10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X]	Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2003.
[  ]	Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from     to

Commission file number 1-8777

VIRCO MFG. CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	95-1613718
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2027 Harpers Way, Torrance, California	90501
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (310) 533-0474

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered:
Common Stock, $0.01 Par Value	American Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

     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 [   ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference or in Part III of this Form 10-K or any amendment to this Form 10-K [X].

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [   ]

     The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates of the registrant on July 31, 2002, based on the closing price at which such stock was sold on the American Stock Exchange on that date, was approximately $154,000,000.

Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of Common Stock outstanding at April 11, 2003, was 13,103,481 shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant’s definitive proxy statement for registrant’s 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this Form are incorporated by reference into Part III of this Form 10-K Report as set forth herein. Portions of registrant’s Annual Report to Stockholders for the year ended January 31, 2003, are incorporated by reference into Part I and Part II of this Form 10-K Report as set forth herein.

TABLE OF CONTENTS

PART I

  Item 1. Business

  Item 2. Properties

  Item 3. Legal Proceedings

  Item 4. Submission of Matters to a Vote of Security Holders

PART II

  Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

  Item 6. Selected Financial Data

  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  Item 7a. Quantitative and Qualitative Disclosures about Market Risk

  Item 8. Financial Statements and Supplementary Data

  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

PART III

  Item 10. Directors and Executive Officers of the Registrant

  Item 11. Executive Compensation

  Item 12. Security Ownership of Certain Beneficial Owners and Management

  Item 13. Certain Relationships and Related Transactions

  Item 14. Disclosure Controls and Procedures

PART IV

  Item 15. Financial Statements, Financial Statement Schedules, Exhibits, and Reports on Form 8-K

SIGNATURES

EXHIBITS TO FORM 10-K ANNUAL REPORT

EXHIBIT 10.7

EXHIBIT 13.1

EXHIBIT 21.1

EXHIBIT 23.1

EXHIBIT 24.1

EXHIBIT 99.1

PART I

     This report on Form 10-K contains a number of “forward-looking statements” that reflect the Company’s current views with respect to future events and financial performance, including, but not limited to, statements regarding plans and objectives of management for future operations, including plans and objectives relating to products, marketing, expansion, manufacturing processes and potential or contemplated acquisitions; new business strategies; our ability to continue to control costs and inventory levels; the potential impact of our “Assemble-To-Ship” program on earnings; market demand; our ability to position ourselves in the market; references to current and future investments in and utilization of our infrastructure; statements relating to management’s beliefs that cash flow from current operations, existing cash reserves, and available lines of credit will be sufficient to support our working capital requirements to fund existing operations; references to expectations of future revenues; pricing; and seasonality.

     Such statements involve known and unknown risks, uncertainties, assumptions and other factors, many of which are out of our control and difficult to forecast, that may cause actual results to differ materially from those which are anticipated. Such factors include, but are not limited to, changes in, or our ability to predict, general economic conditions, the markets for school and office furniture generally and specifically in areas and with customers with which we conduct our principal business activities, the rate of approval of school bonds for the construction of new schools, the extent to which existing schools order replacement furniture, customer confidence, and competition.

     In this report, words such as “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” “potential,” “budgets,” “may,” “could” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.

Item 1. Business

Introduction

     Designing, producing and distributing high-value furniture for a diverse family of customers is a 53-year tradition at Virco Mfg. Corporation. Over the years, Virco has become the largest manufacturer of moveable educational furniture for the kindergarten to 12^th grade (K-12) market in the United States. The Company has also become a leading supplier of tables, chairs and storage equipment for offices, convention centers, auditoriums, places of worship, hotels and related settings.

     The markets that Virco has served over the years include the education market (the Company’s primary market), which includes public and private schools (preschool through 12^th grade), junior and community colleges, four-year colleges and universities, and trade, technical and vocational schools; convention centers and arenas; the hospitality industry, with respect to their banquet and meeting facilities requirements; government facilities at the federal, state, county and municipal levels; and places of worship. In addition, the Company sells to wholesalers, distributors, retailers and catalog retailers that serve these same markets.

     Although Virco started as a local supplier of chairs and desks for Los Angeles-area schools, folding chairs and folding tables were soon added to the Company’s offerings with a resultant expansion of sales to a broadening customer base. Successive product lines were subsequently introduced, including a variety of upholstered stack chairs, banquet tables and mobile storage equipment. Products such as these have helped Virco provide complete furniture solutions for thousands of customers in the hospitality, food service, convention center and public facilities markets.

     Virco serves its customers through a well-trained, nationwide sales and support team. Virco’s educational product line is marketed through what management believes is the largest direct sales force of any education furniture manufacturer. In addition, Virco also established a Corporate Accounts Group to pursue wholesalers, mail order accounts and national chains where management believes that it would be more efficient to have a single sales representative or group approach such persons, as they tend to have needs that transcend the geographic boundaries established for Virco’s local accounts. The Company also has an array of support services, including complete package solutions for the Furniture, Fixture, and Equipment (FF&E) line item on school budgets, computer-assisted layout planning, transportation planning, product delivery, installation, and repair.

     Virco operates one business segment, with one product line that is marketed and distributed through a variety of sales channels. Virco maintains a core marketing group, which reports to the President and is composed of representatives from sales, product development and corporate marketing. This group prepares annual plans for the allocation of resources for product development, marketing and selling expense for various sales channels, for customer service, and for the implementation of the Company’s product stocking plan.

     Virco employs approximately 2,000 people nationwide and has approximately 1.1 million square feet of fabrication facilities and 1.4 million square feet of assembly and warehousing facilities for the production and distribution of furniture in two principal facilities which are located in Torrance, California, and Conway, Arkansas. Much of the Company’s product line can be made in either facility, although management has chosen to produce many products and components at only one factory in consideration of space, cost or process requirements. In addition, both facilities maintain a customer service department, giving Virco the ability to provide sales support and order fulfillment services to end users

from coast to coast.

     Management’s strategy is to position Virco as the overall value supplier of moveable furniture for publicly-funded institutions characterized by extreme seasonality and/or a bid-based purchasing function. The Company’s business model, which is designed to support this strategy, includes the development of several competencies to enable superior service to the markets in which Virco competes. For one, Virco has developed what management believes to be the largest direct sales force of any education furniture manufacturer. Management believes this provides Virco with a competitive advantage over the Company’s primary competitors, who rely instead upon distributorships, by allowing Virco to cut-out the “middleman” and deal directly with end customers. Another important element of Virco’s business model is the Company’s emphasis on developing and maintaining key manufacturing capabilities. For example, Virco has developed competencies in several manufacturing processes that are important to the markets the Company serves, such as finishing systems, plastic molding, metal fabrication and woodworking. For more information about the Company’s business model and strategy for the future, please see the section entitled “To Our Stockholders” in Virco’s Annual Report to Stockholders for the year ended January 31, 2003.

     Finally, management continues to hone Virco’s ability to finance, manufacture and warehouse furniture within the relatively narrow delivery window associated with the highly seasonal demand for education sales. In the fiscal year covered by this report, over 50% of the Company’s total sales were delivered in June, July, August and September with an even higher portion of educational sales delivered in that period. Virco’s substantial warehouse space allows the Company to build adequate inventories to service this narrow delivery window for the education market.

     Virco was incorporated in California in February 1950, and reorganized as a Delaware corporation in April 1984.

Principal Products

     Virco offers the broadest line of furniture for the K-12 market of any company in the United States. Virco also provides a variety of products for the pre-school markets and has recently developed products that are targeted for college, university, and corporate learning center environments. The Company’s primary furniture lines are constructed of tubular metal legs and frames, combined with wood and plastic tops, plastic seats and backs, upholstered seats and backs, and upholstered rigid polyethylene and polypropylene shells.

     Virco’s principal products include:

SEATING — Among the Company’s newest chair offerings are the Ph.D.™, I.Q.®, Lunada® and Virtuoso® lines. Traditional favorites include best-selling Classic Series™ stack chairs and a variety of Martest 21® hard plastic seating. In addition, Virco provides a wide selection of upholstered stack chairs, plastic stack chairs, Egg® Series ergonomic office chairs, steel dining chairs and folding chairs.

TABLES — Virco tables range from the innovative Plateau® table system to lightweight Core-a-Gator® folding tables. The Future Access® Series delivers functional computer-support solutions, while Lunada bases by Peter Glass may be used in a wide variety of environments. The Company offers a full spectrum of traditional folding and banquet tables, activity tables, mobile tables, cafe tops and bases, and office tables.

COMPUTER FURNITURE — Virco’s full range of computer furniture includes the Mojave® desking system, as well as versatile Future Access and 8700 Series computer tables. In addition, the Company’s new Plateau Office Solutions collection offers a variety of technology-support furniture alternatives, as does the recently released Plateau Library/Technology Solutions product line.

DESKS/CHAIR DESKS — Virco’s extensive offerings include a complete spectrum of student desks, chair desks, combo units, tablet arms and teachers’ desks. Selected models are available with durable, colorfast Martest 21 hard plastic seats, backs and work surfaces.

MOBILE FURNITURE — Virco offers a complete line of sturdy mobile cabinets for storage needs. In addition, the Company offers mobile tables for situations where quick set-up and tear-down are desirable, such as in banquet facility and lunchroom settings.

STORAGE EQUIPMENT — Virco offers a complete line of chair and table trucks, as well as large-scale storage units for arenas, convention centers and similar venues.

     Please note that this report includes trademarks of Virco, including, but not limited to, the following: Ph.D.™, I.Q.®, Virtuoso®, Classic Series™, Martest 21®, Lunada®, Plateau®, Core-a-Gator®, Future Access®, and Mojave®. Other names and brands included in this report may be claimed by Virco as well or by third parties.

     Virco’s major customers include educational institutions, convention centers and arenas, hospitality providers, government facilities, and places of worship.

Raw Materials

     The Company purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood, particleboard, cartons and other raw materials in the manufacture of its principal products from many different sources. Management does not believe that we are more vulnerable with respect to the sources and availability of these raw materials than other manufacturers.

Marketing and Distribution

     Virco serves its customers through a well-trained, nationwide sales and support team. The Company’s sales professionals were divided into two main groups in fiscal 2000, “Education” and “Commercial”, and were organized by market within those groups. In November 2001, management combined what had previously been the Commercial and Education sales groups into one field sales team. Instead of having two representatives pursuing separate customers within the same geographical territory, Virco now has only one. It was increasingly clear to management that the needs of commercial and educational customers were evolving towards greater similarity, and that combining the Company’s sales efforts would allow individual representatives to plow more deeply in a smaller field. In addition, Virco also established a Corporate Accounts Group to pursue wholesalers, mail order accounts and national chains where management believes that it would be more efficient to have a single sales representative or group approach such persons, as they tend to have needs that transcend the geographic boundaries established for Virco’s local accounts.

     Virco’s educational product line is marketed through what management believes to be the largest direct sales force of any education furniture manufacturer. The Company’s approach to servicing its customer base is very flexible, and is tailored to best meet the needs of individual customers and regions. When considered to be most efficient, the sales force will call directly upon school business officials, who can include purchasing agents or individual school principals where site based management is practiced. Where it is considered advantageous, the Company will use large exclusive distributors and full service dealer partners. The Company’s direct sales force is considered to be an important competitive advantage over competitors who rely primarily upon dealer networks for distribution of their products. Significant portions of educational furniture are sold on a bid basis.

     On May 1, 2002, Virco acquired certain assets of Furniture Focus™, an Ohio based reseller of furniture that offers complete package solutions for the Furniture, Fixture, and Equipment (FF&E) segment of bond funded public school construction projects. The Furniture Focus sales force and back office operations were integrated into Virco at the acquisition date. Because the acquisition date was very close to the peak summer season, the marketing of package solutions or “PlanScape™”, was limited to the five state region that Furniture Focus had operated in. Beginning in 2003, Virco plans to market package solutions nationwide.

     Sales of commercial and contract furniture are made throughout the United States by distributorships and by Company sales representatives who service the distributorship network. Virco representatives call directly upon state and local governments, convention centers, individual hospitality installations, and mass merchants. Sales to this market include colleges and universities, pre-schools, private schools, and office training facilities, which typically purchase furniture through commercial channels.

     Sales are made to thousands of customers, and no single customer represents a significant amount of the Company’s business.

Seasonality

     The trend in educational sales is becoming increasingly seasonal. Over 50% of total sales are delivered in June, July, August and September with an even higher portion of educational sales delivered in that period.

Working Capital Requirements During the “Peak” Summer Season

     As discussed above, the market for educational furniture is marked by extreme seasonality, with the vast majority of sales occurring from June to September each year, which is the Company’s peak season. Hence, Virco builds and carries significant amounts of inventory during 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, Virco has historically relied on third party bank financing to meet cash flow requirements during the build-up period immediately preceding the high season.

     In addition, Virco typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances naturally 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. Virco has historically enjoyed high levels of collectability on these accounts receivable due to the low-credit risk associated with such customers. Nevertheless, due to the time differential between inventory build-up in anticipation of the peak season and the collection on accounts receivable throughout the peak season, the Company currently relies on a revolving line of credit from Wells Fargo Bank, N.A., that approximately ranges from $40,000,000 to $70,000,000, to assist in meeting cash flow requirements as inventory is built for, and business is transacted during, the peak summer season. For more information on this financing arrangement, please see the section entitled “Liquidity” in the Management’s Discussion and Analysis section contained in Virco’s Annual Report to Shareholders for the fiscal year ended January 31, 2003.

     Virco’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. For example, management expends a significant amount of time in the first quarter of each year developing a stocking plan and estimating the number of temporary summer employees, the amount of raw materials, and the types of components and products that will be required during the peak season. If management underestimates any of these requirements, Virco’s ability to meet customer orders in a timely manner or to provide adequate customer service may be diminished. If management overestimates any of these requirements, the Company may be required to absorb higher storage, labor and

related costs, each of which may affect the bottom line. On an on-going basis, management evaluates its estimates, including those related to market demand, labor costs, and stocking inventory; moreover, management continually strives to improve its ability to correctly forecast the requirements of the Company’s business during the peak season each year.

     As part of Virco’s efforts to balance seasonality, financial performance and quality without sacrificing service or market share, management has been refining an operating model called Assemble-to-Ship (ATS). ATS is Virco’s version of mass-customization, which assembles standard, stocked components into customized configurations before shipment. The ATS program reduces the total amount of inventory and working capital needed to support a given level of sales. It does this by increasing the inventory’s versatility, delaying costly assembly until the last moment, and reducing the amount of warehouse space needed to store finished goods. As part of the ATS stocking program, Virco has endeavored to create a more flexible workforce. The Company has developed compensation programs to reward employees who are willing to move from fabrication to assembly to the warehouse as the seasonal demands evolve. During the 2002 year, the Company added a sabbatical program to reduce spending in the fourth quarter when sales and required production are at the lowest levels. These programs have helped Virco avoid layoffs and reduce the need for inefficient temporary production workers.

Developments During 2002

     For a discussion of the general developments of Virco’s business during the period covered by this report, please see the section entitled “To Our Stockholders” in the Company’s Annual Report to Stockholders for the year ended January 31, 2003.

Other Matters

          Competition

     Virco has numerous competitors in each of its markets. In the educational furniture market, competitors include Artco-Bell, American Desk, Royal, Bretford, Smith Systems, Columbia, Scholarcraft and School Specialty. Competitors in contract furniture vary depending upon the specific product line or sales market and include Falcon Products, Inc., Krueger International, Inc., MTS and Mity Enterprises, Inc.

     The educational furniture market is characterized by price competition, as many sales occur on a bid basis. Management compensates for this market characteristic through a combination of methods that may include, but are not expected to emphasize, direct price competition. Instead, management expects to emphasize the value of Virco’s products, the value of Virco’s distribution and delivery capabilities, the value of Virco’s customer support capabilities and other intangibles. In addition, management believes that the streamlining of costs assists the Company in compensating for this market characteristic by allowing Virco to offer a higher value product at a lower price. For example, as disclosed above, Virco has decreased distribution costs by avoiding resellers, and management believes that the Company’s large direct sales force and the Company’s sizeable manufacturing and warehousing capabilities facilitate these efforts.

          Backlog

     Sales order backlog at January 31, 2003, totaled $13.0 million and approximates five weeks of sales, compared to $26.0 million at January 31, 2002, and $20.0 million at January 31, 2001.

          Patents and Trademarks

     In November 2002, the United States Patent and Trademark Office (the “USPTO”) issued to Virco a patent entitled “Office Furniture System” for the Mojave® product line. This patent covers the method of connecting the pieces within the system and it covers the method of stacking pieces to create multiple configurations. In addition, in 2002, the USPTO issued Virco three design patents covering its new Ph.D.® chair.

     Virco has a number of other design and utility patents in the United States and other countries that provide protection for Virco’s intellectual property as well. These patents expire over a period of time ranging from 4 to 17 years. Virco maintains an active program to protect its investment in technology and all of its patents by monitoring and enforcing its intellectual property rights. While Virco’s patents are an important element of its success, Virco’s business as a whole is not believed to be materially dependent on any one patent.

     In order to distinguish genuine Virco products from competitors’ products, Virco has obtained certain trademarks and tradenames for its products and engages in advertising and sales campaigns to promote its brands and to identify genuine Virco products. While Virco’s tradenames play an important role in its success, Virco’s business as a whole is not believed to be materially dependent on any one trademark, except perhaps the trademark “Virco,” which the company has protected and enhanced as an emblem of quality educational furniture for over fifty years.

     Virco has no franchises or concessions that are considered to be of material importance to the conduct of its business and has not appraised or established a value for its patents or trademarks.

          Employees

     Virco and its subsidiaries employ approximately 2,000 full-time employees at various locations. Of this number, approximately 1,640 are involved in manufacturing and distribution, 240 in sales and marketing and approximately 120 in administration. During the period covered by this report, the Company’s headcount was reduced by approximately 100 from the prior year, due primarily to attrition.

          Environmental Compliance

     Virco is subject to numerous environmental laws and regulations in the various jurisdictions in which it operates that (a) govern

operations that may have adverse environmental effects, such as the discharge of materials into the environment, as well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials. Although Virco has enacted policies for recycling and resource recovery that have earned repeated commendations, including designation in 2002 as a WasteWise Partner of the Year and 2001 as a WasteWise Program Champion for Large Businesses by the United States Environmental Protection Agency, it is possible that the Company’s operations may result in noncompliance with or liability for remediation pursuant to environmental laws. Environmental laws have changed rapidly in recent years, and Virco may be subject to more stringent environmental laws in the future. The Company has expended, and may be expected to continue to expend, significant amounts in the future for the investigation of environmental conditions, installation of environmental control equipment, or remediation of environmental contamination.

          Financial Information About Geographic Areas

     During the period covered by this report, Virco derived approximately 3.0 % of its revenues from external customers located outside of the United States (primarily in Canada). The Company determines sales to these markets based upon the customers principal place of business. The Company does not have any long-lived assets outside of the United States.

Executive Officers of the Registrant

     As of April 11, 2003, the executive officers of Virco Mfg. Corporation, who are elected by and serve at the discretion of the Company’s Board of Directors, were as follows:

		Age at		Has Held
		January 31,		Office
Name	Office	2003		Since
R. A. Virtue(1)	President, Chairman of the Board and Chief Executive Officer		70		1990
R. E. Dose(2)	Vice President — Finance, Secretary & Treasurer		46		1995
G. D. Parish(3)	Vice President — General Manager, Conway Division		65		1999
W. D. Roberts(4)	Vice President — Chief Information Officer		26		2001
D. R. Smith(5)	Vice President — Corporate Marketing		54		1995
L. L. Swafford(6)	Vice President — Legal Affairs		38		1998
D. A. Virtue(7)	Corporate Executive Vice President		44		1992
L. O. Wonder(8)	Vice President — Sales		51		1995

(1)	Appointed Chairman in 1990; has been employed by the Company for 47 years. Has served as the President since 1982.
(2)	Appointed in 1995; has been employed by the Company for 13 years and has served as the Corporate Controller, and currently as Vice President - Finance, Secretary and Treasurer.
(3)	Appointed in 1999; has been employed by the Company for 44 years and has served in a variety of manufacturing, warehousing and sales and marketing positions and currently as Vice President and General Manager of the Conway Division.
(4)	Appointed in 2001; has been employed by the Company for 6 years in a variety of analytic and technology positions, currently as Vice President and Chief Information Officer.
(5)	Appointed in 1995; has been employed by the Company for 18 years in a variety of sales and marketing positions, currently as Corporate Vice President of Marketing.
(6)	Appointed in 1998; has been employed by the Company for 8 years and has served as Associate Corporate Counsel, and currently as Vice President of Legal Affairs.
(7)	Appointed in 1992; has been employed by the Company for 18 years and has served in Production Control, as Contract Administrator, as Manager of Marketing Services, as General Manager of Torrance Division, and currently as Corporate Executive Vice President.
(8)	Appointed in 1995; has been employed by the Company for 25 years in a variety of sales and marketing positions, currently as Corporate Vice President of Sales.
*	Company officers do not have employment contracts.

     The information required by this Item regarding Directors is incorporated by reference to Virco’s Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and is incorporated herein by this reference.

Available Information

     Virco files annual, quarterly and special reports, proxy statements and other information with the SEC. Stockholders may read and copy this information at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Stockholders may also obtain copies of this information by mail from the Public Reference Room at the address set forth above, at prescribed rates.

The SEC also maintains an internet world wide web site that contains reports, proxy statements and other information about issuers like Virco who file electronically with the SEC. The address of that site is http://www.sec.gov.

     In addition, Virco makes available to its stockholders, free of charge through its internet world wide web site, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after Virco electronically files such material with, or furnishes it to, the SEC. The address of that site is http://www.virco.com.

Item 2. Properties

Torrance, California

     Virco leases a 560,000 sq. ft. office, manufacturing and warehousing facility located on 23.5 acres of land in Torrance, California. This facility is occupied under a ten-year lease (with two five-year renewal options) expiring January 2005. This facility also includes the corporate headquarters, the West Coast showroom, and all West Coast distribution operations. In April 2000, Virco sold a 200,000 sq. ft. warehouse, which was held as rental property, located on 8.5 acres of land in Torrance, California.

Conway, Arkansas

     The Company owns 100 acres of land in Conway, Arkansas, containing 1,200,000 sq. ft. of manufacturing, warehousing, and office facilities. This facility is equipped with high-density storage systems, features 70 dock doors dedicated to outbound freight, and has substantial yard capacity to store and stage trailers, which has enabled the Company to consolidate the warehousing function and implement the Assemble-to-Ship (ATS) inventory stocking program. Management believes that this facility supports Virco’s ability to handle increased sales during the peak delivery season and enhances the efficiency with which orders are filled.

     In addition to the complex described above, the Company operates three facilities in Conway, Arkansas. The first is a 375,000 sq. ft. fabrication facility that was acquired in 1954, and expanded and modernized over the subsequent 45 years. The Company manufactures fabricated steel and injection molded plastic components at this facility. The second is a 175,000 sq. ft. manufacturing facility that is used to fabricate and store compression molded components. This building is leased under a 10 year lease expiring in March 2008. The third is a 150,000 sq. ft. finished goods warehouse, which is being marketed for sale.

     Capital spending at this location was approximately $2,010,000 in 2002, $3,979,000 in 2001, $15,974,000 in 2000, $29,200,000 in 1999 and $20,600,000 in 1998. For a discussion of how the Company’s Conway, Arkansas, expansion project impacted Virco’s results of operations, please refer to the Management’s Discussion and Analysis section of the Company’s 2002 Annual Report to Stockholders.

Los Angeles, California

     Virco owns a 160,000 sq. ft. manufacturing facility located on 8 acres of land in Gardena, California. This manufacturing facility is currently leased to a third party through January 31, 2005. The lease has an option to extend through June 2006. The Company has marketed this building for sale and is currently in discussions with potential buyers.

Newport, Tennessee

     Virco owns a 55,000 sq. ft. manufacturing facility located on 3.5 acres of land in Newport, Tennessee, which was previously used to manufacture melamine plastic seats, backs and table tops for classroom furniture. This factory was leased under a 10-year lease that was terminated subsequent to year end, at which time the Company donated the property to the Newport Cocke County Economic Development Commission. The book value of this property was written down to zero during the past fiscal year.

Item 3. Legal Proceedings

     Virco has various legal actions pending against it arising in the ordinary course of business, which in the opinion of the Company, are not material in that management either expects to be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

     Incorporated herein by reference is the information appearing under the caption “Supplemental Stockholders’ Information” which appears in Virco’s Annual Report to Stockholders for the year ended January 31, 2003. As of April 16, 2003, there were approximately 350 Registered Stockholders according to transfer agent records. There were approximately 1,500 Beneficial Stockholders.

Dividend Policy

     It is the Board of Directors’ policy to periodically review the payment of cash and stock dividends in light of the Company’s earnings and liquidity. In each of the fiscal years ending January 31, 2003, and January 31, 2002, Virco declared a $0.02 per quarter cash dividend and an annual 10% stock dividend.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information
						Number of securities
						remaining available for
						future issuance under
		Number of securities to		Weighted-average		equity compensation
		be issued upon exercise		exercise price of		plans-excluding
		of outstanding options,		outstanding options,		securities reflected in
		warrants and rights		warrants and rights		column (a)
Plan category		(a)		(b)		(c)
Equity compensation plans approved by security holders			482,000	$	10.82		373,000
Equity compensation plans not approved by security holders			None		None		None
	Total		482,000	$	10.82		373,000

Item 6. Selected Financial Data

     Incorporated herein by reference is the Selected Financial Data Information appearing in Virco’s Annual Report to Stockholders for the year ended January 31, 2003. This data should be read in conjunction with Item 8, Financial Statements and Supplementary Data thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This information is incorporated herein by reference to the “Management’s Discussion and Analysis and Results of Operations” section included in Virco’s Annual Report to Stockholders for the year ended January 31, 2003.

Item 7a . Quantitative and Qualitative Disclosures about Market Risk

     This information is incorporated herein by reference to the “Inflation and Future Change in Prices” section of “Management’s Discussion and Analysis and Results of Operations” included in Virco’s Annual Report to Stockholders for the year ended January 31, 2003.

     On February 22, 2000, Virco entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount was $30,000,000 for the period February 22, 2000, through February 29, 2001. The notional swap amount then decreased to $20,000,000 until the end of the swap agreement, March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.25% to 1.50%.

     As of January 31, 2003, Virco had borrowed $26,655,000 under the Wells Fargo credit facilities, of which $20,000,000 is subject to the interest rate swap agreement as described above, and the remaining balance contains variable interest rates. Accordingly, a 100 basis point upward fluctuation in the interest rate would have caused the Company to incur additional interest charges of approximately $331,000 for the fiscal year ended January 31, 2003. Virco would have benefited from a similar interest savings if the base rate were to fluctuate downward by the same amount.

Item 8 . Financial Statements and Supplementary Data

     The report of independent auditors and consolidated financial statements included in the Annual Report to Stockholders for the year ended January 31, 2003, are incorporated herein by reference.

     Unaudited quarterly results in Note 12 of the financial statements included in the Annual Report to Stockholders for the year ended January 31, 2003, are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

     None.

PART III

Item 10. Directors and Executive Officers of the Registrant

     The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year and in Part I of this report under the heading “Executive Officers of the Registrant.”

Item 11 . Executive Compensation

     The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year.

Item 13. Certain Relationships and Related Transactions

     The information required by this Item is incorporated by reference to information set forth in the Company’s definitive Proxy Statement to be filed within 120 days after the end of the Company’s most recent fiscal year.

Item 14. Disclosure Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Securities Exchange Act of 1934 (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.

     Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of its 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 pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that Virco’s disclosure controls and procedures are effective in alerting them in a timely fashion to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date that the Company carried out its evaluation.

PART IV

Item 15. Financial Statements, Financial Statement Schedules, Exhibits, and Reports on Form 8-K

a) 1.	The following consolidated financial statements of Virco Mfg. Corporation, included in the annual report of the registrant to its stockholders for the year ended January 31, 2003, are incorporated by reference in Item 8.
	Report of Management.
	Report of Independent Auditors.
	Consolidated balance sheets — January 31, 2003 and 2002.
	Consolidated statements of income — Years ended January 31, 2003, 2002, and 2001.
	Consolidated statements of stockholders’ equity — Years ended January 31, 2003, 2002, and 2001.
	Consolidated statements of cash flows — Years ended January 31, 2003, 2002, and 2001.
	Notes to consolidated financial statements — January 31, 2003.
2.	The following consolidated financial statement schedule of Virco Mfg. Corporation is included in Item 15:
	Schedule II Valuation and Qualifying Accounts and Reserves.
	All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or are included in the Financial Statements or Notes thereto, and therefore are not required to be presented under this Item.
3.	Exhibits
	See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
b)	Reports on Form 8-K.
	None.

SIGNATURES

     Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Torrance, and State of California, on the 25th of April, 2003.

VIRCO MFG. CORPORATION

/s/ Robert A. Virtue
Robert A. Virtue, Chairman of the Board (Principal Executive Officer)

/s/ Robert E. Dose
Robert E. Dose, Vice President — Finance, Secretary & Treasurer (Principal Financial Officer)

/s/ Bassey Yau
Bassey Yau, Corporate Controller (Principal Accounting Officer)

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert A. Virtue and Robert E. Dose his/her true and lawful attorney-in-fact and agent, with full power of substitution and, for him/her and in his/her name, place and stead, in any and all capacities to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Robert A. Virtue Robert A. Virtue	Chairman of the Board, Chief Executive Officer, President and Director	April 25, 2003
/s/ Douglas A. Virtue Douglas A. Virtue	Director	April 25, 2003
/s/ Donald S. Friesz Donald S. Friesz	Director	April 25, 2003
/s/ Evan M. Gruber Evan M. Gruber	Director	April 25, 2003
/s/ Robert K. Montgomery Robert K. Montgomery	Director	April 25, 2003
/s/ Glen D. Parish Glen D. Parish	Director	April 25, 2003
/s/ Donald A. Patrick Donald A. Patrick	Director	April 25, 2003
/s/ James R. Wilburn James R. Wilburn	Director	April 25, 2003

VIRCO MFG. CORPORATION

EXHIBITS TO FORM 10-K ANNUAL REPORT

For the Year Ended January 31, 2003

Exhibit
Number		Description
	3.1	Certificate of Incorporation of the Company dated April 23, 1984, as amended (incorporated by reference to Exhibit 4.4 to the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
	3.2	Amended and Restated Bylaws of the Company dated September 10, 2001 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (Commission File No. 001-08777), filed with the Commission on September 14, 2001).
	10.1	Form of Virco Mfg. Corporation Employee Stock Ownership Plan (the “ESOP”) (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
	10.2	Trust Agreement for the ESOP (incorporated by reference to Exhibit 4.2 to the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
	10.3	Form of Registration Rights Agreement for the ESOP (incorporated by reference to Exhibit 4.3 to the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
	10.4	Rights Agreement dated as of October 18, 1996, by and between the Company and Mellon Investor Services, as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form S-8 Registration Statement (Commission File No. 001-08777), filed with the Commission on October 25, 1996).
	10.5	1993 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on June 1993).
	10.6	Lease between FHL Group, a California Corporation, as landlord and Virco Mfg. Corporation, a Delaware Corporation, as tenant (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2002 (Commission File No. 001-08777), filed with the Commission on May 1, 2002).
	10.7	Revolving Line of Credit Note dated February 1, 2003 between the Company and Wells Fargo Bank, N.A., a national banking association.
	13.1	Annual Report to Stockholders for the Year Ended January 31, 2003.
	21.1	List of All Subsidiaries of Virco Mfg. Corporation.
	23.1	Consent of Independent Auditors.
	24.1	Power of Attorney (see signature page).
	99.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

Certification of Chief Executive Officer

     I, Robert A. Virtue, certify that:

1.	I have reviewed this annual report on Form 10-K of Virco Mfg. Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.	Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:      April 25, 2003	/s/ Robert A. Virtue
	Robert A. Virtue      President

Certification of Chief Financial Officer

     I, Robert E. Dose, certify that:

1.	I have reviewed this annual report on Form 10-K of Virco Mfg. Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.	Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:      April 25, 2003	/s/ Robert E. Dose
	Robert E. Dose      Vice President - Finance

EX-10.7 3 v89559exv10w7.txt EXHIBIT 10.7 Exhibit 10.7 REVOLVING LINE OF CREDIT NOTE $70,000,000.00 West Covina, California February 1, 2003 FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at San Gabriel Valley Regional Commercial Banking Office, 1000 Lakes Drive, Suite 250, West Covina, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Seventy Million Dollars ($70,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2) or three (3) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than One Million Dollars ($1,000,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR --------------------------------- 100% - LIBOR Reserve Percentage (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. -1- (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) initially either (i) at a fluctuating rate per annum three-eighths percent (0.375%) above the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be one and three quarters percent (1.75%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. In addition to any interest rate adjustments resulting from changes in the Prime Rate, Bank shall adjust the Prime Rate and LIBOR margins used to determine the rates of interest applicable to this Note on a quarterly basis, as set forth in that certain Credit Agreement between Borrower and Bank dated as of February 1, 2003 (as amended from time to time, the "Credit Agreement"). (b) Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it's sole option but without obligation to do so, accepts Borrower's notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be -2- deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (d) Payment of Interest. Interest accrued on this Note shall be payable on the first day of each month, commencing March 1, 2003. (e) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount set forth above or such lesser amount as shall at any time be available hereunder, as set forth in the Credit Agreement. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on February 1, 2005. (b) Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Robert A. Virtue or Robert Dose, either one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. -3- (c) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Million Dollars ($1,000,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. -4- EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of the Credit Agreement. Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or other person or entity. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. VIRCO MFG. CORPORATION By: ___________________________ Title: ________________________ -5- Exhibit 10.7 CREDIT AGREEMENT THIS AGREEMENT is entered into as of February 1, 2003, by and between VIRCO MFG. CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS A. Bank and Borrower previously entered into that certain Credit Agreement dated as of December 1, 2000 (as amended from time to time, the "Prior Credit Agreement"), pursuant to which Bank extended to Borrower a line of credit (the "Prior Line of Credit") with a subfeature for the issuance of letters of credit (the "Prior Letters of Credit"). B. Bank and Borrower wish to amend and restate the Prior Credit Agreement in its entirety with this Agreement to evidence the extension to Borrower of the credit accommodation described below on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I CREDIT TERMS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including February 1, 2005, not to exceed at any time the aggregate principal amount of Forty Million Dollars ($40,000,000.00) from February 1, 2003 through and including February 28, 2003, Sixty Million Dollars ($60,000,000.00) from March 1, 2003 through and including May 31, 2003, Seventy Million Dollars ($70,000,000.00) from June 1, 2003 through and including August 31, 2003, Sixty Million Dollars ($60,000,000.00) from September 1, 2003 through and including October 31, 2003 and Forty Million Dollars ($40,000,000.00) from November 1, 2003 through the maturity date referred to above ("Line of Credit"), the proceeds of which shall be used to finance Borrower's working capital requirements and to refinance the amount outstanding under the Prior Line of Credit (which shall be deemed cancelled hereby). Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of EXHIBIT A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue sight commercial or standby letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Fifteen Million Dollars ($15,000,000.00). The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. Each commercial Letter of Credit shall be issued for a term not to exceed one hundred eighty (180) days, as designated by Borrower; provided however, that no -1- commercial Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. Each standby Letter of Credit shall be issued for a term not to exceed three (3) years, as designated by Borrower; provided, however, that no standby Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof. Each drawing paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any drawing is paid, then Borrower shall immediately pay to Bank the full amount drawn, together with interest thereon from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such drawing. All Prior Letters of Credit which are outstanding as of the date hereof shall be deemed "Letters of Credit" hereunder. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. Notwithstanding the foregoing, for a period of at least thirty (30) consecutive days during each fourth fiscal quarter of Borrower, borrowings outstanding under the Line of Credit shall not exceed Twenty-five Million Dollars ($25,000,000.00). SECTION 1.2. INTEREST/FEES. (a) Interest. The outstanding principal balance of the Line of Credit shall bear interest initially at the rate of interest set forth in the Line of Credit Note. In addition to any interest rate adjustments resulting from changes in the Prime Rate (as defined in the Line of Credit Note, Bank shall adjust the Prime Rate and LIBOR (as defined in the Line of Credit Note) margins used to determine the rates of interest applicable to the Line of Credit on a quarterly basis, commencing with Borrower's fiscal quarter ending April 30 2003, if required to reflect a change in Borrower's ratio of Funded Debt to EBITDA (as defined Section 4.9(d) below), in accordance with the following grid:

Applicable Applicable Prime Rate LIBOR Funded Debt to EBITDA Margin Margin - --------------------- ------ ------ at least 3.0 to 1.0 but less than or equal to 4.0 to 1.0 .500% 2.50% at least 2.0 to 1.0 but less than or equal to 3.0 to 1.0 .375% 1.75% at least 1.0 to 1.0 but less than 2.0 to 1.0 .250% 1.625%

-2- less than 1.0 to 1.0 .250% 1.500% Each such adjustment shall be effective on the first Business Day of Borrower's fiscal quarter following the quarter during which Bank receives and reviews Borrower's most current fiscal quarter-end financial statements in accordance with any requirements established by Bank for the preparation and delivery thereof. The foregoing pricing grid is not intended to constitute a waiver of any violation of the Funded Debt to EBITDA covenant set forth herein, and Bank hereby reserves all of its rights and remedies in connection therewith, should such a violation occur. (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby. (c) Unused Commitment Fee. Borrower shall pay to Bank a fee on the average daily unused amount of the Line of Credit. Initially, such fee shall be ..375%. Bank shall adjust such percentage on a fiscal quarterly basis, commencing with Borrower's fiscal quarter ending April 30, 2003, if required, to reflect a change in Borrower's ratio of Funded Debt to EBITDA (as defined in Section 4.9(d) below) in accordance with the following grid:

Funded Debt to EBITDA Percentage Fee - --------------------- -------------- less than 2.0 to 1.0 .375% greater than or equal to 2.0 to 1.0 .500%

Each such adjustment shall be effective on the first Business Day (as defined in the Line of Credit Note) of Borrower's fiscal quarter following the quarter during which Bank receives and reviews Borrower's most current fiscal quarter-end financial statements in accordance with the provisions of Section 4.3 below. Such fee shall be due and payable by Borrower quarterly in arrears on the 15th day of the month immediately following each fiscal quarter end. The foregoing fee schedule is not intended to constitute a waiver of any violation of the Funded Debt to EBITDA covenant set forth in Section 4.9(e) below, and Bank hereby reserves all of its rights and remedies in connection therewith, should such a violation occur. (d) Commercial Letter of Credit Fees. Borrower shall pay to Bank fees upon the issuance of each commercial Letter of Credit, upon the payment or negotiation by Bank of each draft under any commercial Letter of Credit and upon the occurrence of any other activity with respect to any commercial Letter of Credit (including without limitation, the transfer, amendment or cancellation of any commercial Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. (e) Standby Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon the issuance of each standby Letter of Credit equal to one and three quarters percent (1.75%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the payment or negotiation of each drawing under any standby Letter of Credit and fees upon the occurrence of any other activity with respect to any standby Letter of Credit (including without limitation, the transfer, amendment or cancellation of any standby Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. -3- SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest and fees due under the Line of Credit by charging Borrower's deposit account number 4648-052785 with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.4. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable and other rights to payment, general intangibles, inventory and equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing fees and costs of appraisals and audits. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material -4- adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated December 31, 2002, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance -5- into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument or document required hereby. (ii) Corporate Resolution: Borrowing. (iii) Certificate of Incumbency. (iv) Continuing Security Agreement: Rights to Payment and Inventory. (v) Security Agreement: Equipment. (vi) UCC Financing Statements. (vii) Loan Disbursement Order. (viii) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. -6- ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of the Line of Credit exceeds the maximum principal amount available thereunder, as set forth in Section 1.1(a) above. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include a balance sheet, an income statement, a statement of cash flow and appropriate footnotes and supporting consolidating information, and, if issued, a copy of the certified public accountant's management letter; (b) not later than 120 days after and as of the end of each fiscal year, Borrower's Annual Report Form 10-K as filed with the Securities and Exchange Commission; (c) not later than 45 days after and as of the end of each month, a financial statement of Borrower, prepared by Borrower, to include a balance sheet and an income statement; (d) not later than 60 days after and as of the end of each fiscal quarter, Borrower's Quarterly Report Form 10-Q as filed with the Securities and Exchange Commission; (e) not later than 30 days prior to end of each fiscal year, Borrower's detailed monthly operating budget for the upcoming fiscal year, to include a projected balance sheet, a projected income statement and a projected budget for capital expenditures; and (f) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. -7- SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $1,000,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending January 31, 2003: (a) Current Ratio not less than 1.1 to 1.0 as of each first fiscal quarter end (April 30), and as of each second fiscal quarter end (July 31), and not less than 1.2 to 1.0 as of each third fiscal quarter end (October 31) and as of each fourth fiscal quarter end (January 31), with "Current Ratio" defined as total current assets divided by total current liabilities (including without limitation the balance outstanding under the Line of Credit). (b) Total Liabilities divided by Tangible Net Worth not greater than 1.5 to 1.0 as of each first fiscal quarter end (April 30) and as of each second fiscal quarter end (July 31), and not greater than 1.25 to 1.0, as of each third fiscal quarter end (October 31) and as of each fourth fiscal quarter end (January 31), with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities (including without limitation the undrawn amount of any issued and outstanding Letters of Credit, guaranties and any other contingent liabilities) less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Fixed Charge Coverage Ratio not less than 1.75 to 1.0 as of each fiscal quarter end through and including July 31, 2003, and not less than 2.25 to 1.0 as of each fiscal quarter end thereafter, calculated on a rolling four-quarter basis, with "Fixed Charge" defined as net profit after taxes paid in cash less dividends and distributions, less stock repurchases, less any gain on the sale of assets, plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "Fixed Charge Coverage Ratio" defined as Fixed Charge divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. -8- (d) Funded Debt to EBITDA Ratio not greater than 1.75 to 1.0 as of January 31, 2003, not greater than 3.0 to 1.0 as of April 30, 2003, not greater than 4.00 to 1.0 as of July 31, 2003, not greater than 2.00 to 1.0 as of October 31, 2003, not greater than 1.50 to 1.0 as of January 31, 2004, not greater than 3.00 to 1.0 as of each April 30 and July 31 thereafter, and not greater than 1.50 to 1.0 as of each October 31 and January 31 thereafter, with "Funded Debt" defined as the principal balance outstanding under all interest bearing liabilities of Borrower plus the undrawn amount of any issued and outstanding Letters of Credit, guaranties and any other contingent liabilities, and with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, less any gain on the sale of assets. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $1,000,000.00. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in excess of an aggregate of $8,000,000.00 for the fiscal year ending January 31, 2003, or in excess of an aggregate of $7,000,000.00 during any subsequent fiscal year. SECTION 5.3. LEASE EXPENDITURES. Incur new operating lease expense in excess of an aggregate of $2,000,000.00 in any fiscal year. SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof, and (c) unsecured liabilities not to exceed an aggregate of $2,500,000.00 during any fiscal year. SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's -9- business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, and (b) asset acquisitions of companies engaged in businesses similar to that of Borrower for purchase prices not to exceed $1,000,000.00 in the aggregate during any fiscal year for all such purchases combined. SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution in cash on Borrower's stock now or hereafter outstanding in excess of $300,000.00 in the aggregate during any given fiscal quarter. SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real -10- property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower; provided, however, that Borrower may have mechanics' liens against its property securing claims not to exceed $250,000.00 in the aggregate so long as such mechanics' liens are released prior to any foreclosure thereunder. (f) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The dissolution or liquidation of Borrower; or Borrower, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower. (i) Any change in ownership during the term of this Agreement of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver -11- of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: VIRCO MFG. CORPORATION 2027 Harpers Way Torrance, California 90501 Attn: Robert E. Dose Chief Financial Officer BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION San Gabriel Valley Regional Commercial Banking Office 1000 Lakes Drive, Suite 250 West Covina, CA 91790 Attn: Randall J. Repp Vice President or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or any collateral required hereunder. -12- SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. (b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a -13- waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section .91 or any similar applicable state law. (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding. -14- (h) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (i) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, VIRCO MFG. CORPORATION NATIONAL ASSOCIATION By: _______________________ By: _______________________ Randall J. Repp Title: ____________________ Vice President -15- EX-13.1 4 v89559exv13w1.txt EXHIBIT 13.1 EXHIBIT 13.1 MANAGEMENT'S STATEMENT The financial statements of Virco Mfg. Corporation were prepared by management, which is responsible for the integrity and objectivity of the financial information presented, including amounts that must necessarily be based on judgments and estimates. The statements were prepared in conformity with accounting principles generally accepted in the United States, and in situations where acceptable alternative accounting principles exist, management selected the method that it believed was most appropriate in the circumstances. Virco depends upon the Company's system of internal controls in meeting its responsibilities for reliable financial statements. This system is designed to be cost-effective while providing reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. Judgments are required to assess and balance the relative cost and expected benefits of these controls. The financial statements have been audited by the Company's independent auditors, Ernst & Young LLP. The independent auditors provide an objective, independent review as to management's discharge of its responsibilities insofar as they relate to the fairness of reported operating results and financial condition. They obtain and maintain an understanding of Virco's accounting and financial controls, and conduct such tests and procedures as they deem necessary to arrive at an opinion on the fairness of the financial statements. The Audit Committee of the Board of Directors, which is composed of Directors from outside the Company, maintains an ongoing appraisal of the effectiveness of audits and the independence of the auditors. The Committee meets periodically with the auditors and management. The independent auditors have free access to the Committee, without management present, to discuss the results of their audit work and their opinions on the adequacy of internal financial controls and the quality of financial reporting. Based on a review and discussions of the Company's 2002 audited consolidated financial statements with management and discussions with the independent auditors, the Audit Committee recommended to the Board of Directors that the Company's 2002 audited consolidated financial statements be included in the Company's annual report on Form 10-K. The Board of Directors concurred. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed herein, in Item 1, and elsewhere in this report on Form 10-K, that could cause actual results to differ materially from historical results or those anticipated. Risks and uncertainties that could cause actual results to vary materially from anticipated results, include without limitation, material availability and cost of materials, especially steel, plastic, fuel and energy; availability and cost of labor, demand for the Company's products, and competitive conditions affecting selling prices and margins, capital costs and general economic conditions. In this report, words such as "anticipates," "believes," "expects," "estimates, "projects," "future," "intends," "plans," "potential," "may," "could" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This discussion and analysis of Virco's financial condition and results of operations is based upon the Company's financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Virco management to make estimates and judgments that affect the Company's reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates such estimates, including those related to revenue recognition, allowance for doubtful accounts, valuation of inventory including LIFO and obsolescence reserves, self-insured retention for products and general liability insurance, self-insured retention for workers compensation insurance, liabilities under defined benefit and other compensation programs, and estimates related to deferred tax assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This forms the basis of judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Factors that could cause or contribute to these differences include the factors discussed above under Item 1, Business, and elsewhere in this report on Form 10-K. Virco's critical accounting policies are as follows: Revenue Recognition: Effective February 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Under the new accounting method adopted, the Company recognizes all sales when title passes and collectibility is reasonably assured under its various shipping terms. In 2002 the Company purchased the assets of Furniture Focus(TM), a company that sells complete Furniture, Fixture, and Equipment (FF&E) packages to schools. For package orders, the Company records revenue upon completion of the project. The Company reports sales as net of sales returns and allowances. Allowances for Doubtful Accounts: Considerable judgment is required when assessing the ultimate realization of receivables, including assessing the probability of collection, current economic trends, historical bad debts and the current creditworthiness of each customer. The Company maintains allowances for doubtful accounts that may result from the inability of our customers to make required payments. Over the past five years, the Company's allowance for doubtful accounts has approximately ranged from 0.7% to 1.3% of accounts receivable at year-end. The Company does not typically obtain collateral to secure credit risk. The primary reason that Virco's allowance for doubtful accounts represents such a small percentage of accounts receivable is that a large portion of the accounts receivable are attributable to low-credit-risk governmental entities, giving Virco's receivables a historically high degree of collectability. Over the next year, no significant change is expected in the Company's sales to government entities as a percentage of total revenues. Inventory Valuation: Inventory is valued at the lower of cost or market. The Company uses the LIFO (last-in, first-out) method of accounting for the material component of inventory. The Company maintains allowances for estimated obsolete inventory to reflect the difference between the cost of inventory and the estimated market value. If market conditions are less favorable than those anticipated by management, additional allowances may be required. Self-Insured Retention: For 2002, the Company was self-insured for product liability losses up to $250,000 per occurrence and was self-insured for workers compensation losses up to $200,000 per occurrence. For 2001, the Company was self-insured for Product Liability losses up to $100,000 per occurrence. The Company obtains annual actuarial valuations for the self-insured retentions. Product liability reserves for known and unknown (IBNR) losses are recorded at the net present value of the estimated losses using a 6.0% discount rate. Estimated workers compensation losses are funded during the insurance year and subject to retroactive loss adjustments. Defined Benefit Obligations: The Company has three defined benefit plans, the Virco Employees Retirement Plan, the Virco Important Performers (VIP) Plan and the Non-Employee Directors Retirement Plan, which provide retirement benefits to employees and outside directors. Virco discounts the pension obligations under the plans using a 6.5% discount rate, 5.0% assumed rate of increases in compensation rates, and estimating an 6.5% return on plan assets. The Company obtains annual actuarial valuations for all three plans. Although the Company does not anticipate any change in these rates in the coming year, any moderate change should not have a significant effect on the Company's financial position, results of operations or cash flows. Deferred Tax Assets and Liabilities: The Company has not provided an allowance against the deferred tax assets recorded in the financial statements. The Company had a net deferred tax asset of $2,396,000 at January 31, 2003. Management believes that it is more likely than not that future earnings will be sufficient to recover deferred tax assets. RESULTS OF OPERATIONS (2002 VS. 2001) INDUSTRY OUTLOOK The commercial furniture markets have suffered from the worst recorded recession in recent history during the past two years. As a group, the members of BIFMA (the Business and Institutional Furniture Manufacturer's Association) recorded a 19.1% decrease in shipments in calendar year 2002. This followed a 17.4% decrease in calendar year 2001. This compares to declines at Virco of 5.1% in 2002 and 10.4% in 2001. To date, it appears that the Company's core public school customers have been less affected by the recession. The outlook for 2003 suggests that the market for furniture will not improve in the short term. The unfortunate combination of a lethargic economy combined with political uncertainty is now being joined by significant budget challenges for many state and local governments. Most states collected less revenue in the 2002-2003 fiscal year than budgeted and many states have announced that they plan to reduce their budgets in the current fiscal year. As a large portion of many states' budgets may be used to fund education, it is anticipated that reduced state budgets may result in a decrease in sales of replacement furniture in fiscal 2003. Despite decreased budgets, many of these same states are passing bonds to finance school construction, which may result in an offsetting increase in sales of furniture. It is unclear how the net effect of budgetary deficits and bond-funded projects in states in which the Company sells its products will impact furniture sales in the 2003 fiscal year. During this two year period, many furniture manufacturers have responded by shutting down significant portions of their manufacturing capacity and laying off thousands of workers, incurring large restructuring charges in the process. Virco has been servicing the education market for over 50 years, and has experienced many business cycles affecting the demand for education furniture. The Company believes that in the long term, demographics underlying the furniture industry will reward companies that survive the current downturn in sales. As such, Virco has responded to the current environment with a different approach, one that has preserved the Company's manufacturing and distribution infrastructure and saved the jobs of Virco's trained workforce. The Company has used a variety of tactics to reduce spending. Capital spending has been curtailed dramatically. Capital expenditures were reduced to approximately one quarter of depreciation expense in 2002 and one third of depreciation expense in 2001. The Company has embraced the Assemble-to-Ship (ATS) operating model, which facilitated a large reduction in inventory levels in 2001, and improved levels of customer service while maintaining reduced levels of inventory in 2002. To control and reduce the cost of Virco's workforce, the Company has used traditional measures such as wage freezes and hiring freezes, as well as more creative measures that address the unique demands of a highly seasonal business. The more creative measures include programs to encourage workforce flexibility and in 2002 the Company introduced a sabbatical program for employees during the traditionally slow fourth quarter. OVERVIEW For the year ended January 31, 2003, the Company earned a modest net income of $282,000 on net sales of $244,355,000 compared to a net income of $246,000 on net sales of $257,462,000 in the same period last year. Earnings were $0.02 per share for the year ended January 31, 2003, compared to $0.02 in the last year, after giving effect to the 10% stock dividend declared August 20, 2002. Cash flow from operations was $12,045,000 compared to $35,037,000 in the prior year. The reduction in cash flow from operations is primarily attributable to fluctuations in inventory levels. In the current year inventory increased by $4,356,000 compared to the prior year, when the large scale introduction of Assemble-to-Ship (ATS) facilitated a reduction in inventory of $19,356,000, a $23,712,000 change. SALES Virco's 2002 sales decreased by 5% in 2002 to $244,355,000, from $257,462,000 in 2001. During 2002, the Company adhered to a policy of turning down low margin and unprofitable business, despite substantial price competition in its primary markets. The Company continued to emphasize the value of Virco's products, the value of Virco's distribution and delivery capabilities, and the value of timely deliveries during the peak seasonal delivery period. Although this policy had an adverse effect on unit volume, the Company achieved a net increase in selling prices. Effective May 1, 2002, Virco acquired certain assets of Furniture Focus, a reseller that offers complete package solutions for the Furniture, Fixtures and Equipment (FF&E) segments of bond-funded public school construction projects. This acquisition provided Virco with the ability to offer packages to its core customer base. Because the acquisition date was very close to the peak summer season, the marketing of package solutions or "PlanScape(TM)" was limited to the five state region in which Furniture Focus has operated. Virco intends to begin marketing package solutions nationwide in 2003. COST OF SALES For fiscal 2002, cost of sales was 69% of sales compared to 70% of sales in the prior year. The improvement was primarily attributable to increases in selling prices. Raw material costs increased, primarily due to increased steel prices. Increased material costs were offset by reductions in labor and overhead spending. Virco began 2002 with a plan to maintain reduced levels of inventory and to use the Assemble-to-Ship (ATS) model to provide acceptable levels of service to our customers. In an effort to match spending to the continued low levels of output, Virco controlled headcount, capital expenditures, and other discretionary spending. As a result, manufacturing spending and production levels were flat compared to the prior year. Inflation rates had a moderate impact on the Company's cost of sales for the first half of 2002. In the second half of 2002, the Company experienced significant increases in the cost of steel. On March 5, 2002, President Bush announced that he would impose, effective March 20th, tariffs of up to 30% on imports of selected steel products pursuant to Section 201 of the Trade Act of 1974. The duties were imposed for a three-year period and are to be progressively reduced each year as required by the World Trade Organization. Cold-rolled steel is the single largest raw material used by many in the educational furniture industry, including Virco, and is subject to the maximum 30% tariff. In addition, domestic steel manufacturers filed a dumping claim against certain international suppliers, which, if successful, could serve to prevent steel prices from falling in the future. In 2003, the Company intends to more tightly integrate the ATS model with our marketing programs, product development programs, and product-stocking plan. This anticipated improvement in execution of ATS should allow the Company to offer a greater variety of product while continuing to improve on-time delivery performance. The ATS model should allow the Company to build inventory earlier in the year and reduce costly overtime and temporary labor costs during the summer. Production levels, which will vary depending upon selling volumes, are anticipated to be slightly lower than in 2002. The Company anticipates continued upward pressure on costs, particularly in the areas of certain raw materials, transportation, energy, and benefits in the coming year and others. For more information, please see the section entitled "Inflation and Future Change in Prices" in the Management's Discussion and Analysis section contained in Virco's Annual Report to Shareholder for the year ended January 31, 2003. SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS Selling, general and administrative expenses for the year ended January 31, 2003, increased 1% from the prior year, and were 29.7% as a percentage of sales in 2002 as compared to 27.9% in 2001. Freight costs declined by approximately $500,000 due to a reduction in selling volume, and were slightly higher as a percentage of sales. Other SG&A costs were adversely affected by increased installation costs reflecting an increase in installed orders, the acquisition of Furniture Focus, and an increase in retirement plan costs, offset by other reductions in selling and administrative expenses. Interest expense was approximately $1,100,000 less than in the prior year due to reduced levels of borrowing and lower interest rates. The Company anticipates a modest reduction in average borrowing levels and a reduction in the average interest rate paid in 2003. The Company entered into a swap agreement with Wells Fargo Bank, which had the effect of establishing a fixed rate of interest for $20,000,000 of loans for both 2001 and 2002. This interest swap expired in March 2003. Interest rates paid under the swap agreement were greater than the current rate paid under the Wells Fargo line of credit. In the current year, Virco realized a $149,000 loss on disposition of fixed assets. This compares to a loss on sale of assets of approximately $86,000 in the prior year. RESULTS OF OPERATIONS (2001 VS. 2000) OVERVIEW For the year ended January 31, 2002, the Company had a modest net income of $246,000 on net sales of $257,462,000 compared to a net income of $4,016,000 on net sales of $287,342,000 in the same period for fiscal 2000. Fiscal 2000 results included a pre-tax gain of $7,945,000 on the sale of real estate and other income of $4,052,000 related to the settlement of a dispute. The settlement was a non-recurring payment unrelated to the Company's ongoing operations. Earnings were $0.02 per share for the year ended January 31, 2002, compared to $0.29 in the same period last year, after giving effect to the 10% stock dividends declared August 20, 2002 and August 21, 2001. For 2001, furniture operations provided net income of $246,000 on net sales of $257,462,000. This compares to a loss on furniture operations of $3,391,000 (which excludes the one-time items mentioned above) on substantially higher sales of $287,342,000 in fiscal 2000. In addition, cash flow from operations reached a historical high of $35,037,000, due largely to a $19,356,000 reduction in inventories made possible by our Assemble-to-Ship program and the decrease in net sales due to the lingering effects of a decline in the commercial furniture market. SALES In years prior to November 2001, Virco's sales force had been organized into two groups, "Education" and "Commercial". During November of 2001, the Company announced a reorganization of the sales force. Instead of having two representatives pursuing separate customers within the same geographical territory, Virco created one National Sales Group. It became increasingly clear that the needs of Virco's commercial and educational customers were evolving towards greater similarity and that combining the Company's sales efforts would allow individual representatives to plow more deeply in a smaller field. In addition, Virco also established a Corporate Sales Group to pursue wholesalers, mail order accounts and national chains where management believes that it would be more efficient to have a single sales representative or group approach such persons, as they tend to have needs that transcend the geographic boundaries established for local accounts. As a group, the members of BIFMA (the Business and Institutional Manufacturer's Association) reported a sales decline of 17.4% for calendar 2001, with an even more dramatic 29.2% decline in the fourth quarter. This compares with only a 10.4% decline at Virco. The Company's core public school customers were less affected by the overall recession. Sales to public schools declined modestly during 2001. Commercial sales were substantially less than the prior year, more closely reflecting the statistical results recorded by BIFMA. Because of the recession in the furniture industry, the Company experienced substantial price competition in its primary markets. During 2001, the Company adhered to a policy of turning down low margin and unprofitable business. Although this policy had an adverse effect on unit volume, the Company achieved a net increase in selling prices. Consequently, the gross margin percentage for the year increased modestly compared to 2000, despite unfavorable manufacturing variances related to reductions in production levels. COST OF SALES Virco began 2001 with a plan to reduce inventory levels and to implement the Assemble-to-Ship (ATS) model. The effect of the reduction in sales volume, combined with management's decision to implement the ATS model to reduce inventories, resulted in a substantial reduction in production hours. In an effort to match spending to the lower levels of output, Virco reduced headcount, capital expenditures, and other discretionary spending. Despite reductions in spending, the Company incurred increased manufacturing variances compared to the prior year. These variances were more than offset by the effects of reduced costs for certain raw materials, and an increase in selling prices. The net effect was a modest increase in gross margins for the year. Inflation rates did not have a significant net impact on the Company's cost of sales in 2001. Material costs decreased, offset by increased costs for certain utilities and employee benefits. SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS Selling, general and administrative expenses for the year ended January 31, 2002, decreased by approximately $11,376,000 compared to the same period in the immediately preceding year. These costs decreased both in absolute dollars and as a percentage of sales. Freight costs declined by approximately $3,500,000 due to a reduction in selling volume, and were slightly lower as a percentage of sales. Other SG&A costs were lower in absolute dollars and as a percentage of sales due to reductions in staffing, reduced sales incentives, and other reductions in spending, including a temporary 10% reduction in salaries and wages during the fourth quarter. Interest expense was approximately $400,000 less in fiscal 2001 than in fiscal 2000 due to reduced levels of borrowing and lower interest rates. The Company expected to continue to reduce borrowing levels in 2002. The Company entered into a swap agreement with Wells Fargo Bank, which has the effect of establishing a fixed rate of interest for $20,000,000 of loans for both 2001 and 2002. The balance of borrowing is based upon LIBOR, and fluctuated with the market rate of interest. In fiscal 2001, Virco realized an $86,000 loss on disposition of fixed assets. This compares to a gain on sale of assets of approximately $7,667,000 in the prior year, and a prior year pre-tax gain of $4,052,000 on a settlement. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL REQUIREMENTS Virco addresses liquidity and capital requirements in the context of short-term seasonal requirements and the long-term capital requirements of the business. The Company's core business of selling furniture to publicly funded educational institutions is extremely seasonal. The seasonal nature of this business permeates most of Virco's operational, capital, and financing decisions. The Company's working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect Virco's assets, liabilities, revenues and expenses. Management expends a significant amount of time during the year, and especially in the first quarter, developing a stocking plan and estimating the number of employees, the amount of raw materials, and the types of components and products that will be required during the peak season. If management underestimates any of these requirements, Virco's ability to timely meet customer orders or to provide adequate customer service may be diminished. If management overestimates any of these requirements, the Company may be required to absorb higher storage, labor and related costs, each of which may affect profitability. On an ongoing basis, management evaluates such estimates, including those related to market demand, labor costs, and inventory levels, and continually strives to improve Virco's ability to correctly forecast business requirements during the peak season each year. As part of Virco's efforts to address seasonality, financial performance and quality without sacrificing service or market share, management has been refining the Company's ATS operating model. ATS is Virco's version of mass-customization, which assembles standard, stocked components into customized configurations before shipment. The Company's ATS program reduces the total amount of inventory and working capital needed to support a given level of sales. It does this by increasing the inventory's versatility, delaying assembly until the last moment, and reducing the amount of warehouse space needed to store finished goods. In addition, Virco finances its largest balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances naturally 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. As the capital required for this summer season generally exceeds cash available from operations, Virco has historically relied on third party bank financing to meet seasonal cash flow requirements. Virco has established a long-term relationship with its primary lender, Wells Fargo Bank. On an annual basis, the Company prepares a forecast of seasonal working capital requirements, and renews its revolving line of credit. For the next fiscal year, Virco has entered into a revolving credit facility with Wells Fargo Bank, amended and restated February 2003, but effective at January 31, 2003, which provides a secured revolving line of credit that varies from $40,000,000 to $70,000,000. This credit facility is intentionally structured to provide additional working capital during the Company's traditional peak period. At September 1, 2003, the available commitment reduces to $60,000,000, and at November 1, 2003, the line reduces to $40,000,000. This is a two-year non-amortizing line with interest payable monthly at a fluctuating rate equal to the Bank's prime rate plus a fluctuating margin of 0.25% to 0.50% (4.75% at January 31, 2003). The line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus a fluctuating margin of 1.50% to 2.50%. Approximately $13,345,000 was available for borrowing as of January 31, 2003. LONG-TERM CAPITAL REQUIREMENTS In addition to short-term liquidity considerations, the Company continually evaluates long-term capital requirements. In 1997, the Company initiated two large capital projects, which have had significant effects on cash flow for the past five years. In the 1998, 1999, and 2000 fiscal years the Company expended significant amounts of capital on these projects. Upon completion of these projects, the Company dramatically reduced capital spending. As shown in the Company's consolidated statements of cash flows, during 2001, capital expenditures were approximately one third of depreciation expense and during 2002, capital expenditures were approximately one quarter of depreciation expense. The first project was the implementation of the SAP enterprise resources planning system, initiated in October 1997. The Company went live with the new system in March 1999, implemented a business-to-business website along with sales force automation in the first quarter of 2000, and upgraded to the most current version of SAP in the fourth quarter of 2000. The initial portion of this project was financed with a lease from General Electric Capital Corporation (GECC). Capital and training costs not funded by the lease were financed from cash flows from operations and from the loan facility from Wells Fargo. During fiscal year 2002 the Company paid off the balance on the capital lease. The second project was the expansion and re-configuration of the Conway, Arkansas, manufacturing and distribution facility. During 1997, 1998, 1999, and 2000 the Company expended approximately $67,000,000 to purchase 100 acres of land, and build a 1,200,000 sq. ft. manufacturing and distribution facility equipped with new manufacturing and warehousing equipment. To finance this project, the Company borrowed $30,000,000 from Wells Fargo Bank that was scheduled to be repaid in three annual $10,000,000 installments, the first of which was paid on January 31, 2001; moreover, as explained below, the Company paid off the entire balance of this loan prior to January 31, 2002. In addition to the loan from Wells Fargo, the Company obtained equipment with operating leases from GE Capital, and used operating cash flow. As phases of the Conway expansion were completed, the Company was able to vacate several leased warehouses, sell a small production facility, and convert a second production facility into a warehouse. In addition, Virco sold a warehouse located in Torrance, California, which had been held as rental property. In the fourth quarter of 2001, primarily due to the reduction in inventory related to the implementation of the previously described ATS model and the reduced levels of capital expenditures, Virco was able to pay off the $20,000,000 balance on the loan facility with Wells Fargo Bank that was used to finance the Conway expansion. Upon the completion of these substantial capital projects, the Company significantly reduced capital spending in 2002 and 2001. Management intends to limit future capital spending until growth in sales volume fully utilizes the new plant and distribution capacity. The Company has established a goal of limiting capital spending to between $5,000,000 to $7,000,000 for 2003, which is approximately one-half of anticipated depreciation expense. The Company is currently marketing two properties for sale or lease, which have a cumulative estimated market value of approximately $8,000,000. One of these properties, a former production facility in Conway, Arkansas, is currently being utilized as a finished goods warehouse. A second property, located in Los Angeles, California, is currently leased to a third party. ASSET IMPAIRMENT In 2002, Virco acquired certain assets of Furniture Focus. As part of this acquisition, the Company recorded goodwill of $2,200,000. For 2003, the Company is rolling out the Furniture Focus package business throughout its nationwide sales force. Virco evaluates the impairment of goodwill at least annually, or when indicators of impairment occur. As of the year ended January 31, 2003, there has been no impairment to the goodwill recorded. Virco made substantial investments in its infrastructure in 1998, 1999, and 2000. The investments included a new factory, new warehouse, and new production and distribution equipment. The factory, warehouse, and equipment acquired are used to produce, store, and ship a variety of product lines, and the use of any one piece of equipment is not dependent on the success or volume of any individual product. New products are designed to use as many common or existing components as practical. As a result, both our ATS inventory components and the machines used to produce them become more versatile. Virco evaluates the potential for impaired assets on a quarterly basis. As of the year ended January 31, 2003, there has been no impairment to the long-term assets of the corporation. CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS The Company leases manufacturing, transportation, and office equipment, as well as real estate under a variety of operating leases. The Company leases substantially all vehicles, including trucks and passenger cars under operating leases where the lessor provides fleet management services for the Company. The fleet management services provide Virco with operating efficiencies relating to the acquisition, administration, and operation of leased vehicles. The use of operating leases for manufacturing equipment has enabled the Company to qualify for and use Industrial Revenue Bond financing. Real estate leases have been used where the Company did not want to make a long-term commitment to a location, or when economic conditions favored leasing. The Company does not have any capital lease obligations or purchase commitments in excess of normal recurring obligations. CONTRACTUAL OBLIGATIONS

PAYMENTS DUE BY PERIOD --------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS MORE THAN 5 YEARS ----------------------- ------- ---------------- --------- --------- ----------------- Long-Term Debt Obligations $28,992 $ 1,087 $27,905 $ 0 $ 0 Capital Lease Obligations 0 0 0 0 0 Operating Lease Obligations 26,000 8,946 11,899 4,651 504 Purchase Obligations 0 0 0 0 0 Other Long-Term Obligations 0 0 0 0 0 ------- ------- ------- ------- ------- Total $54,992 $10,033 $39,804 $ 4,651 $ 504 ======= ======= ======= ======= =======

Virco's largest market is publicly funded school districts. A significant portion of this business is awarded on a bid basis. Many school districts require that a bid bond be posted as part of the bid package. In addition to bid bonds, many districts require a performance bond when the bid is awarded. At January 31, 2003, the Company had bonds outstanding valued at approximately $6,850,000. To the best of management's knowledge, in over 50 years of selling to schools, Virco has never had a bid or performance bond called. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and warranty claims incurred. For 2002, warranty claims were higher than normal due to a recurring cosmetic complaint relating to a high volume component. At the current time, management cannot reasonably determine whether the warranty claims for the upcoming fiscal year will be less than, equal to, or greater than the warranty claims incurred in 2002. The following is a summary of the Company's warranty-claim activity during 2002.

BALANCE AT JANUARY 31, 2002 PROVISION COSTS INCURRED BALANCE AT JANUARY 31, 2003 $150,000 $2,091,000 $(1,341,000) $900,000

RETIREMENT OBLIGATIONS The Company provides retirement benefits to employees and non-employee directors under three defined benefit retirement plans; the Virco Employee's Retirement Plan, the Virco Important Performers (VIP) Retirement Plan, and the Retirement Plan for Non-Employee Directors. The Virco Employee Retirement Plan is a qualified retirement plan that is funded through a trust held at Wells Fargo Bank (Trustee). The other two plans are non-qualified retirement plans. The VIP Plan is secured by life insurance policies held in a rabbi trust and the plan for Non-Employee Directors is not funded. In 2002 the Company used more conservative assumptions for estimating the return on plan assets held in the Wells Fargo Trust (Trust) and the rate used to discount the Projected Benefit Obligation (PBO). For 2002 the Company used a 6.5% expected return on plan assets, a 5.0% expected rate of increase in compensation, and a 6.5% discount rate. The result of using these more conservative estimates was to increase annual pension expense for the fiscal year ended January 31, 2003, by approximately $1.5 million and to increase the PBO by approximately $6 million. The Company expects that it will continue to incur the higher annual pension expense through the foreseeable future. The combined impact of reduced discount rates and poor investment results over the past three years resulted in the plan being under-funded. To correct this condition, the Company made an $8 million contribution to the Trust in September 2002, and a total contribution of approximately $10 million for the fiscal year. The Company does not anticipate that it will need to make a similar large contribution in the future, and that annual funding will more closely approximate annual pension expense. The Company does not anticipate making any changes to the pension assumptions in the near future. If the Company were to have used different assumptions in fiscal year ended January 31, 2003, a 1% reduction in investment return would increase expense by approximately $125,000, a 1% change in the rate of compensation increase would increase expense by approximately $355,000 and a 1% reduction in the discount rate would increase expense by $1,240,000. A 1% reduction in the discount rate would increase the PBO by approximately $7.5 million. Refer to note 4 of the financial statements for additional information regarding the pension plans and related expenses. SHAREHOLDERS EQUITY In April 1998, the Board of Directors approved a stock buy-back program giving authorization to buy back up to $5,000,000 of Company stock. The authorization of this stock buy-back program was increased to $7,000,000, $14,000,000, $20,000,000 and $22,000,000 in January 1999, April 1999, December 2001 and December 2002, respectively. As of the end of January 2003 and 2002, the Company had repurchased approximately 1,383,000 and 884,000 shares at a cost of approximately $18,151,000 and $13,505,000 respectively. The Company intends to continue buying back shares of Virco common stock as long as the Company believes the shares are undervalued and either operating cash flow or borrowing capacity under the Wells Fargo Bank line is available. Virco has established a track record of paying cash dividends to its stockholders for more than 20 consecutive years. The Company paid an annual cash dividend from 1983 through 1996. In 1996 the Company converted from one annual cash dividend to paying quarterly cash dividends. When combined with the effect of our annual stock dividend, Virco has a track record of 20 consecutive years of increasing cash dividends. Virco evaluates its dividend policy on a quarterly basis, and there can be no assurance that past dividend practices will be indicative of future practices. If the Company maintains its current dividend policy, it will pay cash dividends approximating $1.2 million in 2003. In addition to the quarterly cash dividend policy, Virco has issued a 10% stock dividend or 3/2 stock split every year beginning in 1982. Although the stock dividend has no cash consequences to the Company, the accounting methodology required for 10% dividends has affected the equity section of the balance sheet. When the Company records a 10% stock dividend, 10% of the market capitalization of the Company on the date of the declaration is reclassified from retained earnings to additional paid in capital. During the period from 1982 through 2002, the cumulative effect of the stock dividends has been to reclassify over $122 million from retained earnings to additional paid in capital. The equity section of the balance sheet on January 31, 2003, reflects additional paid in capital of approximately $126 million and deficit retained earnings of approximately $19 million. The retained deficit is a result of the accounting reclassification, and is not the result of accumulated losses. Management believes cash generated from operations and from the previously described sources will be adequate to meet its capital requirements. ENVIRONMENTAL AND CONTINGENT LIABILITIES The Company and other furniture manufacturers are subject to federal, state, and local laws and regulations relating to the discharge of materials into the environment and the generation, handling, storage, transportation, and disposal of waste and hazardous materials. In addition to policies and programs designed to comply with environmental laws and regulations, Virco has enacted programs for recycling and resource recovery that have earned repeated commendations, including designation in 2002 as a WasteWise Partner of the Year and 2001 as a WasteWise Program Champion for Large Businesses by the United States Environmental Protection Agency. Despite these significant accomplishments, environmental laws have changed rapidly in recent years, and Virco may be subject to more stringent environmental laws in the future. The Company has expended, and expects to continue to expend, significant amounts in the future for the investigation of environmental conditions, installation of environmental control equipment, and remediation of environmental contamination. In 2002, the Company was self-insured for Product Liability losses up to $250,000 per occurrence and had a Workers Compensation deductible of $200,000 per occurrence. For the insurance year beginning April 1, 2003, the Company is self-insured for Product Liability losses up to $500,000 per occurrence and has a Workers Compensation deductible of $250,000 per occurrence, and a deductible of $50,000 for auto liability. In prior years the Company has been self-insured for Workers Compensation, Automobile, Product, and General Liability losses. The Company has purchased insurance to cover losses in excess of the self-insured retention or deductible up to a limit of $30,000,000. During the past 10 years the Company has aggressively pursued a program to improve product quality, reduce product liability claims and losses, and to more aggressively litigate product liability cases. This program has continued through 2002 and has resulted in reductions in product liability claims and litigated product liability cases. In addition, the Company has active safety programs to improve plant safety and reduce Workers Compensation losses. Management does not anticipate that any related settlement, after consideration of the existing reserves for claims and potential insurance recovery, would have a material adverse effect on the Company's financial position, results of operations, or cash flows. INFLATION AND FUTURE CHANGE IN PRICES Inflation rates had a modest impact on the Company's operating costs for the first half of 2002. In the second half of 2002, the Company experienced significant increases in the cost of steel. Please refer to the discussion of steel tariffs under the "Results of Operation" for 2002 section of this MD&A for additional information. In addition, the Company incurred increases in utilities costs in California, and increases in employee benefits, especially medical insurance. For 2003, the Company anticipates upward pressure on costs, particularly in the areas of certain raw materials, transportation, energy and employee benefits. Although the increase in steel prices appears to have stabilized in 2003, prices have not returned to the lower levels of early 2002. There is pressure on raw material costs that are affected by the price of oil, especially plastics. Transportation costs are also expected to be adversely affected by increased oil prices, in the form of increased operation costs for our fleet, and surcharges on freight paid to 3rd party carriers. For 2003, the Company has mitigated the increased costs of employee benefits, primarily by passing on a greater portion of medical costs to our employees. To counter the impact of increased costs, the Company has raised the list prices for our product. As a significant portion of our business is through competitive bids, the Company is carefully considering the increased material cost in addition to increased transportation costs as part of the bidding process. Total material costs for 2003, as a percentage of sales, could be higher than in 2002. However, no assurance can be given that the Company will experience stable, modest or substantial increases in prices in 2003. The Company is working to control and reduce costs by improving production and distribution methodologies, investigating new packaging and shipping materials, and searching for new sources of purchased components and raw materials. The Company uses the LIFO method of accounting for the material component of inventory. Under this method, the cost of products sold as reported in the financial statements approximates current cost, and reduces the distortion in reported income due to increasing costs. Depreciation expense represents an allocation of historic acquisition costs and is less than if based on the current cost of productive capacity consumed. In 2002 and 2001, the Company significantly reduced its expenditures for capital assets, but in the prior three fiscal years (1998, 1999, and 2000) the Company made the significant fixed asset acquisitions described above. The assets acquired result in higher depreciation charges, but due to technological advances should result in operating cost savings and improved product quality. In addition, some depreciation charges will be offset by a reduction in lease expense. The Company is also subject to interest rate risk related to its $26,655,000 of borrowings as of January 31, 2003, and any seasonal borrowings used to finance additional inventory and receivables. Fluctuating interest rates may adversely affect the Company's results of operations and cash flows related to its variable rate bank borrowings. Accordingly, a 100 basis point upward fluctuation in the lender's base rate would cause the Company to incur additional interest charges of approximately $331,000 for the twelve months ended January 31, 2003. The Company would have benefited from a similar interest savings if the base rate were to have fluctuated downward by a like amount. In February 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank to reduce exposure due to changes in interest rates. The initial notional swap amount is $30,000,000 for the period February 22, 2000, through February 28, 2001. The notional swap amount then decreased to $20,000,000 until the end of the swap agreement on March 3, 2003. Under this agreement, interest is payable monthly at 7.23% plus a fluctuating margin of 1.50% to 2.50%. At January 31, 2003, the carrying value approximated the fair value of $196,000. During the year ended January 31, 2003, the Company recorded a reduction of $544,000 (net of an applicable income tax of $363,000) in other comprehensive loss in order to account for the change in fair value. The fair value of the swap is estimated on pricing models using current assumptions. FINANCIAL STRATEGY Virco's financial strategy is to continue to strive to increase levels of profitability by targeting specific profitable market segments and customers. The Company has organized its sales force, developed products, and acquired production and distribution facilities for the specific needs of these customers. During the fiscal years 1998, 1999, and 2000, the Company made significant capital expenditures to support future sales growth in these targeted markets. For the next several years, the Company intends to increase sales to these markets, and to service these sales without making further significant investments in facilities or working capital. ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and requires such obligations and costs to be recognized at fair value in the period in which they are incurred. The Company will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material effect upon the adoption of the Statement on the Company's financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires most gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13 to require certain lease modifications to be treated as sales-leaseback transactions. Certain provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, while other provisions are effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a material effect on the Company's results of operations or financial condition. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect a material effect on its results of operations or financial condition as a result of the adoption of SFAS No. 146. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of the Interpretation, which are effective for the Company's year ended January 31, 2003, are included in note 9 to the consolidated financial statements, which discuss disclosures relative to its product warranty liability. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

IN THOUSANDS EXCEPT PER SHARE DATA 2002 2001 2000 1999 1998 - --------------------------------------------- -------- -------- -------- -------- -------- SUMMARY OF OPERATIONS Net sales (4) (5) $244,355 $257,462 $287,342 $268,079 $275,096 Net income before cumulative effect of change in accounting principle $ 282 $ 246 $ 4,313 $ 10,166 $ 17,630 Cumulative effect of change in accounting principle, net of $191 tax benefit(5) (297) -------- -------- -------- -------- -------- Net income $ 282 $ 246 $ 4,016 $ 10,166 $ 17,630 ======== ======== ======== ======== ======== Per share data Income before cumulative effect of change in accounting principle(1) Basic $ 0.02 $ 0.02 $ 0.31 $ 0.74 $ 1.22 Assuming dilution 0.02 0.02 0.31 0.72 1.20 Cumulative effect of change in accounting principle(1) Basic -- -- (0,02) -- -- Assuming dilution -- -- (0,02) -- -- Net income(1) Basic 0.02 0.02 0.29 0.74 1.22 Assuming dilution 0.02 0.02 0.29 0.72 1.20 Pro forma amounts assuming the accounting change is applied retroactively Net income(5) $ 282 $ 246 $ 4,313 $ 10,186 $ 17,663 Per share data Net income Basic 0.02 0.02 0.31 0.73 1.23 Assuming dilution 0.02 0.02 0.31 0.72 1.20 Dividends declared per share, adjusted for 10% stock dividend Cash dividends $ 0.08 $ 0.07 $ 0.06 $ 0.06 $ 0.05 OTHER FINANCIAL DATA Total assets $154,796 $161,372 $199,549 $190,863 $151,380 Working capital $ 38,748 $ 34,464 $ 43,173 $ 51,423 $ 47,405 Current ratio 2.4/1 2.2/1 1.9/1 2.3/1 2.4/1 Total long-term obligations $ 44,604 $ 40,853 $ 55,075 $ 53,995 $ 25,690 Stockholders' equity $ 82,774 $ 90,223 $ 94,141 $ 93,834 $ 88,923 Shares outstanding at year-end (3) 13,111 13,445 13,652 13,750 14,119 Stockholders' equity per share (2) $ 6.31 $ 6.71 $ 6.90 $ 6.82 $ 6.30

(1) Based on average number of shares outstanding each year after giving retroactive effect for stock dividends and 3 for 2 stock split. (2) Based on number of shares outstanding at year-end after giving effect for stock dividends and 3 for 2 stock split. (3) Adjusted for stock dividends and 3 for 2 stock split. (4) The prior period statements of operations contain certain reclassifications to conform to the presentation required by EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which the Company adopted during the fourth quarter of the year ended January 31, 2001. (5) During the fourth quarter of 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Pursuant to Financial Accounting Standards Board Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," effective February 1, 2000, the Company recorded the cumulative effect of the accounting change.

FINANCIAL HIGHLIGHTS in thousands, except per share data 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Summary of Operations Net sales - continuing operations (3, 4) $ 244,355 $ 257,462 $ 287,342 $ 268,079 $ 275,096 Net income Continuing operations 282 246 4,313 10,166 17,630 Discontinued operations - - - - - Change in accounting methods - - (297) - - ---------------------------------------------------------------------------- $ 282 $ 246 $ 4,016 $ 10,166 $ 17,630 ---------------------------------------------------------------------------- Net income per share (1) $ 0.02 $ 0.02 $ 0.29 $ 0.72 $ 1.20 Stockholder's equity 82,774 90,223 94,141 93,834 88,923 Stockholder's equity per share (2) 6.31 6.71 6.90 6.82 6.30

FINANCIAL HIGHLIGHTS in thousands, except per share data 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Summary of Operations Net sales - continuing operations (3, 4) $ 259,586 $ 237,551 $ 225,559 $ 216,822 $ 206,738 Net income Continuing operations 13,852 9,326 5,209 5,001 4,302 Discontinued operations - - - - - Change in accounting methods - - - - (275) ---------------------------------------------------------------------------- $ 13,852 $ 9,326 $ 5,209 $ 5,001 $ 4,027 ---------------------------------------------------------------------------- Net income per share (1) $ 0.94 $ 0.64 $ 0.36 $ 0.35 $ 0.28 Stockholder's equity 77,077 63,921 55,386 50,466 45,637 Stockholder's equity per share (2) 5.39 4.48 3.88 3.55 3.20

(1) Based on average number of shares outstanding each year after giving retroactive effect for stock dividends and 3 for 2 stock split. (2) Based on number of shares outstanding at year-end giving effect for stock dividends and 3 for 2 stock split. (3) The prior period statements of operations contain certain reclassifications to conform to the presentation required by EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs, which the Company adopted during the fourth quarter of the year ended January 31, 2001. (4) During the fourth quarter of 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Pursuant to Financial Accounting Standards Board Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," effective February 1, 2000, the Company recorded the cumulative effect of the accounting change. Report of Independent Auditors The Board of Directors and Stockholders Virco Mfg. Corporation We have audited the accompanying consolidated balance sheets of Virco Mfg. Corporation as of January 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Virco Mfg. Corporation at January 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Long Beach, California March 14, 2003 1 Virco Mfg. Corporation Consolidated Balance Sheets (In thousands, except per share data)

JANUARY 31 2003 2002 ------------------- ASSETS Current assets Cash $ 1,639 $ 1,704 Trade accounts receivable (less allowance for doubtful accounts of $225 in 2003 and $200 in 2002) 17,178 19,251 Other receivables 223 175 Inventories Finished goods 16,510 16,159 Work in process 18,233 12,322 Raw materials and supplies 8,296 10,202 ------------------- 43,039 38,683 Prepaid expenses and other current assets 1,495 935 Deferred income taxes 2,494 1,711 ------------------- Total current assets 66,068 62,459 Property, plant and equipment Land and land improvements 3,626 3,548 Buildings and building improvements 50,311 50,245 Machinery and equipment 101,648 100,999 Leasehold improvements 1,278 1,375 ------------------- 156,863 156,167 Less accumulated depreciation and amortization 83,827 72,761 ------------------- Net property, plant and equipment 73,036 83,406 Other assets 15,692 15,507 ------------------- Total assets $154,796 $161,372 ===================

2

JANUARY 31 2003 2002 ---------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Checks released but not yet cleared bank $ 2,506 $ 2,930 Accounts payable 8,395 8,816 Income tax payable 3,538 1,282 Accrued compensation and employee benefits 7,109 8,602 Current portion of long-term debt 1,087 2,061 Other accrued liabilities 4,685 4,304 ---------------------- Total current liabilities 27,320 27,995 Noncurrent liabilities Accrued self-insurance retention 2,936 2,777 Accrued pension expenses 13,763 11,429 Long-term debt, less current portion 27,905 26,647 ---------------------- Total noncurrent liabilities 44,604 40,853 Deferred income taxes 98 2,301 Commitments and contingencies Stockholders' equity Preferred stock: Authorized 3,000,000 shares, $.01 par value; none issued or outstanding Common stock: Authorized 25,000,000 shares, $.01 par value; issued 14,527,074 shares in 2003 and 13,167,399 shares in 2002 145 132 Additional paid-in capital 126,284 109,638 Retained deficit (18,927) (2,006) Less treasury stock at cost (1,416,472 shares in 2003 and 944,352 shares in 2002) (18,634) (13,975) Less accumulated comprehensive loss (6,094) (3,566) ---------------------- Total stockholders' equity 82,774 90,223 ---------------------- Total liabilities and stockholders' equity $ 154,796 $ 161,372 ======================

See accompanying notes. 3 Virco Mfg. Corporation Consolidated Statements of Income (In thousands, except per share data)

YEAR ENDED JANUARY 31 2003 2002 2001 --------------------------------- Net sales $ 244,355 $ 257,462 $ 287,342 Costs of goods sold 167,570 180,275 203,765 --------------------------------- Gross profit 76,785 77,187 83,577 Selling, general and administrative expenses 72,536 71,816 83,192 Provision for doubtful accounts 267 288 156 Interest expense 3,410 4,561 4,962 Loss (Gain) on sale of assets 149 86 (7,667) Other income -- -- (4,052) --------------------------------- Income before income taxes and cumulative effect of change in 423 436 6,986 accounting principle Provision for income taxes 141 190 2,673 --------------------------------- Income before cumulative effect of change in 282 246 4,313 accounting principle Cumulative effect of change in accounting principle -- -- (297) --------------------------------- Net income $ 282 $ 246 $ 4,016 ================================= AMOUNTS PER COMMON SHARE - BASIC Income before cumulative effect of change in accounting principle $ 0.02 $ 0.02 $ 0.31 Cumulative effect of change in accounting principle -- -- (0.02) --------------------------------- Net income $ 0.02 $ 0.02 $ 0.29 ================================= AMOUNTS PER COMMON SHARE - ASSUMING DILUTION Income before cumulative effect of change in accounting principle $ 0.02 $ 0.02 $ 0.31 Cumulative effect of change in accounting principle -- -- (0.02) --------------------------------- Net income $ 0.02 $ 0.02 $ 0.29 ================================= Weighted average shares outstanding Basic 13,344 13,485 13,747 Assuming dilution 13,458 13,675 13,885

See accompanying notes. 4 Virco Mfg. Corporation Consolidated Statements of Stockholders' Equity (In thousands, except per share data)

Additional Retained Common Stock Paid-In Earnings Comprehensive Shares Amount Capital (Deficit) Income (Loss) ---------------------------------------------------------------------- Balance at January 31, 2000 10,330,476 $ 110 $ 84,635 $ 20,242 Net income -- -- -- 4,016 $ 4,016 Minimum pension liability, net of tax -- -- -- -- (1,155) ------------- Comprehensive income -- -- -- -- $ 2,861 ============= Unearned ESOP shares -- -- -- -- Stock issued under option plans 49,783 -- 284 -- Stock dividend (10%) 1,030,100 10 12,737 (12,747) Cash dividends -- -- -- (866) Purchase of treasury stock (127,372) -- -- -- ---------------------------------------------------------------------- Balance at January 31, 2001 11,282,987 120 97,656 10,645 Net income -- -- -- 246 $ 246 Minimum pension liability, net of tax -- -- -- -- (1,329) Derivative instrument, net of tax -- -- -- -- (662) ------------- Comprehensive loss, net of tax -- -- -- -- $ (1,745) ============= Unearned ESOP shares -- -- -- -- Stock issued under option plans 13,847 -- 30 -- Stock dividend (10%) 1,120,268 12 11,952 (11,952) Cash dividends -- -- -- (945) Purchase of treasury stock (194,055) -- -- -- ---------------------------------------------------------------------- Balance at January 31, 2002 12,223,047 132 109,638 (2,006) Net income -- -- -- 282 282 Minimum pension liability, net of tax -- -- -- -- (3,072) Derivative instrument, net of tax -- -- -- -- 544 ------------- Comprehensive loss, net of tax -- -- -- -- $ (2,246) ============= Stock issued under option plans 147,004 1 469 Stock dividend (10%) 1,212,671 12 16,177 (16,189) Cash dividends -- -- -- (1,014) Purchase of treasury stock (472,120) -- -- -- ---------------------------------------------------------------------- Balance at January 31, 2003 13,110,602 $ 145 $ 126,284 $ (18,927) ======================================================================

Accumulated Treasury ESOP Comprehensive Stock Trust Loss Total ------------------------------------------------------------ Balance at January 31, 2000 $ (10,692) $ (41) $ (420) $ 93,878 Net income -- -- -- 4,016 Minimum pension liability, net of tax -- -- (1,155) (1,155) Comprehensive income -- -- -- -- Unearned ESOP shares -- (655) -- (655) Stock issued under option plans -- -- -- 284 Stock dividend (10%) -- -- -- -- Cash dividends -- -- -- (866) Purchase of treasury stock (1,317) -- -- (1,317) ------------------------------------------------------------ Balance at January 31, 2001 (12,009) (696) (1,575) 94,141 Net income -- -- -- 246 Minimum pension liability, net of tax -- -- (1,329) (1,329) Derivative instrument, net of tax -- -- (662) (662) Comprehensive loss, net of tax -- -- -- -- Unearned ESOP shares -- 696 -- 696 Stock issued under option plans -- -- -- 30 Stock dividend (10%) -- -- -- 12 Cash dividends -- -- -- (945) Purchase of treasury stock (1,966) -- -- (1,966) ------------------------------------------------------------ Balance at January 31, 2002 (13,975) -- (3,566) 90,223 Net income -- -- -- 282 Minimum pension liability, net of tax -- -- (3,072) (3,072) Derivative instrument, net of tax -- -- 544 544 Comprehensive loss, net of tax -- -- -- -- Stock issued under option plans -- -- -- 470 Stock dividend (10%) -- -- -- -- Cash dividends -- -- -- (1,014) Purchase of treasury stock (4,659) -- -- (4,659) ------------------------------------------------------------ Balance at January 31, 2003 $ (18,634) $ -- $ (6,094) $ 82,774 ============================================================

See accompanying notes. 5 Virco Mfg. Corporation Consolidated Statements of Cash Flows (In thousands, except per share data)

YEAR ENDED JANUARY 31 2003 2002 2001 -------------------------------- OPERATING ACTIVITIES Net income $ 282 $ 246 $ 4,016 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting change -- 297 Depreciation and amortization 13,659 15,813 13,412 Provision for doubtful accounts 267 288 156 Loss (Gain) on sale of property, plant and equipment 149 86 (7,667) Deferred income taxes 555 (1,722) (407) Changes in assets and liabilities: Trade accounts receivable 4,156 5,020 1,742 Other receivables (48) 411 341 Inventories (4,356) 19,356 (981) Income taxes 2,256 3,790 (755) Prepaid expenses and other current assets (560) 215 138 Accounts payable and accrued liabilities (4,443) (8,230) 560 Other 128 (236) (4,383) -------------------------------- Net cash provided by operating activities 12,045 35,037 6,469 INVESTING ACTIVITIES Capital expenditures (3,532) (5,229) (22,711) Proceeds from sale of property, plant and equipment 93 570 10,258 Net investment in life insurance (109) 1,385 -- Acquisition of business (4,550) -- -- -------------------------------- Net cash used in investing activities (8,098) (3,274) (12,453)

6 Virco Mfg. Corporation Consolidated Statements of Cash Flows (continued) (In thousands, except per share data)

YEAR ENDED JANUARY 31 2003 2002 2001 -------------------------------- FINANCING ACTIVITIES Dividends paid $ (1,014) $ (945) $ (866) Issuance of long-term debt 4,240 -- 19,817 Repayment of long-term debt (3,049) (28,237) (12,000) Proceeds from issuance of common stock 178 30 284 Purchase of treasury stock (4,367) (1,954) (1,317) ESOP loan -- 696 (655) -------------------------------- Net cash (used in) provided by financing activities (4,012) (30,410) 5,263 Net increase (decrease) in cash (65) 1,353 (721) Cash at beginning of year 1,704 351 1,072 -------------------------------- Cash at end of year $ 1,639 $ 1,704 $ 351 ================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (received) during the year for Interest, net of amounts capitalized $ 3,513 $ 4,805 $ 4,953 Income tax, net (2,495) (1,935) 3,835

See accompanying notes. 7 Virco Mfg. Corporation Notes to Consolidated Financial Statements January 31, 2003 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Virco Mfg. Corporation, which operates in one business segment, is engaged in the design, production and distribution of quality furniture for the commercial and education markets. Over 50 years of manufacturing has resulted in a wide product assortment. Major products include mobile tables, mobile storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables. The Company manufactures its products in Torrance, California, and Conway, Arkansas, for sale primarily in the United States. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2001 and 2000 information to conform to the 2002 presentation. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company purchases insurance on receivables from commercial sales to minimize the Company's credit risk. The Company does not typically obtain collateral to secure credit risk. A substantial percentage of the Company's receivables comes from low-risk government entities. No customers exceeded 10% of the Company's sales for each of the three years in the period ended January 31, 2003. Foreign sales were less than 5% for each of the three years in the period ended January 31, 2003. DERIVATIVES The Company uses derivative financial instruments to reduce interest rate risks. The Company does not hold or issue derivative financial instruments for trading purposes. All derivatives are recognized as either assets or liabilities in the statement of financial condition and are measured at fair value. At January 31, 2003, the only derivative instrument is an interest rate swap that qualifies as a cash flow hedge. Changes in the fair value of the swap are recorded in other comprehensive income/loss as the hedge is effective in achieving offsetting changes in the fair value of cash flows of the liability. 8 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method of valuation for the material content of inventories and the first-in, first-out (FIFO) method for labor and overhead. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization is computed on the straight-line method for financial reporting purposes based upon the following estimated useful lives: Land improvements 5 to 25 years Buildings and building improvements 5 to 40 years Machinery and equipment 3 to 10 years Leasehold improvements Life of lease Certain assets are depreciated under accelerated methods for income tax purposes. Interest costs, amounting to $38,000, $55,000 and $453,000 for the years ended January 31, 2003, 2002 and 2001, respectively, have been capitalized as part of the acquisition cost of property, plant and equipment. The Company capitalizes costs associated with software developed for its own use. Such costs are amortized over three to seven years from the date the software becomes operational. The net book value of capitalized software was $5,149,000 and $7,593,000 at January 31, 2003 and 2002, respectively. The net book value of assets held under capital leases included in machinery and equipment amounted to $0 and $2,294,000 at January 31, 2003 and 2002, respectively. Amortization of capital leases is included in depreciation expense. IMPAIRMENT OF LONG-LIVED ASSETS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting 9 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The adoption of the Statement on February 1, 2002 did not have a significant impact on the Company's financial position, results of operations, or cash flows. An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of an asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents the Company's expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with the risks involved. NET INCOME PER SHARE Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the dilution effect of convertible securities. The following table sets forth the computation of basic and diluted earnings per share before cumulative effect of the accounting change:

2002 2001 2000 --------------------------------------- Numerator Income before cumulative effect of the accounting change $ 282,000 $ 246,000 $ 4,313,000 ======================================= Denominator Denominator for basic earnings per share - weighted-average shares 13,344,000 13,485,000 13,747,000 Dilutive potential common shares 114,000 190,000 138,000 --------------------------------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 13,458,000 13,675,000 13,885,000 =======================================

On August 20, 2002, the Company's Board of Directors authorized a 10% stock dividend payable on September 30, 2002, to stockholders of record as of September 6, 2002. This resulted in the issuance of approximately 1,213,000 additional shares of common stock. All per share and weighted-average share amounts have been restated to reflect this stock dividend and any splits or dividends previously declared. 10 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective for any business combination completed subsequent to June 30, 2001, and SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible assets deemed to have an indefinite life will no longer be amortized and will be subjected to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The adoption of SFAS No. 142 did not have a material effect on the Company's financial position, results of operations or cash flows as prior to April 2002 the Company did not have any recorded goodwill or any indefinite lived or finite lived intangible assets, other than deferred pension assets (see note 11). At January 31, 2003, goodwill totaled $2,200,000. ENVIRONMENTAL COSTS Costs incurred to investigate and remediate environmental waste are expensed as incurred, unless the remediation extends the useful life of the assets employed at the site. Remediation costs that extend the useful life of assets are capitalized and amortized over the useful life of the assets. ADVERTISING COSTS Advertising costs are expensed in the period in which they occur. Selling, general and administrative expenses include advertising costs of $2,921,000 in 2002, $4,237,000 in 2001 and $3,517,000 in 2000. PRODUCT WARRANTY EXPENSE The Company provides for a product warranty on most of the products. It generally provides that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or repair at no cost to the consumer. The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The Company recorded reserves of $900,000 and $150,000 as of January 31, 2003 and 2002, respectively. SELF-INSURANCE The Company has a self-insured retention for workers' compensation, automobile and general and product liability claims. Consulting actuaries assist the Company in determining its liability for the self-insured component of claims, which have been discounted to their net present value. 11 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION PLANS Stock based compensation--In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting of Stock Based Compensation," which established accounting and reporting standards for stock based employee compensation plans effective after fiscal year 1996. SFAS No. 123 encourages entities to adopt the fair value based method of accounting; however, it also allows an entity to continue to measure compensation cost using the intrinsic value based method prescribed by Accounting Principles Board No. 25. Entities electing to remain on the "intrinsic value based" method must make certain pro forma disclosures as if the new fair value method had been applied. At this time, the Company has not adopted the recognition provision of SFAS No. 123, but has provided pro forma disclosures. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting For Stock Based Compensation--Transition and Disclosure." SFAS No. 148 amended SFAS No. 123 "Accounting For Stock-Based Compensation", to provide new guidance concerning the transition when a company changes from the intrinsic-value method to the fair-value method of accounting for employee stock-based compensation cost. As amended by SFAS No. 148, SFAS No. 123 also requires additional disclosure regarding such cost in annual financial statements and in condensed interim financial statements. Certain disclosure provisions of SFAS No. 148 were adopted by the Company in its financial statements prepared as of January 31, 2003. SFAS No. 123, as amended by SFAS No. 148, requires pro forma information regarding net income and net income per share to be disclosed for new options granted after fiscal year 1996. The fair value of these options was determined at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rates of 4.11% to 6.26%; dividend yield of 0.10% to 0.98%; volatility factor of the expected market price of the Company's common stock of 0.26 to 0.40; and a weighted-average expected life of the option of five years. 12 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The estimated fair value of the options is amortized to expense over the options' vesting period for pro forma disclosures. The per share "pro forma" for the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of the effects on reported net income (loss) for future years. The Company's "reported" and "pro forma" information is as follows:

YEAR ENDED JANUARY 31 2003 2002 2001 ------------------------------- Net income, as reported $ 282 $ 246 $ 4,016 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax effects (41) (42) (102) ------------------------------- Pro forma net income $ 241 $ 204 $ 3,914 =============================== Basic earnings per share Net income, as reported $ .02 $ .02 $ .29 Net income, pro forma $ .02 $ .02 $ .28 Diluted earnings per share Net income, as reported $ .02 $ .02 $ .29 Net income, pro forma $ .02 $ .01 $ .28

USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Effective February 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Previously, the Company had recognized revenue upon shipment of merchandise to the customer even though at each fiscal year-end and quarter a portion of its merchandise was shipped FOB destination. The Company believes it had given up substantially all the risks and rewards of ownership upon shipment. Under the new accounting method adopted 13 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) retroactive to February 1, 2000, the Company now recognizes all sales when title passes under its various shipping terms. The cumulative effect of the change on prior years resulted in a charge to income of $297,000 (net of income taxes of $191,000), which is included in income for the year ended January 31, 2001. There was no effect on the Company's net income for the year ended January 31, 2001, before the cumulative effect of the accounting change was made. In 2002, the Company purchased certain assets of Furniture Focus, a company which sells complete educational furniture packages to schools. For package orders, the Company records revenue upon completion of the projects and delivery of all products. The Company reports sales as net of sales returns and allowances. SHIPPING AND HANDLING FEES Shipping and handling fees are included as revenue in net sales. Costs related to shipping and handling are included in operating expenses. For the years ended January 31, 2003, 2002 and 2001, shipping and handling costs of approximately $27,590,000, $27,491,000 and $31,903,000, respectively, were included in selling, general and administrative expenses. FISCAL YEAR END Fiscal years 2002, 2001 and 2000, refer to the years ended January 31, 2003, 2002 and 2001, respectively. FUTURE ACCOUNTING REQUIREMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and requires such obligations and costs to be recognized at fair value in the period in which they are incurred. The Company will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material effect upon the adoption of the Statement on the Company's financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires most gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13 to require certain lease modifications to be treated as sales-leaseback 14 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) transactions. Certain provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, while other provisions are effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a material effect on the Company's results of operations or financial condition. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect a material effect on its results of operations or financial condition as a result of the adoption of SFAS No. 146. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: (the Interpretation or FIN No. 45)." The Interpretation's disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN No. 45 effective January 31, 2003, and disclosed the Company's accounting policy and methodology used in determining its liability for product warranties. A tabular reconciliation of the changes in the Company's product warranty liability is included in Note 9. 2. INVENTORIES The current material cost for inventories exceeded LIFO cost by $3,519,000 and $2,048,000 at January 31, 2003 and 2002, respectively. Liquidation of prior year LIFO layers due to a reduction in certain inventories (decreased) increased income by $(423,000), $(825,000) and $111,000 in the years ended January 31, 2003, 2002 and 2001, respectively. Details of inventory amounts, including the material portion of inventory which is valued at LIFO, at January 31, 2003 and 2002, are as follows (in thousands):

JANUARY 31, 2003 --------------------------------------------- MATERIAL LABOR, CONTENT AT LIFO OVERHEAD FIFO RESERVE AND OTHER TOTAL --------------------------------------------- Finished goods $10,772 $ (981) $ 6,719 $16,510 Work in process 9,822 (1,314) 9,725 18,233 Raw materials and supplies 9,520 (1,224) -- 8,296 --------------------------------------------- Total $30,114 $(3,519) $16,444 $43,039 =============================================

15 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued)

JANUARY 31, 2002 --------------------------------------------- MATERIAL LABOR, CONTENT AT LIFO OVERHEAD FIFO RESERVE AND OTHER TOTAL --------------------------------------------- Finished goods $10,583 $ (493) $ 6,069 $16,159 Work in process 6,081 (586) 6,827 12,322 Raw materials and supplies 11,171 (969) -- 10,202 --------------------------------------------- Total $27,835 $(2,048) $12,896 $38,683 =============================================

3. NOTES PAYABLE Outstanding balances (in thousands) for the Company's long-term debt were as follows:

JANUARY 31 2003 2002 ------------------ Revolving credit line with Wells Fargo Bank (a) $26,655 $22,414 IRB with the City of Torrance (b) 2,141 3,165 Equipment credit line with GECC (c) -- 884 Derivative instrument (a) 196 1,103 Other -- 1,142 ------------------ 28,992 28,708 Less current portion 1,087 2,061 ------------------ $27,905 $26,647 ================== Outstanding stand-by letters of credit $ -- $ 2,411

(a) A revolving credit facility with Wells Fargo Bank, amended and restated in February 2003, but effective at January 31, 2003 provides a secured revolving line of credit that ranges from $40,000,000 to $70,000,000 to allow for additional working capital requirements during the Company's traditional peak period. This is a two-year non-amortizing line with interest payable monthly at a fluctuating rate equal to the Bank's prime rate, plus a fluctuating margin of 0.25% - 0.50% (4.75% at January 31, 2003). The line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus a fluctuating margin of 1.50% to 2.50%. Approximately $13,345,000 was available for borrowing as of January 31, 2003. The $26,655,000 due under Wells Fargo Bank's line of credit will be payable in the 16 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 3. NOTES PAYABLE (CONTINUED) fiscal year ending January 31, 2005, if the agreement is not renewed. The Company intends to renew the agreement. On February 22, 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount was $30,000,000 for the period February 22, 2000 through February 28, 2001. The notional swap amount decreased to $20,000,000 until its expiration on March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.50% to 2.50%. The Company adopted SFAS No. 133 "Accounting for Derivatives and Hedging Activities" on February 1, 2001. The adjustment to adopt SFAS 133 resulted in recording a liability of $920,000 and an offset to other comprehensive loss, which was $552,000 net of applicable income tax benefit of $368,000. At January 31, 2003, the carrying value of the swap approximated the fair value of $196,000, with an offset to other comprehensive loss of $118,000 net of an applicable tax benefit of $78,000. The revolving credit facility with Wells Fargo Bank is subject to various financial covenants including a liquidity requirement, a leverage requirement, a cash flow coverage requirement and profitability requirements. The agreement also places certain restrictions on capital expenditures, dividends and the repurchase of the Company's common stock. The revolving credit facility is secured by the Company's accounts receivable, inventory and equipment. (b) Ten-year $8,900,000 IRB issued through the City of Torrance. This 5.994% fixed interest rate bond is payable in monthly installments of $99,000, including interest, through December 2004. (c) Credit agreement with General Electric Capital Corporation (GECC) to finance the initial portion of the new business information system. This is a four-year amortizing capital lease with principal and interest (approximately 7.5%) payable of $87,500 monthly. The Company has the option of buying out the lease three years into the lease period. During the year ended January 31, 2003, the Company exercised the buy-out option. Long-term debt repayments are approximately as follows (in thousands):

Year ending January 31 - ---------------------- 2004 $ 1,087 2005 27,905 ------- $28,992 =======

17 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) The Company believes that the carrying value of debt under the Wells Fargo credit facility approximates fair value at January 31, 2003 and 2002, as the majority of the long-term debt bears interest at variable rates or is fixed for periods equal to or less than 90 days. The carrying value of other debt instruments approximates their fair value given the Company's incremental borrowing rate for similar types of financing arrangements. For fiscal year 2000, the Company guaranteed a $1,500,000 line of credit from Wells Fargo Bank to the Virco Employee Stock Ownership Plan (ESOP), of which $696,000 was outstanding under the line at January 31, 2001. The ESOP plan was dissolved during the year ended January 31, 2002. 4. RETIREMENT PLANS QUALIFIED PENSION PLAN The Company and its subsidiaries cover all employees under a noncontributory defined benefit retirement plan, the Virco Employees' Retirement Plan (the Plan). Benefits under the Plan are based on years of service and career average earnings. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Minimum pension liability adjustments for the years 2002, 2001 and 2000 were $3,072,000, $1,329,000 and $1,155,000, respectively (net of taxes of $2,005,000, $850,000 and $768,000, respectively), and are included in comprehensive loss. Assets of the Plan are invested in common trust funds. 18 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED) The following table sets forth (in thousands) the funded status of the Plan at December 31, 2002 and 2001:

PENSION BENEFITS 2002 2001 ---------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 21,163 $ 19,435 Service cost 1,437 1,017 Interest cost 1,684 1,515 Plan amendments 503 438 Actuarial loss 4,520 748 Benefit paid (520) (1,990) ---------------------------- Benefit obligation at end of year $ 28,787 $ 21,163 ============================ Change in plan assets Fair value at beginning of year $ 8,808 $ 10,193 Actual return on plan assets (1,696) (2,116) Company contributions 10,482 2,721 Benefits paid (520) (1,990) ---------------------------- Fair value at end of year $ 17,074 $ 8,808 ============================ Funded status of plan $(11,713) $(12,355) Unrecognized net transition amount (184) (225) Unrecognized prior service cost 4,333 4,430 Unrecognized net actuarial loss 14,700 8,702 ---------------------------- Net amount recognized $ 7,136 $ 552 ============================ Statements of financial position Accrued benefit liability $ (7,077) $ (8,680) Intangible asset 4,333 4,430 Accumulated other comprehensive income 9,880 4,802 ---------------------------- Net amount recognized $ 7,136 $ 552 ============================

2002 2001 ------------------------ Weighted average assumptions Discount rate 6.50% 7.75% Expected return on plan assets 6.50% 8.00% Rate of compensation increase 5.00% 5.00%

The total pension expense for the Plan (in thousands) included the following components: 19 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED)

DECEMBER 31 2002 2001 2000 ------------------------------------------- Components of net cost Service cost $ 1,437 $ 1,017 $ 930 Interest cost 1,684 1,515 1,425 Expected return on plan assets (820) (821) (1,089) Amortization of transition amount (42) (42) (42) Amortization of prior service cost 601 562 528 Recognized net actuarial loss 1,039 398 148 ------------------------------------------- Benefit cost $ 3,899 $ 2,629 $ 1,900 ===========================================

VIP RETIREMENT PLAN The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit up to 50% of average compensation for the last five years in the VIP Plan, offset by benefits earned under the Virco Employees' Retirement Plan. The VIP Plan is funded by a life insurance program. The cash surrender values of the policies funding the VIP Plan were $2,419,000 and $2,138,000 at January 31, 2003 and 2002, respectively. These cash surrender values are included in other assets in the consolidated balance sheets. The Company maintains a rabbi trust to hold assets related to the VIP Plan, the Dual Option Life Insurance Plan, and the Deferred Compensation Plan. Substantially all assets funding these Plans are held in the rabbi trust. 20 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED) The following table sets forth (in thousands) the funded status of the VIP Plan at December 31, 2002 and 2001:

NONQUALIFIED VIP PENSION 2002 2001 ------------------------ Change in benefit obligation Benefit obligation at beginning of year $ 4,821 $ 4,298 Service cost 820 490 Interest cost 431 323 Plan amendments (503) (438) Actuarial loss 2,453 492 Benefit paid (266) (344) ------- ------- Benefit obligation at end of year $ 7,756 $ 4,821 ======= ======= Change in plan assets Company contributions $ 266 $ 344 Benefits paid (266) (344) ------- ------- Fair value at end of year $ - $ - ======= ======= Funded status of plan $(7,756) $(4,821) Unrecognized prior service cost (3,121) (3,035) Unrecognized net actuarial loss 4,816 2,718 ------- ------- Accrued benefit cost $(6,061) $(5,138) ======= ======= Statements of financial position Accrued benefit liability $(6,061) $(5,138) ------- ------- Net amount recognized $(6,061) $(5,138) ======= =======

2002 2001 --------------------- Weighted average assumptions Discount rate 6.50% 7.75% Rate of compensation increase 5.00% 5.00%

21 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED) The total plan expense for the VIP Plan included the following components (in thousands):

DECEMBER 31 2002 2001 2000 -------------------------- Components of net cost Service cost $ 820 $ 490 $ 417 Interest cost 431 323 299 Amortization of prior service cost (417) (366) (314) Recognized net actuarial loss 355 193 157 -------------------------- Benefit cost $1,189 $ 640 $ 559 ==========================

NON-EMPLOYEE DIRECTORS RETIREMENT PLAN In April 2001, the Board of Directors established a non-qualified plan for non-employee directors of the Company. This 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. At January 31, 2003, this Plan did not hold any assets. 22 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED) The following table sets forth (in thousands) the funded status of the Non-Employee Directors Retirement Plan at December 31, 2002:

NON EMPLOYEE DIRECTOR PENSION 2002 2001 ------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 485 $ 461 Service cost 29 24 Interest cost 34 36 Plan amendments -- -- Actuarial loss 6 (36) Benefits paid -- -- ------------------------- Benefit obligation at end of year $ 554 $ 485 ========================= Change in plan assets Fair value of plan assets at inception and end of year $ -- $ -- ========================= Funded status of plan $ (554) $(485) Unrecognized prior service cost 286 373 Unrecognized net actuarial loss (30) (36) ------------------------- Net amount recognized $ (298) $(148) ========================= Statements of financial position Accrued benefit liability $ (554) $(485) Intangible asset 256 337 ------------------------- Net amount recognized $ (298) $(148) =========================

2002 2001 ------------------ Weighted average assumptions Discount rate 6.50% 7.75% Rate of compensation increase 5.00% 5.00%

23 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 4. RETIREMENT PLANS (CONTINUED) The total plan expense for the Non-Employee Directors Retirement Plan included the following components (in thousands):

DECEMBER 31 2002 2001 ---------------- Components of net cost Service cost $ 29 $ 24 Interest cost 34 36 Amortization of prior year service cost 88 88 ---------------- Benefit Cost $151 $148 ================

401(k) RETIREMENT PLAN The Company's Retirement Plan, which covers all U.S. employees, allows participants to defer from 1% to 15% of their eligible compensation through a 401(k) retirement program. Through December 31, 2001, this Plan included an employee stock ownership component. This Plan continues to include the Virco Stock Fund as one of the investment options. Shares owned by this Plan are held by the Plan Trustee, Security Trust Company. At January 31, 2003, this Plan held 561,914 shares of Virco Stock. While these shares were included in the employee stock ownership component prior to the dissolution of the ESOP Plan, allocated shares held by the Trust were included in shares outstanding and the related dividends were charged to retained earnings. For the fiscal years ended January 31, 2003, 2002 and 2001, there was no employer match and therefore no compensation cost to the Company. LIFE INSURANCE The Company provides current and post-retirement life insurance to certain salaried employees with split dollar life insurance policies under the Dual Option Life Insurance Plan. Cash surrender values of these policies, which are included in other assets in the consolidated balance sheets, were $3,915,000 and $3,523,000 at January 31, 2003 and 2002, respectively. DEFERRED COMPENSATION PLAN The Company established, effective January 1, 1997, a Deferred Compensation Plan, which allows certain key employees to defer up to a maximum of 90% of their base annual salary and/or up to 90% of their annual bonus on a pretax basis. The total participant deferrals were $1,772,000 and $1,461,000 for the years ended January 31, 2003 and 2002, respectively. The Deferred Compensation Plan is funded with investment funds held in the rabbi trust and are included in other assets in the consolidated balance sheets. 24 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS The 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 these stock plans, the Company may grant an aggregate of approximately 1,432,000 shares (as adjusted for the stock split and stock dividends) to its employees in the form of stock options. Non-employee directors automatically receive a grant for options to purchase 2,000 shares of common stock on the first business day following each annual meeting of the Company's stockholders. As of January 31, 2003, 373,000 shares remain available for future grant. Options granted under the 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. During the year, certain optionees satisfied the exercise price of their options by exchanging shares already owned rather than paying cash. As a result, 29,632 and 1,051 shares were recorded as treasury stock for the years ended January 31, 2003 and 2002, respectively. A summary of the Company's stock option activity, and related information for the years ended January 31 are as follows:

2003 2002 2001 ------------------------------------------------------------------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------------------------------------------------------------------------------ Outstanding at beginning of year 659,475 $ 9.09 714,679 $ 9.34 768,970 $ 8.97 Granted 13,200 13.59 38,720 8.37 6,655 9.40 Exercised (149,431) 3.15 (16,498) 2.20 (60,946) 4.64 Forfeited (41,470) 11.68 (77,426) 12.27 -- -- -------- ------- ------- Outstanding at end of year 481,774 10.82 659,475 9.09 714,679 9.34 ======== ======= ======= Exercisable at end of year 433,280 10.81 578,076 8.96 597,166 8.90 Weighted-average fair value of options granted during the year $ 5.54 $ 3.45 $ 3.27

The data included in the above table have been retroactively adjusted, if applicable, for stock dividends and the stock split. 25 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED) Information regarding stock options outstanding as of January 31, 2003, is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE - -------------------------------------------------------------------------------------------- $ 1.87 TO 8.55 153,428 4.00 YEARS $ 6.67 132,812 $ 6.42 10.14 TO 13.59 223,870 6.34 11.68 196,475 11.52 15.06 TO 16.07 104,476 4.69 15.80 103,993 15.01 ------- ------- 481,774 5.23 10.82 433,280 10.81 ======= =======

The Company has elected to account for its employee stock options under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for employee stock options. No compensation expense is recorded under APB 25 because the exercise price of the Company's employee common stock options equals the market price of the underlying common stock on the grant date. On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase right (a Right) for each outstanding share of the Company's common stock. Each Right entitles a stockholder to purchase for an exercise price of $50.00 ($20.70, as adjusted for the stock split and stock dividend), subject to adjustment, one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock of the Company, or under certain circumstances, shares of common stock of the Company or a successor company with a market value equal to two times the exercise price. The Rights are not exercisable, and would only become exercisable for all other persons when any person has acquired or commences to acquire a beneficial interest of at least 20% of the Company's outstanding common stock. The Rights expire on October 25, 2006, have no voting privileges, and may be redeemed by the Board of Directors at a price of $.001 per Right at any time prior to the acquisition of a beneficial ownership of 20% of the outstanding common shares. There are 200,000 shares (483,153 shares as adjusted by the stock split and stock dividend) of Series A Junior Participating Cumulative Preferred Stock reserved for issuance upon exercise of the Rights. 26 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 6. PROVISION FOR INCOME TAXES The Company uses the liability method to determine the provision for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provisions for the last three years are reconciled to the statutory federal income tax rate using the liability method as follows:

JANUARY 31 2003 2002 2001 ---------------------------------------- Statutory 34.0% 34.0% 34.0% State taxes (net of federal tax) 1.0 4.1 3.2 Nondeductible expenses and other (1.7) 5.5 1.1 ---------------------------------------- 33.3% 43.6% 38.3% ========================================

Significant components of the provision for income taxes (in thousands) attributed to income before income taxes and cumulative effect of the accounting change are as follows:

JANUARY 31 2003 2002 2001 ------------------------------------- Current Federal $ (333) $ 1,562 $ 2,690 State (81) 350 390 ------------------------------------- (414) 1,912 3,080 Deferred Federal 469 (1,449) (350) State 86 (273) (57) ------------------------------------- 555 (1,722) (407) ------------------------------------- $ 141 $ 190 $ 2,673 =====================================

27 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 6. PROVISION FOR INCOME TAXES (CONTINUED) Deferred tax assets and liabilities (in thousands) are comprised of the following:

JANUARY 31 2003 2002 ------------------------- Deferred tax assets Accrued vacation and sick leave $ 1,209 $ 1,090 Retirement plans 3,996 3,308 Insurance reserves 1,607 1,306 Inventory 574 244 Other 372 1,068 ------------------------- 7,758 7,016 Deferred tax liabilities Tax in excess of book depreciation (4,148) (4,288) Capitalized software development costs (1,214) (3,318) ------------------------- (5,362) (7,606) ------------------------- Net deferred tax asset (liability) $ 2,396 $ (590) =========================

7. COMMITMENTS The Company has long-term leases on real property and equipment, which expire at various dates. Certain of the leases contain renewal, purchase options and require payment for property taxes and insurance. Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2003, are as follows:

Year ending January 31 - ---------------------- 2004 $ 8,946 2005 7,560 2006 4,339 2007 2,997 2008 1,654 Thereafter 504 ------- $26,000 =======

28 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 7. COMMITMENTS (CONTINUED) Rent expense relating to operating leases was as follows (in thousands):

Year ending January 31 - ---------------------- 2003 $ 9,969 2002 11,042 2001 12,937

The Company leases machinery and equipment from GECC under a 10-year operating lease arrangement. The Company has the option of buying out the leases three to five years into the lease period. Minimum future lease-receipts (in thousands) for leases relating to properties owned or subleased as of January 31, 2003, are as follows:

Year ending January 31 - ---------------------- 2004 $ 628 2005 627 2006 33 2007 33 2008 33 Thereafter 112 ------ $1,466 ======

8. CONTINGENCIES The Company and other furniture manufacturers are subject to federal, state and local laws and regulations relating to the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. The Company has expended, and may be expected to expend, significant amounts for the investigation of environmental conditions, installation of environmental control equipment and remediation of environmental contamination. The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. At January 31, 2003 and 2002, there are no required reserves for such environmental contingencies. 29 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 8. CONTINGENCIES (CONTINUED) The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a limit of $30,000,000. The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded the net present value of $4,130,000 at January 31, 2003, based upon the Company's estimated payout period of four years using a 6% discount rate. Workers' compensation, automobile, general and product liability claims may be asserted in the future for events not currently known by management. Management does not anticipate that any related settlement, after consideration of the existing reserve for claims incurred and potential insurance recovery, would have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management that the ultimate outcome of all such matters will not materially affect the Company's financial position, results of operations or cash flows. 9. WARRANTY The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The majority of the Company's products carry a five-year warranty. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The warranty liability is in accrued liabilities in the accompanying consolidated balance sheet. Changes in the Company's warranty liability were as follows (in thousands):

JANUARY 31 2003 2002 ------------------- Balance at January 31, 2002 $ 150 $ 150 Provision 2,091 703 Costs incurred (1,341) (703) ------------------- Balance at January 31, 2003 $ 900 $ 150 ===================

30 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 10. GAIN ON SALE OF ASSETS AND OTHER INCOME On April 25, 2000, the Company completed the sale of its Torrance, California, warehouse, which was held as rental property. The Company received $9,385,000 in cash and recorded a $7,945,000 pre-tax gain on disposition during the quarter ended April 30, 2000. In October 2000, the Company entered into a confidential settlement of a dispute involving past services related to the installation of non-manufacturing equipment for which it received a final cash payment in November 2000. This payment is a non-recurring amount unrelated to the Company's ongoing operations. In the third quarter ended October 31, 2000, the Company recognized $4,052,000 in other income from this settlement. 11. ACQUISITION OF BUSINESS In April 2002, the Company entered into an agreement with Dew-El Corporation to purchase certain assets of Furniture Focus (TM), Inc., an Ohio reseller that offers complete package solutions for the furniture, fixtures and equipment segments of bond-funded public school construction projects, primarily in the upper Midwest. In May 2002, the Company paid $2,400,000 in cash for certain assets of the corporation and recorded goodwill of $2,200,000. The goodwill is not expected to be deductible for income tax. In addition, the Company purchased approximately $2,150,000 of accounts receivable. The financial statements for the fiscal 2002 included nine months of Furniture Focus operations. The additional revenue and operating results as a result of this acquisition did not have a significant effect on the Company's financial position, operations or cash flows. 31 Virco Mfg. Corporation Notes to Consolidated Financial Statements (continued) 12. QUARTERLY RESULTS (UNAUDITED) The Company's quarterly results for the years ended January 31, 2003 and 2002 are summarized as follows (in thousands, except per share data):

APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 -------------------------------------------------- Year ended January 31, 2003 Net sales $41,168 $83,164 $85,022 $35,001 Gross profit 13,056 29,080 28,893 5,756 Net income (loss) (2,137) 4,260 3,244 (5,085) Per common share(1) (2) Net income Basic (0.16) 0.32 0.24 (0.39) Assuming dilution (0.16) 0.32 0.24 (0.39) Year ended January 31, 2002 Net sales $42,457 $89,193 $86,232 $39,580 Gross profit 11,483 28,349 28,591 8,764 Net income (loss) (3,765) 4,490 3,912 (4,391) Per common share(1) (2) Net income: Basic (0.27) 0.34 0.29 (0.33) Assuming dilution (0.27) 0.33 0.29 (0.33)

(1) Net income per share has been adjusted to reflect the 10% stock dividend declared in August 2002 and 2001. (2) Per common share amounts for the quarters and full years have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period and with regard to diluted per common share amounts only, because of the effect of potentially dilutive securities only in the periods in which the effect would have been dilutive. 32 SUPPLEMENTAL STOCKHOLDERS' INFORMATION ANNUAL MEETING The Annual Meeting of Virco stockholders will be held on Tuesday, June 10, 2003, at 10:00 a.m., at 2027 Harpers Way, Torrance, California. The record date for this meeting is May 2, 2003. The Proxy Statement and Proxy pertaining to this meeting will be mailed on or about May 16, 2003. SEC FORM 10-K A copy of the annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge upon written request to: Corporate Secretary Virco Mfg. Corporation 2027 Harpers Way Torrance, CA 90501 VIRCO COMMON STOCK The American Stock exchange is the principal market on which Virco Mfg. Corporation (VIR) stock is traded. As of April 16, 2002, there were approximately 341 registered stockholders according to the transfer agent records. There are approximately 1,900 beneficial stockholders. STOCKHOLDER RECORDS Records pertaining to stockholdings and dividends are maintained by Mellon Investor Services. Inquiries with respect to these matters, as well as notices of address changes, should be directed to: Mellon Investor Services, 85 Challenger Road, Ridgefield Park, NJ 07660, telephone 1-800-356-2017. If a stock certificate is lost or mutilated, immediately communicate with Mellon Investor Services at the above address. ADDITIONAL SERVICES FOR STOCKHOLDERS Information about the Company is now available to stockholders at the Company's web site (www.virco.com). A brief description of Virco's product line is offered together with illustrations showing a sampling of our furniture. QUARTERLY DIVIDEND AND STOCK MARKET INFORMATION

Cash Dividends Declared Common Stock Range 1-31-2003 1-31-2002 1-31-2003 1-31-2002 ------------------------------------------------------------------------- High Low High Low --------------------------------------- 1st Quarter $0.02 $0.02 $ 9.54 $8.09 $9.09 $8.06 2nd Quarter 0.02 0.02 13.70 9.18 8.80 8.14 3rd Quarter 0.02 0.02 12.18 8.43 9.45 8.50 4th Quarter 0.02 0.02 10.48 7.98 8.18 7.41

The data included in the above table has been retroactively adjusted, if applicable, for the stock split and stock dividends. DIRECTORS, OFFICERS AND FACILITIES DIRECTORS Robert A. Virtue President, Chairman of the Board and Chief Executive Officer Donald S. Friesz Former Vice President - Sales and Marketing Evan M. Gruber Chairman and Chief Executive Officer, Modtech Holdings, Inc. Robert K. Montgomery Partner, Gibson, Dunn & Crutcher Glen D. Parish Vice President and General Manager, Conway Division Donald A. Patrick Management Consultant, Diversified Business Resources, Inc. Douglas A. Virtue Executive Vice President Dr. James R. Wilburn Dean of the School of Public Policy, Pepperdine University OFFICERS Robert A. Virtue President, Chairman of the Board and Chief Executive Officer Douglas A. Virtue Executive Vice President Robert E. Dose Vice President - Finance, Secretary and Treasurer Glen D. Parish Vice President and General Manager - Conway Division Wesley D. Roberts Vice President and Chief Information Officer D. Randal Smith Vice President - Marketing Lori L. Swafford Vice President - Legal Affairs Larry O. Wonder Vice President - Sales INDEPENDENT AUDITORS Ernst & Young LLP One World Trade Center Long Beach, California 90831 LEGAL COUNSEL Gibson, Dunn & Crutcher 2029 Century Park East Los Angeles, California 90067 CORPORATE HEADQUARTERS 2027 Harpers Way Torrance, California 90501 (310) 533-0474 MAJOR FACILITIES Torrance Division 2027 Harpers Way Torrance, California 90501 Conway Division Highway 65, South Conway, Arkansas 72032 VIRCO MFG. CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED JANUARY 31, 2001, 2002 AND 2003 (In Thousands)

Col. A Col. B Col. C Col. D Col. E Col. F Additions Balance at Charged to Costs Charged to Other Deductions from Balance at Close of Description Beginning of Period and Expenses Accounts Reserves Period ----------- ------------------- ------------ -------- -------- ------ Allowance for Doubtful Accounts: Year Ended: January 31, 2001 $ 200 $ 156 $ 156 (1) $ 200 January 31, 2002 $ 200 $ 288 $ 288 (1) $ 200 January 31, 2003 $ 200 $ 267 $ 242 (1) $ 225

(1) Uncollectable accounts written off, net of recoveries. EX-21.1 5 v89559exv21w1.txt EXHIBIT 21.1 Exhibit 21.1 LIST OF SUBSIDIARIES Virtue of California, Inc. (INACTIVE) 2027 Harpers Way Torrance, CA 90501 Delkay Plastics (INACTIVE) 2027 Harpers Way Torrance, CA 90501 Virco Inc. 2027 Harpers Way Torrance, CA 90501 Virco Mgmt. Corporation 2027 Harpers Way Torrance, CA 90501 EX-23.1 6 v89559exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Virco Mfg. Corporation of our report dated March 14, 2003, included in the 2002 Annual Report to Stockholders of Virco Mfg. Corporation. Our audits also include the financial statement schedule of Virco Mfg. Corporation listed in Item 15(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-65096, Form S-8 No. 333-32539, Form S-8 No. 333-51717 and Form S-8 No. 333-74832) pertaining to the Virco Mfg. Corporation 1993 Stock Incentive Plan, the Virco Mfg. Corporation 1997 Stock Incentive Plan, the Virco Mfg. Corporation Employee Stock Ownership Plan, and the Virco Mfg. Corporation 401(K) Savings Plan, respectively, of our report dated March 14, 2003, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Virco Mfg. Corporation for the year ended January 31, 2003. /s/ Ernst & Young LLP Long Beach, California April 24, 2003 EX-99.1 7 v89559exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies, in his capacity as an officer of Virco Mfg. Corporation (the "Company"), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: - the Annual Report of the Company on Form 10-K for the period ended January 31, 2003, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and - the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: April 25, 2003 /s/ Robert A. Virtue - -------------------- Robert A. Virtue President /s/ Robert E. Dose - ------------------- Robert E. Dose Vice President--Finance -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.7

                                  Exhibit 10.7

                          REVOLVING LINE OF CREDIT NOTE

$70,000,000.00                                           West Covina, California
                                                                February 1, 2003

         FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Gabriel Valley Regional Commercial Banking Office, 1000
Lakes Drive, Suite 250, West Covina, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America and
in immediately available funds, the principal sum of Seventy Million Dollars
($70,000,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

DEFINITIONS:

         As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:

         (a)      "Business Day" means any day except a Saturday, Sunday or any
other day on which commercial banks in California are authorized or required by
law to close.

         (b)      "Fixed Rate Term" means a period commencing on a Business Day
and continuing for one (1), two (2) or three (3) months, as designated by
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to LIBOR; provided however, that
no Fixed Rate Term may be selected for a principal amount less than One Million
Dollars ($1,000,000.00); and provided further, that no Fixed Rate Term shall
extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would
end on a day which is not a Business Day, then such Fixed Rate Term shall be
extended to the next succeeding Business Day.

         (c)      "LIBOR" means the rate per annum (rounded upward, if
necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the
following formula:

                           LIBOR =              Base LIBOR
                                    ---------------------------------
                                     100% - LIBOR Reserve Percentage

         (i)      "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.

                                      -1-



         (ii)     "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the
Federal Reserve Board, as amended), adjusted by Bank for expected changes in
such reserve percentage during the applicable Fixed Rate Term.

         (d)      "Prime Rate" means at any time the rate of interest most
recently announced within Bank at its principal office as its Prime Rate, with
the understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

         (a)      Interest. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed)
initially either (i) at a fluctuating rate per annum three-eighths percent
(0.375%) above the Prime Rate in effect from time to time, or (ii) at a fixed
rate per annum determined by Bank to be one and three quarters percent (1.75%)
above LIBOR in effect on the first day of the applicable Fixed Rate Term. When
interest is determined in relation to the Prime Rate, each change in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank. With respect to each LIBOR selection hereunder, Bank is
hereby authorized to note the date, principal amount, interest rate and Fixed
Rate Term applicable thereto and any payments made thereon on Bank's books and
records (either manually or by electronic entry) and/or on any schedule attached
to this Note, which notations shall be prima facie evidence of the accuracy of
the information noted. In addition to any interest rate adjustments resulting
from changes in the Prime Rate, Bank shall adjust the Prime Rate and LIBOR
margins used to determine the rates of interest applicable to this Note on a
quarterly basis, as set forth in that certain Credit Agreement between Borrower
and Bank dated as of February 1, 2003 (as amended from time to time, the "Credit
Agreement").

         (b)      Selection of Interest Rate Options. At any time any portion of
this Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone (or such other electronic
method as Bank may permit) so long as, with respect to each LIBOR selection, (A)
if requested by Bank, Borrower provides to Bank written confirmation thereof not
later than three (3) Business Days after such notice is given, and (B) such
notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate
Term, or at a later time during any Business Day if Bank, at it's sole option
but without obligation to do so, accepts Borrower's notice and quotes a fixed
rate to Borrower. If Borrower does not immediately accept a fixed rate when
quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request
from Borrower shall be subject to a redetermination by Bank of the applicable
fixed rate. If no specific designation of interest is made at the time any
advance is requested hereunder or at the end of any Fixed Rate Term, Borrower
shall be

                                      -2-



deemed to have made a Prime Rate interest selection for such advance or the
principal amount to which such Fixed Rate Term applied.

         (c)      Taxes and Regulatory Costs. Borrower shall pay to Bank
immediately upon demand, in addition to any other amounts due or to become due
hereunder, any and all (i) withholdings, interest equalization taxes, stamp
taxes or other taxes (except income and franchise taxes) imposed by any domestic
or foreign governmental authority and related in any manner to LIBOR, and (ii)
future, supplemental, emergency or other changes in the LIBOR Reserve
Percentage, assessment rates imposed by the Federal Deposit Insurance
Corporation, or similar requirements or costs imposed by any domestic or foreign
governmental authority or resulting from compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority and related in any manner to LIBOR to the extent
they are not included in the calculation of LIBOR. In determining which of the
foregoing are attributable to any LIBOR option available to Borrower hereunder,
any reasonable allocation made by Bank among its operations shall be conclusive
and binding upon Borrower.

         (d)      Payment of Interest. Interest accrued on this Note shall be
payable on the first day of each month, commencing March 1, 2003.

         (e)      Default Interest. From and after the maturity date of this
Note, or such earlier date as all principal owing hereunder becomes due and
payable by acceleration or otherwise, the outstanding principal balance of this
Note shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to four
percent (4%) above the rate of interest from time to time applicable to this
Note.

BORROWING AND REPAYMENT:

         (a)      Borrowing and Repayment. Borrower may from time to time during
the term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount set forth
above or such lesser amount as shall at any time be available hereunder, as set
forth in the Credit Agreement. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for any Borrower, which
balance may be endorsed hereon from time to time by the holder. The outstanding
principal balance of this Note shall be due and payable in full on February 1,
2005.

         (b)      Advances. Advances hereunder, to the total amount of the
principal sum stated above, may be made by the holder at the oral or written
request of (i) Robert A. Virtue or Robert Dose, either one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any deposit account of Borrower, which advances, when
so deposited, shall be conclusively presumed to have been made to or for the
benefit of Borrower regardless of the fact that persons other than those
authorized to request advances may have authority to draw against such account.
The holder shall have no obligation to determine whether any person requesting
an advance is or has been authorized by Borrower.

                                      -3-



         (c)      Application of Payments. Each payment made on this Note shall
be credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

         (a)      Prime Rate. Borrower may prepay principal on any portion of
this Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.

         (b)      LIBOR. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to LIBOR at any time and in the
minimum amount of One Million Dollars ($1,000,000.00); provided however, that if
the outstanding principal balance of such portion of this Note is less than said
amount, the minimum prepayment amount shall be the entire outstanding principal
balance thereof. In consideration of Bank providing this prepayment option to
Borrower, or if any such portion of this Note shall become due and payable at
any time prior to the last day of the Fixed Rate Term applicable thereto by
acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted monthly differences for each month from
the month of prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:

         (i)      Determine the amount of interest which would have accrued each
                  month on the amount prepaid at the interest rate applicable to
                  such amount had it remained outstanding until the last day of
                  the Fixed Rate Term applicable thereto.

         (ii)     Subtract from the amount determined in (i) above the amount of
                  interest which would have accrued for the same month on the
                  amount prepaid for the remaining term of such Fixed Rate Term
                  at LIBOR in effect on the date of prepayment for new loans
                  made for such term and in a principal amount equal to the
                  amount prepaid.

         (iii)    If the result obtained in (ii) for any month is greater than
                  zero, discount that difference by LIBOR used in (ii) above.

Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

                                      -4-



EVENTS OF DEFAULT:

         This Note is made pursuant to and is subject to the terms and
conditions of the Credit Agreement. Any default in the payment or performance of
any obligation under this Note, or any defined event of default under the Credit
Agreement, shall constitute an "Event of Default" under this Note.

MISCELLANEOUS:

         (a)      Remedies. Upon the occurrence of any Event of Default, the
holder of this Note, at the holder's option, may declare all sums of principal
and interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Borrower shall pay to the holder immediately
upon demand the full amount of all payments, advances, charges, costs and
expenses, including reasonable attorneys' fees (to include outside counsel fees
and all allocated costs of the holder's in-house counsel), expended or incurred
by the holder in connection with the enforcement of the holder's rights and/or
the collection of any amounts which become due to the holder under this Note,
and the prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Borrower or other person or entity.

         (b)      Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.

         (c)      Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

         IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.

VIRCO MFG. CORPORATION

By: ___________________________

Title: ________________________

                                       -5-



                                  Exhibit 10.7

                                CREDIT AGREEMENT

         THIS AGREEMENT is entered into as of February 1, 2003, by and between
VIRCO MFG. CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank").

                                    RECITALS

         A.       Bank and Borrower previously entered into that certain Credit
Agreement dated as of December 1, 2000 (as amended from time to time, the "Prior
Credit Agreement"), pursuant to which Bank extended to Borrower a line of credit
(the "Prior Line of Credit") with a subfeature for the issuance of letters of
credit (the "Prior Letters of Credit").

         B.       Bank and Borrower wish to amend and restate the Prior Credit
Agreement in its entirety with this Agreement to evidence the extension to
Borrower of the credit accommodation described below on the terms and conditions
contained herein.

         NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

                                    ARTICLE I
                                  CREDIT TERMS

         SECTION 1.1.      LINE OF CREDIT.

         (a)   Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including February 1, 2005, not to exceed at any time the aggregate
principal amount of Forty Million Dollars ($40,000,000.00) from February 1, 2003
through and including February 28, 2003, Sixty Million Dollars ($60,000,000.00)
from March 1, 2003 through and including May 31, 2003, Seventy Million Dollars
($70,000,000.00) from June 1, 2003 through and including August 31, 2003, Sixty
Million Dollars ($60,000,000.00) from September 1, 2003 through and including
October 31, 2003 and Forty Million Dollars ($40,000,000.00) from November 1,
2003 through the maturity date referred to above ("Line of Credit"), the
proceeds of which shall be used to finance Borrower's working capital
requirements and to refinance the amount outstanding under the Prior Line of
Credit (which shall be deemed cancelled hereby). Borrower's obligation to repay
advances under the Line of Credit shall be evidenced by a promissory note
substantially in the form of EXHIBIT A attached hereto ("Line of Credit Note"),
all terms of which are incorporated herein by this reference.

         (b)   Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue or cause
an affiliate to issue sight commercial or standby letters of credit for the
account of Borrower (each, a "Letter of Credit" and collectively, "Letters of
Credit"); provided however, that the aggregate undrawn amount of all outstanding
Letters of Credit shall not at any time exceed Fifteen Million Dollars
($15,000,000.00). The form and substance of each Letter of Credit shall be
subject to approval by Bank, in its sole discretion. Each commercial Letter of
Credit shall be issued for a term not to exceed one hundred eighty (180) days,
as designated by Borrower; provided however, that no

                                      -1-



commercial Letter of Credit shall have an expiration date subsequent to the
maturity date of the Line of Credit. Each standby Letter of Credit shall be
issued for a term not to exceed three (3) years, as designated by Borrower;
provided, however, that no standby Letter of Credit shall have an expiration
date subsequent to the maturity date of the Line of Credit. The undrawn amount
of all Letters of Credit shall be reserved under the Line of Credit and shall
not be available for borrowings thereunder. Each Letter of Credit shall be
subject to the additional terms and conditions of the Letter of Credit
agreements, applications and any related documents required by Bank in
connection with the issuance thereof. Each drawing paid under a Letter of Credit
shall be deemed an advance under the Line of Credit and shall be repaid by
Borrower in accordance with the terms and conditions of this Agreement
applicable to such advances; provided however, that if advances under the Line
of Credit are not available, for any reason, at the time any drawing is paid,
then Borrower shall immediately pay to Bank the full amount drawn, together with
interest thereon from the date such drawing is paid to the date such amount is
fully repaid by Borrower, at the rate of interest applicable to advances under
the Line of Credit. In such event Borrower agrees that Bank, in its sole
discretion, may debit any account maintained by Borrower with Bank for the
amount of any such drawing. All Prior Letters of Credit which are outstanding as
of the date hereof shall be deemed "Letters of Credit" hereunder.

         (c)   Borrowing and Repayment. Borrower may from time to time during
the term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above. Notwithstanding the foregoing, for a period of at least thirty (30)
consecutive days during each fourth fiscal quarter of Borrower, borrowings
outstanding under the Line of Credit shall not exceed Twenty-five Million
Dollars ($25,000,000.00).

         SECTION 1.2.      INTEREST/FEES.

         (a)   Interest. The outstanding principal balance of the Line of Credit
shall bear interest initially at the rate of interest set forth in the Line of
Credit Note. In addition to any interest rate adjustments resulting from changes
in the Prime Rate (as defined in the Line of Credit Note, Bank shall adjust the
Prime Rate and LIBOR (as defined in the Line of Credit Note) margins used to
determine the rates of interest applicable to the Line of Credit on a quarterly
basis, commencing with Borrower's fiscal quarter ending April 30 2003, if
required to reflect a change in Borrower's ratio of Funded Debt to EBITDA (as
defined Section 4.9(d) below), in accordance with the following grid:



                                                  Applicable                Applicable
                                                  Prime Rate                  LIBOR
Funded Debt to EBITDA                               Margin                    Margin
- ---------------------                               ------                    ------
                                                                      
at least 3.0 to 1.0 but less than
or equal to 4.0 to 1.0                              .500%                      2.50%

at least 2.0 to 1.0 but
less than or equal to 3.0 to 1.0                    .375%                      1.75%

at least 1.0 to 1.0 but
less than 2.0 to 1.0                                .250%                     1.625%


                                      -2-



                                                                        
less than 1.0 to 1.0                                .250%                     1.500%



Each such adjustment shall be effective on the first Business Day of Borrower's
fiscal quarter following the quarter during which Bank receives and reviews
Borrower's most current fiscal quarter-end financial statements in accordance
with any requirements established by Bank for the preparation and delivery
thereof. The foregoing pricing grid is not intended to constitute a waiver of
any violation of the Funded Debt to EBITDA covenant set forth herein, and Bank
hereby reserves all of its rights and remedies in connection therewith, should
such a violation occur.

         (b)   Computation and Payment. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the times
and place set forth in each promissory note or other instrument or document
required hereby.

         (c)   Unused Commitment Fee. Borrower shall pay to Bank a fee on the
average daily unused amount of the Line of Credit. Initially, such fee shall be
..375%. Bank shall adjust such percentage on a fiscal quarterly basis, commencing
with Borrower's fiscal quarter ending April 30, 2003, if required, to reflect a
change in Borrower's ratio of Funded Debt to EBITDA (as defined in Section
4.9(d) below) in accordance with the following grid:



Funded Debt to EBITDA                       Percentage Fee
- ---------------------                       --------------
                                         
less than 2.0 to 1.0                            .375%

greater than or equal to 2.0 to 1.0             .500%


Each such adjustment shall be effective on the first Business Day (as defined in
the Line of Credit Note) of Borrower's fiscal quarter following the quarter
during which Bank receives and reviews Borrower's most current fiscal
quarter-end financial statements in accordance with the provisions of Section
4.3 below. Such fee shall be due and payable by Borrower quarterly in arrears on
the 15th day of the month immediately following each fiscal quarter end.

         The foregoing fee schedule is not intended to constitute a waiver of
any violation of the Funded Debt to EBITDA covenant set forth in Section 4.9(e)
below, and Bank hereby reserves all of its rights and remedies in connection
therewith, should such a violation occur.

         (d)   Commercial Letter of Credit Fees. Borrower shall pay to Bank fees
upon the issuance of each commercial Letter of Credit, upon the payment or
negotiation by Bank of each draft under any commercial Letter of Credit and upon
the occurrence of any other activity with respect to any commercial Letter of
Credit (including without limitation, the transfer, amendment or cancellation of
any commercial Letter of Credit) determined in accordance with Bank's standard
fees and charges then in effect for such activity.

         (e)   Standby Letter of Credit Fees. Borrower shall pay to Bank (i)
fees upon the issuance of each standby Letter of Credit equal to one and three
quarters percent (1.75%) per annum (computed on the basis of a 360-day year,
actual days elapsed) of the face amount thereof, and (ii) fees upon the payment
or negotiation of each drawing under any standby Letter of Credit and fees upon
the occurrence of any other activity with respect to any standby Letter of
Credit (including without limitation, the transfer, amendment or cancellation of
any standby Letter of Credit) determined in accordance with Bank's standard fees
and charges then in effect for such activity.

                                      -3-



         SECTION 1.3.      COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all interest and fees due under the Line of Credit by charging
Borrower's deposit account number 4648-052785 with Bank, or any other deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such deposit account to pay all such sums
when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.

         SECTION 1.4.      COLLATERAL.

         As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in all
Borrower's accounts receivable and other rights to payment, general intangibles,
inventory and equipment.

         All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements and other documents as Bank shall
reasonably require, all in form and substance satisfactory to Bank. Borrower
shall reimburse Bank immediately upon demand for all costs and expenses incurred
by Bank in connection with any of the foregoing security, including without
limitation, filing fees and costs of appraisals and audits.

                                   ARTICLE II
                         REPRESENTATIONS AND WARRANTIES

         Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.

         SECTION 2.1.       LEGAL STATUS. Borrower is a corporation, duly
organized and existing and in good standing under the laws of the State of
Delaware, and is qualified or licensed to do business (and is in good standing
as a foreign corporation, if applicable) in all jurisdictions in which such
qualification or licensing is required or in which the failure to so qualify or
to be so licensed could have a material adverse effect on Borrower.

         SECTION 2.2.       AUTHORIZATION AND VALIDITY. This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.

         SECTION 2.3.       NO VIOLATION. The execution, delivery and
performance by Borrower of each of the Loan Documents do not violate any
provision of any law or regulation, or contravene any provision of the Articles
of Incorporation or By-Laws of Borrower, or result in any breach of or default
under any contract, obligation, indenture or other instrument to which Borrower
is a party or by which Borrower may be bound.

         SECTION 2.4.       LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material

                                      -4-



adverse effect on the financial condition or operation of Borrower other than
those disclosed by Borrower to Bank in writing prior to the date hereof.

         SECTION 2.5.      CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated December 31, 2002, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) discloses
all liabilities of Borrower that are required to be reflected or reserved
against under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.

         SECTION 2.6.      INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.

         SECTION 2.7.      NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.

         SECTION 2.8.      PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.

         SECTION 2.9.      ERISA. Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time ("ERISA");
Borrower has not violated any provision of any defined employee pension benefit
plan (as defined in ERISA) maintained or contributed to by Borrower (each, a
"Plan"); no Reportable Event as defined in ERISA has occurred and is continuing
with respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan will
be able to fulfill its benefit obligations as they come due in accordance with
the Plan documents and under generally accepted accounting principles.

         SECTION 2.10.     OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.

         SECTION 2.11.     ENVIRONMENTAL MATTERS. Except as disclosed by
Borrower to Bank in writing prior to the date hereof, Borrower is in compliance
in all material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's operations
and/or properties, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance

                                      -5-



into the environment. Borrower has no material contingent liability in
connection with any release of any toxic or hazardous waste or substance into
the environment.

                                   ARTICLE III
                                   CONDITIONS

         SECTION 3.1.      CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to extend any credit contemplated by this Agreement is
subject to the fulfillment to Bank's satisfaction of all of the following
conditions:

         (a)   Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.

         (b)   Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:

         (i)      This Agreement and each promissory note or other instrument or
                  document required hereby.

         (ii)     Corporate Resolution: Borrowing.

         (iii)    Certificate of Incumbency.

         (iv)     Continuing Security Agreement: Rights to Payment and
                  Inventory.

         (v)      Security Agreement: Equipment.

         (vi)     UCC Financing Statements.

         (vii)    Loan Disbursement Order.

         (viii)   Such other documents as Bank may require under any other
                  Section of this Agreement.

         (c)   Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.

         (d)   Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank.

         SECTION 3.2.      CONDITIONS OF EACH EXTENSION OF CREDIT. The
obligation of Bank to make each extension of credit requested by Borrower
hereunder shall be subject to the fulfillment to Bank's satisfaction of each of
the following conditions:

         (a)   Compliance. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date of
the signing of this Agreement and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.

         (b)   Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

                                      -6-



                                   ARTICLE IV
                              AFFIRMATIVE COVENANTS

         Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:

         SECTION 4.1.      PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at the
times and place and in the manner specified therein, and immediately upon demand
by Bank, the amount by which the outstanding principal balance of the Line of
Credit exceeds the maximum principal amount available thereunder, as set forth
in Section 1.1(a) above.

         SECTION 4.2.      ACCOUNTING RECORDS. Maintain adequate books and
records in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the same,
and to inspect the properties of Borrower.

         SECTION 4.3.      FINANCIAL STATEMENTS.  Provide to Bank all of the
following, in form and detail satisfactory to Bank:

         (a)   not later than 90 days after and as of the end of each fiscal
year, an audited financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, an income statement,
a statement of cash flow and appropriate footnotes and supporting consolidating
information, and, if issued, a copy of the certified public accountant's
management letter;

         (b)   not later than 120 days after and as of the end of each fiscal
year, Borrower's Annual Report Form 10-K as filed with the Securities and
Exchange Commission;

         (c)   not later than 45 days after and as of the end of each month, a
financial statement of Borrower, prepared by Borrower, to include a balance
sheet and an income statement;

         (d)   not later than 60 days after and as of the end of each fiscal
quarter, Borrower's Quarterly Report Form 10-Q as filed with the Securities and
Exchange Commission;

         (e)   not later than 30 days prior to end of each fiscal year,
Borrower's detailed monthly operating budget for the upcoming fiscal year, to
include a projected balance sheet, a projected income statement and a projected
budget for capital expenditures; and

         (f)   from time to time such other information as Bank may reasonably
request.

         SECTION 4.4.      COMPLIANCE. Preserve and maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary for
the conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.

                                      -7-



         SECTION 4.5.      INSURANCE. Maintain and keep in force insurance of
the types and in amounts customarily carried in lines of business similar to
that of Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.

         SECTION 4.6.      FACILITIES. Keep all properties useful or necessary
to Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.

         SECTION 4.7.      TAXES AND OTHER LIABILITIES. Pay and discharge when
due any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.

         SECTION 4.8.      LITIGATION.  Promptly give notice in writing to Bank
of any litigation pending or threatened against Borrower with a claim in excess
of $1,000,000.00.

         SECTION 4.9.      FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles consistently
applied and used consistently with prior practices (except to the extent
modified by the definitions herein), with compliance determined commencing with
Borrower's financial statements for the period ending January 31, 2003:

         (a)   Current Ratio not less than 1.1 to 1.0 as of each first fiscal
quarter end (April 30), and as of each second fiscal quarter end (July 31), and
not less than 1.2 to 1.0 as of each third fiscal quarter end (October 31) and as
of each fourth fiscal quarter end (January 31), with "Current Ratio" defined as
total current assets divided by total current liabilities (including without
limitation the balance outstanding under the Line of Credit).

         (b)   Total Liabilities divided by Tangible Net Worth not greater than
1.5 to 1.0 as of each first fiscal quarter end (April 30) and as of each second
fiscal quarter end (July 31), and not greater than 1.25 to 1.0, as of each third
fiscal quarter end (October 31) and as of each fourth fiscal quarter end
(January 31), with "Total Liabilities" defined as the aggregate of current
liabilities and non-current liabilities (including without limitation the
undrawn amount of any issued and outstanding Letters of Credit, guaranties and
any other contingent liabilities) less subordinated debt, and with "Tangible Net
Worth" defined as the aggregate of total stockholders' equity plus subordinated
debt less any intangible assets.

         (c)   Fixed Charge Coverage Ratio not less than 1.75 to 1.0 as of each
fiscal quarter end through and including July 31, 2003, and not less than 2.25
to 1.0 as of each fiscal quarter end thereafter, calculated on a rolling
four-quarter basis, with "Fixed Charge" defined as net profit after taxes paid
in cash less dividends and distributions, less stock repurchases, less any gain
on the sale of assets, plus interest expense (net of capitalized interest
expense), depreciation expense and amortization expense, and with "Fixed Charge
Coverage Ratio" defined as Fixed Charge divided by the aggregate of total
interest expense plus the prior period current maturity of long-term debt and
the prior period current maturity of subordinated debt.

                                      -8-



         (d)   Funded Debt to EBITDA Ratio not greater than 1.75 to 1.0 as of
January 31, 2003, not greater than 3.0 to 1.0 as of April 30, 2003, not greater
than 4.00 to 1.0 as of July 31, 2003, not greater than 2.00 to 1.0 as of October
31, 2003, not greater than 1.50 to 1.0 as of January 31, 2004, not greater than
3.00 to 1.0 as of each April 30 and July 31 thereafter, and not greater than
1.50 to 1.0 as of each October 31 and January 31 thereafter, with "Funded Debt"
defined as the principal balance outstanding under all interest bearing
liabilities of Borrower plus the undrawn amount of any issued and outstanding
Letters of Credit, guaranties and any other contingent liabilities, and with
"EBITDA" defined as net profit before tax plus interest expense (net of
capitalized interest expense), depreciation expense and amortization expense,
less any gain on the sale of assets.

         SECTION 4.10.     NOTICE TO BANK. Promptly (but in no event more than
five (5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or the
passage of time or both would constitute an Event of Default; (b) any change in
the name or the organizational structure of Borrower; (c) the occurrence and
nature of any Reportable Event or Prohibited Transaction, each as defined in
ERISA, or any funding deficiency with respect to any Plan; or (d) any
termination or cancellation of any insurance policy which Borrower is required
to maintain, or any uninsured or partially uninsured loss through liability or
property damage, or through fire, theft or any other cause affecting Borrower's
property in excess of an aggregate of $1,000,000.00.

                                    ARTICLE V
                               NEGATIVE COVENANTS

         Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:

         SECTION 5.1.      USE OF FUNDS.  Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.

         SECTION 5.2.      CAPITAL EXPENDITURES. Make any additional investment
in fixed assets in excess of an aggregate of $8,000,000.00 for the fiscal year
ending January 31, 2003, or in excess of an aggregate of $7,000,000.00 during
any subsequent fiscal year.

         SECTION 5.3.      LEASE EXPENDITURES.  Incur new operating lease
expense in excess of an aggregate of $2,000,000.00 in any fiscal year.

         SECTION 5.4.      OTHER INDEBTEDNESS. Create, incur, assume or permit
to exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
(b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof, and (c) unsecured liabilities not to exceed an
aggregate of $2,500,000.00 during any fiscal year.

         SECTION 5.5.      MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into
or consolidate with any other entity; make any substantial change in the nature
of Borrower's

                                      -9-



business as conducted as of the date hereof; acquire all or substantially all of
the assets of any other entity; nor sell, lease, transfer or otherwise dispose
of all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.

         SECTION 5.6.      GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank.

         SECTION 5.7.      LOANS, ADVANCES, INVESTMENTS. Make any loans or
advances to or investments in any person or entity, except (a) any of the
foregoing existing as of, and disclosed to Bank prior to, the date hereof, and
(b) asset acquisitions of companies engaged in businesses similar to that of
Borrower for purchase prices not to exceed $1,000,000.00 in the aggregate during
any fiscal year for all such purchases combined.

         SECTION 5.8.      DIVIDENDS, DISTRIBUTIONS.  Declare or pay any
dividend or distribution in cash on Borrower's stock now or hereafter
outstanding in excess of $300,000.00 in the aggregate during any given fiscal
quarter.

         SECTION 5.9.      PLEDGE OF ASSETS. Mortgage, pledge, grant or permit
to exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof.

                                   ARTICLE VI
                                EVENTS OF DEFAULT

         SECTION 6.1.      The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:

         (a)   Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.

         (b)   Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.

         (c)   Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above), and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.

         (d)   Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has incurred
any debt or other liability to any person or entity, including Bank.

         (e)   The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real

                                      -10-



property; or the service of a notice of levy and/or of a writ of attachment or
execution, or other like process, against the assets of Borrower; or the entry
of a judgment against Borrower; provided, however, that Borrower may have
mechanics' liens against its property securing claims not to exceed $250,000.00
in the aggregate so long as such mechanics' liens are released prior to any
foreclosure thereunder.

         (f)   Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered against
Borrower by any court of competent jurisdiction under the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors.

         (g)   There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.

         (h)   The dissolution or liquidation of Borrower; or Borrower, or any
of its directors, stockholders or members, shall take action seeking to effect
the dissolution or liquidation of Borrower.

         (i)   Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock of Borrower.

         SECTION 6.2.      REMEDIES. Upon the occurrence of any Event of
Default: (a) all indebtedness of Borrower under each of the Loan Documents, any
term thereof to the contrary notwithstanding, shall at Bank's option and without
notice become immediately due and payable without presentment, demand, protest
or notice of dishonor, all of which are hereby expressly waived by Borrower; (b)
the obligation, if any, of Bank to extend any further credit under any of the
Loan Documents shall immediately cease and terminate; and (c) Bank shall have
all rights, powers and remedies available under each of the Loan Documents, or
accorded by law, including without limitation the right to resort to any or all
security for any credit subject hereto and to exercise any or all of the rights
of a beneficiary or secured party pursuant to applicable law. All rights, powers
and remedies of Bank may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.

                                   ARTICLE VII
                                  MISCELLANEOUS

         SECTION 7.1.      NO WAIVER. No delay, failure or discontinuance of
Bank in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver

                                      -11-



of such right, power or remedy; nor shall any single or partial exercise of any
such right, power or remedy preclude, waive or otherwise affect any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any breach of or
default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.

         SECTION 7.2.      NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:

     BORROWER:       VIRCO MFG. CORPORATION
                     2027 Harpers Way
                     Torrance, California 90501
                     Attn: Robert E. Dose
                           Chief Financial Officer

     BANK:           WELLS FARGO BANK, NATIONAL ASSOCIATION
                     San Gabriel Valley Regional Commercial Banking Office
                     1000 Lakes Drive, Suite 250
                     West Covina, CA 91790
                     Attn: Randall J. Repp
                           Vice President

or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

         SECTION 7.3.      COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall
pay to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel),
expended or incurred by Bank in connection with (a) the negotiation and
preparation of this Agreement and the other Loan Documents, Bank's continued
administration hereof and thereof, and the preparation of any amendments and
waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to Borrower or any other person or entity.

         SECTION 7.4.      SUCCESSORS, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without Bank's
prior written consent. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has or
may hereafter acquire relating to any credit subject hereto, Borrower or its
business, or any collateral required hereunder.

                                      -12-



         SECTION 7.5.      ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement between Borrower and Bank
with respect to each credit subject hereto and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in writing signed by each
party hereto.

         SECTION 7.6.      NO THIRD PARTY BENEFICIARIES. This Agreement is made
and entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or entity
shall be a third party beneficiary of, or have any direct or indirect cause of
action or claim in connection with, this Agreement or any other of the Loan
Documents to which it is not a party.

         SECTION 7.7.      TIME.  Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.

         SECTION 7.8.      SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.

         SECTION 7.9.      COUNTERPARTS.  This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall constitute
one and the same Agreement.

         SECTION 7.10.     GOVERNING LAW.  This Agreement shall be governed by
and construed in accordance with the laws of the State of California.

         SECTION 7.11.     ARBITRATION.

         (a)   Arbitration. The parties hereto agree, upon demand by any party,
to submit to binding arbitration all claims, disputes and controversies between
or among them (and their respective employees, officers, directors, attorneys,
and other agents), whether in tort, contract or otherwise arising out of or
relating to in any way (i) the loan and related Loan Documents which are the
subject of this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.

         (b)   Governing Rules. Any arbitration proceeding will (i) proceed in a
location in California selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a

                                      -13-



waiver by any party that is a bank of the protections afforded to it under 12
U.S.C. Section .91 or any similar applicable state law.

         (c)   No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in sections (i), (ii) and (iii) of this paragraph.

         (d)   Arbitrator Qualifications and Powers. Any arbitration proceeding
in which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of California and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

         (e)   Discovery. In any arbitration proceeding discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

         (f)   Class Proceedings and Consolidations. The resolution of any
dispute arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

         (g)   Payment Of Arbitration Costs And Fees. The arbitrator shall award
all costs and expenses of the arbitration proceeding.

                                      -14-



         (h)   Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no dispute shall be submitted to arbitration if
the dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such dispute is not submitted to arbitration, the dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.

         (i)   Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.

                                                     WELLS FARGO BANK,
VIRCO MFG. CORPORATION                                 NATIONAL ASSOCIATION

By: _______________________                          By: _______________________
                                                         Randall J. Repp
Title: ____________________                              Vice President

                                      -15-

EX-13.1

                                  EXHIBIT 13.1

MANAGEMENT'S STATEMENT

The financial statements of Virco Mfg. Corporation were prepared by management,
which is responsible for the integrity and objectivity of the financial
information presented, including amounts that must necessarily be based on
judgments and estimates. The statements were prepared in conformity with
accounting principles generally accepted in the United States, and in situations
where acceptable alternative accounting principles exist, management selected
the method that it believed was most appropriate in the circumstances.

Virco depends upon the Company's system of internal controls in meeting its
responsibilities for reliable financial statements. This system is designed to
be cost-effective while providing reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorization. Judgments are required to assess and balance
the relative cost and expected benefits of these controls.

The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP. The independent auditors provide an objective,
independent review as to management's discharge of its responsibilities insofar
as they relate to the fairness of reported operating results and financial
condition. They obtain and maintain an understanding of Virco's accounting and
financial controls, and conduct such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements.

The Audit Committee of the Board of Directors, which is composed of Directors
from outside the Company, maintains an ongoing appraisal of the effectiveness of
audits and the independence of the auditors. The Committee meets periodically
with the auditors and management. The independent auditors have free access to
the Committee, without management present, to discuss the results of their audit
work and their opinions on the adequacy of internal financial controls and the
quality of financial reporting.

Based on a review and discussions of the Company's 2002 audited consolidated
financial statements with management and discussions with the independent
auditors, the Audit Committee recommended to the Board of Directors that the
Company's 2002 audited consolidated financial statements be included in the
Company's annual report on Form 10-K. The Board of Directors concurred.

MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed herein, in Item 1, and elsewhere in this report on
Form 10-K, that could cause actual results to differ materially from historical
results or those anticipated. Risks and uncertainties that could cause actual
results to vary materially from anticipated results, include without limitation,
material availability and cost of materials, especially steel, plastic, fuel and
energy; availability and cost of labor, demand for the Company's products, and
competitive conditions affecting selling prices and margins, capital costs and
general economic conditions. In this report, words such as "anticipates,"
"believes," "expects," "estimates, "projects," "future," "intends," "plans,"
"potential," "may," "could" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This discussion and analysis of Virco's financial condition and results of
operations is based upon the Company's financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Virco
management to make estimates and judgments that affect the Company's reported
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates such
estimates, including those related to revenue recognition, allowance for
doubtful accounts, valuation of inventory including LIFO and obsolescence
reserves, self-insured retention for products and general liability insurance,
self-insured retention for workers compensation insurance, liabilities under
defined benefit and other compensation programs, and estimates related to
deferred tax assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. This forms the basis of judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Factors that could cause or contribute to these
differences include the factors discussed above under Item 1, Business, and
elsewhere in this report on Form 10-K. Virco's critical accounting policies are
as follows:

Revenue Recognition: Effective February 1, 2000, the Company changed its method
of accounting for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Under the
new accounting method adopted, the Company recognizes all sales when title
passes and collectibility is reasonably assured under its various shipping
terms. In 2002 the Company purchased the assets of Furniture Focus(TM), a
company that sells complete Furniture, Fixture, and Equipment (FF&E) packages to
schools. For package orders, the Company records revenue upon completion of the
project. The Company reports sales as net of sales returns and allowances.

Allowances for Doubtful Accounts: Considerable judgment is required when
assessing the ultimate realization of receivables, including assessing the
probability of collection, current economic trends, historical bad debts and the
current creditworthiness of each customer. The Company maintains allowances for
doubtful accounts that may result from the inability of our customers to make
required payments. Over the

past five years, the Company's allowance for doubtful accounts has approximately
ranged from 0.7% to 1.3% of accounts receivable at year-end. The Company does
not typically obtain collateral to secure credit risk. The primary reason that
Virco's allowance for doubtful accounts represents such a small percentage of
accounts receivable is that a large portion of the accounts receivable are
attributable to low-credit-risk governmental entities, giving Virco's
receivables a historically high degree of collectability. Over the next year, no
significant change is expected in the Company's sales to government entities as
a percentage of total revenues.

Inventory Valuation: Inventory is valued at the lower of cost or market. The
Company uses the LIFO (last-in, first-out) method of accounting for the material
component of inventory. The Company maintains allowances for estimated obsolete
inventory to reflect the difference between the cost of inventory and the
estimated market value. If market conditions are less favorable than those
anticipated by management, additional allowances may be required.

Self-Insured Retention: For 2002, the Company was self-insured for product
liability losses up to $250,000 per occurrence and was self-insured for workers
compensation losses up to $200,000 per occurrence. For 2001, the Company was
self-insured for Product Liability losses up to $100,000 per occurrence. The
Company obtains annual actuarial valuations for the self-insured retentions.
Product liability reserves for known and unknown (IBNR) losses are recorded at
the net present value of the estimated losses using a 6.0% discount rate.
Estimated workers compensation losses are funded during the insurance year and
subject to retroactive loss adjustments.

Defined Benefit Obligations: The Company has three defined benefit plans, the
Virco Employees Retirement Plan, the Virco Important Performers (VIP) Plan and
the Non-Employee Directors Retirement Plan, which provide retirement benefits to
employees and outside directors. Virco discounts the pension obligations under
the plans using a 6.5% discount rate, 5.0% assumed rate of increases in
compensation rates, and estimating an 6.5% return on plan assets. The Company
obtains annual actuarial valuations for all three plans. Although the Company
does not anticipate any change in these rates in the coming year, any moderate
change should not have a significant effect on the Company's financial position,
results of operations or cash flows.

Deferred Tax Assets and Liabilities: The Company has not provided an allowance
against the deferred tax assets recorded in the financial statements. The
Company had a net deferred tax asset of $2,396,000 at January 31, 2003.
Management believes that it is more likely than not that future earnings will be
sufficient to recover deferred tax assets.

RESULTS OF OPERATIONS (2002 VS. 2001)

INDUSTRY OUTLOOK

The commercial furniture markets have suffered from the worst recorded recession
in recent history during the past two years. As a group, the members of BIFMA
(the Business and Institutional Furniture Manufacturer's Association) recorded a
19.1% decrease in shipments in calendar year 2002. This followed a 17.4%
decrease in calendar year 2001. This compares to declines at Virco of 5.1% in
2002 and 10.4% in 2001. To date, it appears that the Company's core public
school customers have been less affected by the recession. The outlook for 2003
suggests that the market for furniture will not improve in the short term. The
unfortunate combination of a lethargic economy combined with political
uncertainty is now being joined by significant budget challenges for many state
and local governments. Most states collected less revenue in the 2002-2003
fiscal year than budgeted and many states have announced that they plan to
reduce their budgets in the current fiscal year. As a large portion of many
states' budgets may be used to fund education, it is anticipated that reduced
state budgets may result in a decrease in sales of replacement furniture in
fiscal 2003. Despite decreased budgets, many of these same states are passing
bonds to finance school construction, which may result in an offsetting increase
in sales of furniture. It is unclear how the net effect of budgetary deficits
and bond-funded projects in states in which the Company sells its products will
impact furniture sales in the 2003 fiscal year.

During this two year period, many furniture manufacturers have responded by
shutting down significant portions of their manufacturing capacity and laying
off thousands of workers, incurring large restructuring charges in the process.
Virco has been servicing the education market for over 50 years, and has
experienced many business cycles affecting the demand for education furniture.
The Company believes that in the long term, demographics underlying the
furniture industry will reward companies that survive the current downturn in
sales. As such, Virco has responded to the current environment with a different
approach, one that has preserved the Company's manufacturing and distribution
infrastructure and saved the jobs of Virco's trained workforce. The Company has
used a variety of tactics to reduce spending. Capital spending has been
curtailed dramatically. Capital expenditures were reduced to approximately one
quarter of depreciation expense in 2002 and one third of depreciation expense in
2001. The Company has embraced the Assemble-to-Ship (ATS) operating model, which
facilitated a large reduction in inventory levels in 2001, and improved levels
of customer service while maintaining reduced levels of inventory in 2002. To
control and reduce the cost of Virco's workforce, the Company has used
traditional measures such as wage freezes and hiring freezes, as well as more
creative measures that address the unique demands of a highly seasonal business.
The more creative measures include programs to encourage workforce flexibility
and in 2002 the Company introduced a sabbatical program for employees during the
traditionally slow fourth quarter.

OVERVIEW

For the year ended January 31, 2003, the Company earned a modest net income of
$282,000 on net sales of $244,355,000 compared to a net income of $246,000 on
net sales of $257,462,000 in the same period last year. Earnings were $0.02 per
share for the year ended January 31, 2003, compared to $0.02 in the last year,
after giving effect to the 10% stock dividend declared August 20, 2002. Cash
flow from operations

was $12,045,000 compared to $35,037,000 in the prior year. The reduction in cash
flow from operations is primarily attributable to fluctuations in inventory
levels. In the current year inventory increased by $4,356,000 compared to the
prior year, when the large scale introduction of Assemble-to-Ship (ATS)
facilitated a reduction in inventory of $19,356,000, a $23,712,000 change.

SALES

Virco's 2002 sales decreased by 5% in 2002 to $244,355,000, from $257,462,000 in
2001. During 2002, the Company adhered to a policy of turning down low margin
and unprofitable business, despite substantial price competition in its primary
markets. The Company continued to emphasize the value of Virco's products, the
value of Virco's distribution and delivery capabilities, and the value of timely
deliveries during the peak seasonal delivery period. Although this policy had an
adverse effect on unit volume, the Company achieved a net increase in selling
prices.

Effective May 1, 2002, Virco acquired certain assets of Furniture Focus, a
reseller that offers complete package solutions for the Furniture, Fixtures and
Equipment (FF&E) segments of bond-funded public school construction projects.
This acquisition provided Virco with the ability to offer packages to its core
customer base. Because the acquisition date was very close to the peak summer
season, the marketing of package solutions or "PlanScape(TM)" was limited to the
five state region in which Furniture Focus has operated. Virco intends to begin
marketing package solutions nationwide in 2003.

COST OF SALES

For fiscal 2002, cost of sales was 69% of sales compared to 70% of sales in the
prior year. The improvement was primarily attributable to increases in selling
prices. Raw material costs increased, primarily due to increased steel prices.
Increased material costs were offset by reductions in labor and overhead
spending. Virco began 2002 with a plan to maintain reduced levels of inventory
and to use the Assemble-to-Ship (ATS) model to provide acceptable levels of
service to our customers. In an effort to match spending to the continued low
levels of output, Virco controlled headcount, capital expenditures, and other
discretionary spending. As a result, manufacturing spending and production
levels were flat compared to the prior year.

Inflation rates had a moderate impact on the Company's cost of sales for the
first half of 2002. In the second half of 2002, the Company experienced
significant increases in the cost of steel. On March 5, 2002, President Bush
announced that he would impose, effective March 20th, tariffs of up to 30% on
imports of selected steel products pursuant to Section 201 of the Trade Act of
1974. The duties were imposed for a three-year period and are to be
progressively reduced each year as required by the World Trade Organization.
Cold-rolled steel is the single largest raw material used by many in the
educational furniture industry, including Virco, and is subject to the maximum
30% tariff. In addition, domestic steel manufacturers filed a dumping claim
against certain international suppliers, which, if successful, could serve to
prevent steel prices from falling in the future.

In 2003, the Company intends to more tightly integrate the ATS model with our
marketing programs, product development programs, and product-stocking plan.
This anticipated improvement in execution of ATS should allow the Company to
offer a greater variety of product while continuing to improve on-time delivery
performance. The ATS model should allow the Company to build inventory earlier
in the year and reduce costly overtime and temporary labor costs during the
summer. Production levels, which will vary depending upon selling volumes, are
anticipated to be slightly lower than in 2002.

The Company anticipates continued upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy, and benefits in the
coming year and others. For more information, please see the section entitled
"Inflation and Future Change in Prices" in the Management's Discussion and
Analysis section contained in Virco's Annual Report to Shareholder for the year
ended January 31, 2003.

SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS

Selling, general and administrative expenses for the year ended January 31,
2003, increased 1% from the prior year, and were 29.7% as a percentage of sales
in 2002 as compared to 27.9% in 2001. Freight costs declined by approximately
$500,000 due to a reduction in selling volume, and were slightly higher as a
percentage of sales. Other SG&A costs were adversely affected by increased
installation costs reflecting an increase in installed orders, the acquisition
of Furniture Focus, and an increase in retirement plan costs, offset by other
reductions in selling and administrative expenses.

Interest expense was approximately $1,100,000 less than in the prior year due to
reduced levels of borrowing and lower interest rates. The Company anticipates a
modest reduction in average borrowing levels and a reduction in the average
interest rate paid in 2003. The Company entered into a swap agreement with Wells
Fargo Bank, which had the effect of establishing a fixed rate of interest for
$20,000,000 of loans for both 2001 and 2002. This interest swap expired in March
2003. Interest rates paid under the swap agreement were greater than the current
rate paid under the Wells Fargo line of credit.

In the current year, Virco realized a $149,000 loss on disposition of fixed
assets. This compares to a loss on sale of assets of approximately $86,000 in
the prior year.

RESULTS OF OPERATIONS (2001 VS. 2000)

OVERVIEW

For the year ended January 31, 2002, the Company had a modest net income of
$246,000 on net sales of $257,462,000 compared to a net income of $4,016,000 on
net sales of $287,342,000 in the same period for fiscal 2000. Fiscal 2000
results included a pre-tax gain of $7,945,000 on the sale of real estate and
other income of $4,052,000 related to the settlement of a dispute. The
settlement was a non-recurring payment unrelated to the Company's ongoing
operations. Earnings were $0.02 per share for the year ended January 31, 2002,
compared to $0.29 in the same period last year, after giving effect to the 10%
stock dividends declared August 20, 2002 and August 21, 2001. For 2001,
furniture operations provided net income of $246,000 on net sales of
$257,462,000. This compares to a loss on furniture operations of $3,391,000
(which excludes the one-time items mentioned above) on substantially higher
sales of $287,342,000 in fiscal 2000. In addition, cash flow from operations
reached a historical high of $35,037,000, due largely to a $19,356,000 reduction
in inventories made possible by our Assemble-to-Ship program and the decrease in
net sales due to the lingering effects of a decline in the commercial furniture
market.

SALES

In years prior to November 2001, Virco's sales force had been organized into two
groups, "Education" and "Commercial". During November of 2001, the Company
announced a reorganization of the sales force. Instead of having two
representatives pursuing separate customers within the same geographical
territory, Virco created one National Sales Group. It became increasingly clear
that the needs of Virco's commercial and educational customers were evolving
towards greater similarity and that combining the Company's sales efforts would
allow individual representatives to plow more deeply in a smaller field. In
addition, Virco also established a Corporate Sales Group to pursue wholesalers,
mail order accounts and national chains where management believes that it would
be more efficient to have a single sales representative or group approach such
persons, as they tend to have needs that transcend the geographic boundaries
established for local accounts.

As a group, the members of BIFMA (the Business and Institutional Manufacturer's
Association) reported a sales decline of 17.4% for calendar 2001, with an even
more dramatic 29.2% decline in the fourth quarter. This compares with only a
10.4% decline at Virco. The Company's core public school customers were less
affected by the overall recession. Sales to public schools declined modestly
during 2001. Commercial sales were substantially less than the prior year, more
closely reflecting the statistical results recorded by BIFMA.

Because of the recession in the furniture industry, the Company experienced
substantial price competition in its primary markets. During 2001, the Company
adhered to a policy of turning down low margin and unprofitable business.
Although this policy had an adverse effect on unit volume, the Company achieved
a net increase in selling prices. Consequently, the gross margin percentage for
the year increased modestly compared to 2000, despite unfavorable manufacturing
variances related to reductions in production levels.

COST OF SALES

Virco began 2001 with a plan to reduce inventory levels and to implement the
Assemble-to-Ship (ATS) model. The effect of the reduction in sales volume,
combined with management's decision to implement the ATS model to reduce
inventories, resulted in a substantial reduction in production hours. In an
effort to match spending to the lower levels of output, Virco reduced headcount,
capital expenditures, and other discretionary spending. Despite reductions in
spending, the Company incurred increased manufacturing variances compared to the
prior year. These variances were more than offset by the effects of reduced
costs for certain raw materials, and an increase in selling prices. The net
effect was a modest increase in gross margins for the year.

Inflation rates did not have a significant net impact on the Company's cost of
sales in 2001. Material costs decreased, offset by increased costs for certain
utilities and employee benefits.

SELLING, GENERAL AND ADMINISTRATIVE AND OTHERS

Selling, general and administrative expenses for the year ended January 31,
2002, decreased by approximately $11,376,000 compared to the same period in the
immediately preceding year. These costs decreased both in absolute dollars and
as a percentage of sales. Freight costs declined by approximately $3,500,000 due
to a reduction in selling volume, and were slightly lower as a percentage of
sales. Other SG&A costs were lower in absolute dollars and as a percentage of
sales due to reductions in staffing, reduced sales incentives, and other
reductions in spending, including a temporary 10% reduction in salaries and
wages during the fourth quarter.

Interest expense was approximately $400,000 less in fiscal 2001 than in fiscal
2000 due to reduced levels of borrowing and lower interest rates. The Company
expected to continue to reduce borrowing levels in 2002. The Company entered
into a swap agreement with Wells Fargo Bank, which has the effect of
establishing a fixed rate of interest for $20,000,000 of loans for both 2001 and
2002. The balance of borrowing is based upon LIBOR, and fluctuated with the
market rate of interest.

In fiscal 2001, Virco realized an $86,000 loss on disposition of fixed assets.
This compares to a gain on sale of assets of approximately $7,667,000 in the
prior year, and a prior year pre-tax gain of $4,052,000 on a settlement.

LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL REQUIREMENTS

Virco addresses liquidity and capital requirements in the context of short-term
seasonal requirements and the long-term capital requirements of the business.
The Company's core business of selling furniture to publicly funded educational
institutions is extremely seasonal. The seasonal nature of this business
permeates most of Virco's operational, capital, and financing decisions.

The Company's working capital requirements during and in anticipation of the
peak summer season require management to make estimates and judgments that
affect Virco's assets, liabilities, revenues and expenses. Management expends a
significant amount of time during the year, and especially in the first quarter,
developing a stocking plan and estimating the number of employees, the amount of
raw materials, and the types of components and products that will be required
during the peak season. If management underestimates any of these requirements,
Virco's ability to timely meet customer orders or to provide adequate customer
service may be diminished. If management overestimates any of these
requirements, the Company may be required to absorb higher storage, labor and
related costs, each of which may affect profitability. On an ongoing basis,
management evaluates such estimates, including those related to market demand,
labor costs, and inventory levels, and continually strives to improve Virco's
ability to correctly forecast business requirements during the peak season each
year.

As part of Virco's efforts to address seasonality, financial performance and
quality without sacrificing service or market share, management has been
refining the Company's ATS operating model. ATS is Virco's version of
mass-customization, which assembles standard, stocked components into customized
configurations before shipment. The Company's ATS program reduces the total
amount of inventory and working capital needed to support a given level of
sales. It does this by increasing the inventory's versatility, delaying assembly
until the last moment, and reducing the amount of warehouse space needed to
store finished goods.

In addition, Virco finances its largest balance of accounts receivable during
the peak season. This occurs for two primary reasons. First, accounts receivable
balances naturally 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.

As the capital required for this summer season generally exceeds cash available
from operations, Virco has historically relied on third party bank financing to
meet seasonal cash flow requirements. Virco has established a long-term
relationship with its primary lender, Wells Fargo Bank. On an annual basis, the
Company prepares a forecast of seasonal working capital requirements, and renews
its revolving line of credit. For the next fiscal year, Virco has entered into a
revolving credit facility with Wells Fargo Bank, amended and restated February
2003, but effective at January 31, 2003, which provides a secured revolving line
of credit that varies from $40,000,000 to $70,000,000. This credit facility is
intentionally structured to provide additional working capital during the
Company's traditional peak period. At September 1, 2003, the available
commitment reduces to $60,000,000, and at November 1, 2003, the line reduces to
$40,000,000. This is a two-year non-amortizing line with interest payable
monthly at a fluctuating rate equal to the Bank's prime rate plus a fluctuating
margin of 0.25% to 0.50% (4.75% at January 31, 2003). The line also allows the
Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR
plus a fluctuating margin of 1.50% to 2.50%. Approximately $13,345,000 was
available for borrowing as of January 31, 2003.

LONG-TERM CAPITAL REQUIREMENTS

In addition to short-term liquidity considerations, the Company continually
evaluates long-term capital requirements. In 1997, the Company initiated two
large capital projects, which have had significant effects on cash flow for the
past five years. In the 1998, 1999, and 2000 fiscal years the Company expended
significant amounts of capital on these projects. Upon completion of these
projects, the Company dramatically reduced capital spending. As shown in the
Company's consolidated statements of cash flows, during 2001, capital
expenditures were approximately one third of depreciation expense and during
2002, capital expenditures were approximately one quarter of depreciation
expense.

The first project was the implementation of the SAP enterprise resources
planning system, initiated in October 1997. The Company went live with the new
system in March 1999, implemented a business-to-business website along with
sales force automation in the first quarter of 2000, and upgraded to the most
current version of SAP in the fourth quarter of 2000. The initial portion of
this project was financed with a lease from General Electric Capital Corporation
(GECC). Capital and training costs not funded by the lease were financed from
cash flows from operations and from the loan facility from Wells Fargo. During
fiscal year 2002 the Company paid off the balance on the capital lease.

The second project was the expansion and re-configuration of the Conway,
Arkansas, manufacturing and distribution facility. During 1997, 1998, 1999, and
2000 the Company expended approximately $67,000,000 to purchase 100 acres of
land, and build a 1,200,000 sq. ft. manufacturing and distribution facility
equipped with new manufacturing and warehousing equipment. To finance this
project, the Company borrowed $30,000,000 from Wells Fargo Bank that was
scheduled to be repaid in three annual $10,000,000 installments, the first of
which was paid on January 31, 2001; moreover, as explained below, the Company
paid off the entire balance of this loan prior to January 31, 2002. In addition
to the loan from Wells Fargo, the Company obtained equipment with operating
leases from GE Capital, and used operating cash flow.

As phases of the Conway expansion were completed, the Company was able to vacate
several leased warehouses, sell a small production facility, and convert a
second production facility into a warehouse. In addition, Virco sold a warehouse
located in Torrance, California, which had been held as rental property.

In the fourth quarter of 2001, primarily due to the reduction in inventory
related to the implementation of the previously described ATS model and the
reduced levels of capital expenditures, Virco was able to pay off the
$20,000,000 balance on the loan facility with Wells Fargo Bank that was used to
finance the Conway expansion.

Upon the completion of these substantial capital projects, the Company
significantly reduced capital spending in 2002 and 2001. Management intends to
limit future capital spending until growth in sales volume fully utilizes the
new plant and distribution capacity. The Company has established a goal of
limiting capital spending to between $5,000,000 to $7,000,000 for 2003, which is
approximately one-half of anticipated depreciation expense.

The Company is currently marketing two properties for sale or lease, which have
a cumulative estimated market value of approximately $8,000,000. One of these
properties, a former production facility in Conway, Arkansas, is currently being
utilized as a finished goods warehouse. A second property, located in Los
Angeles, California, is currently leased to a third party.

ASSET IMPAIRMENT

In 2002, Virco acquired certain assets of Furniture Focus. As part of this
acquisition, the Company recorded goodwill of $2,200,000. For 2003, the Company
is rolling out the Furniture Focus package business throughout its nationwide
sales force. Virco evaluates the impairment of goodwill at least annually, or
when indicators of impairment occur. As of the year ended January 31, 2003,
there has been no impairment to the goodwill recorded.

Virco made substantial investments in its infrastructure in 1998, 1999, and
2000. The investments included a new factory, new warehouse, and new production
and distribution equipment. The factory, warehouse, and equipment acquired are
used to produce, store, and ship a variety of product lines, and the use of any
one piece of equipment is not dependent on the success or volume of any
individual product. New products are designed to use as many common or existing
components as practical. As a result, both our ATS inventory components and the
machines used to produce them become more versatile. Virco evaluates the
potential for impaired assets on a quarterly basis. As of the year ended January
31, 2003, there has been no impairment to the long-term assets of the
corporation.

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

The Company leases manufacturing, transportation, and office equipment, as well
as real estate under a variety of operating leases. The Company leases
substantially all vehicles, including trucks and passenger cars under operating
leases where the lessor provides fleet management services for the Company. The
fleet management services provide Virco with operating efficiencies relating to
the acquisition, administration, and operation of leased vehicles. The use of
operating leases for manufacturing equipment has enabled the Company to qualify
for and use Industrial Revenue Bond financing. Real estate leases have been used
where the Company did not want to make a long-term commitment to a location, or
when economic conditions favored leasing. The Company does not have any capital
lease obligations or purchase commitments in excess of normal recurring
obligations.

                            CONTRACTUAL OBLIGATIONS



                                                      PAYMENTS DUE BY PERIOD
                                 ---------------------------------------------------------------------
  CONTRACTUAL OBLIGATIONS         TOTAL   LESS THAN 1 YEAR   1-3 YEARS   3-5 YEARS   MORE THAN 5 YEARS
  -----------------------        -------  ----------------   ---------   ---------   -----------------
                                                                      
Long-Term Debt Obligations       $28,992       $ 1,087        $27,905     $     0         $     0
Capital Lease Obligations              0             0              0           0               0
Operating Lease Obligations       26,000         8,946         11,899       4,651             504
Purchase Obligations                   0             0              0           0               0
Other Long-Term Obligations            0             0              0           0               0
                                 -------       -------        -------     -------         -------
Total                            $54,992       $10,033        $39,804     $ 4,651         $   504
                                 =======       =======        =======     =======         =======


Virco's largest market is publicly funded school districts. A significant
portion of this business is awarded on a bid basis. Many school districts
require that a bid bond be posted as part of the bid package. In addition to bid
bonds, many districts require a performance bond when the bid is awarded. At
January 31, 2003, the Company had bonds outstanding valued at approximately
$6,850,000. To the best of management's knowledge, in over 50 years of selling
to schools, Virco has never had a bid or performance bond called.

The Company accrues an estimate of its exposure to warranty claims based upon
both product sales data and warranty claims incurred. For 2002, warranty claims
were higher than normal due to a recurring cosmetic complaint relating to a high
volume component. At the current time, management cannot reasonably determine
whether the warranty claims for the upcoming fiscal year will be less than,
equal to, or greater than the warranty claims incurred in 2002. The following is
a summary of the Company's warranty-claim activity during 2002.



BALANCE AT JANUARY 31, 2002         PROVISION        COSTS INCURRED       BALANCE AT JANUARY 31, 2003
                                                                 
         $150,000                  $2,091,000         $(1,341,000)                 $900,000


RETIREMENT OBLIGATIONS

The Company provides retirement benefits to employees and non-employee directors
under three defined benefit retirement plans; the Virco Employee's Retirement
Plan, the Virco Important Performers (VIP) Retirement Plan, and the Retirement
Plan for Non-Employee Directors. The Virco Employee Retirement Plan is a
qualified retirement plan that is funded through a trust held at Wells Fargo
Bank (Trustee). The other two plans are non-qualified retirement plans. The VIP
Plan is secured by life insurance policies held in a rabbi trust and the plan
for Non-Employee Directors is not funded. In 2002 the Company used more
conservative assumptions for estimating the return on plan assets held in the
Wells Fargo Trust (Trust) and the rate used to discount the Projected Benefit
Obligation (PBO). For 2002 the Company used a 6.5% expected return on plan
assets, a 5.0% expected rate of increase in compensation, and a 6.5% discount
rate. The result of using these more conservative estimates was to increase
annual pension expense for the fiscal year ended January 31, 2003, by
approximately $1.5 million and to increase the PBO by approximately $6 million.
The Company expects that it will continue to incur the higher annual pension
expense through the foreseeable future. The combined impact of reduced discount
rates and poor investment results over the past three years resulted in the plan
being under-funded. To correct this condition, the Company made an $8 million
contribution to the Trust in September 2002, and a total contribution of
approximately $10 million for the fiscal year. The Company does not anticipate
that it will need to make a similar large contribution in the future, and that
annual funding will more closely approximate annual pension expense. The Company
does not anticipate making any changes to the pension assumptions in the near
future. If the Company were to have used different assumptions in fiscal year
ended January 31, 2003, a 1% reduction in investment return would increase
expense by approximately $125,000, a 1% change in the rate of compensation
increase would increase expense by approximately $355,000 and a 1% reduction in
the discount rate would increase expense by $1,240,000. A 1% reduction in the
discount rate would increase the PBO by approximately $7.5 million. Refer to
note 4 of the financial statements for additional information regarding the
pension plans and related expenses.

SHAREHOLDERS EQUITY

In April 1998, the Board of Directors approved a stock buy-back program giving
authorization to buy back up to $5,000,000 of Company stock. The authorization
of this stock buy-back program was increased to $7,000,000, $14,000,000,
$20,000,000 and $22,000,000 in January 1999, April 1999, December 2001 and
December 2002, respectively. As of the end of January 2003 and 2002, the Company
had repurchased approximately 1,383,000 and 884,000 shares at a cost of
approximately $18,151,000 and $13,505,000 respectively. The Company intends to
continue buying back shares of Virco common stock as long as the Company
believes the shares are undervalued and either operating cash flow or borrowing
capacity under the Wells Fargo Bank line is available.

Virco has established a track record of paying cash dividends to its
stockholders for more than 20 consecutive years. The Company paid an annual cash
dividend from 1983 through 1996. In 1996 the Company converted from one annual
cash dividend to paying quarterly cash dividends. When combined with the effect
of our annual stock dividend, Virco has a track record of 20 consecutive years
of increasing cash dividends. Virco evaluates its dividend policy on a quarterly
basis, and there can be no assurance that past dividend practices will be
indicative of future practices. If the Company maintains its current dividend
policy, it will pay cash dividends approximating $1.2 million in 2003.

In addition to the quarterly cash dividend policy, Virco has issued a 10% stock
dividend or 3/2 stock split every year beginning in 1982. Although the stock
dividend has no cash consequences to the Company, the accounting methodology
required for 10% dividends has affected the equity section of the balance sheet.
When the Company records a 10% stock dividend, 10% of the market capitalization
of the Company on the date of the declaration is reclassified from retained
earnings to additional paid in capital. During the period from 1982 through
2002, the cumulative effect of the stock dividends has been to reclassify over
$122 million from retained earnings to additional paid in capital. The equity
section of the balance sheet on January 31, 2003, reflects additional paid in
capital of approximately $126 million and deficit retained earnings of
approximately $19 million. The retained deficit is a result of the accounting
reclassification, and is not the result of accumulated losses.

Management believes cash generated from operations and from the previously
described sources will be adequate to meet its capital requirements.

ENVIRONMENTAL AND CONTINGENT LIABILITIES

The Company and other furniture manufacturers are subject to federal, state, and
local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation, and disposal
of waste and hazardous materials. In addition to policies and programs designed
to comply with environmental laws and regulations, Virco has enacted programs
for recycling and resource recovery that have earned repeated commendations,
including designation in 2002 as a WasteWise Partner of the Year and 2001 as a
WasteWise Program Champion for Large Businesses by the United States
Environmental Protection Agency. Despite these significant accomplishments,
environmental laws have changed rapidly in recent years, and Virco may be
subject to more stringent environmental laws in the future. The Company has
expended, and expects to continue to expend, significant amounts in the future
for the investigation of environmental conditions, installation of environmental
control equipment, and remediation of environmental contamination.

In 2002, the Company was self-insured for Product Liability losses up to
$250,000 per occurrence and had a Workers Compensation deductible

of $200,000 per occurrence. For the insurance year beginning April 1, 2003, the
Company is self-insured for Product Liability losses up to $500,000 per
occurrence and has a Workers Compensation deductible of $250,000 per occurrence,
and a deductible of $50,000 for auto liability. In prior years the Company has
been self-insured for Workers Compensation, Automobile, Product, and General
Liability losses. The Company has purchased insurance to cover losses in excess
of the self-insured retention or deductible up to a limit of $30,000,000. During
the past 10 years the Company has aggressively pursued a program to improve
product quality, reduce product liability claims and losses, and to more
aggressively litigate product liability cases. This program has continued
through 2002 and has resulted in reductions in product liability claims and
litigated product liability cases. In addition, the Company has active safety
programs to improve plant safety and reduce Workers Compensation losses.
Management does not anticipate that any related settlement, after consideration
of the existing reserves for claims and potential insurance recovery, would have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.

INFLATION AND FUTURE CHANGE IN PRICES

Inflation rates had a modest impact on the Company's operating costs for the
first half of 2002. In the second half of 2002, the Company experienced
significant increases in the cost of steel. Please refer to the discussion of
steel tariffs under the "Results of Operation" for 2002 section of this MD&A for
additional information. In addition, the Company incurred increases in utilities
costs in California, and increases in employee benefits, especially medical
insurance.

For 2003, the Company anticipates upward pressure on costs, particularly in the
areas of certain raw materials, transportation, energy and employee benefits.
Although the increase in steel prices appears to have stabilized in 2003, prices
have not returned to the lower levels of early 2002. There is pressure on raw
material costs that are affected by the price of oil, especially plastics.
Transportation costs are also expected to be adversely affected by increased oil
prices, in the form of increased operation costs for our fleet, and surcharges
on freight paid to 3rd party carriers. For 2003, the Company has mitigated the
increased costs of employee benefits, primarily by passing on a greater portion
of medical costs to our employees.

To counter the impact of increased costs, the Company has raised the list prices
for our product. As a significant portion of our business is through competitive
bids, the Company is carefully considering the increased material cost in
addition to increased transportation costs as part of the bidding process. Total
material costs for 2003, as a percentage of sales, could be higher than in 2002.
However, no assurance can be given that the Company will experience stable,
modest or substantial increases in prices in 2003. The Company is working to
control and reduce costs by improving production and distribution methodologies,
investigating new packaging and shipping materials, and searching for new
sources of purchased components and raw materials.

The Company uses the LIFO method of accounting for the material component of
inventory. Under this method, the cost of products sold as reported in the
financial statements approximates current cost, and reduces the distortion in
reported income due to increasing costs. Depreciation expense represents an
allocation of historic acquisition costs and is less than if based on the
current cost of productive capacity consumed. In 2002 and 2001, the Company
significantly reduced its expenditures for capital assets, but in the prior
three fiscal years (1998, 1999, and 2000) the Company made the significant fixed
asset acquisitions described above. The assets acquired result in higher
depreciation charges, but due to technological advances should result in
operating cost savings and improved product quality. In addition, some
depreciation charges will be offset by a reduction in lease expense.

The Company is also subject to interest rate risk related to its $26,655,000 of
borrowings as of January 31, 2003, and any seasonal borrowings used to finance
additional inventory and receivables. Fluctuating interest rates may adversely
affect the Company's results of operations and cash flows related to its
variable rate bank borrowings. Accordingly, a 100 basis point upward fluctuation
in the lender's base rate would cause the Company to incur additional interest
charges of approximately $331,000 for the twelve months ended January 31, 2003.
The Company would have benefited from a similar interest savings if the base
rate were to have fluctuated downward by a like amount.

In February 2000, the Company entered into an interest rate swap agreement with
Wells Fargo Bank to reduce exposure due to changes in interest rates. The
initial notional swap amount is $30,000,000 for the period February 22, 2000,
through February 28, 2001. The notional swap amount then decreased to
$20,000,000 until the end of the swap agreement on March 3, 2003. Under this
agreement, interest is payable monthly at 7.23% plus a fluctuating margin of
1.50% to 2.50%. At January 31, 2003, the carrying value approximated the fair
value of $196,000. During the year ended January 31, 2003, the Company recorded
a reduction of $544,000 (net of an applicable income tax of $363,000) in other
comprehensive loss in order to account for the change in fair value. The fair
value of the swap is estimated on pricing models using current assumptions.

FINANCIAL STRATEGY

Virco's financial strategy is to continue to strive to increase levels of
profitability by targeting specific profitable market segments and customers.
The Company has organized its sales force, developed products, and acquired
production and distribution facilities for the specific needs of these
customers. During the fiscal years 1998, 1999, and 2000, the Company made
significant capital expenditures to support future sales growth in these
targeted markets. For the next several years, the Company intends to increase
sales to these markets, and to service these sales without making further
significant investments in facilities or working capital.

ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs, and requires such obligations and costs to be
recognized at fair value in the period in which they are incurred. The Company
will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material
effect upon the adoption of the Statement on the Company's financial position,
results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires most gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13
to require certain lease modifications to be treated as sales-leaseback
transactions. Certain provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, while other provisions are effective for fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a
material effect on the Company's results of operations or financial condition.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect a material effect on its results of operations or
financial condition as a result of the adoption of SFAS No. 146.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on required disclosures
by a guarantor in its financial statements about obligations under certain
guarantees that it has issued and clarifies the need for a guarantor to
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of the Interpretation, which are effective for the Company's year
ended January 31, 2003, are included in note 9 to the consolidated financial
statements, which discuss disclosures relative to its product warranty
liability.

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA



      IN THOUSANDS EXCEPT PER SHARE DATA             2002         2001        2000         1999         1998
- ---------------------------------------------      --------     --------    --------     --------     --------
                                                                                       
SUMMARY OF OPERATIONS
Net sales (4) (5)                                  $244,355     $257,462    $287,342     $268,079     $275,096
Net income before cumulative effect of change
 in accounting principle                           $    282     $    246    $  4,313     $ 10,166     $ 17,630
Cumulative effect of change in accounting
 principle, net of $191 tax benefit(5)                 (297)
                                                   --------     --------    --------     --------     --------
Net income                                         $    282     $    246    $  4,016     $ 10,166     $ 17,630
                                                   ========     ========    ========     ========     ========
Per share data
Income before cumulative effect of
change in accounting principle(1)
     Basic                                         $   0.02     $   0.02    $   0.31     $   0.74     $   1.22
     Assuming dilution                                 0.02         0.02        0.31         0.72         1.20
Cumulative effect of change in accounting
 principle(1)
     Basic                                               --           --       (0,02)          --           --
     Assuming dilution                                   --           --       (0,02)          --           --
Net income(1)
     Basic                                             0.02         0.02        0.29         0.74         1.22
     Assuming dilution                                 0.02         0.02        0.29         0.72         1.20
Pro forma amounts assuming the accounting
 change is applied retroactively
Net income(5)                                      $    282     $    246    $  4,313     $ 10,186     $ 17,663
Per share data
Net income
     Basic                                             0.02         0.02        0.31         0.73         1.23
     Assuming dilution                                 0.02         0.02        0.31         0.72         1.20
Dividends declared per share,
adjusted for 10% stock dividend
     Cash dividends                                $   0.08     $   0.07    $   0.06     $   0.06     $   0.05
OTHER FINANCIAL DATA
     Total assets                                  $154,796     $161,372    $199,549     $190,863     $151,380
     Working capital                               $ 38,748     $ 34,464    $ 43,173     $ 51,423     $ 47,405
     Current ratio                                    2.4/1        2.2/1       1.9/1        2.3/1        2.4/1
     Total long-term obligations                   $ 44,604     $ 40,853    $ 55,075     $ 53,995     $ 25,690
     Stockholders' equity                          $ 82,774     $ 90,223    $ 94,141     $ 93,834     $ 88,923
     Shares outstanding at year-end (3)              13,111       13,445      13,652       13,750       14,119
     Stockholders' equity per share (2)            $   6.31     $   6.71    $   6.90     $   6.82     $   6.30


(1)   Based on average number of shares outstanding each year after giving
      retroactive effect for stock dividends and 3 for 2 stock split.

(2)   Based on number of shares outstanding at year-end after giving effect for
      stock dividends and 3 for 2 stock split.

(3)   Adjusted for stock dividends and 3 for 2 stock split.

(4)   The prior period statements of operations contain certain
      reclassifications to conform to the presentation required by EITF No.
      00-10, "Accounting for Shipping and Handling Fees and Costs," which the
      Company adopted during the fourth quarter of the year ended January 31,
      2001.

(5)   During the fourth quarter of 2000, the Company changed its method of
      accounting for revenue recognition in accordance with Staff Accounting
      Bulletin No. 101, "Revenue Recognition in Financial Statements." Pursuant
      to Financial Accounting Standards Board Statement No. 3, "Reporting
      Accounting Changes in Interim Financial Statements," effective February 1,
      2000, the Company recorded the cumulative effect of the accounting change.



FINANCIAL HIGHLIGHTS
in thousands, except per share data             2002              2001             2000             1999            1998
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                  
Summary of Operations
Net sales - continuing operations (3, 4)      $ 244,355        $ 257,462        $ 287,342        $ 268,079       $ 275,096
Net income
  Continuing operations                             282              246            4,313           10,166          17,630
  Discontinued operations                             -                -                -                -               -
  Change in accounting methods                        -                -             (297)               -               -
                                              ----------------------------------------------------------------------------
                                              $     282        $     246        $   4,016        $  10,166        $ 17,630
                                              ----------------------------------------------------------------------------
Net income per share (1)                      $    0.02        $    0.02        $    0.29        $    0.72          $ 1.20
Stockholder's equity                             82,774           90,223           94,141           93,834          88,923
Stockholder's equity per share (2)                 6.31             6.71             6.90             6.82            6.30




FINANCIAL HIGHLIGHTS
in thousands, except per share data             1997             1996              1995            1994            1993
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                  
Summary of Operations
Net sales - continuing operations (3, 4)      $ 259,586        $ 237,551        $ 225,559        $ 216,822       $ 206,738
Net income
  Continuing operations                          13,852            9,326            5,209            5,001           4,302
  Discontinued operations                             -                -                -                -               -
  Change in accounting methods                        -                -                -                -            (275)
                                              ----------------------------------------------------------------------------
                                              $  13,852        $   9,326        $   5,209        $   5,001       $   4,027
                                              ----------------------------------------------------------------------------
Net income per share (1)                      $    0.94        $    0.64        $    0.36        $    0.35       $    0.28
Stockholder's equity                             77,077           63,921           55,386           50,466          45,637
Stockholder's equity per share (2)                 5.39             4.48             3.88             3.55            3.20


(1)      Based on average number of shares outstanding each year after giving
         retroactive effect for stock dividends and 3 for 2 stock split.

(2)      Based on number of shares outstanding at year-end giving effect for
         stock dividends and 3 for 2 stock split.

(3)      The prior period statements of operations contain certain
         reclassifications to conform to the presentation required by EITF No.
         00-10, Accounting for Shipping and Handling Fees and Costs, which the
         Company adopted during the fourth quarter of the year ended January 31,
         2001.

(4)      During the fourth quarter of 2000, the Company changed its method of
         accounting for revenue recognition in accordance with Staff Accounting
         Bulletin No. 101, "Revenue Recognition in Financial Statements."
         Pursuant to Financial Accounting Standards Board Statement No. 3,
         "Reporting Accounting Changes in Interim Financial Statements,"
         effective February 1, 2000, the Company recorded the cumulative effect
         of the accounting change.

                         Report of Independent Auditors

The Board of Directors and Stockholders
Virco Mfg. Corporation

We have audited the accompanying consolidated balance sheets of Virco Mfg.
Corporation as of January 31, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Virco Mfg.
Corporation at January 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States.


                                             /s/ Ernst & Young LLP

Long Beach, California
March 14, 2003

                                                                               1



                             Virco Mfg. Corporation

                           Consolidated Balance Sheets
                      (In thousands, except per share data)



                                                                             JANUARY 31
                                                                          2003       2002
                                                                        -------------------
                                                                             
ASSETS
Current assets
   Cash                                                                 $  1,639   $  1,704
   Trade accounts receivable (less allowance for doubtful accounts of
     $225 in 2003 and $200 in 2002)                                       17,178     19,251
   Other receivables                                                         223        175

   Inventories
     Finished goods                                                       16,510     16,159
     Work in process                                                      18,233     12,322
     Raw materials and supplies                                            8,296     10,202
                                                                        -------------------
                                                                          43,039     38,683

   Prepaid expenses and other current assets                               1,495        935
   Deferred income taxes                                                   2,494      1,711
                                                                        -------------------
Total current assets                                                      66,068     62,459

Property, plant and equipment
   Land and land improvements                                              3,626      3,548
   Buildings and building improvements                                    50,311     50,245
   Machinery and equipment                                               101,648    100,999
   Leasehold improvements                                                  1,278      1,375
                                                                        -------------------
                                                                         156,863    156,167
   Less accumulated depreciation and amortization                         83,827     72,761
                                                                        -------------------
Net property, plant and equipment                                         73,036     83,406

Other assets                                                              15,692     15,507
                                                                        -------------------
Total assets                                                            $154,796   $161,372
                                                                        ===================


2





                                                                              JANUARY 31
                                                                           2003         2002
                                                                        ----------------------
                                                                               
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Checks released but not yet cleared bank                             $   2,506    $   2,930
   Accounts payable                                                         8,395        8,816
   Income tax payable                                                       3,538        1,282
   Accrued compensation and employee benefits                               7,109        8,602
   Current portion of long-term debt                                        1,087        2,061
   Other accrued liabilities                                                4,685        4,304
                                                                        ----------------------
Total current liabilities                                                  27,320       27,995

Noncurrent liabilities
   Accrued self-insurance retention                                         2,936        2,777
   Accrued pension expenses                                                13,763       11,429
   Long-term debt, less current portion                                    27,905       26,647
                                                                        ----------------------
Total noncurrent liabilities                                               44,604       40,853

Deferred income taxes                                                          98        2,301

Commitments and contingencies

Stockholders' equity
   Preferred stock:
     Authorized 3,000,000 shares, $.01 par value;
       none issued or outstanding
   Common stock:
     Authorized 25,000,000 shares, $.01 par value; issued 14,527,074
       shares in 2003 and 13,167,399 shares in 2002                           145          132
   Additional paid-in capital                                             126,284      109,638
   Retained deficit                                                       (18,927)      (2,006)
   Less treasury stock at cost (1,416,472  shares in 2003 and 944,352
     shares in 2002)                                                      (18,634)     (13,975)
   Less accumulated comprehensive loss                                     (6,094)      (3,566)
                                                                        ----------------------
Total stockholders' equity                                                 82,774       90,223
                                                                        ----------------------
Total liabilities and stockholders' equity                              $ 154,796    $ 161,372
                                                                        ======================


See accompanying notes.

                                                                               3



                             Virco Mfg. Corporation

                        Consolidated Statements of Income
                      (In thousands, except per share data)



                                                                      YEAR ENDED JANUARY 31
                                                                  2003        2002        2001
                                                                ---------------------------------
                                                                               
Net sales                                                       $ 244,355   $ 257,462   $ 287,342
Costs of goods sold                                               167,570     180,275     203,765
                                                                ---------------------------------
Gross profit                                                       76,785      77,187      83,577

Selling, general and administrative expenses                       72,536      71,816      83,192
Provision for doubtful accounts                                       267         288         156
Interest expense                                                    3,410       4,561       4,962
Loss (Gain) on sale of assets                                         149          86      (7,667)
Other income                                                           --          --      (4,052)
                                                                ---------------------------------
Income before income taxes and cumulative effect of change in         423         436       6,986
   accounting principle
Provision for income taxes                                            141         190       2,673
                                                                ---------------------------------
Income before cumulative effect of change in                          282         246       4,313
   accounting principle
Cumulative effect of change in accounting principle                    --          --        (297)
                                                                ---------------------------------
Net income                                                      $     282   $     246   $   4,016
                                                                =================================

AMOUNTS PER COMMON SHARE - BASIC
Income before cumulative effect of change in
   accounting principle                                         $    0.02   $    0.02   $    0.31
Cumulative effect of change in accounting principle                    --          --       (0.02)
                                                                ---------------------------------
Net income                                                      $    0.02   $    0.02   $    0.29
                                                                =================================

AMOUNTS PER COMMON SHARE - ASSUMING DILUTION
Income before cumulative effect of change
   in accounting principle                                      $    0.02   $    0.02   $    0.31
Cumulative effect of change in accounting principle                    --          --       (0.02)
                                                                ---------------------------------
Net income                                                      $    0.02   $    0.02   $    0.29
                                                                =================================

Weighted average shares outstanding
   Basic                                                           13,344      13,485      13,747
   Assuming dilution                                               13,458      13,675      13,885


See accompanying notes.

                                                                               4



                             Virco Mfg. Corporation

                 Consolidated Statements of Stockholders' Equity

                      (In thousands, except per share data)



                                                                         Additional    Retained
                                                   Common Stock           Paid-In      Earnings      Comprehensive
                                              Shares         Amount       Capital      (Deficit)     Income (Loss)
                                            ----------------------------------------------------------------------
                                                                                      
Balance at January 31, 2000                 10,330,476    $       110   $    84,635   $    20,242
   Net income                                       --             --            --         4,016    $       4,016
   Minimum pension liability, net of tax            --             --            --            --           (1,155)
                                                                                                     -------------
   Comprehensive income                             --             --            --            --    $       2,861
                                                                                                     =============
   Unearned ESOP shares                             --             --            --            --
   Stock issued under option plans              49,783             --           284            --
   Stock dividend (10%)                      1,030,100             10        12,737       (12,747)
   Cash dividends                                   --             --            --          (866)
   Purchase of treasury stock                 (127,372)            --            --            --
                                            ----------------------------------------------------------------------
Balance at January 31, 2001                 11,282,987            120        97,656        10,645
   Net income                                       --             --            --           246    $         246
   Minimum pension liability, net of tax            --             --            --            --           (1,329)
   Derivative instrument, net of tax                --             --            --            --             (662)
                                                                                                     -------------
   Comprehensive loss, net of tax                   --             --            --            --    $      (1,745)
                                                                                                     =============
   Unearned ESOP shares                             --             --            --            --
   Stock issued under option plans              13,847             --            30            --
   Stock dividend (10%)                      1,120,268             12        11,952       (11,952)
   Cash dividends                                   --             --            --          (945)
   Purchase of treasury stock                 (194,055)            --            --            --
                                            ----------------------------------------------------------------------
Balance at January 31, 2002                 12,223,047            132       109,638        (2,006)
   Net income                                       --             --            --           282              282
   Minimum pension liability, net of tax            --             --            --            --           (3,072)
   Derivative instrument, net of tax                --             --            --            --              544
                                                                                                     -------------
   Comprehensive loss, net of tax                   --             --            --            --    $      (2,246)
                                                                                                     =============
   Stock issued under option plans             147,004              1           469
   Stock dividend (10%)                      1,212,671             12        16,177       (16,189)
   Cash dividends                                   --             --            --        (1,014)
   Purchase of treasury stock                 (472,120)            --            --            --
                                            ----------------------------------------------------------------------
Balance at January 31, 2003                 13,110,602    $       145   $   126,284   $   (18,927)
                                            ======================================================================




                                                                          Accumulated
                                             Treasury        ESOP        Comprehensive
                                              Stock          Trust            Loss             Total
                                           ------------------------------------------------------------
                                                                                
Balance at January 31, 2000                $   (10,692)   $       (41)   $        (420)     $    93,878
   Net income                                       --             --               --            4,016
   Minimum pension liability, net of tax            --             --           (1,155)          (1,155)
   Comprehensive income                             --             --               --               --
   Unearned ESOP shares                             --           (655)              --             (655)
   Stock issued under option plans                  --             --               --              284
   Stock dividend (10%)                             --             --               --               --
   Cash dividends                                   --             --               --             (866)
   Purchase of treasury stock                   (1,317)            --               --           (1,317)
                                           ------------------------------------------------------------
Balance at January 31, 2001                    (12,009)          (696)          (1,575)          94,141
   Net income                                       --             --               --              246
   Minimum pension liability, net of tax            --             --           (1,329)          (1,329)
   Derivative instrument, net of tax                --             --             (662)            (662)
   Comprehensive loss, net of tax                   --             --               --               --
   Unearned ESOP shares                             --            696               --              696
   Stock issued under option plans                  --             --               --               30
   Stock dividend (10%)                             --             --               --               12
   Cash dividends                                   --             --               --             (945)
   Purchase of treasury stock                   (1,966)            --               --           (1,966)
                                           ------------------------------------------------------------
Balance at January 31, 2002                    (13,975)            --           (3,566)          90,223
   Net income                                       --             --               --              282
   Minimum pension liability, net of tax            --             --           (3,072)          (3,072)
   Derivative instrument, net of tax                --             --              544              544
   Comprehensive loss, net of tax                   --             --               --               --
   Stock issued under option plans                  --             --               --              470
   Stock dividend (10%)                             --             --               --               --
   Cash dividends                                   --             --               --           (1,014)
   Purchase of treasury stock                   (4,659)            --               --           (4,659)
                                           ------------------------------------------------------------
Balance at January 31, 2003                $   (18,634)   $        --    $      (6,094)     $    82,774
                                           ============================================================


See accompanying notes.

5



                             Virco Mfg. Corporation

                      Consolidated Statements of Cash Flows

                      (In thousands, except per share data)



                                                           YEAR ENDED JANUARY 31
                                                        2003        2002        2001
                                                      --------------------------------
                                                                     
OPERATING ACTIVITIES
Net income                                            $    282    $    246    $  4,016
Adjustments to reconcile net income to net cash
   provided by operating activities
     Cumulative effect of accounting change                             --         297
     Depreciation and amortization                      13,659      15,813      13,412
     Provision for doubtful accounts                       267         288         156
     Loss (Gain) on sale of property, plant and
       equipment                                           149          86      (7,667)
     Deferred income taxes                                 555      (1,722)       (407)
     Changes in assets and liabilities:
       Trade accounts receivable                         4,156       5,020       1,742
       Other receivables                                   (48)        411         341
       Inventories                                      (4,356)     19,356        (981)
       Income taxes                                      2,256       3,790        (755)
       Prepaid expenses and other current assets          (560)        215         138
       Accounts payable and accrued liabilities         (4,443)     (8,230)        560
       Other                                               128        (236)     (4,383)
                                                      --------------------------------
Net cash provided by operating activities               12,045      35,037       6,469

INVESTING ACTIVITIES
Capital expenditures                                    (3,532)     (5,229)    (22,711)
Proceeds from sale of property, plant and equipment         93         570      10,258
Net investment in life insurance                          (109)      1,385          --
Acquisition of business                                 (4,550)         --          --
                                                      --------------------------------
Net cash used in investing activities                   (8,098)     (3,274)    (12,453)


                                                                               6



                             Virco Mfg. Corporation

                Consolidated Statements of Cash Flows (continued)

                      (In thousands, except per share data)



                                                             YEAR ENDED JANUARY 31
                                                        2003        2002        2001
                                                      --------------------------------
                                                                     
FINANCING ACTIVITIES
Dividends paid                                        $ (1,014)   $   (945)   $   (866)
Issuance of long-term debt                               4,240          --      19,817
Repayment of long-term debt                             (3,049)    (28,237)    (12,000)
Proceeds from issuance of common stock                     178          30         284
Purchase of treasury stock                              (4,367)     (1,954)     (1,317)
ESOP loan                                                   --         696        (655)
                                                      --------------------------------
Net cash (used in) provided by financing activities     (4,012)    (30,410)      5,263

Net increase (decrease) in cash                            (65)      1,353        (721)
Cash at beginning of year                                1,704         351       1,072
                                                      --------------------------------
Cash at end of year                                   $  1,639    $  1,704    $    351
                                                      ================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for
   Interest, net of amounts capitalized               $  3,513    $  4,805    $  4,953
   Income tax, net                                      (2,495)     (1,935)      3,835


See accompanying notes.

                                                                               7



                             Virco Mfg. Corporation

                   Notes to Consolidated Financial Statements

                                January 31, 2003

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Virco Mfg. Corporation, which operates in one business segment, is engaged in
the design, production and distribution of quality furniture for the commercial
and education markets. Over 50 years of manufacturing has resulted in a wide
product assortment. Major products include mobile tables, mobile storage
equipment, desks, computer furniture, chairs, activity tables, folding chairs
and folding tables. The Company manufactures its products in Torrance,
California, and Conway, Arkansas, for sale primarily in the United States.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Virco Mfg.
Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2001 and 2000 information to conform to
the 2002 presentation.

CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company purchases insurance on receivables from
commercial sales to minimize the Company's credit risk. The Company does not
typically obtain collateral to secure credit risk. A substantial percentage of
the Company's receivables comes from low-risk government entities. No customers
exceeded 10% of the Company's sales for each of the three years in the period
ended January 31, 2003. Foreign sales were less than 5% for each of the three
years in the period ended January 31, 2003.

DERIVATIVES

The Company uses derivative financial instruments to reduce interest rate risks.
The Company does not hold or issue derivative financial instruments for trading
purposes. All derivatives are recognized as either assets or liabilities in the
statement of financial condition and are measured at fair value. At January 31,
2003, the only derivative instrument is an interest rate swap that qualifies as
a cash flow hedge. Changes in the fair value of the swap are recorded in other
comprehensive income/loss as the hedge is effective in achieving offsetting
changes in the fair value of cash flows of the liability.

                                                                               8



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method of valuation for the material content of
inventories and the first-in, first-out (FIFO) method for labor and overhead.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization is computed on the straight-line method for
financial reporting purposes based upon the following estimated useful lives:

                                                    
Land improvements                                      5 to 25 years
Buildings and building improvements                    5 to 40 years
Machinery and equipment                                3 to 10 years
Leasehold improvements                                 Life of lease



Certain assets are depreciated under accelerated methods for income tax
purposes.

Interest costs, amounting to $38,000, $55,000 and $453,000 for the years ended
January 31, 2003, 2002 and 2001, respectively, have been capitalized as part of
the acquisition cost of property, plant and equipment.

The Company capitalizes costs associated with software developed for its own
use. Such costs are amortized over three to seven years from the date the
software becomes operational. The net book value of capitalized software was
$5,149,000 and $7,593,000 at January 31, 2003 and 2002, respectively.

The net book value of assets held under capital leases included in machinery and
equipment amounted to $0 and $2,294,000 at January 31, 2003 and 2002,
respectively. Amortization of capital leases is included in depreciation
expense.

IMPAIRMENT OF LONG-LIVED ASSETS

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting

                                                                               9



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." The adoption of the Statement on February
1, 2002 did not have a significant impact on the Company's financial position,
results of operations, or cash flows.

An impairment loss is recognized in the event facts and circumstances indicate
the carrying amount of an asset may not be recoverable, and an estimate of
future undiscounted cash flows is less than the carrying amount of the asset.
Impairment is recorded based on the excess of the carrying amount of the
impaired asset over the fair value. Generally, fair value represents the
Company's expected future cash flows from the use of an asset or group of
assets, discounted at a rate commensurate with the risks involved.

NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding. Diluted net income per
share is calculated by dividing net income by the weighted-average number of
common shares outstanding plus the dilution effect of convertible securities.
The following table sets forth the computation of basic and diluted earnings per
share before cumulative effect of the accounting change:



                                               2002          2001          2000
                                            ---------------------------------------
                                                               
Numerator
   Income before cumulative effect of the
     accounting change                      $   282,000   $   246,000   $ 4,313,000
                                            =======================================
Denominator
   Denominator for basic earnings
     per share - weighted-average shares     13,344,000    13,485,000    13,747,000
   Dilutive potential common shares             114,000       190,000       138,000
                                            ---------------------------------------
   Denominator for diluted earnings per
     share - adjusted weighted-average
     shares and assumed conversions          13,458,000    13,675,000    13,885,000
                                            =======================================


On August 20, 2002, the Company's Board of Directors authorized a 10% stock
dividend payable on September 30, 2002, to stockholders of record as of
September 6, 2002. This resulted in the issuance of approximately 1,213,000
additional shares of common stock. All per share and weighted-average share
amounts have been restated to reflect this stock dividend and any splits or
dividends previously declared.

                                                                              10



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL AND INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective for any business combination completed
subsequent to June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible
assets deemed to have an indefinite life will no longer be amortized and will be
subjected to annual impairment tests. Other intangible assets will continue to
be amortized over their useful lives. The adoption of SFAS No. 142 did not have
a material effect on the Company's financial position, results of operations or
cash flows as prior to April 2002 the Company did not have any recorded goodwill
or any indefinite lived or finite lived intangible assets, other than deferred
pension assets (see note 11). At January 31, 2003, goodwill totaled $2,200,000.

ENVIRONMENTAL COSTS

Costs incurred to investigate and remediate environmental waste are expensed as
incurred, unless the remediation extends the useful life of the assets employed
at the site. Remediation costs that extend the useful life of assets are
capitalized and amortized over the useful life of the assets.

ADVERTISING COSTS

Advertising costs are expensed in the period in which they occur. Selling,
general and administrative expenses include advertising costs of $2,921,000 in
2002, $4,237,000 in 2001 and $3,517,000 in 2000.

PRODUCT WARRANTY EXPENSE

The Company provides for a product warranty on most of the products. It
generally provides that customers can return a defective product during the
specified warranty period following purchase in exchange for a replacement
product or repair at no cost to the consumer. The Company accrues an estimate of
its exposure to warranty claims based upon both current and historical product
sales data and warranty costs incurred. The Company recorded reserves of
$900,000 and $150,000 as of January 31, 2003 and 2002, respectively.

SELF-INSURANCE

The Company has a self-insured retention for workers' compensation, automobile
and general and product liability claims. Consulting actuaries assist the
Company in determining its liability for the self-insured component of claims,
which have been discounted to their net present value.

                                                                              11



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION PLANS

Stock based compensation--In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123 "Accounting of Stock Based Compensation," which
established accounting and reporting standards for stock based employee
compensation plans effective after fiscal year 1996. SFAS No. 123 encourages
entities to adopt the fair value based method of accounting; however, it also
allows an entity to continue to measure compensation cost using the intrinsic
value based method prescribed by Accounting Principles Board No. 25. Entities
electing to remain on the "intrinsic value based" method must make certain pro
forma disclosures as if the new fair value method had been applied. At this
time, the Company has not adopted the recognition provision of SFAS No. 123, but
has provided pro forma disclosures.

In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting For Stock Based
Compensation--Transition and Disclosure." SFAS No. 148 amended SFAS No. 123
"Accounting For Stock-Based Compensation", to provide new guidance concerning
the transition when a company changes from the intrinsic-value method to the
fair-value method of accounting for employee stock-based compensation cost. As
amended by SFAS No. 148, SFAS No. 123 also requires additional disclosure
regarding such cost in annual financial statements and in condensed interim
financial statements. Certain disclosure provisions of SFAS No. 148 were adopted
by the Company in its financial statements prepared as of January 31, 2003.

SFAS No. 123, as amended by SFAS No. 148, requires pro forma information
regarding net income and net income per share to be disclosed for new options
granted after fiscal year 1996. The fair value of these options was determined
at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest rates of 4.11% to
6.26%; dividend yield of 0.10% to 0.98%; volatility factor of the expected
market price of the Company's common stock of 0.26 to 0.40; and a
weighted-average expected life of the option of five years.

                                                                              12



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The estimated fair value of the options is amortized to expense over the
options' vesting period for pro forma disclosures. The per share "pro forma" for
the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of the
effects on reported net income (loss) for future years. The Company's "reported"
and "pro forma" information is as follows:



                                                      YEAR ENDED JANUARY 31
                                                 2003       2002        2001
                                                -------------------------------
                                                             
Net income, as reported                         $   282    $   246    $   4,016
  Deduct: Total stock-based employee
  compensation expense determined under the
  fair value based method for all awards, net
  of tax effects                                    (41)       (42)        (102)
                                                -------------------------------
Pro forma net income                            $   241    $   204    $   3,914
                                                ===============================

Basic earnings per share
  Net income, as reported                       $   .02    $   .02    $     .29
  Net income, pro forma                         $   .02    $   .02    $     .28

Diluted earnings per share
  Net income, as reported                       $   .02    $   .02    $     .29
  Net income, pro forma                         $   .02    $   .01    $     .28


USE OF ESTIMATES AND ASSUMPTIONS

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

REVENUE RECOGNITION

Effective February 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." Previously, the Company had
recognized revenue upon shipment of merchandise to the customer even though at
each fiscal year-end and quarter a portion of its merchandise was shipped FOB
destination. The Company believes it had given up substantially all the risks
and rewards of ownership upon shipment. Under the new accounting method adopted

                                                                              13



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

retroactive to February 1, 2000, the Company now recognizes all sales when title
passes under its various shipping terms. The cumulative effect of the change on
prior years resulted in a charge to income of $297,000 (net of income taxes of
$191,000), which is included in income for the year ended January 31, 2001.
There was no effect on the Company's net income for the year ended January 31,
2001, before the cumulative effect of the accounting change was made.

In 2002, the Company purchased certain assets of Furniture Focus, a company
which sells complete educational furniture packages to schools. For package
orders, the Company records revenue upon completion of the projects and delivery
of all products. The Company reports sales as net of sales returns and
allowances.

SHIPPING AND HANDLING FEES

Shipping and handling fees are included as revenue in net sales. Costs related
to shipping and handling are included in operating expenses. For the years ended
January 31, 2003, 2002 and 2001, shipping and handling costs of approximately
$27,590,000, $27,491,000 and $31,903,000, respectively, were included in
selling, general and administrative expenses.

FISCAL YEAR END

Fiscal years 2002, 2001 and 2000, refer to the years ended January 31, 2003,
2002 and 2001, respectively.

FUTURE ACCOUNTING REQUIREMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs, and requires such obligations and costs to be
recognized at fair value in the period in which they are incurred. The Company
will adopt SFAS No. 143 as of February 1, 2003, and does not expect any material
effect upon the adoption of the Statement on the Company's financial position,
results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires most gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required. SFAS No. 145 also amends SFAS No. 13
to require certain lease modifications to be treated as sales-leaseback

                                                                              14



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

transactions. Certain provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, while other provisions are effective for fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 has not had a
material effect on the Company's results of operations or financial condition.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect a material effect on its results of operations or
financial condition as a result of the adoption of SFAS No. 146.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others: (the Interpretation or FIN No. 45)." The
Interpretation's disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company adopted
FIN No. 45 effective January 31, 2003, and disclosed the Company's accounting
policy and methodology used in determining its liability for product warranties.
A tabular reconciliation of the changes in the Company's product warranty
liability is included in Note 9.

2. INVENTORIES

The current material cost for inventories exceeded LIFO cost by $3,519,000 and
$2,048,000 at January 31, 2003 and 2002, respectively. Liquidation of prior year
LIFO layers due to a reduction in certain inventories (decreased) increased
income by $(423,000), $(825,000) and $111,000 in the years ended January 31,
2003, 2002 and 2001, respectively.

Details of inventory amounts, including the material portion of inventory which
is valued at LIFO, at January 31, 2003 and 2002, are as follows (in thousands):



                                           JANUARY 31, 2003
                              ---------------------------------------------
                               MATERIAL                  LABOR,
                              CONTENT AT    LIFO        OVERHEAD
                                 FIFO      RESERVE     AND OTHER     TOTAL
                              ---------------------------------------------
                                                        
Finished goods                 $10,772     $  (981)     $ 6,719     $16,510
Work in process                  9,822      (1,314)       9,725      18,233
Raw materials and supplies       9,520      (1,224)          --       8,296
                              ---------------------------------------------
Total                          $30,114     $(3,519)     $16,444     $43,039
                              =============================================


                                                                              15



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)



                                             JANUARY 31, 2002
                              ---------------------------------------------
                               MATERIAL                  LABOR,
                              CONTENT AT    LIFO       OVERHEAD
                                 FIFO      RESERVE     AND OTHER     TOTAL
                              ---------------------------------------------
                                                        
Finished goods                 $10,583     $  (493)     $ 6,069     $16,159
Work in process                  6,081        (586)       6,827      12,322
Raw materials and supplies      11,171        (969)          --      10,202
                              ---------------------------------------------
Total                          $27,835     $(2,048)     $12,896     $38,683
                              =============================================


3. NOTES PAYABLE

Outstanding balances (in thousands) for the Company's long-term debt were as
follows:



                                                       JANUARY 31
                                                    2003       2002
                                                   ------------------
                                                        
Revolving credit line with Wells Fargo Bank (a)    $26,655    $22,414
IRB with the City of Torrance (b)                    2,141      3,165
Equipment credit line with GECC (c)                     --        884
Derivative instrument (a)                              196      1,103
Other                                                   --      1,142
                                                   ------------------
                                                    28,992     28,708
Less current portion                                 1,087      2,061
                                                   ------------------
                                                   $27,905    $26,647
                                                   ==================

Outstanding stand-by letters of credit             $    --    $ 2,411


(a) A revolving credit facility with Wells Fargo Bank, amended and restated in
    February 2003, but effective at January 31, 2003 provides a secured
    revolving line of credit that ranges from $40,000,000 to $70,000,000 to
    allow for additional working capital requirements during the Company's
    traditional peak period. This is a two-year non-amortizing line with
    interest payable monthly at a fluctuating rate equal to the Bank's prime
    rate, plus a fluctuating margin of 0.25% - 0.50% (4.75% at January 31,
    2003). The line also allows the Company the option to borrow under 30- 60-
    and 90-day fixed term rates at LIBOR plus a fluctuating margin of 1.50% to
    2.50%. Approximately $13,345,000 was available for borrowing as of January
    31, 2003.

    The $26,655,000 due under Wells Fargo Bank's line of credit will be payable
    in the

                                                                              16



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

3.  NOTES PAYABLE (CONTINUED)

         fiscal year ending January 31, 2005, if the agreement is not renewed.
         The Company intends to renew the agreement.

         On February 22, 2000, the Company entered into an interest rate swap
         agreement with Wells Fargo Bank. The initial notional swap amount was
         $30,000,000 for the period February 22, 2000 through February 28, 2001.
         The notional swap amount decreased to $20,000,000 until its expiration
         on March 3, 2003. The swap agreement is in consideration for a fixed
         rate at 7.23% plus a fluctuating margin of 1.50% to 2.50%. The Company
         adopted SFAS No. 133 "Accounting for Derivatives and Hedging
         Activities" on February 1, 2001. The adjustment to adopt SFAS 133
         resulted in recording a liability of $920,000 and an offset to other
         comprehensive loss, which was $552,000 net of applicable income tax
         benefit of $368,000. At January 31, 2003, the carrying value of the
         swap approximated the fair value of $196,000, with an offset to other
         comprehensive loss of $118,000 net of an applicable tax benefit of
         $78,000. The revolving credit facility with Wells Fargo Bank is subject
         to various financial covenants including a liquidity requirement, a
         leverage requirement, a cash flow coverage requirement and
         profitability requirements. The agreement also places certain
         restrictions on capital expenditures, dividends and the repurchase of
         the Company's common stock. The revolving credit facility is secured by
         the Company's accounts receivable, inventory and equipment.

     (b) Ten-year $8,900,000 IRB issued through the City of Torrance. This
         5.994% fixed interest rate bond is payable in monthly installments of
         $99,000, including interest, through December 2004.

     (c) Credit agreement with General Electric Capital Corporation (GECC) to
         finance the initial portion of the new business information system.
         This is a four-year amortizing capital lease with principal and
         interest (approximately 7.5%) payable of $87,500 monthly. The Company
         has the option of buying out the lease three years into the lease
         period. During the year ended January 31, 2003, the Company exercised
         the buy-out option.

Long-term debt repayments are approximately as follows (in thousands):



Year ending January 31
- ----------------------
                                               
        2004                                      $ 1,087
        2005                                       27,905
                                                  -------
                                                  $28,992
                                                  =======


                                                                              17



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)


The Company believes that the carrying value of debt under the Wells Fargo
credit facility approximates fair value at January 31, 2003 and 2002, as the
majority of the long-term debt bears interest at variable rates or is fixed for
periods equal to or less than 90 days. The carrying value of other debt
instruments approximates their fair value given the Company's incremental
borrowing rate for similar types of financing arrangements.

For fiscal year 2000, the Company guaranteed a $1,500,000 line of credit from
Wells Fargo Bank to the Virco Employee Stock Ownership Plan (ESOP), of which
$696,000 was outstanding under the line at January 31, 2001. The ESOP plan was
dissolved during the year ended January 31, 2002.

4. RETIREMENT PLANS

QUALIFIED PENSION PLAN

The Company and its subsidiaries cover all employees under a noncontributory
defined benefit retirement plan, the Virco Employees' Retirement Plan (the
Plan). Benefits under the Plan are based on years of service and career average
earnings. The Company's general funding policy is to contribute amounts
deductible for federal income tax purposes. Minimum pension liability
adjustments for the years 2002, 2001 and 2000 were $3,072,000, $1,329,000 and
$1,155,000, respectively (net of taxes of $2,005,000, $850,000 and $768,000,
respectively), and are included in comprehensive loss. Assets of the Plan are
invested in common trust funds.

                                                                              18



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)

The following table sets forth (in thousands) the funded status of the Plan at
December 31, 2002 and 2001:



                                                          PENSION BENEFITS
                                                      2002                2001
                                                    ----------------------------
                                                                  
Change in benefit obligation
   Benefit obligation at beginning of year          $ 21,163            $ 19,435
   Service cost                                        1,437               1,017
   Interest cost                                       1,684               1,515
   Plan amendments                                       503                 438
   Actuarial loss                                      4,520                 748
   Benefit paid                                         (520)             (1,990)
                                                    ----------------------------
   Benefit obligation at end of year                $ 28,787            $ 21,163
                                                    ============================
Change in plan assets
   Fair value at beginning of year                  $  8,808            $ 10,193
   Actual return on plan assets                       (1,696)             (2,116)
   Company contributions                              10,482               2,721
   Benefits paid                                        (520)             (1,990)
                                                    ----------------------------
   Fair value at end of year                        $ 17,074            $  8,808
                                                    ============================

   Funded status of plan                            $(11,713)           $(12,355)
   Unrecognized net transition amount                   (184)               (225)
   Unrecognized prior service cost                     4,333               4,430
   Unrecognized net actuarial loss                    14,700               8,702
                                                    ----------------------------
   Net amount recognized                            $  7,136            $    552
                                                    ============================

Statements of financial position
   Accrued benefit liability                        $ (7,077)           $ (8,680)
   Intangible asset                                    4,333               4,430
   Accumulated other comprehensive income              9,880               4,802
                                                    ----------------------------
   Net amount recognized                            $  7,136            $    552
                                                    ============================




                                                        2002               2001
                                                        ------------------------
                                                                     
Weighted average assumptions
   Discount rate                                        6.50%               7.75%
   Expected return on plan assets                       6.50%               8.00%
   Rate of compensation increase                        5.00%               5.00%


The total pension expense for the Plan (in thousands) included the following
components:

                                                                              19



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)



                                                               DECEMBER 31
                                                2002               2001              2000
                                               -------------------------------------------
                                                                          
Components of net cost
   Service cost                                $ 1,437           $ 1,017           $   930
   Interest cost                                 1,684             1,515             1,425
   Expected return on plan assets                 (820)             (821)           (1,089)
   Amortization of transition amount               (42)              (42)              (42)
   Amortization of prior service cost              601               562               528
   Recognized net actuarial loss                 1,039               398               148
                                               -------------------------------------------
   Benefit cost                                $ 3,899           $ 2,629           $ 1,900
                                               ===========================================


VIP RETIREMENT PLAN

The Company also provides a supplementary retirement plan for certain key
employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit
up to 50% of average compensation for the last five years in the VIP Plan,
offset by benefits earned under the Virco Employees' Retirement Plan. The VIP
Plan is funded by a life insurance program. The cash surrender values of the
policies funding the VIP Plan were $2,419,000 and $2,138,000 at January 31, 2003
and 2002, respectively. These cash surrender values are included in other assets
in the consolidated balance sheets.

The Company maintains a rabbi trust to hold assets related to the VIP Plan, the
Dual Option Life Insurance Plan, and the Deferred Compensation Plan.
Substantially all assets funding these Plans are held in the rabbi trust.

                                                                              20



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)

The following table sets forth (in thousands) the funded status of the VIP Plan
at December 31, 2002 and 2001:



                                                          NONQUALIFIED VIP PENSION
                                                            2002             2001
                                                          ------------------------
                                                                     
Change in benefit obligation
   Benefit obligation at beginning of year                $ 4,821          $ 4,298
   Service cost                                               820              490
   Interest cost                                              431              323
   Plan amendments                                           (503)            (438)
   Actuarial loss                                           2,453              492
   Benefit paid                                              (266)            (344)
                                                          -------          -------
   Benefit obligation at end of year                      $ 7,756          $ 4,821
                                                          =======          =======

Change in plan assets
   Company contributions                                  $   266          $   344
   Benefits paid                                             (266)            (344)
                                                          -------          -------
   Fair value at end of year                              $     -          $     -
                                                          =======          =======

   Funded status of plan                                  $(7,756)         $(4,821)
   Unrecognized prior service cost                         (3,121)          (3,035)
   Unrecognized net actuarial loss                          4,816            2,718
                                                          -------          -------
   Accrued benefit cost                                   $(6,061)         $(5,138)
                                                          =======          =======

Statements of financial position
   Accrued benefit liability                              $(6,061)         $(5,138)
                                                          -------          -------
   Net amount recognized                                  $(6,061)         $(5,138)
                                                          =======          =======




                                                   2002             2001
                                                   ---------------------
                                                              
Weighted average assumptions
   Discount rate                                   6.50%            7.75%
   Rate of compensation increase                   5.00%            5.00%


                                                                              21



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)

The total plan expense for the VIP Plan included the following components (in
thousands):



                                                              DECEMBER 31
                                                       2002       2001      2000
                                                      --------------------------
                                                                  
Components of net cost
   Service cost                                       $  820     $ 490     $ 417
   Interest cost                                         431       323       299
   Amortization of prior service cost                   (417)     (366)     (314)
   Recognized net actuarial loss                         355       193       157
                                                      --------------------------
   Benefit cost                                       $1,189     $ 640     $ 559
                                                      ==========================


NON-EMPLOYEE DIRECTORS RETIREMENT PLAN

In April 2001, the Board of Directors established a non-qualified plan for
non-employee directors of the Company. This 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. At January 31, 2003, this Plan did not hold any assets.

                                                                              22



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)

The following table sets forth (in thousands) the funded status of the
Non-Employee Directors Retirement Plan at December 31, 2002:



                                                                 NON EMPLOYEE DIRECTOR
                                                                        PENSION
                                                                2002                2001
                                                               -------------------------
                                                                             
Change in benefit obligation
   Benefit obligation at beginning of year                     $  485              $ 461
   Service cost                                                    29                 24
   Interest cost                                                   34                 36
   Plan amendments                                                 --                 --
   Actuarial loss                                                   6                (36)
   Benefits paid                                                   --                 --
                                                               -------------------------
   Benefit obligation at end of year                           $  554              $ 485
                                                               =========================

Change in plan assets
   Fair value of plan assets at inception and end of year      $   --              $  --
                                                               =========================

   Funded status of plan                                       $ (554)             $(485)
   Unrecognized prior service cost                                286                373
   Unrecognized net actuarial loss                                (30)               (36)
                                                               -------------------------
   Net amount recognized                                       $ (298)             $(148)
                                                               =========================

Statements of financial position
   Accrued benefit liability                                   $ (554)             $(485)
   Intangible asset                                               256                337
                                                               -------------------------
   Net amount recognized                                       $ (298)             $(148)
                                                               =========================




                                             2002          2001
                                             ------------------
                                                     
Weighted average assumptions
 Discount rate                               6.50%         7.75%
 Rate of compensation increase               5.00%         5.00%


                                                                              23



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

4. RETIREMENT PLANS (CONTINUED)

The total plan expense for the Non-Employee Directors Retirement Plan included
the following components (in thousands):



                                                    DECEMBER 31
                                                 2002        2001
                                                 ----------------
                                                       
Components of net cost
   Service cost                                  $ 29        $ 24
   Interest cost                                   34          36
   Amortization of prior year service cost         88          88
                                                 ----------------
   Benefit Cost                                  $151        $148
                                                 ================


401(k) RETIREMENT PLAN

The Company's Retirement Plan, which covers all U.S. employees, allows
participants to defer from 1% to 15% of their eligible compensation through a
401(k) retirement program. Through December 31, 2001, this Plan included an
employee stock ownership component. This Plan continues to include the Virco
Stock Fund as one of the investment options. Shares owned by this Plan are held
by the Plan Trustee, Security Trust Company. At January 31, 2003, this Plan held
561,914 shares of Virco Stock. While these shares were included in the employee
stock ownership component prior to the dissolution of the ESOP Plan, allocated
shares held by the Trust were included in shares outstanding and the related
dividends were charged to retained earnings. For the fiscal years ended January
31, 2003, 2002 and 2001, there was no employer match and therefore no
compensation cost to the Company.

LIFE INSURANCE

The Company provides current and post-retirement life insurance to certain
salaried employees with split dollar life insurance policies under the Dual
Option Life Insurance Plan. Cash surrender values of these policies, which are
included in other assets in the consolidated balance sheets, were $3,915,000 and
$3,523,000 at January 31, 2003 and 2002, respectively.

DEFERRED COMPENSATION PLAN

The Company established, effective January 1, 1997, a Deferred Compensation
Plan, which allows certain key employees to defer up to a maximum of 90% of
their base annual salary and/or up to 90% of their annual bonus on a pretax
basis. The total participant deferrals were $1,772,000 and $1,461,000 for the
years ended January 31, 2003 and 2002, respectively. The Deferred Compensation
Plan is funded with investment funds held in the rabbi trust and are included in
other assets in the consolidated balance sheets.

                                                                              24



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS

The 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 these
stock plans, the Company may grant an aggregate of approximately 1,432,000
shares (as adjusted for the stock split and stock dividends) to its employees in
the form of stock options. Non-employee directors automatically receive a grant
for options to purchase 2,000 shares of common stock on the first business day
following each annual meeting of the Company's stockholders.

As of January 31, 2003, 373,000 shares remain available for future grant.
Options granted under the 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. During the year, certain optionees
satisfied the exercise price of their options by exchanging shares already owned
rather than paying cash. As a result, 29,632 and 1,051 shares were recorded as
treasury stock for the years ended January 31, 2003 and 2002, respectively.

A summary of the Company's stock option activity, and related information for
the years ended January 31 are as follows:



                                       2003                           2002                         2001
                              ------------------------------------------------------------------------------------
                                            WEIGHTED-                     WEIGHTED-                      WEIGHTED-
                                             AVERAGE                       AVERAGE                        AVERAGE
                                            EXERCISE                      EXERCISE                       EXERCISE
                               OPTIONS        PRICE           OPTIONS       PRICE          OPTIONS         PRICE
                              ------------------------------------------------------------------------------------
                                                                                       
Outstanding at beginning
   of year                     659,475       $  9.09          714,679      $  9.34         768,970        $  8.97
     Granted                    13,200         13.59           38,720         8.37           6,655           9.40
     Exercised                (149,431)         3.15          (16,498)        2.20         (60,946)          4.64
     Forfeited                 (41,470)        11.68          (77,426)       12.27              --             --
                              --------                        -------                      -------
Outstanding at end of year     481,774         10.82          659,475         9.09         714,679           9.34
                              ========                        =======                      =======

Exercisable at end of year     433,280         10.81          578,076         8.96         597,166           8.90

Weighted-average fair value
   of options granted
   during the year                           $  5.54                       $  3.45                        $  3.27


The data included in the above table have been retroactively adjusted, if
applicable, for stock dividends and the stock split.

                                                                              25



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

5. STOCK OPTIONS AND STOCKHOLDERS' RIGHTS (CONTINUED)

Information regarding stock options outstanding as of January 31, 2003, is as
follows:



                                  OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------
                                        WEIGHTED
                                         AVERAGE      WEIGHTED                      WEIGHTED
                                        REMAINING     AVERAGE                       AVERAGE
                        NUMBER OF     CONTRACTUAL     EXERCISE        NUMBER OF     EXERCISE
  PRICE RANGE            SHARES          LIFE          PRICE           SHARES        PRICE
- --------------------------------------------------------------------------------------------
                                                                     
$ 1.87 TO 8.55           153,428       4.00 YEARS      $ 6.67          132,812       $ 6.42
 10.14 TO 13.59          223,870       6.34             11.68          196,475        11.52
 15.06 TO 16.07          104,476       4.69             15.80          103,993        15.01
                         -------                                       -------
                         481,774       5.23             10.82          433,280        10.81
                         =======                                       =======


The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for employee stock
options. No compensation expense is recorded under APB 25 because the exercise
price of the Company's employee common stock options equals the market price of
the underlying common stock on the grant date.

On October 15, 1996, the Board of Directors declared a dividend of one preferred
stock purchase right (a Right) for each outstanding share of the Company's
common stock. Each Right entitles a stockholder to purchase for an exercise
price of $50.00 ($20.70, as adjusted for the stock split and stock dividend),
subject to adjustment, one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock of the Company, or under certain
circumstances, shares of common stock of the Company or a successor company with
a market value equal to two times the exercise price. The Rights are not
exercisable, and would only become exercisable for all other persons when any
person has acquired or commences to acquire a beneficial interest of at least
20% of the Company's outstanding common stock. The Rights expire on October 25,
2006, have no voting privileges, and may be redeemed by the Board of Directors
at a price of $.001 per Right at any time prior to the acquisition of a
beneficial ownership of 20% of the outstanding common shares. There are 200,000
shares (483,153 shares as adjusted by the stock split and stock dividend) of
Series A Junior Participating Cumulative Preferred Stock reserved for issuance
upon exercise of the Rights.

                                                                              26



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

6. PROVISION FOR INCOME TAXES

The Company uses the liability method to determine the provision for income
taxes. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

The provisions for the last three years are reconciled to the statutory federal
income tax rate using the liability method as follows:



                                                         JANUARY 31
                                          2003              2002              2001
                                          ----------------------------------------
                                                                     
Statutory                                 34.0%             34.0%             34.0%
State taxes (net of federal tax)           1.0               4.1               3.2
Nondeductible expenses and other          (1.7)              5.5               1.1
                                          ----------------------------------------
                                          33.3%             43.6%             38.3%
                                          ========================================


Significant components of the provision for income taxes (in thousands)
attributed to income before income taxes and cumulative effect of the accounting
change are as follows:



                                      JANUARY 31
                          2003           2002            2001
                         -------------------------------------
                                              
Current
   Federal               $ (333)       $  1,562        $ 2,690
   State                    (81)            350            390
                         -------------------------------------
                           (414)          1,912          3,080
Deferred
   Federal                  469          (1,449)          (350)
   State                     86            (273)           (57)
                         -------------------------------------
                            555          (1,722)          (407)
                         -------------------------------------
                         $  141        $    190        $ 2,673
                         =====================================


                                                                              27



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

6. PROVISION FOR INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities (in thousands) are comprised of the
following:



                                                      JANUARY 31
                                                 2003             2002
                                               -------------------------
                                                           
Deferred tax assets
   Accrued vacation and sick leave             $ 1,209           $ 1,090
   Retirement plans                              3,996             3,308
   Insurance reserves                            1,607             1,306
   Inventory                                       574               244
   Other                                           372             1,068
                                               -------------------------
                                                 7,758             7,016

Deferred tax liabilities
   Tax in excess of book depreciation           (4,148)           (4,288)
   Capitalized software development costs       (1,214)           (3,318)
                                               -------------------------
                                                (5,362)           (7,606)

                                               -------------------------
Net deferred tax asset (liability)             $ 2,396           $  (590)
                                               =========================


7. COMMITMENTS

The Company has long-term leases on real property and equipment, which expire at
various dates. Certain of the leases contain renewal, purchase options and
require payment for property taxes and insurance.

Minimum future lease payments (in thousands) for operating leases in effect as
of January 31, 2003, are as follows:



Year ending January 31
- ----------------------
                                
         2004                      $ 8,946
         2005                        7,560
         2006                        4,339
         2007                        2,997
         2008                        1,654
      Thereafter                       504
                                   -------
                                   $26,000
                                   =======


                                                                              28



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

7. COMMITMENTS (CONTINUED)

Rent expense relating to operating leases was as follows (in thousands):



Year ending January 31
- ----------------------
                                
         2003                      $   9,969
         2002                         11,042
         2001                         12,937


The Company leases machinery and equipment from GECC under a 10-year operating
lease arrangement. The Company has the option of buying out the leases three to
five years into the lease period.

Minimum future lease-receipts (in thousands) for leases relating to properties
owned or subleased as of January 31, 2003, are as follows:



Year ending January 31
- ----------------------
                               
         2004                     $  628
         2005                        627
         2006                         33
         2007                         33
         2008                         33
      Thereafter                     112
                                  ------
                                  $1,466
                                  ======


8. CONTINGENCIES

The Company and other furniture manufacturers are subject to federal, state and
local laws and regulations relating to the discharge of materials into the
environment and the generation, handling, storage, transportation and disposal
of waste and hazardous materials. The Company has expended, and may be expected
to expend, significant amounts for the investigation of environmental
conditions, installation of environmental control equipment and remediation of
environmental contamination.

The Company is subject to contingencies pursuant to environmental laws and
regulations that in the future may require the Company to take action to correct
the effects on the environment of prior disposal practices or releases of
chemical or petroleum substances by the Company or other parties. At January 31,
2003 and 2002, there are no required reserves for such environmental
contingencies.

                                                                              29



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

8. CONTINGENCIES (CONTINUED)

The Company has a self-insured retention for product and general liability
losses up to $250,000 per occurrence. The Company has purchased insurance to
cover losses in excess of the retention up to a limit of $30,000,000. The
Company has obtained an actuarial estimate of its total expected future losses
for liability claims and recorded the net present value of $4,130,000 at January
31, 2003, based upon the Company's estimated payout period of four years using a
6% discount rate.

Workers' compensation, automobile, general and product liability claims may be
asserted in the future for events not currently known by management. Management
does not anticipate that any related settlement, after consideration of the
existing reserve for claims incurred and potential insurance recovery, would
have a material adverse effect on the Company's financial position, results of
operations or cash flows.

The Company and its subsidiaries are defendants in various legal proceedings
resulting from operations in the normal course of business. It is the opinion of
management that the ultimate outcome of all such matters will not materially
affect the Company's financial position, results of operations or cash flows.

9. WARRANTY

The Company accrues an estimate of its exposure to warranty claims based upon
both current and historical product sales data and warranty costs incurred. The
majority of the Company's products carry a five-year warranty. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The warranty liability is in accrued
liabilities in the accompanying consolidated balance sheet.

Changes in the Company's warranty liability were as follows (in thousands):



                                          JANUARY 31
                                       2003         2002
                                     -------------------
                                             
Balance at January 31, 2002          $   150       $ 150
   Provision                           2,091         703
   Costs incurred                     (1,341)       (703)
                                     -------------------
Balance at January 31, 2003          $   900       $ 150
                                     ===================


                                                                              30



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

10. GAIN ON SALE OF ASSETS AND OTHER INCOME

On April 25, 2000, the Company completed the sale of its Torrance, California,
warehouse, which was held as rental property. The Company received $9,385,000 in
cash and recorded a $7,945,000 pre-tax gain on disposition during the quarter
ended April 30, 2000.

In October 2000, the Company entered into a confidential settlement of a dispute
involving past services related to the installation of non-manufacturing
equipment for which it received a final cash payment in November 2000. This
payment is a non-recurring amount unrelated to the Company's ongoing operations.
In the third quarter ended October 31, 2000, the Company recognized $4,052,000
in other income from this settlement.

11. ACQUISITION OF BUSINESS

In April 2002, the Company entered into an agreement with Dew-El Corporation to
purchase certain assets of Furniture Focus (TM), Inc., an Ohio reseller that
offers complete package solutions for the furniture, fixtures and equipment
segments of bond-funded public school construction projects, primarily in the
upper Midwest. In May 2002, the Company paid $2,400,000 in cash for certain
assets of the corporation and recorded goodwill of $2,200,000. The goodwill is
not expected to be deductible for income tax. In addition, the Company purchased
approximately $2,150,000 of accounts receivable. The financial statements for
the fiscal 2002 included nine months of Furniture Focus operations. The
additional revenue and operating results as a result of this acquisition did not
have a significant effect on the Company's financial position, operations or
cash flows.

                                                                              31



                             Virco Mfg. Corporation

             Notes to Consolidated Financial Statements (continued)

12. QUARTERLY RESULTS (UNAUDITED)

The Company's quarterly results for the years ended January 31, 2003 and 2002
are summarized as follows (in thousands, except per share data):





                                    APRIL 30     JULY 31      OCTOBER 31    JANUARY 31
                                    --------------------------------------------------
                                                                
Year ended January 31, 2003
  Net sales                         $41,168      $83,164       $85,022       $35,001
  Gross profit                       13,056       29,080        28,893         5,756
  Net income (loss)                  (2,137)       4,260         3,244        (5,085)

  Per common share(1) (2)
    Net income
      Basic                           (0.16)        0.32          0.24         (0.39)
      Assuming dilution               (0.16)        0.32          0.24         (0.39)

Year ended January 31, 2002
  Net sales                         $42,457      $89,193       $86,232       $39,580
  Gross profit                       11,483       28,349        28,591         8,764
  Net income (loss)                  (3,765)       4,490         3,912        (4,391)

Per common share(1) (2)
    Net income:
      Basic                           (0.27)        0.34          0.29         (0.33)
      Assuming dilution               (0.27)        0.33          0.29         (0.33)


(1) Net income per share has been adjusted to reflect the 10% stock dividend
    declared in August 2002 and 2001.

(2) Per common share amounts for the quarters and full years have each been
    calculated separately. Accordingly, quarterly amounts may not add to the
    annual amounts because of differences in the average common shares
    outstanding during each period and with regard to diluted per common share
    amounts only, because of the effect of potentially dilutive securities only
    in the periods in which the effect would have been dilutive.

                                                                              32



SUPPLEMENTAL STOCKHOLDERS' INFORMATION

ANNUAL MEETING

The Annual Meeting of Virco stockholders will be held on Tuesday, June 10, 2003,
at 10:00 a.m., at 2027 Harpers Way, Torrance, California. The record date for
this meeting is May 2, 2003. The Proxy Statement and Proxy pertaining to this
meeting will be mailed on or about May 16, 2003.

SEC FORM 10-K

A copy of the annual report to the Securities and Exchange Commission on Form
10-K may be obtained without charge upon written request to:

Corporate Secretary
Virco Mfg. Corporation
2027 Harpers Way
Torrance, CA 90501

VIRCO COMMON STOCK

The American Stock exchange is the principal market on which Virco Mfg.
Corporation (VIR) stock is traded. As of April 16, 2002, there were
approximately 341 registered stockholders according to the transfer agent
records. There are approximately 1,900 beneficial stockholders.

STOCKHOLDER RECORDS

Records pertaining to stockholdings and dividends are maintained by Mellon
Investor Services. Inquiries with respect to these matters, as well as notices
of address changes, should be directed to: Mellon Investor Services, 85
Challenger Road, Ridgefield Park, NJ 07660, telephone 1-800-356-2017.

If a stock certificate is lost or mutilated, immediately communicate with Mellon
Investor Services at the above address.

ADDITIONAL SERVICES FOR STOCKHOLDERS

Information about the Company is now available to stockholders at the Company's
web site (www.virco.com). A brief description of Virco's product line is offered
together with illustrations showing a sampling of our furniture.



QUARTERLY DIVIDEND AND STOCK MARKET INFORMATION



                 Cash Dividends Declared                      Common Stock Range
                  1-31-2003   1-31-2002                 1-31-2003            1-31-2002
                 -------------------------------------------------------------------------
                                                    High        Low         High      Low
                                                   ---------------------------------------
                                                                   
1st Quarter         $0.02       $0.02              $ 9.54      $8.09       $9.09     $8.06
2nd Quarter          0.02        0.02               13.70       9.18        8.80      8.14
3rd Quarter          0.02        0.02               12.18       8.43        9.45      8.50
4th Quarter          0.02        0.02               10.48       7.98        8.18      7.41


The data included in the above table has been retroactively adjusted, if
applicable, for the stock split and stock dividends.



DIRECTORS, OFFICERS AND FACILITIES

DIRECTORS

Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer

Donald S. Friesz
Former Vice President - Sales and Marketing

Evan M. Gruber
Chairman and Chief Executive Officer, Modtech Holdings, Inc.

Robert K. Montgomery
Partner, Gibson, Dunn & Crutcher

Glen D. Parish
Vice President and General Manager, Conway Division

Donald A. Patrick
Management Consultant, Diversified Business Resources, Inc.

Douglas A. Virtue
Executive Vice President

Dr. James R. Wilburn
Dean of the School of Public Policy, Pepperdine University



OFFICERS

Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer

Douglas A. Virtue
Executive Vice President

Robert E. Dose
Vice President - Finance, Secretary and Treasurer

Glen D. Parish
Vice President and General Manager - Conway Division

Wesley D. Roberts
Vice President and Chief Information Officer

D. Randal Smith
Vice President - Marketing

Lori L. Swafford
Vice President - Legal Affairs

Larry O. Wonder
Vice President - Sales

INDEPENDENT AUDITORS

Ernst & Young LLP
One World Trade Center
Long Beach, California 90831

LEGAL COUNSEL

Gibson, Dunn & Crutcher
2029 Century Park East
Los Angeles, California 90067



CORPORATE HEADQUARTERS

2027 Harpers Way
Torrance, California 90501
(310) 533-0474

MAJOR FACILITIES

Torrance Division
2027 Harpers Way
Torrance, California 90501

Conway Division
Highway 65, South
Conway, Arkansas 72032



                     VIRCO MFG. CORPORATION AND SUBSIDIARIES

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

               FOR THE YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
                                 (In Thousands)



        Col. A                   Col. B                 Col. C            Col. D              Col. E               Col. F
                                                      Additions
                               Balance at         Charged to Costs    Charged to Other    Deductions from    Balance at Close of
      Description          Beginning of Period      and Expenses          Accounts           Reserves              Period
      -----------          -------------------      ------------          --------           --------              ------
                                                                                              
Allowance for Doubtful
Accounts:

Year Ended:

January 31, 2001                  $ 200                 $ 156                                $ 156 (1)              $ 200

January 31, 2002                  $ 200                 $ 288                                $ 288 (1)              $ 200

January 31, 2003                  $ 200                 $ 267                                $ 242 (1)              $ 225


(1) Uncollectable accounts written off, net of recoveries.

EX-21.1

                                  Exhibit 21.1

                              LIST OF SUBSIDIARIES

                           Virtue of California, Inc. (INACTIVE)
                           2027 Harpers Way
                           Torrance, CA 90501

                           Delkay Plastics (INACTIVE)
                           2027 Harpers Way
                           Torrance, CA 90501

                           Virco Inc.
                           2027 Harpers Way
                           Torrance, CA  90501

                           Virco Mgmt. Corporation
                           2027 Harpers Way
                           Torrance, CA  90501

EX-23.1

                                  Exhibit 23.1

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Virco Mfg. Corporation of our report dated March 14, 2003, included in the
2002 Annual Report to Stockholders of Virco Mfg. Corporation.

Our audits also include the financial statement schedule of Virco Mfg.
Corporation listed in Item 15(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-65096, Form S-8 No. 333-32539, Form S-8 No. 333-51717 and Form
S-8 No. 333-74832) pertaining to the Virco Mfg. Corporation 1993 Stock Incentive
Plan, the Virco Mfg. Corporation 1997 Stock Incentive Plan, the Virco Mfg.
Corporation Employee Stock Ownership Plan, and the Virco Mfg. Corporation 401(K)
Savings Plan, respectively, of our report dated March 14, 2003, with respect to
the consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of Virco Mfg.
Corporation for the year ended January 31, 2003.

                                            /s/ Ernst & Young LLP

Long Beach, California
April 24, 2003

EX-99.1

                                  EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in his capacity as an officer of Virco
Mfg. Corporation (the "Company"), for purposes of 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his
knowledge:

         -        the Annual Report of the Company on Form 10-K for the period
                  ended January 31, 2003, fully complies with the requirements
                  of Section 13(a) of the Securities Exchange Act of 1934; and

         -        the information contained in such report fairly presents, in
                  all material respects, the financial condition and results of
                  operation of the Company.

Dated:  April 25, 2003

/s/ Robert A. Virtue
- --------------------
    Robert A. Virtue
    President

/s/  Robert E. Dose
- -------------------
Robert E. Dose
Vice President--Finance