VIDEO DISPLAY CORP - 10-K Annual Report

Financial Statements:

Index to Consolidated Financial Statements.

Financial Statement Schedule:

Index to Consolidated Financial Statements Schedule

VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)

1868 Tucker Industrial Drive, Tucker, Georgia 30084
(address of principal executive offices and zip 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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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 in Part III of this Form 10-K or any amendment to this Form 10-K. ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter was $14,835,472.

The number of shares outstanding of the registrant's Common Stock as of May 13, 2003 was 4,579,526.

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

List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

Portions of the Definitive Proxy Statement related to the 2003 Annual Meeting of Stockholders in Part III, Items 10 (as related to directors), 11, 12 and 13.

Video Display Corporation (the "Company") is a leading supplier of a complete range of display products and component parts for the display industry. Its product line consists of a wide variety of electron optic parts for original equipment manufacturers ("OEMs"), cathode ray tubes ("CRTs") and monitor manufacturers. The Company manufactures monochrome and color CRTs for medical, military, industrial and television applications and high and low-end monochrome and color CRT and AMLCD monitor displays for specialty high-performance and ruggedized requirements. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. The Company's operations are principally located in the U.S.; however, the Company does have a subsidiary operation located in the United Kingdom. During the third quarter 2003 and into the fourth quarter, the Company ceased manufacturing operations at its facility in Monterrey, Mexico and began the process of winding down its business there, effectively closing this operation by the end of the fiscal year ended February 28, 2003.

The Company began operations in 1975 in Stone Mountain, Georgia manufacturing and recycling replacement CRTs for color and black/white television sets. Beginning in 1983, with the growth of the computer industry, the Company expanded to meet the needs of the replacement market for computer monitors and other data display screens by acquiring production equipment and customers from other smaller CRT remanufacturers. Today, the Company with its plants in Louisiana, Pennsylvania, Georgia, Texas, New York, Florida, Kentucky, California, and Lye, U.K. combine to form an international display manufacturing and display replacement parts distribution network for military, medical, training simulation and other niche market display applications.

In November 2001, the Company acquired the Marquee™ line of CRT projectors from Christie Digital Systems Canada Inc. ("Christie"). These assets were transferred to the Company's subsidiary, VDC Display Systems ("Display Systems") of Cape Canaveral, Florida and complement Display System's position in the simulation, virtual reality, home theater and other specialized markets.

In June 2001, the Company acquired the common stock of XKD Corporation ("XKD") of San Jose, California. XKD is a manufacturer of high-resolution displays used for training, simulation, ruggedized military/industrial, and instrumentation applications.

In May 2000, the Company acquired the common stock of Lexel Imaging Systems, Inc. ("Lexel") of Lexington, Kentucky. Lexel manufactures a wide range of CRT storage tubes and other complete visual displays for commercial, medical and military programs. Shortly after the Lexel acquisition, the Company acquired certain assets of the Electro Optical division of Imaging and Sensing Technology ("IST"), the CRT operations of the Raytheon Corporation and the assets of the former Datagraphix business unit of Anacomp. IST provides a product line that includes specialty CRTs and complete visual displays used to produce computer-generated graphics, high quality photography and medical diagnostic images. The acquired assets of IST, Raytheon and Datagraphix were integrated into Lexel's manufacturing facility in fiscal 2001.

During fiscal 2000, in order to support the data display segment, the Company opened Display Systems in Cape Canaveral, Florida. Display Systems provides custom CRT solutions for training rooms, board rooms, teleconferencing, flight training simulators, command and control centers, air traffic control, ship simulators, process status displays and integrated home theater. The Company's VDC Wolcott subsidiary, established in fiscal 2000, was closed and merged into the operations of Lexel

in fiscal 2003. The Lexel operations of VDC Wolcott offers high-resolution monochrome displays for use in medical and military applications.

During fiscal 1999, the Company acquired the assets and assumed certain liabilities of the U.S. and U.K. Display Divisions of Aydin Corporation ("Aydin"); acquired 100% of the outstanding common stock of Mengel Industries, Inc. ("MII"); and acquired the net assets of both Wintron, Inc. ("Wintron") and MegaScan Corporation ("MegaScan"). Aydin offers a complete line of high-resolution commercial and ruggedized CRT monitors, AMLCD flat panel displays and monitors used by the public and private sector industries including medical diagnostic or treatment centers, utility and financial companies, and the military industry. MII, now combined with Teltron, supplies independent, OEM and hospital service personnel with CRTs, camera tubes and other components for medical imaging within the healthcare industry. Wintron manufactures high quality, custom-designed deflection components, high voltage power supplies, coils and flyback transformers and other CRT drive circuitry for airborne, commercial and military applications. MegaScan was shutdown and merged into Z-Axis, Inc. ("Z-Axis") in fiscal 2003. The Z-Axis operations of MegaScan offers a specialty line of high-resolution monochrome CRT monitors to the medical display industry.

In fiscal 1996, the Company acquired the assets and assumed certain of the liabilities of Teltron Technologies, Inc. ("Teltron") and the stock of Z-Axis. Teltron is involved in the development and production of new and recycled camera and CRTs and special purpose sensors. Teltron's products are used in camera tube applications including nuclear inspection, UV sensing, x-ray and astronomy; military applications including avionics instrument displays, marine radar displays, helmet mounted displays, vehicular displays, and target monitoring image tubes; and in CRT applications including OEM displays, flying spot scanners, photo typesetting and electrostatic deflection tube applications. Z-Axis is involved in the design and production of color and monochrome video display monitors. Z-Axis' monitors are used in industrial control, medical instruments, test equipment, visual aid devices, on-board tracking systems, point-of-sale terminals and naval tactical displays.

The Company, through Southwest Vacuum Devices, Inc. ("Southwest Vacuum") located in Tucker, Georgia, is involved in the manufacturing, marketing and distribution of electron guns and related hardware. The electron gun is a main component of a CRT and Southwest Vacuum provides the Company the ability to supply virtually all of its internal electron gun requirements.

In the late 1980's, the Company entered the market of wholesale distribution of consumer electronic parts and consumer products and accessories with the acquisition of Fox International Ltd., Inc. ("Fox International") of Cleveland, Ohio. Fox International is involved in the wholesale distribution of consumer electronic parts for most major U.S. and foreign electronic manufacturers.

The Company continues to explore opportunities to expand the products offered in the display industry. This expansion will be achieved by adding new products to its inventory or by acquiring existing companies that would enhance the Company's position in the display industry. Management currently is evaluating product trends in the industry and subsegments in which the Company operates. Overall trends are discussed herein under "Flat Panel and Other Technology". Research and development primarily consists of establishing the interchangeability of products from various manufacturers and, when advantageous, manufacturing products to replace original electronic parts.

This information is provided in Note 13 to the Consolidated Financial Statements.

Since its organization in 1975, Video Display Corporation has been engaged in the distribution and manufacture of CRTs using new and recycled CRT glass bulbs, primarily in the replacement market, for use in data display screens, including computer terminal monitors, medical monitoring equipment and various other data display applications and in television sets. The Company currently markets CRTs in over 3,000 types and sizes.

The Company's CRT manufacturing operations of new or recycled CRTs are conducted at facilities located in White Mills, Pennsylvania (Chroma); Bossier City, Louisiana (Novatron); Dallas, Texas (MagnaView); Birdsboro, Pennsylvania (Teltron); and Lye, England (VDC—Europe). With the closure of the Mexico manufacturing facility in the fourth quarter of fiscal 2003, the Atlanta, Georgia location acts as a distributor of CRTs purchased from outside sources. The European location is a sales and distribution facility. The Company's Monterrey, Mexico monochrome CRT manufacturing facility (Video Electronics) was closed in the fourth quarter of fiscal 2003, as the Company has been able to more affordably source these tubes from foreign vendors.

The recycling process for monochrome CRTs involves the cleaning and reconditioning of the glass bulb and the insertion of new electronic components, which are purchased from OEMs and the Company's electron gun subsidiary. The recycling of color CRTs involves the insertion of new electronic components, while leaving the original display screen intact. All CRTs manufactured by the Company are tested for quality in accordance with standards approved by UL and are shipped to customers or warehoused to meet future customer demand. The Company provides one-year limited warranties on its computer and other data display CRTs and two-year limited warranties on its color television components. Management believes that the Company is the largest recycler of CRTs in the domestic television replacement market.

The Company also distributes new CRTs and other electronic tubes purchased from original manufacturers, both domestic and international. There is typically a 60 to 90 day lead time on purchases from international manufacturers. The Company must forecast its inventory requirements for six months to one year. Occasionally, manufacturers offer large quantities of overstocked original manufactured tubes at significant price reductions. The Company acquires these tubes when the existing replacement market demonstrates adequate future demand and the purchase price allows a reasonable profit for the risk. Due to the extended time frame for the replacement market to develop (five to seven years), these purchased inventories sometimes do not turn as quickly as other inventories. Bulk purchases have declined over the past few years as the Company is managing current inventory levels and space availability.

The Company markets its products through approximately 200 independent wholesale electronics distributors located throughout the U.S. and sells directly to OEMs and their service organizations. The Company also supplies, under private-brand labeling, many of the replacement tubes marketed by several national brand name television manufacturers.

In addition to factors affecting the overall market for such products, the Company's sales volumes in both the color television and the data display CRT replacement markets are dependent upon the Company's ability to provide prompt response to customers' orders, while maintaining quality control and competitive pricing. The Company's manufacturing activities are scheduled primarily around orders received.

With its most recent acquisitions, the Company continues to position itself to compete in the design and manufacture of complete monitor units for use in the healthcare, military and industrial sectors.

The Company's monitor operations are conducted at Phelps, New York (Z-Axis); Birdsboro, Pennsylvania (Teltron and Aydin); Cape Canaveral, Florida (Display Systems), Lexington, Kentucky (Lexel); and San Jose, California (XKD). In the third quarter of fiscal 2003, the VDC Wolcott and MegaScan operations were shut down and merged into the Lexel and Z-Axis' operations, respectively.

The Company's monitor segment involves the design, engineer and manufacture of complete monochrome and color monitor units using new CRTs or flat panel displays. The Company will customize these monitors for specific applications, including ruggedization for military uses or size reduction due to space limitations in industrial and medical applications. Because of the Company's flexible and cost efficient manufacturing, it is able to handle low volume orders that generate higher margins.

The Company, through its electron gun manufacturing subsidiary Southwest Vacuum, manufactures electron gun assemblies comprised of small metal and ceramic parts in a glass housing. The assembly process is highly labor intensive. While the particular electron guns being sold are of the Company's own design, most are replacements for electron guns previously designed for original equipment CRTs used in television sets and computer monitors. Therefore, the total amount of research and development expense is not significant and is not segregated in the consolidated financial statements, but is instead included in cost of sales. Raw materials consist of glass and metal stamped parts.

The electron gun division markets electron gun component parts to OEMs who manufacture high resolution and specialty tubes for unique applications. The majority of electron guns produced by the Company are consumed internally among the Company's own CRT manufacturing facilities. Sales to these related divisions, which have been eliminated in the consolidated financial statements, amounted to approximately $910,000, $549,000, and $434,000 for fiscal 2003, 2002 and 2001, respectively.

Electron gun sales are historically dependent upon the demand by domestic and foreign television CRT remanufacturers. The Company continues to seek alternative, growth-oriented markets to fully utilize its electron gun and component assembly facility.

The Company, through its subsidiary, Wintron, located in Howard, Pennsylvania, produces flyback transformers, coils and power transformers. Intercompany sales transactions were $221,000, $210,000 and $85,000 for fiscal 2003, 2002 and 2001, respectively.

The Company anticipates that AMLCD and Plasma Display products, due to their lower space and power requirements, will eventually become the display of choice in many new display applications. To date, this has not had a significant effect on the Company's operations due to the nature of the Company's business, which primarily emphasizes replacement and service parts and specialty niche markets. In anticipation of long-term trends toward flat panel display usage, the Company has focused its efforts as well as its acquisition strategy toward flat panel technologies for niche market applications in the medical, simulation, training and military markets. Other types of technology including HDTV have not had a significant impact on the Company's business. HDTV utilizes both CRT and flat panel technology and, therefore, has potential positive effects on the Company due to higher margin CRT replacements. There can also be long-term negative effects should the HDTV market move toward

greater flat panel utilization. The Company will continue to monitor these trends and continue to make adjustments to its CRT inventory levels and operating facilities to reflect changes in demand.

Fox International distributes consumer electronic parts of most major consumer electronics manufacturers, both foreign and domestic. This subsidiary resells these products to major electronic distributors; retail electronic repair facilities; third-party contractual repair shops; and directly to consumers. In its relationship with consumer electronic manufacturers, Fox International receives the right, often exclusively, to ship parts to authorized dealers. Many of the manufacturers also direct inquiries for replacement parts to Fox International. Each manufacturer requires a distributor to stock its most popular parts and monitors the order fill ratio to ensure that their customers have access to sufficient replacement parts. Fox International maintains 98% fill ratios in order to secure favored distributor status from the manufacturers, requiring a significant investment in inventories.

The Company holds certain patents with respect to some of its products and markets its services and products under various trademarks and tradenames. Additionally, in fiscal 2001 the Company began licensing certain electronic technology to other manufacturing companies, which generated royalty revenues of approximately $63,000 and $155,000 in fiscal 2003 and 2002, respectively. Although the Company believes that the patents and trademarks owned are of value, the Company believes that success in its industry will be dependent upon incorporating emerging technology into new product line introductions, frequent product enhancements, and customer support and service. However, the Company intends to protect its rights when, in its view, these rights are infringed upon. The Company's key patents and trademarks expire in 2014 and 2004, respectively.

Historically, there have not been any seasonal variations in the Company's CRT operating subsegments. The wholesale electronic parts distribution segment has experienced minimally higher sales during the Company's third quarter, which includes the impact of higher repair parts sales during the beginning of the new fall television season.

Information contained under Item 7—"Management's Discussion and Analysis—Liquidity and Capital Resources" ("MD&A") included in this Report is incorporated herein by reference in response to this item.

The Company sells to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the medical, military, television and avionics industries. The Company's CRT division had direct and indirect net sales to the U.S. government, primarily the Department of Defense for training and simulation programs, that comprised approximately 25%, 15% and 17% of CRT segment net sales and 20%, 13% and 13% of consolidated net sales in fiscal 2003, 2002 and 2001, respectively. Sales to foreign customers were 14% of consolidated net sales for fiscal 2003. Foreign sales were less than 10% for fiscal years 2002 and 2001. The Company's wholesale electronic parts distributor, Fox International, had net sales to one customer, National Parts, Inc., that comprised approximately 18%, 20% and 22% of that subsidiary's net sales in fiscal 2003, 2002 and 2001, respectively. The Company attempts to minimize credit risk by reviewing all customers' credit history before extending credit, and by monitoring customers' credit exposure on a

daily basis. The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information.

The Company's backlog is comprised of undelivered, firm customer orders, which are scheduled to ship within eighteen months. The Company's backlog was approximately $21,413,000 at February 28, 2003 and $22,312,000 at February 28, 2002. The Company's Lexel division comprised $14,414,000 (67%) and $15,810,000 (71%) of the February 28, 2003 and 2002 backlog, respectively. It is anticipated that more than 95% of the February 28, 2003 backlog is expected to ship during fiscal 2004.

The Company, primarily through its Aydin, Teltron, Lexel, XKD and Display Systems subsidiaries, had contracts with the U.S. government (principally the Department of Defense) which generated revenues of approximately $15,083,000, $9,098,000 and $9,282,000 for the fiscal years ended 2003, 2002 and 2001, respectively. The Company's costs and earnings in excess of billings on these contracts were approximately $514,000 at February 28, 2003 and $924,000 at February 28, 2002. The Company had no billings in excess of costs and earnings on these contracts at February 28, 2003 and at February 28, 2002. These contracts are typically less than twelve months in duration and specify a set number of units to be shipped based on a set delivery schedule.

The Company's operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the Company's financial condition or results of operations in the past and are not expected to have a material adverse impact in the foreseeable future.

The objectives of the Company's research and development activities are to increase efficiency and quality in its manufacturing and assembly operations and to enhance its existing product line by developing alternative product applications to existing cathode ray and electron optic technology. The Company's commercial and military divisions continue their research and development in advanced infrared imaging ("FLIR"). The Company has funded additional FLIR research in partnership with the University of Rhode Island. Potential future markets for FLIR include military and security surveillance, target acquisition, fire fighting, and industrial and medical thermography. Through fiscal 2003, the Company has not incurred significant costs for basic research or new product development and, therefore, has not segregated these costs as a separate item but has included such costs in the consolidated financial statements as a part of costs of goods sold. As the Company continues to increase its development of new technology, these costs will be monitored and separately categorized, if material. Research and development costs amounted to approximately $285,000 and $550,000 in fiscal 2003 and 2002, respectively.

As of February 28, 2003, the Company employed a total of 455 persons on a full time basis. Of these, 153 are employed in executive, administrative, and clerical positions, 57 are employed in sales and distribution, and 245 are employed in manufacturing operations. A union represents 3 employees at the Wintron location in Howard, Pennsylvania. The Company believes its employee relations to be satisfactory.

Although the Company believes that it is the largest domestic recycler and distributor of recycled television CRTs in the United States CRT replacement market, it competes with other CRT manufacturers, as well as OEMs, many of which have greater financial resources than the Company. The Company believes it is the only company that offers complete service in replacement markets with its manufacturing and recycling capabilities. As a wholesale distributor of original equipment CRTs purchased from other manufacturers, the Company also competes with numerous other distributors, as well as the manufacturers' own distribution centers, many of which are larger and have substantially greater financial resources than the Company. The Company's ability to compete effectively in this market is dependent upon its continued ability to respond promptly to customer orders and to offer competitive pricing. The Company expects that competition may increase, especially in the computer and other display replacement markets, should domestic and foreign competitors expand their presence in the domestic replacement markets.

Compared to domestic manufacturing prices on new CRTs, the Company's prices are competitive due to lower manufacturing costs associated with recycling the glass portion of previously used tubes, which the Company obtains at a fraction of the cost of new glass. The Company has to date been able to maintain competitive pricing with respect to imported CRTs because, generally, the CRT replacement market is characterized by customers requiring a variety of types of CRTs in quantities not sufficiently large enough to absorb the additional transportation costs incurred by foreign CRT manufacturers.

The Company believes it has a competitive advantage and is a sole source in providing many of its CRTs to the customer base of its Teltron and Lexel subsidiaries as these operations have been providing reliable products and services to these customers for more than 30 years.

The Company believes that it has a competitive advantage in the monitor industry due to its flexibility to handle lower volume orders as well as its ability to provide internally produced component parts. As a result, the Company can offer more customization in the design and engineering of new products.

With the Company's acquisition of Lexel and the relatively new operations of Display Systems and XKD Corp., the Company has become one of the leading suppliers within the specialty CRT and monitor markets, especially in the military and medical imaging industries.

The Company does utilize flat panel displays in some of its monitor units. These flat panels are purchased from OEMs. The revenues generated in fiscal 2003 from products utilizing flat panel technology was $4,031,000 as compared to $3,458,000 a year ago. Being in the replacement market, the Company has the opportunity to see trends in OEM sales, and while the growth in flat panel products is outpacing growth in CRT products, on a percentage basis, the CRT market remains more dominant. Because of this, the Company is still primarily in the CRT market. As trends continue to define themselves, and replacement of these products occur in five to seven years, the Company foresees a bigger impact and utilization of flat panel products in its business. There is competition in the area of flat panel technology and the Company will look towards its ability to adapt and incorporate designs into its future products so that it may compete in a profitable nature.

The Company's competition in the consumer electronics parts segment comes primarily from other parts distributors. Many of these distributors are smaller than Fox International but a few are of equal or greater sales size. Prices for major manufacturers' products can be directly affected by the manufacturers' suggested resale price. The Company believes that its service to customers and warehousing and shipping network give it a competitive advantage. Fox International sells a wide variety of electronic parts and accessories, including semiconductors, resistors, audio/video parts and batteries.

The Company leases its corporate headquarters at 1868 Tucker Industrial Drive in Tucker, Georgia (within the Atlanta metropolitan area) and occupies approximately 10,000 square feet of the total 59,000 square feet at this location. The remainder is utilized as warehouse and assembly facilities. Extension of this lease would be expected at its expiration in October 2003. This location, as well as several others, is leased from related parties at current market rates. See "Item 13—Certain Relationships and Related Transactions". Management believes the facilities to be adequate for its needs. The following table details manufacturing, warehouse, and administrative facilities:

Location	Square Feet	Lease Expires
CRT, Monitor and Electron Gun Manufacturing and Warehouse Facilities
Tucker, Georgia	59,000	October 31, 2003
Stone Mountain, Georgia	45,000	December 31, 2007
Tucker, Georgia	40,000	January 2, 2006
White Mills, Pennsylvania	110,000	Company Owned
Bossier City, Louisiana	26,000	Company Owned
Dallas, Texas	24,000	January 31, 2004
Lye, England	4,800	February 28, 2006
Birdsboro, Pennsylvania	40,000	Company Owned (a)
Phelps, New York	32,000	Company Owned
Howard, Pennsylvania	19,000	Company Owned
Cape Canaveral, Florida	15,600	January 17, 2005
Lexington, Kentucky	152,000	March 31, 2005
San Jose, California	10,500	March 31, 2006
Atlanta, Georgia	500	September 30, 2003
Wholesale Electronic Parts Distribution
Bedford Heights, Ohio	60,000	Company Owned (b)
Richardson, Texas	13,000	April 30, 2007
New York, New York	18,000	July 31, 2007

The Company is involved in various legal proceedings relating to claims arising in the ordinary course of business. There are no material proceedings to which the Company is a party and management is unaware of any significant contemplated actions against the Company.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Company's common stock is traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") national market system under the symbol VIDE.

The following table shows the range of prices for the Company's common stock as reported (and as adjusted for the stock dividend discussed below) by the NASDAQ for each quarterly period beginning on March 1, 2001. The prices reflect inter-dealer prices, without mark-up, mark-down, or commission, and may not necessarily represent actual transactions.

There were approximately 750 holders of record of the Company's common stock as of May 12, 2003.

The Company has not paid cash dividends in the past. Payment of cash dividends in the future will be dependent upon the earnings and financial condition of the Company and other factors which the Board of Directors may deem appropriate. The Company is restricted by certain loan agreements regarding the payout of cash dividends, as further described in the notes to the consolidated financial statements.

In March 2001, the Company's Board of Directors declared a stock dividend of 0.20 shares of common stock for each common share outstanding. The stock dividend was issued on April 16, 2001 to all common stock shareholders of record as of March 31, 2001. All per share data for all periods presented in this Report, including the consolidated financial statements, reflect the increase in the amount of common stock outstanding due to the stock dividend.

The following table sets forth certain selected financial data with respect to the Company's last five fiscal years.

Data relating to the five fiscal years ended February 28, 2003 are derived from the Consolidated Financial Statements appearing elsewhere in this Report or in previous reports, which have been audited by BDO Seidman, LLP, independent certified public accountants. The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by reference to,

management's discussion and analysis, the consolidated financial statements of the Company, the notes thereto and the report thereon included elsewhere in this Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement under the Private Securities Litigation Reform Act: Except for the historical information contained herein, the matters discussed herein are forward-looking statements that involve risk and uncertainties, including but not limited to (i) economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and (ii) other factors discussed in the Company's filings with the Securities and Exchange Commission.

The following table sets forth, for the fiscal years indicated, the percentages which selected items in the Company's consolidated statements of income bear to total revenues:

(See Item 1. Business—Description of Principal Business and Principal Products for discussion about the Company's Products and Subsegments.)

Consolidated net sales for fiscal 2003 increased $4,216,000 or 5.8% over fiscal 2002 net sales. CRT division and wholesale parts segment sales increased $669,000 or 1.1% and $3,547,000 or 26.3%, respectively for the comparative periods.

The net increase in CRT segment sales in fiscal 2003 over fiscal 2002 is attributed to growth within the monitor sub-segment of $2,720,000 from an increase in number of orders. Offsetting declines occurred in net sales of the data display, entertainment and component parts sub-segments of $1,623,000, $335,000 and $92,000, respectively.

The net gain in monitor division sales includes increases from Display Systems of $3,498,000, Lexel of $1,721,000 (radar displays) and XKD of $554,000 (cockpit displays). These increases reflect revenues from new contract orders received during fiscal 2003. There were offsetting declines of $1,604,000 resulting from management's decisions to shift production of high-resolution medical monitors and

military displays produced by the Megascan and Wolcott divisions, respectively. As a result of this decision, plants were shut down and production was moved to the Z-Axis and Lexel divisions, respectively. This movement disrupted the ability to produce these monitors and displays thereby, negatively impacting sales for these products. Z-Axis and Lexel will handle future sales of the high-resolution medical monitors and military display lines. Teltron and Aydin had declines of $940,000 in comparative sales for fiscal 2003 to fiscal 2002. During fiscal 2003, the building addition construction was completed on the Birdsboro, Pennsylvania (Teltron) facility and Aydin operations relocated from Horsham, Pennsylvania to the new Teltron facility. During the period of relocation there was a delay in the completion and shipment of orders which negatively impacted Aydin's sales for the year.

Declines in the data display division reflect declines primarily within the international locations including Mexico, U.K. and Netherlands. The international location sales were down $1,206,000 when compared to a year ago. The Netherlands location was closed in mid-fiscal 2002 and Mexico was substantially closed in the fourth quarter of fiscal 2003.

The component parts division recorded declines of $92,000 for the fiscal year ended 2003 as compared to a year ago. Electron gun and stem sales increased $153,000 while other component parts declined $245,000, which was attributed to fewer units being sold.

Within the entertainment division, sales of projection tube CRTs increased $619,000 but were offset by declines in sales of replacement television CRTs by $954,000 for the year ended February 28, 2003 as compared to the same period a year ago. The increases in projection CRTs sales reflects the continued efforts by the Company to expand its marketing of projection tubes for use in home theater and commercial applications through greater direct sales contact and internet marketing.

The Company is the primary supplier of replacement television CRTs to the domestic entertainment market. A majority of the entertainment segment's sales (37%) 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 are sold by retailers, a trend consistent with the past two fiscal years. The Company remains the primary supplier of the manufacturer's standard warranties. Growth in this division will be impacted by the timing and number of extended warranties sold for the larger, more expensive sets. Due to the fact that 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 the exposure to obsolescence. In fiscal 2003, retail trends continued to indicate increased sales in the mid-to-larger size television sets.

Flat panel technology has not had a significant impact on the television replacement market. Most of the flat panel units sold within the television market are for commercial usage rather than end user consumer usage. Within the data display and monitor sub-segments, there has been an impact by flat panel technology. The Company has converted manufacturing of certain subsidiaries within these sub-segments to produce flat panel products. As noted above, being in the replacement market, the Company has the ability to see product trends and make marketing, production and stocking decisions based on those trends. As a result of declining market conditions, management shut down the monochrome CRT manufacturing operations (closure of Mexican operations) and began sourcing these products from overseas suppliers.

The increase in the wholesale consumer parts segment of $3,547,000 is attributed primarily to the additions of the Applica, Inc. ("Applica") and Norelco distribution agreement revenues. These agreements authorize Fox International to distribute parts and accessories for Applica's Black & Decker, Profinish, Quick & Easy, and Spacemaker product lines and for Norelco's product lines. Sales generated pursuant to these agreements were approximately $5,800,000 and $718,000 in fiscal 2003 and 2002, respectively. These increases were offset by decreases of approximately $1,500,000 in consumer retail sales, which have been negatively impacted by general economic conditions.

Consolidated gross profit margins decreased from 31.7% to 25.5% for the year ended February 28, 2003 as compared to the year ended February 28, 2002. CRT segment margins decreased from 30.2% to 19.7% and the wholesale electronic parts segment margins increased from 38.0% to 46.1%.

The primary factors for the decline of CRT margins were third quarter write-downs and write-offs of inventories and manufacturing equipment in the amount of $4,896,000 related to the closing of operations in Mexico, Wolcott, MegaScan and Aydin UK. These locations, which during the past few years had experienced reduced sales volume, lower margins due to aging product lines with limited potential for future product development and high overhead were part of an internal restructuring of operations. Other locations within the Company with excess capacity and newer, complementary product lines were determined to be the successors of these related customer bases. As such, certain raw materials inventories and equipment used in the manufacturing process of these closed locations were written down or off as the Company has been able to more affordably source these products from overseas vendors or to shift the processes to more efficient locations within the Company. Management determined it cost prohibitive to physically transfer the related materials and equipment to other Company locations. Included in the above charge to cost of sales in the third quarter of fiscal 2003 was a write-down of $1,082,000, which reflects the carrying cost of inventories previously manufactured by the Mexican operation to current net realizable value as well as the write-off of older or large quantity stocks.

The remainder of the decline in CRT margins is attributed in part to decreases in margins within the monitor sub-segment. Display Systems margins declined due to the fact that products sold in the previous year included bulk inventories acquired at significantly reduced costs related to the acquisition of the Marquee™ product line in the third quarter of fiscal 2002. As these inventories have been sold, replacement items have been purchased at current market costs and, thus, have increased the cost of items produced.

The increase in the wholesale consumer parts segment margins is largely attributable to the Applica and Norelco distribution agreements. The revenues associated with these agreements include primarily handling charges and shipping income, which accounts for an approximately 79% profit margin before the effects of offsetting operating expenses.

Operating expenses as a percentage of sales increased from 26.6% for the year ended February 28, 2002 to 28.9% for the year ended February 28, 2003.

The CRT segment operating expenses increased $1,603,000 for the year ended February 28, 2003 as compared to a year ago. Included in operating expenses is $572,000 of accounts receivable and other assets that were written off in the third quarter of fiscal 2003 related to the closure of the Mexican operations. Additionally, a third quarter non-cash charge of $1,296,000 was recognized for the cumulative foreign currency translation adjustment related to the Mexican subsidiary that was previously carried as a component of shareholders' equity.

Operating expenses increased by $828,000 compared to the prior year at Display Systems in order to handle the increased business generated from the Christie Marquee™ product line acquired in fiscal 2002. Based on expected increased sales volume, it is anticipated that these costs will continue to increase slightly in the near term and then stabilize as sales level out. Additionally, there were increased operating costs associated with the closure of the Mexican operations including severance payments, as required by Mexican law of $217,000, which were paid during the third and fourth quarters of 2003. The increases were offset by reductions to operating expenses of $223,000 related to the locations closed during the year. Additionally, the Company adopted SFAS No. 142 at the

beginning of fiscal 2003 and, accordingly, ceased amortization of goodwill at that time. Goodwill amortization expense was $320,000 for the year ended February 28, 2002.

The wholesale parts segment operating expenses were up $1,298,000 for the year ended February 28, 2003 as compared to a year ago, but as a percentage of sales decreased from 41.3% to 40.3%. The increase includes $1,520,000 related to increases in delivery, labor and commission expenses associated with the Applica and Norelco revenue increases. Offsetting decreases of $222,000 were experienced in various operating expense line items. The delivery and commission expenses related to the Applica and Norelco lines are a function of sales volume. As sales increase it is expected that these costs will increase as well. However, the percentage of total operating expenses to net sales as a whole should stabilize or decline slightly as certain overhead expenses are expected to remain fixed.

Interest expense decreased $92,000 for the year ended February 28, 2003 as compared to February 28, 2002. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. LIBOR and prime rates were slightly lower during the comparable periods. While overall debt decreased during the twelve month comparative periods by $840,000, the mix of interest rates changed.

The effective tax rate for fiscal 2003 was (23.9)% compared to 45.4% for fiscal 2002. The effective tax rate for 2003 was lower than the Federal statutory rate due to differences between income tax and financial reporting purposes relating to the abandonment of Mexican net operating losses, effects of state income taxes and offset by a decrease in non-deductible operating expenses of $118,000 in fiscal 2003 compared to $467,000 in fiscal 2002. Non-deductible expenses in 2002 included goodwill amortization.

Consolidated net sales for fiscal 2002 increased $1,560,000 or 2.2% over fiscal 2001 net sales. CRT division segment sales increased $2,652,000 or 4.7% over fiscal 2001 while the wholesale parts segment declined $1,092,000 or (7.5)%.

The net increase in CRT segment sales can be attributed to growth within the monitor subsegment, primarily at Display Systems and Lexel. These locations added $2,622,000 and $4,852,000, respectively to fiscal 2002 sales. The offsetting declines are primarily attributed to the decline in revenues in the entertainment subsegment and declines at the Aydin and Z-Axis locations. The monitor division increased $3,422,000 or 9.4%, data display CRT sales increased $552,000 or 5.3%; entertainment CRT sales decreased $986,000 or (13.1)%; and the electron gun/component parts segment decreased $336,000 or (17.3)%.

The increase in monitor division sales was impacted in several ways. The Lexel operations integrated the fiscal 2001 acquisitions of IST and Raytheon product lines, which contributed approximately $6,000,000 in additional sales in fiscal 2002, and streamlined processes to allow for better delivery times, thereby decreasing the amount of backlog. The successful integration of the acquired product lines into the Lexel facility were not completed until late in the fourth quarter of fiscal 2001. Offsetting sales declines in the monitor division occurred at Aydin and Z-Axis in the amount of approximately $2,600,000. Aydin's government sales were down slightly due to completion of pre-existing contracts, which were not replaced at the same rate with new contracts. Commercial sales of monitors were negatively impacted as well. Certain customers had been lost during the previous year's change of production facilities from Aydin to Z-Axis. Additionally, there has been a slight impact as some commercial customers have changed to flat panel technology.

In November 2001, Displays Systems in Florida began shipping the Marquee™ product line acquired from Christie and recognized sales of $2,269,000 from this product line during the third and fourth quarters of fiscal 2002.

The Company is the primary supplier of replacement CRTs to the entertainment market. A majority of the entertainment segment's sales (41%) are to major television retailers as replacements for products sold under manufacturer and extended warranties. Due to the economics of lower retail sales prices for mid-size television sets (25" to 30"), fewer extended warranties are sold. The Company remains the primary supplier of the manufacturer's standard warranties. Growth in this division will be impacted by the timing and number of extended warranties sold for the larger, more expensive sets. Due to the fact that the Company is in the replacement market, it has the ability to track retail sales trends and accordingly, can adjust quantities of certain size CRTs carried in stock and reduce the exposure to obsolescence.

Flat panel technology has not had an impact on the television replacement market. Most of the flat panel units sold within the television market are for commercial usage rather than end user consumer usage. Within the data display and monitor subsegments, there has been an impact by flat panel technology. The Company has made adjustments internally and several of the subsidiaries within these subsegments currently produce flat panel products. As noted above, being in the replacement market, the Company has the ability to see product trends and make marketing, production and stocking decisions based on those trends.

The decline in the wholesale consumer parts segment of $1,092,000 is attributed primarily to the decline in consumer retail sales during the comparative periods. Sales to larger distributors have declined slightly as well. General economic conditions have had a direct, negative impact on this segment. To help offset these declines, Fox International signed a distribution agreement in fiscal 2002 with Applica, Inc. ("Applica"), authorizing Fox International to distribute parts and accessories for

Applica's Black & Decker Toaster Oven, Profinish, Quick & Easy, and Spacemaker product lines. Sales earned pursuant to this agreement were $718,000 in fiscal 2002.

Consolidated gross margins increased from 29.5% to 31.7% for the year ended February 28, 2002 as compared to the year ended February 28, 2001. CRT division margins increased from 28.3% to 30.2% and wholesale electronic parts division margins increased from 33.9% to 38.0% for the same comparative period.

The increase in margins within the CRT division resulted from increases in sales volume at Lexel and Display Systems while manufacturing overhead remained stable. Margins at Lexel increased from 9.9% to 16.8%, or $1,538,000. Display System's gross margins increased in dollars by $1,117,000, while its gross margin percentage remained essentially flat. Additionally, margins have improved in the data display subsegment as sales of higher margin high-resolution color tubes have increased in comparison to lower margin monochrome tubes.

Margins in the wholesale consumer parts segment have increased due primarily to higher margins obtained on Black & Decker distribution sales. Additionally, margins have improved on sales to this segment's primary electronics retailer.

Operating expenses as a percentage of sales increased from 26.0% for the year ended February 28, 2001 to 26.6% for the year ended February 28, 2002.

The CRT division operating expenses increased $297,000 for the year ended February 28, 2002 as compared to February 28, 2001. Included in these increases were expenses within the monitor subsegment for the new California operations of $318,000 that were not present in the previous year. Also, expenses increased at Display Systems by $587,000, due to the increase in business with the Christie product line. Despite its significant increase in sales volume, Lexel's operating expenses increased only $41,000, as the existing administrative infrastructure was able to absorb the increased sales volume. Included in the CRT division expenses for fiscal 2001 was a $514,000 write-down of a note receivable.

The wholesale consumer parts segment increased operating expenses $543,000, (11.2%) in the year ended February 28, 2002 as compared to a year ago. This segment incurred costs to shut down its warehouse in Solon, Ohio and to open a warehouse in New York for the Black & Decker product line. Additionally, when Fox International acquired the Black & Decker distribution agreement with Applica, there were outstanding coupon offers the Company had to honor that included free shipping. The segment's delivery expense increased $310,000 despite an overall decrease in sales. The Company believes that the majority of these coupons have been utilized and, going forward, that Fox International will be able to charge its customers for shipping costs related to this product line.

Interest expense decreased $507,000 to $1,585,000 for the comparative fiscal periods due primarily to decreases in variable interest rates through fiscal 2002. A gradual decrease throughout the period at rates from 8.25% to 4.37% was realized on the Company's Primary line of credit. The notes payable to officer have interest rates of prime plus 1%, which varied from 9.5% to 5.75% during fiscal 2002, and LIBOR plus 2.4%, respectively, which varied from 7.58% to 4.37% during fiscal 2002. The Company's debt levels increased in fiscal 2002, which can be attributed primarily to the increase in the Primary line of credit from $8,500,000 to $9,285,000 and the increase in notes payable to an officer of $3,000,000 relating to the Christie product line acquisition in the third quarter of fiscal 2002.

The effective tax rate for fiscal 2002 was 45.4% as compared to 92.4% for fiscal 2001. The decrease in the effective rate is attributable to higher income before income taxes in 2002 compared to 2001, as expenses that are not deductible for tax purposes remained relatively constant. The Company had expenses of $467,000 and $438,000 that were not deductible for tax purposes in fiscal 2002 and 2001, respectively.

As of February 28, 2003, the Company had total cash and cash equivalents of $2,392,000. The Company's working capital was $26,739,000 and $27,569,000 at February 28, 2003 and 2002, respectively.

Overall increases in sales and increased collections of accounts receivable provided cash used in repayment of accounts payable and other current liabilities. Additionally, consolidated debt levels were reduced by a net $840,000.

Cash provided by operations for fiscal 2003 was $3,009,000 as compared to cash used in operations of $2,544,000 in fiscal 2002. Cash provided by operations for fiscal 2003 reflect the declines in accounts receivable of $943,000. While sales increased $884,000 for the comparative fourth quarters, overall receivables were down due to better collection efforts primarily within the data display and monitor subsegments.

Inventories, excluding the effects of the third quarter write-offs and additions to the reserve for obsolescence of $4,953,000, increased $1,754,000. These increases are the result of purchase requirements for XKD and Aydin related to contracts that began in the fourth quarter of fiscal 2003. Additionally, bulk inventories acquired at lower costs have been utilized and are being replaced by inventories at current market values. The change in Prepaids and other assets reflect the decline in costs in excess of billings of $410,000 on contract revenues during 2003, increases in refundable income taxes of $875,000 as a result of the current year taxable loss and changes in deferred tax assets included in this classification on the Company's balance sheet. Decreases in accounts payable and accrued liabilities of $1,722,000 are a function of the excess cash generated during the year being utilized to reduce these current obligations.

Investing activities used cash of $1,106,000 and $3,441,000 in fiscal 2003 and 2002, respectively. Capital expenditures were $1,137,000 in fiscal 2003 as compared to $3,156,000 in fiscal 2002. The new addition to the facility in Birdsboro, Pennsylvania was completed in fiscal 2003. Additions to debt of $463,000 were incurred to finance a portion of these costs.

Financing activities used cash of $1,217,000 in fiscal 2003 and provided cash of $3,375,000 in fiscal 2002. During fiscal 2003, the Company repaid a net amount of $840,000 towards overall debt. During the year one of the Company's lines of credit was converted to a term note. The term note matures in July 2004, and bears interest at prime plus 1.75%. The Company increased its borrowings from its CEO by $1,116,000 during fiscal 2003. These funds were utilized to pay for stock repurchased by the Company during the year and to assist with short-term refinancing needs. The debt with the CEO bears interest at the higher of 6% or prime plus 1%. In February, 2003, this note was converted from a demand note payable to a term loan maturing in February 2006.

The Company's debt agreements 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's line of credit with its primary lender expires July 1, 2003, and at February 28, 2003, the Company was not in compliance with the minimum debt service ratio (as defined), senior funded debt to EBITDA (as

defined) and additional indebtedness. The primary lender subsequently waived these covenant violations. Additionally, the Company was not in compliance with its loan covenants for the Fox International (wholesale) segment and the lender waived such noncompliance.

Management is negotiating the renewal of its line of credit with its current lender. Management anticipates being able to renew financing with its current lender or obtain new financing from another lender under terms not less favorable to those that presently exist, and that such financing will be adequate to meet the Company's liquidity needs for the fiscal year ending February 2004.

The Company has a stock repurchase program, pursuant to which it is authorized to repurchase up to 462,500 shares of the Company's common stock in the open market. In fiscal year 2003, 61,000 shares were repurchased for $414,000. No shares were repurchased in fiscal 2002. Subsequent to year end, the Company purchased an additional 135,000 shares for $875,000.

The Company does not anticipate any significant investment in capital assets for fiscal 2004.

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 always examines opportunities to grow its business and as sales contracts or acquisitions present themselves, there could be an impact to working capital requirements. As in the past, the intent is to finance such projects with existing bank lines; however, longer, more permanent sources of capital may be required in certain circumstances.

Transactions with Related Parties, Contractual Obligations and Commitments

At February 28, 2002 the Company had outstanding borrowings in the form of a demand note and a one-year note from its CEO in the amount of $4,100,000 and $3,000,000, respectively. During fiscal 2003, the Company borrowed an additional $1,656,000 and repaid $540,000 to the CEO to assist with the repurchase of stock and short-term financing. In February 2003 the two notes were combined into a three year term note with interest due monthly at a rate of 6% or prime (4.25% at February 28, 2003) plus 1% whichever is higher. As of February 28, 2003, the cumulative outstanding balance due the CEO was $8,216,000.

During fiscal 2003, the Company repaid $86,000 to a Director, resulting in a balance of $155,000 at February 28, 2003. Yearly principal payments of $60,000 are payable through 2005 with a final payment of $35,000 due in 2006. These borrowings bear interest at 6%.

In fiscal 1997, the Company issued $2,000,000 in face value, 8% five-year convertible subordinated debentures in payment of the acquisition of the stock of Z-Axis. The debentures were issued to the former owners of Z-Axis, of which the Company's CEO was a majority shareholder. The debentures are convertible at the holder's option into common shares based upon a conversion rate of $4.17 per share, as adjusted for the April 2001 stock dividend. During fiscal 2002, $775,000 of debentures plus accrued interest were converted into 186,068 common shares. The Company's CEO, in accordance with the provisions of the subordinated debt agreement, elected to extend the maturity date of the remaining $1,000,000 debentures to May 31, 2005.

Future maturities of long-term debt and future minimum rental payments due under operating leases are as follows (in thousands):

Included in the above operating lease commitments are leases for four of the Company's manufacturing facilities and certain warehouse space from shareholders and officers. Future minimum rental payments due under these leases with related parties are as follows (in thousands):

	Years
	Footnote Ref.
	Total		1		2	3		4		5	>5
Related party leases	$	1,072		$	392	$	240		$	220	$	120	$	100	$	—	15

Except for operating leases, the Company historically has not relied upon off-balance sheet arrangements (such as sale-leasebacks), transactions or relationships that would materially affect liquidity or the availability of, or requirements for, capital resources.

Management's Discussion and Analysis of Results of Operations and Financial Condition 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, the allowance for bad debts and warranty reserves. The company uses the following methods and assumptions in determining its estimates:

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 is also able to observe the production trends of the OEMs and the new products that are being promoted.

The Company wrote off approximately $4,000,000 of inventory in fiscal 2003 related to changing market conditions affecting Mexican operations, and the Aydin UK, VDC Wolcott and MegaScan businesses. Aydin UK, Wolcott and MegaScan had experienced weak returns and management expected limited potential for future product development on a stand-alone basis. Another component of the fiscal 2003 write down was the disposal of older or large quantity stocks that management determined had limited future salability. The reserve for inventory obsolescence was approximately $2,339,000 and $1,640,000 at February 28, 2003 and 2002, respectively.

Revenue from product sales is recognized when goods are shipped. The Company does not offer rights of return to customers; however, it does offer one and two-year limited warranties on certain products.

Revenue from contracts that are long-term in nature is recognized by the percentage of completion method. Profit estimates are revised periodically based upon actual costs incurred. Any expected losses identified on contracts are recognized immediately. Revenue related to short-term contracts is recognized upon shipment of product, which is typically mandated by set delivery dates in the related contract.

The allowance is determined by reviewing known customer exposures 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 and overall trends in past due accounts compared to established thresholds. The company monitors credit exposure and assesses the adequacy of the allowance for bad debts on a regular basis.

Management reviews the valuation of accounts receivable on a monthly basis. The allowance for doubtful accounts is estimated based on historical experience of write-offs and current economic conditions that might impact the collectibility of customer accounts, including such factors as bankruptcies and insolvencies. The Company performs ongoing credit evaluations of its customers. The Company continually updates the history it uses to make these estimates so as to reflect the most recent information available. The allowance for doubtful accounts was approximately $502,000 and $343,000 at February 28, 2003 and 2002, respectively.

Warranty reserves are determined by recording a specific reserve for known warranty issues and a general reserve based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

Management's review of these accounting items and the resulting accounting positions taken by the Company are based upon certain assumptions and conditions and reflect management's best assumptions and estimates; however, estimates of these types of accounting items involve inherent uncertainties as described above, that are beyond management's control. The Company incorporates

many years of historical data into the determination of each of these estimates. Actual results may differ from these estimates under different assumptions or conditions.

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 forecasts that often depend on judgments about potential actions by third parties.

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies related to the impairment of long-lived assets require difficult judgments on matters that are often subject to multiple sources of authoritative accounting guidance. See also Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives.

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. Among the factors that could cause actual results to differ materially are the following: business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listed from time to time in the Company's reports filed with the Commission.

In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No.142, "Goodwill and Other Intangible Assets." SFAS No.142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. The Company adopted SFAS No. 142 on March 1, 2002 and, accordingly, ceased amortization of goodwill at that time. Goodwill amortization expense of $320,000 and $318,000 was included in the consolidated financial statements for the years ended February 28, 2002 and 2001, respectively. Had goodwill amortization expense not been recognized in those years, diluted earnings per share would have increased from $0.24 per share to $0.30 per share for the year ended February 28, 2002 and from $0.01 per share to $0.08 per share for the year ended February 28, 2001. See Note 1 to the Consolidated Financial Statements for further discussion of SFAS No. 142.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires companies to recognize 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 to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" ("SFAS No. 148"). SFAS

No. 148 amends Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to provide alternative methods for voluntary transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation ("the fair value method"). SFAS No. 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The transition provisions of SFAS No. 148 are effective in fiscal years beginning after December 15, 2002. The Company is currently evaluating the transition provisions of SFAS No. 148 but expects that it will not have a material adverse impact on the Company's consolidated financial position and results of operations upon adoption since the Company has not adopted the fair value method. The Company adopted the required disclosure provisions of SFAS No. 148, see Note 1 to the Consolidated Financial Statements included in this report.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2003 and such adoption did not have a material impact on the Company's consolidated financial statements. The recognition provisions of FIN 45 are not expected to have a material adverse impact on the Company's consolidated results of operations or financial position.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to other entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company currently has identified no variable interest entities, management expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company's consolidated results of operations or financial position.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 requires three types of freestanding financial instruments to be classified as liabilities in statements of financial position. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instrument is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominately to a variable such as a market index, or varies inversely with the value of the issuer's shares. The majority of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is

effective at the beginning of the first interim period beginning after June 15, 2003. In accordance with SFAS No. 150, the Company plans to adopt this standard on September 1, 2003.

During fiscal 2003, the Company issued $100,000 of redeemable common stock in exchange for inventory. At the option of the holder, the stock was redeemable at the end of one year for $100,000 cash. Subsequent to February 28, 2003, the holder exercised his option and redeemed approximately 15,000 shares for $100,000. Adoption of SFAS No. 150 by the Company on September 1, 2003 is not expected to have a material impact on the Company's consolidated financial position and results of operations.

Inflation has not had a material effect on the Company's results of operations to date.

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 $25,307,000 of outstanding debt at February 28, 2003 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 an decrease of approximately $253,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at February 28, 2003. 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 effect the Company's financial position.

Beginning January 1, 1997, the Company reported its former Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. Due to the closure of the Mexican subsidiary in the fourth quarter of fiscal 2003, cumulative foreign currency translation losses of $1,296,000 previously included as a separate component of shareholders' equity were recognized in operating expense. These translation losses accumulated prior to January 1, 1997, when the functional currency of this subsidiary was the Mexican peso.

The financial statements listed on page F-1 of this Report are filed as part of this Report on the pages indicated.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2003 fiscal year end, with respect to directors and executive officers of the Company, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference.

The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2003 fiscal year end, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference.

The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2003 fiscal year end, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item.

The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2003 fiscal year end, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item.

Exhibit Number		Exhibit Description
*3	(a)	Articles of Incorporation of the Company.
*3	(b)	By-Laws of the Company.
*10	(f)	Employee Stock Option Plan. **
*10	(i)	Lease dated January 1, 1992 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain, Georgia.
*10	(j)	Lease dated November 1, 1993 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia.
*10	(k)	Lease dated January 1, 1996 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4701 Granite Drive, Tucker, Georgia.
*10	(l)	$10,000,000 amended and restated promissory note dated May 4, 2001 between Registrant (Maker) and SouthTrust Bank (Holder).
21		Subsidiary companies—see page F-32 herein.
99.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002—see page F-33 herein.

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.

Know all men by these presents, that each person whose signature appears below constitutes and appoints Ronald D. Ordway as attorney-in-fact, with power of substitution, for him in any and all capacity, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may 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 and in the capacities and on the dates indicated.

Signature—Name	Capacity	Date

/s/ RONALD D. ORDWAY Ronald D. Ordway	Chief Executive Officer, Treasurer and Director	June 13, 2003
/s/ ERV KUCZOGI Erv Kuczogi	President and Director	June 13, 2003
/s/ MURRAY FOX Murray Fox	Director	June 13, 2003
/s/ CARLETON E. SAWYER Carleton E. Sawyer	Director	June 13, 2003
/s/ CAROLYN HOWARD Carolyn Howard	Director	June 13, 2003
/s/ CAROL D. FRANKLIN Carol D. Franklin	Chief Financial Officer, and Secretary	June 13, 2003

Video Display Corporation and Subsidiaries

Index to Consolidated Financial Statements

Board of Directors and Shareholders of
Video Display Corporation
Tucker, Georgia

We have audited the accompanying consolidated balance sheets of Video Display Corporation and subsidiaries as of February 28, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended February 28, 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 of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Video Display Corporation and subsidiaries as of February 28, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2003, in conformity with accounting principles generally accepted in the United States of America.

Video Display Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss)

Video Display Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Video Display Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Video Display Corporation (the "Company") principally manufactures and distributes cathode ray tubes ("CRTs") in the worldwide replacement market for use in television sets and data display screens for medical, military and industrial monitoring systems as well as manufacturing and distributing electron optic parts, which are significant components in new and recycled CRTs and monitors. The Company also manufactures low and high-end monochrome and color CRT and AMLCD monitor displays for use in specialty high performance and ruggedized applications. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. The Company's operations are principally located in the U.S.; however, the Company does have a subsidiary operation located in the United Kingdom.

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

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory reserves, valuations on deferred tax assets and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.

Revenue from product sales is recognized when goods are shipped. The Company does not offer rights of return to customers; however, it does offer one-year and two-year limited warranties on certain products.

Revenue from contracts that are long-term in nature at the Company's Aydin subsidiary is recognized by the percentage of completion method. Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately. Revenue related to all other contracts is recognized upon shipment of product.

In the consolidated statements of operations, revenues from shipping and handling fees charged to customers are included under the caption "Net sales" and shipping costs incurred are included under the caption "Selling and delivery." Shipping costs of $2,080,000, $1,010,000 and $700,000 were incurred in the three years ended 2003, 2002 and 2001, respectively.

Cash and cash equivalents include cash on account, demand deposits and certificates of deposit with maturities of less than three months.

Fair values of cash and cash equivalents, accounts receivable, short-term investments and short-term debt approximate cost due to the short period of time to maturity. The recorded amounts of long-term debt and convertible debentures are considered to approximate fair value due to either rates which fluctuate with the market or are otherwise commensurate with the current market. Fair values of investments are based on quoted market prices or pricing models using current market rates, which approximate carrying value.

Accounts receivable are customer obligations due under normal trade terms. The Company sells its products primarily to manufacturers and consumers of CRTs and to consumers of electronic products. Senior management performs continuing credit evaluations of its customers' financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. The Company records an allowance for doubtful accounts based on specifically identified amounts that senior management believes to be uncollectible. The Company also records additional allowance based on certain percentages of its aged receivables, which are determined based on historical experience and the assessment of the general financial conditions affecting its customer base. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to management, the Company believes its allowance for doubtful accounts as of February 28, 2003 is adequate. However, actual write-offs might exceed the recorded allowance.

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

Reserves on 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 realizable value of the inventory falls below its original cost. The age of the inventory is not as significant as is the projected demand for CRTs. 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 is also able to observe the production trends of the OEMs and the new products that are being promoted. Based on the information available to management, the Company believes its reserve on inventories as of February 28, 2003 is adequate. However, actual write-offs might exceed the recorded reserve.

Property, plant and equipment are stated at cost. Depreciation and amortization are computed principally by the straight-line method for financial reporting purposes over the following estimated useful lives: Buildings—ten to twenty-five years; Machinery and Equipment—five to ten years. Depreciation expense totaled approximately $1,130,000, $1,240,000 and $1,079,000 for the three years ended 2003, 2002 and 2001, respectively. Substantial betterments to property, plant and equipment are capitalized and routine repairs and maintenance are expensed as incurred.

Management reviews and assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset.

In addition, SFAS No. 142 requires that the Company identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized finite-lived intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement was required to be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 required the Company to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption.

The Company adopted SFAS No. 142 on March 1, 2002 and, accordingly, ceased amortization of goodwill at that time. Goodwill amortization expense of $320,000 and $318,000 was included in the consolidated financial statements for each of the years ended February 28, 2002 and 2001.

The following table presents the impact of SFAS No. 142 on operating profit, net income, and diluted earnings per share as if it had been in effect for the years ended February 28, 2002 and 2001.

As of August 31, 2002, the Company completed the first phase of transitional testing for the potential impairment of goodwill relating to its monitor subsegment. This goodwill impairment test will be completed annually on December 1 unless events or evidence exist that would significantly alter amounts used in the annual calculation. The Company used a multiple of EBITDA (earnings before interest, tax, depreciation and amortization expenses) in evaluating the fair value of the monitor subsegment. As a result of such testing, the Company determined there was no impairment of goodwill that should be included in the accompanying financial statements. At August 31, 2002, the net book

value recorded for goodwill was $1,227,000. No events have occurred since this assessment to cause a significant change in the values used for computation.

The Company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS or Statement) No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure", which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. The Statement also improves the timeliness of disclosures by requiring the information be included in interim, as well as annual, financial statements. The adoption of these disclosure provisions did not have a material affect on the Company's 2002 consolidated results of operations, financial position, or cash flows.

SFAS No. 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The option price of all the Company's stock options is equal to the market value of the stock at the grant date. As such, no compensation expense is recorded in the accompanying consolidated financial statements.

Had compensation cost been determined based upon the fair value at the grant date for awards under the stock option plan consistent with the methodology prescribed under SFAS No. 123, the Company's pro forma net (loss) income and net (loss) income per share would have differed from the amounts reported as follows:

For the Year ended February 28,		2003		2002		2001
Net (loss) income, as reported		$	(3,286,000	)	$	1,182,000		$	31,000
Stock-based employee compensation expense, as reported			—			—			—
Stock-based employee compensation expense determined under fair value basis, net of tax			(23,000	)		(26,000	)		(7,000	)

Pro forma net (loss) income		$	(3,309,000	)	$	1,156,000		$	24,000

Net (loss) earnings per share:
	Basic—as reported		$	(0.69	)	$	0.25		$	0.01
	Basic—pro forma		$	(0.70	)	$	0.25		$	0.01
Diluted—as reported		$	(0.69	)	$	0.24		$	0.01
Diluted—pro forma		$	(0.70	)	$	0.24		$	0.01

The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during the years 2003, 2002 and 2001 was $2.89, $4.33 and $1.17, respectively. The weighted average remaining life of options outstanding at February 28, 2003, 2002 and 2001 was 4.4, 5.3 and 5.7 years, respectively. At February 28, 2003 and 2002, the Company had approximately 278,000 and 298,000 shares, respectively, available for the granting of options under the stock option plan.

The fair value of stock options used to compute pro forma net income applicable to common shareholders and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 2003, 2002 and 2001, respectively: expected volatility of 60%, 60% and 50%; a risk-free interest rate of 2.1%, 4.50% and 6.50%; expected lives of 3.3, 3.5 and 2.0 years; and dividend yield of 0.00% for all years.

The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than possible enactments of changes in the tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates are recognized as income or expense in the period that includes the enactment date.

The Company owns certain marketable equity securities which are recorded at fair value based upon quoted market prices and classified as available-for-sale securities. Changes in fair value of these marketable equity securities are reflected in the accompanying statements of shareholders' equity. Investments are included under the captions "Prepaid expenses and other" and "Other assets" in the accompanying balance sheets.

Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the year. Revenues and expenses are translated using the average of the exchange rates in effect during the year. Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders' equity. The Company has a subsidiary in the U.K., which is not material, and uses the British pound as its functional currency.

The Company reported its former Mexican subsidiary on the basis of the functional currency being the U.S. dollar, effective January 1, 1997, as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. Cumulative foreign currency translation losses of $1,296,000 related to the Mexican subsidiary were recognized in operating expense in the third quarter of fiscal 2003. This cumulative translation adjustment was previously recorded as a separate component of shareholders' equity.

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

presented in the consolidated financial statements reflect the increase in the amount of common stock outstanding resulting from the stock dividend. Additionally, information regarding the Company's stock option plan includes the effect of the dividend (see Note 11).

The following is a reconciliation from basic (loss) earnings per share to diluted (loss) earnings per share for each of the last three years.

Stock options and convertible debentures in the amount of 344,000 shares were anti-dilutive and excluded from the 2003 diluted earnings per share calculation due to the Company's net loss. Stock options in the amount of 20,000 and 23,000 shares for the years ended 2002 and 2001, respectively, were excluded from the diluted earnings per share calculation due to their anti-dilutive effect. Also, convertible debentures in the amount of 479,000 shares were excluded from the 2001 diluted earnings per share calculation due to their anti-dilutive effect.

The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" to report information about operating segments in annual and interim financial reports. An operating segment is defined as a component that engages in business activities, whose operating results are reviewed by the executive officers in order to make decisions about allocating resources, and for which discrete financial information is available (see Note 13).

than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to provide alternative methods for voluntary transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation ("the fair value method"). SFAS No. 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The transition provisions of SFAS No. 148 are effective in fiscal years beginning after December 15, 2002. The Company is currently evaluating the transition provisions of SFAS No. 148 but expects that it will not have a material adverse impact on the Company's consolidated financial position and results of operations upon adoption since the Company has not adopted the fair value method. The Company adopted the disclosure provisions of SFAS No. 148, which are included herein; see "Stock-Based Compensation Plans".

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The adoption of FIN 45 required additional warranty activity disclosures for the Company (see Note 10). The Company is currently evaluating the recognition provisions of FIN 45 but expects that it will not have a material adverse impact on the Company's consolidated results of operations or financial position upon adoption.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to other entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company currently has identified no variable interest entities, management expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company's consolidated results of operations or financial position.

During fiscal 2003, the Company issued $100,000 of redeemable common stock in exchange for inventory. At the option of the holder, the stock was redeemable at the end of one year for $100,000 cash. Subsequent to February 28, 2003, the holder exercised his option and the Company was compelled to redeem approximately 15,000 shares for $100,000. Adoption of SFAS No. 150 by the Company on September 1, 2003 is not expected to have a material impact on the Company's consolidated financial position and results of operations.

All references herein to "2003", "2002" and "2001" mean the fiscal years ended February 28, 2003, 2002 and 2001, respectively.

Certain balances have been reclassified in the 2002 and 2001 consolidated financial statements to conform to the 2003 presentation.

In June 2001, the Company acquired the outstanding common stock of XKD Corporation ("XKD"), a manufacturer of high-resolution displays used in training, simulation, ruggedized military and industrial applications. The Company acquired assets of $968,000 and assumed liabilities of $968,000; accordingly, no goodwill was recognized from the acquisition. The transaction was accounted for under the purchase method of accounting and the results of operations of XKD since its acquisition date have been included in the Company's consolidated financial statements. The purchase agreement includes potential royalty payments of up to $2,000,000 based on specific future revenues of XKD, options to acquire 10,000 shares of the Company's common stock, and the release of corporate indemnification of the seller of certain personal obligations. Royalty expense of $207,000 and $126,000 was incurred during the years ended February 28, 2003 and 2002, respectively.

	2003			2002
Costs incurred to date on uncompleted contracts	$	2,194,000		$	2,949,000
Estimated earnings recognized to date on these contracts		1,468,000			2,239,000

		3,662,000			5,188,000
Billings to date		(3,148,000	)		(4,264,000	)

Costs and earnings in excess of billings, net	$	514,000		$	924,000

Costs and earnings in excess of billings	$	514,000		$	924,000
Billings in excess of costs and earnings		—			—

	$	514,000		$	924,000

Costs and earnings in excess of billings are classified in the consolidated balance sheets under the caption "Prepaid expenses and other".

The Company holds a one year commercial note receivable in the amount of $504,000 as a result of the sale of the building in Wolcott, Connecticut. The note bears interest at 7% payable monthly. The

principal amount is due in full on December 6, 2003. The note is secured by a first mortgage on the property and is classified as "Prepaid expenses and other" in the accompanying consolidated balance sheet.

	2002			2001
Term loan facility; floating interest rate based on an adjusted LIBOR rate (4.25% as of February 28, 2003); quarterly principal payments of $313,000 payable through November 2005; collateralized by assets of Aydin Displays, Inc.	$	3,125,000		$	4,375,000
Term loan facility (converted from line of credit); interest rate of prime (4.25% as of February 28, 2003) plus 1.75%; monthly principal payments of $57,000 payable through July 2004 with a final balance due July 31, 2004 of $1,441,000; collateralized by inventories and receivables of Fox International, Inc.		2,410,000			—
Note payable to bank; interest rate of prime plus 1.5%; monthly principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation		593,000			656,000
Mortgage payable to bank; interest at the greater of 7.5% or the U.S. five-year Treasury constant maturity (2.69% as of February 28, 2003) plus 2.5%; monthly principal and interest payments of $4,000 payable through December 2003 with a final principal payment of $539,000 in December 2003; collateralized by land and building of Fox International, Inc.		589,000			627,000
Mortgage payable to bank; interest rate at FHLB index rate (5.45% as of February 28, 2003) plus 1.95%; monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		588,000			509,000
Other		558,000			231,000

		7,863,000			6,398,000

Less current maturities		(2,708,000	)		(1,443,000	)

	$	5,155,000		$	4,955,000

In May 2001, the Company and its primary bank agreed to consolidate an existing line of credit and term note payable into a $10,000,000 credit facility. The interest rate on the line of credit is based on a floating LIBOR rate (3.8% at February 28, 2003) based on a ratio of debt to EBITDA, as defined. The weighted average interest rate during fiscal 2003, 2002 and 2001 was 3.4%, 4.6% and 8.6%. The average amount and maximum amount outstanding during fiscal 2003 were $9,248,000 and $9,524,000, respectively. The line of credit expires on July 1, 2003, and accordingly has been classified as current on the February 28, 2003 balance sheet. The amount of credit available for advance was reduced by $500,000 on July 1, 2001. A second scheduled reduction of $500,000 scheduled for July 1, 2002 was extended indefinitely while the Company currently negotiates changes to the line of credit. Borrowings under the line of credit are limited by eligible accounts receivable, inventory and real estate, as defined, and includes a commitment fee of 0.25% for the unused portion. As of February 28, 2003, the outstanding balance on the line of credit was $9,229,000 and the available amount for borrowing was $271,000.

The agreement contains affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. As of February 28, 2003, the Company was not in compliance with the minimum debt service ratio, the senior funded debt to EBITDA ratio (due to the third quarter adjustment and write-off of inventories, equipment and other assets as a result of the internal reorganization and closure of three facilities) and additional indebtedness. Subsequent to February 28, 2003, the bank waived those covenant violations with respect to the year ended February 28, 2003.

At February 28, 2002 the Company had outstanding borrowings in the form of a demand note and a one-year note payable to its CEO in the amount of $4,100,000 and $3,000,000, respectively. During fiscal 2003, the Company borrowed an additional $1,656,000 and repaid $540,000 to the CEO to assist with the repurchase of stock and short-term financing. In February 2003 the two notes were combined into a three year term note with interest due monthly at an annual rate of 6% or prime (4.25% at February 28, 2003) plus 1%, whichever is higher. As of February 28, 2003, the cumulative outstanding balance due the CEO was $8,216,000.

The Company issued $2,000,000 in face value, 8% five-year convertible subordinated debentures in payment of the acquisition of the stock of Z-Axis in fiscal 1997. The debentures are convertible at the holder's option into common shares based upon a conversion rate of $4.17 per share, as adjusted for the April 2001 stock dividend. During fiscal 2002, $775,000 of debentures plus accrued interest were converted into 186,068 common shares. In May 2003, the Company's CEO, the holder of the remaining debentures, in accordance with the provisions of the subordinated debt agreement, elected to extend the maturity date of the remaining $1,000,000 debentures to May 31, 2005.

The Company records a liability for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available. The provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", which the Company adopted in December 2002, require disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The following provides a reconciliation of changes in the Company's warranty reserve. The Company provides no other guarantees.

	Fiscal Year Ended
	2003			2002			2001
Balance at beginning of year	$	543,000		$	803,000		$	190,000
Provision for current year sales		1,257,000			805,000			1,090,000
Warranty liability assumed in purchase		—			—			350,000
Warranty costs incurred		(1,113,000	)		(1,065,000	)		(827,000	)

Balance at end of year	$	687,000		$	543,000		$	803,000

The Company has an incentive stock option plan whereby total options to purchase 600,000 shares may be granted to key employees at a price not less than fair market value at the time the options are granted and are exercisable beginning on the first anniversary of the grant date for a period not to exceed ten years. The stock option plan stipulates that, in the event of a stock dividend, all outstanding grants will be proportionally adjusted both in number of options and exercise price. Information regarding the stock option plan is as follows, which includes the effect of the 20% stock dividend issued on April 16, 2001 for all periods presented:

Options Exercisable	Number of Shares	Weighted Average Exercise Price
February 28, 2003	220,000	$	4.12
February 28, 2002	220,000		3.93
February 28, 2001	162,000		3.58

(Benefit from) provision for federal, state and foreign income taxes in the consolidated statements of operations consisted of the following components:

		Fiscal Year Ended
		2003			2002			2001
Current:
	Federal	$	(337,000	)	$	560,000		$	361,000
	State		(62,000	)		105,000			72,000
	Foreign		—			—			—

			(399,000	)		665,000			433,000

Deferred:
	Federal		(889,000	)		369,000			(24,000	)
	State		(162,000	)		24,000			(4,000	)
	Foreign		424,000			(70,000	)		(112,000	)

			(627,000	)		323,000			(140,000	)

Total		$	(1,026,000	)	$	988,000		$	293,000

(Loss) income before (benefit from) provision for taxes consisted of the following:

The effective income tax rate differed from the statutory federal income tax rate as follows:

	Fiscal Year Ended
	2003			2002		2001
Taxes at statutory federal income tax rate	$	(1,466,000	)	$	740,000	$	108,000
State income taxes, net of federal benefit		(153,000	)		86,000		45,000
Tax rates attributable to foreign operations		—			—		(8,000	)
Foreign operating losses abandoned		519,000			—		—
Non-deductible expenses		40,000			158,000		170,000
Change in valuation allowance		—			—		(47,000	)
Other		34,000			4,000		25,000

Taxes at effective income tax rate	$	(1,026,000	)	$	988,000	$	293,000

In connection with the Company's closure of its Mexican operations, foreign net operating losses are considered to be abandoned since they will not be realized by the Company.

Deferred income taxes as of February 28, 2003 and 2002 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carryforwards.

The sources of the temporary differences and their effect on the net deferred tax asset consisted of the following:

		2003			2002
Deferred tax assets:
	Investment capital loss carryforwards	$	240,000		$	240,000
	Foreign net operating loss carryforwards		46,000			470,000
	Uniform capitalization costs		455,000			382,000
	Inventory reserves		664,000			391,000
	Accrued liabilities		758,000			71,000
	Allowance for doubtful accounts		191,000			122,000
	Other		68,000			34,000

			2,422,000			1,710,000
	Valuation allowance		(240,000	)		(240,000	)
Deferred tax liabilities:
	Basis difference of property, plant and equipment		(414,000	)		(363,000	)
	Other		(79,000	)		(45,000	)

Net deferred tax assets		$	1,689,000		$	1,062,000

Current asset			2,243,000			1,175,000
Non-current liability			(554,000	)		(113,000	)

		$	1,689,000		$	1,062,000

Current deferred tax assets of $2,243,000 are included in the consolidated balance sheets under the caption "Prepaid expenses and other." Investment loss carryforwards consist primarily of investment losses, which may be utilized to offset any future taxable gains on the sale of investments. The investment loss carryforwards expire in 2005. The Company has provided a valuation allowance on these loss carryforwards, as realization of these assets is not considered likely. The foreign net operating loss carryforwards related to the U.K. operations expire at various times through 2017.

Undistributed earnings of the Company's foreign subsidiary are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign country. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments with subsegments within one of the main segments. The two reportable segments are as follows: (1) the manufacture and distribution of cathode ray tubes and electron guns in the replacement market and (2) the wholesale distribution of consumer electronic parts from foreign and domestic manufacturers. The subsegments within the CRT segment

consists of data display CRTs, entertainment (television and projection) CRTs, monitors and component parts. Sales to foreign customers were 14% of consolidated net sales in fiscal 2003 and less than 10% for fiscal years 2002 and 2001, respectively. Foreign operations are included in the data display subsegment.

The accounting policies of the operating segments are the same as those described in Note 1—Summary of Significant Accounting Policies. Segment amounts disclosed reflect elimination entries made in consolidation. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of interest expense and income taxes.

The following table sets forth net sales, operating profit, depreciation and amortization, capital expenditures, and identifiable assets for each industry segment and applicable subsegments:

The Company has a defined contribution plan that covers substantially all U.S. employees. Employees may contribute up to 15% of their compensation, as allowed by IRS regulations. At the Company's discretion, employee contributions of up to 4% of their compensation can be matched at 50% by the Company. The Company accrued $129,000, $0 and $98,000 in fiscal 2003, 2002 and 2001, respectively for 401(k) matching contributions.

The Company leases various manufacturing facilities and transportation equipment under leases classified as operating leases. These leases provide that the Company pays taxes, insurance and other expenses on the leased property and equipment. Rent expense for all leases was approximately $2,412,000, $2,340,000 and $2,546,000 in 2003, 2002 and 2001, respectively.

Included above are leases for manufacturing and warehouse facilities leased from shareholders and officers under operating leases expiring at various dates through 2008. Rent expense under these leases totaled approximately $434,000, $491,000 and $439,000 in 2003, 2002 and 2001, respectively.

Future minimum rental payments due under these leases with related parties are as follows:

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks are in excess of the FDIC insurance limit.

The Company's CRT segment had net sales to the U.S. government that comprised approximately 25% and 15% of CRT segment net sales and 20% and 13% of consolidated net sales both in fiscal 2003 and 2002, respectively. Sales to foreign customers were 14% of consolidated net sales for fiscal 2003. The amount was less than 10% for fiscal years 2002 and 2001. The Company's wholesale electronic parts distributor had net sales to one customer that comprised approximately 18%, 20% and 22% of that subsidiary's net sales in 2003, 2002 and 2001, respectively. Other subsidiaries have a few concentrated customers and vendors that could, if lost, negatively affect sales. The Company attempts

to minimize credit risk by reviewing all customers' credit history before extending credit, and by monitoring customers' credit exposure on a daily basis. The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information.

During 2003, the Company sold the building at its Wolcott, Connecticut facility for a $504,000 note receivable due in full on December 9, 2003. Also in 2003, the Company issued $100,000 of redeemable common stock (15,000 shares) in exchange for inventory.

During 2002, three holders of subordinated debentures converted $775,000 into 186,068 shares of the Company's common stock. Also in 2002, the Company acquired $968,000 of assets and assumed $968,000 of liabilities in the acquisition of the outstanding common stock of XKD, Corp. No cash was exchanged in this transaction.

The following table sets forth selected quarterly consolidated financial data for the years ended February 28, 2003 and 2002, respectively. The summation of quarterly (loss) earnings per share may not agree with annual (loss) earnings per share.

	2003
	First Quarter		Second Quarter		Third Quarter(a)	Fourth Quarter
	(in thousands, except per share amounts)
Net Sales	$	18,819		$	19,607	$	18,240		$	19,916
Gross profit		6,106			5,677		959			6,798
Net income (loss)		339			357		(4,924	)		942
Basic earnings (loss) per share	$	0.07		$	0.07	$	(1.03	)	$	0.20
Diluted earnings (loss) per share	$	0.07		$	0.07	$	(1.03	)	$	0.19

	2002
	First Quarter		Second Quarter		Third Quarter	Fourth Quarter
	(in thousands, except per share amounts)
Net Sales	$	17,479		$	18,821	$	17,034	$	19,032
Gross profit		5,401			5,809		5,786		5,916
Net income		234			352		453		143
Basic and diluted earnings per share	$	0.05		$	0.07	$	0.10	$	0.03

Video Display Corporation and Subsidiaries

Index to Consolidated Financial Statements Schedule

The audits referred to in our report dated June 6, 2003 relating to the consolidated financial statements of Video Display Corporation and subsidiaries, which are contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying schedule. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits.

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

VIDEO DISPLAY CORPORATION AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Georgia		58-1217564
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class		Name of each exchange of which registered
Common stock (no par value)		NASDAQ/NMS

	For Fiscal Years Ended
	February 28, 2003				February 28, 2002
Quarter Ended	February 28, 2003				February 28, 2002
Quarter Ended	High		Low		High		Low
May	$	8.55	$	5.60	$	8.25	$	4.60
August		8.00		5.45		5.95		4.05
November		7.62		6.50		6.00		4.70
February		8.00		6.23		6.15		4.40

	For Fiscal Years Ended
	Feb. 28, 2003			Feb. 28, 2002		Feb. 28, 2001 (c)		Feb. 29, 2000 (c)		Feb. 28, 1999 (c)
	(In Thousands, Except Per Share Data)
Statement of Operations Data
Net sales	$	76,582		$	72,366	$	70,806	$	63,838	$	58,889
Gross profit		19,540			22,912		20,883		20,316		19,992
Goodwill amortization expense		—			320		318		310		240
Operating (loss) profit (b)		(2,622	)		3,651		2,489		2,713		3,594
Net (loss) income		(3,286	)		1,182		31		705		1,122

Net (loss) income per share—basic (a)	$	(0.69	)	$	0.25	$	0.01	$	0.15	$	0.24
Net (loss) income per share—diluted (a)	$	(0.69	)	$	0.24	$	0.01	$	0.15	$	0.23
Average number of shares outstanding—basic (a)		4,758			4,701		4,552		4,708		4,729
Average number of shares outstanding—diluted (a)		4,758			5,073		4,639		5,233		5,337
Cash dividends	$	—		$	—	$	—	$	—	$	—
Balance Sheet Data (at year end)
Total assets	$	57,335		$	61,841	$	56,882	$	49,851	$	51,641
Working capital		26,739			27,569		26,311		21,862		26,564
Long-term obligations		14,466			14,957		14,020		8,644		13,987

		2002					2003					2001
		Amount			%		Amount			%		Amount			%
		(in thousands, except percentages)
Sales:
CRT segment
	Data display CRTs	$	9,405		12.3	%	$	11,028		15.2	%	$	10,476		14.8	%
	Entertainment CRTs		6,223		8.1			6,558		9.1			7,544		10.6
	Electron guns and components		1,514		2.0			1,607		2.2			1,943		2.7
	Monitors		42,417		55.4			39,697		54.9			36,275		51.3

Total CRT Segment			59,559		77.8			58,890		81.4			56,238		79.4
Wholesale distribution segment Consumer electronic parts			17,023		22.2			13,476		18.6			14,568		20.6

			76,582		100.0			72,366		100.0			70,806		100.0

Costs and expenses:
Cost of goods sold			57,042		74.5			49,454		68.3			49,923		70.5
Selling and delivery			7,830		10.2			6,109		8.4			6,314		8.9
General and administrative			13,036		17.0			13,152		18.2			12,080		17.1
Recognized foreign currency translation loss			1,296		1.7			—		—			—		—

			79,204		103.4			68,715		94.9			68,317		96.5

Operating (loss) profit			(2,622	)	(3.4	)		3,651		5.1			2,489		3.5
Interest expense			(1,493	)	(1.9	)		(1,585	)	(2.2	)		(2,092	)	(2.9	)
Other income (expense), net			(197	)	(0.3	)		104		0.1			(73	)	(0.1	)

(Loss) income before taxes			(4,312	)	(5.6	)		2,170		3.0			324		0.5
Income tax (benefit) expense			(1,026	)	(1.3	)		988		1.4			293		0.4

Net (loss) income		$	(3,286	)	(4.3	)%	$	1,182		1.6	%	$	31		0.1	%

Date:		VIDEO DISPLAY CORPORATION
June 13, 2003		By:		/s/ RONALD D. ORDWAY Ronald D. Ordway Chairman of the Board and Chief Executive Officer

Report of Independent Certified Public Accountants		F-2
Consolidated Balance Sheets as of February 28, 2003 and 2002		F-3
Consolidated Statements of Operations for the years ended February 28, 2003, 2002 and 2001		F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended February 28, 2003, 2002 and 2001		F-6
Consolidated Statements of Cash Flows for the years ended February 28, 2003, 2002 and 2001		F-7
Notes to Consolidated Financial Statements		F-8

		February 28, 2003			February 28, 2002
Assets (Notes 6 and 7)
Current assets
	Cash and cash equivalents	$	2,392,000		$	1,615,000
	Accounts receivable, net of allowance of $502,000 and $343,000 (Note 16)		11,120,000			12,712,000
	Inventories (Note 4)		28,821,000			31,920,000
	Prepaid expenses and other (Notes 3, 5 and 12)		4,289,000			3,276,000

Total current assets			46,622,000			49,523,000

Property, plant and equipment
	Land		540,000			600,000
	Buildings		6,858,000			6,814,000
	Machinery and equipment		17,949,000			18,845,000

			25,347,000			26,259,000
	Accumulated depreciation		(17,186,000	)		(16,891,000	)

Net property, plant and equipment			8,161,000			9,368,000

Other assets (Note 1)			2,552,000			2,950,000

		$	57,335,000		$	61,841,000

		February 28, 2003			February 28, 2002
Liabilities and Shareholders' Equity
Current liabilities
	Accounts payable	$	3,809,000		$	4,808,000
	Accrued liabilities (Note 10)		4,077,000			4,800,000
	Lines of credit (Note 7)		9,229,000			3,779,000
	Notes payable to shareholders (Note 8)		60,000			7,124,000
	Current maturities of long-term debt (Note 6)		2,708,000			1,443,000

Total current liabilities			19,883,000			21,954,000
Lines of credit (Note 7)			—			8,785,000
Long-term debt, less current maturities (Note 6)			5,155,000			4,955,000
Notes payable to shareholders, less current maturities (Note 8)			8,311,000			217,000
Convertible subordinated debentures (Note 9)			1,000,000			1,000,000
Deferred income taxes (Note 12)			554,000			113,000

Total liabilities			34,903,000			37,024,000

Minority interests			176,000			158,000
Redeemable common stock; 15,000 shares issued and outstanding (Notes 1 and 17)			100,000			—
Commitments (Notes 2, 14 and 15)
Shareholders' equity (Notes 1, 7 and 11)
Preferred stock; no par value—2,000,000 shares authorized, none issued and outstanding			—			—
Common stock; no par value—10,000,000 shares authorized; 4,700,000 and 4,749,000 shares issued and outstanding			3,449,000			3,826,000
Additional paid-in capital			92,000			92,000
Retained earnings			18,848,000			22,134,000
Accumulated other comprehensive income (loss)			(233,000	)		(1,393,000	)

Total shareholders' equity			22,156,000			24,659,000

		$	57,335,000		$	61,841,000

			Common Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Current Year Comprehensive Income (Loss)
Balance, February 29, 2000			$	2,994,000		$	92,000	$	20,921,000		$	(1,401,000	)
	Net income for the year			—			—		31,000			—		$	31,000
	Unrealized loss on marketable equity securities			—			—		—			(29,000	)		(29,000	)
	Foreign currency translation adjustment			—			—		—			(49,000	)		(49,000	)

		Total comprehensive loss												$	(47,000	)

	Issuance of common stock under stock option plan			40,000			—		—			—

Balance, February 28, 2001				3,034,000			92,000		20,952,000			(1,479,000	)
	Net income for the year			—			—		1,182,000			—		$	1,182,000
	Unrealized loss on marketable equity securities			—			—		—			(2,000	)		(2,000	)
	Foreign currency translation adjustment			—			—		—			88,000			88,000

		Total comprehensive income												$	1,268,000

	Issuance of common stock under stock option plan			17,000			—		—			—
	Conversion of subordinated debentures to common stock			775,000			—		—			—

Balance, February 28, 2002				3,826,000			92,000		22,134,000			(1,393,000	)

	Net loss for the year			—			—		(3,286,000	)		—		$	(3,286,000	)
	Unrealized loss on marketable equity securities			—			—		—			(4,000	)		(4,000	)
Foreign currency translation adjustment				—			—		—			(132,000	)		(132,000	)
	Foreign currency translation adjustment recognized in operations resulting from liquidation of foreign subsidiary			—			—		—			1,296,000			1,296,000

		Total comprehensive loss												$	(2,126,000	)

	Issuance of common stock under stock option plan			37,000			—		—			—
	Repurchase of common stock			(414,000	)		—		—			—

Balance, February 28, 2003			$	3,449,000		$	92,000	$	18,848,000		$	(233,000	)

*Year ended February 28,*			2003			2002			2001
(Note 17)
Operating Activities
Net (loss) income			$	(3,286,000	)	$	1,182,000		$	31,000
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
	Depreciation and amortization			1,313,000			1,660,000			1,474,000
	Provision for losses on accounts and notes receivable			649,000			278,000			585,000
	Provision for inventory reserves			4,953,000			350,000			438,000
	Deferred income taxes			(627,000	)		323,000			(140,000	)
	Recognized foreign currency translation loss			1,296,000			—			—
	Net income (loss) allocated to minority interests			18,000			5,000			(7,000	)
	Net loss on disposal of fixed assets			667,000			—			—
	Net (gains) losses in investing activities			—			—			(67,000	)
	Changes in working capital items, net of effect of acquisitions:
		Accounts receivable		943,000			(2,349,000	)		(1,441,000	)
		Inventories		(1,754,000	)		(2,092,000	)		(65,000	)
		Prepaid expenses and other assets		559,000			(1,131,000	)		(196,000	)
		Accounts payable and accrued liabilities		(1,722,000	)		(770,000	)		361,000

Net cash provided by (used in) operating activities				3,009,000			(2,544,000	)		973,000

Investing Activities
	Capital expenditures			(1,137,000	)		(3,156,000	)		(1,466,000	)
	Proceeds from disposal of fixed assets			43,000			—			100,000
	Net cash paid for acquisitions			—			—			(5,357,000	)
	Other investing activities			(12,000	)		(285,000	)		37,000

Net cash used in investing activities				(1,106,000	)		(3,441,000	)		(6,686,000	)

Financing Activities
	Proceeds from long-term debt and lines of credit			19,149,000			27,303,000			32,714,000
	Repayments of long-term debt and lines of credit			(19,989,000	)		(23,945,000	)		(27,090,000	)
	Proceeds from stock option exercises			37,000			17,000			40,000
	Purchases and retirements of common stock			(414,000	)		—			—

Net cash (used in) provided by financing activities				(1,217,000	)		3,375,000			5,664,000

Effect of exchange rates on cash				91,000			88,000			(49,000	)

Net change in cash and cash equivalents				777,000			(2,522,000	)		(98,000	)
Cash and cash equivalents, beginning of year				1,615,000			4,137,000			4,235,000

Cash and cash equivalents, end of year			$	2,392,000		$	1,615,000		$	4,137,000

	2002		2001
Operating profit, as reported	$	3,651,000	$	2,489,000
Add back: Goodwill amortization		320,000		318,000

Adjusted operating income	$	3,971,000	$	2,807,000

Net income, as reported	$	1,182,000	$	31,000
Add back: Goodwill amortization		320,000		318,000
Tax effect		—		—

Adjusted net income	$	1,502,000	$	349,000

Diluted earnings per share, as reported	$	0.24	$	0.01
Goodwill amortization		0.06		0.07

Adjusted diluted earnings per share	$	0.30	$	0.08

		Net (Loss) Income			Weighted Average Shares Outstanding	(Loss) Earnings Per Share
2003
Basic		$	(3,286,000	)	4,758,000	$	(0.69	)
Effect of dilution:
	Options		—		—
	Convertible debt		—		—

Diluted		$	(3,286,000	)	4,758,000	$	(0.69	)

2002
Basic		$	1,182,000		4,701,000	$	0.25
Effect of dilution:
	Options		—		71,000
	Convertible debt		59,000		301,000		0.19

Diluted		$	1,241,000		5,073,000	$	0.24

2001
Basic		$	31,000		4,552,000	$	0.01
Effect of dilution:
	Options		—		87,000

Diluted		$	31,000		4,639,000	$	0.01

	2003			2002
Raw materials and work-in-process	$	14,947,000		$	14,478,000
Finished goods		16,213,000			19,082,000

		31,160,000			33,560,000
Reserves for obsolescence		(2,339,000	)		(1,640,000	)

	$	28,821,000		$	31,920,000

Year	Amount
2004	$	2,708,000
2005		3,140,000
2006		786,000
2007		133,000
2008		140,000
Thereafter		956,000

	$	7,863,000

		Number of Shares		Weighted Average Exercise Price
Outstanding at February 29, 2000		186,000		$	3.74
	Granted	6,000			5.31
	Exercised	(12,000	)		3.48
	Forfeited or expired	—			—

Outstanding at February 28, 2001		180,000		$	3.81
	Granted	42,000			4.65
	Exercised	—			—
	Forfeited or expired	(2,000	)		7.40

Outstanding at February 28, 2002		220,000		$	3.93
	Granted	21,000			6.78
	Exercised	(12,000	)		3.13
	Forfeited or expired	(1,000	)		7.26

Outstanding at February 28, 2003		228,000		$	4.22

	2003			2002			2001
U.S. operations	$	(259,000	)	$	2,359,000		$	598,000
Foreign operations		(4,035,000	)		(184,000	)		(281,000	)

	$	(4,294,000	)	$	2,175,000		$	317,000

		As of
		2003		2002		2001
Capital Expenditures**
CRT segment
	Data display	$	39	$	120	$	117
	Entertainment		—		—		4
	Monitors		970		3,033		2,421
	Component parts		8		16		31

			1,017		3,169		2,573
Wholesale Distribution segment			120		87		43

		$	1,137	$	3,256	$	2,616

	2003		2002
Accrued compensation and benefits	$	1,369,000	$	1,255,000
Accrued royalties		1,005,000		1,178,000
Accrued warranty		687,000		543,000
Accrued other		1,016,000		1,824,000

	$	4,077,000	$	4,800,000

		Options Outstanding
					Options Exercisable
Range of Exercise Prices					Options Exercisable
Range of Exercise Prices	Number Outstanding at February 28, 2003	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at February 28, 2003	Weighted Average Exercise Price
		*(in years)*
$2.29—3.96	139,000	4.5	$	3.13	139,000	$	3.13
4.40—5.50	47,000	7.6		4.73	47,000		4.73
6.50—7.24	21,000	4.4		6.78	13,000		6.55
7.29—8.44	21,000	5.2		8.00	21,000		8.00

	228,000	5.4	$	4.22	220,000	$	4.12


Identifiable Assets
CRT segment
	Data display	$	13,899	$	20,854	$	18,926
	Entertainment		3,232		3,305		3,679
	Monitors		32,424		30,924		25,936
	Component parts		2,537		2,343		2,212

			52,092		57,426		50,753
Wholesale Distribution segment			5,243		4,415		6,129

		$	57,335	$	61,841	$	56,882

Fiscal Year	Amount
2004	$	1,828,000
2005		1,642,000
2006		731,000
2007		504,000
2008		157,000

	$	4,862,000

Fiscal Year	Amount
2004	$	392,000
2005		240,000
2006		220,000
2007		120,000
2008		100,000

	$	1,072,000

		2003		2002		2001
Cash paid (received) for:
	Interest	$	1,339,000	$	1,852,000	$	2,146,000

	Income taxes, net of refunds	$	476,000	$	464,000	$	1,470,000

Report of Independent Certified Public Accountants on Financial Statement Schedule		F-30
Schedule II—Valuation and Qualifying Accounts		F-31

Column A		Column B		Column C				Column D			Column E
				Additions
Description		Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
Allowance for doubtful accounts:
	February 28, 2003	$	343,000	$	649,000	$	—	$	490,000	(a)	$	502,000
	February 28, 2002	$	289,000	$	278,000	$	—	$	224,000		$	343,000
	February 28, 2001	$	522,000	$	585,000	$	—	$	818,000	(b)	$	289,000
Reserves for inventory:
	February 28, 2003	$	1,640,000	$	4,953,000	$	—	$	4,254,000	(c)	$	2,339,000
	February 28, 2002	$	1,643,000	$	350,000	$	—	$	353,000		$	1,640,000
	February 28, 2001	$	1,337,000	$	438,000	$	—	$	132,000		$	1,643,000