UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)





x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
Quarter Ended December 31, 2009





o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
  ACT





For the
transition period from ____________ to ____________





Commission
file number:  0-15224





Advance
      Display Technologies, Inc.(Exact
      name of registrant as specified in its
charter)





Colorado
            
            84-0969445(State
      of incorporation)
            
            (IRS
      Employer ID number)





7334
      South Alton Way, Suite F, Centennial, CO 80112(Address
      of principal executive offices)  (Zip
  Code)





(303)
      267-0111(Issuer’s
      telephone number, including area
code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


YES   x  NO   o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


YES   oNO   o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “larger accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            Smaller
      reporting company
            x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES   o     NO   x





As of
February 16, 2010, there were 32,014,723 shares of the registrant’s common stock
outstanding.










ADVANCEDISPLAY TECHNOLOGIES, INC.INDEXPART
      I.  FINANCIAL INFORMATIONPageItem
      1.
            
            Financial StatementsConsolidated Balance Sheets - December 31, 2009 (unaudited) and
      June 30, 2009
            
            1Consolidated Statements of Operations (unaudited) Three and six
      months ended December 31, 2009 and 2008 and for the period from March 15,
      1995, inception, to December 31, 2009
            
            2Consolidated Statements of Cash Flows (unaudited) Six months
      ended December 31, 2009 and 2008 and for the period from March 15, 1995,
      inception, to December 31, 2009
            
            3Notes to Consolidated Financial Statements
      (unaudited)
            
            5Item
      2.
            
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            
            10Item
      3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            17Item
      4.
            
            Controls and Procedures
            
            17PART
      II.  OTHER INFORMATIONItem
      1.
            
            Legal Proceedings
            
            18Item
      1A.
            
            Risk Factors
            
            18Item
      2.
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            18Item
      3.
            
            Defaults Upon Senior Securities
            
            18Item
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            
            18Item
      5.
            
            Other Information
            
            19Item
      6.
            
            Exhibits
            
            19Signatures


Index


Item1.


ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


CONSOLIDATED
BALANCE SHEETS


December
      31,
              2009
            
            
            June
      30,
              2009(Unaudited)ASSETSCurrent
      Assets:Cash
            
            $
            305,566
            
            
            $
            1,320,358Component
      inventory, net of reserve for obsolescence
            
            
            492,762
            
            
            
            429,350Work
      in progress inventory
            
            
            1,935,452
            
            
            
            1,624,001Finished
      Goods inventory
            
            
            619,342
            
            
            
            531,685Vendor
      deposits
            
            
            64,173
            
            
            
            29,775Other
      current assets
            
            
            63,406
            
            
            
            54,893Total
      current assets
            
            
            3,480,701
            
            
            
            3,990,062Property
      and Equipment, Net
            
            
            1,037,284
            
            
            
            1,381,888Deferred
      Manufacturing Costs, Net
            
            
            256,270
            
            
            
            344,134Deposits
            
            
            31,353
            
            
            
            31,353Total
      Assets
            
            $
            4,805,608
            
            
            $
            5,747,437LIABILITIES AND STOCKHOLDERS’ EQUITY
      (DEFICIT)Current
      Liabilities:Accounts
      payableTrade
            
            $
            388,938
            
            
            $
            551,732Related
      party
            
            
            85,095
            
            
            
            62,979Senior
      secured revolving convertible note, net of debt discount, to related
      parties
            
            
            11,525,293
            
            
            
            7,135,357Demand
      notes to related parties
            
            
            100,000
            
            
            
            100,000Accrued
      interest payable to related parties
            
            
            598,727
            
            
            
            381,715Other
      accrued liabilities
            
            
            41,544
            
            
            
            95,913Total
      current liabilities
            
            
            12,739,597
            
            
            
            8,327,696Long-term
      obligations, less current maturities
            
            
            31,533
            
            
            
            32,281Total
      liabilities
            
            
            12,771,130
            
            
            
            8,359,977COMMITMENTS
      AND CONTINGENCIESStockholders’ Equity
      (Deficit):Preferred
      Series D stock, $.001 par value, 500,000,000 shares authorized,
      177,002,763 shares issued and outstanding.
            
            
            177,003
            
            
            
            177,003Common
      stock, $.001 par value,1,000,000,000 shares authorized, 32,014,723 issued
      and outstanding
            
            
            32,015
            
            
            
            32,015Additional
      paid-in capital
            
            
            23,813,716
            
            
            
            23,201,490Deficit
      accumulated during the development stage
            
            
            (31,988,256
            )
            
            
            (26,023,048
            )Total
      stockholders’ equity (deficit)
            
            
            (7,965,522
            )
            
            
            (2,612,540
            )Total
      Liabilities and Stockholders’ Equity (Deficit)
            
            $
            4,805,608
            
            
            $
            5,747,437





(See
accompanying notes to consolidated, unaudited financial
statements)


1
 Index


ADVANCEDISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


Three
      Months Ended
              December
      31,
            
            
            Six
      Months Ended
              December
      31,
            
            
            Cumulative
      From Inception
              (March
      15, 1995)
              Through
      December 31,2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009Consulting
      Revenue
            
            $
            ---
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            91,014Other
      Income:Related
      party interest income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            162,761Other
      interest income
            
            
            498
            
            
            
            289
            
            
            
            905
            
            
            
            719
            
            
            
            31,398Settlement
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            463,179Other
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            550Total
      revenue and other income
            
            
            498
            
            
            
            289
            
            
            
            905
            
            
            
            719
            
            
            
            748,902Costs
      and Expenses:Cost
      of consulting revenue
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            93,648Manufacturing
      operations
            
            
            525,830
            
            
            
            382,247
            
            
            
            1,080,083
            
            
            
            1,136,753
            
            
            
            3,972,814General
      and administrative
            
            
            485,234
            
            
            
            493,468
            
            
            
            973,567
            
            
            
            969,877
            
            
            
            9,874,430Marketing
            
            
            364,472
            
            
            
            148,675
            
            
            
            724,562
            
            
            
            437,934
            
            
            
            2,389,485Research
      and development
            
            
            299,896
            
            
            
            97,418
            
            
            
            588,651
            
            
            
            167,695
            
            
            
            9,317,497Impairment
      of intangible asset
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            451,492Interest
      expense – related parties
            
            
            290,417
            
            
            
            97,792
            
            
            
            533,464
            
            
            
            147,203
            
            
            
            4,998,058Total
      costs and expenses
            
            
            1,965,849
            
            
            
            1,219,600
            
            
            
            3,900,327
            
            
            
            2,859,462
            
            
            
            31,097,424Operating
      Loss
            
            $
            (1,965,351
            )
            
            $
            (1,219,311
            )
            
            $
            (3,899,422
            )
            
            $
            (2,858,743
            )
            
            $
            (30,348,522
            )Other
      Income and  Expenses:Change
      in derivative conversion feature
            
            
            ---
            
            
            
            3,148,638
            
            
            
            ---
            
            
            
            3,148,638
            
            
            
            4,917,976Interest
      expense - derivative conversion feature
            
            
            ---
            
            
            
            (1,516,736
            )
            
            
            ---
            
            
            
            (1,516,736
            )
            
            
            (1,516,736
            )Amortization
      of debt discount
            
            
            (668,521
            )
            
            
            (508,383
            )
            
            
            (2,065,786
            )
            
            
            (508,383
            )
            
            
            (5,017,587
            )Total
      other income and expenses
            
            
            (668,521
            )
            
            
            1,123,519
            
            
            
            (2,065,786
            )
            
            
            1,123,519
            
            
            
            (1,616,347
            )Loss
      Before  Discontinued Operations and Extraordinary
      Gain
            
            $
            (2,633,872
            )
            
            $
            (95,792
            )
            
            $
            (5,965,208
            )
            
            $
            (1,735,224
            )
            
            $
            (31,964,869
            )Loss
      from discontinued operations
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (202,278
            )Gain
      on disposal of discontinued operations
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            108,652Loss
      Before Extraordinary Gain
            
            $
            (2,633,872
            )
            
            $
            (95,792
            )
            
            $
            (5,965,208
            )
            
            $
            (1,735,224
            )
            
            $
            (32,058,495
            )Extraordinary
      Gain Due to Extinguishment of Debt
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            328,785Net
      Loss
            
            $
            (2,633,872
            )
            
            $
            (95,792
            )
            
            $
            (5,965,208
            )
            
            $
            (1,735,224
            )
            
            $
            (31,729,710
            )accrued
      preferred series e dividend
            
            
            ---
            
            
            
            (12,612
            )
            
            
            ---
            
            
            
            (25,224
            )
            
            
            (258,546
            )Net
      loss applicable to common shareholders
            
            $
            (2,633,872
            )
            
            $
            (108,404
            )
            
            $
            (5,965,208
            )
            
            $
            (1,760,448
            )
            
            $
            (31,988,256
            )net
      loss per common share  (basic and dilutive):
            
            $
            (.08
            )
            
            $
            (.00
            )
            
            $
            (.19
            )
            
            $
            (.07
            )weighted
      average number of common shares outstanding
            
            
            32,014,723
            
            
            
            26,198,177
            
            
            
            32,014,723
            
            
            
            26,198,177





(See
accompanying notes to consolidated, unaudited financial
statements)


2
 Index


ADVANCEDISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


Six
      Months Ended
              December
      31,
            
            
            Cumulative
      From Inception
              (March
      15, 1995) Through December 31,2009
            
            
            2008
            
            
            2009cash
      flows from (to) operating activities:Net
      (Loss)
            
            $
            (5,965,208
            )
            
            $
            (1,735,224
            )
            
            $
            (31,729,710
            )Adjustments to
      reconcile net loss to netCash
      used in operating activities:Loss
      from discontinued operations
            
            
            ---
            
            
            
            ---
            
            
            
            202,278Gain
      on disposition of discontinued operations
            
            
            ---
            
            
            
            ---
            
            
            
            (108,652
            )Gain
      on debt forgiven
            
            
            ---
            
            
            
            ---
            
            
            
            (496,777
            )Acquired
      research and development expense
            
            
            ---
            
            
            
            ---
            
            
            
            2,536,494Reserve
      for inventory obsolescence
            
            
            31,211
            
            
            
            ---
            
            
            
            254,287Impairment
      of intangible asset
            
            
            ---
            
            
            
            ---
            
            
            
            451,492Impairment
      of assets
            
            
            196,840
            
            
            
            ---
            
            
            
            952,170Depreciation
      and amortization
            
            
            343,587
            
            
            
            322,679
            
            
            
            1,414,754Amortization
      of deferred merger costs
            
            
            ---
            
            
            
            ---
            
            
            
            75,000Stock
      and stock option compensation expense
            
            
            86,375
            
            
            
            94,628
            
            
            
            716,521Interest
      expense related to debt discount
            
            
            2,065,786
            
            
            
            508,383
            
            
            
            6,911,160Interest
      expense related to derivative conversion feature on debt
            
            
            ---
            
            
            
            1,516,736
            
            
            
            1,516,736Change
      in derivative conversion feature
            
            
            ---
            
            
            
            (3,148,638
            )
            
            
            (4,917,976
            )Loss
      on disposal of property and equipment
            
            
            ---
            
            
            
            ---
            
            
            
            8,765(Increase)
      decrease in:Inventory
            
            
            (493,731
            )
            
            
            (1,003,217
            )
            
            
            (3,996,144
            )Vendor
      deposits
            
            
            (34,398
            )
            
            
            14,229
            
            
            
            (64,173
            )Other
      current assets
            
            
            (8,513
            )
            
            
            230
            
            
            
            (118,133
            )(Decrease)  increase
      in:Accounts
      payable
            
            
            (140,677
            )
            
            
            (207,052
            )
            
            
            436,334Interest
      payable to shareholders
            
            
            217,012
            
            
            
            147,201
            
            
            
            2,715,081Other
      accrued liabilities
            
            
            (52,110
            )
            
            
            (16,534
            )
            
            
            (126,569
            )Net
      cash used in operating activities
            
            
            (3,753,826
            )
            
            
            (3,506,579
            )
            
            
            (23,367,062
            )cash
      flows from (to)  investing activities:Purchases
      of property and equipment
            
            
            (107,959
            )
            
            
            (378,329
            )
            
            
            (2,229,581
            )Proceeds
      from sale of property and equipment
            
            
            ---
            
            
            
            ---
            
            
            
            17,030Long-term
      deposits
            
            
            ---
            
            
            
            ---
            
            
            
            (33,111
            )Deferred
      manufacturing costs
            
            
            ---
            
            
            
            (112,630
            )
            
            
            (525,598
            )Advances
      to affiliates
            
            
            ---
            
            
            
            ---
            
            
            
            (932,925
            )Purchase
      of notes receivable and security interest
            
            
            ---
            
            
            
            ---
            
            
            
            (225,000
            )Cash
      received in acquisition
            
            
            ---
            
            
            
            ---
            
            
            
            303,812Net
      cash used in investing activities
            
            
            (107,959
            )
            
            
            (490,959
            )
            
            
            (3,625,373
            )cash
      flows from (to) financing activities:Proceeds
      from stock sales
            
            
            ---
            
            
            
            ---
            
            
            
            9,505,877Proceeds
      from exercise of options
            
            
            ---
            
            
            
            ---
            
            
            
            14,400Proceeds
      from notes payable to shareholders
            
            
            2,850,000
            
            
            
            3,100,000
            
            
            
            17,496,754Proceeds
      from line of credit
            
            
            ---
            
            
            
            ---
            
            
            
            299,505Principal
      payments on leased equipment
            
            
            (3,007
            )
            
            
            (2,682
            )
            
            
            (18,535
            )Net
      cash provided by financing activities
            
            
            2,846,993
            
            
            
            3,097,318
            
            
            
            27,298,001Increase
      (decrease) in cash
            
            
            (1,014,792
            )
            
            
            (900,220
            )
            
            
            305,566Cash
      & cash equivalent at beginning of period
            
            
            1,320,358
            
            
            
            1,271,364
            
            
            
            ---Cash
      & cash equivalent at end of period
            
            $
            305,566
            
            
            $
            371,144
            
            
            $
            305,566





(See
accompanying notes to consolidated, unaudited financial
statements)


3
 Index




ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Continued)


Six
      Months Ended
              December
      31,
            
            
            March
      15, 1995
              (Inception)
      Through
              December
      31,2009
            
            
            2008
            
            
            2009Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for:Interest
            
            $
            316,452
            
            
            $
            ---
            
            
            $
            343,022Non-cash
      transactions:Issuance
      of common stock for acquisition of Display Group, LLC and Display Optics,
      Ltd. and conversion of convertible debt
            
            $
            ---
            
            
            $
            ---
            
            
            $
            2,199,026Conversion
      of notes payable stockholders to common stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            550,000Conversion
      of interest payable on notes to notes payable
            
            $
            ---
            
            
            $
            ---
            
            
            $
            12,354Retirement
      of shares in settlement
            
            $
            ---
            
            
            $
            ---
            
            
            $
            1,402Extinguishment
      of debt and trade payables
            
            $
            ---
            
            
            $
            ---
            
            
            $
            496,777Acquired
      membership interest in Regent Theaters and RegentReleasing,
      LLC
            
            $
            ---
            
            
            $
            ---
            
            
            $
            50,000Conversion
      of Preferred Series C stock to common stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            1,844Subscriptions
      for Preferred Series D stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            400,000Cancellation
      of Subscriptions for Preferred Series D stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (325,000
            )Conversion
      of convertible, redeemable promissory notes to Preferred Series D
      Stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            740,000Conversion
      of interest on convertible, redeemable promissory notes to Preferred
      Series D Stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            273,330Conversion
      of demand notes and accrued interest to Preferred Series E
      stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            1,008,985Conversion
      of convertible, redeemable Promissory notes, demand notes and accrued
      interest to Preferred Series F stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            4,549,015Acquisition
      of 15,000,000 shares of Preferred Series D stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            75,000Conversion
      of demand notes and accrued interest to senior secured revolving
      convertible note to related parties
            
            $
            ---
            
            
            $
            2,694,362
            
            
            $
            2,694,362Conversion
      feature on senior secured revolving convertible note to related
      parties
            
            $
            ---
            
            
            $
            5,198,873
            
            
            $
            6,417,068Discount
      on senior secured revolving convertible note to related
      parties
            
            $
            (525,850
            )
            
            $
            (3,682,137
            )
            
            $
            (5,460,162
            )Equipment
      acquired under capital lease
            
            $
            ---
            
            
            $
            8,395
            
            
            $
            42,606Issuance
      of Common Stock for debt
            
            $
            ---
            
            
            $
            ---
            
            
            
            5,000Issuance
      of  shares of Preferred Series D stock for deferred
      compensation
            
            $
            ---
            
            
            $
            ---
            
            
            $
            304,500Cancellation
      of unearned Preferred Series D stock
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (297,491
            )





(See
accompanying notes to consolidated, unaudited financial
statements)


4
 Index


ADVANCEDISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Note 1. –
Interim Financial Statements





These
unaudited consolidated interim financial statements have been prepared by
Advance Display Technologies, Inc. (the “Company”) in accordance with the rules
and regulations of the Securities and Exchange Commission.  The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) that are, in the opinion of management,
necessary to fairly present the operating results for the respective
periods.  Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations.  These unaudited consolidated
interim financial statements should be read in conjunction with the audited
financial statements and footnotes for the Company for its year ended June 30,
2009 included in the Company’s Annual Report on Form 10-K for that
year.  The results for the three and six-month interim periods ended
December 31, 2009 are not necessarily indicative of the results to be expected
for the full year ending June 30, 2010.





Going
Concern





The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the liquidation of liabilities
in the normal course of business.  The Company is in the development
stage, has not yet realized significant revenues from operations and is
dependent on the continuation of outside funding which is not
certain.  Since inception, the Company devoted most of its efforts on
raising capital and research and development efforts.  More recently,
the Company has begun manufacturing operations and related marketing and sales
efforts.  The Company has incurred losses since inception and has a
working capital deficit of $9,258,896 and negative stockholders’ equity of
$7,965,522 as of December 31, 2009.  These issues raise substantial
doubt about the Company’s ability to continue as a going concern.





The
Company’s current sales and marketing plan calls for a concentrated effort to
generate sales of its proprietary SkyNetTM video display screens.  The
Company’s SkyNetTM LED Screen is a large, flexible, high resolution, video
display screen that can be assembled in varying sizes and specifications
according to a customer’s individual needs.  Accordingly, the
Company’s manufacturing process consists of assembling portions of the screens
that can, in turn, be assembled into larger, custom sized
screens.  During the quarter and six months ended December 31, 2009,
the Company continued to build screen sub-assemblies and finished product
inventory in order to be able to promptly respond to orders from prospective
buyers.    The Company is actively pursuing sales from
specific domestic and international customers.  The Company has not
yet sold any of its SkyNetTM LED Screens and there can be no assurance that the
Company will be able to do so in the future.





On
November 6, 2008, the Company entered into a Senior Secured Revolving Credit
Facility (the “Credit Facility”) with DeGeorge Holdings Three LLC, a Delaware
limited liability company (“Lender”), which is an affiliate of the Company’s
majority shareholder and a member of its Board of Directors.  On June
15, 2009, the Company and the Lender entered into the Amendment to the Credit
Facility (the “Amendment”) that modified certain terms of the Credit
Facility.  See Note 3, Notes Payable – Related
Parties.


5
 Index


ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





The
Company believes the Credit Facility will provide sufficient financial resources
to support its operations until June of 2010.  Management believes
that the Company’s continued existence after such funding is discontinued is
dependent upon its ability to: (1) successfully raise new permanent capital; (2)
secure interim funding from outside sources; and (3) achieve and maintain
positive cash flow and profitable operations.  There can be no
assurance that the Company will be able to do so.





At the
end of fiscal 2009, the Company completed a series of transactions (the
“Recapitalization”) that restructured its debt and senior debt
securities.  As part of the Recapitalization, the Company converted
$740,000 in principal and $193,330 in interest outstanding on its Convertible
Redeemable Promissory Notes into 55,888,021 shares of Series D Preferred
Stock.  The Company also exchanged all of the outstanding shares of
its Series E Preferred Stock and Series F Preferred Stock for 1,267,531 and
4,549,015 shares of our Common Stock, respectively.  In addition, the
Company converted all of its outstanding shares of Series G Preferred Stock into
90,544,000 shares of Series D Preferred Stock.  As a result of the
foregoing transactions, the Company eliminated the Series E, F and G Preferred
Stock, leaving the Company with only two classes of stock, Common Stock and
Series D Preferred Stock.  The Recapitalization lowered the Company’s
total debt, reduced its interest expense and eliminated accrued dividend
costs.





Principles of
Consolidation





On July
23, 2007, the Company formed a subsidiary called ADTI Media Inc. (the
“Subsidiary”), purchased 100 shares of the Subsidiary’s common stock for $100
and is the sole shareholder of the Subsidiary.  The consolidated
financial statements include the accounts of the Company and the
Subsidiary.  All significant intercompany accounts and transactions
have been eliminated in consolidation.





Significant Accounting
Policies





For a
description of the Company’s significant accounting policies, refer to the
footnotes to the audited financial statements for the Company for its year ended
June 30, 2009 included in the Company’s Annual Report on Form 10-K for that
year.





Use of
Estimates





The
preparation of the Company’s financial statements in conformity with generally
accepted accounting principles requires the Company’s management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes.  Actual results could differ from
those estimates.





Component
Inventory





Component
Inventory consists of parts and materials stated at the lower of cost or market
on a first-in, first-out basis.  Parts that may be used in research
and development activities are expensed as used.


6
 Index


ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Work-in-Progress
Inventory





Work-in-progress inventory consists of
raw materials, labor and overhead used to build subassemblies and finished
product assemblies.





Finished Goods
Inventory





Finished goods inventory consists of
completed screen systems for sale.





Deferred Manufacturing
Costs





Costs
associated with production engineering, process development and facility
preparation have been capitalized as deferred manufacturing costs and are being
amortized over the estimated life of this generation of the LED Screens,
currently estimated to be three years, of which approximately 18 months
remain.  The Company reported deferred manufacturing costs of $256,270
at December 31, 2009, reflecting total capitalized costs of $525,598 less
accumulated amortization of $269,328.  Amortization expense for
the three month periods ended December 31, 2009 and 2008 was $43,932.
Amortization expense for the six-month periods ended December 31, 2009 and 2008
was $87,864.





Impact of Recently Issued
Accounting Pronouncements




On
December 15, 2009, the FASB issued Accounting Standards Update
(“ASU”) No. 2010-06 Fair Value Measurements and Disclosures Topic 820
“Improving Disclosures about Fair Value Measurements”.  This ASU
requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement as set forth in Codification Subtopic
820-10. The FASB’s objective is to improve these disclosures and, thus, increase
the transparency in financial reporting.  The adoption of this ASU
will not have a material impact on the Company’s consolidated financial
statements.
 
 In October 2009, the FASB issued anASUregarding accounting
for own-share lending arrangements in contemplation of convertible debt issuance
or other financing.  This ASU requires that at the date of issuance of
the shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.


In June 2009, the FASB issued SFAS No.
166 “Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140” (“SFAS 166”) codified as FASB ASC Topic 860.  SFAS
166 improves the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. SFAS 166 is effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. The
Company is evaluating the impact the adoption of SFAS 166 will have on its
financial statements.





On September 15,
2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01,
“Topic 105 - Generally Accepted Accounting Principles - amendments based on
Statement of Financial Accounting Standards No. 168 , “The FASB Accounting
Standards CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines
authoritative US GAAP for nongovernmental entities to be only comprised of the
FASB Accounting Standards CodificationTM (“Codification”) and, for SEC
registrants, guidance issued by the SEC.  The Codification is a
reorganization and compilation of all then-existing authoritative US GAAP for
nongovernmental entities, except for guidance issued by the SEC.  The
Codification is amended to effect non-SEC changes to authoritative US
GAAP.  Adoption of ASU No. 2009-01 only changed the referencing
convention of US GAAP in Notes to the Consolidated Financial
Statements.





Note 2. Impairment of
Assets





During fiscal 2009 the Company
installed its first completed screen in Denver near the Colorado Convention
Center on August 11, 2008 for marketing purposes.  Due to
nonconforming and defective parts provided by one of the Company’s key
suppliers, the Company removed the screen and returned it to the manufacturing
facility for analysis and repair.  Because of the extent of the
defective components, it was considered uneconomical to repair the screen for
sale for outdoor use.  Following reconditioning of the screen,
management determined that the screen could be used for marketing demonstrations
and for product integration testing.  Accordingly, the Company
reported a net impairment to inventory totaling $568,349 and marketing equipment
of $277,888.  The sign was being depreciated over its estimated useful
life of three years.  Because the repaired screen continued to
experience some outages due to the non-conforming parts that could not be
replaced, the Company estimated that, as of September 2009, the market value of
the screen had decreased to approximately $75,000.  Accumulated
amortization on the sign totaled $115,787 at that time and, accordingly, the
Company recorded an additional impairment to the screen of
$87,101.   The remaining value of the screen is being amortized
over the screen’s remaining expected useful life at $3,571 per month, unless
sold sooner.   The impairments to inventory and the depreciation
recorded by the Company do not reflect the consequential damages and other
losses suffered by the Company due to the nonconforming and defective parts
provided by the supplier.


7
 Index


ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Note 3. – Notes Payable to
Related Parties





During
fiscal 2009, the Company entered into a Senior Secured Revolving Credit Facility
(the “Credit Agreement”) with DeGeorge Holdings Three LLC, a Delaware limited
liability company (“Lender”), an affiliate of its majority shareholder and a
member of its Board of Directors, Lawrence F. DeGeorge.  The November
6, 2008, Credit Agreement, as amended June 15, 2009 (the “Amendment”),
established a revolving line of credit (the “Credit Facility”) not to exceed an
aggregate amount of $15,000,000 that was secured by all of the Company’s
assets.  The Company issued a Convertible Revolving Promissory Note to
the Lender dated June 15, 2009 (the “Convertible Note”) for any amounts drawn on
the revolving line of credit, which provides for interest at ten percent per
annum, and is due and payable December 31, 2010.  The principal amount
of the Convertible Note is convertible into shares of the Company’s Series D
Preferred stock from $0.084 to $0.11 per share.  The Company also
issued a warrant to the Lender for the purchase of 810,564 shares of Series D
Convertible Preferred Stock at $0.084 per share which expires on June 15,
2013.  The Company borrowed an additional $2,850,000 under the Credit
Facility during the six months ended December 31, 2009.  As of
December 31, 2009, the Company had borrowed a total of $11,967,869 under the
Credit Facility.  Pursuant to Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification Topic 470-20 “Conversion of Debt with
Conversion and Other Options” (“ASC-470-20”),  if the value of the
underlying shares based on the share price of the Company’s common stock on the
date of borrowing is greater than the value of the underlying shares based on
the conversion rate, a debt discount is recorded for the difference up to the
amount borrowed.  From November 6, 2008 to December 31, 2009, the
Company reported total debt discount of $5,460,162 less amortization of
$5,017,587.  The Company reported amortization expense on debt
discount of $668,521 and $2,065,786 for the three and six months ended December
31, 2009 and net debt discount of $442,575 at December 31, 2009.





Note 4. – Loss Per
Share





Loss per share is presented in
accordance with the provisions of SFAS No. 128, Earnings Per Share (“EPS”)and
Accounting Standards Codification Subtopic 260-10-55-2, Earnings Per Share-Computing a
Weighted-Average.  SFAS No. 128 and ASC 260-10-55-2 provide for
the calculation of basic and diluted earnings or loss per
share.  Basic EPS is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.  Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.  Such amounts include shares potentially issuable pursuant to
the Revolving, Convertible, Redeemable Promissory Notes and related interest,
borrowings under the Credit Facility, stock options, warrants and the
convertible preferred stock.  Basic and diluted EPS were the same for
the quarters and six months ended December 31, 2009 and 2008 because the Company
had losses from operations and, therefore, the effect of all potential common
stock representing shares underlying convertible notes including interest, the
outstanding balance under the Credit Facility, preferred stock, options and
warrants in 2009 and 2008 was anti-dilutive.  Diluted EPS does not
include the following because they would have been
anti-dilutive.


8
 Index


ADVANCE
DISPLAY TECHNOLOGIES, INC.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Quarter
      Ended December 31,
            
            Preferred
      Series Dstock
            
            
            Preferred
      Series Gstock (1)
            
            
            Convertible,
      redeemable promissorynotes
            
            
            Interest
      on convertible redeemable promissorynotes
            
            
            Outstanding
      balance under theCreditFacility
            
            
            Warrants
            
            
            Vested
      Stock Options2009
            
            
            177,002,763
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            123,074,913
            
            
            
            810,564
            
            
            
            4,059,3752008
            
            
            30,570,742
            
            
            
            90,544,000
            
            
            
            44,311,377
            
            
            
            11,392,014
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            2,717,209





(1)
            36,364,000
      shares of the Preferred Series G stock outstanding were not convertible
      until the shareholders approved an increase in the Company’s authorized
      common stock.





Had all
such shares in the table above been included in the calculation of diluted EPS,
they would have resulted in weighted-average common shares of 327,275,393 and
315,540,957 for the quarter and six months ended December 31, 2009 and
224,012,487 and 213,723,289 for the quarter and six months ended December 31,
2008, respectively.  Not including the 36,364,000 shares of Preferred
Series G stock listed in (1) in the calculation of diluted EPS would result in
weighted-average common shares of 187,648,487 and 177,359,289 for the quarter
and six months ended December 31, 2008, respectively.





Note 5. – Subsequent
Events





The
Company has evaluated events and transactions that occurred between January 1,
2010 and February 16, 2010, which is the date the financial statements were
issued for possible disclosure or recognition in the financial statements. The
Company has determined that the following events and transactions required
disclosure in the footnotes to the financial statements.





On
January 15, 2010 the Company made an additional draw on the Credit Facility of
$950,000.


9
 Index


Item2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION





Going
Concern





The
Report of the Company’s Independent Registered Public Accounting firm on the
Financial Statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2009, includes a qualification regarding the
Company’s ability to continue as a going concern because the Company is in the
development stage, has not yet commenced significant operations from its
business, has not yet realized significant revenues from operations and is
dependent on the continuation of outside funding which is not
certain.  Since inception, the Company  devoted most of its
efforts toward raising capital and its research and development efforts although
in recent years, it has focused on developing, manufacturing and marketing its
proprietary SkyNetTM video display screens.





Credit
Facility





During
fiscal 2009, the Company entered into a Senior Secured Revolving Credit Facility
(the “Credit Agreement”) with DeGeorge Holdings Three LLC, a Delaware limited
liability company (“Lender”), an affiliate of its majority shareholder and a
member of its Board of Directors, Lawrence F. DeGeorge.  The November
6, 2008, Credit Agreement, as amended June 15, 2009 (the “Amendment”),
established a revolving line of credit (the “Credit Facility”) not to exceed an
aggregate amount of Fifteen Million Dollars, $15,000,000 secured by all of the
Company’s assets.  The Company issued a Convertible Revolving
Promissory Note to the Lender dated June 15, 2009 (the “Convertible Note”) for
any amounts drawn on the revolving line of credit, which provides for interest
at ten percent per annum, and is due and payable December 31,
2010.  The principal amount of the Convertible Note is convertible
into shares of the Company’s Series D Preferred stock from $0.084 to $0.11 per
share.  The Company also issued a warrant to the Lender for the
purchase of 810,564 shares of Series D Convertible Preferred Stock at $0.084 per
share which expires on June 15, 2013.  As of December 31, 2009, the
Company had borrowed a total of $11,967,869 under the Credit
Facility.  The Company borrowed an additional $950,000 on January 15,
2010.





Recapitalization





At the
end of fiscal 2009, the Company completed a series of transactions (the
“Recapitalization”) that restructured its debt and senior debt
securities.  As part of the Recapitalization, the Company converted
$740,000 in principal and $193,330 in interest outstanding on its Convertible
Redeemable Promissory Notes into 55,888,021 shares of Series D Preferred
Stock.  The Company also exchanged all of the outstanding shares of
its Series E Preferred Stock and Series F Preferred Stock for 1,267,531 and
4,549,015 shares of our Common Stock, respectively.  In addition, the
Company converted all of its outstanding shares of Series G Preferred Stock into
90,544,000 shares of Series D Preferred Stock.  As a result of the
foregoing transactions, the Company eliminated the Series E, F and G Preferred
Stock, leaving only two classes of stock, Common Stock and Series D Preferred
Stock.  The Recapitalization also lowered the Company’s total debt,
reduced its interest expense and eliminated accrued dividend
costs.


10
 Index


Denver SkyNetTM Video Screen
Installation





The Company installed a SkyNetTM screen
at the Colorado Convention Center in Denver on August 11, 2008.  While
installed, the screen suffered a series of performance failures resulting from
noncompliant and defective parts provided by one of the Company’s key
suppliers.  It was subsequently determined that, due to the extent of
the defective components, the screen could not be repaired in a manner that
would permit it to be offered for sale for outdoor use.  The Company
determined that the sign would be used for marketing demonstrations and for
ongoing product integration testing purposes and ultimately may be sold for an
indoor application at a significantly reduced price due to the
impairment.





The Company continues to be engaged in
negotiations with the supplier and its insurance company concerning the losses
suffered by the Company because of the supplier’s defective and nonconforming
parts.  The Company is uncertain whether a mutually satisfactory
resolution of the dispute with the supplier can be achieved without
litigation.   The problem caused by the supplier’s defective and
noncompliant parts temporarily suspended production at the Temecula facility but
screen production was resumed in December of 2008.





Activities This
Period





During
the quarter and six months ended December 31, 2009, the Company’s business
activities were principally focused on (1) building subassemblies and finished
product to position the company to respond to anticipated fulfillment timelines
for current customer prospects; (2) improvement of its manufacturing and quality
management operations for SkyNetTM LED screens; (3) expanding and training its
production, engineering, sales, marketing and administrative workforce; (4)
performing sales and marketing analysis and sales operations to support and
bring to market SkyNetTM LED Screens, and (5) continuing its proprietary product
development activities.





On August
21, 2009, the Company’s engineering and production facility in Temecula,
California was successfully certified for ISO 9001 compliance.  As a
result of achieving ISO 9001 certification, the Company expects to be permitted
to affix a “CE Mark” to all of its SkyNetTM products in early 2010, thus
declaring quality and conformity to the necessary standards and
directives.  The CE mark is internationally recognized and accepted as
the standard of a quality manufactured product.  CE marking is also
widely considered to be a prerequisite to selling manufactured products in the
European Union.





On
December 1, 2009, Robert Ridgeway, was appointed Vice President of Global
Business Development and Planning of the Company.  From July 2008
until his appointment, Mr. Ridgeway had been principally engaged as an
independent contractor to the Company, providing consulting services in the
areas of finance, corporate development and administration.





During
the quarter ended December 31, 2009, the Company continued its international
sales and marketing efforts by exhibiting its SkyNetTM LED screen products at
Trade Expos in Abu Dhabi, UAE and in Buenos Aires, Argentina.  While
no immediate sales were realized at either of these expositions, successful
demonstration of the SkyNetTM product to interested commercial parties in and
around these markets was accomplished.





The
Company’s inability to date to make any sales of its LED screens suggests that
it may not be successful in generating enough revenue from such sales to cover
its operating expenses so that it will need to raise capital in the near future
to fund its operating losses.  Even if the Company successfully
generates a substantial amount of new sales orders for Screens, it will still
face challenges in developing, internally or through outside vendors, sufficient
manufacturing capacity and capital resources to fill those orders.  If
the Company is not successful in these endeavors, the Lender may foreclose on
the Collateral, which would leave the Company without any assets or
operations.  While the Lender may elect to utilize the Collateral to
continue some or all of the former operations of the Company after foreclosure,
it is extremely unlikely that there would be any funds or property left in the
Company that would be available for distribution to its shareholders upon a
liquidation of the Company.


11
 Index


During
the same periods a year ago, the Company’s business activities were principally
focused on (1) raising additional capital in support of manufacturing operations
of its SkyNetTM screens; (2) completing the second half of its first production
model SkyNetTM screen; (3) after that screen failed because of the supplier’s
defective parts, reconditioning the damaged screen for indoor marketing
demonstrations and product integration testing purposes; (4) extensive analysis
of the noncompliant and defective components provided by the supplier; (5)
continued sales and marketing efforts; (6) resumed production of subassemblies
for its SkyNetTM Screens; (7) evaluating other potential business opportunities;
and (8) continuing its proprietary product development efforts.





Results of
Operations





For the
quarter and six months ended December 31, 2009, the Company reported a net loss
of ($2,633,872) and ($5,965,208), or ($.08) and ($.19) per share, respectively,
compared to ($95,792) and ($1,735,224), or ($.00) and ($.07) per share,
respectively, for the quarter and six months ended December 31,
2008.  The increase in net loss for the quarter and six months ended
December 31, 2009 from 2008 is primarily due to: (1) an increase in marketing
costs of approximately $216,000 and $287,000, respectively, due to the Company’s
efforts to generate sales of its SkyNetTM Screens; (2) an increase in research
and development costs of approximately $202,000 and $421,000, respectively, due
to continued product development efforts; (3) an increase in interest expense of
approximately $193,000 and $386,000, respectively, due to the increased debt
outstanding; and (4) an increase in amortization of debt discount of
approximately $160,000 and $1,557,000, respectively, partially offset by a
positive net change in derivative conversion feature totaling approximately
$1,632,000 for the 2008 period in connection with the Senior Secured Revolving
Credit Facility.





The
Company had no sales during the quarter or six months ended December 31, 2009 or
2008.  As of the date of this report, the Company remains in a
development stage, since it has not received significant revenues from
continuing operations.  The Company reported interest income of $498
and $905 for the quarter and six months ended December 31, 2009 compared to $289
and $719 for the same periods in 2008.





Manufacturing
Operations - The Company reported manufacturing costs of approximately
$526,000 and $1,080,000 for the quarter and six months ended December 31, 2009
compared to approximately $382,000 and $1,137,000 for 2008.  During
the December 2009 quarter, the Company continued to build subassemblies and
complete rework enhancements on existing inventory.  For the six
months ended December 31, 2009, the Company completed additional components for
one screen system for sale and increased its work-in-progress for varying
subassemblies to position the Company to respond to anticipated fulfillment
timelines for current customer prospects.  Manufacturing costs were
allocated to work in progress and finished goods inventory based on expected
normal capacity rates.  Cost in excess of the allocations to
work-in-progress and finished goods inventories are included in manufacturing
expense, including a reserve for obsolete inventory of approximately $31,000 for
the 2009 six-month period.  In addition to these manufacturing
activities, the Company also engaged in preparations to install one of its
SkyNetTM Screens for demonstration purposes in Dubai, United Arab
Emirates.


12
 Index


During
the 2008 periods, the Company completed the second half of its first 123 square
foot production level SkyNetTM Screen and installed the completed screen in
Denver at the Colorado Convention Center on August 11, 2008 for marketing
purposes.  Due to nonconforming and defective parts supplied by one of
the Company’s key suppliers, the Company removed the screen and returned it to
the Company’s manufacturing facility in Temecula, California for analysis and
repair.  Because of the extent of the defective components, it was
determined that it would be uneconomical to repair the screen for sale for
outdoor use.  Following reconditioning of the screen, management
determined that the screen could be used for marketing demonstrations and for
product integration testing. Accordingly, the Company capitalized a total of
$277,888 to marketing equipment.  The Company recorded a net
impairment to inventory of approximately $375,000 for the six months ended
December 31, 2008, which is included in manufacturing costs.  The
impairment to inventory recorded by the Company to date does not reflect the
consequential damages and other losses suffered by the Company as a result of
the nonconforming and defective parts provided by the supplier.





Impaired
and obsolete inventory and tooling expense decreased by approximately $326,000
for the six-month period in 2009 from 2008 primarily on account of the
impairment to the SkyNetTM Screen recorded in the 2008 period, partially offset
by inventory and tooling determined to be obsolete due to a change in product
design during the 2009 period.  These same costs increased slightly by
approximately $2,000 for the 2009 quarter over 2008.  During the
quarter ended December 31, 2009, the Company continued manufacturing activities
to complete partial subassemblies from the prior quarter.  The
relatively light inventory activities for the quarter resulted in a decrease in
manufacturing and maintenance supplies in the 2009 periods from
2008.  However, due to a higher allocation of overhead costs to
inventory in the 2008 periods, these other manufacturing and inventory related
costs increased by approximately $55,000 and $72,000 for the three and six-month
periods of 2009, respectively, over 2008.





Contract
labor decreased by approximately $23,000 and $75,000 for the quarter and six
month periods in 2009 from 2008, respectively, due to hiring most of the
contract assemblers as employees during the 2009 period.  Salaries and
benefits increased by approximately $73,000 and $171,000 for the three and
six-month periods in 2009 from 2008 due to hiring the former contract assemblers
as employees and the hiring of additional personnel for quality assurance,
engineering and production activities.  Professional consulting fees
increased by approximately $19,000 and $86,000 for the three and six-month
periods in 2009 from 2008 primarily due to ongoing product enhancement efforts
and review and design of installation specifications for the Dubai
project.





Travel
expenses for manufacturing decreased by approximately $4,000 and $25,000 from
the 2008 periods to 2009 on account of international travel in the 2008 quarter
to meet with suppliers, including the supplier of faulty components, that did
not recur in 2009.  Depreciation expense increased by approximately
$4,000 and $11,000 for the 2009 three and six-month periods, respectively due to
additional equipment and tooling purchases since the year ago
period.  Other manufacturing expenses increased approximately $18,000
and $29,000 due to the expanded staff and increased level of manufacturing
overhead.


13
 Index


General and Administrative
Costs - The Company reported general and administrative (“G&A”)
expenses of approximately $485,000 and $974,000 for the quarter and six months
ended December 31, 2009, respectively, compared to approximately $493,000 and
$970,000 for the corresponding periods in 2008.  Salaries and related
expenses increased approximately $64,000 and $124,000 for the three and
six-month periods ended December 31, 2009 from 2008, primarily resulting
from the appointment of Mr. Ridgeway as the Company’s Vice President of Business
Development and Planning, additional accounting staff, including the conversion
of a contract accounting assistant to an employee, and a reduced allocation of
the president’s time to research and development.  Professional fees
decreased by approximately $72,000 and $124,000 for the three and six-month
periods ended December 31, 2009 from 2008 primarily due to: (1) a
decrease in legal fees associated with the Company’s patent applications and
other activities related to protection of the Company’s proprietary products and
processes conducted during the 2008 periods; and (2) a decrease in legal fees
related to the completion of the Credit Agreement during the 2008
periods.





The
Company is continuing its efforts to convert its existing enterprise software
system to a more robust and comprehensive system with enhanced accounting,
reporting, customer relationship management, inventory tracking and
manufacturing resource planning capabilities.  This effort required an
increase in G&A software license fees of approximately $8,000 and $23,000
for the quarter and six months ended December 31, 2009 from the corresponding
2008 periods.  The Company also enhanced its website during the
quarter and six months ended December 31, 2008, resulting in a decrease in these
costs for the same periods in 2009 of approximately $21,000 and $23,000,
respectively.





Other net
G&A expenses fluctuated slightly, resulting in an increase of approximately
$13,000 and $4,000 for the 2009 three and six-month periods from 2008,
respectively.





Marketing Costs -
Sales and marketing expenses increased by approximately $216,000 and $287,000 to
approximately $364,000 and $725,000 for the quarter and six months ended
December 31, 2009 from approximately $149,000 and $438,000 for the same periods
in 2008.  During the 2008 periods, the Company employed three people
to conduct business development activities related to sales, market analysis and
project management of anticipated installations from the sales of SkyNetTM
Screens.  After the removal of the first production screen from the
Colorado Convention Center installation and the resulting shutdown of the
Company’s production line, the business development and project management
positions were eliminated to conserve costs.  During the quarter and
six months ended December 31, 2009, the Company employed a Director of Middle
East Operations to develop the market and pursue potential sales and a Director
of Field Operations to manage installations. Combined, these changes resulted in
an increase in marketing salaries and related benefits of approximately $49,000
and $23,000 for three and six-month periods of 2009 from 2008,
respectively.  Consulting fees for sales and marketing increased
approximately $47,000 and $85,000 for the three and six-month periods of 2009
over the 2008 periods, primarily from expanded marketing efforts and
installation design for inclusion in marketing
proposals.   Marketing travel expenses increased by approximately
$104,000 and $96,000 for the three and six-month periods ended December 31, 2009
over the same periods in 2008, respectively,  due to increased
international travel in the December 31, 2009 quarter to promote potential sales
opportunities, primarily in South America and Dubai, UAE.





Product
demonstration costs decreased approximately $77,000 for the six months ended
December 31, 2009, from the year ago period, primarily due to costs incurred in
connection with the Colorado Convention Center installation in August
2008.  With respect to the video screen originally installed at that
location and subsequently relocated to the Company’s Temecula facility for
marketing purposes, the repaired screen  continued to experience some
outages due to non-conforming parts that cannot be replaced.  As a
result, management estimated that the market value of the screen has decreased
to approximately $75,000 and, accordingly, in September 2009, recorded an
additional impairment to the screen of approximately $87,000 affecting the
six-month period ended December 31, 2009.  Depreciation expense
decreased approximately $11,000 and $10,000 for the 2009 three and six-month
periods from 2008 primarily resulting from the impairment to the
screen.


14
 Index


Trade
show and other marketing event fees increased by approximately $10,000 and
$23,000 for the December 31, 2009 three and six-month periods from the
corresponding periods in 2008, primarily due to the Company’s exhibition at a
Boston trade show in July 2009 and a trade show in Abu Dhabi, UAE in October
2009.  In connection with the Abu Dhabi trade show and the shipment of
the SkyNetTM Screen to Dubai for an upcoming demonstration installation, the
Company reported an increase in freight and duty taxes of approximately $11,000
and $54,000 for the 2009 three and six-month periods over 2008,
respectively.





Other
sales and marketing expenses increased slightly by approximately $6,000 for the
2009 three and six-month periods over 2008.





Research and Development
Costs - Research and development (“R&D”) fees increased by
approximately $202,000 and $421,000 for the 2009 three and six-month periods
over the same periods in 2008 as the Company continued development for new
generations of the SkyNetTM Screen.  Due to changes in design with some
of these efforts, the Company recorded an impairment of approximately $30,000
and $92,000 with respect to certain tooling that had been purchased for prior
iterations for the three and six-month periods ended December 31,
2009.  Depreciation expense increased by approximately $9,000 and
$17,000 for the 2009 three and six-month periods over the 2008 periods due to
purchases of R&D equipment.





Salaries
and related benefits increased by approximately $108,000 and $200,000 during the
three and six-month periods compared to the same periods a year ago, primarily
due to the addition of the Company’s new Vice President of Research and
Development and Chief Technology Officer in July 2009, along with more internal
engineering efforts being directed toward research and development. Likewise,
R&D consulting fees increased by approximately $60,000 and $71,000 for the
2009 three and six-month periods over 2008, respectively, due to an increase in
ongoing proprietary product development efforts.  Travel expenses for
research and development also increased approximately $2,000 and $24,000 for the
2009 periods over 2008 primarily due to international travel to LED and other
suppliers for future development.





Other
research and development costs for the 2009 quarter decreased from 2008 by
approximately $7,000.  On the other hand, these costs increased for
the six-month period of 2009 by approximately $17,000 versus a year ago on
account of the purchase of materials, prototype development and
testing.





Other Expense -
Interest expense increased by approximately $193,000 and $386,000 for the
quarter and six months ended December 31, 2009 over 2008, respectively, due to
higher debt levels .  During fiscal 2009, the Company entered into a
Senior Secured Revolving Credit Agreement  (the “Credit Agreement”)
with DeGeorge Holdings Three LLC, a Delaware limited liability company
(“Lender”), an affiliate of its majority shareholder and a member of its Board
of Directors, Lawrence F. DeGeorge.  The November 6, 2008, Credit
Agreement, as amended June 15, 2009 (the “Amendment”), established a revolving
line of credit (the “Credit Facility”) not to exceed an aggregate amount of
Fifteen Million Dollars, $15,000,000 secured by all of the Company’s
assets.  Under ASC-470-20, if the value of the underlying shares based
on the share price of the Company’s common stock on the date of borrowing is
greater than the value of the underlying shares based on the conversion rate, a
debt discount is recorded for the difference up to the amount borrowed. The
Company has recorded total debt discount under the Convertible Note of
approximately $5,460,000 through December 31, 2009.  As of June 30,
2009, the Company had recorded amortization of the debt discount totaling
approximately $2,951,000.  The Company reported approximately $669,000
and $2,066,000 in additional amortization of debt discount for the quarter and
six months ended December 31, 2009.  The Company reported
approximately $508,000 in amortization of debt discount for the three and six
month periods ended December 31, 2008.


15
 Index


Liquidity and Capital
Resources





Since
inception, the Company has been totally dependent on financing from outside
sources to fund operations.  At December 31, 2009, the Company
reported negative net worth of $7,965,522 and negative working capital of
$9,258,896, compared to negative net worth of $2,612,540 and negative working
capital of $4,337,634 at June 30, 2009.  The Company continues to
require the infusion of outside capital to cover its administrative expenses,
product development, manufacturing costs and business development
efforts.  Under the Credit Agreement,  the Lender has the
right to accelerate payment of principal, interest and other amounts, if any,
that are outstanding as of July 1, 2010, if the Company has not sold, delivered
or executed any binding sales agreements for SkyNetTM screens by that
time.  If the Company does not pay the amounts due under the Credit
Agreement when due, or if there is a continuing Event of Default under the
Credit Agreement, the Lender may elect to sell or seize all or any portion of
the Collateral or, in its discretion, refinance any amounts
outstanding.  Management believes that the Credit Facility will
provide sufficient financial resources to support its operations until June of
2010.  Management also believes that the Company’s continued existence
after this source of funding is no longer available will depend upon its ability
to: (1) successfully raise new permanent capital; (2) secure interim funding
from outside sources; and (3) achieve and maintain positive cash flow and
profitable operations.  There can be no assurance that the Company
will be able to successfully raise the necessary capital, secure interim funding
from outside sources or achieve or maintain profitable operations. If the
Company fails to do so, it will be forced to discontinue operations and
liquidate its assets.  Irrespective of whether the Lender elects to
assume or continue some or all of the Company’s former operations after such a
foreclosure, , it would not affect the Company’s liquidation and it is extremely
unlikely that any funds or property would be distributed to shareholders in any
such liquidation.





Cash
flows from financing activities for the six months ended December 31, 2009
consisted of borrowings under the Credit Facility totaling $2,850,000, partially
offset by nominal lease payments. These cash flows were used for: (1)
operating expenses; (2) sales and marketing efforts; (3) manufacturing
operations; (4) ongoing research and product development; (5) continued
manufacturing process development and tooling design and fabrication; (6)
purchases of materials inventory; and (7) equipment purchases.





Cash
flows from financing activities for the six months ended December 31, 2008,
consisted of borrowings under the Credit Facility totaling $3,100,000 partially
offset by nominal lease payments.  These cash flows primarily were
used for: (1) operating expenses; (2) business development; (3) manufacturing
operations; (4) materials inventory; and (5) equipment purchases.





At
December 31, 2009, the Company reported current assets of $3,480,701 and a
working capital deficit. Current liabilities exceeded current assets by
$9,258,896.  At December 31, 2009 current liabilities consisted of:
(1) notes to shareholders with accrued interest, net of debt discount, of
$12,224,020 and (2) trade payables and accrued expenses totaling $515,577, which
were incurred primarily for business development, operating costs, inventory
purchases, equipment purchases, manufacturing operations, continued proprietary
product development and marketing efforts.


16
 Index


Off-Balance Sheet
Arrangements





The
Company does not have any off-balance sheet arrangements.





ITEM3.
            QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK





Not
applicable.





ITEM4.
            CONTROLS AND
      PROCEDURES





Our
management, including our Principal Executive and Financial Officer, has
evaluated the design, operation, and effectiveness of our disclosure controls
and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the
period covered by this quarterly report on Form 10-Q.  Based upon this
evaluation, the Company’s Principal Executive and Financial Officer, concluded
that the Company’s disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the reports
filed or submitted pursuant to the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the SEC, and that such information is accumulated and communicated to
our management, including its Principal Executive Officer and Principal
Financial Officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding disclosures.





Changes in Internal Control
Over Financial Reporting





There
were no changes in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the quarter ended December 31, 2009 that have materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting except for the risks ordinarily associated with the
increased level of business activity at the Company since that date, as the
Company continues to develop its manufacturing operations for its proprietary
LED Screens, including but not limited to the purchase, shipment and tracking of
parts, tooling and equipment and the implementation of new systems and software,
including an enterprise resource management system and related
software.





Inherent Limitations on
Effectiveness of Controls





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  All internal control systems, no
matter how well designed, have inherent limitations.  Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation.  Additionally, projections of an evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


17
 Index


PARTII.  OTHER INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS





None.





ITEM1A.
            RISK
      FACTORS





Risk of
Foreclosure on Assets.Management has pledged all of its
assets as collateral to secure a revolving line of credit agreement (the “Credit
Agreement”) with its principal investor group (the “Lender”). By that agreement,
the Lender has indicated a willingness to continue to fund the Company’s
operations through the fourth quarter of fiscal 2010 and, if the Company has
sold, delivered or executed any binding agreements with unaffiliated
third-parties for the sale of SkyNetTM display systems by that time, to continue
such funding until December 2010.  Management believes that the
Company’s continued existence beyond that time is dependent upon its ability to:
(1) successfully raise new permanent capital; (2) secure interim funding from
outside sources; and (3) achieve and maintain positive cash flow and profitable
operations. There can be no assurance that the Company will be able to do so.
There can be no assurance that the Company will be successful in raising any
more capital or producing revenue from operations.  Accordingly, if
the Company fails to meet the goals set by the Credit Agreement or otherwise
fails to raise enough new capital to repay the amounts owed under the Credit
Agreement and otherwise needed to sustain its operations, the Lender can be
expected to seize all of the Company’s assets upon a default, and the Company
will be forced to immediately discontinue operations and liquidate its
assets.  In such an event, it is extremely unlikely that there would
be any funds or property available for distribution to shareholders in any such
liquidation.





Please
see the additional Risk Factors relating to the Company in Item 1A of the
Company’s Annual Report on Form 10-K for the year ended June 30, 2009, which
Risk Factors are incorporated herein by reference.





ITEM2.
            UNREGISTERED SALES OF
      EQUITY SECURITIES AND USE OF
PROCEEDS





None.





ITEM 3.
            DEFAULTS UPON SENIOR
      SECURITIES





None.





ITEM4.
            SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY
HOLDERS





None.


18
 Index


ITEM5.
            OTHER
      INFORMATION





None.





ITEM6.
            EXHIBITS





Exhibit No.
            
            Description31.1
            
            Certificate
      of Principal Executive Officer pursuant to Section 302 of The
      Sarbanes-Oxley Act of 200231.2
            
            Certificate
      of Principal Financial Officer pursuant to Section 302 of The
      Sarbanes-Oxley Act of 200232.1
            
            Certificate
      of Principal Executive and Principal Financial Officer pursuant to Section
      906 of The Sarbanes-Oxley Act of
2002


19
 Index


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report on Form 10-Q to be signed on its behalf by the undersigned,
thereunto duly authorized.





ADVANCE
      DISPLAY TECHNOLOGIES, INC.Date:
      February 16, 2010
            /s/  Matthew
      W. ShankleMatthew
      W. Shankle
              President,
      Chief Executive and Financial OfficerDate:  February
      16, 2010
            /s/  Rebecca
      L. McCallRebecca
      L. McCall
              VP
      of Accounting, Principal Accounting
Officer


Index


INDEX
OF EXHIBITS





Exhibit No.
            
            Description31.1
            
            Certificate
      of Principal Executive Officer pursuant to Section 302 of The
      Sarbanes-Oxley Act of 200231.2
            
            Certificate
      of Principal Financial Officer pursuant to Section 302 of The
      Sarbanes-Oxley Act of 200232.1
            
            Certificate
      of Principal Executive and Principal Financial Officer pursuant to Section
      906 of The Sarbanes-Oxley Act of
2002