VIDEO DISPLAY CORPORATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended May 31, 2007.


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

For the Transition Period From to

Commission File Number 0-13394

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)


GEORGIA		58-1217564

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

770-938-2080

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 31, 2007, the registrant had 9,649,670 shares of Common Stock outstanding.

Video Display Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands)


	May 31,			February 28,
	2007			2007
	(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	4,954		$	6,325
Accrued liabilities		4,156			4,054
Billings in excess of cost and estimated earnings on uncompleted contracts		—			34

Current maturities of notes payable to officers and directors		442			446
Convertible notes payable, net of discount of $50 and $75 respectively		1,200			1,175
Income taxes payable		488			61
Current maturities of long-term debt and financing lease obligations		719			726

Total current liabilities		11,959			12,821

Lines of credit		15,736			13,593
Long-term debt, less current maturities		2,394			2,550
Financing lease obligations, less current maturities		251			269
Notes payable to officers and directors, less current maturities		3,510			5,619
Other long term liabilities		623			623
Deferred income taxes		51			71

Total liabilities		34,524			35,546


Commitments and Contingencies

Shareholders’ Equity
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value – 50,000 shares authorized; 9,702 and 9,649 issued and outstanding at May 31, 2007 and 9,707 and 9,600 issued and outstanding at February 28, 2007		7,292			7,284
Additional paid-in capital		196			171
Retained earnings		24,229			23,376
Accumulated other comprehensive income		132			95
Treasury stock, 184 and 166 shares at cost		(1,514	)		(1,385	)

Total shareholders’ equity		30,335			29,541

Total liabilities and shareholders’ equity	$	64,859		$	65,087

The accompanying notes are an integral part of these statements.

Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)


	Three Months Ended
	May 31,
	2007			2006
Operating Activities
Net income (loss)	$	853		$	(235	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		583			478
Provision for doubtful accounts		27			51
Provision for inventory reserve		103			203
Non-cash charge for share based compensation		25			13
Deferred income taxes		(183	)		(137	)
Interest on convertible note		25			6

Changes in working capital, net of effects from acquisitions:
Accounts receivable		(571	)		(361	)
Inventories		83			(899	)
Prepaid expenses and other current assets		73			154
Accounts payable and accrued liabilities		(1,269	)		(1,052	)
Cost, estimated earnings and billings, net, on uncompleted contracts		(30	)		—
Income taxes payable		426			—

Net cash provided by (used in) operating activities		145			(1,779	)


Investing Activities
Capital expenditures		(235	)		(40	)

Net cash used in investing activities		(235	)		(40	)

Video Display Corporation and Subsidiaries
May 31, 2007

Note 1. – Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions.

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K for the fiscal year ended February 28, 2007, as filed with the Commission. There have been no material changes in accounting policy during the three months ended May 31, 2007.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 28, 2007 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U. S. generally accepted accounting principles.

The Company has a subsidiary in the U.K., which uses the British pound as its functional currency. Assets and liabilities of this foreign subsidiary are translated using the exchange rate in effect at the end of the period. Revenues and expenses are translated using the average of the exchange rates in effect during the period. Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders’ equity.

Note 2. – New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Interpretation No. 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of initially adopting Interpretation No. 48 is to record an adjustment to opening retained earnings in the year of adoption and should be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of Interpretation No. 48. Management has evaluated the provisions of the interpretation and the adoption of this interpretation did not have a material impact on the Company’s consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force in Issue No. 06-3(“EITF 06-3”), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 concluded that the presentation of taxes within its scope on either a gross (included in revenue and cost) or net (excluded from revenues) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The company presents these taxes on a net basis and the adoption of EITF 06-3 does not have a material effect on the Company’s consolidated financial statements.

Video Display Corporation and Subsidiaries
May 31, 2007

In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement No.”) 157, Fair Values Measurements. Statements No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. The adoption of Statement No. 157 does not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). This Standard allows companies to elect to apply fair value accounting for certain financial assets and liabilities. FAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect, if any, FAS 159 may have on its financial statements.

Note 3. – Business Acquisition

Effective December 31, 2006, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp. located in Loves Park, Illinois. The Cathode Ray Tube Manufacturing and Distribution Business has been an industry leader in the supply of monochrome CRTs used in video display products since 1964. The assets acquired in this transaction have been recorded based on their fair value at the date of acquisition and include inventories of $2,125,000, equipment of $100,000 and certain intellectual property and customer lists of $325,000. Consideration for the assets acquired include a $1.0 million face value Convertible Note Payable, convertible into 120,000 shares of the Company’s common stock, delivered on the closing date, January 9, 2007, an agreement to deliver, on the first anniversary of the closing date, a certificate for $1,125,000 in market value of the Company’s common stock as of that date, and on the second anniversary of the closing date, a certificate for $500,000 in market value of the Company’s common stock as of that date. The agreement to subsequently deliver shares of common stock includes terms which limit the maximum number of shares which may be issued and provide an option for the seller to receive cash in lieu of stock, if the Company’s common stock is selling for less than $7.00 per share on the applicable anniversary dates of the agreement. The Company recorded the convertible notes payable net of an implied discount of $75,000. The purchase agreement provides for an adjustment to this base purchase price on the second anniversary of the closing date, to be paid in shares of the Company’s common stock, based on the remaining fair value of the initial inventories on hand as of that date. The purchase agreement also included a $300,000 cash payment on the closing date for a 12 month lease of facilities located in Loves Park. The product development designs and drawings are being amortized over a five year period, while the customer list is being amortized over a three year period, which the Company estimates to be the useful life of these assets.

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

On June 22, 2006, the Company acquired the business and assets of EDL Displays, Inc. (“EDL”) located in Dayton Ohio. EDL is noted for its specialized, large-size, ruggedized, high-resolution displays with application in air traffic control, shipboard navigation, simulation, homeland security, and command and control. The assets acquired in this transaction have been recorded based on their fair value at the date of acquisition and include accounts receivable of $120,000, inventories of $400,000, equipment of $50,000 and certain intellectual property and customer lists of $658,000. Total consideration for the assets acquired included a cash payment of $550,000 and the assumption of a $678,000 bank loan. The purchase agreement provides for an adjustment to the purchase price based on final collection of accounts receivable and evaluation of the market value of purchased inventories at the end of a 12 month period of operation. The intellectual property, including product development designs and drawings are being amortized over a five

Video Display Corporation and Subsidiaries
May 31, 2007

year period, while the customer list is being amortized over a three year period, which the Company estimates to be the useful life of these assets. The EDL business was relocated and merged into the Company’s Pennsylvania based Aydin Displays operation effective December 31, 2006.

Note 4. — Inventories

Inventories are stated at the lower of cost (first in, first out) or market.

Inventories consisted of the following (in thousands):


	May 31,			February 28,
	2007			2007
Raw materials	$	19,022		$	19,540
Work-in-process		5,120			4,210
Finished goods		14,505			14,980

		38,647			38,730
Reserves for obsolescence		(5,490	)		(5,386	)

	$	33,157		$	33,344

Note 5. – Costs and Estimated Earnings Related to Billings on Uncompleted Contracts

Information relative to contracts in progress consisted of the following


	May 31,			February 28,
	2007			2007
Costs incurred to date on uncompleted contracts	$	4,754		$	9,733
Estimated earnings recognized to date on these contracts		1,578			6,769

		6,332			16,502
Billings to date		(3,373	)		(13,573	)

Costs and estimated earnings in excess of billings, net	$	2,959		$	2,929


Costs and estimated earnings in excess of billings	$	2,959		$	2,963
Billings in excess of costs and estimated earnings		—			(34	)

	$	2,959		$	2,929

Video Display Corporation and Subsidiaries
May 31, 2007

Costs and estimated earnings in excess of billings are the results of contracts in progress (jobs) in completing orders to customers’ specifications on contracts accounted for under SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. Costs included are material, labor and overhead. These jobs require design and engineering effort for a specific customer purchasing a unique product. The Company records revenue on these fixed-price and cost-plus contracts on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable. Billings are generated based on specific contract terms, which might be a progress payment schedule, specific shipments, etc. None of the above contracts in progress contain post-shipment obligations.

Changes in job performance, manufacturing efficiency, final contract settlements and other factors affecting estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

As of May 31, 2007 and February 28, 2007, there were no production costs which exceeded the aggregate estimated cost of all in process and delivered units relating to long-term contracts. Additionally, there were no claims outstanding that would affect the ultimate realization of full contract values. As of May 31, 2007 and February 28, 2007, there were no progress payments that had been netted against inventory.

Video Display Corporation and Subsidiaries
May 31, 2007

Note 7. – Long-term Debt and Financing Lease Obligations

Long-term debt and financing lease obligations consisted of the following (in thousands):


	May 31,			February 28,
	2007			2007
Note payable to bank syndicate (RBC Centura and Regions Bank); interest rate at LIBOR plus applicable margin as defined per the loan agreement, (7.40% combined rate as of May 31, 2007); monthly principal payments of $50 plus accrued interest, payable through July 2011; collateralized by all assets of the Company.	$	2,500		$	2,650

Mortgage payable to bank; interest rate at Federal Home Loan Bank Board Index rate plus 1.95% (7.35% as of May 31, 2007); monthly principal and interest payments of $5 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc		515			521

Other		13			16

		3,028			3,187
Financing lease obligations		336			358

		3,364			3,545
Less current maturities		(719	)		(726	)


	$	2,645		$	2,819

Note 8. — Lines of Credit

On June 29,2006, Video Display Corporation and Subsidiaries executed a Loan and Security Agreement with a syndicate including RBC Centura Bank and Regions Bank to provide a $17 million line of credit to the Company and a $3.5 million line of credit to the Company’s subsidiary Fox International, Inc. As of May 31,2007, the outstanding balances of these lines of credit were $12.2 million and $3.5 million, respectively and the available amounts for borrowing were $4.8 million and $0.0 million, respectively. These loans are secured by all assets and personal property of the Company. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and assets coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The agreement expires in June 2009, and accordingly is classified under long term liabilities on the Company’s balance sheet. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, as defined in the loan documents. In conjunction with Loan and Security Agreement, the syndicate also executed a $3.0 million term note with the Company, and the CEO of the Company provided a $6.0 million subordinated term note to the company.

Video Display Corporation and Subsidiaries
May 31, 2007

Note 11. – Shareholder’s Equity

Earnings Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all dilutive potential common shares that were outstanding during the period.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three month periods ended May 31, 2007 and 2006 (in thousands, except per share data):


				Weighted
				Average		Earnings
	Net			Common Shares		(Loss) Per
	Income (Loss)			Outstanding		Share
Three months ended May 31, 2007
Basic	$	853			9,655	$	0.09
Effect of dilution:
Convertible debt		—			—
Options		—			61

Diluted	$	853			9,716	$	0.09


Three months ended May 31, 2006
Basic	$	(235	)		9,703	$	(0.02	)
Effect of dilution:
Convertible debt		—			20
Options		—			198

Diluted	$	(235	)		9,921	$	(0.02	)

Video Display Corporation and Subsidiaries
May 31, 2007

Stock-Based Compensation Plans

For the three month period ended May 31, 2007 and May 31,2006, the Company recognized general and administrative expense of $25,626 and $13,500 respectively related to share-based compensation. After the adoption of SFAS No. 123(R), the liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital. As of May 31, 2007, total unrecognized compensation costs related to stock options granted was $23,200. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 5 years.

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

No options were granted during the three month periods ended May 31, 2007 and 2006.

Stock Repurchase Program

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a non-time limited continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the first quarter ended May 31, 2007, the Company repurchased 17,815 shares at an average price of $7.28 per share, which have been added to treasury shares on the consolidated balance sheet. Under this program, an additional 533,768 shares remain authorized to be repurchased by the Company at May 31, 2007. The Loan and Security Agreement executed by the Company on June 29, 2006 included restrictions on investments which restricted further repurchases of stock under this program. The company currently is authorized by the bank to repurchase in excess of 100,000 additional shares.

Note 12. – Comprehensive Income

Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” establishes standards for reporting and display of non-owner changes in shareholders’ equity. For the Company, total non-owner changes in shareholders’ equity include net income/(loss) and the change in the cumulative foreign exchange translation adjustment component of shareholders’ equity. During the three months ended May 31, 2007 and 2006, total comprehensive income (loss) was $0.9 million and $(0.04) million, respectively.

Note 13. – Related Party Transactions

In conjunction with an agreement involving re-financing of the Company’s lines of credit and Loan and Security Agreement, on June 29, 2006 the Company’s CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33,333 plus interest through July 2021. The interest rate on this note is equal to the prime rate plus one percent. The note is secured by a general lien on all assets of the Company, subordinate to the lien held by the syndicate of RBC Centura and Regions Bank. The balance outstanding under this loan agreement was approximately

Video Display Corporation and Subsidiaries
May 31, 2007

$3.7 million at May 31, 2007 after an early reduction of $2.0 million and $5.8 million at February 28, 2007. Interest paid during the quarter ending May 31, 2007 and May 31, 2006 on this note was $129,342 and $80,178.

The Company has a $250,000 term note due December 1, 2008 and a demand note outstanding from another officer, both bearing interest at 8%. Interest on the demand note for the quarter ending May 31, 2007 was $5,518. Principal payments of $14,000 were made on these notes in the first quarter.

Note 14. – Convertible Notes Payable

In connection with the purchase of the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp. discussed in Note. 5, the Company issued a $1.0 million face value non-interest bearing Convertible Note Payable with a maturity date of January 8, 2008. The note is convertible into 120,000 shares of the Company’s common stock at any time prior to maturity. The Company recognized a $75,000 discount on the debt to reflect the inherent interest in the notes, which will accrete as interest expense over the one year life of the note. Total interest expense accreted on this note for the quarter ending May 31, 2007 was $19,000.

During fiscal 2004, the Company issued four non-interest bearing notes payable due August 2007, valued at $125,000 each, and convertible at any time into common shares of the Company’s stock at a rate of $12.50 per share. The Company recognized a $150,000 discount on the debt to reflect the inherent interest in the notes. This discount on debt is accreted as interest expense over the three year life of the notes. The discount fully accretes upon conversion of the debt to equity. During the fourth quarter of fiscal 2005, one of the notes was converted into 10,000 shares of the Company’s common stock. During the first quarter of fiscal 2006, another of the notes was converted into 10,000 shares of the Company’s common stock. Total interest expense accreted on these notes for the quarter ending May 31, 2007 and May 31, 2006 was $6,250 and $6,250 respectively.

Note 15. – Disposal of Assets

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

Video Display Corporation and Subsidiaries
May 31, 2007

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

The following discussion should be read in conjunction with the attached interim consolidated financial statements and with the Company’s 2007 Annual Report to Shareholders, which included audited financial statements and notes thereto for the fiscal year ended February 28, 2007, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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

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

	•		Data Display CRTs– offers a complete range of CRTs for use in data display screen, including computer terminal monitors and medical monitoring equipment.

	•		Entertainment CRTs– offers a wide range of CRTs and projection tubes for television and home theater equipment.

	•		Component Parts – provides replacement electron guns and other components for CRTs primarily for servicing the Company’s internal needs.

During Fiscal 2008, management of the Company is focusing key resources on strategic efforts to dispose of unprofitable operations and seek acquisition opportunities that enhance the profitability and sales growth of the Company’s more profitable product lines. In addition, the Company plans to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:

Inventory management - the Company continually monitors historical sales trends as well as projected future needs to ensure adequate on hand supplies of inventory and to ensure against overstocking of slower moving, obsolete items.

Certain of the Company’s divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. The Company’s inventory turnover averages over 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations. This level of inventory is higher than some of the Company’s competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make last time buys. In the monitor operations of the Company’s business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors. Because of this, the Company’s management monitors the adequacy of its inventory reserves regularly, and at May 31, 2007 and February 28, 2007, believes its reserves to be adequate.

Interest rate exposure – The Company had outstanding bank debt in excess of $18.0 million as of May 31, 2007, all of which is subject to interest rate fluctuations by the Company’s lenders. Higher rates applied by the Federal Reserve Board over the past four fiscal quarters and potential continued rate hikes have negatively affected the

Video Display Corporation and Subsidiaries
May 31, 2007

Company’s earnings and will continue to negatively impact the Company’s earnings. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company’s debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges.

Results of Operations

The following table sets forth, for the three months ended May 31, 2007 and 2006, the percentages which selected items in the Statements of Operations bear to total sales:


	Three Months
	Ended May 31,
	2007			2006
Sales
Display Segment
Monitors		46.0	%		56.8	%
Data Display CRTs		18.6			13.6
Entertainment CRTs		3.0			4.0
Electron Guns and Components		0.7			0.8

Total Display Segment		68.3	%		75.2	%
Wholesale Distribution Segment		31.7			24.8

		100.0	%		100.0	%
Costs and expenses
Cost of goods sold		64.9	%		70.1	%
Selling and delivery		9.0			10.3
General and administrative		18.1			19.1

		92.0	%		99.5	%

Income from Operations		8.0	%		0.5	%

Interest expense		(2.2	)%		(2.7	)%
Other income, net		0.3			0.2

Income (loss) before income taxes		6.1	%		(2.0	)%
Benefit (Provision) for income taxes		2.2			.7

Net Income (loss)		3.9	%		1.3	%

Video Display Corporation and Subsidiaries
May 31, 2007

Net sales

Consolidated net sales increased $2.9 million for the three months ended May 31, 2007 compared to the three months ended May 31, 2006. Display segment sales increased $.7 million for the three-month comparative period and sales within the Wholesale Distribution segment increased $2.2 million for the three-month comparative period.

The net increase in Display Segment sales for the three months ended May 31, 2007 is primarily attributed to the sales from the acquisition of Clinton Electronics’ CRT manufacturing operations, as compared to the same period ended May 31, 2006. The Monitor revenues declined $.7 million over the three-month period primarily due to the fulfillment of a military contract for replacement CRTs early in fiscal 2007, which had not been renewed. Shipments under this program have been reinstated in the first quarter of fiscal 2008. The Data Display CRT revenues increased $1.5 million over the three-month period primarily due to the acquisition of the Clinton facility and replacement CRTs shipped from Data Display compared to the prior year period. Entertainment CRTs revenues declined $0.01 million over the comparable three-month period. A significant portion of the entertainment division’s sales are to major television retailers as replacements for products sold under manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets (25” to 30”), fewer extended warranties were sold by retailers, a trend consistent with recent prior fiscal years. The Company remains the primary supplier of product to meet manufacturers’ standard warranties. Growth in this division will be negatively impacted by the decreasing number of extended warranties sold for the larger, more expensive sets. Because the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce exposure to obsolescence.

Gross margins

Consolidated gross margins increased from 29.9% for the three months ended May 31, 2006 to 35.1% for the three months ended May 31, 2007.

Display segment margins increased from 18.0% to 20.6% for the comparative three month period. Gross margins within the Monitor segment decreased to 12.5% for the three months ended May 31, 2007 from 15.5% for the three months ended May 31, 2006. This decrease is primarily attributable to the impact of reduced volume of sales in the Monitor segment in Fiscal 2007, as well as by higher than expected design costs on certain flat panel products during the three months ended May 31, 2007. Data display gross margins increased from .5% for the three months ended May 31, 2006 to 6.6% for the three months ended May 31, 2007, due to the impact of the increased sales volume during the three months ended May 31, 2007. Gross margins in home entertainment CRTs decreased from 1.9% for the three months ended May 31, 2006 to 1.4% for the three months ended May 31, 2007, due to the impact of the reduced sales volume. Gross margins from Component Parts sold were flat for the three months ended May 31, 2006 compared to the three months ended May 31, 2007 at 0.2%.

Operating expenses

Operating expenses as a percentage of sales decreased from 29.4% for the three months ended May 31, 2006 to 27.1% for the three months ended May 31, 2007.

Display segment operating expenses decreased 2.3% for the three month period as compared to the comparable prior year period.

Wholesale Distribution segment operating expenses increased $0.4 million compared to the three month period a year ago, primarily due to additional expenses associated with the call center which was expanded during the second half of Fiscal 2006. These expenses (primarily payroll and telephone) are classified in general and administrative expense in the consolidated financial statements.

Video Display Corporation and Subsidiaries
May 31, 2007

Interest expense

Interest expense decreased $0.03 million for the three months ended May 31, 2007 as compared to the same period a year ago. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. These decreases in interest expense reflect lower average borrowings outstanding.

Income taxes

The effective tax rate for the three months ended May 31, 2007 and May 31, 2006 was 35.6% and 34.7%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes and the permanent non-deductibility of certain expenses for tax purposes.

The company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes in the first quarter ending May 31,2007. See Note 2.

Foreign currency translation

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

Liquidity and Capital Resources

As of May 31, 2007, the Company had total cash of $.9 million. The Company’s working capital was $39.9 million and $39.9 million at May 31, 2007 and February 28, 2007, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, advances from the Company’s Chief Executive Officer and long-term debt. Liquidity provided by operating activities of the Company is reduced by working capital requirements, largely inventories and accounts receivable, debt service, capital expenditures, product line additions and dividends.

The Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many instances, the Company’s products are components of larger display systems for which immediate availability is critical for the customer. Accordingly, the Company enjoys higher gross margins on certain products, but typically has larger investments in inventories than those of its competitors.

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

Cash provided by operations for the three months ended May 31, 2007 was $.1 million as compared to cash used of $1.8 million for the three months ended May 31, 2006. This net increase in cash provided is primarily the result of a decrease in inventories and an increase in taxes payable in addition to the impact of the increased net income compared to the same period last year.

Investing activities used cash of $235,000 related to the purchase of various equipment items during the three months ended May 31, 2007, compared to cash used of $40,000 during the three months ended May 31, 2006.

Financing activities used cash of $.3 million for the three months ended May 31, 2007, compared to cash provided of $2.8 million for the three months ended May 31, 2006, reflecting a payment against a loan from the Company’s Chief Executive Officer and the purchases of Treasury stock.

Video Display Corporation and Subsidiaries
May 31, 2007

The Company’s debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company’s retained earnings are restricted based upon these covenants.

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. Under this program, an additional 533,768 shares remain authorized to be repurchased by the Company at May 31, 2007. The Loan and Security Agreement executed by Company on June, 29, 2006 includes restrictions on investments which currently restrict further repurchases of stock under this program.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:

Reserves on inventories

Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company’s investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management considers the projected demand for CRTs in this estimate of net realizable value. Management is able to identify consumer buying trends, such as size and application, well in advance of supplying replacement CRTs. Thus, the Company is able to adjust inventory-stocking levels according to the projected demand. The average life of a CRT is five to seven years, at which time the Company’s replacement market develops. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the OEMs, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories. There have been no significant changes in management’s estimates in fiscal 2007 and 2006; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

Revenue Recognition

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

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

A portion of the Company’s revenue is derived from contracts to manufacture CRTs to a buyers’ specification. These contracts are accounted for under the provisions of the American Institute of Certified Public Accountants’

Video Display Corporation and Subsidiaries
May 31, 2007

Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

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

Allowance for doubtful accounts

The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying historical credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as past payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Company’s allowance has been sufficient for any customer write-offs. Although the Company cannot guarantee future results, management believes its policies and procedures relating to customer exposure are adequate.

Warranty reserves

The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on historical claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management believes that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.

Other Accounting Policies

Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.

Recent Accounting Pronouncements

Video Display Corporation and Subsidiaries
May 31, 2007

Forward-Looking Information and Risk Factors

This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report of Form 10-K for the year ended February 28, 2007 could cause actual results to differ materially.

Video Display Corporation and Subsidiaries
May 31, 2007

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company’s primary market risks include fluctuations in interest rates and variability in interest rate spread relationships, such as prime to LIBOR spreads. Approximately $21.9 million of outstanding debt at May 31, 2007 related to long-term indebtedness under variable rate debt. Interest on the outstanding balance of this debt will be charged based on a variable rate related to the prime rate or the LIBOR rate. Both rate bases are incremented for margins specified in their agreements. Thus, the Company’s interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase across all maturities of variable rate debt would result in a decrease of approximately $0.2 million in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at May 31, 2007. The Company does not trade in derivative financial instruments.

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

ITEM 4. CONTROLS AND PROCEDURES

Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of May 31, 2007. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of May 31, 2007.

Changes in Internal Controls

There have not been any changes in the our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Video Display Corporation and Subsidiaries
May 31, 2007

Item 5. Other information

None.

Item 6. Exhibits


Exhibit
Number		Exhibit Description

3(a)		Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985).

3(b)		By-Laws of the Company (incorporated by reference to Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January 15, 1985).

10(d)		$27,500,000 promissory note dated November 10, 2004 between the Company and Bank of America (holder) (incorporated by reference to Exhibit 10(d) to the Company’s 2005 Annual Report on Form 10-K).

10(e)		$6,800,000 term note dated February 27, 2006 between the Company and Ronald D. Ordway (holder) (incorporated by reference to Exhibit 10(e) to the Company’s 2006 Annual Report on Form 10-K) .

10(h)		Loan and Security Agreement and related documents, dated June 14, 2006, among Video Display Corporation and Subsidiaries and RBC Centura Bank and Regions Bank as lenders and RBC Centura Bank as collateral agent (incorporated by reference to Exhibit 10(h) to the Company’s Current Report on Form 8-K dated June 29, 2006).

10(i)		$6,000,000 Subordinated Note, dated June 29, 2006, between Video Display Corporation and Ronald D. Ordway (holder) (incorporated by reference to Exhibit 10(i) to the Company’s Current Report on Form 8-K dated June 29, 2006).

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets – May 31, 2007 (unaudited) and February 28, 2007		3

Consolidated Statements of Operations - Three months ended May 31, 2007 and 2006 (unaudited)		5

Consolidated Statement of Shareholders’ Equity - For the three months ended May 31, 2007 (unaudited)		6

Consolidated Statements of Cash Flows – Three months ended May 31, 2007 and 2006 (unaudited)		7

Notes to Consolidated Financial Statements - May 31, 2007 (unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosure About Market Risk		26

Item 4. Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults upon Senior Securities		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 5. Other Information		28

Item 6. Exhibits		28

SIGNATURES		29
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO


	May 31,			February 28,
	2007			2007
	(unaudited)
Assets
Current Assets
Cash	$	902		$	1,226
Accounts receivable, less allowance for doubtful accounts of $485 and $458		11,042			10,497
Inventories, net		33,157			33,344
Cost and estimated earnings in excess of billings on uncompleted contracts		2,959			2,963
Deferred income taxes		3,205			3,042
Prepaid expenses and other		664			737

Total current assets		51,929			51,809


Property, plant and equipment:
Land		585			585
Buildings		8,237			8,223
Machinery and equipment		20,417			20,196

		29,239			29,004
Accumulated depreciation and amortization		(21,432	)		(21,084	)

Net property, plant, and equipment		7,807			7,920


Goodwill		1,343			1,343
Intangible assets, net		3,659			3,894
Other assets		121			121


Total assets	$	64,859		$	65,087


	Three Months Ended
	May 31,
	2007			2006
Net sales	$	21,465		$	18,598

Cost of goods sold		13,925			13,034


Gross profit		7,540			5,564


Operating expenses
Selling and delivery		1,922			1,915
General and administrative		3,885			3,551

		5,807			5,466


Operating profit		1,733			98

Other income (expense)
Interest expense		(471	)		(501	)
Other, net		65			43

		(406	)		(458	)


Income (loss) before income taxes		1,327			(360	)

Provision for (benefit of) income taxes		474			(125	)


Net income (loss)	$	853		$	(235	)


Basic earnings (loss) per share of common stock	$	.09		$	(.02	)


Diluted earnings (loss) per share of common stock	$	.09		$	(.02	)


Basic weighted average shares outstanding		9,655			9,703


Diluted weighted average shares outstanding		9,716			9,921


	Three Months Ended
	May 31,
	2007			2006
Financing Activities
Proceeds from long-term debt, lines of credit and financing lease obligations		6,449			10,221
Payments on long-term debt, lines of credit and financing lease obligations		(4,486	)		(3,916	)
Proceeds from loans from officers and directors		—			220
Repayments of loans from officers and directors		(2,113	)		(3,800	)
Purchases and retirements of common stock and purchase of treasury stock		(129	)		—
Proceeds from exercise of stock options		8			23

Net cash (used in) provided by financing activities		(271	)		2,748


Effect of exchange rate changes on cash		37			192


Net (decrease) increase in cash		(324	)		1,121

Cash, beginning of period		1,226			1,577


Cash, end of period	$	902		$	2,698


	May 31, 2007				February 28, 2007
			Accumulated				Accumulated
	Cost		Amortization		Cost		Amortization
Customer lists	$	3,611	$	1,226	$	3,611	$	1,089
Non-compete agreements		1,245		615		1,245		552
Patents		765		184		765		154
Other intangibles		149		86		149		81

	$	5,770	$	2,111	$	5,770	$	1,876

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										Accumulated
						Additional				Other					Compre-
	Common			Share		Paid-in		Retained		Comprehensive		Treasury			hensive
	Shares			Amount		Capital		Earnings		Income		Stock			Income
Balance, February 28, 2007		9,600		$	7,284	$	171	$	23,376	$	95	$	(1,385	)

Net income		—			—		—		853		—		—		$	853
Foreign currency translation adjustment		—			—		—		—		37		—			37

Total comprehensive income		—			—		—		—		—		—		$	890

Issuance of common stock under stock option plan		67			8		—		—		—		—
Repurchase of Treasury Stock		(18	)		—		—		—		—		(129	)
Share based compensation		—			—		25		—		—		—


Balance, May 31, 2007		9,649		$	7,292	$	196	$	24,229	$	132	$	(1,514	)


	VIDEO DISPLAY CORPORATION
July 23, 2007	By:	/s/ Ronald D. Ordway
		Ronald D. Ordway
		Chief Executive Officer


July 23, 2007	By:	/s/ Gregory L. Osborn
		Gregory L. Osborn
		Chief Financial Officer