##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 FORM 10-Q
 For Quarter Ended October 31, 2006
 Commission File Number 1-8777
 VIRCO MFG. CORPORATION
  Delaware
    
    95-1613718(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2027 Harpers Way, Torrance, CA
    
    90501(Address of principal executive offices)
    
    (Zip Code)
 (310) 533-0474
   þ o
  o þ o
 o þ




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Part I. Financial InformationItem 1. Financial StatementsCondensed consolidated balance sheets  October 31, 2006, January 31, 2006 and October 31, 2005Condensed consolidated statements of operations  Three months ended October 31, 2006 and 2005Condensed consolidated statements of operations  Nine months ended October 31, 2006 and 2005Condensed consolidated statements of cash flows  Nine months ended October 31, 2006 and 2005Notes to condensed consolidated financial statements  October 31, 2006Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 6. ExhibitsExhibit 10.1  Stock Purchase Agreement, dated as of June 26, 2006, by and among Virco Mfg.
Corporation, and certain purchasers named therein.Exhibit 31.1  Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of
the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2  Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.Exhibit 32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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PART I
 
 Item 1. Financial Statements
  
  10/31/2006
    
    1/31/2006
    
    10/31/2005(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)AssetsCurrent assetsCash
    
    $
    2,158
    
    
    $
    1,489
    
    
    $
    1,441Trade accounts receivable
    
    
    28,994
    
    
    
    17,470
    
    
    
    22,569Less allowance for doubtful accounts
    
    
    234
    
    
    
    200
    
    
    
    289Net trade accounts receivable
    
    
    28,760
    
    
    
    17,270
    
    
    
    22,280Other receivables
    
    
    160
    
    
    
    377
    
    
    
    74InventoriesFinished goods, net
    
    
    7,786
    
    
    
    11,070
    
    
    
    8,777Work in process, net
    
    
    10,257
    
    
    
    13,796
    
    
    
    10,335Raw materials and supplies, net
    
    
    7,118
    
    
    
    6,751
    
    
    
    6,47125,161
    
    
    
    31,617
    
    
    
    25,583Prepaid expenses and other current assets
    
    
    802
    
    
    
    1,493
    
    
    
    631Total current assets
    
    
    57,041
    
    
    
    52,246
    
    
    
    50,009Property, plant and equipment:Land and land improvements
    
    
    3,596
    
    
    
    3,591
    
    
    
    3,253Buildings and building improvements
    
    
    49,555
    
    
    
    49,581
    
    
    
    49,581Machinery and equipment
    
    
    108,385
    
    
    
    106,475
    
    
    
    105,114Leasehold improvements
    
    
    1,323
    
    
    
    1,289
    
    
    
    1,289162,859
    
    
    
    160,936
    
    
    
    159,237Less accumulated depreciation and amortization
    
    
    114,417
    
    
    
    109,513
    
    
    
    107,433Net property, plant and equipment
    
    
    48,442
    
    
    
    51,423
    
    
    
    51,804Goodwill and other intangible assets, net
    
    
    2,314
    
    
    
    2,324
    
    
    
    2,327Other assets
    
    
    8,728
    
    
    
    8,727
    
    
    
    8,816Total assets
    
    $
    116,525
    
    
    $
    114,720
    
    
    $
    112,956
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10/31/2006
    
    1/31/2006
    
    10/31/2005(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    Unaudited (Note 1)LiabilitiesCurrent liabilitiesChecks released but not yet cleared bank
    
    $
    2,222
    
    
    $
    2,030
    
    
    $
    2,280Accounts payable
    
    
    11,856
    
    
    
    17,504
    
    
    
    10,339Accrued compensation and employee benefits
    
    
    6,435
    
    
    
    6,047
    
    
    
    5,160Income tax payable
    
    
    1,050
    
    
    
    847
    
    
    
    858Current portion of long-term debt
    
    
    5,012
    
    
    
    5,012
    
    
    
    5,012Other accrued liabilities
    
    
    4,537
    
    
    
    5,318
    
    
    
    4,696Total current liabilities
    
    
    31,112
    
    
    
    36,758
    
    
    
    28,345Non-current liabilities:Accrued self-insurance retention and other
    
    
    3,815
    
    
    
    2,703
    
    
    
    2,591Accrued pension expenses
    
    
    15,671
    
    
    
    14,618
    
    
    
    13,749Long-term debt, less current portion
    
    
    10,877
    
    
    
    21,541
    
    
    
    20,537Total non-current liabilities
    
    
    30,363
    
    
    
    38,862
    
    
    
    36,877Commitments and contingenciesStockholders equityPreferred stockAuthorized 3,000,000 shares, $.01 par
value; none issued or outstanding
    
    
    
    
    
    
    
    
    
    
    Common stockAuthorized 25,000,000 shares, $.01 par
value; issued 14,379,506 shares at
10/31/2006, 13,137,288 at 1/31/2006 and
10/31/2005
    
    
    144
    
    
    
    131
    
    
    
    131Additional paid-in capital
    
    
    113,616
    
    
    
    108,143
    
    
    
    108,143Accumulated deficit
    
    
    (54,583
    )
    
    
    (64,981
    )
    
    
    (57,198
    )Accumulated comprehensive loss
    
    
    (4,127
    )
    
    
    (4,193
    )
    
    
    (3,342
    )Total stockholders equity
    
    
    55,050
    
    
    
    39,100
    
    
    
    47,734Total liabilities and stockholders equity
    
    $
    116,525
    
    
    $
    114,720
    
    
    $
    112,956
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Three months ended10/31/2006
    
    10/31/2005(In thousands, except share data)Net sales
    
    $
    73,678
    
    
    $
    70,484Costs of goods sold
    
    
    46,586
    
    
    
    50,400Gross profit
    
    
    27,092
    
    
    
    20,084Selling, general and administrative expenses
    
    
    20,125
    
    
    
    21,523Interest expense
    
    
    1,014
    
    
    
    895Income (loss) before income taxes
    
    
    5,953
    
    
    
    (2,334
    )Income tax provision (benefit)
    
    
    120
    
    
    
    (140
    )Net income (loss)
    
    $
    5,833
    
    
    $
    (2,194
    )Net income (loss) per common shareBasic
    
    $
    0.41
    
    
    $
    (0.17
    )Diluted
    
    $
    0.41
    
    
    $
    (0.17
    )Weighted average shares outstandingBasic
    
    
    14,362
    
    
    
    13,146Diluted
    
    
    14,364
    
    
    
    13,146
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Nine months ended10/31/2006
    
    10/31/2005(In thousands, except share data)Net sales
    
    $
    186,788
    
    
    $
    179,644Costs of goods sold
    
    
    119,819
    
    
    
    123,649Gross profit
    
    
    66,969
    
    
    
    55,995Selling, general and administrative expenses
    
    
    53,134
    
    
    
    55,572Interest expense
    
    
    3,197
    
    
    
    2,324Income (loss) before income taxes
    
    
    10,638
    
    
    
    (1,901
    )Income tax provision (benefit)
    
    
    240
    
    
    
    (109
    )Net income (loss)
    
    $
    10,398
    
    
    $
    (1,792
    )Net income (loss) per common shareBasic
    
    $
    0.77
    
    
    $
    (0.14
    )Diluted
    
    $
    0.77
    
    
    $
    (0.14
    )Weighted average shares outstandingBasic
    
    
    13,475
    
    
    
    13,111Diluted
    
    
    13,499
    
    
    
    13,111
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Nine months ended10/31/2006
    
    10/31/2005(In thousands)Operating activitiesNet income (loss)
    
    $
    10,398
    
    
    $
    (1,792
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    5,486
    
    
    
    6,767Provision for doubtful accounts
    
    
    25
    
    
    
    60Loss on sale of property, plant and equipment
    
    
    1
    
    
    
    77Stock based compensation
    
    
    645
    
    
    
    Changes in operating assets and liabilitiesTrade accounts receivable
    
    
    (11,515
    )
    
    
    (6,343
    )Other receivables
    
    
    217
    
    
    
    91Inventories
    
    
    6,456
    
    
    
    464Income taxes
    
    
    203
    
    
    
    2,137Prepaid expenses and other current assets
    
    
    691
    
    
    
    731Accounts payable and accrued liabilities
    
    
    (3,702
    )
    
    
    (2,611
    )Net cash provided by (used in) operating activities
    
    
    8,905
    
    
    
    (419
    )Investing activitiesCapital expenditures
    
    
    (2,463
    )
    
    
    (1,774
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    15Net cash used in investing activities
    
    
    (2,463
    )
    
    
    (1,759
    )Financing activitiesIssuance of long-term debt
    
    
    
    
    
    
    2,419Repayment of long-term debt
    
    
    (10,580
    )
    
    
    Proceeds from issuance of common stock
    
    
    4,807
    
    
    
    8Net cash (used in) provided by financing activities
    
    
    (5,773
    )
    
    
    2,427Net increase in cash
    
    
    669
    
    
    
    249Cash at beginning of year
    
    
    1,489
    
    
    
    1,192Cash at end of year
    
    $
    2,158
    
    
    $
    1,441Supplemental disclosures of cash flow informationCash paid (received) during the year for:Interest, net of amounts capitalized
    
    $
    3,197
    
    
    $
    2,324Income tax, net
    
    
    37
    
    
    
    (2,249
    )
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The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months and nine months ended
October 31, 2006, are not necessarily indicative of the results that may be expected for the
year ending January 31, 2007. The balance sheet at January 31, 2006, has been derived from the
audited financial statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for
complete financial statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys annual report on Form 10-K for the
year ended January 31, 2006.
  The market for educational furniture is marked by extreme seasonality, with over 50% of the
Companys total sales typically occurring from June to September each year, which is the
Companys peak season. Hence, the Company typically builds and carries significant amounts of
inventory during and in anticipation of this peak summer season to facilitate the rapid
delivery requirements of customers in the educational market. This requires a large up-front
investment in inventory, labor, storage and related costs as inventory is built in anticipation
of peak sales during the summer months. As the capital required for this build-up generally
exceeds cash available from operations, the Company has historically relied on third-party bank
financing to meet cash flow requirements during the build-up period immediately preceding the
peak season.
 In addition, the Company typically is faced with a large balance of accounts receivable during
the peak season. This occurs for two primary reasons. First, accounts receivable balances
typically increase during the peak season as shipments of products increase. Second, many
customers during this period are government institutions, which tend to pay accounts receivable
more slowly than commercial customers.
 The Companys working capital requirements during and in anticipation of the peak summer season
require management to make estimates and judgments that affect assets, liabilities, revenues
and expenses, and related contingent assets and liabilities. On an on-going basis, management
evaluates its estimates, including those related to market demand, labor costs, and stocking
inventory.
  In February 2006, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments
(SFAS 155). SFAS 155 establishes, among other things, the accounting for certain derivatives
embedded in other financial instruments. This statement permits fair value remeasurement for
any hybrid financial instrument containing an embedded derivative that would otherwise require
bifurcation. It also requires that beneficial interests in securitized financial assets be
accounted for in accordance with SFAS No. 133. SFAS 155 is effective for fiscal years beginning
after September 15, 2006, and is not expected to have a material impact on the Companys
financial operations or financial positions.
 On July 13, 2006, the FASB issued Interpretation No. 48 (FIN No. 48) Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with SFAS No. 109,
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Accounting for Income Taxes. FIN No. 48 prescribes
a recognition threshold and measurement principles for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is assessing the impact the
adoption of FIN No. 48 will have on the Companys consolidated financial position and results
of operations.In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157) which
provides enhanced guidance for using fair value to measure assets and liabilities. The standard
also expands the amount of disclosure regarding the extent to which companies measure assets
and liabilities at fair value, the
information used to measure fair value, and the effect of fair value measurements on earnings.
The standard applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value but does not expand the use of fair value in any new circumstances.
This statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is currently
reviewing the impact, if any, that SFAS 157 will have on its consolidated financial statements.In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). This statement requires an employer that is a business entity to
recognize in its balance sheet the over funded or under funded status of a defined benefit
postretirement plan measured as the difference between the fair value of plan assets and the
benefit obligation. The recognition of the net liability or asset will require an offsetting
adjustment to accumulated other comprehensive income in shareholders equity. SFAS 158 does
not change how pensions and other postretirement benefits are accounted for and reported in the
income statement. This statement is effective for fiscal years ending after December 15, 2006.
The Company will be required to apply the new standard for its 2006 year-end financial
statements and recognize on the 2006 balance sheet the funded status of pension and other
postretirement benefit plans. The Company estimates that adoption of this statement will
increase the Companys recorded liabilities by approximately $9 million with no impact to the
statement of operations.In October 2006, the FASB ratified EITF 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This
statement is effective for years beginning after December 15, 2007. This statement clarifies
FASB 106, Employers Accounting for Post-Retirement Benefits other than Pensions, applies to
endorsement split-dollar life insurance arrangements. The Company estimates that adoption of
this statement will increase the Companys recorded liabilities by approximately $2 million
with no impact to the statement of operations or cash flows of the Company . The Company has
purchased life insurance policies that are designed to pay a death benefit that is greater than
the promised retirement benefit.
  Year end financial statements at January 31, 2006 reflect inventories verified by physical
counts with the material content valued by the LIFO method. At October 31, 2006 and 2005, there
were no physical verifications of inventory quantities. Cost of sales is recorded at current
cost. The effect of penetrating LIFO layers is not recorded at interim dates unless the
reduction in inventory is expected to be permanent. No such adjustments have been made for the
periods ended October 31, 2006 and 2005. LIFO reserves at October 31, 2006 and January 31, 2006
were $6,423,000. LIFO reserves at October 31, 2005 were $6,201,000. Management continually
monitors production costs, material costs and inventory levels to determine that interim
inventories are fairly stated.
  The Company has entered into a revolving credit facility with Wells Fargo Bank, amended and
restated in December 2005, which provides a term loan of $20,000,000 and a secured revolving
line of credit that varies as a percentage of inventory and receivables, up to a maximum of
$40,000,000. The revolving line of credit increases to $50,000,000 between May and September.
The term note is a two-year loan amortizing at $5,000,000 per year with interest payable monthly
at a fluctuating rate equal to Wells Fargo Banks prime rate (8.25% at October 31, 2006) plus a
2% margin.The revolving line has a 24-month maturity with interest payable monthly at a fluctuating rate
equal to Wells Fargo Banks prime rate plus a fluctuating margin similar to the term note. The
revolving line typically provides
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for advances of 80% on eligible accounts receivable and 20% 
60% on eligible inventories. The advance rates fluctuate depending on the time of the year and
the types of assets. The agreement has an unused commitment fee of 0.375%. Approximately
$24,917,000 was available for borrowing as of October 31, 2006.The revolving credit facility with Wells Fargo Bank is subject to various financial covenants
including a minimum EBITDA and an annual clean down. The annual clean down provision limits the
Companys outstanding debt balance at a maximum of $30 million for a period of 90 consecutive
days during the fourth quarter ending January 31, 2007. The agreement also places certain
restrictions on capital expenditures, new
operating leases, dividends and the repurchase of the Companys common stock. The revolving
credit facility is secured by the Companys accounts receivable, inventories, equipment and
property. The Company was in compliance with its covenants at October 31, 2006 and January 31,
2006. At October 31, 2005, the Company was in violation of certain of its loan covenants. In
December 2005, the Company restructured its debt with Wells Fargo Bank, which waived the October
31, 2005 covenant violation and amended the terms of the loan and several of the financial
covenants. The $15,877,000 due under Wells Fargo Banks line of credit will be payable on
February 15, 2008, if the agreement is not renewed. The Company currently intends to renew the
agreement.
  The Company recognizes deferred income taxes under the asset and liability method of accounting
for income taxes in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes are recognized
for differences between the financial statement and tax basis of assets and liabilities at
enacted statutory tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In assessing the realizability of deferred tax assets,
the Company considers whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income or reversal of deferred tax liabilities during the
periods in which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based on this consideration, management believes
it is more likely than not that the net deferred tax assets will not be realized, and a
valuation allowance has been recorded against the net deferred tax assets at October 31, 2006,
January 31, 2006 and October 31, 2005.
 At January 31, 2006, the Company had net operating losses that can potentially be carried
forward for federal and state income tax purposes, expiring at various dates through 2026 if
not utilized. Federal net operating losses that can potentially be carried forward total
approximately $27,411,000 at January 31, 2006. State net operating losses that can potentially
be carried forward total approximately $51,122,000 at January 31, 2006. Net operating losses
carried forward will be utilized to offset taxable income realized for the nine months ended
October 31, 2006.
 For the nine months ended October 31, 2006, the Company recognized an income tax expense of
$240,000 due to alternative minimum tax and minimum income and franchise taxes as required by
various states and local tax authorities. For the nine months ended October 31, 2005, the
Company recognized a net income tax benefit of $109,000.
  The following table sets forth the computation of income per share:
 Three Months Ended
    
    Nine Months Ended10/31/2006
    
    10/31/2005
    
    10/31/2006
    
    10/31/2005(In thousands, except per share data)
    
    (In thousands, except per share data)Net income (loss)
    
    $
    5,833
    
    
    $
    (2,194
    )
    
    $
    10,398
    
    
    $
    (1,792
    )Average shares outstanding
    
    
    14,362
    
    
    
    13,146
    
    
    
    13,475
    
    
    
    13,111Net effect of dilutive stock
options based on the treasury
stock method using average market
price
    
    
    2
    
    
    
    
    
    
    
    24
    
    
    
    Totals
    
    
    14,364
    
    
    
    13,146
    
    
    
    13,499
    
    
    
    13,111Net income (loss) per share  basic
    
    $
    0.41
    
    
    $
    (0.17
    )
    
    $
    0.77
    
    
    $
    (0.14
    )Net income (loss) per share 
diluted
    
    $
    0.41
    
    
    $
    (0.17
    )
    
    $
    0.77
    
    
    $
    (0.14
    )
 Potentially dilutive options and grants in the aggregate of
211,000 and 239,000 for the three and nine months ended
October 31, 2005 have been excluded from the calculation of the
diluted loss per share as their effect would have been anti-dilutive.
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Stock Option PlansThe Companys two stock plans are the 1997 Employee Incentive Plan (the 1997 Plan) and the
1993 Employee Incentive Stock Plan (the 1993 Plan). Under the 1993 Plan, the Company was
authorized to grant an aggregate of 707,384 shares (as adjusted for stock splits and stock
dividends) to its employees in the form of stock options. The 1993 Plan expired in 2003 and had
47,182 unexercised options outstanding at October 31, 2006. Under the 1997 Plan, the Company
may grant an aggregate of 724,729 shares (as adjusted for stock splits and stock dividends) to
its employees in the form of stock options or awards. As of October 31, 2006, the 1997 Plan had
234,594 unexercised options outstanding. Options granted under these plans have an exercise
price equal to the market price at the date of grant, have a maximum term of 10 years and
generally become exercisable ratably over a five-year period. The Company did not grant any
stock options during the quarter and the nine months ended October 31, 2006.The shares of common stock issued upon exercise of a previously granted stock option are
considered new issuances from shares reserved for issuance upon adoption of the various plans.
While the Company does not have a formal written policy detailing such issuance, it requires
that the option holders provides a written notice of exercise to the stock plan administrator
and payment for the shares prior to issuance of the shares.Accounting for the PlansPrior to February 1, 2006, the Company accounted for incentive stock plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock Based Compensation. No stock based employee compensation was reflected in net income, as
all options granted under those plans had an exercise price equal to the fair value of the
underlying common stock on the date of grant. Effective February 1, 2006 the Company adopted
the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment,
using the modified prospective-transition. The modified prospective method was applied to those
unvested options issued prior to the Companys adoption that have historically been accounted
for under the Intrinsic Value Method. All outstanding options were 100% vested prior to the
adoption. Accordingly, no compensation expense was recorded on the Companys options during the
three months and nine months ended October 31, 2006. The following table illustrates the impact
on net earnings and earnings per common share if the fair value method had been applied for all
periods presented.
 Three Months Ended
    
    Nine months ended10/31/2006
    
    10/31/2005
    
    10/31/2006
    
    10/31/2005(In thousands, except per share data)
    
    (In thousands, except per share data)Net income (loss), as reported
    
    $
    5,833
    
    
    $
    (2,194
    )
    
    $
    10,398
    
    
    $
    (1,792
    )Total stock-based employee compensation expense
determined under the fair value based method for
all awards, net of related tax effects
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    38Pro forma net income (loss)
    
    $
    5,833
    
    
    $
    (2,205
    )
    
    $
    10,398
    
    
    $
    (1,830
    )
 11




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##### Table of Contents



Three Months Ended
    
    Nine months ended10/31/2006
    
    10/31/2005
    
    10/31/2006
    
    10/31/2005(In thousands, except per share data)
    
    (In thousands, except per share data)Net income (loss) per share  basic, as reported
    
    $
    0.41
    
    
    $
    (0.17
    )
    
    $
    0.77
    
    
    $
    (0.14
    )Net income (loss) per share  diluted, as reported
    
    $
    0.41
    
    
    $
    (0.17
    )
    
    $
    0.77
    
    
    $
    (0.14
    )Weighted average shares outstanding  basic
    
    
    14,362
    
    
    
    13,146
    
    
    
    13,475
    
    
    
    13,111Weighted average shares outstanding  diluted
    
    
    14,364
    
    
    
    13,146
    
    
    
    13,499
    
    
    
    13,111
 The Company has estimated the fair value of all stock option awards as of the date of grant by
applying the Black-Scholes pricing valuation model. The application of this valuation model
involves assumptions that are judgmental and sensitive in the determination of compensation
expense. Historical information was the primary basis for the selection of the expected
volatility and life of the option. The risk-free interest rate was selected based upon the
yield of the U.S. Treasury issue with a term equal to the expected life of the option being
valued.
 Stock option activity during the three and nine months ended October 31, 2006 is as follows:
 Weighted AverageWeighted
    
    Remaining
    
    AggregateNumber of
    
    Average
    
    Contractual Term (in
    
    Intrinsic ValueShares
    
    Exercise Price
    
    yrs.)
    
    (in thousands)Outstanding at February 1, 2006
    
    
    292,571
    
    
    $
    11.56
    
    
    
    2.49Lapsed
    
    
    (10,795
    )
    
    
    13.30Exercised
    
    
    Granted
    
    
    Outstanding at April 30, 2006
    
    
    281,776
    
    
    
    11.50
    
    
    
    2.25
    
    
    $
    Lapsed
    
    
    Exercised
    
    
    Granted
    
    
    Outstanding at July 31, 2006
    
    
    281,776
    
    
    
    11.50
    
    
    
    1.99
    
    
    
    Lapsed
    
    
    (47,182
    )
    
    
    6.37Exercised
    
    
    Granted
    
    
    Outstanding at October 31, 2006
    
    
    234,594
    
    
    
    12.53
    
    
    
    2.10
    
    
    
    
 As all options had vested prior to February 1, 2006, there was no effect on the statement of
operations or cash flows due to the adoption of FASB Statement
No. 123(R).Restricted Stock Unit AwardsOn June 30, 2004, the Company granted a total of 270,000 restricted stock units, with an
estimated fair value of $6.92 per unit and exercise price of $0.01 per unit, to eligible
employees under the 1997 Plan. Interests in such restricted stock units vest ratably over five
years, with such units vesting 20% at each anniversary date. At such time that the restricted
stock units vest, they become exchangeable for shares of common stock. As such, 153,000 of the
units remain outstanding as of October 31, 2006. Compensation expense is recognized based on
the estimated fair value of restricted stock units and vesting provisions. Compensation expense
incurred in connection with this award was $88,000 and $99,000 for quarters ended October 31,
2006 and 2005, respectively. Compensation expense incurred in connection with this award was
$265,000 and $296,000 for nine months ended October 31, 2006 and 2005, respectively. As of
October 31, 2006, there was
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##### Table of Contents



approximately $941,000 of unrecognized compensation cost related to
non-vested restricted stock unit awards, which is expected to be recognized through June 30,
2009.On January 13, 2006, the Company granted a total of 73,881 restricted stock units, with an
estimated fair value of $5.21 per unit and exercise price of $0.01 per unit, to non-employee
directors under the 1997 Plan. Interests in such restricted stock units vest 100% on July 5,
2006. Compensation expense is recognized based on the estimated fair value of restricted stock
units and vesting provisions. For the nine months ended October 31, 2006, compensation expense
incurred in connection with this award was $343,000. As of October 31, 2006, there was no
unrecognized compensation cost related to this award.On June 20, 2006, the Company granted a total of 17,640 shares of restricted stock, with an
estimated fair value of $4.96 per unit and exercise price of $0.01 per unit, to non-employee
directors under the 1997 Plan. Interests in such restricted stock units vest 100% on June 19,
2007. Compensation expense is recognized based on the estimated fair value of restricted stock
units and vesting provisions. For the three ended October
31, 2006, compensation expense incurred in connection with this award was $36,000. As of
October 31, 2006, there was approximately $51,000 of unrecognized compensation cost related to
non-vested restricted stock unit awards. The cost is expected to be recognized through May 31,
2007. In connection with the grant of these restricted stock units all outstanding,
unexercised stock options held by the non-employee directors were cancelled.As the compensation cost for the restricted stock units was measured using the estimated fair
value on the date of grant and recognized over the vesting period, there was no effect on the
statements of operations, due to the adoption of FASB Statement
No. 123(R). At February 1, 2006,
the Company recorded a transitional reclassification of $247,000 from current liabilities to
additional paid-in capital.
  Comprehensive income (loss) for the three and nine months ended October 31, 2006 and 2005 was
the same as net income (loss) reported on the statements of operations. Accumulated
comprehensive income (loss) at October 31, 2006 and 2005 and January 31, 2006 is composed of
minimum pension liability adjustments.
  The Company and its subsidiaries cover all employees under a noncontributory defined benefit
retirement plan, entitled the Virco Employees Retirement Plan (the Plan). Benefits under the
Plan are based on years of service and career average earnings. As more fully described in the
Form 10-K for the period ended January 31, 2006, benefit accruals under this plan were frozen
effective December 31, 2003.
 The Company also provides a supplementary retirement plan for certain key employees, the VIP
Retirement Plan (the VIP Plan). The VIP Plan provides a benefit of up to 50% of average
compensation for the last five years in the VIP Plan, offset by benefits earned under the Plan.
As more fully described in the Form 10-K for the period ended January 31, 2006, benefit
accruals under this plan were frozen effective December 31, 2003.
 The Company also provides a non-qualified plan for non-employee directors of the Company (the
Non-Employee Directors Retirement Plan). The Non-Employee Directors Retirement Plan provides
a lifetime annual retirement benefit equal to the directors annual retainer fee for the fiscal
year in which the director terminates his or her position with the Board, subject to the
director providing 10 years of service to the Company. As more fully described in the Form 10-K
for the period ended January 31, 2006, benefit accruals under this plan were frozen effective
December 31, 2003.
 The net periodic pension costs for the Plan, the VIP Plan, and the Non-Employee Directors
Retirement Plan for the three months each ended October 31, 2006 and 2005 were as follows (in
thousands):
 13




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##### Table of Contents



Three Months EndedNon-Employee DirectorsPension Plan
    
    VIP Retirement Plan
    
    Retirement Plan2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Service cost
    
    $
    43
    
    
    $
    55
    
    
    $
    53
    
    
    $
    58
    
    
    $
    6
    
    
    $
    6Interest cost
    
    
    352
    
    
    
    337
    
    
    
    85
    
    
    
    89
    
    
    
    6
    
    
    
    6Expected return on
plan assets
    
    
    (246
    )
    
    
    (248
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of
transition amount
    
    
    (9
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of
prior service cost
    
    
    117
    
    
    
    107
    
    
    
    (134
    )
    
    
    (125
    )
    
    
    22
    
    
    
    22Recognized net
actuarial (Gain) or
loss
    
    
    41
    
    
    
    33
    
    
    
    34
    
    
    
    27
    
    
    
    (7
    )
    
    
    (7
    )Settlement and
curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic
pension cost
    
    $
    298
    
    
    $
    275
    
    
    $
    38
    
    
    $
    49
    
    
    $
    27
    
    
    $
    27
 Nine Months EndedNon-Employee DirectorsPension Plan
    
    VIP Retirement Plan
    
    Retirement Plan2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Service cost
    
    $
    129
    
    
    $
    165
    
    
    $
    159
    
    
    $
    174
    
    
    $
    18
    
    
    $
    18Interest cost
    
    
    1,056
    
    
    
    1,011
    
    
    
    255
    
    
    
    267
    
    
    
    18
    
    
    
    18Expected return on plan assets
    
    
    (738
    )
    
    
    (744
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition amount
    
    
    (27
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    351
    
    
    
    321
    
    
    
    (402
    )
    
    
    (375
    )
    
    
    66
    
    
    
    66Recognized net actuarial (Gain)
or loss
    
    
    123
    
    
    
    99
    
    
    
    102
    
    
    
    81
    
    
    
    (21
    )
    
    
    (21
    )Settlement and curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    894
    
    
    $
    825
    
    
    $
    114
    
    
    $
    147
    
    
    $
    81
    
    
    $
    81
  The Company provides a product warranty on most products. It generally warrants that customers
can return a defective product during the specified warranty period following purchase in
exchange for a replacement product or that the Company can repair the product at no charge to
the customer. The Company determines whether replacement or repair is appropriate in each
circumstance. The Company uses historic data to estimate appropriate levels of warranty
reserves. Because product mix, production methods, and raw material sources change over time,
historic data may not always provide precise estimates for future warranty expense. The
following is a summary of the Companys warranty claim activity for the three and nine month
periods each ended October 31, 2006 and 2005:
 Three months ended
    
    Nine months ended10/31/2006
    
    10/31/2005
    
    10/31/2006
    
    10/31/2005(In thousands)
    
    (In thousands)Beginning Accrued Warranty Balance
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500Provision
    
    
    258
    
    
    
    261
    
    
    
    660
    
    
    
    693Costs Incurred
    
    
    (258
    )
    
    
    (261
    )
    
    
    (660
    )
    
    
    (693
    )Ending Accrued Warranty Balance
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
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##### Table of Contents



On June 6, 2006, WEDBUSH, Inc. and Wedbush Morgan Securities, Inc. (Wedbush Morgan, and
together with WEDBUSH, Inc., the Purchasers), entered into a stock purchase agreement (the Agreement) with the
Company. Pursuant to the Agreement, (a) the Purchasers purchased from the Company shares (the
Shares) of the Companys common stock yielding gross proceeds to the Company of $5,000,000 at
a purchase price per share of $4.66 (the Per Share Purchase Price) and (b) the Company issued
warrants to the Purchasers exercisable for 268,010 shares of common stock pursuant to which the
Purchasers will have the right to acquire the 268,010 shares at an exercise price of 120% of
the Per Share Purchase Price during the first three years following the closing of the
transaction and at 130% of the Per Share Purchase Price during the fourth and fifth years
following the closing of the transaction. The Company filed a Registration Statement on Form
S-3 registering the resale of the Shares on July 6, 2006 and amended that registration
statement on August 17, 2006. The Registration Statement became effective on September 18,
2006. Wedbush Morgan holds the securities purchased pursuant to the Agreement as nominee on
behalf of its clients which purchased the securities.On June 26, 2006, certain members of management and certain Directors (the Follow-on Purchasers)
entered into a stock purchase agreement with the Company to purchase shares of common stock and warrants.
On August 29, 2006 this agreement was rescinded and replaced with a similar agreement for the purchase of
57,455 shares at a purchase price per share of $5.02 (the Follow-on Per Share Purchase Price) yielding gross
proceeds to the Company of approximately $288,000. Additionally the Company issued warrants
to the Follow-on Purchasers exercisable for 14,364 shares of common stock pursuant to which the
Follow-on Purchasers will have the right to acquire the 14,364 shares at an exercise price of
120% of the Follow-on Per Share Purchase Price during the first three years following the
closing of the transaction and at 130% of the Follow-on Per Share Purchase Price during the
fourth and fifth years following the closing of the transaction. The transaction closed during
the third quarter ended October 31, 2006. Although the shares were not issued as of October 31,
2006, they have been included as shares outstanding in accordance with SFAS No. 128
Earnings per Share, as the amounts due the Company were fully paid. The Company expects to
issue the 57,455 shares during the quarter ending January 31, 2007. The Company recorded
$65,000 in compensation expense during the second quarter ended July 31, 2006 based on the terms
of the June 26, 2006 agreement. Because the August 29, 2006
agreement set the Follow-on Per Share Purchase Price at the prior 10 day average market
price of $5.02 per share, no compensation
expense was required to be recorded, and the Company reversed the $65,000 compensation expense during the third
quarter ended October 31, 2006.The securities sold to the Purchasers and Follow-on Purchasers were issued pursuant to the
exemption from the registration requirements of the Securities Act of 1933, as amended (the
Securities Act), afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder, as a transaction to accredited and sophisticated investors not involving a public
offering. The proceeds from the sale of the Shares were used for general corporate purposes,
and the proceeds, if any, received from the exercise of the warrant agreements will be used to
reduce outstanding indebtedness and for general corporate purposes. At October 31, 2006, the
Company incurred $481,000 in closing costs, which were netted against the proceeds received.
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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of OperationsThree Months Ended October 31, 2006 and 2005For the third quarter of 2006, the Company earned net income of $5,833,000 on sales of
$73,678,000 compared to net loss of $2,194,000 on sales of $70,484,000 in the same period last
year.Sales for the third quarter ended October 31, 2006 increased by $3,194,000, a 4.5% increase,
compared to the same period last year. This increase in sales for the third quarter is
attributable to increases in selling prices, partially offset by a decrease in unit volume.
Incoming orders for the same period increased by approximately 5.8%. Backlog at October 31,
2006 is approximately 5% lower than at the same date last year.As more fully disclosed in the Companys Annual Report for the fiscal year ended January 31,
2006, during the fiscal years ended January 31, 2005 and January 31, 2006, the Company incurred
a severe increase in the cost of certain raw materials, especially steel and petroleum related
products such as plastic. Steel prices began to increase in the first quarter of 2004 and
reached a peak during the fourth quarter of 2004. Petroleum related products, especially
plastic, increased substantially in 2005. In addition to cost increases, in the third quarter of
2005 the Company incurred supply chain disruptions due to the hurricanes in the Gulf Coast
region of the United States. The Company did not suffer any comparable adverse business
conditions in 2006. In response to these cost increases, the Company raised selling prices in
2005, but did not raise them enough to compensate for the cumulative impact of the increases in
commodity costs. The Company substantially raised prices again at the beginning of 2006. The
combination of increased selling prices, combined with relatively stable raw materials costs
have returned gross margins to more traditional levels.Gross profit for the third quarter, as a percentage of sales, increased by more than 8% compared
to the same period last year. The increase in gross margin was attributable to increased prices
and to reduced manufacturing overhead variances. Of the $7 million increase in gross margin,
approximately two-thirds of the increase was attributable to increased selling prices and the
balance attributable to improved manufacturing variances. The Company started the second
quarter of 2006 with approximately $6 million more in inventory than in the prior year. The
Company ended the second quarter of 2006 with approximately $7 million less inventory than the
prior year. This reduction in inventory was attained by reducing production levels by
approximately 30% during the second quarter of 2006 compared to the prior year. Because the
Company entered the third quarter of 2006 with less inventory, it was able to increase third
quarter production by approximately 15% compared to the prior year. Production levels for the
second and third quarters of 2006 were comparable. The net result of running more production in
the third quarter, combined with the efficiencies realized by operating at stable levels of
production during the summer, contributed to an improvement in manufacturing variances.Selling, general and administrative expenses for the quarter ended October 31, 2006 decreased by
6.5% compared to the same period last year, and decreased as a percentage of sales by
approximately 3%. The decrease as a percentage of sales was primarily attributable to an
increase in the Companys selling prices combined with cost reductions in selling, general and
administrative expenses. The cost reductions were attributable to a slight reduction in unit
volume combined with cost reductions. In the third quarter of 2005, the Company incurred a
$742,000 restructuring charge related to a reduction in work force.Interest expense for the quarter ended October 31, 2006 increased by approximately $120,000
compared to the same period last year. The increase was primarily due to higher interest rates
offset by reduced levels of borrowing.Nine Months Ended October 31, 2006 and 2005For the nine months ended October 31, 2006, the Company earned net income of $10,398,000 on
sales of $186,788,000 compared to net loss of $1,792,000 on sales of $179,644,000 in the same
period last year.
 16




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##### Table of Contents



Sales for the nine months ended October 31, 2006 increased by $7,144,000, a 4% increase,
compared to the same period last year. The increase in sales for the first nine months is
attributable to increases in selling prices, partially offset by a decrease in unit volume.
Incoming orders for the first nine months increased by approximately 4.1%.Gross profit for the first nine months increased as a percent of sales by 4.7%. As described
above, and more fully disclosed in the Companys Annual Report on Form 10-K for the fiscal year
ended January 31, 2006, the Company incurred significant increases in raw material costs during
2004 and 2005, as well as supply chain disruptions related to hurricanes in the gulf region in
2005. The Company did not suffer any comparable adverse business conditions in 2006. The
Company raised prices in 2005 and again at the beginning of 2006, and margins are now
approximating those realized prior to the increases in material costs. The $11 million increase
in gross margin for the first nine months is primarily attributable to increased selling prices,
offset slightly by increased costs.Selling, general and administrative expenses for the nine months ended October 31, 2006
decreased slightly compared to the same period last year, and decreased as a percentage of sales
by approximately 2%. The decrease as a percentage of sales was primarily attributable to the
price increase. The decrease in spending for selling, general, and administration expenses was
attributable to a slight decrease in units shipped combined with the impact of a reduction in
force during the third quarter of 2005.Interest expense for the nine months ended October 31,
2006 increased by approximately $873,000 compared to the same period last year. The increase is
primarily due to higher interest rates combined with a slight increase in average borrowings
during the period.Financial ConditionAs a result of seasonally higher deliveries in the third quarter, accounts and notes receivable
increased compared to January 31, 2006. Receivables increased compared to the third quarter of
2005, partially due to increased sales and partially due to increased days sales outstanding.
The Company traditionally builds large quantities of inventory during the first six months in
anticipation of seasonally high summer shipments. This increase in inventory was significantly
less than the increase in the first six months of the prior year. The Company intentionally
reduced production levels during the second quarter of 2006 to more efficiently utilize
inventory, and to allow for more stable and higher levels of production during the third quarter
of 2006. The net effect was to move production from the second to the third quarter when
compared to the prior year operations. The net impact was that the Company ended the third
quarter of 2006 with approximately the same level of inventory as at the third quarter of 2005.
The seasonal increase in inventory and receivables was financed through the Companys credit
facility with Wells Fargo Bank and from proceeds from the sale of stock. At the end of the
third quarter, borrowings under the Companys lines with Wells Fargo Bank had been reduced to
under $16 million compared to over $26 million at October 31, 2005.On June 6, 2006, the Company sold 1,072,041 shares of its common stock (the Shares), and
warrants to purchase 268,010 shares of its common stock, to WEDBUSH, Inc. and clients of Wedbush
Morgan Securities, Inc. for an aggregate purchase price of $5 million, or $4.66 per Share (the
Per Share Purchase Price). On August 29, 2006, the Company entered into a follow-on investment
agreement with certain Directors and members of management. The investment with Directors and
management was made under substantially the same terms but at a higher price, for the issuance
of 57,455 shares of common stock and 14,363 warrants, yielding proceeds of approximately
$288,000. The investment with Directors and managers was completed subsequent to October 31,
2006. The Company incurred approximately $481,000 in closing costs which were netted against
the proceeds received from the sale of Shares. The cash received from the shares of stock was
used to strengthen the balance sheet and finance seasonal business activities.The Company has established a goal of limiting capital spending to less than $4,000,000 for
2006, which is approximately one-half of anticipated depreciation expense. Capital spending for
the nine months ended October 31, 2006, was $2,463,000 compared to $1,774,000 for the same
period last year. Capital expenditures are being financed through the Companys credit facility
with Wells Fargo Bank and operating cash flow.Net cash generated in operating activities for the nine months ended October 31, 2006 was
$8,905,000 compared to net cash used in operations of $419,000 for the same period last year.
The increase in operating
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##### Table of Contents



cash was attributable to the significant improvement in net income; offset by increased cash
used for receivables and increased cash used for inventory.The Company believes that cash flows from operations, cash raised from the June 6, 2006 and June
26, 2006 stock sales, and the Companys unused borrowing capacity under the Companys credit
facility will be sufficient to fund the Companys debt service requirements, capital
expenditures and working capital needs. Approximately $24,917,000 was available for borrowing as
of October 31, 2006 when calculated using the asset based advance formula. In order to comply
with debt covenants, the Company must meet a clean down requirement of less than $30 million
for 90 days. The Company anticipates that it will meet this requirement.Critical Accounting Policies and EstimatesThe Companys critical accounting policies are outlined in its Form 10-K for fiscal year ended
January 31, 2006.Forward-Looking StatementsFrom time to time, the Company or its representatives have made and may make forward-looking
statements, orally or in writing, including those contained herein. Such forward-looking
statements may be included in, without limitation, reports to stockholders, press releases, oral
statements made with the approval of an authorized executive officer of the Company and filings
with the Securities and Exchange Commission. The words or phrases anticipates, expects,
will continue, believes, estimates, projects, or similar expressions are intended to
identify forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The results contemplated by the Companys forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to vary materially
from anticipated results, including without limitation, material availability and cost of
materials, especially steel, availability and cost of labor, demand for the Companys products,
competitive conditions affecting selling prices and margins, capital costs and general economic
conditions. Such risks and uncertainties are discussed in more detail in the Companys Annual
Report on Form 10-K for the fiscal year ended January 31, 2006.The Companys forward-looking statements represent its judgment only on the dates such
statements were made. By making any forward-looking statements, the Company assumes no duty to
update them to reflect new, changed or unanticipated events or circumstances.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 The Company has entered into a revolving credit facility with Wells Fargo Bank, amended and
restated in December 2005, which provides a term loan of $20,000,000 and a secured revolving
line of credit that varies as a percentage of inventory and receivables, up to a maximum of
$40,000,000. The revolving line of credit increases to $50,000,000 between May and September.
The term note is a two-year loan amortizing at $5,000,000 per year with interest payable monthly
at a fluctuating rate equal to Wells Fargo Banks prime rate (8.25% at October 31, 2006) plus a
2% margin.The revolving line has a 24-month maturity with interest payable monthly at a fluctuating rate
equal to Wells Fargo Banks prime rate plus a fluctuating margin similar to the term note. The
revolving line typically provides for advances of 80% on eligible accounts receivable and 20% 
60% on eligible inventory. The advance rates fluctuate depending on the time of the year and the
types of assets. The agreement has an unused commitment fee of 0.375%. Approximately $24,917,000
was available for borrowing as of October 31, 2006.The revolving credit facility with Wells Fargo Bank is subject to various financial covenants
including a minimum requirement, minimum EBITDA and an annual clean down. The annual clean down
provision limits the Companys outstanding debt balance at a maximum of $30 million for a period
of 90 consecutive days during the fourth quarter ending January 31, 2007. The agreement also
places certain restrictions on capital expenditures, new operating leases, dividends and the
repurchase of the Companys common stock. The revolving credit facility is secured by the
Companys accounts receivable, inventories, equipment and property. The Company was in
compliance with its covenants at October 31, 2006, January 31, 2006. At October 31, 2005, the
Company was in violation of certain of its loan covenants. In December 2005, the Company
restructured its debt with Wells Fargo Bank, which waived the October 31, 2005 covenant
violation and amended the terms of the loan and several of the financial covenants. The
$15,877,000 due under Wells Fargo
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##### Table of Contents



Banks line of credit will be payable on February 15, 2008, if the agreement is not renewed. The
Company currently intends to renew the agreement.
 
 Item 4. Controls and Procedures
  The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed with the Securities and Exchange
Commission (the SEC) pursuant to the Securities Exchange Act of 1934, as amended (the
Exchange Act) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its President and Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Assessing the costs and benefits of such controls and procedures necessarily
involves the exercise of judgment by management, and such controls and procedures, by their
nature, can provide only reasonable assurance that managements objectives in establishing them
will be achieved.We carried out an evaluation, under the supervision and with the participation of the Companys
management, including the Companys President and Chief Executive Officer along with the
Companys Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the period covered by this
Quarterly Report pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Companys
President and Chief Executive Officer, along with the Companys Chief Financial Officer and
other members of management, concluded that the Companys disclosure controls and procedures are
effective in ensuring that (i) information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms and (ii) information
required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Companys management, including its
President and Chief Executive Officer as well as its Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure.
  No changes in the Companys internal control over financial reporting have come to managements
attention during the last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, its internal control over financial reporting.
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PART II
   
 Unregistered Sales of Equity Securities, Use of Proceeds
 On June 6, 2006, WEDBUSH, Inc. and Wedbush Morgan Securities, Inc. (Wedbush Morgan, and
together with WEDBUSH, Inc., the Purchasers), entered into a stock purchase agreement
(the Agreement) with the Company. Pursuant to the Agreement, (a) the Purchasers purchased from
the Company shares (the Shares) of the Companys common stock yielding gross proceeds to the
Company of $5,000,000 at
a purchase price per share of $4.66 (the Per Share Purchase Price) and (b) the Company issued
warrants to the Purchasers exercisable for 268,010 shares of common stock pursuant to which the
Purchasers will have the right to acquire the 268,010 shares at an exercise price of 120% of
the Per Share Purchase Price during the first three years following the closing of the
transaction and at 130% of the Per Share Purchase Price during the fourth and fifth years
following the closing of the transaction. The Company filed a Registration Statement on Form
S-3 registering the resale of the Shares on July 6, 2006 and amended that registration
statement on August 17, 2006. The Registration Statement became effective on September 18,
2006. Wedbush Morgan holds the securities purchased pursuant to the Agreement as nominee on
behalf of its clients which purchased the securities.On June 26, 2006 certain members of management and
certain Directors (the Follow-on Purchasers)
entered into a stock purchase agreement with the Company (the Follow-on Agreement),
purchasing 57,455 shares at a purchase price per share of $5.02 (the Follow-on Per Share
Purchase Price) yielding gross proceeds to the Company of approximately $288,000.
Additionally, the Company issued warrants to the Follow-on Purchasers exercisable for 14,364
shares of common stock pursuant to which the Follow-on Purchasers will have the right to
acquire the 14,364 shares at an exercise price of 120% of the Follow-on Per Share Purchase
Price during the first three years following the closing of the transaction and at 130% of the
Follow-on Per Share Purchase Price during the fourth and fifth years following the closing of
the transaction. The transaction closed during the third quarter ended October 31, 2006.
Although the shares were not issued as of October 31, 2006, they have been included as shares
outstanding in accordance with SFAS No. 128 Earnings per Share, as the amounts due the Company
were fully paid. The Company expects to issue the 57,455 shares during the quarter ending
January 31, 2007.The securities sold to the Purchasers and Follow-on Purchasers pursuant to the Agreements were
issued pursuant to the exemption from the registration requirements of the Securities Act of
1933, as amended (the Securities Act), afforded by Section 4(2) of the Securities Act and
Rule 506 of Regulation D thereunder, as a transaction to accredited and sophisticated investors
not involving a public offering. The proceeds from the sale of the Shares were used for general
corporate purposes, and the proceeds, if any, received from the exercise of the warrant
agreements will be used to reduce outstanding indebtedness and for general corporate purposes.
At October 31, 2006, the Company incurred $492,000 in closing costs, which were netted against
the proceeds received.
 
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VIRCO MFG. CORPORATIONDate: December 8, 2006
    
    By:
    
    /s/ Robert E. DoseRobert E. DoseVice President  Finance
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