**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-K**
 (Mark
        One)
 x
                
                **ANNUAL REPORT PURSUANT
                  TO SECTION 13
                  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**For the fiscal year ended September
                  2,
                  2005**OR**o
                
                **TRANSITION REPORT PURSUANT
                  TO SECTION
                  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**For
                    the transition period from__________________________to
                    _______________________
  Commission
        file No. 0-11003
 **WEGENER
        CORPORATION**
 (Exact
        name of registrant as specified in its charter)
 **Delaware**
              **81-0371341**(State
                  of incorporation)
              (I.R.S.
                  Employer Identification No.)**11350
                  Technology Circle, Duluth, Georgia**
              **30097-1502**(Address
                  of principal executive offices)
              (Zip
                  Code)
 **Registrant’s
        telephone number, including area code:** (770)
        623-0096
 Registrant’s
        Web site: http://www.wegener
        .com
 **Securities
        registered pursuant to Section 12(b) of the Act:** None
 **Securities
        registered pursuant to Section 12(g) of the Act:**
 Common
        Stock, $.01 par value
 (Title
        of
        class)
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.    **Yes
        o** **No
        x**
  Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or 15(d) of the Act.    **Yes o****No
o**
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days: **Yes
        o** **No
        o**
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (§ 229.405 of this chapter) 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. **x**
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Act). **Yes
oNo
x**
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).  **Yes
oNo
x**
  As
        of
        March 4, 2005 (the last business day of the registrant’s most recently completed
        second fiscal quarter), the aggregate market value of the Common Stock held
        by
        non-affiliates was $26,982,498 based on the last sale price of the Common
        Stock
        as quoted on the NASDAQ Small-Cap Market on such date. (The officers and
        directors of the registrant, and owners of over 10% of the registrant’s common
        stock, are considered affiliates for purposes of this calculation.)
  As
        of
        November 15, 2005, 12,579,051 shares of registrant’s Common Stock were
        outstanding.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Portions
        of the definitive Proxy Statement pertaining to the January 31, 2006 Annual
        Meeting of Stockholders, only to the extent expressly so stated herein, are
        incorporated herein by reference into Part III.
 
 
 **WEGENER
        CORPORATION**
  **FORM
        10-K**
  **YEAR
        ENDED** **SEPTEMBER
        2** **,
        2005**
  **INDEX**
  **PART
                  I**
              PageItem
                  1.
              Business
              2Item
                  1A.
              Risk
                  Factors
              13Item
                  1B.
              Unresolved
                  Staff Comments
              15Item
                  2.
              Properties
              15Item
                  3.
              Legal
                  Proceedings
              16Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              16**PART
                  II**Item
                  5.
              Market
                  for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer
                  Purchases of Equity Securities
              16Item
                  6.
              Selected
                  Financial Data
              17Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              18Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              28Item
                  8.
              Financial
                  Statements and Supplementary Data
              29Item
                  9.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosures
              50Item
                  9A.
              Controls
                  and Procedures
              50Item
                  9B.
              Other
                  Information
              50**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the Registrant
              51Item
                  11.
              Executive
                  Compensation
              51Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              51Item
                  13.
              Certain
                  Relationships and Related Transactions
              51Item
                  14.
              Principal
                  Accountant Fees and Services
              51**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              52
 
  
 1
 **PART
        I**
 ITEM
        1.  BUSINESS
  WegenerTM Corporation, the Registrant, together with its subsidiaries, is referred
        to
        herein as “we,” 
        “our,”  “us,” the
“Company” or “WGNR.”
  (a)  General
        development of business.
  Wegener
        Corporation was formed in 1977 and is a Delaware corporation. We conduct
        our
        continuing business through Wegener Communications, Inc. (WCI), a wholly-owned
        subsidiary. WCI was formed in April 1978 and is a Georgia corporation. WCI
        is a
        leading provider of digital solutions for video, audio and Internet Protocol
        (IP) data networks. Applications include IP
        data
        delivery, broadcast television, cable television, radio networks, business
        television, distance education, business music and financial information
        distribution. COMPEL ® ,
        our
        patented network control system, provides network flexibility to regionalize
        programming, commercials and file transfers.
  (b)  Financial
        information about segments.
  Segment
        information contained in Note 11 to the consolidated financial statements
        contained in this report is incorporated herein by reference in response
        to this
        item.
  (c)  Narrative
        description of business.
  **MARKETS
        AND INDUSTRY OVERVIEW**
  The
        primary markets we serve are business and private networks, cable and broadcast
        television and broadcast radio.
  Business/Private
        Networks
  Business
        networks consist of corporate and enterprise networks distributing video,
        audio
        and/or data via satellite. Private networks consist of networks that target
        video, audio and/or data to a select group of subscribers or viewers via
        satellite. Our equipment is currently used for a large percentage of the
        horse
        racing video distribution in the United States and Sweden and we are continuing
        to expand that market. Our business and private network customers include
        Muzak
        LLC, Roberts Communications, Inc., Scientific Games-Autotote Communication
        Service Division, and Swedish companies ATG and TERACOM. In addition, we
        work
        through third-party integrators, such as Ascent Media and Globecomm, to reach
        this market space.
  Business
        and private networks almost universally have bandwidth as their single largest
        operating expense. They are typically willing to convert their networks to
        new
        technology whenever they can find a satisfactory return on investment.
  Business
        networks are looking for alternatives to replace the current methods of
        corporate training they use. Currently they (1) send trainers to facilities,
        which is difficult to coordinate and expensive, or (2) send video tapes,
        which
        is costly and complicated to manage, or (3) broadcast a linear satellite
        television network, which can be cost prohibitive and requires schedule
        coordination throughout the facilities, or (4) stream programming over their
        IP
        networks, which provides low quality video and requires advanced training
        for
        users and operators. Video-on-demand promises to reduce the costs and
        complications of their networks by allowing operators to send video files
        to the
        remote locations and allow trainees to view the training videos when it is
        convenient for them, with no need to coordinate schedules with the central
        office.
  2
 The
        dropping cost of plasmas, LCDs and television monitors has made it economically
        feasible for more businesses to use widescreen televisions for advertising.
        Digital signs and advertisements are becoming more common and retail stores
        are
        beginning to display market video advertisements within their prime locations.
  Cable
        and Broadcast Television
  Cable
        television consists of (1) program providers that provide programming to
        cable,
        direct-to-home satellite and telecom companies for distribution to consumers,
        and (2) cable distribution companies, such as cable multiple system operators.
        Broadcast television consists of (1) companies that broadcast television
        signals
        over satellite to local affiliate stations and (2) broadcast stations: local
        stations that broadcast typically free-to-air, television signals to local
        viewers. Cable television and broadcast television customers include FOX,
        HDNet,
        Time Warner, Adelphia, Turner Broadcasting, and PaxTV. In addition, we work
        through distributors, such as MegaHertz, AMT and Satellite Engineering Group.
  Program
        providers continue to distribute their programming over satellite to cable,
        direct to home (DTH) satellite, and telecom companies. They are starting
        to
        stream programming directly to consumers via the Internet as well. They continue
        to launch new services to compete for advertising dollars. They are launching
        increasing numbers of high definition services, as well as distributing
        video-on-demand content. They are concerned about the effect that personal
        video
        recorders could potentially have on their advertising revenue as well as
        the
        security of their high value content being stored in consumers’ homes in a
        digital and potentially easy to copy format.
  With
        the
        drop in costs of high definition televisions, more consumers have now seen
        high
        definition television and want a widescreen digital television to watch DVDs
        and
        the programming offered to them. This is increasing pressure on cable, satellite
        and telecom networks to offer high definition to their customers.
  Cable,
        DTH satellite and telecom companies are all competing to provide consumers
        with
        television, telephone and high speed internet services. To gain and maintain
        subscribers, they are rolling out the new high definition and video-on-demand
        services and fielding personal video recording devices.
  Broadcasters
        continue to launch local digital broadcast stations. Many are opting to provide
        high definition content only during primetime hours from their main satellite
        feed and provide multi-channel standard definition services during the day.
        They
        are hoping the FCC will force cable operators to carry both their analog
        and
        digital channels.
  Satellite
        teleports are recovering from a global slowdown that affected satellite
        transponder use. They are increasingly looking at integrated video and data
        solutions for their customers.
  Broadcast
        Radio
  Broadcast
        radio consists of companies that broadcast, typically free-to-air, radio
        signals
        to local listeners. Radio network customers include EMF Broadcasting, Jones
        Radio Networks, Christian Radio Consortium and Salem Radio Network.
  Broadcast
        radio operators are interested in regionalizing their broadcasts to give
        a local
        feel to the programming. They also want to shift their programming for
        time-zones so that “drive times” are able to be addressed with particular
        morning and afternoon shows and advertisements, which can demand higher
        advertising dollars. In addition, they are coming under increasing pressure
        from
        advertisers to ensure that affidavit information provided is
        accurate.
  3
 Telecom
        Operators
  Telecom
        operators offer telephony and high speed internet access (DSL) to consumers.
        In
        large numbers, they are now launching video service offerings to compete
        with
        cable companies and maintain subscribers.
  **PRODUCTS**
  Our
        products include: iPump ® Media
        Servers, MediaPlan ® Content
        Management and Ingest, Compel ® Network
        Control System, UNITY ® Satellite Receivers, DTV Digital Stream Processors, analog audio products
        and
        third-party uplink products, such as encoders.
  iPump
        Media Servers
  The
        iPump ® product
        line combines the features of our integrated receiver decoders (IRD) with
        advanced media server functionality. The iPump ® delivers
        and stores digital content into broadcast, cable and business operations
        utilizing store and forward technology compared to traditional real-time
        linear
        broadcasts. Store and forward technology allows network operators to store
        content at receive locations and then play back the content locally either
        based
        on schedules or on-demand user selection. Network operators with repetitive
        content in their programming line-up can reduce their satellite space segment
        costs by sending programming and playback schedules as stored files into
        the
        iPump ® for
        later playback according to the schedules. The network operator can then
        utilize
        limited satellite time to refresh the programming and play-out schedules
        without
        the necessity to maintain a constant signal on the satellite. An existing
        iPump ® customer
        has significantly reduced its satellite bandwidth expenses by switching to
        store
        forward network operations. It now spends less than 10% of what they used
        to
        spend on satellite bandwidth, which was its largest operating
        expense.
  There
        are
        three models of iPump ® that
        utilize store-forward technology. The iPump ® 6400
        Professional Media Server is designed for broadcast television, private network
        and broadcast radio customers. The new iPump ® 622
        Enterprise Media Server is designed specifically for private network and
        enterprise applications, such as distance learning. It was released to the
        field
        during fiscal 2005. The new iPump ® 6420
        Audio Media Server is designed specifically to meet the needs of broadcast
        radio
        and is third generation store-forward product. It will be released in fiscal
        2006.
  The
        iPump ® 615
        Streaming Media Decoder is a peripheral settop decoder for the iPump ® 6400 or
        622. It is designed for high volume dynamic environments such as retail
        point-of-sale kiosks, point of purchase (POP) digital signs and advertisements,
        and corporate communications. It receives a video stream via Internet Protocol
        from the iPump ® 6400 or
        622 and outputs high quality video to large video monitors for digital signage
        or classroom training applications. It supports high-definition video and
        advanced digital audio, in addition to standard definition video and audio
        to
        ensure quality media displays for such high visibility purposes.
  We
        are
        targeting all of our core markets for the iPump ® product
        line. Within these markets, applications for the iPump ® products
        include:
  Business
        and Private Networks
 ·
              On-Demand
                  Training
 ·
              Distance
                  Learning, Educational Purposes
 ·
              Customized
                  or Regionalized Training by Site
 4
  ·
                Retail
                    Point-of-Sale Displays or
                    Kiosks
 ·
              Corporate
                  Communications
 ·
              Streaming
                  Video/Audio/Data to the Desktop
 ·
              Digital
                  Signage
 ·
              Reduction
                  of Satellite Delivery Costs
 ·
              Distribution
                  of Additional Training Materials, such as manuals and
                  exams
 Television
        and Radio Broadcast
 ·
              Regional
                  Advertising and Content
 ·
              Time
                  Zone Shifted Programming
 ·
              News
                  Distribution
 ·
              Reduction
                  of Satellite Delivery Costs
 Cable
        Television
 ·
              Regional
                  Ad Insertion
 ·
              Segment
                  Spot Distribution by Group or
                  Region
 ·
              Video
                  on Demand
 ·
              Digital
                  File Creation from Linear Broadcast
 ·
                Replacement
                    for video tape recorders
 MediaPlan
  MediaPlan Ò i/o and
        MediaPlan Ò CM
        products are control and management system modules to our patented
        Compel Ò Control
        System, which is discussed below. The MediaPlan ® products
        are crucial for customers in controlling iPump ® Media
        Server networks and are a competitive advantage for us in sales of
        iPump ® Media
        Servers.
  MediaPlan ® i/o is
        the media creation product for the iPump ® network.
        In traditional linear networks, network operators are required to compress
        the
        video, distribute it to remote locations and decompress it for broadcast,
        all
        within one or two seconds. This requires the use of real-time encoders to
        compress the video and audio as it is sent to the receivers at the remote
        locations. In store-forward networks, the paradigm changes and the process
        of
        video and audio compression, media distribution and decompression of the
        media
        for broadcast can be done at different times. Network operators can now prepare
        the media files containing the compressed video and audio ahead of airtime.
        As
        well, they can distribute the media files any time before airing, so they
        can
        maximize the use of their bandwidth. When it is time for the program to be
        broadcast, it merely needs to be played from the local hard drive on the
        iPump ® ,
        not
        transported through the network. As the media creation tool,
        MediaPlan ® i/o
        handles the first part of the process, the creation of media files containing
        compressed video and audio which will be sent to iPumps ® .
  MediaPlan ® Content
        Management (MediaPlan ® CM) is a
        powerful content management system used for managing media files and actively
        tracking their delivery throughout the iPump ® network.
        In a store-forward network, media is simultaneously stored in multiple
        iPumps ® in the
        field, rather than all in one repository at a central location, so management
        of
        the media becomes a crucial part of the network operation. Operators need
        easy
        ways to view the content on individual iPumps ® and
        automated mechanisms for updating/deleting media as it changes, and
        MediaPlan ® CM is
        designed to address those and many other specific needs of managing media
        files
        in a store-forward network. Operators can create libraries of assets, generate
        descriptive information, view content at each network iPump ® ,
        send
        requested content directly to targeted users and track file usage.
  The
        MediaPlan ® product
        line is an integral part of an iPump ® network,
        so the same markets and applications exist for MediaPlan ® as were
        described in the iPump ® section
        above.
  
 5
 Compel ® Network Control System
  Compel ® Network
        Control System is our patented control system and has been a key differentiator
        to our products since 1989. Compel ® is used
        in over 150 networks controlling over 100,000 receivers. Compel ® has
        patented grouping and addressing controls that provide flexibility in network
        management. Receivers can be controlled as individual sites and as groups.
        Commands are synchronized with video and audio programming, which allows
        users
        to regionalize programming and blackout programming from nonsubscribers,
        as well
        as target commercials to subscribers.
  Compel ® option
        modules include Web Access and Conditional Access. Web Access allows multiple
        users to access their Compel ® system
        from a LAN using a standard Web browser. Conditional Access utilizes a secure
        micro in every Unity ® receiver
        to deliver fast, secure conditional access to a network without the high
        cost of
        consumer smart card systems.
  Our
        Unity ® satellite receivers and iPumps are controlled by our Compel ® Network
        Control System, so the markets for Compel ® are
        those for iPump ® and
        Unity ® receivers.
  Unity
        Receivers
  The
        Unity ® 4600
        receiver is a digital satellite receiver primarily for program providers
        to
        distribute programming to cable and telecom headends. It offers analog and
        digital outputs to support analog and digital headends. Cable headends utilize
        the Unity ® 4600 to
        support digital high definition television distribution.
  The
        Unity ® 4650
        receiver is our digital receiver primarily for broadcast television networks.
        The Unity ® 4650
        receiver is a video and audio decoder that features MPEG 4:2:0 and 4:2:2
        video
        for enhanced video quality for television network distribution.
  The
        Unity ® 500
        receiver is targeted to meet the needs of private and business television
        networks. It offers MPEG-2 video distribution and has an option for high
        speed
        delivery of Internet Protocol data over the satellite.
  The
        Unity ® 201
        audio
        receiver is designed for business music providers. It is a multichannel per
        carrier satellite music receiver and offers an optional audio storage card
        which
        adds a second stereo pair and one hour of audio storage for ad insertion
        or
        disaster recovery. It is our first generation of store-forward
        receiver.
  As
        MPEG-4
        development continues, the Unity ® receiver
        product line will be updated with MPEG-4 video decompression technology.
        We are
        currently developing the first MPEG-4 Unity ® product
        and expect it to begin shipping for revenue late in fiscal 2006.
  Nielsen
        Media Research NAVE IIc Audio Encoder
  The
        NAVE
        IIc watermarks program audio with tagging information to identify the television
        program and the television station that originated the program. The watermarks
        are used by Nielsen devices to automate the process of cataloging viewers’
        television viewing habits which ultimately translate into Nielsen ratings.
        The
        NAVE IIc makes advances over prior units in that it inserts the watermarks
        for
        audio in the digital domain, so that stations do not have to down-convert
        to
        analog audio to insert Nielsen data and can insert watermarking on the entire
        transport stream of multiple programs simultaneously. The NAVE IIc was released
        to the field during fiscal 2005.
  6
 DTV
        Digital Stream Processors
  The
        DTV
        Digital Stream Processors enable cable and telecom operators to capture local
        off-air high definition broadcast video signals and easily insert them onto
        their networks. Our products provide for multiple signals to be inserted
        with
        one unit. Models include DTV 720, DTV 742 and DTV 744. The market for DTV
        products is cable and telecom headend operators.
  Analog
        Audio
  Our
        legacy analog products are sold primarily to the cable television market.
        These
        products consist of Series 1600 and 1700 mainframes, subcarrier modulators,
        demodulators and decoders, which are used for cable audio distribution. Our
        Series 2046 network communications and control system cards allow cable
        operators to insert local commercials which increase their advertising
        revenues.
  Uplink
        Equipment
  We
        offer
        our customers complete system solutions for video and audio distribution.
        The
        complete system solution requires us to resell components, such as encoders
        and
        modulators, from other manufacturers, such as Harmonic, Inc and Thompson.
  Custom
        Products
  We
        offer
        our customers the option to create custom products for their needs when they
        cannot find off-the-shelf products to satisfy their requirements. They pay
        non-recurring engineering expenses through product pricing and/or up-front
        milestone payments.
  
  **MARKET
        OPPORTUNITY**
 
 Growth
        opportunities are most significant in the technologies that we have been
        making
        significant R&D investments over the past year, including store-forward
        technology and MPEG-4 technology. See “Research and Development Activities”
        section below.
  Currently
        we have completed field deployments of the iPump ® Network,
        including Compel ® and
        MediaPlan ® ,
        in
        three different market spaces for different applications: private networks
        for
        virtual channel application, broadcast television and broadcast radio. We
        have
        orders placed for iPump ® products
        in additional applications of broadcast news, private networks for training
        and
        digital signage. In some cases, we have multiple orders for a particular
        application. The breadth of the applications for iPump ® networks
        represents many market opportunities in multiple applications and across
        multiple markets. The broad appeal of the iPump ® is due
        to the diversification of the iPump ® store-forward technology that we invested in during fiscal 2005.
  The
        virtual channel application of the iPump ® allows a
        current private network customer to reduce their budget for satellite bandwidth
        by greater than 90% of what they had been spending prior to the upgrade to
        the
        iPump ® .
        Bandwidth utilization was one of the customers’ largest operating expenses prior
        to the upgrade, so this represents a sizable savings for them. The network
        used
        to run continuously, utilizing satellite bandwidth the entire time; now they
        use
        bandwidth twice a month to update the iPumps ® with new
        content and playout schedules. This change in operations promises significant
        savings for potential customers.
  7
 The
        broadcast television customer switched to store-forward technology to offer
        extended services to its customers. The channel is often featured in museums
        and
        schools, so with the iPump ® ,
        the
        network operator can send additional educational materials and digital videos
        along with the broadcast video. All the video files and additional materials
        are
        stored locally on the iPump ® so that
        the museums or schools can have easy access to the materials. The distribution
        is possible without an increase in satellite bandwidth utilization (which
        would
        be costly), since with store-forward the operator can manage bandwidth more
        effectively and send repetitive video only once to the iPump ® ,
        rather
        than sending it each time the video is scheduled for broadcast.
  The
        audio
        customers for iPump ® are
        interested in store-forward to update their operations. It will allow them
        to
        send repetitive material to their affiliates a single time and provide an
        easy
        interface for affiliates to access the audio files. Additionally, in some
        radio
        broadcasting operations, they have a manual process for verifying that
        advertisements are playing as scheduled and providing affidavits of the
        advertisement playback to their advertisers. The iPump ® provides
        an automated interface for verifying the advertisements and providing that
        information back to the radio broadcaster. Radio broadcasters are seeing
        the
        operational improvements available to them with the iPump ® .
  The
        broadcast news customer is converting to iPump ® to
        improve the operations of its affiliates. Currently the news broadcaster
        uses
        different mechanisms to distribute video and script information to affiliates.
        Video is distributed on a linear feed and the affiliate has to track the
        schedule and manually record any video that is of interest to them. If they
        miss
        the linear broadcast, then the broadcaster has to do a “re-feed” and use
        additional costly satellite bandwidth to redistribute the video to the
        affiliate. With the iPump ® ,
        the
        broadcaster will send all the video as files that will be stored for the
        affiliate on the hard drive of the iPump ® .
        This
        completely removes the manual recording by the affiliate and also removes
        the
        need for re-feeds. Additionally, the broadcaster will send scripts and other
        descriptive information to the iPump ® so the
        affiliate can now access all the related information from a single location
        on
        the iPump ® hard
        drive.
  The
        private network customer for digital signage and distance training will be
        using
        the iPump ® for both
        applications simultaneously. This allows the customer to install, field and
        manage a single iPump ® at each
        location, rather than run two separate hardware platforms. This reduces the
        network complexity at the receiver locations since the iPump ® can
        optionally generate two networks out of a single unit. The customer is
        generating a back-room training center for their employees at each site and
        they
        can create customized training schedules at each location depending on the
        viewers’ availability, or the viewer can watch the materials on demand. The
        other output is being used for advertising at the point of sale by outputting
        high quality video advertisements to large video monitors in a retail
        environment. Revenue from advertisers can off-set the cost of running the
        network.
  Our
        iPump ® ,
        MediaPlan ® and
        Compel ® products
        create systems that directly address the next generation needs of the distance
        learning, corporate training, digital signage advertising, broadcast radio,
        broadcast news and broadcast television markets and they show significant
        opportunities for growth.
  Another
        area for growth is MPEG-4 products (see “Research and Development activities”
        section below for addition information). The next generation Unity ® product
        is currently under development and takes advantage of MPEG-4 technology.
        The
        MPEG-4 standard is the next evolutionary step in video compression and reduces
        the bandwidth requirements of video by almost half. This reduction in bandwidth
        utilization is significant, as bandwidth utilization is one of the largest
        operating costs for customers.
  In
        addition, we are exploring other potential applications for the MPEG-4
        technology including a settop for telecom operators to deploy video to their
        customers. The settop would allow telecom operators to deploy video offerings
        to
        their customers and complete the “triple-play” of telephony, high speed Internet
        connectivity and television services. The typical architecture of telecom
        operations has more limited bandwidth available than their cable competitors,
        so
        MPEG-4 video compression enables the telecom operators to compete more
        effectively.
   8
 **SALES
        AND MARKETING**
 
 Domestically,
        we sell our products principally through our own direct sales force, which
        is
        organized geographically. We have sales representatives in Atlanta, Eastern
        Canada, Dallas, Silicon Valley, and Southern California, as well as a key
        account executive in North Carolina. We use a major domestic distributor
        for
        additional sales coverage in the cable market. We have relationships with
        a few
        key integrators as an additional sales channel. Internationally, we sell
        primarily through independent distributors and integrators, mostly in North
        America, South America and Europe. The majority of our sales have payment
        terms
        of net 30 days. Due to the technical nature of our business, both sales
        application engineering and system integration engineering support sales.
        We
        hired a new Vice President of Sales in the first quarter of fiscal 2006.
  Our
        marketing organization develops strategies for product lines and provides
        direction to product development on product feature requirements. Our marketing
        organization is also responsible for setting price levels and general support
        of
        the sales force, particularly with major proposal responses, presentations
        and
        demonstrations. We strive to further establish Wegener’s brand within the
        industry, including participation on technical committees, publication of
        articles in industry journals, speaking opportunities at industry events
        and
        exhibitions at trade shows.
  
 **Manufacturing
        and suppliers; sources and availability of raw materials.**
  During
        fiscal 2005 and fiscal 2004, we contracted with offshore manufacturers for
        a
        significant amount of our finished goods. We are currently working with two
        offshore manufacturers with facilities located in Taiwan. Raw materials consist
        of passive electronic components, electronic circuit boards and fabricated
        sheet
        metal. Approximately 20% of our raw materials are purchased directly from
        manufacturers and the other 80% are purchased from distributors. Passive
        and
        active components include parts such as resistors, integrated circuits and
        diodes. We use approximately ten distributors and two contract manufacturers
        to
        supply our electronic components. We often use a single contract manufacturer
        or
        subcontractor to supply a total subassembly or turnkey solution for higher
        volume products. Direct suppliers provide sheet metal, electronic circuit
        boards
        and other materials built to specifications. We maintain relationships with
        approximately 20 direct suppliers. Most of our materials are available from
        a
        number of different suppliers; however, certain components used in existing
        and future
        products are currently available from a single or a limited number of sources.
        Although we believe that all single-source components currently are available
        in
        adequate quantities, there can be no assurance that shortages or unanticipated
        delivery interruptions will not develop in the future. Any disruption or
        termination of supply of certain single-source components or agreements with
        contract manufacturers could have an adverse effect on our business and results
        of operations. Our manufacturing operations consist primarily of final assembly
        and testing of our products, utilizing technically trained personnel, electronic
        test equipment and proprietary test programs .
  **Patents,
        trademarks, licenses, franchises and concessions held.**
 
 We
        hold
        three U.S. patents currently, the most significant of which is a patent covering
        advanced receiver grouping techniques in Compel ® and will
        expire on January 15, 2008. We hold eight active trademarks, such as
        Compel ® ,
        iPump ® ,
        Wegener ® and
        Unity ® Currently we have 15 patent applications pending and two trademark applications
        pending.
 
 Although
        we attempt to protect our intellectual property rights through patents,
        trademarks, copyrights, licensing arrangements and other measures, we cannot
        assure you that any patent, trademark, copyright or other intellectual property
        rights owned by us will not be invalidated, circumvented or challenged, that
        such intellectual property rights will provide competitive advantages to
        us, or
        that any of our pending or future patent applications will be issued. We
        also
        cannot assure you that others will not develop technologies that are similar
        or
        superior to our technology, duplicate our technology or design around the
        patents that we own . In order
        to successfully develop and market certain of our planned products for digital
        applications, we may be required to enter into technology development or
        licensing agreements with third parties. Although many companies are often
        willing to enter into such technology development or licensing agreements,
        we
        cannot assure you that such agreements will be negotiated on terms acceptable
        to
        us, or at all. The failure to enter into technology  development
        or licensing agreements, when necessary, could limit our ability to develop
        and
        market new products and could cause our business to suffer. Third parties
        have
        in the past claimed, and may in the future claim, that we  have  infringed
        their current or future intellectual property rights. There can be no assurance
        that we will prevail in any intellectual property infringement litigation
        given
        the complex technical issues and inherent uncertainties in litigation. Even
        if
        we prevail in litigation, such litigation could result in substantial costs
        and
        diversion of resources and could negatively affect our business, operating
        results, financial position and cash flows.
 
 9
 Although
        we believe that the patents and trademarks we own are of value, we believe
        that
        success in our industry will be dependent upon new product introductions,
        frequent product enhancements, and customer support and service. However,
        we
        intend to protect our rights when, in our view, these rights are infringed
        upon.
        Additionally, we license certain analog audio processing technology to several
        manufacturing companies which generated royalty revenues of approximately
        $58,000, $87,000, and $141,000 in fiscal 2005, 2004 and 2003, respectively.
        These royalty license agreements renew annually unless cancelled by the licensee
        on the expiration date.
  During
        the second quarter of fiscal 2003, we entered into a license agreement with
        StarGuide Digital Networks, Inc., a Nevada corporation. These limited licenses
        were granted to Wegener under a number of StarGuide patents related to
        delivering IP data by satellite and store/forward audio. These licenses extend
        to and conclude upon the last to expire of any licensed patent. We have agreed
        to pay StarGuide a running royalty on certain of our products. We believe
        that
        these royalties will not have a material adverse effect on our financial
        condition or results of operations. In addition, as of September 2, 2005,
        we
        have entered into six other license agreements for utilization of various
        technologies. These agreements currently require royalty payments, or may
        require future royalties for products under development, none of which are
        expected to have a material adverse effect on our financial condition or
        results
        of operations.
  **Seasonal
        variations in business.**
  There
        do
        not appear to be any seasonal variations in our business.
  **Working
        capital practices.**
  Information
        contained under the caption "Management's Discussion and Analysis of Financial
        Condition and Results of Operations" (MD&A) section of this report is
        incorporated herein by reference in response to this item.
  **Dependence
        upon a limited number of customers.**
  We
        sell
        to a variety of domestic and international customers on an open-unsecured
        account basis. These customers principally operate in the cable television,
        broadcast business music, private network and data communications industries.
        Sales to Muzak, Ascent Media Systems & Technology Services, Educational
        Media Foundation and Roberts Communications Network accounted for approximately
        22.5%, 14.1%, 13.0% and 10.3%, of revenues in fiscal 2005, respectively.
        Sales
        to Muzak accounted for approximately 39.6% of revenues in fiscal 2004. Sales
        to
        Roberts Communications Network and Muzak accounted for approximately 16.3%
        and
        39.3% of revenues in fiscal 2003, respectively. At September 2, 2005 and
        September 3, 2004, two customers accounted for more than 10% of our accounts
        receivable. Sales to a relatively small number of major customers have typically
        comprised a majority of our revenues. This trend is expected to continue
        in
        fiscal 2006. The loss of one or more of these customers would likely have,
        at
        least in the near term, a material adverse effect on our
        operations.
  **Backlog
        of orders.**
  Our
        backlog is comprised of undelivered, firm customer orders, which are scheduled
        to ship within 18 months. Our eighteen month backlog was approximately
        $10,100,000 at September 2, 2005, $12,010,000 at September 3, 2004, and
        $12,699,000 at August 29, 2003. Three customers accounted for 97.7% of the
        backlog at September 2, 2005. Reference is hereby made to the information
        contained in MD&A, which is incorporated herein by reference in response to
        this item. The total multi-year backlog at September 2, 2005 was approximately
        $23,964,000.
  Approximately
        $7,956,000 of the September 2, 2005, backlog is expected to ship during fiscal
        2006. Three customers accounted for 96.9% of the backlog expected to ship
        during
        fiscal 2006.
  
 10
 **Government
        contracts.**
  Not
        applicable.
  **Competitive
        Conditions.**
  We
        compete both with companies that have substantially greater resources and
        with
        small specialized companies. Competitive forces generally change from year
        to
        year for the markets we serve. Through relationships with component and
        integrated solution providers, we believe we are positioned to provide complete
        end-to-end digital video and audio systems to our customers.
  Cable
        Television
  Competition
        for our Unity ® products
        in the cable television market is from large and well-established companies,
        such as Scientific Atlanta and Motorola. Our Unity ® products
        have a competitive advantage with our advanced Compel ® control,
        so we focus on opportunities where that advantage is of value to the customer.
  Competition
        for our DTV products is mostly from smaller companies that are not as well
        established in the cable television market. Our products in this area offer
        technical advantages over competing offerings. Significant orders for this
        product line depend on the overall growth of broadcast and telecom HDTV
        offerings and possible legislative decisions by the FCC in the future.
  Broadcast
        Television
  Competition
        for our Unity ® products
        in the broadcast television market is from the same large and well-established
        companies with which we compete in cable television, such as Scientific Atlanta
        and Motorola. Our Unity ® products
        have a competitive advantage with our advanced Compel ® control,
        so we focus on opportunities where that advantage is of value to the customer.
        In addition, since the revenue opportunities in broadcast television are
        smaller
        than cable, our competitors do not compete for all of those opportunities
        as
        aggressively.
  Broadcast
        Radio
  Competition
        is currently limited to a few companies for our iPump ® Media
        Server in the broadcast radio market. The competition is formidable, but
        we have
        long history in the market, and believe our iPump ® and
        MediaPlan ® products
        offer significant advantages.
  Business
        and Private Networks
  Competition
        in the business and private networks market generally comes from smaller
        companies with unique products tailored to the needs of the customer.
        Competition in this field is increasing, although still limited, and we expect
        to be among the industry key players. Our products are well positioned for
        this
        market and have competitive advantages, such as our powerful network control
        and
        targeting capabilities.
  **Research
        and development activities.**
  Our
        research and development activities are designed to strengthen and enhance
        our
        existing products and systems and to develop new products and systems. Our
        development strategy is to identify features, products and systems which
        are, or
        are expected to be, needed by a number of customers. A major portion of the
        fiscal 2005 research and development expenses were spent on new product
        development of our iPump ® 6400,
        Compel ® ,  MediaPlan ® CM,
        SMD
        515, DTV digital stream processors and the Unity ® 4600
        products. WCI’s research and development expenses totaled $3,493,000 in fiscal
        2005, $3,095,000 in fiscal 2004, and $2,853,000 in fiscal 2003. Additional
        information contained on pages 2-7 and in MD&A is incorporated herein by
        reference in response to this item.
  11
 Technological
        advances occur frequently in our industry and our product offerings must
        be
        upgraded with the advances to continue to remain current with industry trends
        and attract potential customers. During fiscal 2005, we invested heavily
        in new
        technologies since the industry is in a transitional period between technologies
        and new technologies are emerging and becoming viable. We have the opportunity
        to invest in new technologies now while they are still very innovative and
        of
        high value to customers. During fiscal 2005, we invested in MPEG-4 technology,
        store-forward technology and network management. We anticipate that we will
        continue to invest in all of these technologies in the coming years as they
        are
        all at the beginnings of their life cycles. During fiscal 2005, we focused
        on
        investments in new technology rather than short-term profitability. We believe
        that this focus will produce growth for Wegener and ultimately be more rewarding
        for our shareholders.
  MPEG-4/H.264
        video compression is a new technology that is just becoming viable for our
        products. It will drive a new cycle of purchases throughout our industry,
        and we
        want to ensure that we have products available as soon as the technology
        is
        ready for deployment. MPEG-4/H.264 compression reduces bandwidth utilization
        by
        almost half, which is significant for our customers. Their largest operating
        expense is bandwidth, so a reduction by half is significant and will drive
        purchases. Alternately, the customers can upgrade their video to high definition
        and significantly increase its quality while maintaining similar bandwidth
        utilization to their current MPEG-2 standard definition networks. We are
        working
        on a next generation Unity ® receiver
        to incorporate MPEG-4 technology, as well as exploring applications within
        the
        telecom industry for consumer settop boxes.
  In
        addition to MPEG-4, we are also investing in the diversification of the iPump®
        Media Server product line to alternate markets. We expanded the functionality
        of
        the iPump ® product
        for use in other markets where we have traditionally been strong - the broadcast
        markets of broadcast television, broadcast radio and broadcast news. The
        diversification is driving additional sales for our iPump ® networks
        in multiple markets and we are starting to see the results in late fiscal
        2005
        and early fiscal 2006 orders. The new iPump ® products
        will begin shipping during fiscal 2006.
  Network
        control and management has long been a differentiator for our Unity ® receivers and iPump ® media
        servers. Through fiscal 2005, we continued to invest in network control for
        our
        products. It allows customers to create dynamic environments with their
        receivers and to gain additional advertising revenue by regionalizing broadcasts
        and advertisements. When network control is included in a store-forward network,
        it becomes a very complex operation to manage the media content and data
        files
        on iPumps ® throughout the network. It is imperative to customers that it is managed
        properly, as the content often has limited viewing rights, so it must be
        deleted
        when rights have expired or replaced by newer versions over time. Network
        control and management products, such as Compel ® and
        MediaPlan ® ,
        manage
        such operations.
 
 **Environmental
        Regulation.**
  Federal,
        state and local pollution control requirements have had no material effect
        upon
        the capital expenditures, earnings or the competitive position of our
        Company.
  **Number
        of employees.**
  As
        of
        September 2, 2005, we had 90 full time employees employed by WCI and no
        employees employed by Wegener Corporation. No employees are parties to a
        collective bargaining agreement and we believe that employee relations are
        good.
  (d)
              Financial
                  information about geographic areas.
  Information
        in Note 11 to the consolidated financial statements contained in this report
        is
        incorporated herein by reference in response to this item.
  (e)
              Available
                  information.
  Our Web site
        is http://www.wegener.com
  12
 Information
        contained on our Web site should not be considered incorporated by reference
        in
        this Form 10-K.
  **EXECUTIVE
        OFFICERS OF THE REGISTRANT**
  The
        executive officers of the Company, for purposes of section 401(b) of Regulation
        S-K, are as follows:
  **Name
                    and Business Experience**
                **Age**
                **Office
                    Held****Robert
                    A. Placek**
                  President
                    and Chief Executive Officerof
                    the Company since August 1987 and Director of the Company since
                    July 1987.
                    Chairman of the Board since 1995. Chairman and Chief Executive
                    Officer and
                    Director of WCI since 1979. President of WCI from October 1979
                    to June
                    1998 and from March 2002 to January 2005.
                67
                Chairman
                    of the Board,President
                    and Chief Executive Officer of the Company**Ned
                    L. Mountain**
                  President
                    and Chief Operating Officer of WCI since January 2005 and Director
                    of the
                    Company since May 2003. Executive Vice President of WCI from
                    March 2002 to
                    January 2005. Senior Vice President of Business Development of
                    WCI from
                    1996 to 2002. Vice President European Operations of WCI from
                    1994 to 1995.
                    Numerous sales and marketing positions from 1981to 1994. Corporate
                    Senior
                    Engineer of UA-Columbia Cablevision from 1979 to 1981.
                57
                President
                    and Chief Operating Office of WCI**C.
                    Troy Woodbury, Jr.**
                  Treasurer
                    and Chief Financial Officer of the Company since June 1988 and
                    Director
                    since 1989. Treasurer and Chief Financial Officer of WCI since
                    1992.
                    Senior Vice President of Finance of WCI since March 2002. Executive
                    Vice
                    President of WCI from July 1995 to March 2002. Chief Operating
                    Officer of
                    WCI from September 1992 to June 1998. Group Controller for
                    Scientific-Atlanta, Inc. from March 1975 to June 1988.
                58
                Treasurer
                    andChief
                    Financial Officerof
                    the Company and WCI
 
  ITEM
        1A.  RISK
        FACTORS
  Our
        business, financial condition and operating results can be affected by a
        number
        of factors, including those listed below, any one of which could cause our
        actual results to vary materially from recent results or from our anticipated
        future results. Any of these risks could also materially and adversely affect
        our business, financial condition or the price of our common stock.
  
 13
  **We
        have a limited history of profitability and may need additional capital in
        the
        future, which we may not be able to secure on terms acceptable to
        us.**
  Over
        the
        past five fiscal years, we have reported positive operating income only in
        fiscal year 2002. As a consequence, we had an accumulated deficit of $12,093,308
        at September 2, 2005. There can be no certainty regarding our ability to
        achieve
        or sustain profitability in the future. Whether or not we are able to operate
        profitably, we may require additional capital to finance our operations.
        We
        believe our existing liquidity sources will satisfy our cash requirements
        for at
        least the next twelve months. However, if our expectations are incorrect,
        we may
        need to raise additional funds to fund our operations, to take advantage
        of
        unanticipated strategic opportunities or to strengthen our financial position.
        Our ability to raise funds, if required, may be adversely affected by a number
        of factors relating to Wegener, as well as factors beyond our control, including
        conditions in capital markets and the cable, telecom and satellite industries.
        There can be no assurance that such financing will be available on terms
        acceptable to us, if at all.
 
 **Our
        future operating results are difficult to predict and may fluctuate
        materially.**
 
 Our
        future operating results are difficult to predict and may be materially affected
        by a number of factors, including: the timing of purchasing decisions by
        our
        customers, the timing of new product announcements or introductions by us
        or our
        competitors, competitive pricing pressures, adequate availability of components
        and offshore manufacturing capacity. Additional factors affecting our operating
        results include our ability to hire, retain and motivate adequate numbers
        of
        engineers and other qualified employees, changes in product mix, and the
        effect
        of adverse changes in economic conditions in the United States and international
        markets. In addition, our markets have historically been cyclical and subject
        to
        significant economic downturns. Our business is subject to rapid technological
        changes and there can be no assurance, depending on the mix of future business,
        that products stocked in inventory will not be rendered obsolete before we
        ship
        them. As a result of these and other factors, there can be no assurance that
        we
        will not experience material fluctuations in future operating results on
        a
        quarterly or annual basis.
 
 **We
        have in the past experienced delays in product development and introduction,
        and
        there can be no assurance that we will not experience further delays in
        connection with our current product development or future development
        activities.**
 
 Delays
        in
        development, testing, manufacture and/or release of new products or features,
        including digital receivers, Compel ® network
        control software, MediaPlan ® content
        management software, streaming media, and other products could adversely
        affect
        our sales and results of operations. In addition, there can be no assurance
        that
        we will successfully identify new product opportunities, develop and bring
        new
        products to market in a timely manner and achieve market acceptance of our
        products, or that products and technologies developed by others will not
        render
        our products or technologies obsolete or noncompetitive.
 
 **Our
        lengthy and variable qualification and sales cycle makes it difficult to
        predict
        the timing of a sale or whether a sale will be made.**
 
 As
        is
        typical in our industry, our customers may expend significant efforts in
        evaluating and qualifying our products. This evaluation and qualification
        process frequently results in a lengthy sales cycle, typically ranging from
        three to six months and sometimes longer. While our customers are evaluating
        our
        products and before they place an order with us, we may incur substantial
        sales,
        marketing, and research and development expenses, expend significant management
        efforts, increase manufacturing capacity and order long-lead-time supplies
        prior
        to receiving an order. Even after this evaluation process, it is possible
        that a
        potential customer will not purchase our products.
 
 **Our
        customer base is concentrated and the loss of one or more of our key customers
        would harm our business.**
  Sales
        to
        a relatively small number of major customers have typically comprised a majority
        of our revenues, and that trend is expected to continue throughout fiscal
        2006
        and beyond. In fiscal 2005, four customers accounted for approximately 22.5%,
        14.1%, 13.0% and 10.3% of revenues, respectively. Three customers accounted
        for
        97.7% of the backlog at September 2, 2005 and for 96.9% of the backlog scheduled
        to ship during fiscal 2006. The loss of any significant customer or any
        reduction in orders by any significant customer would likely adversely affect
        our business, operating results and liquidity.
  14
 **We
        rely on third-party subcontractors, certain suppliers and offshore
        manufacturers.**
  We
        use
        two offshore manufacturers for a significant amount of finished goods or
        component inventories. Certain raw materials, video sub-components and licensed
        video processing technologies used in existing and future products are currently
        available from a single source or limited sources. Any disruption or termination
        of supply of certain single-source components or technologies, or interruption
        of supply from offshore manufacturers, would likely have a material adverse
        effect on our business and results of operations, at least in the near
        term.
  **Competition
        in our industry is intense and can result in reduced sales and market
        share** .
 
 We
        compete with companies which have substantially larger operations and greater
        financial, engineering, marketing, production and other resources than we
        have.
        These competitors may develop and market their products more quickly, devote
        greater marketing and sales resources, or offer more aggressive pricing,
        than we
        can. As a result, this could cause us to lose orders or customers or force
        reductions in pricing, all of which would have a material adverse impact
        on our
        financial position and results of operations.
  **Our
        business is subject to rapid changes in technology and new product
        introductions.**
  The
        market for our products is characterized by rapidly changing technology,
        evolving industry standards and frequent product introductions. Product
        introductions are generally characterized by increased functionality and
        better
        quality, sometimes at reduced prices. The introduction of products embodying
        new
        technology may render existing products obsolete and unmarketable. Our ability
        to successfully develop and introduce on a timely basis new and enhanced
        products that embody new technology, and achieve levels of functionality
        and
        price acceptable to the market will be a significant factor in our ability
        to
        grow and to remain competitive. If we are unable, for technological or other
        reasons, to develop competitive products in a timely manner in response to
        changes in the industry, our business and operating results will be materially
        and adversely.
 
 **There
        is no assurance of a continued trading market in our
        stock.**
 
 Our
        common stock is traded on the Nasdaq SmallCap Market. There is no assurance
        that
        a public market for our stock will continue to be made or that persons
        purchasing our common stock will be able to avail themselves of a public
        trading
        market for the common shares in the future. We currently satisfy all
        requirements for continued eligibility for trading on the Nasdaq SmallCap
        Market. There can be no assurance that we will remain in compliance with
        Nasdaq's continued listing requirements. If the common stock is delisted
        by
        Nasdaq, the trading market for the common stock will be adversely affected,
        as
        price quotations for the common stock will not be as readily obtainable,
        which
        would likely have a material adverse effect on the market price of the common
        stock.
 
 **Our
        stock price is subject to volatility.**
 
 Our
        common stock has experienced substantial price volatility and such volatility
        may occur in the future, particularly as a result of quarter to quarter
        variations in the actual or anticipated financial results of the Company
        or
        other companies in the satellite communications industry or in the markets
        we
        serve. These and other factors may adversely affect the market price of the
        common stock.
 
 ITEM
        1B.  UNRESOLVED STAFF COMMENTS
  Not
        applicable
  ITEM
        2.   PROPERTIES
  Our
        executive, sales, engineering and administrative offices are located at 11350
        Technology Circle, Duluth, Georgia 30097-1502. This 40,000 square foot facility,
        which is located on a 4.7 acre site, was purchased by WCI in February 1987.
        During August 1989, WCI purchased an additional 4.4 acres of adjacent property.
        WCI also leases a 21,000 square foot manufacturing facility in Alpharetta,
        Georgia under a two-year lease expiring in January 2007 with annual rent
        of
        approximately $143,000. WCI's 40,000 square foot facility and 4.4 acres of
        adjacent land are pledged as collateral under our line of credit
        facility.
  15
 ITEM
        3.   LEGAL
        PROCEEDINGS
  From
        time
        to time in the ordinary course of business, we have become a defendant in
        various types of legal proceedings. We do not believe that these proceedings,
        individually or in the aggregate, will have a material adverse effect on
        our
        financial position, results of operations or cash flows.
  
 ITEM
        4.   SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Not
        applicable
  **PART
        II**
  ITEM
                5.
              MARKET
                  FOR THE REGISTRANT'S COMMON EQUITY, RELATEDSTOCKHOLDER
                  MATTERS AND ISSUER PURCHASES OF EQUITY
                  SECURITIES
  Our
        Common Stock is traded on the NASDAQ Small-Cap Market (NASDAQ symbol: WGNR).
        As
        of November 15, 2005, there were approximately 381 holders
        of record of Common Stock. This number does not reflect beneficial ownership
        of
        shares held in nominee name.
  The
        quarterly ranges of high and low sale prices for fiscal 2005 and 2004 were
        as
        follows:
  **Fiscal
                    2005**
                
                Fiscal
                    2004**High**
                
                **Low**
                
                High
                
                LowFirst
                    Quarter
                
                **$**
                **2.65**
                
                **$**
                **1.07**
                
                $
                3.15
                
                $
                2.00Second
                    Quarter
                
                
                **2.93**
                
                
                **1.63**
                
                
                3.28
                
                
                1.94Third
                    Quarter
                
                
                **2.25**
                
                
                **1.62**
                
                
                2.63
                
                
                1.35Fourth
                    Quarter
                
                
                **2.34**
                
                
                **1.01**
                
                
                2.05
                
                
                1.06
 
  We
        have
        not paid any cash dividends on our Common Stock. For the foreseeable future,
        our
        Board of Directors does not intend to pay cash dividends, but rather plans
        to
        retain earnings to support our operations and growth. Furthermore, we are
        prohibited from paying dividends in accordance with our bank loan agreement,
        as
        more fully described in MD&A and in Note 7 to the consolidated financial
        statements contained in this report.
  The
        following table summarizes information as of September 2, 2005, regarding
        our
        common stock reserved for issuance under the our equity compensation plans.
  16
 
 Plan
                  Category
              
              Number
                  of Securities to be Issued Upon Exercise of Outstanding
                  Options
                (a)
              
              Weighted-Average
                  Exercise Price of Outstanding Options
                (b)
              
              Number
                  of Securities Remaining Available for Future Issuance Under the
                  Plans
                  (Excluding Securities Reflected in Column (a))
                (c)Equity
                  Compensation Plans Approved by Security Holders
              
              
              1,313,531
              
              $
              1.58
              
              
              510,669Equity
                  Compensation PlansNot
                  Approved by Security Holders
              
              
              -
              
              
              -
              
              
              -Total
              
              
              1,313,531
              
              $
              1.58
              
              
              510,669
 
 ITEM
        6.   SELECTED
        FINANCIAL DATA
 
 **SELECTED
        FINANCIAL DATA**
 **(in
        thousands, except per share amounts** **)**
  Year
                          ended**September
                          2,****2005**
                      
                      September
                          3,2004
                      
                      August
                          29,2003
                      
                      August
                          30,2002
                      
                      August
                          31,2001Revenue
                      
                      **$**
                      **21,902**
                      
                      $
                      18,104
                      
                      $
                      20,133
                      
                      $
                      23,459
                      
                      $
                      20,333Operating
                          income (loss)
                      
                      
                      **(1,470**
                      **)**
                      
                      (3,086
                      )
                      
                      (240
                      )
                      
                      1,311
                      
                      
                      (3,100
                      )Net
                          earnings (loss) (1)
                      
                      
                      **(5,671**
                      **)**
                      
                      (2,108
                      )
                      
                      88
                      
                      
                      808
                      
                      
                      (1,976
                      )Net
                          earnings (loss) per shareBasic
                      
                      **$**
                      **(.45**
                      **)**
                      $
                      (.17
                      )
                      $
                      (a
                      )
                      $
                      .07
                      
                      $
                      (.17
                      )Diluted
                      
                      **$**
                      **(.45**
                      **)**
                      $
                      (.17
                      )
                      $
                      (a
                      )
                      $
                      .07
                      
                      $
                      (.17
                      )Cash
                          dividends paid per share (2)
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      **-**Total
                          assets
                      
                      **$**
                      **12,802**
                      
                      $
                      17,496
                      
                      $
                      18,168
                      
                      $
                      18,700
                      
                      $
                      18,660Long-term
                          obligations inclusiveof
                          current maturities
                      
                      
                      -
                      
                      
                      -
                      
                      
                      4
                      
                      
                      10
                      
                      
                      55
  (a)
                Less than $.01 per
                  share.
 (1)
              The
                  year ended September 2, 2005 includes a fourth quarter noncash
                  tax charge
                  of $4,710,000 to provide a full valuation allowance for net deferred
                  tax
                  assets.
  (2)
              We
                  have never paid cash dividends on our common stock and do not intend
                  to
                  pay cash dividends in the foreseeable future. Additionally, our
                  line of
                  credit precludes the payment of
                  dividends.
  
  17
 ITEM
        7.   MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
  Certain
        statements contained in this filing are “forward-looking statements” within the
        meaning of the Private Securities Litigation Reform Act of 1995, such as
        statements relating to financial results, future business or product development
        plans, research and development activities, capital spending, financing
        resources or capital structure, the effects of regulation and competition,
        and
        are thus prospective. Such forward-looking statements are subject to risks,
        uncertainties and other factors, which could cause actual results to differ
        materially from future results expressed or implied by such forward-looking
        statements. Potential risks and uncertainties include, but are not limited
        to,
        economic conditions, customer plans and commitments, product demand, government
        regulation, rapid technological developments and changes, performance issues
        with key suppliers and subcontractors, delays in product development and
        testing, availability of raw materials, new and existing well-capitalized
        competitors, and other uncertainties detailed from time to time in the Company’s
        periodic Securities and Exchange Commission filings.
  We
        design
        and manufacture satellite communications equipment through Wegener
        Communications, Inc. (WCI), a wholly-owned subsidiary. WCI is a leading provider
        of digital solutions for video, audio and IP data networks. Applications
        include IP
        data
        delivery, broadcast television, cable television, radio networks, business
        television, distance education, business music and financial information
        distribution.
  We
        operate on a 52-53 week fiscal year. The fiscal year ends on the Friday nearest
        to August 31. Fiscal years 2005 and 2003 contained 52 weeks while fiscal
        year
        2004 contained 53 weeks. All references herein to 2005, 2004 and 2003, refer
        to
        the fiscal years ending September 2, 2005, September 3, 2004, and August
        29,
        2003, respectively .
  OVERVIEW
  Our
        fiscal 2005 revenues improved compared to fiscal 2004. Revenues increased
        21% in
        fiscal 2005 compared to fiscal 2004. However, we did not achieve the revenue
        growth that we expected in fiscal 2005 due to lower than expected shippable
        orders for the year, especially for our iPump ® system.
  Subsequent
        to September 2, 2005, $8.8 million in new orders have been booked. Four
        significant orders were received from two radio networks, a government agency
        and a private network. iPump ® systems
        accounted for more than 90% of these orders. Additionally, within this time
        frame, initial orders for the SMD 515 Streaming Media Decoder, our high
        definition MPEG-4/h.264 set top box, have been received.
 
 These
        new
        orders are scheduled to begin shipping in the first quarter of fiscal 2006
        and
        continue throughout fiscal 2006 and beyond. We are actively pursuing
        opportunities to increase orders needed to achieve revenue goals for fiscal
        2006. Due to the current level of additional orders needed for the first
        half of
        fiscal 2006, it is likely that we will have an operating loss for that period.
        Management is working to improve near term bookings.
 
 We
        continue to believe the iPump ® is the
        right product for our markets and will make a significant contribution to
        future
        revenues. The
        iPump ® Media
        Server uses a store and forward approach to network operations compared to
        traditional real-time video and audio delivery networks. The iPump ® Media
        Server provides customers with many additional capabilities not available
        in
        traditional real-time delivery networks, such as streaming video and audio
        to
        the desktop, more efficient use of expensive satellite bandwidth and the
        ability
        to originate two complete television networks from a single unit. MediaPlan ® i/o and
        MediaPlan ® CM
        modules provide control over storing and managing digital media content.
        These
        features enhance network content management and ease of network
        operations.
  
  18
 **Current
        Developments**
  Over
        the
        past two years, senior management has been developing a much stronger executive
        team to focus on improvements in our operations. During fiscal 2005, sharper
        focus has been brought to bear in the following areas: execution of product
        development projects in a more focused and cost effective manner; improvement
        of
        our strategic planning processes with an emphasis on improving marketing
        data
        input; improvement of sales effectiveness with additional training and new
        personnel; and a renewed focus on the customers we serve and our value
        proposition to them.
 
 We
        have
        made improvements in our product development processes that will allow products
        to be developed, properly tested and released to the marketplace in a more
        timely manner. Improvements have also been made in ensuring that the proper
        feature sets are being developed for new products.
 
 We
        have
        recently hired a very experienced and successful Vice President of Sales.
        He is
        a proven executive with experience in understanding current markets and opening
        new opportunities for growth. Other changes have been made in the sales team.
        We
        are working with our outside strategic planning consultants to assist us
        in
        improving operations and to develop additional markets and opportunities
        for our
        products. We completed an initial review of our operations that resulted
        in a
        reduction in our workforce during the last week of fiscal 2005. We are
        continuing to monitor costs in relation to revenues.
 
 Revenue
        opportunities appear to be most significant in the radio and business/private
        network markets with our iPump ® Solutions. We are in the process of deploying a rollout of iPump ® for the
        broadcast radio market and are working with multiple customers on additional
        programs. We believe our iPump ® ,
        MediaPlan ® and
        Compel ® products
        create systems that directly address the next generation needs of satellite
        delivery of content.
  We
        continue to invest in and develop our SMD 515 Streaming Media Decoder settop
        for
        the telecom market. The SMD 515 enables telecom companies to offer IPTV
        services, including high definition television, to existing DSL consumers.
        We
        showcased the SMD 515 utilizing MPEG-4/h.264 video streams to display high
        definition video at the October TELECOM ’05 and at the November Telco TV
        tradeshow. MPEG-4 is a key focus for next generation video distribution network
        architectures in satellite, telecom and cable markets.
  **Financial
        Position and Liquidity**
 
 We
        have
        no long-term debt or line of credit borrowings outstanding at September 2,
        2005.
        Our cash balances were $1,107,000 at September 2, 2005. Our $5,000,000 bank
        loan
        facility, which is subject to availability advance formulas based on eligible
        accounts receivable, import letter of credit commitment balances and
        inventories, is currently being used to support import letters of credit
        issued
        to our offshore manufacturers, which at September 2, 2005 amounted to
        $1,016,000. At September 2, 2005, **** approximately
        $2,664,000 net of the outstanding letters of credit was available to borrow
        under the advance formulas. We expect to utilize borrowings on the line of
        credit beginning in the first half of fiscal 2006 to support operations.
        If we
        achieve our revenue projections for the third and fourth quarter of fiscal
        2006,
        we expect to exceed our line of credit limit of $5,000,000 during this period.
        An increase in the line of credit would be required to support anticipated
        increases in inventory, accounts receivable and letter of credit commitment
        balances beginning in the third quarter of fiscal 2006. No assurances may
        be
        given that the bank would grant an increase in the line of credit or that
        upon
        maturity the line will be renewed or that additional sources of capital,
        if
        needed, would be available. Should anticipated future revenues not materialize,
        we are committed to reducing operating costs to bring them in line with revenue
        levels.
 
 
 (See
        the
        Liquidity and Capital Resources section for further discussion.)
 
 
 
 19
 RESULTS
        OF OPERATIONS
  The
        following table sets forth, for the periods indicated, the components of
        the
        results of operations as a percentage of revenue:
  Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003Revenue
                
                
                **100.0**
                **%**
                
                100.0
                %
                
                100.0
                %Cost
                    of products sold
                
                
                **63.6**
                
                
                73.3
                
                
                62.7Gross
                    margin
                
                
                **36.4**
                
                
                26.7
                
                
                37.3Selling,
                    general, and administrative
                
                
                **27.1**
                
                
                26.7
                
                
                24.3Research
                    & development
                
                
                **15.9**
                
                
                17.1
                
                
                14.2Operating
                    income (loss)
                
                
                **(5.8**
                **)**
                
                (17.0
                )
                
                (1.2
                )Interest
                    expense
                
                
                **(0.3**
                **)**
                
                (0.5
                )
                
                (0
                    .3
                )Interest
                    income
                
                
                **0.1**
                
                
                0.2
                
                
                0.3Earnings
                    (loss) before income taxes
                
                
                **(6.9**
                **)**
                
                (17.3
                )
                
                (1.3
                )Income
                    tax (expense) benefit
                
                
                **(19.0**
                **)**
                
                5.7
                
                
                1.7Net
                    earnings (loss)
                
                
                **(25.9**
                **)%**
                
                (11.6
                )%
                
                0.4
                %
 
 Net
        loss
        for the year ended September 2, 2005, was $(5,671,000) or $(0.45) per diluted
        share, compared to a net loss of $(2,108,000) or $(0.17) per diluted share
        for
        the year ended September 3, 2004, and net earnings of $88,000 or less than
        $0.01
        per diluted share for the year ended August 29, 2003. The net loss for the
        year
        ended September 2, 2005 includes a fourth quarter noncash income tax charge
        of
        $4,710,000 to provide a full valuation allowance for net deferred tax assets.
  Revenues
        for fiscal 2005 increased $3,798,000, or 21.0%, to $21,902,000 from $18,104,000
        in fiscal 2004. Direct Broadcast Satellite (DBS) revenues (including service
        revenues) in fiscal 2005 increased $4,475,000, or 26.1%, to $21,642,000 from
        $17,167,000 in fiscal 2004. Telecom and Custom Product revenues decreased
        $677,000, or 72.3%, in fiscal 2005 to $260,000 from $937,000 in fiscal 2004.
        Revenues and order backlog are subject to the timing of significant orders
        from
        customers, and as a result revenue levels may fluctuate on a quarterly and
        yearly basis. Fiscal 2005 revenues included two new orders from Ascent Media
        of
        iPump ® Media
        Servers, digital encoders and Unity ® receivers for a private network application and to convert a television
        distribution network from analog to digital and upgrade the network’s
        capabilities with store and forward technology. Initial shipments were made
        to
        Fox NewsEdge to upgrade their network operations using Compel ® Network
        Control, MediaPlan ® and
        iPump ® Media
        Servers. Shipments continued to Roberts Communications Network on additional
        orders of uplink equipment and Unity ® receivers to upgrade its existing network. Fiscal 2005 also included shipments
        of transmission equipment, receivers and our Compel ® network
        control system  to
        a new
        radio broadcast customer for network upgrades and expansion and to Microspace
        Communications for delivery of audio programming for the Christian Radio
        Consortium. The Telecom and Custom Products Group revenue decrease in fiscal
        2005 reflected a continuing decline in orders for older analog and cue and
        control equipment.
  Revenues
        for fiscal 2004 decreased $2,029,000, or 10.1%, to $18,104,000 from $20,133,000
        in fiscal 2003. Direct Broadcast Satellite (DBS) revenues (including service
        revenues) in fiscal 2004 decreased $1,555,000, or 8.3%, to $17,167,000 from
        $18,722,000 in fiscal 2003. Telecom and Custom Product revenues decreased
        $474,000, or 33.6%, in fiscal 2004 to $937,000 from $1,411,000 in fiscal
        2003.
        DBS revenues and bookings were adversely impacted by delayed purchasing
        decisions in the digital satellite transmission market and particularly by
        a
        longer than expected sales cycle for the iPump ® Media
        Server and DTV 700 series products. Fiscal 2004 revenues included shipments
        of
        network equipment to Roberts Communications for network upgrades and expansion,
        and to Ascent Media for new cable network applications and expansion of private
        video networks. Shipments to Ascent Media included deliveries of
        iPump ® Media
        Servers for their network applications. The Telecom and Custom Products Group
        revenue decrease in fiscal 2004 was primarily due to completion of shipments
        of
        commercial insertion equipment in fiscal 2003 to a cable television
        operator.
  20
 WCI's
        backlog of orders scheduled to ship within 18 months was $10,100,000 at
        September 2, 2005, compared to $12,010,000 at September 3, 2004, and $12,699,000
        at August 29, 2003. The total multi-year backlog at September 2, 2005, was
        approximately $23,964,000. Approximately $7,956,000 of the September 2, 2005,
        backlog is expected to ship during fiscal 2006. Subsequent to September 2,
        2005,
        $8.8 million in new orders have been booked. These new orders are scheduled
        to
        begin shipping in the first quarter of fiscal 2006 and continue throughout
        the
        fiscal year and beyond. Three customers accounted for 97.7% of our backlog
        at
        September 2, 2005 and for 96.9% of the backlog expected to ship during fiscal
        2006. Sales to a relatively small number of major customers have typically
        comprised a majority of our revenues and that trend is expected to continue.
        (See note 11 to the consolidated financial statements, Segment Information
        and
        Significant Customers.) Future revenues are subject to the timing of significant
        orders from customers and are difficult to forecast. As a result, we expect
        future revenue levels and operating results to fluctuate from quarter to
        quarter.
  International
        sales are generated through a direct sales organization and through foreign
        distributors. International sales were $532,000 or 2.4% of revenues in fiscal
        2005 compared to $606,000 or 3.3% of revenues in fiscal 2004, and $839,000
        or
        4.2% of revenues in fiscal 2003. International shipments are generally project
        specific, and revenues, therefore, are subject to variations from year to
        year
        based on the timing of customer orders. All international sales are denominated
        in U.S. dollars. Additional financial information on geographic areas is
        provided in Note 11 to the consolidated financial statements.
  Gross
        profit as a percent of sales was 36.4% in fiscal 2005 compared to 26.7% in
        fiscal 2004, and 37.3% in fiscal 2003. Gross profit margin dollars increased
        $3,128,000, or 64.6%, to $7,968,000 in fiscal 2005 from $4,840,000 in fiscal
        2004. Fiscal 2003 gross profit margin dollars amounted to $7,510,000. The
        increase in margin percentages and dollars in fiscal 2005 was mainly due
        to
        higher revenues, which resulted in lower unit fixed overhead costs and a
        favorable product sales mix with lower variable cost components. Fiscal 2005
        gross margin dollars and percentages were favorably impacted by an adjustment
        of
        accrued expenses of $218,000. Profit margins in fiscal 2005 included inventory
        reserve charges of $325,000 compared to $225,000 in fiscal 2004 and $75,000
        in
        fiscal 2003.
  Selling,
        general, and administrative (SG&A) expenses increased $1,115,000, or 23.1%,
        to $5,946,000 in fiscal 2005 from $4,831,000 in fiscal 2004. As a percentage
        of
        revenues, SG&A expenses were 27.1% of revenues in fiscal 2005 and 26.7% in
        fiscal 2004. Corporate SG&A expenses in fiscal 2005 increased $215,000
        compared to fiscal 2004. Corporate SG&A expenses in fiscal 2004 included an
        insurance reimbursement of $191,000 for a portion of legal costs expensed
        in
        fiscal 2003 related to defending the Company against an unsolicited, hostile
        takeover attempt by Radyne ComStream, Inc. WCI’s SG&A expenses increased
        $900,000,or 22.0%, to $4,985,000 in fiscal 2005 from $4,085,000 in fiscal
        2004.
        The increase in WCI’s SG&A expenses in fiscal 2005 was mainly due to higher
        sales salaries of $326,000 due to an increase in personnel, increases in
        selling
        and marketing expenses of $295,000 due to increased sales activity and sales
        commissions, higher consulting expenses of $126,000 related to strategic
        planning and increases in relocation expenses and placement fees of $29,000.
        These expenses were offset by lower professional fees at WCI of
        $57,000.
  SG&A
        expenses decreased $67,000, or 1.4%, to $4,831,000 in fiscal 2004 from
        $4,898,000 in fiscal 2003. As a percentage of revenues, SG&A expenses were
        26.7% of revenues in fiscal 2004 and 24.3% in fiscal 2003. SG&A expenses in
        fiscal 2004 included an insurance reimbursement of $191,000 described above.
        SG&A expenses in fiscal 2003 included $974,000 in corporate legal and
        professional fees related to defending the Company against the unsolicited
        hostile takeover attempt and related litigation. WCI’s SG&A expenses
        increased $755,000, or 22.7%, to $4,085,000 in fiscal 2004 from $3,330,000
        in
        fiscal 2003. Sales and marketing salary expenses increased $319,000 due to
        an
        increase in personnel and marketing expenses increased $205,000 due to increased
        sales activity related to new products.
  General
        corporate expenses included in SG&A expense were approximately $961,000,
        $746,000, and $1,568,000, in fiscal 2005, 2004 and 2003, respectively. Fiscal
        2004 included an insurance reimbursement of $191,000 for a portion of the
        fiscal
        2003 corporate legal costs. Sarbanes-Oxley compliance costs for fiscal 2005
        were
        approximately $188,000 compared to none in fiscal 2004.
  21
 Research
        and development expenditures, including capitalized software development
        costs,
        were $5,046,000 or 23.0% of revenues in fiscal 2005, $4,789,000 or 26.4%
        of
        revenues in fiscal 2004, and $4,230,000 or 21.0% of revenues in fiscal 2003.
        The
        increase in expenditures in fiscal 2005 compared to fiscal 2004 was due to
        increased prototype part costs and placement fees. The increase in expenditures
        in fiscal 2004 compared to fiscal 2003 was due to increases in engineering
        consulting expenses primarily related to the development of iPump ® Media
        Server and the DTV series 700 products. Software development costs totaling
        $1,553,000, $1,693,000, and $1,377,000 were capitalized during fiscal 2005,
        2004
        and 2003, respectively. The decreases in capitalized software costs in fiscal
        2005 compared to fiscal 2004 are due to decreased expenditures on the
        iPump ® Media
        Server, Unity ® 4600
        and
        DTV series 700 products, which were partially offset by increased expenditures
        on the SMD 515 product. The increases in capitalized software costs during
        fiscal 2004 compared to 2003 are due to increased expenditures on the
        Compel ® network
        control software, the iPump ® Media
        Server, Unity ® 4600
        and
        DTV series 700 products. Research and development expenses, excluding
        capitalized software development costs, were $3,493,000 or 15.9% of revenues
        in
        fiscal 2005, $3,095,000 or 17.1% of revenues in fiscal 2004, and $2,853,000
        or
        14.2% of revenues in fiscal 2003. We expect fiscal 2006 research and development
        expenditures to approximate fiscal 2005 levels as we continue to develop
        and
        enhance DBS products.
  Interest
        expense was $59,000 in fiscal 2005 compared to $96,000 in fiscal 2004 and
        $69,000 in fiscal 2003. Interest expense in fiscal years 2005, 2004 and 2003
        was
        principally associated with letters of credit commitments and bank float
        charges
        on lockbox collections. The decrease in fiscal 2005 compared to fiscal 2004
        was
        primarily due to a decrease in the average outstanding letter of credit
        commitment balances. We believe that interest expense in fiscal 2006 will
        increase compared to fiscal 2005 as a result of expected increases in line
        of
        credit borrowings, as well as increases in prime rates.
  Interest
        income was $27,000 in fiscal 2005 compared to $43,000 in fiscal 2004 and
        $57,000
        in fiscal 2003. The decrease in fiscal 2005 compared to fiscal 2004 was mainly
        due to lower average balances of cash and cash equivalents and by a one-time
        benefit of $19,000 in fiscal 2004 related to the collection of a trade accounts
        receivable. The decrease in fiscal 2004 compared to fiscal 2003 was mainly
        due
        to lower average balances of cash and cash equivalents, which was offset
        by the
        one-time benefit of $19,000 related to the collection of a trade accounts
        receivable.
  Fiscal
        2005 income tax expense of $4,169,000 was comprised of deferred federal and
        state tax expenses of $3,659,000 and $510,000, respectively. Federal and
        state
        tax expenses included a fourth quarter non-cash charge of $4,710,000 to provide
        a full valuation allowance for net deferred tax assets.
 
 Statement
        of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
        Taxes,"
        requires that a valuation allowance be established when it is “more likely than
        not” that all or a portion of a deferred tax asset will not be realized. A
        review of all available positive and negative evidence must be considered
        in
        judging the likelihood of realizing tax benefits. Forming a conclusion that
        a
        valuation allowance is not needed is difficult when there is negative evidence
        such as cumulative losses in recent years. Cumulative losses are one of the
        most
        difficult pieces of negative evidence to overcome in the absence of sufficient
        existing orders and backlog (versus forecasted future orders) supporting
        a
        return to profitability. During the fourth quarter of fiscal 2005, it became
        evident we would not meet our forecast for actual orders and profitability
        for
        the fourth quarter and fiscal year 2005. This lessened the weight that we
        could
        assign to future prospects for returning to consistent profitability. Although
        order activity subsequent to September 2, 2005, points to an improvement
        in
        backlog, additional orders and backlog are currently needed to return to
        profitability in fiscal 2006. That, combined with recent cumulative net losses,
        represented sufficient negative evidence that was difficult for positive
        evidence to overcome under the evaluation guidance of SFAS No. 109.  Our
        assessment in applying SFAS No. 109 indicated that a full valuation allowance
        for our net deferred tax assets was required as of September 2,
        2005.  The
        effect was to reverse the benefits of net deferred tax assets that were recorded
        in prior years’ financial statements. These tax benefits will be available,
        prior to the expiration of carryforwards, to reduce future income tax expense
        resulting from earnings or increases in deferred tax liabilities.
  
 22
 At
        September 2, 2005, we had a federal net operating loss carryforward of
        $7,750,000, of which $1,604,000 expires in fiscal 2021, $1,296,000 in fiscal
        2023, $3,396,000 in fiscal 2024 and $1,454,000 in fiscal 2025. Additionally,
        we
        had an alternative minimum tax credit of $138,000 and a state income tax
        credit
        of $199,000, expiring in fiscal 2009, all of which were fully offset by the
        valuation allowance.
 
  Fiscal
        2004 income tax benefit of $1,031,000 was comprised of deferred federal and
        state tax benefits of $969,000 and $62,000, respectively. Net deferred tax
        assets increased $1,031,000 to $4,169,000 at September 3, 2004. The increase
        was
        principally due to increases in net operating loss carryforwards, offset
        by
        reductions of general business and foreign tax credits of $98,000 which expired
        September 3, 2004. Fiscal 2003 income tax expense of $340,000 was comprised
        of a
        current federal income tax benefit of $50,000 and deferred federal and state
        income tax expenses of $85,000 and $205,000, respectively. The fiscal 2003
        state
        income tax benefits were favorably impacted primarily by state income tax
        credits of $199,000 related to Georgia retraining credits. A reconciliation
        of
        our effective income tax rate as compared to the statutory U.S. income tax
        rate
        is provided in Note 8 to the consolidated financial statements.
 
 
 CRITICAL
        ACCOUNTING POLICIES
  Certain
        accounting policies are very important to the portrayal of our financial
        condition and results of operations and require management’s most subjective or
        difficult judgements. These policies are as follows:
  **Revenue
        Recognition** - Our
        revenue recognition policies are in compliance with Staff Accounting Bulletin
        (SAB) No. 104, “Revenue Recognition”, SAB No. 101, “Revenue Recognition in
        Financial Statements” and EITF Issue No. 00-21, "Revenue Arrangements with
        Multiple Deliverables." Revenue is recognized when persuasive evidence of
        an
        agreement with the customer exists, products are shipped or title passes
        pursuant to the terms of the agreement with the customer, the amount due
        from
        the customer is fixed or determinable, collectibility is reasonably assured,
        and
        there are no significant future performance obligations. Service revenues
        are
        recognized at the time of performance. Revenues from separate service
        maintenance agreements are recognized ratably over the term of the agreements.
        We recognize revenue in certain circumstances before delivery has occurred
        (commonly referred to as “bill and hold” transactions). In such circumstances,
        among other things, risk of ownership has passed to the buyer, the buyer
        has
        made a written fixed commitment to purchase the finished goods, the buyer
        has
        requested the finished goods be held for future delivery as scheduled and
        designated by them, and no additional performance obligations exist by us.
        For
        these transactions, the finished goods are segregated from inventory and
        normal
        billing and credit terms are granted. For the year ended September 2, 2005,
        revenues to one customer in the amount of $3,431,000 were recorded prior
        to
        delivery as bill and hold transactions. At September 2, 2005, accounts
        receivable for these revenues amounted to $385,000 and were paid in full
        subsequent to September 2, 2005.
  These
        policies require management, at the time of the transaction, to assess whether
        the amounts due are fixed or determinable, collection is reasonably assured
        and
        no future performance obligations exist. These assessments are based on the
        terms of the agreement with the customer, past history and creditworthiness
        of
        the customer. If management determines that collection is not reasonably
        assured
        or future performance obligations exist, revenue recognition is deferred
        until
        these conditions are satisfied.
  Our
        principal sources of revenues are from the sales of various satellite
        communications equipment. Embedded in our products is internally developed
        software of varying applications. Historically, we have not sold or marketed
        our
        software separately or otherwise licensed our software apart from the related
        communications equipment. Should we begin to market or sell software whereby
        it
        is more than an incidental component of the hardware, then we would recognize
        software license revenue in accordance with SOP No. 97-2, “Software Revenue
        Recognition” as amended by SOP No. 98-9, “Software Revenue Recognition, with
        Respect to Certain Transactions.”
  23
 **Inventory
        Reserves** **-** Inventories
        are valued at the lower of cost (at standard, which approximates actual cost
        on
        a first-in, first-out basis) or market. Inventories include the cost of raw
        materials, labor and manufacturing overhead. We make inventory reserve
        provisions to properly reflect inventory value based on a review of inventory
        quantities on hand, sales forecasts, new products being developed and technology
        changes. These reserves are to provide for items that are potentially
        slow-moving, excess or obsolete. Changes in market conditions, lower than
        expected customer demand and rapidly changing technology could result in
        additional obsolete and slow-moving inventory that is unsaleable or saleable
        at
        reduced prices, which could require additional inventory reserve provisions.
        At **** September
        2, 2005, inventories, net of reserve provisions, amounted to $3,956,000.
  **Capitalized
        Software Costs** **-** Software
        development costs are capitalized subsequent to establishing technological
        feasibility. Capitalized costs are amortized based on the larger of the amounts
        computed using (a) the ratio that current gross revenues for each product
        bears
        to the total of current and anticipated future gross revenues for that product,
        or (b) the straight-line method over the remaining estimated economic life
        of
        the product. Expected future revenues and estimated economic lives are subject
        to revisions due to market conditions, technology changes and other factors
        resulting in shortfalls of expected revenues or reduced economic lives, which
        could result in additional amortization expense or write-offs. At September
        2,
        2005, capitalized software costs, net of accumulated amortization, amounted
        to
        $1,766,000.
  **Deferred
        Tax Asset Valuation Allowance** -
        Deferred tax assets are recognized for deductible temporary differences,
        net
        operating loss carryforwards and credit carryforwards, if it is more likely
        than
        not that the tax benefits will be realized. Realization of our deferred tax
        assets is dependent on generating sufficient future taxable income prior
        to the
        expiration of the loss and credit carryforwards. As discussed in the "Results
        of
        Operations" section of this MD&A, during the fourth quarter of fiscal 2005,
        we recorded a $4,710,000 non-cash income tax charge to establish a full
        valuation allowance against all of our net deferred tax assets.
  **Accounts
        Receivable Valuation** - We
        maintain allowances for doubtful accounts for estimated losses resulting
        from
        the inability of our customers to make required payments. If the financial
        condition of our customers were to deteriorate, resulting in an impairment
        of
        their ability to make payments, additional allowances may be required. At
        September 2, 2005, accounts receivable net of allowances for doubtful accounts
        amounted to $2,309,000.
  LIQUIDITY
        AND CAPITAL RESOURCES
  At
        September 2, 2005, our primary sources of liquidity were cash of $1,107,000
        and
        a $5,000,000 bank loan facility, which matures on June 30, 2006. Cash and
        cash
        equivalents decreased $414,000 in fiscal 2005. We have no long-term debt
        or line
        of credit borrowings outstanding at September 2, 2005. Our bank loan facility,
        which is subject to availability advance formulas based on eligible accounts
        receivable, import letter of credit commitment balances and inventories,
        is
        currently being used to support import letters of credit issued to our offshore
        manufacturers, which at September 2, 2005 amounted to $1,016,000. At September
        2, 2005, **** approximately
        $2,664,000 net of the outstanding letters of credit was available to borrow
        under the advance formulas. We expect to utilize borrowings on the line of
        credit beginning in the first half of fiscal 2006 to support operations.
        If we
        achieve our revenue projections for the third and fourth quarter of fiscal
        2006,
        we expect to exceed our line of credit limit of $5,000,000 during this period.
        An increase in the line of credit would be required to support anticipated
        increases in inventory, accounts receivable and letter of credit commitment
        balances beginning in the third quarter of fiscal 2006. No assurances may
        be
        given that the bank would grant an increase in the line of credit or that
        upon
        maturity the line will be renewed or that additional sources of capital,
        if
        needed, would be available. Should anticipated future revenues not materialize,
        we are committed to reducing operating costs to bring them in line with revenue
        levels.
 
 In
        addition, at September 2, 2005, we had land and buildings and improvements
        with
        a cost basis of $4,454,000, which had no mortgage balances outstanding. Land
        and
        buildings are not currently used in the existing loan facility’s availability
        advance formulas; however, we believe these assets could be used to support
        additional borrowing capacities either with our existing bank or from other
        sources.
 
 Cash
        provided by operating activities was $1,659,000 in fiscal 2005, $562,000
        in
        fiscal 2004 and $1,792,000 in fiscal 2003. Fiscal 2005 net loss adjusted
        for
        noncash expenses provided cash of $1,179,000. Increases in inventories and
        other
        assets used cash of $389,000 while changes in accounts receivable and customer
        deposits provided cash of $679,000. Changes in accounts payable and accrued
        expenses provided cash of $190,000.
 
 24
 Cash
        used
        by investing activities in fiscal 2005 was $2,109,000 compared to $2,299,000
        in
        fiscal 2004 and $2,673,000 in fiscal 2003. In fiscal 2005, investing activities
        used cash of $355,000 for property and equipment expenditures, $1,553,000
        for
        capitalized software additions and $200,000 for legal expenses related to
        the
        filing of applications for various patents and trademarks. Capitalized software
        expenditures were incurred primarily for the development of Compel ® network
        control and MediaPlan ® software, the iPump ® Media
        Server, and the SMD 515 Streaming Media Settop product. Property and equipment
        expenditures were for planned additions of principally manufacturing and
        engineering test equipment. Fiscal 2006 expenditures for investing activities
        are expected to approximate fiscal 2005 levels.
  Cash
        provided by financing activities was $36,000 in fiscal 2005 and $168,000
        in
        fiscal 2004. Cash used by financing activities was $75,000 in fiscal 2003.
        In
        fiscal 2005, financing activities used cash of $37,000 for loan facility
        fees,
        and provided $73,000 of cash from the exercise of stock options.
  Net
        accounts receivable decreased $171,000 to $2,309,000 at September 2, 2005,
        from
        $2,480,000 at September 3, 2004, compared to $3,560,000 at August 29, 2003.
        The
        decrease in fiscal 2005 was due to lower average days outstanding of fiscal
        2005
        receivables, primarily due to a prepayment on a large order from one customer,
        compared to the same period of fiscal 2004. The allowance for doubtful accounts
        was $371,000 at September 2, 2005, $363,000 at September 3, 2004 and $355,000
        at
        August 29, 2003. Write-offs were $77,000 in fiscal 2005, $5,000 in fiscal
        2004
        and $27,000 in fiscal 2003. Recoveries in fiscal 2004 were $14,000. Increases
        to
        the allowance and charges to general and administrative expense were $85,000
        in
        fiscal 2005, $0 in fiscal 2004 and $30,000 in fiscal 2003.
  Customer
        deposits increased $594,000 to $1,554,000 at September 2, 2005, from $960,000
        at
        September 3, 2004, primarily due to one customer booking scheduled to ship
        in
        fiscal 2006. Customer deposits vary with the timing and terms of customer
        bookings.
  Inventory
        before reserves increased $142,000, or 1.9%, to $7,449,000 at September 2,
        2005,
        from $7,307,000 at September 3, 2004. During fiscal 2005, inventory reserves
        were increased by provisions charged to cost of sales of $325,000. The increase
        in the provision was to provide additional reserves for 1) slower-moving
        analog
        products, 2) excess digital audio inventories, and 3) potentially slow-moving
        inventories of earlier generations of other digital products. These products
        continue to sell but at reduced quantities. Inventory reserves were increased
        by
        provisions charged to cost of sales of $225,000 in fiscal 2004 and $75,000
        in
        fiscal 2003. Inventory reserves were decreased by write-offs of $300,000
        in
        fiscal 2005, $248,000 in fiscal 2004 and $365,000 in fiscal 2003. During
        fiscal
        2005 and 2004, increases in inventories used cash of $442,000 and $1,922,000,
        respectively. During fiscal 2003, decreases in inventories provided cash
        of
        $1,703,000.
  WCI’s
        bank loan facility provides a maximum available credit limit of $5,000,000
        subject to availability advance formulas. The loan facility matures on June
        30,
        2006, or upon demand and requires an annual facility fee of .75% of the maximum
        credit limit. The loan facility consists of a term loan and a revolving line
        of
        credit with a combined borrowing limit of $5,000,000, bearing interest at
        the
        bank’s prime rate (6.75% at September 2, 2005).
 
 The
        term
        loan facility provides for a maximum of $1,000,000 for advances of up to
        80% of
        the cost of equipment acquisitions. Principal advances are payable monthly
        over
        60 months with a balloon payment due at maturity. The revolving line of credit
        is subject to availability advance formulas of 80% against eligible accounts
        receivable; 20% of eligible raw materials inventories; 20% of eligible work-in
        process kit inventories; 40% to 50% of eligible finished goods inventories;
        and
        50% of import letter of credit commitment balances. The loan is secured by
        a
        first lien on substantially all of WCI’s assets and guaranteed by Wegener
        Corporation. At September 2, 2005, no balances were outstanding on the revolving
        line of credit or the equipment term loan portions of the loan facility.
        The
        loan facility is currently being used to support import letters of credit
        issued
        to offshore manufacturers, which at September 2, 2005 amounted to $1,016,000.
        At
        September 2, 2005, **** approximately
        $2,664,000, net of outstanding letters of credit, was available to borrow
        under
        the advance formulas.
  We
        are
        required to maintain a minimum tangible net worth with annual increases at
        each
        fiscal year end commencing with fiscal year 2005, retain certain key employees,
        maintain certain financial ratios, and are precluded from paying dividends.
        At
        September 2, 2005, we were not in compliance with the tangible net worth
        covenant, for which the bank granted a waiver.
 
 
 25
  We
        have
        two manufacturing and purchasing agreements for certain finished goods
        inventories. At September 2, 2005, outstanding purchase commitments under
        these
        agreements amounted to $4,705,000. Pursuant to the above agreements, at
        September 2, 2005, we had outstanding letters of credit in the amount of
        $1,016,000. In addition, at September 2, 2005, we had an outstanding commitment
        for engineering design and software development services in the amount of
        $893,000.
  A
        summary
        of our long-term contractual obligations as of September 2, 2005 consisted
        of:
  Payments
                  Due by PeriodContractual
                  Obligations
              
              Total
              
              One
                  Year
              
              2
                  -3 Years
              
              4
                  -5 YearsOperating
                  leases
              
              $
              328,000
              
              $
              188,000
              
              $
              140,000
              
              $
              -Purchase
                  commitments
              
              
              5,599,000
              
              
              5,120,000
              
              
              479,000
              
              
              -Total
              
              $
              5,927,000
              
              $
              5,308,000
              
              $
              619,000
              
              $
              -
  In
        addition we license certain technologies under various license agreements
        which
        require royalty payments based on the sales volume of certain products. See
        the
        discussion under the section “Patents, trademarks, licenses, franchises and
        concessions held” above.
  OFF-BALANCE
        SHEET ARRANGEMENTS
  At
        September 2, 2005, we had no off-balance sheet arrangements.
  IMPACT
        OF
        INFLATION
  We
        do not
        believe that inflation has had a material impact on revenues or expenses
        during
        the past three fiscal years.
  IMPACT
        OF
        RECENTLY ISSUED ACCOUNTING STANDARDS
  In
        November 2004, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs - an
        amendment of ARB No.43, Chapter 4,” which clarifies the accounting for abnormal
        amounts of idle facility expense, freight, handling costs and wasted material.
        SFAS No. 151 will be effective for inventory costs incurred during fiscal
        years
        beginning after June 15, 2005. We do not believe the adoption of SFAS No.
        151
        will have a material impact on our financial statements.
  In
        December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based
        Payment” (SFAS No. 123R). SFAS No.123R requires all share-based payments to
        employees, including grants of employee stock options, to be recognized as
        compensation expense in the consolidated financial statements based on their
        fair values. That expense will be recognized over the period during which
        an
        employee is required to provide services in exchange for the award, known
        as the
        requisite service period (usually the vesting period). This standard is
        effective for public companies at the beginning of the first annual period
        beginning after June 15, 2005. We will adopt SFAS 123R using the Modified
        Prospective Application Method beginning September 3, 2005. Under this method,
        SFAS 123R applies to new awards and to awards modified, repurchased or cancelled
        after the effective date. Additionally, compensation cost for the portion
        of
        awards for which the requisite service has not been rendered, such as unvested
        options that are outstanding as of the date of adoption, shall be recognized
        as
        the remaining requisite services are rendered. The compensation cost relating
        to
        unvested awards at the date of adoption shall be based on the grant-date
        fair
        value of those awards as calculated for pro forma disclosures under the original
        SFAS 123. Effective as of September 2, 2005, the Board of Directors approved
        the
        acceleration of vesting on all remaining unvested “out-of-the-money” options.
        These unvested options had exercise prices greater than $1.26, the closing
        price
        of WGNR common stock on September 2, 2005. The acceleration covered options
        for
        346,000 shares, exercisable at $2.21, of which 75% were scheduled to vest
        over
        the next three fiscal years. The purpose of the vesting acceleration was
        to
        reduce the expense that would be associated with these options in accordance
        with the adoption of SFAF No.123R. The impact of adoption of SFAS No. 123R
        cannot be predicted at this time because it will depend on levels of share-based
        payments granted in the future.
 
 26
 In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
        an amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are
        based on the principle that exchanges of nonmonetary assets should be measured
        based on the fair value of the assets exchanged. Further, the amendments
        eliminate the narrow exception for nonmonetary exchanges of similar productive
        assets and replace it with a broader exception for exchanges of nonmonetary
        assets that do not have commercial substance. Previously, Opinion 29 required
        that the accounting for an exchange of a productive asset for a similar
        productive asset or an equivalent interest in the same or similar productive
        asset should be based on the recorded amount of the asset relinquished. By
        focusing the exception on exchanges that lack commercial substance, the Board
        believes SFAS No. 153 produces financial reporting that more faithfully
        represents the economics of the transactions. This statement is effective
        for
        nonmonetary asset exchanges occurring in fiscal periods beginning after June
        15,
        2005. We do not believe the adoption of this new statement will have a material
        impact on our financial statements.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
        which replaces APB Opinion No. 20 “Accounting Changes,” and FASB Statement No. 3
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
        requirements for the accounting for and reporting of a change in accounting
        principle. This Statement requires retrospective application to prior periods’
        financial statements of changes in accounting principle, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. This Statement shall be effective for accounting changes
        and corrections of errors made in fiscal years beginning after December 15,
        2005. Early adoption is permitted for accounting changes and corrections
        of
        errors made in fiscal years beginning after the date this Statement is issued.
        We do not believe that adoption of SFAS 154 will have a material impact on
        our
        financial statements.
 
 
 OUTLOOK:
        ISSUES AND UNCERTAINTIES
  The
        market for our products is characterized by rapidly changing technology,
        evolving industry standards and frequent product introductions. Product
        introductions are generally characterized by increased functionality and
        better
        quality, sometimes at reduced prices. The introduction of products embodying
        new
        technology may render existing products obsolete and unmarketable, or marketable
        at substantially reduced prices. Our ability to successfully develop and
        introduce on a timely basis new and enhanced products that embody new
        technology, and achieve levels of functionality and price acceptable to the
        market, will be a significant factor in our ability to grow and remain
        competitive. If we are unable, for technological or other reasons, to develop
        competitive products in a timely manner in response to changes in the industry,
        our business and operating results will be materially and adversely
        affected.
  WCI
        competes with companies that have substantially greater resources and a larger
        number of products, as well as with small specialized companies. Through
        relationships with technology partners and original equipment manufacturer
        (OEM)
        suppliers, we are positioned to provide end-to-end solutions to our customers.
        Competition in the market for our MPEG-2 broadcast television electronics
        products, including digital video equipment, is driven by timeliness,
        performance and price. Our broadcast digital video products in production
        are
        competitively priced, with unique, desirable features. The Compel ® Network
        Control System meets customer needs by providing regionalization of receiver
        control and spot advertisement. Due to the large number of potential end
        users,
        both small and large competitors continue to emerge. We believe we are
        positioned to capitalize on the market trends in this business through careful
        development of products and market strategies. In the cable television market
        we
        believe that the competitive position for many of our products is strong.
        However, the Unity ® product
        family competes with significant and established firms. Other products for
        cable
        television include proprietary cueing and network control devices. Competition
        for radio network products, including our digital audio products, is very
        aggressive and pricing is very competitive. We believe that success in all
        of
        our markets will depend on aggressive marketing and product development.
  The
        demand for digital products is being driven by the high cost of satellite
        capacity and increasing demand for video and multi-media content. The digital
        conversion of major networks is expected to continue, but it remains difficult
        to predict the precise timing and number of customers converting to digital.
        We
        believe the market as a whole has considerable built-up demand for digital
        technology. Although no assurances can be given, we expect to directly benefit
        from this increase in demand. There may be fluctuations in our revenues and
        operating results from quarter to quarter due to several factors, including
        the
        timing of significant orders from customers and the timing of new product
        introductions by us.
  27
 We
        have
        invested a significant amount of financial resources to acquire certain raw
        materials, to incur direct labor and to contract to have specific outplant
        procedures performed on inventory in process. We purchased this inventory
        based
        upon previously known backlog and anticipated future sales, given existing
        knowledge of the marketplace. Our inventory reserve of $3,492,000 at September
        2, 2005, is to provide for items that are potentially slow-moving, excess
        or
        obsolete. Changes in market conditions, lower than expected customer demand
        and
        rapidly changing technology could result in additional obsolete and slow-moving
        inventory that is unsaleable or saleable at reduced prices. No estimate can
        be
        made of a range of amounts of loss from obsolescence that might occur should
        our
        sales efforts not be successful.
  Sales
        to
        a relatively small number of major customers have typically comprised a majority
        of our revenues, and that trend is expected to continue throughout fiscal
        2006
        and beyond. Future revenues are subject to the timing of significant orders
        from
        customers and are difficult to forecast. As a result, future revenues may
        fluctuate from quarter to quarter. Three customers accounted for 97.7% of
        the
        backlog at September 2, 2005 and for 96.9% of the backlog scheduled to ship
        during fiscal 2006.
  Our
        gross
        margin percentage is subject to variations based on the product mix sold
        in any
        given period and on sales volumes. Start-up costs associated with new product
        introductions could adversely impact costs and future margins. We are very
        focused on controlling both direct and indirect manufacturing costs and other
        operating expenses. These costs will be adjusted as necessary if revenues
        do not
        increase as planned. Management believes that digital compression technology
        may
        be profitably employed to create increased demand for our satellite receiving
        equipment if those products are manufactured in a high volume, standardized
        production environment.
  Certain
        raw materials, video sub-components and licensed video processing technologies
        used in existing and future products are currently available from a single
        source or limited sources. Although we believe that all single-source components
        are currently available in adequate quantities, there can be no assurance
        that
        shortages or unanticipated delivery interruptions will not develop in the
        future. Any disruption or termination of supply of certain single-source
        components or technologies could have a material adverse effect on our business
        and results of operations.
  We
        have
        made significant investments in capitalized software, principally related
        to
        digital audio and video products. At September 2, 2005, capitalized software
        costs were $1,766,000. These costs are amortized based on the larger of the
        amounts computed using (a) the ratio that current gross revenues for each
        product bears to the total of current and anticipated future gross revenues
        for
        that product, or (b) the straight-line method over the remaining estimated
        economic life of the product. Expected future revenues and estimated economic
        lives are subject to revisions due to market conditions, technology changes
        and
        other factors resulting in shortfalls of expected revenues or reduced economic
        lives.
  The
        industry in which we operate is subject to rapid technological advances and
        frequent product introductions. We expect to remain committed to research
        and
        development expenditures as required to compete effectively and maintain
        pace
        with the rapid technological changes in the communications industry and to
        support innovative engineering and design for future products.
  ITEM
        7A.  QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Our
        exposure to market rate risk for changes in interest rates relates primarily
        to
        our revolving line of credit facility and cash equivalents. The interest
        rate on
        certain advances under the line of credit and term loan facility fluctuates
        with
        the bank’s prime rate (6.75% at September 2, 2005). There were no borrowings
        outstanding at September 2, 2005, subject to variable interest rate
        fluctuations.
  28
 At
        September 2, 2005, cash and cash equivalents consisted of bank account balances
        of $1,107,000.
  We
        do not
        enter into derivative financial instruments. All sales and purchases are
        denominated in U.S. dollars.
  ITEM
        8.   FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA
  PageManagement’s
                  Statement of Responsibility
              
              
              30Report
                  of Independent Registered Public Accounting Firm
              
              
              31Consolidated
                  Statements of OperationsYears
                  ended September 2, 2005, September 3, 2004, and August 29,
                  2003
              
              
              32Consolidated
                  Balance SheetsAs
                  of September 2, 2005 and September 3, 2004
              
              
              33Consolidated
                  Statements of Shareholders' EquityYears
                  ended September 2, 2005, September 3, 2004, and August 29,
                  2003
              
              
              34Consolidated
                  Statements of Cash FlowsYears
                  ended September 2, 2005, September 3, 2004, and August 29,
                  2003
              
              
              35Notes
                  to Consolidated Financial Statements
              
              
              36Consolidated
                  Supporting Schedules Filed:Schedule
                  II-Valuation and Qualifying AccountsYears
                  ended September 2, 2005, September 3, 2004, and August 29,
                  2003
              
              
              54
 
 29
 MANAGEMENT'S
        RESPONSIBILITY FOR FINANCIAL STATEMENTS
  The
        management of Wegener Corporation is responsible for the accuracy
        and **** consistency
        of all the information contained in the annual report **,** including the accompanying consolidated financial statements. These statements
        have been prepared to conform with generally accepted accounting principles
        appropriate to the circumstances of the Company. The statements include amounts
        based on estimates and judgments as required.
 
 Wegener
        Corporation maintains internal accounting controls designed to provide
        reasonable assurance that the financial records are accurate, that the assets
        of
        the Company are safeguarded, and that the financial statements present fairly
        the consolidated financial position, results of operations and cash flows
        of the
        Company.
 
 The
        Audit
        Committee of the Board of Directors reviews the scope of the audits and the
        findings of the independent certified public accountants. The auditors meet
        regularly with the Audit Committee to discuss audit and financial reporting
        issues, with and without management present.
  BDO
        Seidman, LLP the Company's independent registered public accounting firm,
        has
        audited the financial statements prepared by management. Their opinion on
        the
        statements is presented below.
 
 
 Robert
        A.
        Placek,
 President,
        Chief Executive Officer
 and
        Chairman of the Board
   
 C.
        Troy
        Woodbury, Jr.
 Treasurer
        and Chief Financial Officer
 
  30
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board
        of
        Directors and Shareholders of Wegener Corporation
 Duluth,
        Georgia
  We
        have
        audited the accompanying consolidated balance sheets of Wegener Corporation
        and
        subsidiaries as of September 2, 2005, and September 3, 2004, and the related
        consolidated statements of operations, shareholders' equity and cash flows
        for
        each of the three years in the period ended September 2, 2005. 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 the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Wegener Corporation
        and subsidiaries as of September 2, 2005, and September 3, 2004, and the
        consolidated results of their operations and their cash flows for each of
        the
        three years in the period ended September 2, 2005 in conformity with accounting
        principles generally accepted in the United States of America.
 
 
 BDO
        Seidman, LLP
  Atlanta,
        GeorgiaNovember 23, 2005
 
   31
 
 *Wegener
        Corporation and Subsidiaries*
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  Year
                        ended**September
                        2,**
                      **2005**
                    
                    September
                        3,
                      2004
                    
                    August
                        29,
                      2003Revenue
                    
                    **$**
                    **21,902,373**
                    
                    $
                    18,104,284
                    
                    $
                    20,133,180Operating
                        costs and expensesCost
                        of products sold
                    
                    
                    **13,934,298**
                    
                    
                    13,263,822
                    
                    
                    12,622,799Selling,
                        general and administrative
                    
                    
                    **5,945,784**
                    
                    
                    4,830,875
                    
                    
                    4,897,864Research
                        and development
                    
                    
                    **3,492,730**
                    
                    
                    3,095,393
                    
                    
                    2,852,573Operating
                        costs and expenses
                    
                    
                    **23,372,812**
                    
                    
                    21,190,090
                    
                    
                    20,373,236Operating
                        income (loss)
                    
                    
                    **(1,470,439**
                    **)**
                    
                    (3,085,806
                    )
                    
                    (240,056
                    )Interest
                        expense
                    
                    
                    **(59,256**
                    **)**
                    
                    (95,962
                    )
                    
                    (69,165
                    )Interest
                        income
                    
                    
                    **27,356**
                    
                    
                    42,870
                    
                    
                    56,980Earnings
                        (loss) before income taxes
                    
                    
                    **(1,502,339**
                    **)**
                    
                    (3,138,898
                    )
                    
                    (252,241
                    )Income
                        tax (expense) benefit
                    
                    
                    **(4,169,000**
                    **)**
                    
                    1,031,000
                    
                    
                    340,000Net
                      earnings (loss)
                    
                    **$**
                    **(5,671,339**
                    **)**
                    $
                    (2,107,898
                    )
                    $
                    87,759Net
                      earnings (loss)
                      per shareBasic
                    
                    **$**
                    **(.45**
                    **)**
                    $
                    (.17
                    )
                    $
                    (a
                    )Diluted
                    
                    **$**
                    **(.45**
                    **)**
                    $
                    (.17
                    )
                    $
                    (a
                    )Shares
                      used in per
                      share calculationBasic
                    
                    
                    **12,561,666**
                    
                    
                    12,456,914
                    
                    
                    12,328,571Diluted
                    
                    
                    **12,561,666**
                    
                    
                    12,456,914
                    
                    
                    12,479,866
  **** (a)
              Less
              than $.01 per share
 *See
        accompanying notes to consolidated financial statements* . ****
 
 
 32
 *Wegener
        Corporation and Subsidiaries*
 **CONSOLIDATED
          BALANCE SHEETS**
  **September
                      2,**
                    **2005**
                  
                  September
                      3,
                    2004**Assets**Current
                    assetsCash
                      and cash equivalents
                  
                  **$**
                  **1,106,872**
                  
                  $
                  1,520,761Accounts
                      receivable
                  
                  
                  **2,309,108**
                  
                  
                  2,479,712Inventories
                  
                  
                  **3,956,422**
                  
                  
                  3,839,840Deferred
                      income taxes
                  
                  
                  **-**
                  
                  
                  2,199,000Other
                  
                  
                  **231,180**
                  
                  
                  283,291Total
                      current assets
                  
                  
                  **7,603,582**
                  
                  
                  10,322,604Property
                      and equipment, net
                  
                  
                  **2,521,012**
                  
                  
                  2,699,502Capitalized
                      software costs, net
                  
                  
                  **1,766,380**
                  
                  
                  1,667,632Deferred
                      income taxes
                  
                  
                  **-**
                  
                  
                  1,970,000Other
                      assets
                  
                  
                  **910,768**
                  
                  
                  835,878**$**
                  **12,801,742**
                  
                  $
                  17,495,616**Liabilities
                      and Shareholders’ Equity**Current
                      liabilitiesAccounts
                      payable
                  
                  **$**
                  **890,564**
                  
                  $
                  1,293,564Accrued
                      expenses
                  
                  
                  **2,432,453**
                  
                  
                  1,719,119Customer
                      deposits
                  
                  
                  **1,553,760**
                  
                  
                  960,092Total
                      current liabilities
                  
                  
                  **4,876,777**
                  
                  
                  3,972,775Commitments
                      and contingenciesShareholders’
                      equityCommon
                      stock, $.01 par value; 20,000,000shares
                      authorized; 12,579,051, and 12,526,051 sharesrespectively,
                      issued and outstanding
                  
                  
                  **125,791**
                  
                  
                  125,261Additional
                      paid-in capital
                  
                  
                  **19,892,482**
                  
                  
                  19,819,549Deficit
                  
                  
                  **(12,093,308**
                  **)**
                  
                  (6,421,969
                  )Total
                      shareholders’ equity
                  
                  
                  **7,924,965**
                  
                  
                  13,522,841**$**
                  **12,801,742**
                  
                  $
                  17,495,616
 *See
          accompanying notes to consolidated financial statements.* ******
  33
 *Wegener
          Corporation and Subsidiaries*
 
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS’ EQUITY**
  Common
                    Stock
                
                Additional
                  Paid-in
                
                Retained
                  Earnings
                
                Treasury
                    StockShares
                
                Amount
                
                Capital
                
                (Deficit)
                
                Shares
                
                AmountBALANCE
                    at August 30, 2002
                
                
                12,314,575
                
                $
                123,146
                
                $
                19,513,977
                
                $
                (4,401,830
                )
                
                72,977
                
                $
                (156,345
                )Issuance
                    of shares throughstock
                    options and 401(k) plan
                
                
                66,676
                
                
                667
                
                
                (42,908
                )
                
                -
                
                
                (72,977
                )
                
                156,345Net
                    earnings for the year
                
                
                -
                
                
                -
                
                
                -
                
                
                87,759
                
                
                -
                
                
                -BALANCE
                    at August 29, 2003
                
                
                12,381,251
                
                $
                123,813
                
                $
                19,471,069
                
                $
                (4,314,071
                )
                
                -
                
                $Common
                    stock issued throughstock
                    options
                
                
                144,800
                
                
                1,448
                
                
                208,680
                
                
                -
                
                
                -
                
                
                -Value
                    of stock options grantedfor
                    services
                
                
                -
                
                
                -
                
                
                139,800
                
                
                -
                
                
                -Net
                    loss for the year
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,107,898
                )
                
                -
                
                
                -BALANCE
                    at September 3, 2004
                
                
                12,526,051
                
                $
                125,261
                
                $
                19,819,549
                
                $
                (6,421,969
                )
                
                -
                
                $
                -Common
                    stock issued throughstock
                    options
                
                
                53,000
                
                
                530
                
                
                72,933
                
                
                -
                
                
                -
                
                
                -Net
                    loss for the year
                
                
                -
                
                
                -
                
                
                -
                
                
                (5,671,339
                )
                
                -
                
                
                -**BALANCE
                      at September 2, 2005**
                ****
                ****
                **12,579,051**
                ****
                **$**
                **125,791**
                ****
                **$**
                **19,892,482**
                ****
                **$**
                **(12,093,308**
                **)**
                ****
                **-**
                ****
                **$**
                **-**
  *See
          accompanying notes to consolidated financial statements.*
  34
 *Wegener
          Corporation and Subsidiaries*
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
  Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003**Cash
                    flows from operating activities**Net
                    earnings (loss)
                
                **$**
                **(5,671,339**
                **)**
                $
                (2,107,898
                )
                $
                87,759Adjustments
                    to reconcile net earnings (loss) tocash
                    provided by (used for) operating activitiesDepreciation
                    and amortization
                
                
                **2,150,961**
                
                
                2,103,160
                
                
                1,513,179Issuance
                    of treasury stock forbenefit
                    plan
                
                
                **-**
                
                
                **-**
                
                
                82,409Value
                    of stock options granted for services
                
                
                **-**
                
                
                139,800
                
                
                -Provision
                    for bad debts
                
                
                **85,000**
                
                
                **-**
                
                
                30,000Provision
                    for inventory reserves
                
                
                **325,000**
                
                
                225,000
                
                
                75,000Provision
                    (benefit) for deferred income taxes
                
                
                **4,169,000**
                
                
                (1,031,000
                )
                
                (290,000
                )Provision
                    for warranty reserves
                
                
                **120,000**
                
                
                90,000
                
                
                -Changes
                    in assets and liabilitiesAccounts
                    receivable
                
                
                **85,604**
                
                
                1,080,415
                
                
                (552,365
                )Inventories
                
                
                **(441,582**
                **)**
                
                (1,922,005
                )
                
                1,702,838Other
                    assets
                
                
                **52,111**
                
                
                (139,894
                )
                
                (53,331
                )Accounts
                    payable and accrued expenses
                
                
                **190,334**
                
                
                294,900
                
                
                (280,687
                )Customer
                    deposits
                
                
                **593,668**
                
                
                705,425
                
                
                (522,356
                )Net
                    cash provided by (used for) operating activities
                
                
                **1,658,757**
                
                
                (562,097
                )
                
                1,792,446**Cash
                    flows from investment activities**Property
                    and equipment expenditures
                
                
                **(355,321**
                **)**
                
                (395,063
                )
                
                (584,245
                )Capitalized
                    software additions
                
                
                **(1,553,139**
                **)**
                
                (1,693,243
                )
                
                (1,377,359
                )License
                    agreements, patents, and trademarkexpenditures
                
                
                **(200,149**
                **)**
                
                (210,396
                )
                
                (710,947
                )Net
                    cash used for investing activities
                
                
                **(2,108,609**
                **)**
                
                (2,298,702
                )
                
                (2,672,551
                )**Cash
                    flows from financing activities**Repayment
                    of long-term debt
                
                
                **-**
                
                
                (4,320
                )
                
                (6,094
                )Loan
                    facility fees
                
                
                **(37,500**
                **)**
                
                (37,500
                )
                
                (50,000
                )Proceeds
                    from stock options exercised
                
                
                **73,463**
                
                
                210,128
                
                
                31,695Net
                    cash provided by (used for) financing activities
                
                
                **35,963**
                
                
                168,308
                
                
                (24,399
                )Decrease
                    in cash and cash equivalents
                
                
                **(413,889**
                **)**
                
                (2,692,491
                )
                
                (904,504
                )Cash
                    and cash equivalents, beginning of year
                
                
                **1,520,761**
                
                
                4,213,252
                
                
                5,117,756Cash
                    and cash equivalents, end of year
                
                **$**
                **1,106,872**
                
                $
                1,520,761
                
                $
                4,213,252
  *See
          accompanying notes to consolidated financial statements.* ******
  35
 *Wegener
          Corporation and Subsidiaries*
 
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 
 **1.
          Summary of Significant Accounting Policies**
 
 **Nature
          of Operations and Principles of Consolidation.** The
          financial statements include the accounts of Wegener Corporation (WGNR,
          “we,”  “our,”  “us” or the “Company") and its wholly-owned
          subsidiaries. Wegener Communications, Inc. (WCI) designs, manufactures
          and
          distributes satellite communications electronics equipment in the U.S.
          and
          internationally. All significant intercompany balances and transactions
          have
          been eliminated in consolidation.
 
 **Use
          of Estimates.** 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
          the reported amounts of revenue and expenses during the reporting period.
          Examples include valuation allowances for deferred tax assets, provisions
          for
          bad debts, inventory obsolescence and warranties. Actual results could
          vary from
          these estimates.
 
 **Fiscal
          Year.** The
          Company operates on a 52-53 week fiscal year. The fiscal year ends on the
          Friday
          nearest to August 31. Fiscal years 2005 and 2003 contained 52 weeks, while
          fiscal year 2004 contained 53 weeks. All references herein to 2005, 2004
          and
          2003, refer to the fiscal years ending September 2, 2005, September 3,
          2004 and
          August 29, 2003, respectively .
  **Cash
          Equivalents** .
          Cash
          equivalents consist of highly liquid investments with original maturities
          of
          three months or less. At September 3, 2004, cash equivalents consisted
          of bank
          commercial paper in the amount of $1,045,000 and none at September 2, 2005.
 
 **Inventories** **.** Inventories
          are stated at the lower of cost (at standard, which approximates actual
          cost on
          a first-in, first-out basis) or market. Inventories include the cost of
          raw
          materials, labor and manufacturing overhead. The Company makes provisions
          for
          obsolete or slow-moving inventories as necessary to properly reflect inventory
          value.
 
 **Property,
          Equipment and Depreciation** . Property
          and equipment are stated at cost. Certain assets financed under lease contracts
          have been capitalized. Depreciation is computed over the estimated useful
          lives
          of the assets on the straight-line method for financial reporting and
          accelerated methods for income tax purposes. Substantial betterments to
          property
          and equipment are capitalized, and repairs and maintenance are expensed
          as
          incurred.
 
 **Other
          Assets** . Other
          assets consist primarily of technology licenses, patents, trademarks and
          loan
          facility fees. Costs of license agreements are amortized on a straight-line
          basis over their estimated useful lives. Legal expenses related to the
          filing of
          patent and trademark applications are capitalized. Upon issuance, these
          costs
          will also be amortized on a straight-line basis over the lesser of the
          legal
          life of the patents and trademarks or their estimated useful lives. Annual
          loan
          facility fees are amortized equally over twelve months.
 
 **Revenue
          Recognition** . Our
          revenue recognition policies are in compliance with Staff Accounting Bulletin
          (SAB) No. 104, “Revenue Recognition,” SAB No. 101, “Revenue Recognition in
          Financial Statements” and EITF Issue No. 00-21, "Revenue Arrangements with
          Multiple Deliverables." Revenue is recognized when persuasive evidence
          of an
          agreement with the customer exists, products are shipped or title passes
          pursuant to the terms of the agreement with the customer, the amount due
          from
          the customer is fixed or determinable, collectibility is reasonably assured,
          and
          there are no significant future performance obligations. Service revenues
          are
          recognized at the time of performance. Revenues from separate service
          maintenance agreements are recognized ratably over the term of the agreements.
 
 We
          have
          recognized revenue in certain circumstances before delivery has occurred
          (commonly referred to as “bill and hold” transactions). In such circumstances,
          among other things, risk of ownership has passed to the buyer, the buyer
          has
          made a written fixed commitment to purchase the finished goods, the buyer
          has
          requested the finished goods to be held for future delivery as scheduled
          and
          designated by them, and no additional performance obligations by the Company
          exist. For these transactions, the finished goods are segregated from inventory
          and normal billing and credit terms are granted. For the years ended September
          2, 2005, September 3, 2004 and August 29, 2003 revenues to one customer
          in the
          amount of $3,431,000, $3,837,000 and $3,049,000, respectively, were recorded
          prior to delivery as bill and hold transactions. At September 2, 2005 and
          at
          September 3, 2004, accounts receivable for these revenues amounted to $385,000
          and $1,140,000, respectively. The accounts receivable balances were paid
          in full
          subsequent to September 2, 2005 and September 3, 2004.
 
 36
 *Wegener
          Corporation and Subsidiaries*
  These
          policies require management, at the time of the transaction, to assess
          whether
          the amounts due are fixed or determinable, collection is reasonably assured,
          and
          no future performance obligations exist. These assessments are based on
          the
          terms of the agreement with the customer, past history and creditworthiness
          of
          the customer. If management determines that collection is not reasonably
          assured
          or future performance obligations exist, revenue recognition is deferred
          until
          these conditions are satisfied.
 
 Our
          principal sources of revenues are from the sales of various satellite
          communications equipment. Embedded in the Company’s products is internally
          developed software of varying applications. Historically, we have not sold
          or
          marketed our software separately or otherwise licensed our software apart
          from
          the related communications equipment. Should we begin to market or sell
          software
          whereby it is more than an incidental component of the hardware, we will
          recognize software license revenue in accordance with SOP No. 97-2, “Software
          Revenue Recognition” as amended by SOP No. 98-9, “Software Revenue Recognition,
          with Respect to Certain Transactions.”
 
 In
          accordance with EITF Issue 00-10, “Accounting for Shipping and Handling Fees and
          Costs,” we included all shipping and handling billings to customers in revenues,
          and freight costs incurred for product shipments have been included in
          cost of
          products sold.
 
 **Research
          and Development/Capitalized Software Costs** .
          We
          expense research and development costs, including expenditures related
          to
          development of our software products that do not qualify for capitalization.
          Software development costs are capitalized subsequent to establishing
          technological feasibility. Capitalized costs are amortized based on the
          larger
          of the amounts computed using (a) the ratio that current gross revenues
          for each
          product bears to the total of current and anticipated future gross revenues
          for
          that product, or (b) the straight-line method over the remaining estimated
          economic life of the product. This has resulted in amortization periods
          of
          primarily three years. Expected future revenues and estimated economic
          lives are
          subject to revisions due to market conditions, technology changes and other
          factors resulting in shortfalls of expected revenues or reduced economic
          lives.
          Software development costs capitalized during fiscal 2005, 2004 and 2003,
          totaled $1,533,000, $1,693,000 and $1,377,000, respectively. Amortization
          expense, included in cost of products sold, was $1,454,000, $1,330,000
          and
          $715,000 for the same periods, respectively. Capitalized software costs,
          net of
          accumulated amortization, were $1,766,000 at September 2, 2005 and $1,668,000
          at
          September 3, 2004. Accumulated amortization amounted to $8,054,000 at September
          2, 2005 and $6,600,000 at September 3, 2004.
 
 **Long-Lived
          Assets** .
          Long-lived assets are reviewed for impairment whenever events or changes
          in
          circumstances indicate that the carrying amount of an asset may not be
          recoverable. If the sum of the expected future undiscounted cash flows
          is less
          than the carrying amount of the asset, a loss is recognized for the difference
          between the fair value and carrying value of the asset.
 
 **Stock-Based
          Compensation.** We have
          adopted the disclosure-only provisions of Statement of Financial Accounting
          Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended
          by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
          Disclosure,” but apply Accounting Principles Board Opinion (APB) No. 25,
“Accounting for Stock Issued to Employees” and related interpretations in
          accounting for our plans. Under APB No. 25, when the exercise price of
          employee
          stock options equals the market price of the underlying stock on the date
          of
          grant, no compensation expense is recognized.
 
 37
 *Wegener
          Corporation and Subsidiaries*
  The
          following table includes disclosures required by SFAS No. 123, as amended
          by
          SFAS No. 148, and illustrates the effect on net earnings (loss) and net
          earnings
          (loss) per share as if we had applied the fair value recognition provisions
          of
          SFAS No. 123:
 Year
                    ended**September
                    2,2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003Net
                    earnings (loss)As
                    Reported
                
                **$**
                **(5,671,339**
                **)**
                $
                (2,107,898
                )
                $
                87,759Add:Compensation
                    costincluded
                    in reportednet
                    earnings (loss)
                
                
                **-**
                
                
                -
                
                
                -Deduct:Compensation
                    costusing
                    the fair valuemethod,
                    net of tax
                
                
                **(285,224**
                **)**
                
                (131,075
                )
                
                (53,519
                )Pro
                    Forma
                
                **$**
                **(5,956,563**
                **)**
                $
                (2,238,973
                )
                $
                34,240Earnings
                    (loss) per shareAs
                    ReportedBasic
                
                **$**
                **(.45**
                **)**
                $
                (.17
                )
                $
                (a
                )Diluted
                
                
                **(.45**
                **)**
                
                (.17
                )
                
                (a
                )Pro
                      FormaBasic
                
                
                **(.47**
                **)**
                
                (.18
                )
                
                (a
                )Diluted
                
                
                **(.47**
                **)**
                
                (.18
                )
                
                (a
                )
 
 **** (a)
          Less
          than $.01 per share
 
 Effective
          as of September 2, 2005, the Board of Directors approved the acceleration
          of
          vesting on all remaining unvested “out-of-the-money” options. These unvested
          options had exercise prices greater than $1.26, the closing price of WGNR
          common
          stock on September 2, 2005. The acceleration covered options for 346,000
          shares,
          exercisable at $2.21, of which 75% were scheduled to vest over the next
          three
          fiscal years. The purpose of the vesting acceleration was to reduce the
          expense
          that would be associated with these options in accordance with the adoption
          of
          SFAS No.123R. The total stock-based employee compensation cost, net of
          tax,
          presented in the table above of $302,000 for fiscal 2005, includes approximately
          $86,000, net of tax, related to the acceleration of these options.
 
 The
          fair
          value of each option was estimated on the date of grant using the Black-Scholes
          option pricing model with the following weighted average
          assumptions:
  Year
                    ended**September
                    2,**
                  **2005**
                
                
                September
                    3,
                  2004
                
                
                August
                    29,
                  2003Risk
                    free interest rate
                
                
                **4.13**
                %
                
                4.00
                %
                
                4.75
                %Expected
                    term
                
                
                **4.9
                    years**
                
                
                2.8
                    years
                
                
                3
                    yearsVolatility
                
                
                **90**
                **%**
                
                90
                %
                
                90
                %Expected
                    annual dividends
                
                
                **none**
                
                
                none
                
                
                none
  The
          weighted average fair value of options granted was as follows:
  Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,2004
                
                August
                    29,
                  2003Per
                    share option value
                
                **$**
                **1.11**
                
                $
                1.23
                
                $
                .86Aggregate
                    total
                
                **$**
                **180,877**
                
                $
                474,230
                
                $
                46,530
 
 
 38
 *Wegener
            Corporation and Subsidiaries*
 **Income
          Taxes.** Income
          taxes are based on income (loss) for financial reporting purposes and reflect
          a
          current tax liability (asset) for the estimated taxes payable (recoverable)
          in
          the current year tax return and changes in deferred taxes. Deferred tax
          assets
          or liabilities are recognized for the estimated tax effects of temporary
          differences between financial reporting and taxable income (loss) and for
          tax
          credit and loss carryforwards based on enacted tax laws and rates. Valuation
          allowances are established to reduce deferred tax assets to amounts that
          we
          expect are more likely than not realizable. At September 2, 2005, net deferred
          tax assets were fully offset by a valuation allowance of $4,710,000.
 
 **Earnings
          Per Share.** Basic
          and
          diluted net earnings (loss) per share were computed in accordance with
          SFAS No.
          128, “Earnings per Share.” Basic net earnings per share are computed by dividing
          net earnings available to common shareholders (numerator) by the weighted
          average number of common shares outstanding (denominator) during the period
          and
          exclude the dilutive effect of stock options. Diluted net earnings per
          share
          gives effect to all dilutive potential common shares outstanding during
          a
          period. In computing diluted net earnings per share, the average stock
          price for
          the period is used in determining the number of shares assumed to be reacquired
          under the treasury stock method from the hypothetical exercise of stock
          options.
 
 The
          following tables represent required disclosure of the reconciliation of
          the
          earnings and shares of the basic and diluted net earnings (loss) per share
          computations:
 
 Year
                        ended**September
                        2,**
                      **2005**
                    
                    September
                          3,
                        2004
                    
                    August
                        29,
                      2003BasicNet
                        earnings (loss)
                    
                    **$**
                    **(5,671,339**
                    **)**
                    $
                    (2,107,898
                    )
                    $
                    87,759Weighted
                        average sharesoutstanding
                    
                    ****
                    **12,561,666**
                    
                    
                    12,456,914
                    
                    
                    12,328,571Net
                        earnings (loss) per share
                    
                    **$**
                    **(.45**
                    **)**
                    $
                    (.17
                    )
                    $
                    (a
                    )DilutedNet
                        earnings (loss)
                    
                    **$**
                    **(5,671,339**
                    **)**
                    $
                    (2,107,898
                    )
                    $
                    87,759Weighted
                        average sharesoutstanding
                    
                    
                    **12,561,666**
                    
                    
                    12,456,914
                    
                    
                    12,328,571Effect
                        of dilutive potential common shares:Stock
                        options
                    
                    
                    **-**
                    
                    
                    -
                    
                    
                    151,295Total
                    
                    
                    **12,561,666**
                    
                    
                    12,456,914
                    
                    
                    12,479,866Net
                        earnings (loss) per share
                    
                    **$**
                    **(.45**
                    **)**
                    $
                    (.17
                    )
                    $
                    (a
                    )
  (a)
          Less
          than $.01 per share
 
 Stock
          options excluded from the diluted earnings (loss) per share calculation
          due to
          their antidilutive effect are as follows:
  Year
                          ended**September
                          2,**
                        **2005**
                      
                      September
                            3,
                          2004
                      
                      August
                          29,
                        2003Common
                        stock options:Number
                          of shares
                      **1,313,531**
                      
                      1,627,781
                      
                      796,050Range
                          of exercise prices
                      **$
                          .63 to $2.72**
                      
                      $
                          .63 to $5.63
                      
                      $1.41
                          to $5.63
 
 
 39
 *Wegener
            Corporation and Subsidiaries*
 **Financial
          Instruments**. Our financial instruments consist of cash and cash
          equivalents, trade accounts receivable, accounts payable, accrued expenses,
          and
          long and short-term borrowings. The fair value of these instruments approximates
          their recorded value. We do not have financial instruments with off-balance
          sheet risk. The fair value estimates were based on market information available
          to management as of September 2, 2005.
  Financial
          instruments that potentially subject us to concentrations of market/credit
          risk
          consist principally of cash and cash equivalents and trade accounts receivable.
          We invest cash through a high credit-quality financial institution. A
          concentration of credit risk may exist with respect to trade receivables,
          as a
          substantial portion of our customers are affiliated with the cable television,
          business broadcast and telecommunications industries. We perform ongoing
          credit
          evaluations of customers worldwide and generally do not require collateral
          from
          our customers. We review accounts receivable on a regular basis to determine
          if
          any such amounts may be potentially uncollectible. We include any balances
          that
          are determined to be uncollectible, along with a general reserve, in the
          overall
          allowance for doubtful accounts. After all attempts to collect a receivable
          have
          failed, the receivable is written off against the allowance. Based on our
          best
          estimate, we believe the allowance for doubtful accounts is adequate as
          presented. Historically, we have not experienced significant losses related
          to
          receivables from individual customers or groups of customers in any particular
          industry or geographic area.
  **Foreign
          Currency.**  The
          U.S.
          dollar is our functional currency for financial reporting. International
          sales
          are made and remitted in U.S. dollars.
 
 **Recently
          Issued Accounting Standards****.** In November 2004, the
          Financial Accounting Standards Board (FASB) issued Statement of Financial
          Accounting Standards (SFAS) No. 151, “Inventory Costs - an amendment of ARB
          No.43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle
          facility expense, freight, handling costs and wasted material. SFAS No.
          151 will
          be effective for inventory costs incurred during fiscal years beginning
          after
          June 15, 2005. We do not believe the adoption of SFAS No. 151 will have
          a
          material impact on our financial statements.
  In
          December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based
          Payment” (SFAS No. 123R). SFAS No.123R requires all share-based payments to
          employees, including grants of employee stock options, to be recognized
          as
          compensation expense in the consolidated financial statements based on
          their
          fair values. That expense will be recognized over the period during which
          an
          employee is required to provide services in exchange for the award, known
          as the
          requisite service period (usually the vesting period). This standard is
          effective for public companies at the beginning of the first annual period
          beginning after June 15, 2005. We will adopt SFAS 123R using the Modified
          Prospective Application Method beginning September 3, 2005. Under this
          method,
          SFAS 123R applies to new awards and to awards modified, repurchased or
          cancelled
          after the effective date. Additionally, compensation cost for the portion
          of
          awards for which the requisite service has not been rendered, such as unvested
          options that are outstanding as of the date of adoption, shall be recognized
          as
          the remaining requisite services are rendered. The compensation cost relating
          to
          unvested awards at the date of adoption shall be based on the grant-date
          fair
          value of those awards as calculated for pro forma disclosures under the
          original
          SFAS 123. Effective as of September 2, 2005, the Board of Directors approved
          the
          acceleration of vesting on all remaining unvested “out-of- the-money” options.
          These unvested options had exercise prices greater than $1.26, the closing
          price
          of WGNR common stock on September 2, 2005. The acceleration covered options
          for
          346,000 shares, exercisable at $2.21, of which 75% were scheduled to vest
          over
          the next three fiscal years. The purpose of the vesting acceleration was
          to
          reduce the expense that would be associated with these options in accordance
          with the adoption of SFAF No.123R. The impact of adoption of SFAS No. 123R
          cannot be predicted at this time because it will depend on levels of share-based
          payments granted in the future.
 
 In
          December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
          an amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are
          based on the principle that exchanges of nonmonetary assets should be measured
          based on the fair value of the assets exchanged. Further, the amendments
          eliminate the narrow exception for nonmonetary exchanges of similar productive
          assets and replace it with a broader exception for exchanges of nonmonetary
          assets that do not have commercial substance. Previously, Opinion 29 required
          that the accounting for an exchange of a productive asset for a similar
          productive asset or an equivalent interest in the same or similar productive
          asset should be based on the recorded amount of the asset relinquished.
          By
          focusing the exception on exchanges that lack commercial substance, the
          Board
          believes SFAS No. 153 produces financial reporting that more faithfully
          represents the economics of the transactions. This statement is effective
          for
          nonmonetary asset exchanges occurring in fiscal periods beginning after
          June 15,
          2005. We do not believe the adoption of this new statement will have a
          material
          impact on our financial statements.
  
 40
 *Wegener
              Corporation and Subsidiaries*
 In
                May
                2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
                which replaces APB Opinion No. 20 “Accounting Changes,” and FASB Statement No. 3
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
                requirements for the accounting for and reporting of a change in
                accounting
                principle. This Statement requires retrospective application to prior
                periods’
                financial statements of changes in accounting principle, unless it
                is
                impracticable to determine either the period-specific effects or
                the cumulative
                effect of the change. This Statement shall be effective for accounting
                changes
                and corrections of errors made in fiscal years beginning after December
                15,
                2005. Early adoption is permitted for accounting changes and corrections
                of
                errors made in fiscal years beginning after the date this Statement
                is issued.
                We do not believe that adoption of SFAS 154 will have a material
                impact on our
                financial statements.
 **2.
          Accounts Receivable**
  Accounts
          receivable are summarized as follows:
  **September
                      2,****2005**
                  
                  September
                      3,
                    2004Accounts
                      receivable
                      - trade
                  
                  **$**
                  **2,603,633**
                  
                  $
                  2,766,528Other
                      receivables
                  
                  
                  **76,528**
                  
                  
                  76,473**2,680,161**
                  
                  
                  2,843,001Less
                      allowance for doubtful accounts
                  
                  
                  **(371,053**
                  **)**
                  
                  (363,289
                  )**$**
                  **2,309,108**
                  
                  **$**
                  **2,479,712**
 
 
 **3.
          Inventories**
  Inventories
          are summarized as follows:
  **September
                    2,**
                  **2005**
                
                September
                    3,
                  2004Raw
                    materials
                
                **$**
                **3,361,530**
                
                $
                3,004,350Work-in-process
                
                
                **1,089,084**
                
                
                1,073,275Finished
                    goods
                
                
                **2,998,121**
                
                
                3,229,704**7,448,735**
                
                
                7,307,329Less
                    inventory reserves
                
                
                **(3,492,313**
                **)**
                
                (3,467,489
                )**$**
                **3,956,422**
                
                $
                3,839,840
 
 We
          have
          invested a significant amount of financial resources to acquire certain
          raw
          materials, sub-assemblies and finished goods, to incur direct labor and
          to
          contract to have specific outplant procedures performed on certain inventory
          in
          process. We purchased this inventory based upon prior backlog and anticipated
          future sales based upon our existing knowledge of the marketplace. Our
          inventory
          reserve of approximately $3,492,000 at September 2, 2005, is to provide
          for
          items that are potentially slow-moving, excess or obsolete. Changes in
          market
          conditions, lower than expected customer demand and rapidly changing technology
          could result in additional obsolete and slow-moving inventory that is unsaleable
          or saleable at reduced prices. No estimate can be made of a range of amounts
          of
          loss from obsolescence that is reasonably possible should our sales efforts
          not
          be successful.
 
 
 41
 *Wegener
            Corporation and Subsidiaries*
  4.
          Property and Equipment
  Major
          classes of property and equipment consist of the following:
 
 Estimated
                  Useful
                    Lives
                  (Years)
                
                **September
                    2,**
                  **2005**
                
                September
                    3,
                  2004Land
                
                
                -
                
                **$**
                **707,210**
                
                $
                707,210Buildings
                    and improvements
                
                
                3-30
                
                
                **3,751,290**
                
                
                3,746,690Machinery
                    and equipment
                
                
                3-5
                
                
                **9,515,348**
                
                
                9,217,354Furniture
                    and fixtures
                
                
                5
                
                
                **601,865**
                
                
                602,269Application
                    software
                
                
                3-5
                
                
                **737,090**
                
                
                737,090**15,312,803**
                
                
                15,010,613Less
                    accumulated depreciationand
                    amortization
                
                
                
                
                
                **(12,791,791**
                **)**
                
                (12,311,111
                )**$**
                **2,521,012**
                
                $
                2,699,502
 
 Depreciation
          expense for fiscal 2005, 2004 and 2003, totaled approximately $534,000,
          $609,000, and $666,000, respectively. Assets recorded under a capital lease
          included in property and equipment at September 2, 2005 and September 3,
          2004,
          are machinery and equipment of approximately $613,000 and accumulated
          amortization of approximately $613,000.
 
 **5.** **Other
              Assets**
 Other
          assets consisted of the following:
 
 **September
                    2, 2005****Cost**
                
                **Accumulated**
                  **Amortization**
                
                **Net**License
                    agreements
                
                **$**
                **686,300**
                
                **$**
                **(317,380**
                **)**
                **$**
                **368,920**Patent
                    applications
                
                
                **420,457**
                
                
                **-**
                
                
                **420,457**Trademarks
                
                
                **89,735**
                
                
                **(6,484**
                **)**
                
                **83,252**Loan
                    facility fees
                
                
                **37,500**
                
                
                **(6,250**
                **)**
                
                **31,250**Other
                
                
                **6,889**
                
                
                **-**
                
                
                **6,889****$**
                **1,240,882**
                
                **$**
                **(330,114**
                **)**
                **$**
                **910,768**
 
  September
                    3, 2004Cost
                
                Accumulated
                  Amortization
                
                NetLicense
                    agreements
                
                $
                570,000
                
                $
                (197,828
                )
                $
                372,172Patent
                    applications
                
                
                352,406
                
                
                -
                
                
                352,406Trademarks
                
                
                73,937
                
                
                (776
                )
                
                73,161Loan
                    facility fees
                
                
                37,500
                
                
                (6,250
                )
                
                31,250Other
                
                
                6,889
                
                
                -
                
                
                6,889$
                1,040,732
                
                $
                (204,854
                )
                $
                835,878
  Amortization
          expense of other assets amounted to $163,000, $164,000, and $133,000 for
          fiscal
          years 2005, 2004 and 2003, respectively.
 
 We
          conduct an ongoing review of our intellectual property rights and potential
          trademarks. As of September 2, 2005, we incurred $420,000 and $40,000 of
          legal
          expenses related to the filing of applications for various patents and
          trademarks, respectively. Upon issuance, these costs will be amortized
          on a
          straight-line basis over the lesser of the legal life of the patents and
          trademarks or their estimated useful lives. If it becomes more likely than
          not
          that the patent application will not be granted, we will write off the
          deferred
          cost at that time. At September 2, 2005, the cost of registered trademarks
          amounted to $49,000. License agreements are amortized over their estimated
          useful life of three to five years. Loan facility fees are amortized over
          twelve
          months.
 
 42
 *Wegener
            Corporation and Subsidiaries*
 **6.
          Accrued Expenses**
  Accrued
          expenses consist of the following:
  **September
                    2,**
                  **2005**
                
                September
                    3,
                  2004Compensation
                
                **$**
                **918,249**
                
                $
                728,304Royalties
                
                
                **340,449**
                
                
                295,673Warranty
                
                
                **224,674**
                
                
                151,390Taxes
                    and insurance
                
                
                **123,719**
                
                
                50,235Commissions
                
                
                **164,879**
                
                
                119,493Professional
                    fees
                
                
                **359,770**
                
                
                254,057Other
                
                
                **300,713**
                
                
                119,967**$**
                **2,432,453**
                
                $
                1,719,119
 
 **7.
          Financing Agreements**
  **Revolving
          Line of Credit and Term Loan Facility**
 
 WCI’s
          bank loan facility provides a maximum available credit limit of $5,000,000
          subject to availability advance formulas. The loan facility matures on
          June 30,
          2006 or upon demand, and requires an annual facility fee of .75% of the
          maximum
          credit limit. The loan facility consists of a term loan and a revolving
          line of
          credit with a combined borrowing limit of $5,000,000, bearing interest
          at the
          bank’s prime rate (6.75% at September 2, 2005).
 
 The
          term
          loan facility provides for a maximum of $1,000,000 for advances of up to
          80% of
          the cost of equipment acquisitions. Principal advances are payable monthly
          over
          60 months with a balloon payment due at maturity. The revolving line of
          credit
          is subject to availability advance formulas of 80% against eligible accounts
          receivable; 20% of eligible raw materials inventories; 20% of eligible
          work-in
          process kit inventories; 40% to 50% of eligible finished goods inventories;
          and
          50% of import letter of credit commitment balances. The loan is secured
          by a
          first lien on substantially all of WCI’s assets and guaranteed by Wegener
          Corporation. At September 2, 2005, no balances were outstanding on the
          revolving
          line of credit or the equipment term loan portions of the loan facility.
          The
          loan facility is currently being used to support import letters of credit
          issued
          to offshore manufacturers, which at September 2, 2005 amounted to $1,016,000.
          At
          September 2, 2005, **** approximately
          $2,664,000, net of outstanding letters of credit, was available to borrow
          under
          the advance formulas.
  We
          are
          required to maintain a minimum tangible net worth with annual increases
          at each
          fiscal year end commencing with fiscal year 2005, retain certain key employees,
          maintain certain financial ratios, and are precluded from paying dividends.
          At
          September 2, 2005, we were not in compliance with the tangible net worth
          covenant, for which the bank granted a waiver. We believe that the loan
          facility
          along with cash and cash equivalent balances will be sufficient to support
          operations for the next twelve months. While no assurances may be given,
          we
          believe, upon maturity, the existing loan facility will be renewed on
          substantially similar terms.
 
 43
 *Wegener
            Corporation and Subsidiaries*
 **8.
          Income Taxes**
  The
          provision for income tax (expense) benefit consists of the
          following:
  Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003CurrentFederal
                
                **$**
                **-**
                
                $
                -
                
                $
                -State
                
                
                **-**
                
                
                -
                
                
                50,000**-**
                
                
                -
                
                
                50,000DeferredFederal
                
                
                **(3,659,000**
                **)**
                
                969,000
                
                
                85,000State
                
                
                **(510,000**
                **)**
                
                62,000
                
                
                205,000**(4,169,000**
                **)**
                
                1,031,000
                
                
                290,000Total
                
                **$**
                **(4,169,000**
                **)**
                $
                1,031,000
                
                $
                340,000
 
 
 The
          effective income tax rate differs from the U.S. federal statutory rate
          as
          follows:
  Year
                          ended**September
                          2,**
                        **2005**
                      
                      September
                          3,
                        2004
                      
                      August
                          29,
                        2003Statutory
                          U.S. income tax rate
                      
                      
                      **34.0**
                      **%**
                      
                      34.0
                      %
                      
                      34.0
                      %State
                          taxes, net of federalbenefits
                      
                      
                      **2.0**
                      
                      
                      2.0
                      
                      
                      99.8Valuation
                          allowance
                      
                      
                      **(313.5**
                      **)**
                      
                      -
                      
                      
                      -Expired
                          federal tax credit
                      
                      
                      **-**
                      
                      
                      (3.1
                      )
                      
                      -Non-deductible
                          expenses
                      
                      
                      **(.2**
                      **)**
                      
                      (.2
                      )
                      
                      (1.6
                      )Other,
                          net
                      
                      
                      **.2**
                      
                      
                      .1
                      
                      
                      2.6Effective
                          income tax rate
                      
                      
                      **(277.5**
                      **)%**
                      
                      32.8
                      %
                      
                      134.8
                      %
 The
            effective tax rate for fiscal 2005 reflected the recording of a full
            valuation
            allowance the our net deferred
            tax assets as further discussed below.
 
 Deferred
          tax assets and liabilities that arise as a result of temporary differences
          are
          as follows:
 **September
                        2,**
                      **2005**
                    
                    September
                        3,
                      2004Deferred
                        tax assets (liabilities):Accounts
                        receivable and inventory reserves
                    
                    **$**
                    **1,962,000**
                    
                    $
                    1,969,000Accrued
                        expenses
                    
                    
                    **256,000**
                    ****
                    
                    231,000Net
                        operating loss carryforwards
                    
                    
                    **2,904,000**
                    
                    
                    2,260,000Credit
                        carryforwards
                    
                    
                    **199,000**
                    
                    
                    199,000AMT
                        credit carryovers
                    
                    
                    **138,000**
                    
                    
                    138,000Depreciation
                    
                    
                    **111,000**
                    
                    
                    80,000Capitalized
                        software costs
                    
                    
                    **(672,000**
                    **)**
                    
                    (634,000
                    )Other
                    
                    
                    **(188,000**
                    **)**
                    
                    (74,000
                    )Deferred
                        tax assets
                    
                    
                    **4,710,000**
                    
                    
                    4,169,000Valuation
                        allowance
                    
                    
                    **(4,710,000**
                    **)**
                    
                    -Net
                        deferred tax asset
                    
                    $
                    -
                    
                    $
                    4,169,000Consolidated
                        balance sheet classifications:Current
                        deferred tax asset
                    
                    $
                    -
                    
                    $
                    2,199,000Noncurrent
                        deferred tax asset
                    
                    
                    -
                    
                    
                    1,970,000Net
                        deferred tax asset
                    
                    $
                    -
                    
                    $
                    4,169,000
 
 
 44
 *Wegener
              Corporation and Subsidiaries*
 SFAS
          No.
          109, "Accounting for Income Taxes," requires that a valuation allowance
          be
          established when it is “more likely than not” that all or a portion of a
          deferred tax asset will not be realized. A review of all available positive
          and
          negative evidence was considered in judging the likelihood of realizing
          tax
          benefits. Forming a conclusion that a valuation allowance is not needed
          is
          difficult when there is negative evidence such as cumulative losses in
          recent
          years. Cumulative losses is one of the most difficult pieces of negative
          evidence to overcome in the absence of sufficient existing orders and backlog
          (versus forecasted future orders) supporting a return to profitability.
          During
          the fourth quarter of fiscal 2005, it became evident we would not meet
          our
          forecast for actual orders and profitability for the fourth quarter and
          fiscal
          year 2005. This lessened the weight that we could assign to future prospects
          for
          returning to consistent profitability. That, combined with recent cumulative
          net
          losses, represented sufficient negative evidence that was difficult for
          positive
          evidence to overcome under the evaluation guidance of SFAS No. 109. As
          a result,
          we concluded that is was appropriate in the fourth quarter of fiscal 2005
          to
          establish a full valuation allowance for our net deferred tax assets. The
          effect
          was to reverse the benefit of net deferred tax assets that were recorded
          in
          prior years’ financial statements. These tax benefits will be available, prior
          to the expiration of carryforwards, to reduce future income tax expense
          resulting from earnings or increases in deferred tax liabilities. During
          the
          fourth quarter of fiscal 2005, we recorded a noncash charge of $4,710,000
          to
          provide a full valuation allowance for net deferred tax assets.
  
 **9.
          Common Stock and Stock Options.**
  **1998
          Incentive Plan.** On
          February 26, 1998, our stockholders approved the 1998 Incentive Plan (the
“1998
          Plan”). The Plan provides for awards of up to an aggregate of 2,000,000 shares
          of common stock which may be represented by (i) incentive or nonqualified
          stock
          options, (ii) stock appreciation rights (tandem and free-standing), (iii)
          restricted stock, (iv) deferred stock, or (v) performance units entitling
          the
          holder, upon satisfaction of certain performance criteria, to awards of
          common
          stock or cash. In addition, the 1998 Plan provides for loans and supplemental
          cash payments to persons participating in the 1998 Plan in connection with
          awards granted. Eligible participants include officers and other key employees,
          non-employee directors, consultants and advisors to the Company. The exercise
          price per share in the case of incentive stock options and any tandem stock
          appreciation rights may be not less than 100% of the fair market value
          on the
          date of grant or, in the case of an option granted to a 10% or greater
          stockholder, not less than 110% of the fair market value on the date of
          grant.
          The exercise price for any other option and stock appreciation rights shall
          be
          at least 75% of the fair market value on the date of grant. The exercise
          period
          for nonqualified stock options may not exceed ten years and one day from
          the
          date of the grant, and the expiration period for incentive stock options
          or
          stock appreciation rights shall not exceed ten years from the date of the
          grant
          (five years for a 10% or greater stockholder). The 1998 Plan contains an
          automatic option grant program to non-employee members of the Board of
          Directors. Such members will each be granted an option to purchase 3,000
          shares
          of common stock on the last day of each December on which regular trading
          occurs
          on the NASDAQ Stock Market, at an exercise price equal to the fair market
          value
          of such stock on the date of grant. Such options will be exercisable during
          the
          period of ten years and one day from the date of grant of the option. On
          December 31, 2004, non-employee directors were granted options to purchase
          12,000 shares at an exercise price of $2.50. In addition, during fiscal
          2005, a
          non-employee director was granted an option to purchase 10,000 shares at
          an
          exercise price of $1.38. The automatic grants in fiscal 2003 were suspended;
          however, on January 21, 2003, non-employee directors were granted options
          to
          purchase 9,000 shares at an exercise price of $1.09. The effective date
          of the
          1998 Plan is January 1, 1998 and the 1998 Plan has a ten-year term. During
          fiscal 2005, an option to purchase 153,000 shares at an exercise price
          of $1.29
          was granted to an officer of the Company to replace an option for the same
          number of shares which expired in fiscal 2005. In addition, during fiscal
          2005,
          options for 21,000 shares were exercised with exercise prices ranging from
          $$.84
          to $2.31 and options for 157,250 shares were forfeited. Effective as of
          September 2, 2005, the Board of Directors approved the acceleration of
          vesting
          on all remaining unvested out-of-the-money options. Options for 346,000
          shares,
          exercisable at $2.21, became fully vested on September 2, 2005. Of these
          options, 75% were scheduled to vest over the next three years. The purpose
          of
          the vesting acceleration was to reduce the expense that would be associated
          with
          these options in accordance with the adoption of SFAS No.123R. During fiscal
          2004, options for 100,000 shares of common stock, exercisable at $2.39,
          were
          granted pursuant to a consulting agreement to provide software development
          services. The fair value of the options was measured on the grant date
          using the
          Black-Scholes option pricing model. As the options were fully vested and
          nonforfeitable, the fair value of $139,800 was charged to research and
          development expenses in fiscal 2004, in accordance with EITF 96-18, “Accounting
          for Equity Instruments That are Issued to Other Than Employees for Acquiring,
          or
          in Conjunction with Selling, Goods or Services.” Additionally, during fiscal
          2004, other stock option activity included grants of options to employees
          to
          purchase an aggregate of 368,156 shares, vesting 25% annually beginning
          one year
          from the date of grant, at a weighted average exercise price of $2.21.
          Options
          for 141,800 shares with exercise prices ranging from $.84 to $2.31 were
          exercised and options for 33,000 shares were forfeited. During fiscal 2003,
          options for 54,000 shares of common stock were granted to outside directors
          and
          employees pursuant to employment agreements at exercise prices ranging
          from $.91
          to $2.09. Additionally, options for 7,500 shares were forfeited and options
          for
          23,000 shares were exercised at $.84 and $1.47. At September 2, 2005, options
          for 510,669 shares of common stock were available for future
          issuance.
 
 45
 *Wegener
              Corporation and Subsidiaries*
 1989
          Directors' Incentive Plan. On
          January 9, 1990, the stockholders approved the Wegener Corporation 1989
          Directors' Incentive Plan, permitting certain participating directors of
          the
          Company to be eligible to receive incentive awards consisting of common
          stock of
          the Company, performance units or stock appreciation rights payable in
          stock or
          cash, or nonqualified stock options to purchase such stock, or any combination
          of the foregoing, together with supplemental cash payments. During the
          second
          quarter of fiscal 1995, the Company amended the 1989 Directors’ Stock Option
          Plan to increase the aggregate number of shares of common stock that may
          be
          awarded from 100,000 to 300,000 shares; to remove the ineligibility provision
          for certain directors; and to grant annually to each non-employee director,
          options to purchase 2,000 shares of common stock at an exercise price equal
          to
          the fair market value of such stock on the date of grant. The exercise
          price per
          share for nonqualified stock options or stock appreciation rights shall
          not be
          less than 85% of fair market value on the date the award is made or not
          more
          than nine trading days immediately preceding such date. The expiration
          period
          for a nonqualified stock option shall be ten years and one day from the
          date of
          the grant. The expiration period for stock appreciation rights, including
          any
          extension, shall not exceed ten years from the date of grant. This plan
          terminated and expired effective December 1, 1999. During fiscal 2005,
          options
          for 32,000 shares were exercised at $1.44 and $1.41 and options for 179,000
          shares were forfeited. During fiscal 2004, no options were exercised. During
          fiscal 2003, options for 16,500 shares were exercised at $ .75. At September
          2,
          2005, options for 54,000 shares of common stock remained outstanding under
          the
          1989 Directors’ Incentive Plan.
 
 **1988
          Incentive Plan.** On
          January 10, 1989, the stockholders approved the 1988 Incentive Plan providing
          to
          key employees, other than directors of the Company, incentive awards consisting
          of common stock, performance units or stock appreciation rights payable
          in stock
          or cash, incentive or nonqualified stock options to purchase stock, or
          any
          combination of the above, together with supplemental cash payments. The
          aggregate number of shares issuable under the 1988 plan is 750,000 common
          shares. The exercise price per share in the case of incentive stock options
          and
          any tandem stock appreciation rights will be equal to 100% of the fair
          market
          value or, in the case of an option granted to a 10% or greater stockholder,
          l10%
          of the fair market value. The exercise price for any other option and stock
          appreciation rights shall be at least 85% of the fair market value on the
          date
          the option is granted. The exercise period for nonqualified stock options
          shall
          be ten years and one day from the date of the grant, and the exercise period
          for
          incentive stock options or stock appreciation rights shall not exceed ten
          years
          from the date of the grant. During fiscal 2003, options for 114,000 shares
          of
          common stock were forfeited. This plan terminated and expired December
          1, 1998.
          At September 2, 2005, no options for shares of common stock remained outstanding
          under the 1988 Incentive Plan.
 
 **Other
          Options.** During
          fiscal 2005, an option for 100,000 shares was forfeited.
 
 46
 Wegener
              Corporation and Subsidiaries
 A
          summary
          of stock option transactions for the above plans follows:
 Number
                    of
                      Shares
                  
                  Range
                      of
                    Exercise
                      Prices
                  
                  Weighted
                    Average
                    Exercise
                      PriceOutstanding
                      atAugust
                      30, 2002
                  
                  
                  1,435,425
                  
                  $
                  .63
                      - 5.63
                  
                  $
                  1.67Granted
                  
                  
                  54,000
                  
                  
                  .91
                      - 2.09
                  
                  
                  1.65Exercised
                  
                  
                  (39,500
                  )
                  
                  .75
                      -.84
                  
                  
                  .80Forfeited
                      or cancelled
                  
                  
                  (121,500
                  )
                  
                  1.41
                      - 2.31
                  
                  
                  1.47Outstanding
                      atAugust
                      29, 2003
                  
                  
                  1,328,425
                  
                  $
                  .63
                      - 5.63
                  
                  $
                  1.70Granted
                  
                  
                  477,156
                  
                  
                  2.08
                      - 2.72
                  
                  
                  2.25Exercised
                  
                  
                  (144,800
                  )
                  
                  .84
                      - 2.31
                  
                  
                  1.45Forfeited
                      or cancelled
                  
                  
                  (33,000
                  )
                  
                  1.47
                  
                  
                  1.47Outstanding
                      atSeptember
                      3, 2004
                  
                  
                  1,627,781
                  
                  $
                  .63
                      - 5.63
                  
                  $
                  1.89Granted
                  
                  
                  175,000
                  
                  
                  1.29
                      - 2.50
                  
                  
                  1.38Exercised
                  
                  
                  (53,000
                  )
                  
                  .63
                      - 2.31
                  
                  
                  1.39Forfeited
                      or cancelled
                  
                  
                  (436,250
                  )
                  
                  .84
                      - 5.63
                  
                  
                  2.68**Outstanding
                      at**
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ******September
                      2, 2005**
                  ****
                  ****
                  **1,313,531**
                  ****
                  **$**
                  **.63
                      - 2.72**
                  ****
                  **$**
                  **1.58**
                  ******Available
                      for issue at**
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ******September
                      2, 2005**
                  ****
                  ****
                  **510,669**
                  ****
                  ****
                  **-**
                  ****
                  
                  -**Options
                      exercisable at**
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ******September
                      2, 2005**
                  ****
                  ****
                  **1,313,531**
                  ****
                  **$**
                  **.63
                      - 2.72**
                  ****
                  **$**
                  **1.58**September
                      3, 2004
                  
                  
                  1,257,414
                  
                  $
                  .63
                      - 5.63
                  
                  $
                  1.80
  The
          weighted average remaining contractual life of options outstanding at September
          2, 2005, was 4.9 years.
  **10.
          Employee Benefit Plans**
 WCI
          has a profit-sharing **** plan
          covering substantially all employees. Amounts to be contributed to the
          plan each
          year are determined in the discretion of the Board of Directors, subject
          to
          legal limitations. No contributions were declared for fiscal years 2005,
          2004
          and 2003.
 
 Eligible
          WCI employees are permitted to make contributions, up to certain regulatory
          limits, to the plan on a tax deferred basis under Section 401(k) of the
          Internal
          Revenue Code. The plan provides for a minimum Company matching contribution
          on a
          quarterly basis at the rate of 25% of employee contributions with a quarterly
          discretionary match. During fiscal years 2005, 2004 and 2003, an additional
          discretionary matching contribution of 25% of employee contributions was
          made
          for all quarters. All matching contributions are in the form of Company
          stock or
          cash in the discretion of the Board of Directors. During fiscal 2005 and
          2004,
          all matching contributions in the amount of $262,000 and $235,000, respectively,
          were in the form of cash. During the first five months of fiscal 2003,
          matching
          contributions were made in the form of Company stock with the remainder
          of the
          fiscal year’s contributions made in the form of cash. Fiscal 2003 matching
          contributions of $189,000 consisted of $132,000 in the form of cash and
          $57,000
          in the form of Company stock.
  **11.**  **Segment
          Information and Significant Customers**
  SFAS
          No.
          131, “Disclosures about Segments of an Enterprise and Related Information,’’
          established standards for the way that public business enterprises report
          information about operating segments in their financial statements. The
          standard
          defines operating segments as components of an enterprise about which separate
          financial information is available that is evaluated regularly by the chief
          operating decision maker in deciding how to allocate resources and in assessing
          performance. Based on these standards, we have determined that we operate
          in a
          single operating segment: the manufacture and sale of satellite communications
          equipment.
  47
 *Wegener
              Corporation and Subsidiaries*
  In
            this
            single operating segment we have three sources of revenues as
            follows:
 Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003Direct
                    Broadcast Satellite
                
                **$**
                **21,045,385**
                
                $
                16,533,758
                
                $
                18,152,647Telecom
                    and Custom Products
                
                ****
                **259,939**
                
                
                937,498
                
                
                1,411,493Service
                
                
                **597,049**
                
                
                633,028
                
                
                569,040**$**
                **21,902,373**
                
                $
                18,104,284
                
                $
                20,133,180
  Revenues
          by geographic areas are as follows:
  Year
                    ended**September
                    2,**
                  **2005**
                
                September
                    3,
                  2004
                
                August
                    29,
                  2003Geographic
                    AreaUnited
                    States
                
                **$**
                **21,370,574**
                
                $
                17,498,397
                
                $
                19,293,956Canada
                
                
                **109,685**
                
                
                83,711
                
                
                314,625Europe
                
                
                **186,403**
                
                
                366,474
                
                
                262,958Asia
                
                
                **-**
                
                
                92,756
                
                
                147,318Latin
                    America and Mexico
                
                
                **195,686**
                
                
                20,788
                
                
                18,366Other
                
                
                **40,025**
                
                
                42,158
                
                
                95,957**$**
                **21,902,373**
                
                $
                18,104,284
                
                $
                20,133,180
 
 Revenues
          attributed to geographic areas are based on the location of the customer.
          All of
          our long-lived assets are located in the United States.
 
 We
          sell
          to a variety of domestic and international customers on an open-unsecured
          account basis. These customers principally operate in the cable television,
          broadcast business music, private network and data communications industries.
          Customers representing 10% or more of the year’s revenues are as
          follows:
  Year
                    ended**September
                    2,**
                  **2005**
                
                
                September
                    3,
                  2004
                
                
                August
                    29,
                  2003Customer
                    1
                
                
                **22.5**
                **%**
                
                39.6
                %
                
                39.3
                %Customer
                    2
                
                
                **14.1**
                
                
                (a
                )
                
                16.3
                %Customer
                    3
                
                
                **13.0**
                
                
                (a
                )
                
                (a
                )Customer
                    4
                
                
                **10.3**
                ****
                
                (a
                )
                
                (a
                )
 
 (a)
            Revenues for the year were less than 10% of total revenues.
 
 Sales
          to
          a relatively small number of major customers have typically comprised a
          majority
          of our revenues and that trend is expected to continue throughout fiscal
          2006
          and beyond. Future revenues are subject to the timing of significant orders
          from
          customers and are difficult to forecast. As a result, future revenue levels
          may
          fluctuate from quarter to quarter.
 
 48
 *Wegener
          Corporation and Subsidiaries*
 At
          September 2, 2005 and at September 3, 2004, two customers accounted for
          more
          than 10% of our accounts receivable. When deemed appropriate, we use letters
          of
          credit and credit insurance to mitigate the credit risk associated with
          foreign
          sales.
  **12.**  **Statements
          of**  **Cash
          Flows**
  Interest
          payments were approximately $59,000, $96,000 and $69,000 for fiscal years
          2005,
          2004 and 2003, respectively. No income taxes were paid or received in 2005,
          2004
          or 2003. Noncash financing activities in fiscal 2004 included the fair
          value of
          stock options granted for services valued at $140,000. Noncash financing
          activities in fiscal 2003 included 72,977 shares of treasury stock reissued
          and
          27,176 shares of common stock issued for 401(k) matching Company contributions
          valued at approximately $82,000.
 
 **13.
          Commitments and Contingencies**
 
 We
          have
          two manufacturing and purchasing agreements for certain finished goods
          inventories. At September 2, 2005, outstanding purchase commitments under
          these
          agreements amounted to $4,705,000. Pursuant to the above agreements, at
          September 2, 2005, we had outstanding letters of credit in the amount of
          $1,016,000. In addition, at September 2, 2005, we had an outstanding commitment
          for engineering design and software development services in the amount
          of
          $893,000.
  We
          lease
          certain office and manufacturing facilities, vehicles and equipment under
          long-term noncancelable operating leases that expire through fiscal 2009.
          Future
          minimum lease commitments are approximately as follows: 2006-$188,000;
          2007-$100,000; 2008-$36,000; 2009-$4,000. Rent expense under all leases
          was
          approximately $230 ,000,
          $228,000 and $242,000 for fiscal years 2005, 2004 and 2003,
          respectively.
 
 From
          time
          to time in the ordinary course of business, we have become a defendant
          in
          various types of legal proceedings. We do not believe that these proceedings,
          individually or in the aggregate, will have a material adverse effect on
          our
          financial position, results of operations or cash flows.
 
 **14.
          Guarantees**
  Warranty
  We
          warrant our products for a 12 to 14 month period beginning at the date
          of
          shipment. The warranty provides for repair or replacement of defective
          products
          returned during the warranty period at no cost to the customer. We expense
          costs
          for routine warranty repairs as incurred. Additional provisions are made
          for
          non-routine warranty repairs based on estimated costs to repair at the
          point in
          time in which the warranty claim is identified. Accrued warranty liabilities
          amounted to $225,000 at September 2, 2005. For the fiscal year ended September
          2, 2005, the accrual was increased by $120,000 and reduced by $47,000 for
          satisfied warranty claims. Warranty expense recognized during the year
          ended
          September 3, 2004, amounted to $120,000.
 
 Letters
          of Credit
  WCI
          provides standby letters of credit in the ordinary course of business to
          certain
          suppliers pursuant to manufacturing and purchasing agreements. At September
          2,
          2005, outstanding letters of credit amounted to $1,016,000.
 
 Financing
          Agreements
  The
          Company guarantees the bank loan facility of WCI. The bank facility provides
          a
          maximum available credit limit of $5,000,000. At September 2, 2005, no
          balances
          were outstanding on the loan facility.
 
 
 49
 *Wegener
          Corporation and Subsidiaries*
  **15.
          Quarterly Financial Data (Unaudited)**
  
 QuarterFirst
                
                Second
                
                Third
                
                Fourth
                
                Year**Fiscal
                    2005****Revenue**
                
                **$**
                **6,406,071**
                
                **$**
                **6,336,557**
                
                **$**
                **4,252,879**
                
                **$**
                **4,906,866**
                
                **$**
                **21,902,373****Gross
                    profit (loss)**
                
                
                **2,394,643**
                
                
                **2,422,018**
                
                
                **1,467,590**
                
                
                **1,683,824**
                
                
                **7,968,075****Operating
                    income (loss)**
                
                
                **186,040**
                
                
                **207,298**
                
                
                **(963,602**
                **)**
                
                **(900,175**
                **)**
                
                **(1,470,439**
                **)****Net
                    earnings (loss)**
                
                
                **111,885**
                
                
                **127,904**
                
                
                **(619,543**
                **)**
                
                **(5,291,585**
                **)(a)**
                
                **(5,671,339**
                **)(a)****Net
                    earnings (loss) per share****Basic**
                
                
                **0.01**
                
                
                **0.01**
                
                
                **(0.05**
                **)**
                
                **(0.42**
                **)**
                
                **(0.45**
                **)****Diluted**
                
                
                **0.01**
                
                
                **0.01**
                
                
                **(0.05**
                **)**
                
                **(0.42**
                **)**
                
                **(0.45**
                **)**Fiscal
                    2004Revenue
                
                $
                4,750,205
                
                $
                4,712,923
                
                $
                4,777,394
                
                $
                3,863,762
                
                $
                18,104,284Gross
                    profit
                
                
                1,274,668
                
                
                1,198,311
                
                
                1,392,372
                
                
                975,111
                
                
                4,840,462Operating
                    (loss)
                
                
                (687,204
                )
                
                (854,717
                )
                
                (550,703
                )
                
                (993,182
                )
                
                (3,085,806
                )Net
                    (loss)
                
                
                (448,668
                )
                
                (655,264
                )
                
                (356,641
                )
                
                (647,325
                )
                
                (2,107,898
                )Net
                    (loss) per shareBasic
                
                
                (0.04
                )
                
                (0.05
                )
                
                (0.03
                )
                
                (0.05
                )
                
                (0.17
                )Diluted
                
                
                (0.04
                )
                
                (0.05
                )
                
                (0.03
                )
                
                (0.05
                )
                
                (0.17
                )
 
 (a)
          Includes a $4,710,000 noncash tax charge to provide a full valuation allowance
          for net deferred tax assets.
  ITEM
          9.CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE
 
 None.
 
 ITEM
          9A.  CONTROLS
          AND PROCEDURES
 
 The
          Company carried out an evaluation, under the supervision and with the
          participation of the Company’s management, including the Chief Executive Officer
          (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the
          design
          and operation of the Company’s disclosure controls and procedures as of the end
          of the period covered by this report (September 2, 2005). Based upon that
          evaluation, the Company’s CEO and CFO have concluded that the Company’s
          disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
          of the Securities Exchange Act of 1934, as amended) are effective. There
          has
          been no change in the Company’s internal control over financial reporting during
          our most recent fiscal quarter that has materially affected, or is reasonably
          likely to materially affect, the Company’s internal control over financial
          reporting.
 
 ITEM
          9B.  OTHER
          INFORMATION
 
 None
 
 
 50
 *Wegener
          Corporation and Subsidiaries*
 **PART
          III**
 
 ITEM
          10.  DIRECTORS
          AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
 Information
          contained under the caption "ELECTION OF DIRECTORS" in the Proxy Statement
          pertaining to the January 31, 2006 Annual Meeting of Stockholders ("Proxy
          Statement") is incorporated herein by reference in partial response to
          this
          item. See also Item 1. “Business - Executive Officers of the Registrant” on page
          9 of this Report.
 
 
 ITEM
          11.  EXECUTIVE
          COMPENSATION
 
 Information
          contained under the caption "EXECUTIVE COMPENSATION" in the Proxy Statement
          is
          incorporated herein by reference in response to this item.
 
 
 ITEM
          12.  SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
          MATTERS
 
 Information
          contained under the captions "ELECTION OF DIRECTORS," “SECURITY OWNERSHIP OF
          CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “ EQUITY
          COMPENSATION PLAN INFORMATION ”
          in the
          Proxy Statement is incorporated herein by reference in response to this
          item.
 
 
 ITEM
          13.  CERTAIN
          RELATIONSHIPS  AND
          RELATED TRANSACTIONS
 
 Information
          contained under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
          in
          the Proxy Statement is incorporated herein by reference in response to
          this
          item.
 
 
 ITEM
          14.  PRINCIPAL
          ACCOUNTANT FEES AND SERVICES
 
 Information
          contained under the caption “PRINCIPAL ACCOUNTANT FEES AND SERVICES” in the
          Proxy Statement is incorporated herein by reference in response to this
          item.
 
 
 51
 *Wegener
          Corporation and Subsidiaries*
 **PART
          IV**
 
 ITEM
          15.  EXHIBITS
          AND FINANCIAL STATEMENT SCHEDULES
 
 ( a)  (1)
          The
          following consolidated financial statements of Wegener Corporation and
          subsidiaries and the related Report of Independent Registered Public Accounting
          Firm thereon are filed as part of this report:
 
 Report
          of
          Independent Registered Public Accounting Firm.
 
 Consolidated
          Balance Sheets - September 2, 2005, and September 3, 2004.
 
 Consolidated
          Statements of Operations - Years ended September 2, 2005, September 3,
          2004, and
          August 29, 2003.
 
 Consolidated
          Statements of Shareholders' Equity - Years ended September 2, 2005, September
          3,
          2004, and August 29, 2003.
 
 Consolidated
          Statements of Cash Flows - Years ended September 2, 2005, September 3,
          2004, and
          August 29, 2003.
 
 Notes
          to
          Consolidated Financial Statements.
 
 Separate
          financial statements of the Registrant have been omitted because the Registrant
          is primarily a holding company and all subsidiaries included in the consolidated
          financial statements are wholly-owned.
 
 (a)
                (2)
                The
                    following consolidated financial statements schedule for Wegener
                    Corporation and subsidiaries is included herein, beginning on
                    page
                    46:
 
 Schedule
          II-Valuation and Qualifying Accounts Years ended September 2, 2005, September
          3,
          2004, and August 29, 2003.
 
 (a)  (3)  The
          exhibits filed in response to Item 601 of Regulation S-K are listed in
          the
          Exhibit Index
          on
          pages 47 and 48.
  (b)   See
          Part
          IV, Item 15(a) (3).
  (c)   See
          Part
          IV, item 15(a) (2).
 
 
 52
 *Wegener
            Corporation and Subsidiaries*
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board
          of
          Directors and Shareholders of Wegener Corporation
 Duluth,
          Georgia
 
 The
          audits referred to in our report dated November 23, 2005, relating to the
          consolidated financial statements of Wegener Corporation and subsidiaries,
          which
          is contained in Item 8 of this Form 10-K included the audit of the financial
          statement schedule listed in the accompanying index. The financial statement
          schedule is the responsibility of the Company's management. Our responsibility
          is to express an opinion on the financial statement schedule based on our
          audits.
 
 In
          our
          opinion, such financial statement schedule presents fairly, in all material
          respects, the information set forth therein.
 
 BDO
          Seidman, LLP
  Atlanta,
          Georgia
 November
          23, 2005
 
  53
  *Wegener
          Corporation and Subsidiaries*
 
 **SCHEDULE
          II**
 **WEGENER
          CORPORATION AND SUBSIDIARIES**
 **VALUATION
          AND QUALIFYING ACCOUNTS**
  Balance
                    at
                  Beginning
                  of
                    Period
                
                Charged
                    to
                  Costs
                    and
                  Expenses
                
                Write-offs
                
                Recoveries
                
                Balance
                    at
                  End
                    of
                  PeriodAllowance
                    for Doubtful Account
                    Receivable:**Year
                    ended September 2, 2005**
                
                **$**
                **363,289**
                
                **$**
                **85,000**
                
                **$**
                **(77,236**
                **)**
                **$**
                **-**
                
                **$**
                **371,053**Year
                    ended September 3, 2004
                
                $
                354,660
                
                $
                -
                
                $
                (5,105
                )
                $
                13,734
                
                $
                363,289Year
                    ended August 29, 2003
                
                $
                351,592
                
                $
                30,000
                
                $
                (26,932
                )
                $
                -
                
                $
                354,660Inventory
                    Reserves:**Year
                    ended September 2, 2005**
                
                **$**
                **3,467,489**
                
                **$**
                **325,000**
                
                **$**
                **(300,176**
                **)**
                **$**
                **-**
                
                **$**
                **3,492,313**Year
                    ended September 3, 2004
                
                $
                3,490,363
                
                $
                225,000
                
                $
                (247,873
                )
                $
                -
                
                $
                3,467,489Year
                    ended August 39, 2003
                
                $
                3,780,607
                
                $
                75,000
                
                $
                (365,244
                )
                $
                -
                
                $
                3,490,363Valuation
                    Allowance for Deferred Tax Assets:**Year
                    ended September 2, 2005**
                
                **$**
                **-**
                
                **$**
                **4,710,000**
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **4,710,000**Year
                    ended September 3, 2004
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Year
                    ended August 39, 2003
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
 
 
 
 
 
 54
 *Wegener
          Corporation and Subsidiaries*
 
 EXHIBIT
          INDEX
 
 The
          following documents are filed as exhibits to this report. An asterisk identifies
          those exhibits previously filed and incorporated herein by reference below.
          For
          each such asterisked exhibit there is shown below the description of the
          previous filing. Exhibits which are not required for this report are omitted.
          Exhibits 10.3 through 10.6 identify management contracts or compensatory
          plans.
  Exhibit
                      Number
                  
                  Description
                      of Document*3.2
                  
                  Certificate
                      of Incorporation as amended through May 4, 1989, (1989 10-K,
                      filed
                      November 30, 1989, SEC file No. 0-11003, Exhibit 3.2).*3.3
                  
                  Amendment
                      to Certificate of Incorporation (1997 10-Q, filed June 27,
                      1997, SEC file
                      No. 0-11003, Exhibit 3.1).*3.4
                  
                  Amended
                      and Restated By-laws (Form 8-K, dated as of May 1, 2003 and
                      filed May 6,
                      2003, Exhibit 3.1).*4.0
                  
                  See
                      By-Laws and Certificate of Incorporation, Exhibits 3.1 and
                      3.2. See
                      Articles II and VIII of the By-Laws and Article IV of the
                      Certificate.*4.1
                  
                  Loan
                      and Security Agreement and Demand Note dated June 5, 1996,
                      by and between
                      Wegener Communications, Inc. and LaSalle National Bank respecting
                      $8,500,000 combined revolving credit note and term note (1996
                      10-K, filed
                      November 27, 1996, SEC file No. 0-11003, Exhibit 4.1).*4.5
                  
                  Loan
                      and Security Agreement - First Amendment dated August 4, 1998,
                      by and
                      between Wegener Communications, Inc. and LaSalle National Bank
                      respecting
                      $10,000,000 combined revolving credit note and term note (1998
                      10-K, filed
                      November 9, 1998, SEC file No. 0-11003, Exhibit 4.5).*4.6
                  
                  Loan
                      and Security Agreement - Third Amendment dated December 11,
                      2000, by and
                      between Wegener Communications, Inc., and LaSalle National
                      Bank respecting
                      $10,000,000 combined revolving credit note and term note. (2001
                      10-Q filed
                      April 16, 2001, Exhibit 4.1.)*4.7
                  
                  Loan
                      and Security Agreement - Fourth Amendment dated March 28, 2002,
                      by and
                      between Wegener Communications, Inc., and LaSalle National
                      Bank respecting
                      $5,000,000 combined revolving credit note and term note (2002
                      10-Q filed
                      June 28, 2002, Exhibit 4.1.)*4.8
                  
                  Loan
                      and Security Agreement - Fifth Amendment dated June 27, 2003,
                      by and
                      between Wegener Communications, Inc. and LaSalle National Bank
                      respecting
                      $5,000,000 combined revolving credit note and term note. (2003
                      10-Q filed
                      July 9, 2003, Exhibit 4.1.)*4.9
                  
                  Stockholder
                      Rights Agreement (Form 8-K, dated as of May 1, 2003 and filed
                      May 6, 2003,
                      Exhibit 4.1).*4.10
                  
                  Loan
                      and Security Agreement - Sixth Amendment dated June 27, 2004,
                      by and
                      between Wegener Communications, Inc. and LaSalle National Bank
                      respecting
                      $5,000,000 combined revolving credit note and term note. (2004
                      10-Q filed
                      July 9, 2004, Exhibit 4.1.)No
                      other long-term debt instrument of the Registrant or its subsidiaries
                      authorizes indebtedness exceeding 10% of the total assets of
                      the
                      Registrant and its subsidiaries on a consolidated basis and
                      the Registrant
                      hereby undertakes to provide the Commission upon request with
                      any
                      long-term debt instrument not filed
                      herewith.
   55
 *Wegener
            Corporation and Subsidiaries*
 Exhibit
                      Number
                  
                  Description
                      of Document*10.1
                  
                  License
                      Agreement, Distributorship and Supply Agreement, and Purchase
                      Pooling and
                      Warehouse Agreement dated May 28, 1994, by and between Wegener
                      Communications, Inc. and Cross Technologies, Inc. (1995 10-K,
                      filed
                      December 15, 1994, SEC file No. 0-11003, Exhibit 10.4).*10.2
                  
                  Wegener
                      Communications, Inc. Profit Sharing Plan and Trust dated January
                      1, 1982,
                      amended and restated as of January 1, 1984. (1987 10-K, dated
                      and filed
                      November 25, 1987, SEC file No. 0-11003, Exhibit
                      10.14).*10.3
                  
                  1989
                      Directors' Incentive Plan (1990 10-K, filed November 29, 1990,
                      SEC file
                      No. 0-11003, Exhibit 10.9).*10.3.1
                  
                  Amendment
                      to 1989 Directors’ Incentive Plan effective February 1, 1995, (1995 10-K,
                      filed December 13, 1996, SEC file No. 0-11003, Exhibit
                      10.4.1).*10.4
                  
                  1998
                      Incentive Plan (1998 Form S-8, Registration No. 333-51205,
                      filed April 28,
                      1998, Exhibit 10.1).*10.5
                  
                  Form
                      of Agreement between Wegener Corporation and Robert A. Placek,
                      Ned L.
                      Mountain, and C. Troy Woodbury, Jr. respecting severance payments
                      in the
                      event of change of control (Schedule 14D-9, filed May 6, 2003,
                      Exhibit (e)
                      (1)).*10.6
                  
                  Director
                      Compensation Plan (2004 10-K, filed December 2, 2004, SEC file
                      No.
                      0-11003, Exhibit 10.6).*14.1
                  
                  Wegener
                      Corporation Code of Business Conduct and Ethics (2003 10-K,
                      filed November
                      26, 2003, SEC file No. 0-11003, Exhibit 14.1).*
                      21.1
                  
                  Subsidiaries
                      of the Registrant (incorporated by reference to the December
                      2, 2004 Form
                      10-K, Exhibit 21).23.1
                  
                  Consent
                      of BDO Seidman, LLP.31.1
                  
                  Certification
                      of the Chief Executive Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
                      of the Chief Financial Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
                      of the Chief Executive Officer pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002.32.2
                  
                  Certification
                      of the Chief Financial Officer pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002.
 
 
 56
 *Wegener
            Corporation and Subsidiaries*
 SIGNATURES
 
 Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, the Registrant has duly caused this report to be signed on its behalf
          by
          the undersigned, thereunto duly authorized.
 
 WEGENER
                  CORPORATIONDate:
                  December 1, 2005
                By
                /s/
                  Robert A. PlacekRobert
                    A. PlacekPresident
  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 indicated on this 1st day of December 2005.
 
 Signature
                
                Title/s/
                    Robert A. Placek
                
                President,
                    Chief Executive Officer and Chairman of the Board,Robert
                    A. Placek
                
                Director
                    (Principal Executive Officer)/s/
                    C. Troy Woodbury, Jr.
                
                Treasurer
                    and Chief Financial Officer, DirectorC.
                    Troy Woodbury, Jr.
                
                (Principal
                    Financial and Accounting Officer)/s/
                    Ned L. Mountain
                
                Director,
                    President and Chief Operating Officer of WCINed
                    L. Mountain/s/
                    Phylis Eagle-Oldson
                
                DirectorPhylis
                    Eagle-Oldson/s/
                    Joe K. Parks
                
                DirectorJoe
                    K. Parks/s/
                    Thomas G. Elliot
                
                DirectorThomas
                    G. Elliot/s/
                    Wendell H. Bailey
                
                DirectorWendell
                    H. Bailey
 
  
 57