyconverted a $2.8 million short term line of credit (collateralized by assets ofFox International, Inc.) with a bank to a $3.5 million line of credit withanother bank. (The $2.8 million short term line of credit repaid during Fiscal2006 replaced a term loan facility with a bank, also collateralized by assetsof Fox International, Inc., executed on July 31, 2004.) As part ofthe new financing, the lender paid off the balance of the short term line ofcredit and a mortgage secured by the land and building of Fox International, Inc.The interest rate on this line is a floating LIBOR rate based on a ratio ofdebt to EBITDA, as defined in the loan documents. As of February 28, 2006,the outstanding balance of this line of credit was $3.5 million with noremaining borrowing availability. The line of credit agreement containscovenants, including requirements related to tangible cash flow, ratio of debtto cash flow and asset coverage. Additionally, the bank requires that anycontemplated acquisitions be accretive. The Company was not in compliance with the consolidated Fixed ChargeCoverage Ratio and the consolidated Senior Funded Debt to EBITDA ratiocovenants at February 28, 2006. To provide additional flexibility infunding for working capital requirements, and to cure the covenant violationsexisting under this line, on June 9, 2006 the Company negotiated a newline of credit with a syndicate of two banks as discussed in Note. 21 SubsequentEvent.

Prior to repayment in November 2004,in conjunction with the execution of the current $27.5 million line of credit,the Company had a $12.0 million credit facility with a bank. The interest rateon the line of credit was a floating LIBOR rate based on a ratio of debt toEBITDA, as defined. The weighted average interest rate during the nine monthsended November 30, 2004 and the year ended February 29, 2004 was3.84% and 3.70%. The average amount and maximum amount outstanding were$8.8 million and $9.6 

51

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

million,respectively, during the nine months ended November 30, 2004, and $6.8million and $8.8 million, respectively, for the fiscal year ended February 29,2004. Borrowings under the line of credit were limited by eligible accountsreceivable, inventory and real estate, as defined, and includes a commitmentfee of 0.25% for the unused portion.

**Note 10. Notes Payable toOfficers and Directors**

On February 27, 2006 the Company’s ChiefExecutive Officer loaned the Company $6.8 million under a note agreementproviding for interest at six percent or the prime rate plus 1⁄4 of one percent,whichever is higher, paid monthly. Principal payments are due in a series ofmonthly payments, with a final payment of $1.0 million due October 1,2006. The note is secured by a general lien on all assets of the Company,subordinate to the lien held by Bank of America. See related comments in Note21. Subsequent Event.

In August 2005, the Company’s Chief ExecutiveOfficer loaned the Company $1.0 million on a non-interest bearing and due ondemand basis, which was repaid in September 2005.

At February 29, 2004, the Company had outstandingborrowings from its CEO in the amount of $8,216,000, with principal due in 2006and monthly interest due at the higher rate of 6% or prime (4.25% at February 29,2004) plus 1%. During November 2004, the Company negotiated a creditfacility with a new lender. As part of the new agreement, the bank agreed topay off the amount due to the Company’s CEO, and accordingly, at February 28,2005, the balance due to him was $0.

During fiscal 2004, theCompany repaid $80,000 to an Officer and Director, resulting in a balance of$75,000 at February 29, 2004. Principal payments of $120,000 were made infiscal 2005, while an additional $240,000 was borrowed during the fiscal year,resulting in a balance of $195,000 at February 28, 2005. Principalpayments of $218,000 were made in fiscal 2006, while an additional $171,000 wasborrowed during the fiscal year, resulting in a balance of $148,000 at February 28,2006. These borrowings on this demand note bear interest at 6%.

**Note 11. Convertible NotesPayable**

In June 2001, the Company announced theacquisition of the outstanding common stock of XKD Corporation (“XKD”). Thepurchase price included royalty payments up to $2.0 million based on specificfuture revenues of XKD, options to acquire 10,000 shares of the Company’scommon stock, and the release of indemnification of the seller of personalobligations of corporate notes payable in the amount of $1.9 million. During August 2004,the Company signed an agreement with the four persons party to the royaltyagreement. Total accrued royalties of $350,000 were exchanged for fournon-interest bearing notes payable, valued at $125,000 each, which areconvertible at any time into common shares of the Company’s stock at a rate of$12.50 per share. The Company recognized a $150,000 discount on the debt toreflect the inherent interest in the notes. This discount on debt is accretedas interest expense over the three year life of the notes. The discount fullyaccretes upon conversion of the debt to equity. During the fourth quarter offiscal 2005, one of the notes was converted into 10,000 shares of the Company’scommon stock. During the first quarter of fiscal 2006, another of the notes wasconverted into 10,000 shares of the Company’s common stock. Total interestexpense accreted on these notes during Fiscal 2006 and Fiscal 2005 was $56,000.

52

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 12.**                                                 AccruedExpenses and Warranty Obligations

Thefollowing provides a reconciliation of changes in the Company’s warrantyreserve for fiscal years 2006, 2005 and 2004. The Company provides no otherguarantees.

| ** **                        | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**         | ** ** |
| ** **                        | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at  beginning of year     | ** ** | **$**                           | **710**    |   | $ | 821 |   | $ | 687 |   |
| Provision for  current year sales | ** ** | **1,269**                       |       | 1,021 |   | 2,022 |   |
| Warranty costs  incurred          | ** ** | **(1,469**                      | **)**      | (1,132 | ) | (1,888 | ) |
| Balance at end of year            | ** ** | **$**                           | **510**    |   | $ | 710 |   | $ | 821 |   |

 

Accruedliabilities consisted of the following (in thousands):

| ** **                         | ** ** | **February 28,  2006** | ** ** | **February 28,  2005** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accrued  compensation and benefits |       |                        | $          | 1,362                       |       |   |   | $ | 1,404 |   |   |
| Accrued income  taxes              |       |                        | —     |                        |       |   | 1,276 |   |   |
| Accrued warranty                   |       |                        | 510        |                        |       |   | 710 |   |   |
| Accrued other                      |       |                        | 961        |                        |       |   | 35 |   |   |
|                               |       |                        | $          | 2,833                       |       |   |   | $ | 3,425 |   |   |

 

**Note 13.**                                                 StockOptions

The Company maintains an incentive stock option planwhereby total options to purchase 1.2 million shares may be granted todirectors and key employees at a price not less than fair market value at thetime the options are granted. Upon vesting, options granted are exercisable fora period not to exceed ten years. The plan will terminate on May 1, 2006and no further options may be granted pursuant to the plan after that date;provided however, those options outstanding at the plan termination date willremain exercisable in accordance with their respective terms. The stock optionplan stipulates that, in the event of a stock dividend, options reserved forissuance and all outstanding grants will be proportionally adjusted both innumber of options and exercise price. The Company has paid two stock dividendssince inception of the plan, including a 20% dividend in April 2001 and a100% dividend in November 2004. All activity presented for the planreflects the appropriate adjustments for these dividends. At February 28,2006 and February 28, 2005, the Company had approximately 419,000 and478,000 shares, respectively, available for the granting of options under thestock option plan.

53

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

Informationregarding the stock option plan is as follows:

| ** **                             | ** ** | **Number of  Shares  (in thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------|------------|
| Outstanding at  February 28, 2003 |       |                                            | 456        |                                   |       |   | $ | 2.11 |   |   |
| Granted                                |       |                                            | 12         |                                   |       |   | 4.67 |   |   |
| Exercised                              |       |                                            | (166       | )                                      |       |   | 2.14 |   |   |
| Forfeited or expired                   |       |                                            | —     |                                   |       |   | — |   |   |
| Outstanding at  February 29, 2004 |       |                                            | 302        |                                   |       |   | $ | 2.20 |   |   |
| Granted                                |       |                                            | 18         |                                   |       |   | 13.30 |   |   |
| Exercised                              |       |                                            | (43        | )                                      |       |   | 6.55 |   |   |
| Forfeited or expired                   |       |                                            | —     |                                   |       |   | — |   |   |
| Outstanding at  February 28, 2005 |       |                                            | 277        |                                   |       |   | $ | 2.42 |   |   |
| Granted                                |       |                                            | 59         |                                   |       |   | 12.85 |   |   |
| Exercised                              |       |                                            | (26        | )                                      |       |   | 2.53 |   |   |
| Forfeited or expired                   |       |                                            | —     |                                   |       |   | — |   |   |
| Outstanding at  February 28, 2006 |       |                                            | 310        |                                   |       |   | $ | 4.57 |   |   |

 

| **Options exercisable** | ** ** | ** ** | ** ** | **Number of  Shares  (in thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------|------------|------------|------------|-------------------------------------------------|------------|----------------------------------------|------------|
| February 28,  2006      |       |       | 260        |                                            |       |                                   | $          | 2.98 |   |   |
| February 28,  2005      |       |       | 272        |                                            |       |                                   | 2.42       |   |   |
| February 29, 2004       |       |       | 290        |                                            |       |                                   | 2.20       |   |   |

 

| ** **                              | ** ** | **Options Outstanding**                                                      | ** ** | **Options Exercisable**                                                 | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Range  of Exercise Prices** | ** ** | **Number  Outstanding at  February 28, 2006  (in thousands)** | ** ** | **Weighted Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable at  February 28, 2006  (in thousands)** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $1.15 - 1.98                            |       |                                                                              | 146        |                                                                         |       |   | 0.5 |   |   |   | $ | 1.43 |   |   |   | 146 |   |   |   | $ | 1.43 |   |   |
| 2.20 - 3.25                             |       |                                                                              | 60         |                                                                         |       |   | 5.7 |   |   |   | 2.64 |   |   |   | 60 |   |   |   | 2.64 |   |   |
| 3.38 - 4.67                             |       |                                                                              | 33         |                                                                         |       |   | 4.2 |   |   |   | 3.96 |   |   |   | 33 |   |   |   | 3.96 |   |   |
| 12.85 - 13.30                           |       |                                                                              | 71         |                                                                         |       |   | 9.6 |   |   |   | 12.93 |   |   |   | 21 |   |   |   | 13.12 |   |   |
|                                    |       |                                                                              | 310        |                                                                         |       |   | 4.0 |   |   |   | $ | 4.57 |   |   |   | 260 |   |   |   | $ | 2.98 |   |   |

 

54

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 14.**                                                 Taxeson Income

Provisionfor (benefit from) income taxes in the consolidated statements of operationsconsisted of the following components (in thousands):

| ** ** | ** ** | **Fiscal Year Ended  (in thousands)** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **February 28,**                                | ** ** | **February 28,** | ** ** | **February 29,** | ** ** |
| ** ** | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal    | ** ** | ** **                                           | **$**      | **569** |   |   |   | $ | 2,533 |   |   |   | $ | 1,521 |   |   |
| State      | ** ** | ** **                                           | **109**    |   |   |   | 482 |   |   |   | 279 |   |   |
| Foreign    | ** ** | ** **                                           | **(75**    | **)** |   |   | — |   |   |   | 2 |   |   |
|       | ** ** | ** **                                           | **$**      | **603** |   |   |   | $ | 3,015 |   |   |   | 1,802 |   |   |
| Deferred:  |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal    | ** ** | ** **                                           | **(250**   | **)** |   |   | (633 | ) |   |   | (6 | ) |   |
| State      | ** ** | ** **                                           | **(48**    | **)** |   |   | (120 | ) |   |   | (2 | ) |   |
| Foreign    | ** ** | ** **                                           | **—** |   |   |   | — |   |   |   | 46 |   |   |
|       | ** ** | ** **                                           | **(298**   | **)** |   |   | (753 | ) |   |   | 38 |   |   |
| Total      | ** ** | ** **                                           | **$**      | **305** |   |   |   | $ | 2,262 |   |   |   | $ | 1,840 |   |   |

 

Incomebefore provision for taxes consisted of the following (in thousands):

| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. operations     | ** ** | **$**    | **668**    |     | $          | 6,108    |       | $ | 4,704 |   |
| Foreign  operations | ** ** | **82**   |       | (339     | )          | 195      |       |
|                | ** ** | **$**    | **750**    |     | $          | 5,769    |       | $ | 4,899 |   |

 

Thefollowing table shows the reconciliation of federal income taxes at thestatutory rate on income before income taxes to the reported provision forincome tax (in thousands):

| ** **                                  | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Feb. 28, 2006**     | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 29, 2004** | ** ** |
| Statutory U.S.  federal income tax rate     | ** ** |                            | **$**      | **255** |   |   |   | $ | 1,961 |   |   |   | $ | 1,666 |   |   |
| State income  taxes, net of federal benefit | ** ** |                            | **65**     |   |   |   | 239 |   |   |   | 184 |   |   |
| Foreign operating  income (loss)            | ** ** |                            | **(29**    | **)** |   |   | — |   |   |   | (66 | ) |   |
| Non-deductible  expenses                    | ** ** |                            | **35**     |   |   |   | 62 |   |   |   | 72 |   |   |
| Other                                       | ** ** |                            | **(21**    | **)** |   |   | — |   |   |   | (16 | ) |   |
| Taxes at effective  income tax rate         | ** ** |                            | **$**      | **305** |   |   |   | $ | 2,262 |   |   |   | $ | 1,840 |   |   |

 

Deferred income taxes as of February 28, 2006 andFebruary 28, 2005 reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes and certain tax losscarryforwards.

55

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

The sources of thetemporary differences and carryforwards, and their effect on the net deferredtax asset consisted of the following (in thousands):

| ** **                                        | ** ** | **2006**  | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|-----------|------------|----------|------------|
| Deferred tax  assets:                             |       |      |       |     |       |
| Investment capital loss carryforwards             | ** ** | **$**     | **226**    |     | $          | 224 |   |
| Uniform capitalization costs                      | ** ** | **452**   |       | 487      |       |
| Inventory reserves                                | ** ** | **1,707** |       | 1,160    |       |
| Accrued liabilities                               | ** ** | **831**   |       | 883      |       |
| Allowance for doubtful accounts                   | ** ** | **147**   |       | 136      |       |
| Other                                             | ** ** | **156**   |       | 365      |       |
|                                              | ** ** | **3,519** |       | 3,255    |       |
| Valuation allowance                               | ** ** | **(240**  | **)**      | (240     | )          |
| Deferred tax liabilities:                         |       |      |       |     |       |
| Basis difference of property, plant and equipment | ** ** | **(522**  | **)**      | (464     | )          |
| Other                                             | ** ** | **(38**   | **)**      | (130     | )          |
| Net deferred tax assets                           | ** ** | **$**     | **2,719**  |     | $          | 2,421 |   |
| Current asset                                     | ** ** | **$**     | **3,279**  |     | $          | 2,855 |   |
| Non-current  liability                            | ** ** | **(560**  | **)**      | (434     | )          |
|                                              | ** ** | **$**     | **2,719**  |     | $          | 2,421 |   |

 

Investment loss carryforwards consist primarily ofinvestment losses, which may be utilized to offset any future taxable gains onthe sale of investments. Investment loss carryforwards in the amount of$589,000 expire in 2009. The Company has provided a valuation allowance of$240,000 on these loss carryforwards, as full realization of these assets isnot considered likely.

Undistributed earnings ofthe Company’s foreign subsidiary are considered to be indefinitely reinvestedand, accordingly, no provision for U.S. federal and state income taxes has beenprovided thereon. Upon distribution of those earnings in the form of dividendsor otherwise, the Company would be subject to both U.S. income taxes (subjectto an adjustment for foreign tax credits) and withholding taxes payable to theforeign country. Determination of the amount of the related unrecognizeddeferred U.S. income tax liability is not practicable because of thecomplexities associated with its hypothetical calculation.

**Note 15.**                                                 SegmentInformation

Based on the quantitative thresholds specified inStatement No. 131, the Company has determined that it has two reportablesegments. The two reportable segments are as follows: (1) the manufactureand distribution of displays and display components and (2) the wholesaledistribution of consumer electronic parts from foreign and domesticmanufacturers. The operations within the Display segment consist of datadisplay CRTs, home entertainment (television and projection) CRTs, projectorsand other monitors and component parts. These operations have similar economiccriteria, and are appropriately aggregated consistent with the criteria ofStatement No. 131. Sales to foreign customers were 14%, 11% and 14% ofconsolidated net sales for fiscal 2006, 2005 and 2004, respectively. Foreignoperations are included in the display segment.

56

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

The accounting policies of the operating segments arethe same as those described in Note. 1 Summary of Significant AccountingPolicies. Segment amounts disclosed reflect elimination entries made inconsolidation. The chief operating decision maker evaluates performance of thesegments based on operating income. Costs excluded from this profit measureprimarily consist of interest expense and income taxes.

The following table sets forth net sales, incomebefore income taxes, depreciation and amortization, capital expenditures, andidentifiable assets for each reportable industry segment and applicableoperations:

| ** **                        | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Net Sales**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Display segment                   |       |       |       |       |       |       |       |
| Monitors                          | ** ** | **$**      | **49,868** |       | $          | 50,806     |       | $ | 45,900 |   |
| Data display                      | ** ** | **10,820** |       | 8,509      |       | 7,801      |       |
| Home entertainment                | ** ** | **3,661**  |       | 4,282      |       | 5,574      |       |
| Component parts                   | ** ** | **730**    |       | 813        |       | 1,122      |       |
|                              | ** ** | **65,079** |       | 64,410     |       | 60,397     |       |
| Wholesale  Distribution segment   | ** ** | **18,799** |       | 18,330     |       | 16,195     |       |
|                              | ** ** | **$**      | **83,878** |       | $          | 82,740     |       | $ | 76,592 |   |
| **Income before income taxes**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Display segment                   |       |       |       |       |       |       |       |
| Monitors                          | ** ** | **$**      | **4,003**  |       | $          | 7,228      |       | $ | 5,702 |   |
| Data display                      | ** ** | **(1,943** | **)**      | (1,097     | )          | (1,177     | )          |
| Home entertainment                | ** ** | **510**    |       | 730        |       | 1,546      |       |
| Component parts                   | ** ** | **(685**   | **)**      | (223       | )          | (33        | )          |
|                              | ** ** | **1,885**  |       | 6,638      |       | 6,038      |       |
| Wholesale  Distribution segment   | ** ** | **257**    |       | 15         |       | 146        |       |
|                              | ** ** | **2,142**  |       | 6,653      |       | 6,184      |       |
| Other income (expense)            |       |       |       |       |       |       |       |
| Interest expense                  | ** ** | **(1,474** | **)**      | (1,060     | )          | (1,182     | )          |
| Other, net                        | ** ** | **82**     |       | 176        |       | (103       | )          |
|                              | ** ** | **$**      | **750**    |       | $          | 5,769      |       | $ | 4,899 |   |
| **Depreciation and Amortization** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Display segment                   |       |       |       |       |       |       |       |
| Monitors                          | ** ** | **$**      | **1,583**  |       | $          | 1,148      |       | $ | 943 |   |
| Data display                      | ** ** | **43**     |       | 45         |       | 117        |       |
| Home entertainment                | ** ** | **41**     |       | 96         |       | 120        |       |
| Component parts                   | ** ** | **46**     |       | 49         |       | 48         |       |
|                              | ** ** | **1,713**  |       | 1,338      |       | 1,228      |       |
| Wholesale  Distribution segment   | ** ** | **216**    |       | 111        |       | 94         |       |
|                              | ** ** | **$**      | **1,929**  |       | $          | 1,449      |       | $ | 1,322 |   |

 

57

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

 

| ** **                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Capital  Expenditures****     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Display segment                 |       |       |       |       |       |       |       |
| Monitors                        | ** ** | **$**      | **1,417**  |       | $          | 399        |       | $ | 652 |   |
| Data display                    | ** ** | **5**      |       | 10         |       | 38         |       |
| Home entertainment              | ** ** | **3**      |       | 1          |       | 20         |       |
| Component parts                 | ** ** | **—** |       | 7          |       | —     |       |
|                            | ** ** | **1,425**  |       | 417        |       | 710        |       |
| Wholesale  Distribution segment | ** ** | **1,026**  |       | 352        |       | 17         |       |
|                            | ** ** | **$**      | **2,451**  |       | $          | 769        |       | $ | 727 |   |

 

**Includesnon-cash additions and additions to fixed assets through business acquisitions.

| ** **                        | ** ** | **Feb. 28, 2006** | ** ** | **Feb. 28, 2005** | ** ** | **Feb. 29, 2004** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Identifiable  Assets**          | ** ** |                        | ** ** | ** **                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Display segment                   |       |                        | ** ** | ** **                  |       |                        |       | ** ** |   |   |   | ** ** |   |
| Monitors                          | ** ** |                        | **$**      | **40,404**                  | ** ** |                        |       | $ | 38,264 | ** ** |   |   | $ | 30,082 | ** ** |   |
| Data display                      | ** ** |                        | **14,005** | ** **                  |       |                        | 12,390     | ** ** |   |   | 12,153 | ** ** |   |
| Home entertainment                | ** ** |                        | **1,917**  | ** **                  |       |                        | 2,121      | ** ** |   |   | 2,900 | ** ** |   |
| Component parts                   | ** ** |                        | **1,045**  | ** **                  |       |                        | 2,224      | ** ** |   |   | 2,150 | ** ** |   |
|                              | ** ** |                        | **57,371** | ** **                  |       |                        | 54,999     | ** ** |   |   | 47,285 | ** ** |   |
| Wholesale  Distribution segment   | ** ** |                        | **8,067**  | ** **                  |       |                        | 7,185      | ** ** |   |   | 6,949 | ** ** |   |
|                              | ** ** |                        | **$**      | **65,438**                  | ** ** |                        |       | $ | 62,184 | ** ** |   |   | $ | 54,234 | ** ** |   |
| **Geographic  sales information** | ** ** |                        | ** ** | ** **                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |
| United States                     | ** ** |                        | **$**      | **72,343**                  | ** ** |                        |       | $ | 73,639 | ** ** |   |   | $ | 65,689 | ** ** |   |
| All other                         | ** ** |                        | **11,535** | ** **                  |       |                        | 9,101      | ** ** |   |   | 10,723 | ** ** |   |
|                              | ** ** |                        | **$**      | **83,878**                  | ** ** |                        |       | $ | 82,740 | ** ** |   |   | $ | 76,592 | ** ** |   |

 

**Note 16.**                                                 BenefitPlan

The Company maintains defined contribution plans thatare available to all U.S. employees. The Company accrued $119,000, $159,000 and$157,000 in fiscal 2006, 2005 and 2004, respectively for 401(k) matchingcontributions.

**Note 17.**                                                 Commitments

Operating Leases

The Company leases various manufacturing facilitiesand transportation equipment under leases classified as operating leases,expiring at various dates through 2011. These leases provide that the Companypays taxes, insurance and other expenses on the leased property and equipment.Rent expense for all leases was approximately $1.9 million, $1.8 million and$2.1 million in 2006, 2005 and 2004, respectively.

58

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

Future minimum rental payments due under these leasesare as follows (in thousands):

| **Fiscal Year** | ** ** | **Amount** |   |
|----------------------|------------|------------|--------|
| 2007                 |       |       | $      | 1,798 |   |   |
| 2008                 |       |       | 1,636  |   |   |
| 2009                 |       |       | 969    |   |   |
| 2010                 |       |       | 684    |   |   |
| 2011                 |       |       | 93     |   |   |
|                 |       |       | $      | 5,180 |   |   |

Related Party Leases

Included above are leases for manufacturing andwarehouse facilities leased from our CEO under operating leases expiring atvarious dates through 2009. Rent expense under these leases totaledapproximately $314,000, $314,000 and $434,000 in fiscal 2006, 2005 and 2004,respectively.

Future minimum rental payments due under these leaseswith related parties are as follows (in thousands):

| **Fiscal Year** | ** ** | **Amount** |   |
|----------------------|------------|------------|--------|
| 2007                 |       |       | $      | 314 |   |   |
| 2008                 |       |       | 304    |   |   |
| 2009                 |       |       | 127    |   |   |
|                 |       |       | $      | 745 |   |   |

 

**Note 18.**                                                 Concentrationsof Risk and Major Customers

Financial instruments which potentially subject theCompany to concentrations of credit risk consist principally of cash andaccounts receivable. At times, such cash in banks are in excess of the FDICinsurance limit.

The Company sells to a variety of domestic andinternational customers on an open-unsecured account basis, in certain casesrequiring letters of credit. These customers principally operate in themedical, military, television and avionics industries. The Company’s Displaysegment had direct and indirect net sales to the U.S. government, primarily theDepartment of Defense for training and simulation programs, which comprisedapproximately 41%, 37% and 21% of Display segment net sales and 32%, 29% and16% of consolidated net sales in fiscal 2006, 2005 and 2004, respectively.Sales to foreign customers were 14%, 11% and 14% of consolidated net sales infiscal 2006, 2005 and 2004, respectively. The Company’s wholesale electronicparts distributor, Fox International, had net sales to one customer thatcomprised approximately 25%, 24% and 19% of that subsidiary’s net sales infiscal 2006, 2005 and 2004, respectively. The Company attempts to minimizecredit risk by reviewing all customers’ credit history before extending credit,by monitoring customers’ credit exposure on a daily basis and requiring lettersof credit for certain sales. The Company establishes an allowance for doubtfulaccounts receivable based upon factors surrounding the credit risk of specific customers,historical trends and other information.

59

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**Note 19.**                                                 SupplementalCash Flow Information

| ** **                    | ** ** | **(in thousands)** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  paid for:**           |       |                    |       |   |   |   |   |
| Interest                      | ** ** | **$**                   | **1,515**  |   | $ | 967 |   | $ | 1,032 |   |
| Income taxes, net  of refunds | ** ** | **$**                   | **3,445**  |   | $ | 1,363 |   | $ | 1,813 |   |

 

**Non-cash investing and financing activities:**

During 2006, the Company acquired certain computer andtelephone equipment in the amount of $450,000 under a financing leaseobligation.

During 2005, the Company acquired the monitoroperations of Data Ray, Inc. The Company acquired inventory, fixed assetsand various other assets of $459,000 in exchange for cash of $150,000 and$400,000 of the Company’s common stock.

Also during 2005, the Company signed an agreementexchanging accrued royalties of $350,000 for four non-interest bearingconvertible notes payable, valued at $125,000 each. The Company recognized a$150,000 discount on debt to reflect the inherent interest in the notes. One ofthese notes was converted into 10,000 shares of the Company’s common stockduring fiscal 2005, and another note was converted into the Company’s commonstock on the same basis during fiscal 2006.

During 2004, the Company’s CEO converted $1,000,000 ofsubordinated debentures into 240,000 shares of the Company’s common stock.

**Note 20.**                                                 SelectedQuarterly Financial Data (unaudited)

The following tablesets forth selected quarterly consolidated financial data for the fiscal yearsended February 28, 2006 and February 28, 2005, respectively. Thesummation of quarterly (loss) earnings per share may not agree with annual(loss) earnings per share.

| ** **                       | ** ** | **2006**                                                              | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                       | ** ** | **First  Quarter**                                                    | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                       | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net Sales                        | ** ** | **$**                                                                 | **20,442** | ** ** | **$** | **23,332** | ** ** | **$** | **19,676** | ** ** | **$** | **20,428** | ** ** |
| Gross profit                     | ** ** | **6,536**                                                             | ** ** | **7,604** | ** ** | **6,445** | ** ** | **3,917** | ** ** |
| Net income (loss)  (a)           | ** ** | **606**                                                               | ** ** | **1,116** | ** ** | **255** | ** ** | **(1,532** | **)** |
| Basic income  (loss) per share   | ** ** | **$**                                                                 | **0.06**   | ** ** | **$** | **0.12** | ** ** | **$** | **0.03** | ** ** | **$** | **(0.16** | **)** |
| Diluted income (loss)  per share | ** ** | **$**                                                                 | **0.06**   | ** ** | **$** | **0.11** | ** ** | **$** | **0.03** | ** ** | **$** | **(0.15** | **)** |

----

(a)           Fourth quarteradjustments consisted of $626,000, net of tax, inventory adjustments related toperpetual to physical inventory and pricing adjustments.

60

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**Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

 

| ** **               | ** ** | **2005  (restated, Note 2)**                                | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **               | ** ** | **First  Quarter**                                                    | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **               | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net Sales                |       | $                                                                     | 19,900     |   | $ | 20,667 |   | $ | 21,434 |   | $ | 20,739 |   |
| Gross profit             |       | 6,586                                                                 |       | 6,835 |   | 7,220 |   | 6,370 |   |
| Net income (b)           |       | 1,093                                                                 |       | 1,130 |   | 1,055 |   | 229 |   |
| Basic income per share   |       | $                                                                     | 0.11       |   | $ | 0.12 |   | $ | 0.11 |   | $ | 0.02 |   |
| Diluted income per share |       | $                                                                     | 0.11       |   | $ | 0.11 |   | $ | 0.11 |   | $ | 0.02 |   |

----

(b)          Fourthquarter adjustments consisted of $265,000 related to perpetual to physicalinventory, net of tax, adjustments and $200,000 aggregate other adjustments,net of tax.

**Note21.**                                                 SubsequentEvent

On June 9, 2006, the Company secured a commitmentfrom a syndicate including RBC Centura Bank and Regions Bank to provide a $17million line of credit to the Company and a $3.5 million line of credit to theCompany’s subsidiary Fox International, Inc., both with a maturity of 24months from closing. These new lines of credit replace two lines of creditoutstanding with Bank of America. In addition, the agreement provides for anequipment term loan of $3.0 million with payments amortized over 60 months. Theinterest rate on these loans is a floating LIBOR rate based on a fixed chargecoverage ratio, as defined in the loan documents. Also as a part of thisagreement, the CEO of the Company will provide a $6.0 million term note with anamortization of 15 years, and a maturity of 60 months. The remaining balance ofthe note provided by the CEO on February 27, 2006 will be repaid effectivewith the issue of the new note. The Company expects to execute a closing onthese new loan facilities effective on or before June 28, 2006.

61

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**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

The Board of Directors ofthe Company engaged Tauber & Balser P.C., Atlanta, Georgia, asindependent accountants for the Company and its subsidiaries for the fiscalyear ended February 28, 2006. BDO Seidman, LLP served as the Company’sindependent accountants from 1995 until the first quarter of Fiscal 2006. On June 27,2005 BDO Seidman, LLP notified the Audit Committee that it would decline tostand for reappointment as the Company’s independent registered publicaccounting firm. BDO Seidman, LLP served as the Company’s independentregistered public accounting firm relative to the Company’s financialstatements for the quarter ended May 31, 2005 in order to facilitate asmooth transition to the successor firm of independent accountants. The auditcommittee did not recommend or approve the decision to decline to stand forre-election.

Tauber & BalserP.C.’s reports on the Company’s financial statements for the fiscal year ended February 28,2005 and BDO Seidman, LLP’s reports on the Company’s financial statements forthe fiscal year ended February 28, 2005 did not contain an adverse opinionor a disclaimer of opinion, and were not qualified or modified as to uncertainty,audit scope or accounting principles. For the fiscal years ended February 28,2006, there has been no disagreement between the Company and Tauber &Balser P.C. on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure. For the fiscal yearsended February 28, 2005, and up to the date of BDO Seidman, LLP’snotification of their resignation on June 27, 2005, there has been nodisagreement between the Company and BDO Seidman, LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure.

As disclosed in theCompany’s Annual Report on Form 10-K for the fiscal year ended February 28,2005, on June 10, 2005 BDO Seidman notified the Audit Committee of amaterial weakness in the Registrant’s internal control structure. The areasthat were deemed to contain material weakness surrounded the failure to retainfinancial reporting personnel necessary to properly identify and record in atimely fashion, non-routine transactions and to prepare financial statementsand related disclosures timely; and the failure of Management to routinelyreview and approve on a monthly basis all repetitive and non-repetitive journalentries made at divisional levels, to ensure that all entries were made andcalculated properly, which could affect the reported results for the accountingperiod.

**ITEM9A.**        CONTROLS AND PROCEDURES.

*Evaluation of disclosure controls and procedures.*

Based on their evaluationas of February 28, 2006, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) were not effective to ensure thatthe information required to be reported and disclosed by us in this AnnualReport on Form 10-K was recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules onForm 10-K. The internal controls that are deemed by management tocontain material weaknesses, lack of adequate controls in the valuation andcosting of inventory and lack of adequate controls over the adjusting of thebooks and records at certain subsidiaries, resulted primarily from a turnoverin financial reporting personnel during the year end closing process. Thisresulted in insufficient personnel necessary to properly identify and record ina timely fashion, non-routine transactions and to prepare financial statementsand related disclosures timely, which could affect the reported results for theaccounting period.

To address the materialweaknesses described above, the Company performed additional analyses and otherprocedures to ensure that the Company’s consolidated financial statements wereprepared in accordance with generally accepted accounting principles in theUnited States. Accordingly, the Company’s management believes that theconsolidated financial statements included in this Annual 

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Reporton Form 10-K fairly present in all material respects the Company’sfinancial condition, results of operations and cash flows for the periodspresented and that this Annual Report on Form 10-K does not containany untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the periods covered bythis report.

The requiredcertifications of our Chief Executive Officer and our Chief Financial Officerare included as exhibits to this Annual Report on Form 10-K. Thedisclosures set forth in this Item 9A contain information concerning theevaluation of our disclosure controls and procedures, internal control overfinancial reporting and changes to internal control referred to in thosecertifications. Those certifications should be read in conjunction with thisItem 9A for a more complete understanding of the matters covered by thecertifications.

*Changes in internal controls*

The material weaknesses statedin the above Evaluation of Disclosure Controls and Procedures require theCompany to make changes in its internal control over financial reporting. Subsequentto the end of the fiscal year, the Company hired replacement financialreporting personnel with the requisite skills, who are being trained in theCompany’s reporting procedures and controls. The monthly, quarterly and annualclosing processes are being documented and the participating members of thefinancial staff are being cross-trained on upgraded procedures.  Management believes that these trainingprocedures and the replacement of financial reporting personnel will ensurethat the disclosed material weaknesses will not have a material effect onfinancial reporting in future periods.

*Limitations on the effectiveness of controls.*

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatinternal control over financial reporting and our disclosure controls andprocedures will prevent all errors and potential fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within Video Display Corporation have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerrors or mistakes. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the control. The design of any system of controls isalso based in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions; over time, controls maybecome inadequate because of changes in conditions, or the degree of compliancewith policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

**ITEM9B.**       OTHER INFORMATION.

None.

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**PART III**

**ITEM10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT.

The information containedin Video Display Corporation’s Proxy Statement to be filed within 120 days ofthe Company’s 2006 fiscal year end (the “2006 Proxy Statement”), with respectto directors and executive officers of the Company under the headings “Electionof Directors” and “Executive Officers”, is incorporated herein by reference inresponse to this item; provided, however, that the information contained in the2006 Proxy Statement under the heading “Compensation and Stock Option CommitteeReport” or under the heading “Performance Graph” shall not be incorporatedherein by reference.

**ITEM11.**         EXECUTIVE COMPENSATION.

The information containedin the 2006 Proxy Statement under the heading, “Executive Compensation andOther Benefits”, with respect to executive compensation, is incorporated hereinby reference in response to this item.

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS.

The information containedin the 2006 Proxy Statement under the headings “Common Stock Ownership” and “ExecutiveCompensation and Other Benefits”, is incorporated herein by reference inresponse to this item.

**ITEM13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS.

The information containedin the 2006 Proxy Statement under the heading, “Transactions with Affiliates”,is incorporated herein by reference in response to this item.

**ITEM14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES.

The information containedin the 2006 Proxy Statement under the heading, “Audit Fees and All Other Fees”is incorporated herein by reference in response to this item.

**PART IV**

**ITEM 15.**                                 EXHIBITS,FINANCIAL STATEMENT SCHEDULES.

(a)           Thefollowing documents are filed as part of this Report:

1.                FinancialStatements:

The following consolidatedfinancial statements of the Company and its consolidated subsidiaries and theReport of the Independent Registered Public Accounting Firms are included in Part II,Item 8.

| Reports of Independent  Registered Public Accounting Firms                                                                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets as of February 28,  2006 and February 28, 2005                                                                                                                |
| Consolidated Statements of Operations—Fiscal Years  Ended February 28, 2006, February 28,    2005 and  February 29, 2004                                         |
| Consolidated Statements of Shareholders’ Equity and Comprehensive  Income—Fiscal Years    Ended February 28, 2006,  February 28, 2005 and February 29, 2004 |
| Consolidated Statements of Cash Flows—Fiscal Years  Ended February 28, 2006, February 28,    2005 and  February 29, 2004                                         |
| Notes to Consolidated Financial Statements                                                                                                                                                          |

 

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2.                FinancialStatement Schedules

| Schedule II—Valuation  and Qualifying Accounts (with auditors reports) |
|-----------------------------------------------------------------------------|

 

(b)          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(a)           |       | Employee Stock  Option Plan (incorporated by reference to Exhibit 4A to the Company’s  Registration Statement on Form S-8 filed November 1, 1996).                                                                                                                                     |
| 10(b)           |       | Lease dated  January 1, 1992 by and between Registrant (Lessee) and Ronald D. Ordway  (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain,  Georgia (incorporated by reference to Exhibit 10(i) to the  Company’s 1995 Annual Report on Form 10-K).      |
| 10(c)           |       | Lease dated November 1,  2003 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with  respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia  (incorporated by reference to Exhibit 10(c) to the Company’s 2004  Annual Report on Form 10-K). |
| 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).                                                                                                                                                                                                     |
| 10(f)           |       | $11,750,000  Senior Secured Debt Facilities Commitment letter, dated June 9, 2006,  between RBC Centura bank and the Company and its subsidiaries.                                                                                                                                                    |
| 10(g)           |       | $11,750,000  Senior Secured Debt Facilities Commitment letter, dated June 9, 2006,  between Regions Bank and the Company and its subsidiaries.                                                                                                                                                        |
| 21              |       | Subsidiary  companies                                                                                                                                                                                                                                                                                      |
| 23.1            |       | Consent of  Tauber & Balser, PC                                                                                                                                                                                                                                                                   |
| 23.2            |       | Consent of BDO  Seidman, LLP                                                                                                                                                                                                                                                                               |
| 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              |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                             |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

| Date: June 14, 2006 |   | VIDEO DISPLAY CORPORATION |
|--------------------------|--------|---------------------------|
|                     |   |                      |
|                     |   |                      |
|                     |   | By:                       |   | /s/ RONALD D.  ORDWAY |
|                     |   |                      |   | Ronald D. Ordway |
|                     |   |                      |   | Chairman of the Board and |
|                     |   |                      |   | Chief Executive Officer |

 

**POWER OF ATTORNEY**

Know all men by these presents, that each person whosesignature appears below constitutes and appoints Ronald D. Ordway asattorney-in-fact, with power of substitution, for him in any and all capacity,to sign any amendments to this Report on Form 10-K, and to file thesame, with exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, hereby ratifying and confirming allthat said attorney-in-fact may do or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

|                                   | **Signature -Name** | ** **                | ** ** |                     | **Capacity** | ** ** | ** ** |  | **Date** | ** ** |
|-----------------------------------|---------------------|---------------------------|------------|---------------------|--------------|------------|------------|--|----------|------------|
|                              |                |                      |       |                |
| /s/ RONALD D. ORDWAY              |                | Chief  Executive Officer, |       | June 14,  2006 |
| Ronald D. Ordway                  |                | Treasurer  and Director   |       |                |
|                              |                |                      |       |                |
| /s/ ERV KUCZOGI                   |                | President  and            |       | June 14,  2006 |
| Erv Kuczogi                       |                | Director                  |       |                |
|                              |                |                      |       |                |
| /s/ CAROLYN HOWARD                |                | Director                  |       | June 14,  2006 |
| Carolyn Howard                    |                |                      |       |                |
|                              |                |                      |       |                |
| /s/ PETER FREND                   |                | Director                  |       | June 14,  2006 |
| Peter Frend                       |                |                      |       |                |
|                              |                |                      |       |                |
| /s/ ERNEST J. THIBEAULT, III |                | Director                  |       | June 14,  2006 |
| Ernest J.  Thibeault, III    |                |                      |       |                |
|                              |                |                      |       |                |
| /s/ MICHAEL D. BOYD               |                | Chief  Financial Officer  |       | June 14,  2006 |
| Michael D. Boyd                   |                |                      |       |                |

 

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**Report ofIndependent Registered Public Accounting Firm**

Video DisplayCorporationTucker, Georgia

The audit referred to inour report dated May 26, 2006 relating to the consolidated financialstatements of Video Display Corporation and subsidiaries, which are containedin Item 8 of this Form 10-K, included the audit of the financialstatement schedule listed in the accompanying schedule. This schedule is theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statement schedule based upon our audit.

In our opinion, such schedule presents fairly, in allmaterial respects, the information set forth therein.

/s/ Tauber & Balser, P.C.Atlanta, GeorgiaMay 26, 2006

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**Report ofIndependent Registered Public Accounting Firm**

Video DisplayCorporationTucker, Georgia

The audits referred to inour report dated June 14, 2005, except as to Note 2, which is as of June 8,2006, relating to the 2005 and 2004 consolidated financial statements of VideoDisplay Corporation and subsidiaries, which are contained in Item 8 of this Form 10-K,included the audit of the 2005 and 2004 financial statement schedule listed inthe accompanying schedule. This schedule is the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatement schedule based upon our audits.

In ouropinion, such schedule presents fairly, in all material respects, theinformation set forth therein.

|                                           |   | /s/ BDO Seidman, LLP |
|-------------------------------------------|--------|---------------------------|
| Atlanta, Georgia                          |   |                      |
| June 14,  2005, except as to Note 2, |   |                      |
| which is as of  June 8, 2006         |   |                      |

 

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**VIDEODISPLAY CORPORATION AND SUBSIDIARIESSCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS(in thousands)**

| **Column A**                     | ** **      | **Column B** | ** ** | **Column C**                              | ** ** | **Column D**                             | ** ** | **Column E**                    | ** ** |
|---------------------------------------|-----------------|-------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** **      | ** **        | ** ** | **Additions**                                  | ** ** | ** **                                    | ** ** | ** **                           | ** ** |
| ** **                            | **Description** | ** **        | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
| **Allowance for doubtful  accounts:** |            |              |       |                                           |       |                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| February 28, 2006                |            |              | $          | 339                                            |       |                                          |       | $                                    | 216        |   |   |   | $ | — |   |   |   | $ | 174 |   |   |   | $ | 381 |   |   |
| February 28, 2005                |            |              | 251        |                                           |       |                                          | 186        |                                 |       |   | — |   |   |   | 98 |   |   |   | 339 |   |   |
| February 29, 2004                |            |              | 502        |                                           |       |                                          | 85         |                                 |       |   | — |   |   |   | 336 |   |   |   | 251 |   |   |
| **Reserves for inventory:**           |            |              |       |                                           |       |                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| February 28, 2006                |            |              | $          | 3,057                                          |       |                                          |       | $                                    | 1,900      |   |   |   | $ | — |   |   |   | $ | 524 |   |   |   | $ | 4,433 |   |   |
| February 28, 2005                |            |              | 2,506      |                                           |       |                                          | 1,386      |                                 |       |   | — |   |   |   | 835 |   |   |   | 3,057 |   |   |
| February 29,  2004               |            |              | 2,339      |                                           |       |                                          | 1,540      |                                 |       |   | — |   |   |   | 1,373 |   |   |   | 2,506 |   |   |
|                                       |                 |                   |            |                                                |            |                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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