UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 2006

                                                         OR

[   ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________


Commission File Number       0-5896
                        ----------------


                             JACO ELECTRONICS, INC.
             (Exact name of registrant as specified in its charter)

                       New York                      11-1978958
            -------------------------------- -----------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)
                145 Oser Avenue, Hauppauge, New York 11788
           ------------------------------------ ---------------------
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (631) 273-5500

        Securities registered pursuant to Section 12(b) of the Act: None

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


                          Common Stock, $0.10 per share
                                (Title of Class)

         Indicate by check mark whether the registrant is a well-known seasoned
         issuer, as defined in Rule 405 of the Securities
                Act.     Yes __     No  X
                                       ---

         Indicate by check mark whether the registrant is not required to file
         reports pursuant to Section 13 or Section 15(d) of the
                Act.     Yes __     No  X
                                       ---

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

                 Yes: X                 No: _____


     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference 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 a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.

Large Accelerated Filer __     Accelerated Filer __    Non-Accelerated Filer  X
                                                                            ---

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

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant as of December 31, 2005 was $ 16,468,936  (based on the last reported
sale price on the Nasdaq National Market on that date).


     The number of shares of the  registrant's  common stock  outstanding  as of
September 20, 2006 was 6,294,332 shares (excluding 659,900 treasury shares).

<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE.


         Portions of the registrant's definitive proxy statement to be filed on
or before October 28, 2006 under Regulation 14A in connection with the
registrant's 2006 Annual Meeting of Shareholders are incorporated by reference
in Part III of this Form 10-K.



<PAGE>




Forward-Looking Statements

         This Form 10-K contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which represent our management's beliefs and
assumptions concerning future events. When used in this report and in other
documents we file or furnish under the Exchange Act, forward-looking statements
include, without limitation, statements regarding our financial forecasts or
projections, our expectations, beliefs, intentions or future strategies that are
signified by the words "expects", "anticipates", "estimates" "believes",
"intends", "plans" or similar language. These forward-looking statements are
subject to numerous assumptions, risks and uncertainties that could cause our
actual results and the timing of certain events to differ materially from those
expressed in the forward-looking statements.

         You should understand that many important factors, in addition to those
discussed or incorporated by reference in this report, could cause our results
to differ materially from those expressed in the forward-looking statements.
Potential factors that could affect our results include, in addition to others
not described in this report, those described in Item 1A. Risk Factors of this
report.


         In light of these risks and uncertainties, the forward-looking events
discussed in this report might not occur and, therefore, you are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report. Except as provided in Item 1A of Form 10-Q under the
Exchange Act, we do not undertake any obligation to update publicly or revise
any forward-looking statements to reflect new information or events or
circumstances occurring after the date of this report.







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<PAGE>








                                     PART I

Item 1.  Business.

     Jaco Electronics,  Inc. was organized in the State of New York in 1961. Our
principal executive offices are located at 145 Oser Avenue,  Hauppauge, New York
11788, and our telephone number is (631) 273-5500.

         Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports, if any, filed or
furnished with the Securities and Exchange Commission, or the SEC, under the
Exchange Act are available free of charge on our website at
www.jacoelectronics.com/investor-fin-news.asp as soon as reasonably practicable
after we file or furnish them with the SEC. Information contained on our website
is not incorporated by reference in this report. As used in this report, the
terms, "we", "us", "our", the "Company", "Jaco" and similar terms refer to Jaco
Electronics, Inc. and our consolidated subsidiaries.

Our Company

We are a leading distributor of active and passive electronic components used in
the manufacture and assembly of electronic products to a wide variety of
industrial Original Equipment Manufacturers ("OEMs"). We also sell products to
contract electronics manufacturers, particularly in the Far East, who
manufacture products for companies in select segments of the electronics
industry.
         We also are a provider of flat panel display and supporting technology
products and services. We distribute a range of semiconductors, (active
components), including transistors, diodes, memory devices, microprocessors,
micro controllers, other integrated circuits, active matrix displays and various
board-level products, as well as passive products, consisting primarily of
capacitors, resistors and electromechanical devices including power supplies,
relays, switches, connectors and printer heads. These products are used in the
manufacture and assembly of a diverse and growing range of electronic products,
including:


o telecommunications equipment            o computers and office equipment
o medical devices and instrumentation     o industrial equipment and controls
o military/aerospace systems              o automotive electronics
o Voting and gaming machines              o home entertainment and other
                                            consumer electronics

         We have two distribution centers and 16 strategically located sales
offices throughout the United States and one sales office in Bejing, China
opened in August 2004. We distribute more than 45,000 products from over 100
vendors, including such market leaders as Kemet Electronics Corporation, NEC,
Samsung Semiconductor, Inc., Vishay Americas, Inc., Sharp Electronics Corp,
Vitesse Semiconductor Corporation, Epson Electronics America, Inc., Lambda
Americas Inc. and Cosel USA, Inc., to a base of over 5,500 customers through a
direct sales force. To enhance our ability to distribute electronic components,
we provide a variety of value-added services, including automated inventory
management services; integration, turnkey design and development, project
management, and extended and post-sale support services for various custom
components with flat panel displays; assembly of stock items for



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<PAGE>


customers into pre-packaged  kits; and programming and testing of power supplies
and crystal oscillators.  Our core customer base consists primarily of small and
medium-sized  manufacturers  that produce  electronic  equipment  used in a wide
variety of industries.

Our Industry

         The electronic components distribution industry represents an important
sales channel for component manufacturers. Electronic components distributors
relieve component manufacturers of a portion of the costs and personnel needed
to warehouse, sell and deliver their products. Distributors market
manufacturers' products to a broader range of customers than such manufacturers
could economically serve with their direct sales forces. Today, distributors
have become an integral part of their customers' purchasing and inventory
processes. Distributors offer their customers the ability to outsource their
purchasing and warehousing responsibilities so that they may concentrate their
resources on their core competencies, namely research, product development,
sales and marketing. Electronic data interchange (EDI) permits distributors to
receive timely scheduling of component requirements from customers enabling them
to better provide these value-added services. Generally, companies engaged in
the distribution of electronic components, including Jaco, are required to
maintain a relatively significant investment in inventories and accounts
receivable to be responsive to the needs of customers. To meet these
requirements, we, as well as other companies in our industry, typically depend
on internally generated funds as well as external sources of financing.

Distributors also provide technical engineers to work directly with their
customers. Our engineers provide technical support to our customers' for our
flat panel display products, micro controllers and power supplies. Our technical
engineers are trained by our key suppliers on their specific product offerings
and serve as an extension of their marketing efforts.


Products

         We currently distribute over 45,000 stock items. Our products fall into
four broad categories: semiconductors (Semi), flat panel displays (FPD), passive
components (Passive) and electromechanical devices (EMCH). Our net distribution
sales in each of these four product categories as a percentage of our total net
distribution sales appears below:
                        2006    2005     2004
       ------------ --------- --------- --------

          Semi        50%       58%       53%
          FPDs        27%       17%       21%
         Passive      15%       17%       19%
          EMCH         8%        8%       7%
       ------------ --------- --------- --------


         Semiconductors are active products consisting of such items as
integrated circuits, microprocessors, transistors, diodes, dynamic random access
memory (RAM), static RAMs, and video RAMs which respond to or activate upon
receipt of electronic current,. FPDs incorporate such items as flat panels,
touch screens and controllers , which are commonly used in personal computers,
televisions,

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automated teller machines,  voting and gaming machines,  and video monitors, and
are rapidly  replacing  standard cathode ray tubes in a variety of applications,
including  medical,  industrial  and  commercial  equipment,  as  well as in the
specific types of products listed above. Passive components consist primarily of
capacitors  and  resistors.  EMCH consists of such  products as power  supplies,
relays  and  printerheads.  Both  passive  and EMCH  products  are  designed  to
facilitate completion of electric functions.


Value-Added Services

         We also provide a number of value-added services which are intended to
attract new customers, to maintain and increase sales to existing customers and,
in the case of FPD integration, to generate revenues from new customers.
Value-added services include:

o                 Automated Inventory Management Services. We offer
                  comprehensive, state-of-the-art solutions that effectively
                  manage our customers' inventory reordering, stocking and
                  administration functions. These services reduce paperwork,
                  inventory, cycle time and the overall cost of doing business
                  for our customers.

o                 Kitting. Kitting consists of assembling to a customer's
                  specifications two or more of our 45,000 stock items into
                  pre-packaged kits ready for use in the customer's assembly
                  line. Kitting services allow us to provide a partial or
                  complete fill of a customer's order and enable the customer to
                  more efficiently manage its inventory.

o                 Programming. We offer both field programming instruments, as
                  well as volume production capabilities performed in-house. All
                  standard surface mount and dip packages are available. We
                  provide custom oscillators at a user-specified frequency. In
                  addition, we offer configurable modular power supplies
                  featuring the flexibility of 10 wide-range outputs, with the
                  best technical specifications in its class. This configurable
                  power supply series offers quick turnaround and fully-tested
                  units in medical, test and measurement, industrial and datacom
                  applications.

o                 FPD Integration. Our FPD sales specialists and technical
                  engineers work directly with our customers to design, develop,
                  configure, test and deliver highly customized solutions to
                  meet specific FPD requirements for both business and consumer
                  applications. We are able to internalize key elements of the
                  FPD integration process that were previously sub-contracted to
                  outside vendors and offer customers a one-stop source for
                  their FPD and integration needs through our state-of-the-art
                  FPD integration facility. See "Operations - Manufacturing."

Sales and Marketing

         We believe we have developed valuable long-term customer relationships
and an understanding of our customers' requirements. Our sales personnel are
trained to identify our customers' requirements and to actively market our
entire product line to satisfy those needs. We serve a broad range of customers
in the computer, computer-related, telecommunications, data transmission,
defense, aerospace, medical equipment and other industries. We have established
inventory management programs to address the specific distribution requirements
of the global contract manufacturing sector. Two of our customers represented
13% and 11%, 21% and 13%, and 14% and 11% of our total net sales for the fiscal
years ended June 30, 2006, 2005 and 2004, respectively. None of our other
customers individually represented more than 7%, 4% or 9% of our total net sales
for fiscal years 2006, 2005 or 2004, respectively.

                                       3
<PAGE>


         As an authorized distributor for many component manufacturers, we are
able to offer technical support as well as a variety of supply chain management
programs. Technical engineering, support and supply chain management services
enhance our ability to attract new customers. Many of today's services revolve
around the use of software automation, computer-to-computer transactions through
EDI, Internet-based solutions, technically competent product managers, business
development managers (BDM) and technical engineers for our FPD product offering.
We provide design support and technical assistance to our customers with
detailed data solutions employing the latest technologies.

         Sales are made throughout North America from the sales departments
maintained at our two distribution facilities located on the East and West
Coasts of the United States in New York and California and from 16 strategically
located sales offices. Sales are made primarily through personal visits by our
employees and by a staff of trained telephone sales personnel who answer
inquiries and receive and process orders from customers. Sales are also made
through general advertising, referrals and marketing support from component
manufacturers. In addition, we utilize the services of independent sales
representatives whose territories include parts of North America and several
foreign countries. In August 2004, we opened a sales office in Beijing, China to
support our business in the Far East. We also utilize a third party warehouse to
support key customers in the Far East. Independent sales representatives
generally operate under agreements which are terminable by either party upon 30
days notice and prohibit them from representing competing product lines. In most
cases, independent sales representatives are authorized to solicit sales of all
of our product lines.

         For our FPD product, we provide high quality component and value-added
display solutions. As panel technology is added to a rapidly expanding list of
electronic products and devices, it has become necessary to support the growing
number of specific applications with a customized solution. We provide in-house
design, sub-assembly, and complete "box-build" capability, high level
integration, project management, and testing and after-market capabilities to
provide the varying levels of support required by our customer base. We define
our addressable market as qualified OEMs and systems integrators with critical
time-to-market and product optimization needs that may also have specialized
design and engineering service requirements followed by a scalable FPD program.

Suppliers

         Manufacturers of electronic components are increasingly relying on the
marketing, customer service, technical support and other resources of
distributors who market and sell their product lines to customers not normally
served by the manufacturer, and to supplement the manufacturer's direct sales
efforts for other accounts often by providing value-added services not offered
by the manufacturer. Manufacturers seek distributors who have strong
relationships with desirable customers, have the infrastructure to handle large
volumes of products and can assist customers in the design and use of the
manufacturers' products. Currently, we have non-exclusive distribution
agreements with many manufacturers, including Dallas Semiconductor Corporation,
Sharp Electronics Corp, NEC, Kemet Electronics Corporation, Samsung
Semiconductor, Inc., 3 M Touch Systems, Inc., Vishay Intertechnology, Inc.,
Vitesse Semiconductor Corporation, Lambda, Cosel and Epson Electronics America,
Inc. We continuously seek to identify potential new suppliers such as NEC.
During the fiscal year ended June 30, 2006, products purchased from our two
largest suppliers accounted for 27% and 7%, respectively, of our total net
sales. As is common in the electronics distribution industry, from time to time
we have experienced terminations of relationships with suppliers. We cannot
assure you that, in the event a supplier cancelled its distributor agreement
with us, we would be able to replace the sales associated with such supplier
with sales of other products.



                                       4
<PAGE>


         We generally purchase products from manufacturers pursuant to
non-exclusive distributor agreements. As an authorized distributor, we are able
to offer our suppliers marketing support and technical assistance regarding
product knowledge. Products requiring specialized technical assistance typically
have higher average selling prices and higher gross profit margins than
commodity components and there is more limited competition for the sale of these
products.

         Most of our distributor agreements are cancelable by either party,
typically upon 30 to 90 days notice, although these agreements are usually
entered into with the intention of a long-term relationship. Many of our current
agreements have continued for more than fifteen years. Most of these agreements
typically provide for price protection, stock rotation privileges and the right
to return inventory. Price protection is typically in the form of a credit to us
for any inventory in our possession for which the manufacturer reduces its
prices. Stock rotation privileges typically allow us to exchange inventory in an
amount up to 5% of a prior period's purchases or some of our vendors allow us to
scrap 3% of traditionally non-returnable inventory. Upon termination of a
distributor agreement, the right of return typically requires the manufacturer
to repurchase our inventory at our adjusted purchase price. We believe that
these types of protective provisions contained in our distributorship agreements
generally have served to reduce our exposure to loss from unsold inventory.
Because price protection, stock rotation privileges and the right to return
inventory are limited in scope, however, and often subject to our compliance
with certain customary conditions, we cannot assure you that we will not
experience significant losses from unsold inventory in the future.

Operations

         Component Distribution. Inventory management is critical to a
distributor's business. We constantly focus on a high number of resales or
"turns" of existing inventory to reduce our exposure to product obsolescence and
changing customer demand.

         Our central computer system facilitates the control of purchasing and
inventory, accounts payable, shipping and receiving, and invoicing and
collection information for our distribution business. Our distribution software
system includes financial systems, EDI, customer order entry, purchase order
entry to manufacturers, warehousing and inventory control. Each of our sales
departments and offices is electronically linked to our central computer
systems, which provide fully integrated on-line, real-time data with respect to
our inventory levels. Most of our inventory management system was developed
internally and is considered proprietary. We track inventory turns by vendor and
by product, and our inventory management system provides immediate information
to assist in making purchasing decisions and decisions as to which inventory to
exchange with suppliers under stock rotation programs. Our inventory management
system also uses bar-code technology. In some cases, customers use computers
that interface directly with our computers to identify available inventory and
to rapidly process orders. Our computer system also tracks inventory turns by
customer. We also monitor supplier stock rotation programs, inventory price
protection, rejected material and other factors related to inventory quality and
quantity. This system enables us to more effectively manage our inventory and to
respond quickly to customer requirements for timely and reliable delivery of
components. Our inventory turnover was approximately six times for the fiscal
year ended June 30, 2006.

         Manufacturing. Our manufacturing capabilities support customization
requirements for almost any commercial or industrial application, including
prototype, sub-assembly, full system assembly, LCD optical enhancement,
touch-screen integration and system integration. The Company has sold
`ruggedized' applications that address military, aerospace and special
industrial requirements (including hazardous environments). We maintain
world-class quality standards and are ISO 9001 certified for company functions.
In February 2005, we completed the construction of a state-of-the-art
integration


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facility in Hauppauge, New York to meet the needs of our expanding
FPD customer base. The 20,000 square foot plant houses design and engineering,
manufacturing, integration, after-market support and operations. The integration
center is equipped with a large, modern batch assembly area as well as work
cells designed for continuous quality manufacturing. Products with clean room
requirements are assembled on premises. The facility is configured to
accommodate customized projects that range from low-volume design and prototype
to higher volume assembly as large as 50,000 units.


Discontinued Operations

On September 20, 2004, we completed the sale of substantially  all of the assets
of our non-core contract manufacturing subsidiary, Nexus Custom Electronics Inc.
("Nexus")  to  Sagamore  Holdings,   Inc.  for  total  consideration  of  up  to
$13,000,000  and the assumption of certain  liabilities.  Under the terms of the
purchase  agreement  relating to this transaction,  we received $9.25 million of
the purchase  consideration in cash at closing. The balance of the fixed portion
of the  purchase  consideration  was  satisfied  through the delivery of a $2.75
million subordinated note issued by the purchaser. This note has a maturity date
of  September  1, 2009 and bears  interest at the lower of the prime rate or 7%.
The note is payable by the purchaser in quarterly cash installments ranging from
$156,250 to $500,000 each,  commencing in September 2006 (which initial  payment
was not  made)  and  continuing  for each  quarter  thereafter  until  maturity.
Prepayment  of the  principal of and accrued  interest on the note is permitted.
Additionally, we are entitled to receive additional consideration in the form of
a six-year earn-out based on 5% of the annual net sales in excess of $20 million
of Nexus after the closing date, up to $1,000,000 in the aggregate.

         Pursuant to the purchase agreement, Sagamore Holdings has also entered
into a contract that designates us as a key supplier of electronic components to
Nexus for a period of five years.

         As a result of the sale, we have classified the operations of Nexus as
"discontinued" for all periods presented herein.

     On September 19, 2006, Nexus Nano Electronics,  Inc. ("NNE"),  as successor
to Sagamore,  and its  subsidiary  filed suit against Jaco in the U.S.  District
Court   for  the   Southern   District   of  New   York   alleging   fraud   and
misrepresentations  by the  Company  in  connection  with the sale of Nexus  and
seeking  an  unspecified  amount  of  damages.  The  Company  believes  that the
plaintiffs'  claims are without merit and intends to contest them  vigorously as
well as assert  counterclaims  for amounts  owed to it in  connection  with such
sale, if this matter is not settled.  Subsequent to the filing of this suit, the
parties  entered into  settlement  discussions  and have reached an agreement in
principle to settle this matter for, among other things, a mutual release of all
disputed  claims  relating  to  this  transaction  and the  cancellation  of the
purchaser's $2.75 million subordinated note held by the Company in consideration
for  NNE's  issuance  to the  Company  of  shares of its  preferred  stock.  The
documentation relating to this proposed settlement has not yet been finalized or
approved by the parties'  respective  boards of directors  and,  therefore,  the
Company cannot assure you that this  settlement will be completed upon the terms
described above or at all.


         See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Comparison of Fiscal Year Ended June 30,
2005 with Fiscal Year Ended June 30, 2004 - Discontinued Operations," and Note B
- "Discontinued Operations" to our Consolidated Financial Statements included
under Item 15 of this report for additional information regarding this
transaction.

Competition

         The electronic components distribution industry is highly competitive,
primarily with respect to price, product availability, knowledge of product and
quality of service. We believe that the breadth of


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<PAGE>


our customer base,  services and product lines, our level of technical expertise
and the  overall  quality of our  services  are  particularly  important  to our
competitive  position. We compete with large national distributors such as Arrow
Electronics, Inc. and Avnet, Inc., as well as mid-size distributors, such as All
American  Semiconductor,  Inc. and Nu Horizons Electronic  Corporation,  many of
whom  distribute the same or competitive  products as we do. We also compete for
customers with some of our own suppliers and additional  competition has emerged
from  third-party   logistics  providers,   fulfillment   companies,   catalogue
distributors  and  e-commerce  companies,  including  on-line  distributors  and
brokers,  which have grown with the  expanded use of the  Internet.  Many of our
competitors have significantly  greater assets,  name recognition and financial,
personnel and other resources than we do.

         Our ability to purchase competitively priced electronic components from
our suppliers, who have foreign parents, could be adversely affected by
increases in tariffs, duties, changes in the U.S trade agreements with Japan,
Taiwan or other foreign countries, transportation strikes or the adoption of
federal laws imposing import restrictions. In addition, the cost of our imported
components could be subject to governmental controls and international currency
fluctuations. The decline in the value of the U.S. dollar relative to the
currencies of Japan and other countries would cause increases in the dollar
prices we pay for these components. Although we have not experienced any
material adverse effect to date on our ability to compete or otherwise as a
result of any of the foregoing factors, we cannot assure you that such factors
will not have a material adverse effect on us in the future.

Backlog

         As is typical of electronic components distributors, we have a backlog
of customer orders. At June 30, 2006, we had a backlog of approximately $53.8
million as compared to a backlog of approximately $43.5 million at June 30,
2005. We believe that a substantial portion of our backlog represents orders due
to be filled within the next 90 days. In recent years, the trend in our industry
has been toward outsourcing, with more customers entering into just-in-time
contracts with distributors, instead of placing orders with long lead times. As
a result, the correlation between backlog and future sales is changing. In
addition, we have increased our use of EDI transactions, where we purchase
inventory based on electronically transmitted forecasts from our customers that
may not become an order until the date of shipment and, therefore, may not be
reflected in our backlog. Our backlog is subject to delivery rescheduling and
cancellations by the customer, sometimes without penalty or notice. For the
foregoing reasons our backlog is not necessarily indicative of our future sales
for any particular period.

Employees

         At June 30, 2006, we had a total of 205 employees, of which five were
engaged in administration, 16 were managerial and supervisory employees, 117
were in sales and 67 performed warehouse, manufacturing and clerical functions.
There are no collective bargaining contracts covering any of our employees. We
believe our relationship with our employees is satisfactory.



Item 1A. Risk Factors

Our industry is highly cyclical, and an industry downturn could have a material
adverse effect on our business.

         The electronic components distribution industry and, in particular, the
semiconductor industry from which a large portion of our revenues come, has
historically been affected by general economic

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downturns and  fluctuations in product supply and demand,  often associated with
changes in technology and  manufacturing  capacity.  These  industry  cycles and
economic downturns have often had an adverse economic effect upon manufacturers,
end-users of  electronic  components  and  electronic  components  distributors,
including  Jaco.  We cannot  predict  the timing or the  severity  of the cycles
within our industry, or how long and to what levels any industry downturn and/or
general  economic  weakness will last or be  exacerbated  by terrorism or war or
other  factors on our  industry.  During each of the fiscal years ended June 30,
2006, 2005 and 2004, sales of semiconductors represented 50%, 58% and 53% of our
net sales, respectively, and our revenues tend to closely follow the strength or
weakness of the  semiconductor  market.  While the  semiconductor  industry  has
strengthened  in recent years,  it is uncertain  whether this  improvement  will
continue,  and future downturns in the technology industry,  particularly in the
semiconductor  sector,  could have a material  adverse  effect on our  business,
results of operations and financial condition.

Our revenues and profitability previously declined significantly from historical
highs and, although revenues have shown growth recently, we may be unable to
achieve profitability at levels experienced in the past.

         Our operations have been significantly and negatively affected in the
past by the downturn in the technology industry and the general economy. From a
high of approximately $321 million in sales in fiscal 2001, our sales stabilized
between $200 million and $250 million in fiscal 2003 through 2005. In the fiscal
year ended June 30, 2006, our revenues showed continued signs of stability with
quarterly sequential revenues of $52.5, $48.1, $60.9 and $67.0 million.
Nevertheless, we have not yet been able to achieve consistent profitability,
much less at a level deemed acceptable to management. During the past fiscal
year, we modified our business plan to focus on those core areas where we
believe we can most effectively compete in the current business environment.
Specifically, we are aggressively pursuing sales of flat panel displays and
concentrating our marketing efforts on those core vendors whose products we
believe still have a viable market in North America. In the event this strategy
is unsuccessful, we may need to adopt further cost-cutting measures, which could
include restructuring and other charges.

We are dependent on a limited number of suppliers. Loss of one or more of our
key suppliers could have a material adverse effect on our business.

         We rely on a limited number of suppliers for products which generate a
significant portion of our sales. During the fiscal year ended June 30, 2006,
products purchased from our two largest suppliers accounted for 27% and 7 %,
respectively, of our total net sales. Substantially all of our inventory has
been and will be purchased from suppliers with which we have entered into
non-exclusive distribution agreements. Moreover, most of our distribution
agreements are cancelable upon short notice. As a result, in the event that one
or more of those suppliers experience financial difficulties or are not willing
to do business with us in the future on terms acceptable to management, there
could be a material adverse effect on our business, results of operations or
financial condition. Additionally, our relationships with our customers could be
materially adversely affected because our customers depend on our distribution
of electronic components and computer products from the industry's leading
suppliers.

Declines in the value of our inventory could materially adversely affect our
business.

         The electronic components and computer products industry is subject to
rapid technological change, new and enhanced products and evolving industry
standards, which can contribute to a decline in value or obsolescence of
inventory. During an industry and/or economic downturn, it is possible that
prices will decline due to an oversupply of product and, therefore, there may be
greater risk of declines in



                                       8
<PAGE>


inventory  value.  Although it is the policy of many of our  suppliers  to offer
distributors  like us certain  protections  from the loss in value of  inventory
(such as price  protection,  stock  rotation  privileges  and limited  rights of
return  and  rebates),  we cannot  assure you that such  protections  will fully
compensate us for the loss in value, or that the suppliers will choose to, or be
able to, honor such  agreements,  some of which are not documented and therefore
subject to the discretion of the supplier.  We cannot assure you that unforeseen
new product  developments  or declines  in the value of our  inventory  will not
materially  adversely  affect our  business,  results of operations or financial
condition,  or  that  we  will  successfully  manage  our  existing  and  future
inventories.

Significant order cancellations, reductions or delays by our customers could
materially adversely affect our business.

         Our sales are typically made pursuant to individual purchase orders,
and we generally do not have long-term supply arrangements with our customers,
but instead work with our customers to develop nonbinding forecasts of future
requirements. Based on these forecasts, we make commitments regarding the level
of business that we will seek and accept, the timing of production schedules and
the levels and utilization of personnel and other resources. A variety of
conditions, both specific to each customer and generally affecting each
customer's industry, may cause customers to cancel, reduce or delay orders that
were either previously made or anticipated. Generally, customers may cancel,
reduce or delay purchase orders and commitments without penalty, except for
payment for services rendered or products competed and, in certain
circumstances, payment for materials purchased and charges associated with such
cancellation, reduction or delay. Significant or numerous order cancellations,
reductions or delays by our customers could have a material adverse effect on
our business, financial condition or results of operations.

The market for our products and services is very competitive and, if we cannot
effectively compete, our business will be harmed.

         The market for our products and services is very competitive and
subject to rapid technological change. We compete with many other distributors
of electronic components, many of which are larger and have significantly
greater assets, name recognition and financial, personnel and other resources
than we have. As a result, our competitors may be in a stronger position to
respond quickly to potential acquisitions and other market opportunities, new or
emerging technologies and changes in customer requirements. Occasionally, we
compete for customers with many of our own suppliers and additional competition
has emerged from third-party logistics providers, fulfillment companies,
catalogue distributors and e-commerce companies, including on-line distributors
and brokers, which have grown with the expanded use of the Internet.
Furthermore, as more and more electronic components manufacturing moves outside
North America, we believe that the total available distribution market share in
North America is being reduced as procurement channels increase in Asia and
Europe. While we have implemented new strategies, including our website and
multiple portals, in response to certain of these new sources of competition and
trends, we cannot assure you that we will be able to maintain our market share
against the emergence of these or other sources of competition. Failure to
maintain and enhance our competitive position could materially adversely affect
our business and prospects.

         Additionally, prices for our products tend to decrease over their life
cycle. This reduces resale per component sold. There is also continuing pressure
from customers to reduce their total cost for products. Our suppliers may also
seek to reduce our margins on the sale of their products in order to increase
their own profitability or to be competitive with other suppliers of comparable
product. We incur substantial costs on our value-added services required to
remain competitive, retain existing business and gain new


                                       9
<PAGE>


customers,  and we must evaluate the expense of those efforts against the impact
of price and margin reductions.

Substantial defaults by our customers on accounts receivable or the loss of
significant customers could have a material adverse effect on our business.

         A substantial portion of our working capital consists of accounts
receivable from customers. If customers responsible for a significant amount of
accounts receivable were to become insolvent or otherwise unable to pay for
products and services, or to make payments in a timely manner, our business,
results of operations or financial condition could be materially adversely
affected. An economic or industry downturn could materially adversely affect the
servicing of these accounts receivable, which could result in longer payment
cycles, increased collection costs and defaults in excess of management's
expectations. A significant deterioration in our ability to collect on accounts
receivable could also trigger an event of default under our credit facility or
otherwise impact the cost or availability of financing available to us.

We may not have adequate liquidity or access to capital resources, and our
substantial leverage and debt service obligations could materially adversely
affect our ability to meet our cash needs.

         We need cash to service our indebtedness and for general corporate
purposes, such as funding our ongoing working capital and capital expenditure
needs. At June 30, 2006, we had cash, and cash equivalents, of approximately
$29,000 (our credit facility, referred to below, currently requires cash from
customer receipts to be applied directly to the repayment of outstanding
indebtedness). In addition, we currently have access to a credit facility
providing for a $40 million secured revolving line of credit, of which $35.1
million was being borrowed as of June 30, 2006, with an additional $1.3 million
available. Our ability to satisfy our cash needs depends on our ability to
generate cash from operations and to continue to access capital from external
sources of financing, both of which are subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based on preliminary discussions with our lenders, we believe we will
be able to renew our credit facility on terms similar to those currently in
effect prior to its scheduled maturity on December 31, 2006, although we cannot
assure that this renewal will occur. Management believes we will be able to
continue to obtain financing on acceptable terms under our existing credit
facility or through other external sources.

     Our credit  facility  imposes  debt service  obligations  and exposes us to
certain risks  associated  with being a  substantially  leveraged  company.  For
example,  our credit facility contains several restrictive  financial covenants,
including,  among others, provisions for maintenance of specified levels of cash
flow,  net worth and fixed charge  coverage  ratio,  and  limitations on capital
expenditures,  dividends  and other  restricted  payments.  Failure to remain in
compliance  with these and other  covenants  could result in an event of default
triggering  an   acceleration   of  our  obligation  to  repay  all  outstanding
indebtedness under our credit facility or limit our ability to borrow additional
amounts thereunder.  Historically,  we have, when necessary, been able to obtain
waivers  or  amendments  to  our  credit   facility  to  satisfy   instances  of
non-compliance with our financial covenants.  However, we cannot assure you that
any such future waivers or amendments, if needed, will be available and, if they
are not, any future non-compliance with our bank covenants could have a material
adverse effect on our business, financial condition or results of operations.

     Our  substantial  leverage  could  also  have  other  significant  negative
consequences  on our business,  including:

          -  increasing  our  vulnerability  to  general  adverse  economic  and
             industry conditions;

                                       10
<PAGE>


          - increasing our exposure to increasing interest rates;

          -  restricting  our credit with our  suppliers,  which would limit our
             ability to purchase inventory;

          - limiting our ability to obtain  additional  financing on  acceptable
            terms or at all;

          -  requiring  the  dedication  of a  portion  of any  cash  flow  from
          operations to service our indebtedness (currently, our credit facility
          requires the deposit of customer  receipts to be directed to a blocked
          account  and  applied   directly  to  the  repayment  of   outstanding
          indebtedness),  thereby reducing the amount of any cash flow available
          for other purposes, including capital expenditures;

          - limiting our flexibility in planning for, or reacting to, changes in
          our business and the industry in which we compete; and

          - placing us at a possible competitive  disadvantage  relative to less
          leveraged  competitors  and  competitors  that have  better  access to
          capital resources.


Interest rate changes may adversely affect our operating results.

         We are affected by interest rate changes with respect to our credit
facility, which currently is based upon, at our option, the prime rate, federal
funds rate or LIBOR. Interest rates have risen over the last year and may
continue to rise. Continuing increases in interest rates could materially
adversely affect our results of operations.

Our business in non-U.S. locations, particularly Asia, represent a significant
and growing portion of our sales, and our failure to expand in Asia may
negatively impact our sales.

         The manufacturing of electronic components and computer products is
increasingly shifting to lower-cost production facilities in Asia, most notably
China. Suppliers in Asia have traditionally had lower gross profit margins than
those in the United States and Europe, and typically charge lower prices in the
Asian markets for their products, which places pressure on us to lower our
prices to meet competition. Additionally, some of our customer base is
transferring to the Far East in order to reduce production costs. In response to
this trend, we continue to seek to expand our presence in Asia, primarily
through marketing our value-added services to support global contract
manufacturers. In addition, as part of our long-term growth plans, we continue
to search for a potential strategic alliance or partner in the Far East. If we
are unsuccessful in expanding our Far East operations, our sales could be
negatively impacted.

         Expanding internationally may subject our operations to a variety of
risks that are specific to international operations, including the following:

     - import and export regulations that could erode profit margins or restrict
     exports;


     - the  burden  and cost of  compliance  with  foreign  laws,  treaties  and
     technical standards and changes in those regulations;

     - potential restrictions on transfers of funds;

     - foreign currency fluctuations;

     - import and export duties and value added taxes;

     - transportation  delays and  interruptions;  - uncertainties  arising from
     local business practices and cultural considerations; and

     - potential military conflicts and political risks.

                                       11
<PAGE>


         While we have and will continue to adopt measures to reduce the
potential impact of losses resulting from the shift of business abroad and the
risks of doing business internationally, we cannot assure you that such measures
will be adequate.


We are dependent on foreign manufacturers and subject to trade regulations which
expose us to political and economic risk.

         A significant number of components sold by us are manufactured by
foreign companies. As a result, our ability to sell certain products at
competitive prices could be adversely affected by any of the following:

     - increases in tariffs or duties;

     - changes in trade treaties;

     - strikes or delays in air or sea transportation;

     - future U.S.  legislation  with respect to pricing and/or import quotas on
     products imported from foreign countries; and

     - turbulence in offshore economies or financial markets.

         Our ability to be competitive with respect to sales of imported
components could also be affected by other governmental actions and policy
changes, including anti-dumping and other international antitrust legislation.

Our industry is subject to supply shortages. Any delay or inability to obtain
components may have a material adverse effect on our business.

         During prior periods, there have been shortages of components in the
electronics industry and the availability of certain components have been
limited by some of our suppliers. Although such shortages and allocations have
not had a material adverse effect on our business, we cannot assure you that any
future shortages or allocations would not have such an effect on us.

The prices of our components are subject to volatility.

         A significant portion of the memory products we sell have historically
experienced volatile pricing. If market pricing for these products decreases
significantly, we may experience periods when our investment in inventory
exceeds the market price of such products. In addition, at times there are price
increases from our suppliers that we are unable to pass on to our customers.
These market conditions could have a negative impact on our sales and gross
profit margins unless and until our suppliers reduce the cost of these products
to us. Furthermore, in the future, the need for aggressive pricing programs in
response to market conditions, an increased number of low-margin, large volume
transactions and/or increased availability of the supply of certain products,
could further impact our gross profit margins.


A reversal of the trend for distribution to play an increasing role in the
electronic components industry could materially adversely affect our business.

         In recent years, there has been a growing trend for original equipment
manufacturers and contract electronics manufacturers to outsource their
procurement, inventory and materials management processes to third parties,
particularly electronic component distributors, including Jaco. Although we do
not currently foresee this trend reversing, if it did, our business would be
materially adversely affected.


                                       12
<PAGE>


Our operations would be materially adversely affected if third party carriers
were unable to transport our products on a timely basis.

         All of our products are shipped through third party carriers. If a
strike or other event prevented or disrupted these carriers from transporting
our products, other carriers may be unavailable or may not have the capacity to
deliver our products to our customers. If adequate third party sources to ship
our products were unavailable at any time, our business would be materially
adversely affected.

Our products may be found to be defective and, as a result, warranty and/or
product liability claims may be asserted against us which could have a material
adverse effect on our business.

         Our products are sold at prices that are significantly lower than the
cost of the equipment or other goods in which they are incorporated. Since a
defect or failure in a product could give rise to failures in the end products
that incorporate them (and claims for consequential damages against us from our
customers), we may face claims for damages that are disproportionate to the
sales and profits we receive from our products involved. While we and our
suppliers specifically exclude consequential damages in our standard terms and
conditions, our ability to avoid such liabilities may be limited by the laws of
some of the countries where we do business. Our business could be materially
adversely affected as a result of a significant quality or performance issue in
the products sold by us depending on the extent to which we are required to pay
for the damages that result. Although we currently have product liability
insurance, such insurance is limited in coverage and amount.

If we are unable to recruit and retain key personnel necessary to operate our
business, our ability to compete successfully will be adversely affected.

         We are heavily dependent on our current executive officers, management
and technical personnel. The loss of any key employee or the inability to
attract and retain qualified personnel could materially adversely affect our
ability to execute our business plans. Competition for qualified personnel is
intense, and we might not be able to retain our existing key employees or
attract and retain any additional personnel.

We rely heavily on our internal information systems which, if not properly
functioning, could materially adversely affect our business.

         Our current global operations reside on our technology platforms. Any
of these systems are subject to electrical or telecommunications outages,
computer hacking or other general system failure. Failure of our internal
information systems or material difficulties in upgrading our global financial
system financial system could have material adverse effects on our business.

If we fail to maintain an effective system of internal controls or discover
material weaknesses in our internal controls over financial reporting, we may
not be able to report our financial results accurately or timely, which could
have a material adverse effect on our business.

         An effective internal control environment is necessary for us to
provide reasonable assurance with respect to our financial reports and to
effectively prevent financial fraud. We are required to periodically evaluate
the effectiveness of the design and operation of our internal control over
financial reporting. These evaluations may result in the conclusion that
enhancements, modifications or changes to internal controls

                                       13
<PAGE>


are necessary or desirable.  While management evaluates the effectiveness of our
internal  controls  on a  regular  basis,  these  controls  may  not  always  be
effective.  There are  inherent  limitations  on the  effectiveness  of internal
controls,  including collusion,  the circumvention or override of controls,  and
human error and failure of judgment. Therefore, even effective internal controls
cannot  provide  absolute  assurance  with respect to the  preparation  and fair
presentation of financial statements. If we fail to maintain an effective system
of  internal  controls,  including  any  failure to  implement  required  new or
improved  controls,  or if  management  or  our  independent  registered  public
accounting firm was to discover material weaknesses in our internal controls, we
may be unable to produce reliable financial reports or timely meet our reporting
obligations,  which  could  have a  material  adverse  effect  on our  business,
financial  condition or results of operations.  In addition,  such failure could
subject us to  investigation  or  sanctions  by  regulatory  or  self-regulatory
authorities,  such as the SEC or the Nasdaq  National  Market.  Any such actions
could also result in an adverse reaction in the financial  markets due to a loss
of confidence in the reliability of our financial statements,  which could cause
the market  price of our common stock to decline or limit our access to external
sources of capital.


Item 1B. Unresolved Staff Comments.

           No response to this item is required.

Item 2.     Properties.

         All of our facilities are leased. We currently lease 18 facilities
strategically located throughout the United States, two of which are
multipurpose facilities used principally as administrative, sales and purchasing
offices, as well as warehouses. Since August 2004, we have also leased a sales
office in Beijing, China to support our business in the Far East. Our satellite
sales offices range in size from approximately 200 square feet to approximately
6,000 square feet. Base rents for such properties range from approximately $850
per month to approximately $8,000 per month. Depending on the terms of each
particular lease, in addition to base rent, we may also be responsible for
portions of real estate taxes, utilities and operating costs, or increases in
such costs over certain base levels. The lease terms range from month-to-month
to as long as ten years. All facilities are linked by computer terminals to our
Hauppauge, New York headquarters. The following table sets forth certain
information as of September 20, 2006 regarding our two principal leased
facilities:

<TABLE>

                                                                                   Lease
                       Base Rent                                                 Expiration
    Location           Per Month         Square Feet             Use                Date
    --------           ---------         -----------             ---                ----

<S>           <C>          <C>                 <C>                                   <C>   <C>
Hauppauge, NY (1)          $55,125             72,000       Administrative,          12/31/13
                                                            Sales,
                                                            Warehouse, and FPD
                                                            Integration

Westlake Village, CA       $4,500               3,750       Administrative,           4/30/09
                                                            Sales and
                                                            Warehouse
</TABLE>

                                       14
<PAGE>



(1)      Leased from a partnership owned by Joel H. Girsky, Chairman and
         President of the Company, and Charles B. Girsky, Executive Vice
         President, at a current monthly rent, which the Company believes
         represents the fair market value for such space.

         We believe that our present facilities will be adequate to meet our
needs for the foreseeable future.

Item 3.    Legal Proceedings.

         We are a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on our business, results of operations or financial
condition.

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

         No matters were submitted to our security holders during the fourth
quarter of fiscal 2006.





                                       15
<PAGE>




                                     PART II

Item 5. Market For Registrant's  Common Equity,  Related Stockholder Matters and
Issuer Purchases of Equity Securities.

(a)            Our common stock is traded on the Nasdaq National Market under
               the symbol "JACO". The stock prices listed below represent the
               high and low sale prices of our common stock, as reported by the
               Nasdaq National Market, for each fiscal quarter beginning with
               the first fiscal quarter of the fiscal year ended June 30, 2005.

<TABLE>

                                                                                 High                    Low
                                                                                 ----                    ---

Fiscal Year 2005:
<S>                                    <C> <C>                                     <C>                    <C>
         First quarter ended September 30, 2004.....................               $6.28                  $4.26
         Second quarter ended December 31, 2004.....................                5.49                   3.82
         Third quarter ended March 31, 2005.........................                4.15                   2.77
         Fourth quarter ended June 30, 2005.........................                3.42                   2.80

Fiscal Year 2006:
         First quarter ended September 30, 2005.....................               $4.50                  $2.80
         Second quarter ended December 31, 2005.....................                3.97                   3.02
         Third quarter ended March 31, 2006.........................                4.10                   3.34
         Fourth quarter ended June 30, 2006.........................                4.10                   3.16
</TABLE>


(b)  As of September 20, 2006, there were approximately 148 holders of record of
     our  common  stock.  We  believe  our  stock  is held by  more  than  1,800
     beneficial owners.

(c)  We have never declared or paid any cash  dividends on our common stock.  We
     intend for the foreseeable  future to retain future earnings for use in our
     business.  The amount of dividends we pay in the future, if any, will be at
     the discretion of our Board of Directors and will depend upon our financial
     condition,  operating  results and other factors as the Board of Directors,
     in its  discretion,  deems  relevant.  In  addition,  our  credit  facility
     prohibits us from paying cash dividends on our common stock.



Item 6.     Selected Financial Data.

         The selected consolidated financial data set forth below contains only
a portion of our financial statements and should be read in conjunction with our
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report. The historical results are not necessarily indicative
of results to be expected for any future period. Significant events affecting
the comparability of this schedule include the acquisition of Reptron
Electronics, Inc. in June 2003. The historical results for 2002 to 2003 have
been adjusted to reclassify the results of operations of Nexus as discontinued.

                                       16
<PAGE>

<TABLE>

                                                                        Year Ended June 30,
                                                   2006         2005       2004          2003          2002
                                                   ----         ----       ----          ----          ----
                                                             (in thousands, except per share data)

<S>                                                   <C>          <C>          <C>          <C>          <C>
Net sales                                       $ 228,521    $ 231,824    $ 249,100    $ 202,656    $ 175,948
Cost of goods sold                                198,316      205,924      214,389      176,918      148,693
                                                ---------    ---------    ---------    ---------    ---------

       Gross profit                                30,205       25,900       34,711       25,738       27,255

 Selling, general and administrative expenses      28,082       32,112       35,016       28,184       32,635
                                                ---------    ---------    ---------    ---------    ---------

       Operating income (loss)                      2,123       (6,212)        (305)      (2,446)      (5,380)

Interest expense                                    2,618        2,029        1,539        1,025        1,683
                                                ---------    ---------    ---------    ---------    ---------

       Loss from continuing operations before
         income taxes                              (8,241)      (1,844)      (3,471)      (7,063)
                                                                                                         (495)

Income tax provision (benefit)                      6,467       (2,814)        (553)      (1,180)      (2,500)
                                                ---------    ---------    ---------    ---------    ---------

       Loss from continuing operations             (6,962)   $  (5,427)   $  (1,291)   $  (2,291)   $  (4,563)

Earnings (loss) from discontinued
operations, net of tax                               _             567          736         (693)        (481)
                                                ---------    ---------    ---------    ---------    ---------

       NET LOSS                                 $  (6,962)   $  (4,860)   $    (555)   $  (2,984)   $  (5,044)
                                                =========    =========    =========    =========    =========

PER SHARE INFORMATION
    Basic (loss) earnings per common share:
     Loss from continuing operations
                                                $   (1.11)   $   (0.87)   $   (0.22)   $   (0.40)   $   (0.80)
     Earnings (loss) from discontinued
     operations                                      _       $    0.09    $    0.13    $   (0.12)   $   (0.08)
                                                ---------    ---------    ---------    ---------    ---------

     Net loss                                   $   (1.11)   $   (0.78)   $   (0.09)   $   (0.52)   $   (0.88)
                                                =========    =========    =========    =========    =========
    Diluted (loss) earnings per common share:
     Loss from continuing operations            $   (1.11)   $   (0.87)   $   (0.22)   $   (0.40)   $   (0.80)
     Earnings (loss) from discontinued
     operations                                      _       $    0.09    $    0.13    $   (0.12)   $   (0.08)
                                                ---------    ---------    ---------    ---------    ---------
     Net loss                                   $   (1.11)   $   (0.78)   $   (0.09)   $   (0.52)   $   (0.88)
                                                 =========    =========    =========    =========    =========

</TABLE>


                                       17
<PAGE>


Weighted-average common shares and common equivalent shares outstanding:
<TABLE>


                      Year Ended June 30,
         2006     2005    2004   2003     2002
         ----     ----    ----   ----     ----

<S>       <C>     <C>     <C>     <C>     <C>
Basic     6,283   6,250   5,974   5,783   5,713
          =====   =====   =====   =====   =====
Diluted   6,283   6,250   5,974   5,783   5,713
          =====   =====   =====   =====   =====

</TABLE>

<TABLE>

                                                                                At June 30,
                                                         2006         2005         2004         2003         2002
                                                         ----         ----         ----         ----         ----
                                                                              (in thousands)
Consolidated Balance Sheet:
<S>                                                   <C>          <C>           <C>           <C>          <C>
Working capital...................................    $  4,106     $  7,334      $  17,459     $ 11,437     $ 18,327
Total assets......................................     103,080      112,222        121,782      114,212      110,635
Short-term debt...................................      35,142       33,266         37,089       35,736       34,705
Long-term debt....................................          88           57            119           63        1,072
Shareholders' equity..............................      35,171       42,071         46,706       45,568       48,668
</TABLE>


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

         For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements and other information appearing elsewhere in this report.

Overview

         Jaco is a leading distributor of active and passive electronic
components to industrial OEMs that are used in the manufacture and assembly of
electronic products in such industries as telecommunications, medical devices,
computers and office equipment, military/aerospace, and automotive and consumer
electronics. Products distributed by the Company include semiconductors, flat
panel displays, capacitors, resistors, electromechanical devices and power
supplies.

         The electronics industry experienced a severe downturn beginning in
2001, which continued through most of 2003. The decline was attributable to
increased manufacturing capacity combined with a significant decrease in demand
for electronic components. The second half of 2003 saw an improvement in the
demand for electronic components throughout the entire industry. While demand
for our products has remained relatively stable in recent periods, the average
selling prices of many of the components we distribute, particularly
semiconductor and passive components, have decreased due to global competitive
pressures, which has adversely affected our operating profits. In response, the
Company has implemented cost reduction initiatives to reduce expenses as
required to support current sales and profit levels. Due to the ongoing shift of
manufacturing to the Far East, the Company has modified its business model to
pursue the business available in the United States, increase its support of
global contract manufacturers that require its value-added services and
logistics programs, and aggressively promote its flat panel display ("FPD")
product offerings, which have experienced significant growth in fiscal 2006 and
which the Company believes have potential for growth in the future.

                                       18
<PAGE>


         Net loss increased in fiscal 2006 to $7.0 million, compared with a net
loss of $4.9 million during fiscal 2005. Fiscal 2006 results were impacted by an
income tax provision of $6.4 million to reduce the carrying value of deferred
tax assets to zero as management has no longer able to conclude that, based upon
the weight of available evidence, it is "more likely than not" that the deferred
tax asset will be realized. See "Results of Operations - Comparison of Fiscal
Year Ended June 30, 2006 with Fiscal Year Ended June 30, 2005 and Note E of the
notes to the Consolidated Financial Statements.

Critical Accounting Policies

         Financial Reporting Release No. 60 recommends that all companies
include a discussion of critical accounting policies used in the preparation of
their financial statements. The SEC defines critical accounting policies as
those that are, in management's view, most important to the portrayal of the
Company's financial condition and results of operations and those that require
significant judgments and estimates.

         The preparation of these consolidated financial statements requires our
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We
base our estimates on historical experience, actuarial valuations and various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex and, consequently, actual results
may differ from these estimates under different assumptions or conditions. While
for any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements. The
accounting principles we utilized in preparing our consolidated financial
statements conform in all material respects to generally accepted accounting
principles in the United States of America.

THE ACCOUNTING POLICIES IDENTIFIED AS CRITICAL ARE AS FOLLOWS:

Valuation of Receivables - The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness. The Company continuously monitors payments
from customers and a provision for estimated uncollectible amounts is maintained
based upon historical experience and any specific customer collection issues,
which have been identified. While such uncollectible amounts have historically
been within the Company's expectations and provisions established, if a
customer's financial condition were to deteriorate, additional reserves may be
required. Concentration of credit risk with respect to accounts receivable is
generally mitigated due to the large number of entities comprising the Company's
customer base, their dispersion across geographic areas and industries, along
with the Company's policy of maintaining credit insurance.

Valuation of Inventories - Inventories are valued at the lower of cost or
market. Cost is determined by using the first-in, first-out and average cost
methods. The Company's inventories are comprised of high technology components
sold to rapidly changing and competitive markets whereby such inventories may be
subject to early technological obsolescence.

         The Company evaluates inventories for excess, obsolescence or other
factors rendering inventories as unsellable at normal gross profit margins.
Write-downs are recorded so that inventories reflect the approximate market
value and take into account the Company's contractual provisions with its
suppliers

                                       19
<PAGE>


governing price protections and stock rotations. Due to the large
number of transactions and complexity of managing the process around price
protections and stock rotations, estimates are made regarding the valuation of
inventory at market value.

         In addition, assumptions about future demand, market conditions and
decisions to discontinue certain product lines can impact the decision to
write-down inventories. If assumptions about future demand change and/or actual
market conditions are different than those projected by management, additional
write-downs of inventories may be required. In any case, actual results may be
different than those estimated.

Goodwill and Other Intangible Assets - The purchase method of accounting for
acquisitions requires extensive use of accounting estimates and judgments to
allocate the excess of the purchase price over the fair value of identifiable
net assets of acquired companies allocated to goodwill. Other intangible assets
primarily represent franchise agreements and non-compete covenants.

         We evaluate long-lived assets used in operations, including goodwill
and purchased intangible assets. The allocation of the acquisition cost to
intangible assets and goodwill has a significant impact on our future operating
results as the allocation process requires the extensive use of estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets. An impairment review is performed whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include, but are not limited to, significant under-performance relative
to historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for our overall business,
and significant industry or economic trends. When impairment indicators are
identified with respect to previously recorded intangible assets, the values of
the assets are determined using discounted future cash flow techniques.
Significant management judgment is required in the forecasting of future
operating results which are used in the preparation of the projected discounted
cash flows and should different conditions prevail, material write downs of net
intangible assets and goodwill could occur.

Valuation of Deferred Income Taxes

         We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". We would
record a valuation allowance when, based on the weight of available evidence, it
is more likely than not that the amount of future tax benefit would not be
realized. While the Company still believes that it is positioned for long-term
growth, the volatility in our industry and markets has made it increasingly
difficult to predict sales and operating results on a short-term basis, and when
coupled with the cumulative losses reported over the last five fiscal years, the
Company was no longer able to conclude that, based upon the weight of available
evidence, it was "more likely than not" that its previously recorded deferred
tax asset of $6.4 million would be realized, and therefore, in the fiscal year
ended June 30, 2006, it recorded a provision for $6.4 million income tax to
reduce the carrying value of its deferred tax asset to zero.


Revenue Recognition

         We derive revenue from the shipment of finished products to its
customers when title is transferred. Revenue is recognized when it is realized
or realizable and earned. We consider revenue realized or realizable and earned
when it has persuasive evidence of an arrangement, the product has been shipped
to the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured.

                                       20
<PAGE>


We  reduce  revenue  for  rebates  and  estimated  customer  returns  and  other
allowances.  We offer  rebates  to  certain  customers  based on the  volume  of
products purchased.

         Our products are sold on a stand alone basis and are not part of sales
arrangements with multiple deliverables. Revenue from product sales is
recognized when the product is shipped as we do not have any obligations beyond
shipment to its customers. When the shipping terms are FOB shipping point,
revenue is recorded as the goods leave our facility. In certain instances and to
certain customers, goods are shipped with shipping terms of FOB destination
point. In these instances we determine when the goods are delivered to our
customer's facility and calculate whether an adjustment to defer revenue
recognition is required. If such adjustment is material, an adjustment is
recorded in the financial statements. Historically, such adjustments have not
been material.

         A portion of our business involves shipments directly from its
suppliers to its customers. In these transactions, we are responsible for
negotiating price both with the supplier and customer, payment to the supplier,
establishing payment terms with the customer, product returns, and has risk of
loss if the customer does not make payment. As the principal with the customer,
we recognize revenue when we are notified by the supplier that the product has
been shipped. We also maintain a consignment inventory program, which provides
for certain components to be shipped on-site to a consignee so that such
components are available for the consignee's use when they are required. The
consignee maintains a right of return related to unused parts that are shipped
under the consignment inventory program. Revenue is not recognized from products
shipped on consignment until notification is received from our customer that
they have accepted title of the inventory that was shipped initially on
consignment. The items shipped on consignment in which title has not been
accepted are included in our inventories.


Stock Based Compensation

         With the adoption of SFAS No. 123(R) on July 1, 2005, we are required
to record the fair value of stock-based compensation awards as an expense. In
order to determine the fair value of stock options on the date of grant, we
apply the Black-Scholes option-pricing model, including an estimate of
forfeitures. Inherent in this model are assumptions related to expected
stock-price volatility, option term, risk-free interest rate and dividend yield.
While the risk-free interest rate and dividend yield are less subjective
assumptions that are based on factual data derived from public sources, the
expected stock-price volatility and option term assumptions require a greater
level of judgment which makes them critical accounting estimates. The adoption
of SFAS No. 123R has had no current impact on our financial position, results of
operation or cash flow.

New Accounting Standards

         In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43" ("SFAS No.
151"), which is the result of its efforts to converge U.S. accounting standards
for inventories with International Accounting Standards. SFAS No. 151 requires
idle facility expenses, freight, handling costs, and wasted material (spoilage)
costs to be recognized as current-period charges. It also requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 did not have a material impact on the Company's
consolidated financial statements.

         In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No. 153") SFAS
No. 153 amends Opinion 29 to

                                       21
<PAGE>


eliminate the exception for non-monetary  exchanges of similar productive assets
and replaces it with a general  exception for exchanges of  non-monetary  assets
that do not have commercial  substance.  A non-monetary  exchange has commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange.  SFAS No. 153 is effective for fiscal
periods  after  June 15,  2005.  The  adoption  of SFAS  No.  153 did not have a
material  impact on the Company's  consolidated  financial  statements in fiscal
2006.

         In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3" ("SFAS No. 154"). Opinion 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No. 154 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. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not expect the adoption of SFAS No. 154 to have an impact on the consolidated
financial statements.


         In June 2000, the FASB issued FIN No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109." This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity's financial statements in accordance with SFAS No. 109
"Accounting for Income Taxes." It prescribes a recognition and threshold
measurement attribute for financial statement disclosure of tax positions taken
or expected to be takes on a tax return. The Company will be required to adopt
the interpretation in the first quarter of fiscal 2008. Management is currently
evaluating the requirements of FIN No. 48 and has not yet determined the impact
on the consolidated financial statements


Results of Operations

     The following table sets forth certain items in our statement of operations
as a percentage of net sales for the periods shown:
<TABLE>

                                                           2006         2005         2004
                                                           ----         ----         ----
<S>                                                        <C>           <C>          <C>
Net sales.........................................         100.0%        100.0%       100.0%
Cost of goods sold................................          86.8          88.8         86.1
                                                            ----          ----         ----
Gross profit......................................          13.2          11.2         13.9
Selling, general and administrative expenses......          12.3          13.9         14.0
                                                            ----          ----         ----
Operating income (loss) ..........................           0.9          (2.7)        (0.1)
Interest expense..................................           1.1           0.9          0.6
                                                             ---           ---          ---
(Loss)  from  continuing  operations  before  income        (0.2)         (3.6)        (0.7)
taxes.............................................
Income tax provision (benefit). ........................     2.8          (1.2)        (0.2)
                                                             ---          ----         ----
Loss from continuing operations.........................    (3.0)         (2.4)        (0.5)
Earnings from discontinued operations,
net of taxes.............................................    ___            0.3         0.3
                                                                            ---          ---
Net loss..........................................          (3.0)%        (2.1)%       (0.2)%
                                                            ====          ====         ====

</TABLE>

                                       22
<PAGE>


Comparison of Fiscal Year Ended June 30, 2006  ("Fiscal  2006") with Fiscal Year
Ended June 30, 2005 ("Fiscal 2005")

         Net sales for Fiscal 2006 were $228.5 million compared to $231.8
million for Fiscal 2005, a decrease of $3.3 million, or 1.4%. Net sales for the
three months ended June 30, 2006 were $67.1 million compared to $59.1 million
for the three months ended June 30, 2005, an increase of $8.0 million, or 13.5%.

         We support contract manufacturers, primarily in the Far East, with
inventory management services. Sales to these contract manufacturers decreased
during Fiscal 2006 by $10.5 million, or 12.3%, to $74.5 million from $85.0
million in Fiscal 2005 primarily due to lower demand from these customers during
the first half of Fiscal 2006. Demand from these customers strengthened in the
second half of Fiscal 2006 and, as a result, net sales to contract manufacturers
in the second half of Fiscal 2006 were higher than in the same period of Fiscal
2005. Sales to contract manufacturers represented 32.6% of our net sales in
Fiscal 2006 compared to 36.7% in Fiscal 2005.

         Our logistical programs, consisting of inventory management services
and warehousing capabilities, through which we generate sales to our contract
manufacturer customers, are comprised almost entirely of semiconductors.
Semiconductors represented 50.2% of our net sales during Fiscal 2006 compared to
57.6% in Fiscal 2005. Passive components, which are primarily commodity product
such as capacitors and resistors, represented 15.7% of our net sales during
Fiscal 2006 compared to 17.3% in Fiscal 2005. Reflecting the continuation of a
long-term trend, passive component unit pricing continued to decline in Fiscal
2006, partially due to additional supply capacity, primarily originating from
the Far East. Accordingly, we do not anticipate material increases in our
passive component sales for the foreseeable future. Electromechanical products,
such as power supplies, relays, and printer heads, represented 7.6% of our net
sales in Fiscal 2006 compared to 8.3% in Fiscal 2005. We believe that these
products, which typically have high per unit selling prices, remain a viable
offering for the U.S. market. Primarily through our logistic programs with
contract manufacturers in the Far East, our export sales represented
approximately 33% of our net sales in Fiscal 2006, as compared to 35% in Fiscal
2005.

         We sell flat panel displays (FPDs) as a component sale through our
standard distribution channel and we sell FPD product as a value-added offering
through our in-house integration center, primarily to target markets where we
believe we can be competitive, including such sectors as electronic voting
machines, electronic kiosk, military and multimedia equipment. We provide design
capabilities and a "full solution" capability enabling us to offer our customers
an expanded range of services to integrate FPDs into their applications sales in
Fiscal 2006 increased 55.8% to $60.6 million compared to $38.4 million for
Fiscal 2005. The growth is primarily attributable to increased sales through our
integration center, which was fully operational for all of Fiscal 2006 as
compared to only five moths of Fiscal 2005 (after opening in February 2005). FPD
product represented 26.5% of our net sales in Fiscal 2006 as compared to 16.8%
in Fiscal 2005.

         We continue to aggressively market our FPD product, while looking to
complement our core product lines with our value-added services, and utilization
of our quote group to quickly respond to customer inquiries. We currently
identify new business opportunities with our vendors to support the needs of
global contract manufacturers. In addition, we continue to seek to identify
potential strategic alliances to expand our presence in the Far East in response
to the significant growth in manufacturing in the region that has occurred in
recent years.

                                       23
<PAGE>


         Gross profit for Fiscal 2006 was $30.2 million, or 13.2% of net sales,
compared to $25.9 million, or 11.2% of net sales, in Fiscal 2005. Management
considers gross profit to be a key performance indicator in managing our
business. Gross profit margins are usually a factor of product mix and demand
for product. During Fiscal 2005, we took a write-down for obsolete inventory of
approximately $2.2 million based on our determination that, due to changes in
market conditions in the United States, certain product primarily intended for
specific customers were no longer saleable. Excluding this write-down, our gross
profit margin for Fiscal 2005 would have been 12.1%. The increase in our gross
profit margin in Fiscal 2006 is primarily due to the increase in sales of our
higher margin FPD product, decrease in sales associated with our logistical
programs with global contract manufacturers which usually operate at lower
margins, and as a result of our focus on those core vendors whose products are
higher margin and still have viable market in the United States. However, we do
not anticipate any material change in our gross profit margin for the
foreseeable future unless we experience an increase in sales associated with our
logistical programs. In addition, demand and pricing for our products have been,
and in the future may continue to be, adversely affected by industry-wide trends
and events beyond our control.

         Selling, general and administrative ("SG&A") expenses were $28.1
million, or 12.3% of net sales, for Fiscal 2006 compared to $32.1 million, or
13.9% of net sales, for Fiscal 2005, representing a reduction of $4.0 million,
or 12.5%. Management considers SG&A as a percentage of net sales to be a key
performance indicator in managing our business. We have been able to implement
significant cost reductions by focusing our spending on core business areas
while decreasing spending in non-strategic areas. This has allowed us to lower
SG&A while maintaining the necessary infrastructure to support our customers. We
plan to continue to look for areas of cost reduction. However, the increase in
our net sales during recent quarters has required us to increase certain costs
to support our growth, although we carefully evaluate any potential increase in
spending. Therefore, we do not anticipate any further reductions in SG&A for the
foreseeable future.

         Interest expense increased $0.6 million, or 29% in Fiscal 2006 to $2.6
million from $2.0 million in Fiscal 2005. Interest expense has increased
primarily due to continuing increases in federal lending rates resulting in
higher borrowing rates under out credit facility. Continued increases in
borrowing rates would further increase our interest expense, which would have a
negative effect on our results of operations.

         During Fiscal 2006, we recorded a provision for income taxes of $6.5
million consisting mainly of a $6.4 million deferred tax write-off. While the
Company believes that it is positioned for long-term growth, as indicated by our
profitability for each of the last two quarter of Fiscal 2006, the volatility in
our industry and markets has made it increasingly difficult to predict sales and
operating results on a short-term basis and, when coupled with the cumulative
losses reported over the last four fiscal years and the first two quarters of
Fiscal 2006, the Company was no longer able to conclude that, based on the
weight of available evidence, it was "more likely than not" that the deferred
tax asset of $6.4 million would be realized.

         Net loss from continuing operations for Fiscal 2006 was $6.9 million,
or $1.11 per diluted share, compared to a net loss from continuing operations of
$5.4 million, or $0.87 per diluted share, for Fiscal 2005. During the fourth
quarter of Fiscal 2006, our net income from continuing operations was $416,000,
or $0.07 per diluted share. Our net income for the fourth quarter and reduced
net loss for Fiscal 2006 is due to our increase in gross profit dollars and
reduction in SG&A expenses. Net loss in Fiscal 2006 was almost entirely
attributable to our write-off of $6.4 million in deferred tax assets during the
fiscal year for the reasons described above and in Note E of the notes to
consolidated financial statements appearing elsewhere in this report.

                                       24
<PAGE>


Comparison of Fiscal Year Ended June 30, 2005  ("Fiscal  2005") with Fiscal Year
Ended June 30, 2004 ("Fiscal 2004")


Results from Continuing Operations:

         Net sales for Fiscal 2005 were $231.8 million as compared to $249.1
million for Fiscal 2004, a decrease of $17.3 million, or 6.9%. We have seen
demand for our products remain stable for the last two quarters of Fiscal 2005.
The average selling price of many of our components has decreased over 20%
compared to our previous fiscal year and where practical, customers continued to
outsource their manufacturing requirements to the Far East. These factors were
the primary reason for the decrease in our net sales. As a result, we have
adapted our marketing strategy in the United States to support the business that
we see remaining in the United States, and have made changes to better serve our
existing customer base. Recent initiatives include expanding our quote group to
enable us to be more responsive to the mid-level contract manufacturers and
changing our marketing efforts to focus on those core lines, including FPDs,
where we believe we can increase our net sales. During the third quarter of
Fiscal 2005, we opened in our Hauppauge, New York facility an in-house FPD
integration center that enables us to expand our value-added capabilities to our
customers. We believe it is important for distributors of electronic components
to focus on the value-added services that our customers require. Our ability to
grow sales will be partially dependent on our ability to increase FPD, sales and
including the integration center, we have made extensive efforts to increase
this business going forward. FPD product represented 16.8% of our net sales
during Fiscal 2005 as compared to 20.7% in Fiscal 2004. We continue to market
semiconductors aggressively. Semiconductor sales represented 57.6% of our net
sales in Fiscal 2005 as compared to 53.1% in Fiscal 2004. Although our business
focus is primarily on the U.S. market, we maintain a sales presence in the Far
East targeted at the global contract manufacturing customers to which we
primarily sell semiconductors through our logistics programs, which consist of
inventory management and warehousing capabilities. Passive components, which are
standard commodity items such as capacitors and resistors, represented 17.3% of
our net sales in Fiscal 2005 as compared to 19.0% in Fiscal 2004. Due to the
increase in capacity worldwide, we saw pricing in passive components decrease by
over 20%. Electromechanical products, such as power supplies, relays and printer
heads, represented 8.3% of our net sales in Fiscal 2005 as compared to 7.2% in
Fiscal 2004. We believe this is a product line with higher selling prices that
still has a viable market in the United States. Primarily through our logistics
programs with global contract manufacturers, our export sales represented
approximately 35% of our net sales for Fiscal 2005 as compared to 23% in Fiscal
2004. Most of these sales derived from business that we were able to maintain as
it transitioned from the United States to the Far East.

         Gross profit for Fiscal 2005 was $25.9 million, or 11.2% of net sales,
compared to $34.7 million, or 13.9% of net sales for Fiscal 2004. Management
considers gross profit to be a key performance indicator in managing our
business. Gross profit margins are usually a factor of product mix and demand
for product. During the fourth quarter, we took a write-down of approximately
$2.2 million for obsolete inventory based on our determination that, due to
changes in market conditions in the United States, certain of our products
primarily intended for distribution to specific customers were no longer
saleable. Without this write-down, our gross profit margin for Fiscal 2005 would
have been 12.1%. As discussed above the Company conducts large amounts of
business through its logistics programs in support of global contract
manufacturers, which constitute lower-end, value-added services that tend to be
at lower margins than the rest of our business. In addition, demand and pricing
for our products have been adversely affected by industry-wide trends and other
events beyond our control.

                                       25
<PAGE>


         Selling, general and administrative ("SG&A") expenses were $32.1
million, or 13.9% of net sales, for Fiscal 2005, as compared to $35.0 million,
or 14.1% of net sales, for Fiscal 2004, representing a reduction of $2.9
million, or 8.3%. Management considers SG&A as a percentage of net sales to be a
key performance indicator in managing our business. We continue to reduce our
costs by targeting our marketing expenditures on our core business areas while
paring back elsewhere. This approach has allowed us to lower SG&A while
maintaining the necessary infrastructure to support our customers. We have been
able to reduce personnel and eliminate non-essential fixed costs by among other
measures, achieving rent reductions, and due to the decrease in gross profit
dollars, our sale commissions have decreased. As of June 30,2005, certain
cost-saving measures were still being implemented.

         Interest expense increased $0.5 million for Fiscal 2005 to $2.0
million, compared to $1.5 million for Fiscal 2004. This increase is primarily
attributable to higher borrowing levels to maintain adequate inventory,
primarily to support a specific customer, and higher borrowing rates.

         Net loss from continuing operations for Fiscal 2005 was $5.4 million,
or $0.87 per diluted share, compared to a net loss from continuing operations of
$1.3 million, or $0.22 per diluted share full diluted for Fiscal 2004. As
discussed above our net loss from operations was impacted in part by our
inventory write-down of approximately $1.4 million, net of taxes, or $0.22 per
diluted share. Our net loss from continuing operations compared to Fiscal 2004
is attributable to the decrease in our net sales and reduction in gross profit
margin due to changes in the mix of our products sold and inventory write-down.

Discontinued Operations:

     On September 20, 2004, the Company  completed the sale of substantially all
of  the  assets  of  its  contract   manufacturing   subsidiary,   Nexus  Custom
Electronics,  Inc. ("Nexus"), to Sagamore Holdings, Inc. for consideration of up
to $13,000,000,  subject to closing  adjustments,  and the assumption of certain
liabilities.  The divestiture of Nexus allows the Company to focus its resources
on its core electronics  distribution business.  Under the terms of the purchase
agreement relating to this transaction,  the Company received  $9,250,000 of the
purchase  consideration in cash on the closing date. Such cash consideration was
used to repay a portion of the outstanding  borrowings  under the Company's line
of credit.  The balance of the fixed portion of the purchase  consideration  was
satisfied  through the delivery of a $2,750,000  subordinated note issued by the
purchaser. This note has a maturity date of September 1, 2009 and bears interest
at the lower of the prime rate or 7%. The note is  payable by the  purchaser  in
quarterly  cash  installments  ranging  from  $156,250  to  $500,000  commencing
September  2006 (which initial payment was not made) and  continuing
for each quarter  thereafter until maturity.  Prepayment of the principal of and
accrued interest on the note is permitted. Additionally, the Company is entitled
to receive additional  consideration in the form of a six-year earn-out based on
5% of the annual net sales of Nexus after the closing  date, up to $1,000,000 in
the aggregate.

     On September 19, 2006, Nexus Nano Electronics,  Inc. ("NNE"),  as successor
to Sagamore,  and its  subsidiary  filed suit against Jaco in the U.S.  District
Court   for  the   Southern   District   of  New   York   alleging   fraud   and
misrepresentations  by the  Company  in  connection  with the sale of Nexus  and
seeking  an  unspecified  amount  of  damages.  The  Company  believes  that the
plaintiffs'  claims are without merit and intends to contest them  vigorously as
well as assert  counterclaims  for amounts  owed to it in  connection  with such
sale, if this matter is not settled.  Subsequent to the filing of this suit, the
parties  entered into  settlement  discussions  and have reached an agreement in
principle to settle this matter for, among other things, a mutual release of all
disputed  claims  relating  to  this  transaction  and the  cancellation  of the
purchaser's $2.75 million subordinated note held by the Company in consideration
for  NNE's  issuance  to the  Company  of  shares of its  preferred  stock.  The
documentation relating to this proposed settlement has not yet been finalized or

                                       26
<PAGE>


approved by the parties'  respective  boards of directors  and,  therefore,  the
Company cannot assure you that this  settlement will be completed upon the terms
described above or at all.


         Net earnings from these discontinued operations for Fiscal 2005 was
$0.6 million, or $0.09 per diluted share, compared to $0.7 million, or $0.13 per
diluted share for Fiscal year 2004. The decrease in our net earnings from
discontinued operations compared to last year was primarily attributable to the
decrease in net sales and gross profit from discontinued operations, which was
partially offset by the gain on the sale of Nexus.

Combined Net Loss:

         The combined net loss from both our continuing and discontinued
operations for Fiscal 2005 was $4.9 million, or $0.78 per diluted share, as
compared to $0.6 million, or $0.09 per diluted share for Fiscal 2004. The
increase in our combined net loss compared to last year is primarily
attributable to the reduction in our net sales and gross profit margins, as
described above.


Liquidity and Capital Resources

         To provide liquidity and flexibility in funding its operations, the
Company borrows amounts under credit facilities and other external sources of
financing. On December 22, 2003, the Company entered into a Third Restated and
Amended Loan and Security Agreement with GMAC Commercial Finance LLC and PNC
Bank, National Association originally providing for a $50,000,000 (which has
subsequently be reduced to $40,000,000) revolving secured line of credit. This
credit facility has a maturity date of December 31, 2006. Borrowings under the
credit facility are based principally on eligible accounts receivable and
inventories of the Company, as defined in the credit agreement, and are
collateralized by substantially all of the assets of the Company. At June 30,
2006, the outstanding balance on this revolving line of credit facility
currently was $35.1 million, with an additional $1.3 million available. At June
30, 2006, the Company also had outstanding under the credit facility $2.5
million of stand-by letters of credit on behalf of certain vendors ($2.6 million
as of September 20, 2006). The interest rate on the outstanding borrowings at
June 30, 2006 was approximately 9.44%.

         Under the credit agreement, as amended, the Company is required to
comply with the following financial covenants: maintain a Fixed Charge Coverage
Ratio (as defined therein) of 1.2 to 1.0 for the six months ending June 30,
2006, nine months ending September 30, 2006 and for each of the twelve months
ending each quarterly period thereafter; maintain minimum Net Worth (as defined
therein), commencing August 31, 2005, of not less than $40,500,000, increasing
as of the end of each fiscal quarter thereafter by 65% of the net profit for
such quarter, if any, reduced by the amount of specified Special Charges and
Write-offs (as defined therein, which includes the establishment of a valuation
allowance of up to $6.4 million); and a limitation on capital expenditures of
$300,000 for the fiscal year ending June 30, 2006 and for each fiscal year
thereafter. The credit agreement also restricts the Company's ability to pay
dividends. In addition, the agreement includes a subjective acceleration clause
and requires the deposit of customer receipts to be directed to a blocked
account and applied directly to the repayment of indebtedness outstanding under
the credit facility. Accordingly, this debt is classified as a current
liability.

          On September 28, 2005, the Company's credit facility was amended to
waive its non-compliance with certain bank covenants, including maintenance of
minimum Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") and minimum Net Worth, for the quarter ended June 30,

                                       27
<PAGE>


2005.  The  Company's  credit  facility  was also  amended to reduce the maximum
available loan amount from  $50,000,000 to $40,000,000,  and modify the existing
covenants and add  additional  covenants,  including,  among other things to (i)
modify the  Availability  Formula,  (as  defined  therein)  (ii) reset  existing
covenants  for Fixed  Charge  Coverage  Ratio,  minimum  Net  Worth and  Capital
Expenditures  (each as defined therein),  and (iii) add a new covenant regarding
maintenance of Operating Cash Flow each as defined  therein,  which replaced its
former bank covenant regarding minimum EBITDA.

         Commencing with the week ended October 28, 2005, the Company failed to
be in compliance with its four week minimum sales covenant (to which it is no
longer subject). On November 14, 2005, the Company received a waiver from its
lenders to cure its non-compliance.

         At December 31, 2005, the Company was in violation of its Fixed Charge
Coverage Ratio covenant contained in the credit agreement. On February 13, 2006,
the Company's credit facility was further amended, among other things, to (i)
retroactively reset the amounts under its existing Fixed Charge Coverage Ratio
covenant (as described above), (ii) increase the interest rates on outstanding
borrowings by 0.25%, (iii) modify the Availability Formula, (iv) provide for a
temporary additional availability amount of up to $1,500,000 from February 13,
2006 through and including February 20, 2006, of up to $800,000 from February
21, 2006 through and including March 20, 2006, and $0 thereafter, and (v)
require the Company's inventory to be appraised on a semi-annual (rather than
annual) basis by an appraiser designated by its lenders at the cost of the
Company.

         On March 31, 2006, PNC Bank, National Association, one of the original
lenders under the credit agreement, assigned all of its rights and interest in
the credit agreement to The CIT Group/Business Credit, Inc. On May 2, 2006, the
Company's credit agreement was further amended to increase the sublimit on the
aggregate amount of letters of credit permitted to be outstanding thereunder
from $2,000,000 to $3,000,000, effective as of April 24, 2006.

         As of June 30, 2006, the Company was in compliance with all of its
covenants contained in the credit agreement. At June 30, 2006, the Company had
cash of approximately $29,000 and working capital of approximately $4,106,000,
as compared to cash of approximately $321,000 and working capital of
approximately $7,334,000 at June 30, 2005. As described above, our credit
agreement requires our cash generated from operations to be applied directly to
the prepayment of indebtedness under our credit facility.

         For Fiscal 2006, our net cash used in operating activities was
approximately $2.0 million, as compared to net cash used in operating activities
of $5.0 million for Fiscal 2005. The decrease in our net cash used in operating
activities is primarily attributable to the net decrease in current liabilities
for Fiscal 2006, offset by our non-cash write off of $6.4 million of deferred
income taxes, as compared to a substantial decrease in our accounts payable
partially offset by a large advance payment from a specific customer in Fiscal
2005. Net cash used in investing activities was approximately $0.2 million for
the Fiscal 2006, as compared to net cash provided by investing activities of
$8.6 million for the Fiscal 2005. The decrease in net cash provided by investing
activities is primarily attributable to $9.1 million in net proceeds we received
from our sale of substantially all of the assets of Nexus in September 2004. Net
cash provided by financing activities was approximately $2.0 million for the
Fiscal 2006 as compared to net cash used in financing activities of $3.8 million
for the Fiscal 2005. The increase in net cash provided by financing activities
is primarily attributable to an increase in net borrowings under our credit
facility of approximately $5.7 million and the repayment of indebtedness under
our credit facility in Fiscal 2005 with the proceeds from our sale of Nexus.



                                       28
<PAGE>


         For Fiscal 2006 and Fiscal 2005, our inventory turnover was 5.7 and 5.1
times, respectively. The average days outstanding of our accounts receivable at
June 30, 2006 were 53 days, as compared to 57 days at June 30, 2005. Inventory
turnover and average days outstanding are key operating measures that management
relies on to monitor our business.

     Based on preliminary  discussions  with our lenders,  we believe we will be
able to renew our credit  facility on terms similar to those currently in effect
prior to its scheduled maturity on December 31, 2006,  although we cannot assure
you that this renewal  will occur.  Based upon our present  plans,  including no
anticipated  material  capital  expenditures,  we  believe  that  cash flow from
operations and funds  available  under our credit facility will be sufficient to
fund our  capital  needs for the next  twelve  months.  However,  our ability to
maintain  sufficient  liquidity  depends  partially  on our  ability  to achieve
anticipated levels of revenue,  while continuing to control costs, and remaining
in compliance  with our bank covenants.  Historically,  we have, when necessary,
been able to obtain  amendments  or waivers to our credit  facilities to satisfy
instances of  non-compliance  with financial  covenants.  While we cannot assure
that any such  future  amendments  or  waivers,  if needed,  will be  available,
management  believes  we will  be  able  to  continue  to  obtain  financing  on
acceptable  terms under our existing  credit  facility or through other external
sources.  In the  event  that in the  future we are  unable  to  obtain  such an
amendment or waiver of our  non-compliance  with our  financial  covenants,  the
lenders  under our credit  facility  could declare us to be in default under the
facility, requiring all amounts outstanding under the facility to be immediately
due and payable and/or limit the Company's ability to borrow additional  amounts
under the facility. If we did not have sufficient available cash to pay all such
amounts that become due and payable,  we would have to seek  additional  debt or
equity financing through other external  sources,  which may not be available on
acceptable  terms,  or at all.  Failure to maintain  financing  arrangements  on
acceptable terms would have a material  adverse effect on our business,  results
of operations and financial condition.

Off-Balance Sheet Arrangements

         We do not have any off-balance sheet debt, nor do we have any
transactions, arrangements or relationships with any special purpose entities.

Contractual Obligations

         This table summarizes our known contractual obligations and commercial
commitments at June 30, 2006.
<TABLE>

                                    Total         < 1 Year      1 to 3 Years     3 to 5 Years    > 5 Years
                                 ------------- --------------- ---------------- --------------- --------------
                               <S>                     <C>         <C>           <C>
         Long-Term Debt (1)         $35,096,088   $35,096,088               __               __            __
         Capital Lease                  133,725        45,614          $88,111
         Operating Lease              7,359,528     1,371,550        2,139,506       $1,609,072    $2,239,400
                                 ------------- --------------- ---------------- --------------- --------------

         Total                      $42,589,341   $36,513,252       $2,227,617       $1,609,072    $2,239,400
                                 ============= =============== ================ =============== ==============
</TABLE>

(1) Our credit facility currently has a maturity date of December 31, 2006, as
stated above, we believe we will be able to renew this facility or, in the
alternatives refinance the indebtedness outstanding thereunder through
borrowings under a new credit facility, and, therefore, we expect to continue to
have significant long-term debt obligations outstanding after December 31, 2006.

                                       29
<PAGE>


Inflation and Seasonality

         Inflation and seasonality have not had a significant impact on our
operations during the last three fiscal years.



Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

         We are exposed to interest rate changes with respect to borrowings
under our credit facility, which bears interest at a variable rate dependent
upon either the prime rate, federal funds rate or the LIBOR rate ("rates"). At
August 31, 2006, $31.9 million was outstanding under the credit facility.
Changes in any of the rates during the current fiscal year will have a positive
or negative effect on our interest expense. Each 1.0% fluctuation in the rate
will increase or decrease our interest expense under the credit facility by
approximately $0.3 million based on outstanding borrowings at August 31, 2006.

         The impact of interest rate fluctuations on our other floating rate
debt is not material.

Item 8.     Financial Statements and Supplementary Data.

         The financial statements and supplementary data are provided under Item
15 of this report.

Item 9.  Changes  in  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         No response to this item is required.



Item 9A.      Controls and Procedures.

         An evaluation was performed, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of June 30, 2006. Based upon that evaluation, the Company's management,
including its Chief Executive Officer and Chief Financial Officer, has concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure. There have been no significant
changes in the Company's internal control over financial reporting or in other
factors identified in connection with this evaluation that occurred during the
three months ended June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.



Item 9B.    Other Information

         No response to this item is required.



                                       30
<PAGE>





                                    PART III

Item 10.    Directors and Executive Officers of the Registrant.


Code of Ethics

         We have adopted a code of ethics within the meaning of Item 406(b) of
SEC Regulation S-K, called the "Jaco Electronics, Inc. Code of Business
Conduct," which applies to our chief executive officer, chief financial officer,
controller and all our other officers, directors and employees. This document is
available free of charge on our website at www.jacoelectronics.com.

         The other information required by this item is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Shareholders to be held on December 12, 2006, which will be filed with the
SEC not later than October 28, 2006 (the "Proxy Statement").

Item 11.    Executive Compensation.

         The information required by this item is incorporated herein by
reference from the Proxy Statement.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters.


Equity Compensation Plan Disclosure

         The following table summarizes equity compensation plans approved by
security holders and equity compensation plans that were not approved by
security holders as of June 30, 2005:
<TABLE>

Plan category                                    (a)                         (b)                              (C)
                                                                                                    Number of Securities
                                         Number of Securities                                      Remaining Available for
                                          To be Issued Upon           Weighted-Average          Future Issuance Under Equity
                                       Exercise of Outstanding        Exercise Price of         Compensation Plans (Excluding
                                        Options, Warrants and       Outstanding Options,                 Securities
                                                Rights               Warrants and Rights          Reflected in Column (a))
-----------------------------------    -------------------------   ------------------------   ----------------------------------
Equity compensation plans (stock
<S>                                            <C>                          <C>                            <C>
options) approved by stockholders              499,750                      $5.07                          621,250

                                       -------------------------   ------------------------   ----------------------------------
Total                                          499,750                      $5.07                          621,250

</TABLE>



         The other information required by this item is incorporated herein by
reference from the Proxy Statement.

Item 13.    Certain Relationships and Related Transactions.

         The information required by this item is incorporated herein by
reference from the Proxy Statement.


                                       31
<PAGE>



Item 14.    Principal Accountant Fees and Services.

         The information required by this item is incorporated herein by
reference from the Proxy Statement.

<TABLE>

                                     PART IV

Item 15.    Exhibits and Financial Statement Schedules.

                                                                                                          Page
                                                                                                          ----
<S>          <C>                                                   <C>
(a)          (1)    Financial Statements included in Part II, Item 8, of this Report:
                    Index to Consolidated Financial Statements and Schedule                             F-1
                    Report of Independent Registered Public Accounting Firm                             F-2
                    Consolidated Balance Sheets                                                         F-3 - F-4
                    Consolidated Statements of Operations                                               F-5
                    Consolidated Statement of Changes in Shareholders' Equity                           F-6
                    Consolidated Statements of Cash Flows                                               F-7
                    Notes to Consolidated Financial Statements                                          F-8 - F-32
             (2)    Financial Statement Schedule included in Part IV of this
Report:
                    Report of Independent Registered Public Accounting Firm on supplemental             F-33
                    schedule
                    Schedule II - Valuation and Qualifying Accounts                                     F-34
(b)                 See Exhibit Index on pages 33 through 38 of this report for
                    a list of the exhibits filed, furnished or incorporated by
                    reference as part of this report.


</TABLE>



                                       32
<PAGE>





Exhibit No.       Exhibit

3.1               Restated Certificate of Incorporation adopted November, 1987,
                  incorporated by reference to the Company's definitive proxy
                  statement distributed in connection with the Company's annual
                  meeting of shareholders held in November, 1987, filed with the
                  SEC on November 3, 1986, as set forth in Appendix A to the
                  aforesaid proxy statement.

3.1.1             Certificate of Amendment of the Certificate of Incorporation,
                  adopted December, 1995, incorporated by reference to the
                  Company's Annual Report on Form 10-K for the year ended June
                  30, 1996 ("the Company's 1996 10-K"), Exhibit 3.1.1.

3.2               Restated  By-Laws  adopted June 18, 1987,  incorporated by
                  reference to the Company's Annual Report on Form 10-K for the
                  year ended June 30, 1987 ("the Company's 1987 10-K"),
                  Exhibit 3.2.

4.1               Form of Common Stock  Certificate,  incorporated  by reference
                   to the Company's  Registration  Statement on Form S-1,
                  Commission File No. 2-91547, filed June 9, 1984, Exhibit 4.1.

10.1              Sale and leaseback with Bemar Realty Company (as assignee of
                  Hi-Tech Realty  Company),  incorporated  by reference to
                  the Company's Annual Report on Form 10-K for the year ended
                  June 30, 1983, Exhibit 10(1), pages 48-312.

10.2              Amendment No. 1 to Lease between the Company and Bemar Realty
                  Company (as assignee of Hi-Tech Realty Company), incorporated
                  by reference to the Company's Registration Statement on Form
                  S-1, Commission File No. 2-91547, filed June 9, 1984, Exhibit
                  10.2. 10.2.2 Lease between the Company and Bemar Realty
                  Company, dated January 1, 1996, incorporated by reference to
                  the Company's 1996 10-K, Exhibit 10.2.2.

10.6              1993 Non-Qualified Stock Option Plan,incorporated by reference
                  to the Company's 1993 10-K, Exhibit 10.6.

10.6.1            1993 Non-Qualified Stock Option Plan, as amended (filed as
                  Exhibit A to the Company's Definitive Proxy Statement, dated
                  November 3, 1997 for the Annual Meeting of Shareholders held
                  on December 9, 1997.

10.6.2            1993 Non-Qualified Stock Option Plan, as amended (filed as
                  Exhibit A to the Company's Definitive Proxy Statement, dated
                  November 2, 1998 for the Annual Meeting of Shareholders held
                  on December 7, 1998.

10.7              Stock Purchase Agreement,  dated as of February 8, 1994 by and
                  among the Company and Reilrop,  B.V. and Guaranteed by
                  Cray  Electronics  Holdings PLC,  incorporated by reference
                  to the Company's  Current Report on Form 8-K, dated March
                  11, 1994.

10.8              1993 Stock Option Plan for Outside  Directors, incorporated by
                  reference to the Company's Annual Report on Form 10-K
                  for the year ended June 30, 1994, Exhibit 10.8.




                                       33
<PAGE>


10.10             Authorized  Electronic  Industrial  Distributor  Agreement,
                  dated as of August 24,  1970 by and  between AVX and the
                  Company,  incorporated  by reference to the  Company's
                  Annual  Report on Form 10-K for the year ended June 30, 1995,
                  Exhibit 10.10.

10.11             Electronics  Corporation  Distributor  Agreement,  dated
                  November  15, 1974,  by and between  KEMET and the Company,
                  incorporated  by  reference to the  Company's  Annual  Report
                  on Form 10-K for the year ended June 30, 1995,  Exhibit
                  10.11.

10.12             Restricted Stock Plan (filed as Exhibit B to the Company's
                  Definitive  Proxy  Statement,  dated November 3, 1997 for
                  the Annual Meeting of Shareholders held on December 9, 1997).

10.12.1           Form of Escrow Agreement under the Restricted Stock Plan,
                  incorporated by reference to the Company's Registration
                  Statement on Form S-8/S-3, Commission File No. 333 -49877,
                  filed April 10, 1998 Exhibit 4.2.

10.12.2           Form of Stock Purchase Agreement under the Restricted Stock
                  Plan, incorporated by reference to the Company's Registration
                  Statement on Form S-8/S-3, Commission File No. 333 - 49877,
                  filed April 10, 1998 Exhibit 4.3.

10.12.3           Form of Stock Option Agreement,  incorporated by reference to
                  the Company's  Registration  Statement on Form S-8/S-3,
                  Commission File No.333 -49877,filed April 10,1998 Exhibit 4.4.

10.12.4           Restricted Stock Plan (filed as Exhibit B to the Company's
                  Definitive  Proxy  Statement,  dated November 2, 1998 for
                  the Annual Meeting of Shareholders held on December 7, 1998).

10.13             Employment  agreement  between Joel Girsky and the Company,
                  incorporated  by  reference to the  Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998,
                  Exhibit 10.13.

10.13.1           Amendment  No. 1 to  Employment  Agreement  between  Joel
                  Girsky and the  Company,  incorporated  by reference to the
                  Company's Annual Report on Form 10-K for the year ended June
                  30, 2001, Exhibit 10.13.1.

10.14             Employment  Agreement  between Charles Girsky and the Company,
                  incorporated by reference to the Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998,
                  Exhibit 10.14.

10.15             Employment  Agreement between Jeffrey D. Gash and the Company,
                  incorporated by reference to the Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998,
                  Exhibit 10.15.

10.15.1           Amendment No. 1 to the Employment  Agreement  between
                  Jeffrey D. Gash and the Company,  incorporated by reference to
                  the Company's Annual Report on Form 10-K for the year ended
                  June 30, 2001, Exhibit 10.15.1.

10.16             Employment  Agreement, dated June 6, 2000, between the Company
                  and Joseph Oliveri,  incorporated by reference to the
                  Company's Current Report on Form 8-K, filed June 12, 2000,
                  Exhibit 10.16.




                                       34
<PAGE>


10.16.1           Amendment No. 1 to the Employment Agreement between Joseph
                  Oliveri and the Company, incorporated by reference to the
                  Company's Annual Report on Form 10-K for the year ended June
                  30, 2001, Exhibit 10.16.1.

10.17             Stock Purchase  Agreement by and among Jaco  Electronics, Inc.
                  and all of the Stockholders of Interface  Electronics
                  Corporation as of May 4, 2000,  incorporated by reference to
                  the Company's  Current Report on Form 8-K, filed May 15,
                  2000, Exhibit 2.1.

10.17.1           Amendment No. 1 to the Stock Purchase  Agreement by and among
                  Jaco  Electronics,  Inc. and all of the Stockholders of
                  Interface  Electronics Corp.  as of May 4, 2000, dated June 6,
                  2000,  incorporated  by reference  to the  Company's
                  Current Report on Form 8-K, filed June 12, 2000, Exhibit 2.2.

10.18             Agreement  between the Company and Gary Giordano, incorporated
                  by reference to the Company's  Annual Report on Form
                  10-K for the year ended June 30, 2001, Exhibit 10.18.

10.19             Employment  Agreement  between Joel H. Girsky and the Company,
                  incorporated  by  reference to the  Company's  Annual
                  Report on Form 10-K for the year ended June 30, 2001,
                  Exhibit 10.19.

10.20             Employment  Agreement  between Charles Girsky and the Company,
                  incorporated  by reference to the Company's  Annual
                  Report on Form 10-K for the year ended June 30, 2001,
                  Exhibit 10.20.

10.21             Asset Purchase Agreement dated as of May 19, 2003 by and
                  between the Company and Reptron Electronics, Inc.,
                  incorporated by reference to the Company's Current Report on
                  Form 8-K, filed June 26, 2003, Exhibit 2.1.

10.21.1           First Amendment to the Asset Purchase Agreement dated as of
                  June 2, 2003 by and between the Company and Reptron
                  Electronics, Inc., incorporated by reference to the Company's
                  Current Report on Form 8-K, filed June 26, 2003, Exhibit 2.2.

10.22             Second Restated and Amended Loan and Security  Agreement dated
                  September 13, 1995 among the Company,  Nexus Custom
                  Electronics,  Inc.,  BNYCC and NatWest  Bank,  N.A.
                  ("Second  Restated and Amended Loan and Security  Agreement"),
                  incorporated by reference to the Company's  Registration
                  Statement on Form S-2, Commission File No. 33-62559,  filed
                  October 13, 1995, Exhibit 99.8.

10.22.1           Amendment to the Second Restated and Amended Loan and Security
                  Agreement, dated as of April 10, 1996, incorporated by
                  reference to the Company's 1996 10-K, Exhibit 99.8.1.

10.22.2           Amendment to the Second Restated and Amended Loan and Security
                  Agreement, dated as of August 1, 1997, incorporated by
                  reference to the Company's Annual Report on Form 10-K for the
                  year ended June 30, 1998, Exhibit 99.8.2.

10.22.3           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated July 1, 1998, incorporated by reference to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1998, Exhibit 99.8.3.



                                       35
<PAGE>


10.22.4           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated September 21, 1998 incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 1998, Exhibit 99.8.4.

10.22.5           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated October 26, 1999, incorporated by reference to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 1999, Exhibit 99.8.5.

10.22.6           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated December 31, 1999, incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 1999, Exhibit 99.8.6.

10.22.7           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated June 6, 2000, incorporated by reference to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  June 30, 2000, Exhibit 99.8.7.

10.22.8           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated September 28, 2000, incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2000, Exhibit 99.8.8.

10.22.9           Amendment to Second Restated and Amended Loan and Security
                  Agreement dated January 29, 2001, incorporated by reference to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 2000, Exhibit 99.8.9.

10.22.10          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated June 12, 2001, incorporated by reference to
                  the Company's Annual Report on Form 10-K for the year ended
                  June 30, 2001, Exhibit 99.8.10.

10.22.11          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated July 1, 2001, incorporated by reference to the
                  Company's Annual Report on Form 10-K for the year ended June
                  30, 2001, Exhibit 99.8.11.

10.22.12          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated November 14, 2001, incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2001, Exhibit 99.8.12.

10.22.13          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated February 6, 2002, incorporated by reference to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 2001, Exhibit 99.8.13.

10.22.14          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated September 23, 2002, incorporated by reference
                  to the Company's Annual Report on Form 10K for the year ended
                  June 30, 2002, Exhibit 99.8.14.

10.22.15          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated May 12, 2003, incorporated by reference to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  March 31, 2003, Exhibit 99.8.15.

10.22.16          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated June 5, 2003, incorporated by reference to the
                  Company's Current Report on Form 8-K, filed June 26, 2003,
                  Exhibit 99.8.16.




                                       36
<PAGE>


10.22.17          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated September 19, 2003, incorporated by reference
                  to the Company's Annual Report on Form 10-K for the year ended
                  June 30, 2003, Exhibit 99.8.17.

10.22.18          Amendment to Second Restated and Amended Loan and Security
                  Agreement dated November 7, 2003, incorporated by reference to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2003, Exhibit 99.8.18.

10.23             Third  Restated  and Amended  Loan and  Security  Agreement
                  dated as of December 22, 2003, by and among GMAC  Commercial
                  Finance  LLC as  Lender  and as Agent,  PNC  Bank,  National
                  Association, as Lender and Co-Agent, Jaco Electronics, Inc.,
                  Nexus Custom Electronics,  Inc., Interface Electronics Corp.
                  and Jaco de Mexico,  Inc.  ("Third Restated and Amended Loan
                  and Security  Agreement"),  incorporated by reference to the
                  Company's Current Report on Form 8-K, filed January 8, 2004,
                  Exhibit 10.23.

10.23.1           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated  September  20,  2004,  by and  among  GMAC
                  Commercial  Finance  LLC, as Lender and as Agent,  PNC Bank,
                  National   Association,   as  Lender  and   Co-Agent,   Jaco
                  Electronics,   Inc.,  Nexus  Custom  Electronics,  Inc.  and
                  Interface  Electronics  Corp.,  incorporated by reference to
                  the Company's  Annual Report on Form 10-K for the year ended
                  June 30, 2004, Exhibit 10.23.1.

10.23.2           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated  November  23,  2004,  by  and  among  GMAC
                  Commercial  Finance  LLC, as Lender and as Agent,  PNC Bank,
                  National   Association,   as  Lender  and   Co-Agent,   Jaco
                  Electronics,   Inc.,  Nexus  Custom  Electronics,  Inc.  and
                  Interface  Electronics  Corp.,  incorporated by reference to
                  the Company's  Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 2004, Exhibit 10.23.2.

10.23.3           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated  February  11,  2005,  by  and  among  GMAC
                  Commercial  Finance  LLC, as Lender and as Agent,  PNC Bank,
                  National   Association,   as  Lender  and   Co-Agent,   Jaco
                  Electronics,   Inc.,  Nexus  Custom  Electronics,  Inc.  and
                  Interface  Electronics  Corp.,  incorporated by reference to
                  the Company's  Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 2004, Exhibit 10.23.3.

10.23.4           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated May 10, 2005, by and among GMAC  Commercial
                  Finance  LLC,  as Lender  and as Agent,  PNC Bank,  National
                  Association, as Lender and Co-Agent, Jaco Electronics, Inc.,
                  Nexus Custom  Electronics,  Inc. and  Interface  Electronics
                  Corp.,  incorporated by reference to the Company's Quarterly
                  Report on Form 10-Q for the quarter  ended  March 31,  2005,
                  Exhibit 10.23.4.

10.23.5           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated  September  28,  2005,  by and  among  GMAC
                  Commercial  Finance  LLC, as Lender and as Agent,  PNC Bank,
                  National   Association,   as  Lender  and   Co-Agent,   Jaco
                  Electronics,   Inc.,  Nexus  Custom  Electronics,  Inc.  and
                  Interface  Electronics  Corp.,  incorporated by refinance to
                  the Company's  Annual Report on Form 10-K for the year ended
                  June 30, 2005, Exhibit 10.23.5.





                                       37
<PAGE>


10.23.6           Waiver to Third Restated and Amended Loan and Security
                  Agreement  dated  November  14 ,  2005,  by and  among  GMAC
                  Commercial  Finance  LLC, as Lender and as Agent,  PNC Bank,
                  National   Association,   as  Lender  and   Co-Agent,   Jaco
                  Electronics,   Inc.,  Nexus  Custom  Electronics,  Inc.  and
                  Interface  Electronics  Corp.,  incorporated by reference to
                  the Company's  Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2005, Exhibit 10.23.6.


10.23.7           Amendment to Third Restated and Amended Loan and Security
                  Agreement dated February 13, 2006, by and among GMAC
                  Commercial Finance LLC, as Lender and as Agent, PNC Bank,
                  National Association, as Lender and Co-Agent, Jaco
                  Electronics, Inc., Nexus Custom Electronics, Inc and Interface
                  Electronics Corp., incorporated by reference to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended December
                  31,2005, Exhibit 10.23.7.


10.23.8           Amendment to Third Restated and Amended Loan and Security
                  Agreement  dated May  2,2006,  by and among GMAC  Commercial
                  Finance LLC, as Lender and as Agent, The CIT Group /Business
                  Credit,  Inc.,  as Lender and  Co-Agent,  Jaco  Electronics,
                  Inc.,   Nexus  Custom   Electronics,   Inc.  and   Interface
                  Electronics   Corp.,   incorporated   by  reference  to  the
                  Company's  Quarterly  Report  on Form  10-Q for the  quarter
                  ended March 31, 2006, Exhibit 10.23.8.

10.24             Asset  Purchase  Agreement  made  and  entered  into  as of
                  September  20,  2004 among  Sagamore  Holdings,  Inc.,  NECI
                  Acquisition,  Inc., Nexus Custom Electronics,  Inc. and Jaco
                  Electronics,   Inc.,   incorporated   by  reference  to  the
                  Company's  Current Report on Form 8-K,  filed  September 23,
                  2004, Exhibit 10.24.

10.25             2000  Stock  Option  Plan,  incorporated  by  reference  to
                  Exhibit A to the  Company's  Definitive  Proxy  Statement on
                  Schedule  14A,  dated  November 17, 2000,  for the Company's
                  Annual Meeting of Shareholders held on December 12, 2000.

10.26             2000  Stock  Option  Plan,  as  amended,   incorporated  by
                  reference to the  Company's  Annual  Report on Form 10-K for
                  the year ended June 30, 2005, Exhibit 10.26.

21.1              Subsidiaries of the Company.

23                Consent of Grant Thornton LLP.

31.1              Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
                  Officer.

31.2              Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
                  Officer.

32.1              Section 1350 Certification of  Principal Executive Officer.

32.2              Section 1350 Certification of  Principal Financial Officer.




                                       38
<PAGE>




<TABLE>


                                               INDEX TO CONSOLIDATED
                                         FINANCIAL STATEMENTS AND SCHEDULE




                                                                                                Page



Report of Independent Registered Public Accounting Firm
                                                                                                F-2


Financial Statements

<S>                                                                                               <C>   <C>
      Consolidated Balance Sheets                                                               F-3 - F-4


      Consolidated Statements of Operations                                                     F-5


      Consolidated Statement of Changes in Shareholders' Equity                                 F-6


      Consolidated Statements of Cash Flows                                                     F-7


      Notes to Consolidated Financial Statements                                                F-8 - F-32


      Report of Independent Registered Public Accounting Firm on Supplemental Schedule          F-33


      Schedule II - Valuation and Qualifying Accounts                                           F-34


</TABLE>





                                      F-1
<PAGE>






                        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders
     Jaco Electronics, Inc.

We have audited the accompanying consolidated balance sheets of Jaco
Electronics, Inc. (a New York Corporation) and Subsidiaries (the "Company") as
of June 30, 2006 and 2005, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2006. 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 audit included consideration of internal control over
financial reporting as a basis of 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jaco
Electronics, Inc. and subsidiaries as of June 30, 2006 and June 30, 2005, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended June 30, 2006 in conformity with
accounting principles generally accepted in the United States of America.




GRANT THORNTON LLP

Melville, New York
September 28, 2006





                                      F-2
<PAGE>



<TABLE>


                                      Jaco Electronics, Inc. and Subsidiaries

                                            CONSOLIDATED BALANCE SHEETS

                                                     June 30,



                                     ASSETS                                                2006                  2005
                                                                                      --------------        ---------

CURRENT ASSETS
<S>                                                                                     <C>                  <C>
    Cash and cash equivalents                                                           $     29,211         $     321,423
    Accounts receivable, less allowance for doubtful accounts
       of $491,000 in 2006 and $554,000 in 2005                                           36,498,390            34,694,811
    Inventories, net                                                                      33,271,437            37,056,949
    Prepaid expenses and other                                                             1,027,763             1,035,633
    Deferred income taxes                                                                                        3,269,000
                                                                                     ---------------             ---------

         Total current assets                                                             70,826,801            76,377,816


PROPERTY, PLANT AND EQUIPMENT - NET                                                        1,766,467             2,280,809


DEFERRED INCOME TAXES                                                                                            3,125,000


GOODWILL                                                                                  25,416,087            25,416,087

NOTE RECEIVABLE                                                                            2,750,000             2,750,000

OTHER ASSETS                                                                               2,320,296             2,272,701
                                                                                           ---------             ---------


                                                                                        $103,079,651          $112,222,413
                                                                                         ===========           ===========
</TABLE>




    The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>


<TABLE>

                                     Jaco Electronics, Inc. and Subsidiaries

                                      CONSOLIDATED BALANCE SHEETS (continued)

                                                     June 30,



                                 LIABILITIES AND
                              SHAREHOLDERS' EQUITY                                         2006                  2005
                                                                                      --------------        ---------

 CURRENT LIABILITIES
<S>                                                                                      <C>                 <C>
    Accounts payable                                                                     $28,947,720         $  24,717,114
    Current maturities of long-term debt and
       capitalized lease obligations                                                      35,141,702            33,266,185
    Accrued compensation                                                                     950,573             1,289,212
    Accrued expenses and other current liabilities                                         1,640,758             1,419,780
    Unearned revenue                                                                                             8,285,200
    Income taxes payable                                                                      39,812                66,354
                                                                                              ------                ------

         Total current liabilities                                                        66,720,565            69,043,845


 LONG-TERM DEBT AND CAPITALIZED LEASE
    OBLIGATIONS                                                                               88,111                57,451


 DEFERRED COMPENSATION                                                                     1,100,000             1,050,000


 COMMITMENTS AND CONTINGENCIES


 SHAREHOLDERS' EQUITY
    Preferred stock - authorized, 100,000 shares, $10
       par value; none issued
    Common stock - authorized, 20,000,000 shares,
       $.10 par value; 6,954,232 and 6,927,732 shares
        issued in 2006 and 2005, and 6,294,332 and 6,267,832
        shares outstanding in 2006 and 2005                                                  695,423               692,773
    Additional paid-in capital                                                            27,049,999            26,990,374
    Retained earnings                                                                      9,740,119            16,702,536
    Treasury stock - 659,900 shares at cost                                               (2,314,566)           (2,314,566)
                                                                                       -------------         -------------

                                                                                          35,170,975            42,071,117
                                                                                        ------------          ------------

                                                                                        $103,079,651          $112,222,413
                                                                                         ===========           ===========


</TABLE>


The accompanying notes are an integral part of these statements.



                                      F-4
<PAGE>


<TABLE>

                                      Jaco Electronics, Inc. and Subsidiaries

                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                                Year ended June 30,

                                                                           2006               2005                 2004
                                                                        -------------      -------------       ---------
<S>                                                                   <C>                <C>                 <C>
Net sales                                                                   $ 228,520,887    $ 231,824,516    $ 249,100,345
Cost of goods sold                                                            198,316,412      205,924,065      214,389,155
                                                                            -------------    -------------    -------------

       Gross profit                                                            30,204,475       25,900,451       34,711,190

 Selling, general and administrative expenses                                  28,081,652       32,112,561       35,016,383
                                                                            -------------    -------------    -------------

       Operating  income (loss)                                                 2,122,823       (6,212,110)        (305,193)

Interest expense                                                                2,617,770        2,028,631        1,539,007
                                                                            -------------    -------------    -------------

       Loss from continuing operations before income taxes                       (494,947)      (8,240,741)      (1,844,200)


Income tax provision (benefit)                                                   6,467,470      (2,813,575)        (553,131)
                                                                            -------------    -------------    -------------


       Loss from continuing operations                                         (6,962,417)      (5,427,166)      (1,291,069)
                                                                            -------------    -------------    -------------

Discontinued operations:
(Loss) earnings from discontinued operations, net of income tax provision
   (benefit) of $(39,312) and $400,359 in 2005 and
   2004, respectively                                                                              (64,140)         735,498

Gain on sale of net assets of subsidiary, net of income tax
    provision of $449,048                                                                          631,446
                                                                                              -------------    -------------


Earnings from discontinued operations                                                              567,306          735,498
                                                                            -------------    -------------    -------------


       NET LOSS                                                             $  (6,962,417)   $  (4,859,860)   $    (555,571)
                                                                            =============    =============    =============

PER SHARE INFORMATION
    Basic (loss) earnings per common share:
     Loss from continuing operations                                        $       (1.11)   $       (0.87)   $       (0.22)
     Earnings from discontinued operations                                           0.00             0.09             0.13
                                                                            -------------    -------------    -------------
     Net loss                                                               $       (1.11)   $       (0.78)   $       (0.09)
                                                                            =============    =============    =============
    Diluted (loss) earnings per common share:
     Loss from continuing operations                                        $       (1.11)   $       (0.87)   $       (0.22)
     Earnings from discontinued operations                                           0.00             0.09             0.13
                                                                            -------------    -------------    -------------
     Net loss                                                               $       (1.11)   $       (0.78)   $       (0.09)
                                                                            =============    =============    =============
Weighted-average common shares and common equivalent shares outstanding:
      Basic                                                                     6,282,601        6,249,622        5,974,844
                                                                            =============    =============    =============
      Diluted                                                                   6,282,601        6,249,622        5,974,844
                                                                            =============    =============    =============

The accompanying notes are an integral part of these statements.
</TABLE>



                                      F-5
<PAGE>



<TABLE>

                     Jaco Electronics, Inc. and Subsidiaries

                        CONSOLIDATED STATEMENT OF CHANGES
                             IN SHAREHOLDERS' EQUITY

                    Years ended June 30, 2006, 2005 and 2004



                                                                                                           Accumulated
                                                  Common stock         Additional                            other
                                           -----------------------      paid-in           Retained        comprehensive
                                            Shares       Amount         capital           Earnings         income (loss)
                                            ------       ------         -------           --------         -------------


<S>             <C> <C>                     <C>          <C>             <C>             <C>            <C>
Balance at June 30, 2003                    6,425,732    $    642,573    $ 25,152,010    $ 22,117,967   $    (30,327)

Net loss                                                                                      (55,571)
Unrealized loss on marketable
   securities - net of deferred taxes                                                                         67,447
   of $41,339
Exercise of stock options                     429,500          42,950         932,258
Stock options income tax benefits                                             651,027
                                          ------------    ------------    ------------    ------------   ------------

Comprehensive loss

Balance at June 30, 2004                    6,855,232         685,523      26,735,295      21,562,396         37,120

Net loss                                                                                   (4,859,860)
Unrealized gain on marketable
   securities - net of deferred taxes                                                                         31,415
   of $19,254
Reclassification adjustment for gains
on
   marketable securities recognized
   included
   in net loss - net of deferred taxes                                                                        68,535)
   of $42,005
Exercise of stock options                      72,500           7,250         173,250
Stock options income tax benefits

                                                                               81,829
                                           -----------  ------------      ------------    ------------   -----------
Comprehensive loss

Balance at June 30, 2005                    6,927,732         692,773      26,990,374      16,702,536           --

Net loss                                                                                   (6,962,417)
Exercise of stock options                      26,500           2,650          59,625                     ----------



Comprehensive loss


Balance at June 30, 2006                    6,954,232    $    695,423    $ 27,049,999    $  9,740,119   $       --
                                         ============    ============    ============    ============   ============



</TABLE>


<TABLE>


                                                           Total
                                          Treasury    shareholders' Comprehensive
                                           stock         equity           loss
                                           -----         ------           ----


<S>             <C> <C>                <C>             <C>
Balance at June 30, 2003               $ (2,314,566)   $ 45,567,657

Net loss                                                   (555,571) $   (555,571)
Unrealized loss on marketable
   securities - net of deferred taxe                         67,447  $     67,447
   of $41,339
Exercise of stock options                                   975,208
Stock options income tax benefits                           651,027


Comprehensive loss                                                   $   (488,124)
                                                                      ============
Balance at June 30, 2004                 (2,314,566)     46,705,768

Net loss                                                 (4,859,860) $ (4,859,860)
Unrealized gain on marketable
   securities - net of deferred taxe                         31,415  $     31,415
   of $19,254
Reclassification adjustment for gain
on
   marketable securities recognized
   included
   in net loss - net of deferred tax                        (68,535) $    (68,535)
   of $42,005
Exercise of stock options                                   180,500
Stock options income tax benefits

                                                             81,829
Comprehensive loss                                                   $ (4,896,980)
                                                                     ============
Balance at June 30, 2005                 (2,314,566)     42,071,117

Net loss                                                 (6,962,417) $ (6,962,417)
Exercise of stock options                                    62,275



Comprehensive loss                                                   $ (6,962,417)
                                                                     ============

Balance at June 30, 2006               $ (2,314,566)   $ 35,170,975
                                       ============    ============
</TABLE>


o The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>

<TABLE>

                                      Jaco Electronics, Inc. and Subsidiaries
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                Year ended June 30,
                                                                          2006                  2005                 2004
                                                                       ------------         ------------         ------------
Cash flows from operating activities
<S>                                                                     <C>              <C>                   <C>
   Net loss                                                             $(6,962,417)     $    (4,859,860)      $    (555,571)
   Loss (earnings) from discontinued operations                                                   64,140            (735,498)
   Gain on sale of net assets of subsidiary                                                     (631,446)
                                                                   -------------------          ---------   -------------------

   Loss from continuing operations                                       (6,962,417)          (5,427,166)         (1,291,069)

   Adjustments to reconcile net loss to net cash
     used in operating activities
       Depreciation and amortization                                        910,337            1,162,019           1,275,745
       Deferred compensation                                                 50,000               50,000              50,000
       Deferred income tax provision (benefit)                            6,394,000           (3,230,249)           (196,339)
       Stock options income tax expense (benefits)                                                81,829             651,027
       Gain on disposal/sale of equipment                                                                            (49,159)
       Gain on sale of marketable securities                                                    (110,540)
       Provision for doubtful accounts                                      (88,295)             366,100             623,850
       Changes in operating assets and liabilities, net of
         effects of acquisitions
           (Increase) decrease in accounts receivable                    (1,715,284)             865,642          (6,428,438)
           Decrease (increase) in inventories                             3,785,512              (39,559)         (2,458,536)
           Decrease (increase) in prepaid expenses and other                  7,870              728,024            (403,230)
           Decrease in prepaid and refundable income taxes                                                         1,059,897
           (Increase) decrease in other assets                             (218,623)             (39,043)          1,007,404
           Increase (decrease) in accounts payable                        4,230,606           (6,815,927)          4,907,297
           (Decrease) increase in unearned revenue                       (8,285,200)           8,285,200
           Decrease in income taxes payable                                 (26,542)            (387,469)
           (Decrease) increase in accrued compensation                     (338,639)            (292,710)            370,536
           Increase (decrease) in accrued expenses and other                220,978              207,776            (583,750)
                                                                            -------          -----------        -------------
           current liabilities

       Net cash used in continuing operations                            (2,035,697)          (4,596,073)         (1,464,765)
       Net cash used in discontinued operations                                                 (439,405)           (192,076)
                                                                          ----------              -------             -------
       Net cash used in operating activities                             (2,035,697)          (5,035,478)         (1,656,841)
                                                                         -----------          -----------         -----------

Cash flows from investing activities
   Purchase of marketable securities                                                              (8,470)             (8,889)
   Proceeds from sale of marketable securities                                                   829,422
   Capital expenditures                                                    (152,915)          (1,143,080)           (313,461)
   Proceeds from the sale of equipment                                                                                 2,100
   Proceeds from sale of assets of a subsidiary, net of                                        8,990,254
                                                                          ---------         ---------
   transaction costs
                                                                                  -
       Net cash (used in) provided by continuing operations                (152,915)           8,668,126            (320,250)
       Net cash used in discontinued operations                                                  (57,855)           (300,909)
                                                                                                 --------           ---------
       Net cash (used in) provided by investing activities                 (152,915)           8,610,271            (621,159)
                                                                           ---------      --------------        --------------
Cash flows from financing activities
   Borrowings from line of credit                                       221,637,540          250,582,387         266,318,190
   Repayments of line of credit                                        (219,746,562)        (254,376,969)       (264,801,418)
   Release of compensating balance                                                                                   800,000
   Principal payments under equipment financing                             (56,853)             (53,498)           (159,094)
   Payments under term loan                                                                      (35,552)            (33,022)
   Proceeds from exercise of stock options                                   62,275              180,500             975,208
                                                                             ------              -------      --------------


       Net cash provided by (used in) continuing operations               1,896,400           (3,703,132)          3,099,864
       Net cash used in discontinued operations                                                 (102,893)           (426,676)
                                                                                                ---------           ---------
       Net cash provided by (used in) financing activities                1,896,400           (3,806,025)          2,673,188
                                                                          ---------           -----------         -----------

       NET (DECREASE) INCREASE IN CASH                                     (292,212)            (231,232)            395,188

Cash and cash equivalents at beginning of year                              321,423              552,655             157,467
                                                                            -------              -------      ---------------

Cash and cash equivalents at end of year                                $    29,211     $         321,423   $         552,655
                                                                        ===========      ================    ================

Supplemental disclosures of cash flow information: Cash paid during the year
   for:
     Interest                                                      $      2,600,000     $      2,100,000    $      1,841,000
     Income taxes                                                            84,000              101,000             117,000
Supplemental schedule of non-cash financing and investing activities:
     Equipment acquired capital leases                                  $    72,052                         $        130,669
The accompanying notes are an integral part of these statements.


</TABLE>

                                      F-7
<PAGE>


                     Jaco Electronics, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          June 30, 2006, 2005 and 2004


NOTE A - DESCRIPTION OF BUSINESS AND LIQUIDITY MATTERS

     Jaco Electronics, Inc. and Subsidiaries (the "Company") is primarily
     engaged, principally in the United States, in the distribution of
     electronic components, including semiconductors, capacitors, resistors,
     electromechanical devices, flat panel displays and monitors, and power
     supplies, which are used in the manufacture and assembly of electronic
     products. In addition, the Company previously provided contract
     manufacturing services. During the first quarter of fiscal 2005, the
     Company sold its contract manufacturing subsidiary. The results of
     operations for the contract manufacturing subsidiary have been classified
     as to discontinued for all periods presented herein (See Note C).

      The Company incurred net losses of approximately $6,962,000, $4,860,000
     and $556,000 during the years ended June 30, 2006, 2005 and 2004,
     respectively. The Company also utilized approximately $2,036,000 of cash in
     operations during the year ended June 30, 2006. At June 30, 2006, the
     Company had cash of approximately $29,000 and working capital of
     approximately $4,100,000.

     As discussed further in Note F, the Company maintains a secured revolving
     line of credit, which provides the Company with bank financing based upon
     eligible accounts receivable and inventory, as defined. The credit facility
     has a maturity date of December 31, 2006. Based on preliminary discussions
     with our lenders, we believe we will be able to renew our credit facility
     on terms similar to those currently in effect prior to its scheduled
     maturity on December 31, 2006, although we cannot assure this renewal will
     occur. In recent quarters, the Company was, at times, in violation of
     certain financial covenants contained in the credit agreement and was
     required to secure waivers and make further amendments to the credit
     agreement. As of June 30, 2006, the Company was in compliance with all of
     its covenants contained in the credit agreement.

     Management believes that the continued implementation of its plan for cost
     containment, paring back of continued unprofitable product lines, and a
     focused sales and marketing effort should continue to improve results from
     operations and cash flows in the near term. Achievement of this plan,
     however, will be dependent upon the Company's ability to generate
     sufficient revenues, improve operating costs and trade support levels
     consistent with management's plan, and remain in compliance with its bank
     covenants. Such operating performance will be subject to financial,
     economic and other factors beyond the Company's control, and there can be
     no assurance that the Company will be able to achieve these goals. If these
     goals are not achieved or if the Company is unable to remain in compliance
     with its bank covenants, or if the Company is unable to extend its credit
     agreement, it would have a material adverse effect upon the Company.



                                      F-8
<PAGE>






                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A summary of the significant accounting policies applied in the preparation
     of the accompanying consolidated financial statements follows:

     1.  Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
         of Jaco Electronics, Inc. and its subsidiaries, all of which are
         wholly-owned. All significant intercompany balances and transactions
         have been eliminated.

     2.  Revenue Recognition

         The Company derives revenue from the shipment of finished products to
         its customers when title is transferred. Revenue is recognized when it
         is realized or realizable and earned. The Company considers revenue
         realized or realizable and earned when it has persuasive evidence of an
         arrangement, the product has been shipped to the customer, the sales
         price is fixed or determinable and collectibility is reasonably
         assured. The Company reduces revenue for rebates and estimated customer
         returns and other allowances. The Company offers rebates to certain
         customers based on the volume of products purchased.

         The Company's products are sold on a stand alone basis and are not part
         of sales arrangements with multiple deliverables. Revenue from product
         sales is recognized when the product is shipped as the Company does not
         have any obligations beyond shipment to its customers. When the
         shipping terms are FOB shipping point, revenue is recorded as the goods
         leave our facility. In certain instances and to certain customers,
         goods are shipped with shipping terms of FOB destination point. In
         these instances, we determine when the goods are delivered to our
         customer's facility and calculate whether an adjustment to defer
         revenue recognition is required. If such adjustment is material, an
         adjustment is recorded in the financial statements. Historically, such
         adjustments have not been material.

         A portion of the Company's business involves shipments directly from
         its suppliers to its customers. In these transactions, the Company is
         responsible for negotiating price both with the supplier and customer,
         payment to the supplier, establishing payment terms with the customer,
         product returns, and has risk of loss if the customer does not make
         payment. As the principal with the customer, the Company recognizes
         revenue when the Company is notified by the supplier that the product
         has been shipped.

         The Company also maintains a consignment inventory program, which
         provides for certain components to be shipped on-site to a consignee so
         that such components are available for the consignee's use when they
         are required. The consignee maintains a right of return related to
         unused parts that are shipped under the consignment inventory program.
         Revenue is not recognized from products shipped on consignment until
         notification is received from the Company's customer that it has
         accepted title to the inventory that was shipped initially on
         consignment. The items shipped on consignment as to which the customer
         has not yet accepted title are included in the Company's inventories on
         the accompanying balance sheets. Consignment inventory at customer's
         locations amounted to $366,000 and $395,000, respectively, at June 30,
         2006 and June 30, 2005.

                                      F-9
<PAGE>


                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

         NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         At June 30, 2005, the Company had approximately $8,285,000 of unearned
         revenue recorded as a current liability in the accompanying
         consolidated balance sheet. The Company purchased inventory to fulfill
         an existing sales order with a specific customer under an arrangement
         whereby the Company collected in advance the amount due related to this
         order, however, at the customer's request, shipment had not been made
         and the inventory remained in the Company's warehouse for future
         delivery, and was included on the Company's balance sheet as of June
         30, 2005. In fiscal 2006, the Company recognized revenue with respect
         to this arrangement as the product was shipped to the customer and
         title was transferred. As of June 30, 2006, all inventory related to
         this sales order had been shipped.

     3.  Cash and Cash Equivalents

         For purposes of the statements of cash flows, the Company considers
         cash instruments with original maturities of less than three months to
         be cash equivalents.

     4.  Investments in Marketable Securities

         Investments in marketable securities consisted of investments in mutual
         funds. Such investments had been classified as "available-for-sale
         securities" and were reported at fair market value, which was inclusive
         of a gross unrealized gain of $59,871 for the fiscal year ended June
         30, 2004. Realized gains and losses from the sale of available-for-sale
         securities are determined on a specific identification basis. Changes
         in the fair value of available-for-sale securities were included in
         accumulated other comprehensive loss, net of the related deferred tax
         effects. During the year ended June 30, 2005, the Company sold all of
         its marketable securities for an aggregate amount of $829,422. The
         Company recognized a net gain of $110,540 in connection with these
         sales.

     5.  Accounts Receivable

         The Company's accounts receivable are due from a broad range of
         customers in the computer, computer-related, telecommunications, data
         transmission, defense, aerospace, medical equipment and other
         industries. The Company extends credit based upon ongoing evaluations
         of a customer's financial condition and payment history and, generally,
         collateral is not required. Accounts receivable are generally due
         within 30 days and are stated at amounts due from customers net of an
         allowance for doubtful accounts. Accounts outstanding longer than the
         contractual payment terms are considered past due. The Company
         determines its allowance by considering a number of factors, including
         the length of time trade accounts receivable are past due, the
         Company's previous loss history, the customer's current ability to pay
         its obligation to the Company, and the condition of the general economy
         and the industry as a whole. The Company writes-off accounts receivable
         when they become



                                      F-10
<PAGE>




                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

         NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         uncollectible, and payments subsequently received on such receivables
         are credited to the allowance for doubtful accounts. While such
         uncollectible amounts have historically been within the Company's
         expectations and provisions established, if a customer's financial
         condition were to deteriorate, additional reserves may be required.

         The following is a roll-forward of the allowance for doubtful accounts:

                                                       2006            2005
                                                    -------------   ---------


          Beginning balance                         $554,000         $695,000

          Provision for doubtful accounts             88,000          366,000
          Other                                       10,000           89,000
          Write-offs of un-collectible accounts     (161,000)        (596,000)
                                                    ---------         -------

          Ending balance                             $491,000          $554,000
                                                     ========          ========


     6.  Inventories

         Inventories, which consist of goods held for resale, are stated at the
         lower of cost or estimated market value. Cost is determined using the
         first-in, first-out and average cost methods. A provision of $6,115,000
         and $6,875,000 to reduce inventories to their estimated market value as
         of June 30, 2006 and 2005, respectively, has been provided for. The
         Company, with most vendor agreements, receives price protection on
         certain product. The Company accounts for price protection received
         from its vendors in accordance with the provisions of EITF 02-16
         "Accounting for Consideration Given By a Vendor to a Customer." The
         Company records cash consideration or credits received from a vendor
         for inventory price protection as a result of the vendor lowering its
         prices as a reduction of product cost, which is therefore reported as a
         reduction of cost of goods sold in the statement of operations.

     7. Properties, Plant and Equipment

         Property, plant and equipment are stated at cost. Depreciation is
         provided for using the straight-line method over the estimated useful
         life of the assets. The Company capitalizes costs incurred for
         internally developed software where economic and technological
         feasibility has been established. These capitalized software costs are
         being amortized on a straight-line basis over the estimated useful life
         of seven years. Significant improvements are capitalized if they extend
         the useful life of the asset. Routine repairs and maintenance are
         expensed when incurred.

     8.  Goodwill And Other Intangible Assets

         Goodwill represents the excess of the aggregate price paid by the
         Company over the fair market value of the tangible assets acquired in
         business acquisitions accounted for as a purchase.

                                      F-11
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004



     NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


     Goodwill and intangibles with indefinite lives are not subject to
     amortization, but are subject to at least an annual assessment for
     impairment by applying a fair value-based test. The Company performed its
     annual impairment test as of June 30, 2006 and reviewed its seven reporting
     units by comparing the fair value of the reporting unit to its carrying
     amount, including goodwill, and determined that no impairment exists with
     respect to the recorded amount of goodwill.

     Intangible assets with finite lives are amortized over their estimated
     useful lives. Those intangible assets are reviewed for impairment under
     SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
     Assets." Included in other assets on the accompanying balance sheets are
     the costs of identifiable intangible assets, net of accumulated
     amortization of $553,000 and $382,000, aggregating $1,197,000 and
     $1,368,000 at June 30, 2006 and 2005, respectively. Such assets consist of
     franchise agreements that are being amortized on a straight-line basis over
     ten and five years, respectively. Amortization expense on intangible assets
     aggregated approximately $171,000, $297,000 and $308,000 for the fiscal
     years ended June 30, 2006, 2005 and 2004, respectively.

         Expected amortization expense related to intangible assets for the next
five years is as follows:


Year ending June 30,
2007                                                           $171,000
2008                                                            171,000
2009                                                            171,000
2010                                                            171,000
2011                                                            171,000




                                      F-12
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

     9.  Impairment of Long-Lived Assets

         The Company evaluates long-lived assets, including identifiable
         intangible assets, for impairment whenever events or changes in
         circumstances indicate that the carrying value of an asset may not be
         recoverable. Recoverability of assets to be held and used is measured
         by a comparison of the carrying amount of an asset to future expected
         undiscounted cash flows attributable to that asset. The amount of any
         impairment is measured as the difference between the carrying value and
         the fair value of the impaired asset. Fair value is determined
         generally based on discounted cash flows. Assets to be disposed of are
         reported at the lower of the carrying amount or fair value less costs
         to sell.

     10. Income Taxes

         Deferred income taxes are recognized for temporary differences between
         financial statement and income tax bases of assets and liabilities and
         net operating loss carry forwards for which income tax expenses or
         benefits are expected to be realized in future years. A valuation
         allowance is established when necessary to reduce deferred tax assets
         to the amount more likely than not to be realized. During the year
         ended June 30, 2006, the Company recorded a valuation allowance of
         $6,394,000, reducing the carrying value of the deferred tax assets to
         zero. (See Note E.)

     11. Earnings (Loss) Per Common Share

         Basic earnings (loss) per share are determined by dividing the
         Company's net earnings (loss) by the weighted average shares
         outstanding. Diluted earnings (loss) per share include any dilutive
         effects of outstanding stock options.

         Excluded from the calculation of earnings (loss) per share are stock
         options to purchase 499,750, 532,000 and 744,750 common shares in
         fiscal 2006, 2005 and 2004, respectively, as their inclusion would have
         been antidilutive.

    12.  Financial Instruments and Business Concentrations

         Financial instruments, which potentially subject the Company to
         concentration of credit risk, consist principally of accounts
         receivable. Concentration of credit risk with respect to accounts
         receivable is generally mitigated due to the large number of entities
         comprising the Company's customer base, their dispersion across
         geographic areas and industries, along with the Company's policy of
         maintaining credit insurance. The Company routinely addresses the
         financial strength of its customers and, historically, its accounts
         receivable credit risk exposure is limited. Two customers of the
         Company accounted for approximately 13% and 11%, 21% and 13%, and 14%
         and 11% of our total net sales for the fiscal years ended June 30,
         2006, 2005 and 2004, respectively. The loss of anyone of these
         customers could have an adverse impact on the Company's financial
         position or results of operations.

         Statement of  Financial  Accounting  Standards  No. 107 "Fair Value of
         Financial  Instruments"  ("SFAS No. 107"),  requires disclosure of the
         estimated fair value of an entity's financial instrument

                                      F-13
<PAGE>


                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

          assets and liabilities.  The Company's principal financial  instrument
          consists  of a revolving  credit  facility,  expiring on December  31,
          2006,  with two  participating  banks.  The Company  believes that the
          carrying  amount  of such  debt  approximates  the  fair  value as the
          variable  interest rate approximates the current  prevailing  interest
          rate. The carrying amount of accounts  receivable and accounts payable
          approximate  fair  value  due  to the  short  term  maturities  of the
          instruments.  The carrying amount of the note receivable  approximates
          fair value as the current  interest rate  approximates  current market
          interest rates on similar instruments.

         The Company generally purchases products from manufacturers pursuant to
         nonexclusive distributor agreements. During the fiscal year ended June
         30, 2006, products purchased from two suppliers accounted for 27% and
         7%, respectively, of net sales, as compared to 29% and 12% for the
         fiscal year ended June 30, 2005 and 26% and 12% for the fiscal year
         ended June 30, 2004. As is common in the electronics distribution
         industry, from time to time the Company has experienced terminations of
         relationships with suppliers. There can be no assurance that, in the
         event a supplier cancelled its distributor agreement with the Company,
         the Company would be able to replace the sales associated with such
         supplier with sales of other products.

    13.  Use of Estimates

         In preparing financial statements in conformity with accounting
         principles generally accepted in the United States of America,
         management is required to make estimates and assumptions that affect
         the reported amounts of assets and liabilities and disclosure of
         contingent assets and liabilities at the date of the financial
         statements, as well as the reported amounts of revenues and expenses
         during the reporting period. Actual results could differ from those
         estimates. Significant estimates made by management in preparing the
         consolidated financial statements include the allowance for doubtful
         accounts, assessing the collectibility of the note receivable, the
         provision for obsolete or slow moving inventories, the valuation of net
         goodwill and other intangible assets and the valuation of net deferred
         income tax assets.

    14.  Comprehensive Income (Loss)

          Statement  of  Financial   Accounting  Standards  No.  130  "Reporting
          Comprehensive   Income"  ("SFAS  No.  130"),   establishes  rules  for
          reporting  and  display  of   comprehensive   income  (loss)  and  its
          components  in  financial  statements.   Comprehensive  income  (loss)
          consists of net  earnings  (loss) and  unrealized  gains and losses on
          available-for-sale  securities  and is presented  in the  consolidated
          statement of changes in shareholders' equity, net of applicable taxes.

    15.  Shipping and Handling Fees

         Shipping and handling fees charged to customers are included in net
         sales. Shipping and handling expenses paid are included as a component
         of cost of good sold.


                                      F-14
<PAGE>


                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


         NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    16.  Advertising

          Advertising  costs, which are incurred primarily for print advertising
          in trade and  leisure  publications,  are  expensed  as  incurred  and
          totaled  $13,969,  $16,296 and $17,175 for the fiscal years ended June
          30, 2006,  2005 and 2004,  respectively.

    17.  Stock Compensation

         As described more fully in Note I, the Company maintained two stock
         option plans during the fiscal years ended June 30, 2006, 2005 and
         2004. Through June 30, 2005, the Company accounted for our two stock
         option plans under the recognition and measurement principles of APB
         Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
         25"), and related interpretations. Under APB No. 25, compensation
         expense was only recognized when the market value of the underlying
         stock at the date of grant exceeded the amount an employee must pay to
         acquire the stock. Since all stock options granted under our plans were
         to employees, officers or independent directors, and since all stock
         options granted under those plans had an exercise price equal to the
         market value of the underlying common stock on the date of the grant,
         no compensation expense had been recognized in the Company's
         consolidated financial statements in connection with employee stock
         option grants.

         Effective July 1, 2005, the Company adopted SFAS No. 123R, "Share Based
         Payment"("SFAS 123(R)"), which requires that the Company measure the
         cost of employee services received in exchange for an award of equity
         instruments based on the grant-date fair value of the award, and
         recognize that cost over the vesting period. The Company uses the
         modified-prospective-transition method. Under this transition method,
         stock-based compensation cost to be recognized includes: (a)
         compensation cost for all unvested stock-based awards as of July 1,
         2005 that were granted prior to July 1, 2005, based on the grant date
         fair value estimated in accordance with the original provisions of SFAS
         123, and (b) compensation cost for all stock-based awards to be granted
         subsequent to July 1, 2005, based on the grant-date fair value
         estimated in accordance with the provisions of SFAS 123(R).

         Since no stock options were granted during the fiscal year ended June
         30, 2006, no previously issued stock options were modified during
         fiscal year ended June 30, 2006 and there were no unvested stock
         options outstanding as of July 1, 2005, the adoption of SFAS 123(R) has
         had no current impact on the Company's financial position, results of
         operations or cash flows. To the extent that new stock options are
         granted or previously issued stock options are modified in the future,
         the adoption of SFAS 123(R) will have an impact on the Company's
         financial position, results of operations or cash flows.

         Determining Fair Value

         Valuation and Amortization Method--The Company estimates the fair value
         of stock options granted using the Black-Scholes option-pricing formula
         and a single option award approach. This fair value is then amortized
         on a straight-line basis over the requisite service periods of the
         awards, which is generally the vesting period.

                                      F-15
<PAGE>


                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


         NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


         Expected Term--The Company's expected term represents the period that
         the Company's stock-based awards are expected to be outstanding and was
         determined based on historical experience of similar awards, giving
         consideration to the contractual terms of the stock-based awards,
         vesting schedules and expectations of future employee behavior as
         influenced by changes to the terms of its stock-based awards.

         Expected Volatility-- The fair value of stock based payments made
         will be valued using the Black-Scholes valuation method with a
         volatility factor based on the Company's historical stock trading
         history.

         Risk-Free Interest Rate--The Company bases the risk-free interest rate
         used in the Black-Scholes valuation method on the implied yield
         currently available on U.S. Treasury securities with an equivalent
         term.

         Estimated Forfeitures--When estimating forfeitures, the Company
         considers voluntary termination behavior as well as analysis of actual
         option forfeitures.

         Fair Value-- The weighted average fair value of each stock option grant
         is estimated on the date of grant using the Black-Scholes option
         pricing model. There were no stock options granted during the fiscal
         year ended June 30, 2006.

         Prior to the adoption of SFAS 123(R), the Company presented all tax
         benefits of deductions resulting from the exercise of stock options as
         operating cash flows in its statement of cash flows. In accordance with
         guidance in SFAS 123(R), the cash flows resulting from excess tax
         benefits (tax benefits related to the excess of proceeds from
         employee's exercises of stock options over the stock-based compensation
         cost recognized for those options) will be classified as financing cash
         flows. During fiscal year ended June 30, 2006, the Company did not
         record any tax benefits from deductions resulting from the exercise of
         stock options.

         For the fiscal year ended June 30, 2006 and June 30, 2005, there were
         no stock options granted and no stock option expense for stock options
         vesting during the period reported in net loss.

         During the fiscal year ended June 30, 2004, 85,000 stock options were
         granted to certain employees or directors of the Company. These stock
         options had exercise prices ranging from $6.70 to $8.31 and are due to
         expire ten years from the date of grant. The weighted-average fair
         value of these options of $4.83, which was estimated at the date of
         grant using the Black-Scholes option-pricing model with the following
         weighted-average assumption: expected volatility of 80%; risk-free
         interest rate of 3.27%; expected term of 5 years and expected dividend
         yield of 0%.


                                      F-16
<PAGE>




                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


The following table illustrates the effect on net loss and loss per share for
the fiscal years ended June 30, 2005 and 2004 had the Company applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation.
<TABLE>


                                                                         2005                 2004
                                                                    --------------         ------------


<S>                                                                    <C>                    <C>
      Net loss, as reported                                            $(4,859,860)           $(555,571)

      Deduct:  Total stock-based employee
           compensation expense determined under
           the fair value based method for all
           awards, net of related tax effects                             (134,997)            (263,201)
                                                                          ---------            ---------

          Pro forma net loss                                            $(4,994,857)          $(818,772)
                                                                        ============          ==========

      Net loss per common share:
          Basic - as reported                                              $(0.78)              $(0.09)
                                                                           =======              =======
          Basic - pro forma                                                $(0.80)              $(0.14)
                                                                           =======              =======
          Diluted - as reported                                            $(0.78)              $(0.09)
                                                                           =======              =======
          Diluted - pro forma                                              $(0.80)              $(0.14)
                                                                           =======              =======
</TABLE>


18.      Impact of Recently Issued Accounting Pronouncements

         In November 2004, the Financial Accounting Standards Board ("FASB")
         issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43"
         ("SFAS No. 151"), which is the result of its efforts to converge U.S.
         accounting standards for inventories with International Accounting
         Standards. SFAS No. 151 requires idle facility expenses, freight,
         handling costs, and wasted material (spoilage) costs to be recognized
         as current-period charges. It also requires that allocation of fixed
         production overheads to the costs of conversion be based on the normal
         capacity of the production facilities. SFAS No. 151 was effective for
         inventory costs incurred during fiscal years beginning after June 15,
         2005. The adoption of SFAS No. 151 did not have a material impact on
         the Company's consolidated financial statements.



                                      F-17
<PAGE>






                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


         In December 2004, the FASB issued SFAS No. 153, "Exchanges of
         Non-monetary Assets-an amendment of APB Opinion No. 29" ("SFAS No.
         153") SFAS No. 153 amends Opinion 29 to eliminate the exception for
         non-monetary exchanges of similar productive assets and replaces it
         with a general exception for exchanges of non-monetary assets that do
         not have commercial substance. A non-monetary exchange has commercial
         substance if the future cash flows of the entity are expected to change
         significantly as a result of the exchange. SFAS No. 153 is effective
         for fiscal periods after June 15, 2005. The adoption of SFAS No. 153
         did not have a material impact on the Company's consolidated financial
         statements.

         In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
         Error Corrections - a replacement of APB Opinion No. 20 and FASB
         Statement No. 3" ("SFAS No. 154"). Opinion 20 previously required that
         most voluntary changes in accounting principle be recognized by
         including in net income of the period of the change the cumulative
         effect of changing to the new accounting principle. SFAS No. 154
         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. SFAS No. 154 is effective for
         accounting changes and corrections of errors made in fiscal years
         beginning after December 15, 2005. The adoption of SFAS No. 154 is not
         expected to have a material impact on the Company's consolidated
         financial statements.

         In June 2000, the FASB issued FIN No. 48, "Accounting for Uncertainty
         in Income Taxes - an interpretation of FASB Statement No. 109." This
         interpretation clarifies the accounting for uncertainty in income taxes
         recognized in an entity's financial statements in accordance with SFAS
         No. 109 "Accounting for Income Taxes." It prescribes a recognition and
         threshold measurement attribute for financial statement disclosure of
         tax positions taken or expected to be takes on a tax return. The
         Company will be required to adopt the interpretation in the first
         quarter of fiscal 2008. Management is currently evaluating the
         requirements of FIN No. 48 and has not yet determined the impact on the
         consolidated financial statements.

NOTE C - DISCONTINUED OPERATIONS

         On September 20, 2004, the Company completed the sale of substantially
         all of the assets of its contract manufacturing subsidiary, Nexus
         Custom Electronics, Inc. ("Nexus"), to Sagamore Holdings, Inc. for
         consideration of up to $13,000,000, subject to closing adjustments, and
         the assumption of certain liabilities. The divestiture of Nexus has
         allowed the Company to focus its resources on its core electronics
         distribution business. Under the terms of the purchase agreement
         relating to this transaction, the Company received $9,250,000 of the
         purchase consideration in cash on the closing date. Such cash
         consideration was used to repay a portion of the outstanding borrowings
         under the Company's line of

                                      F-18
<PAGE>





                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


NOTE C - DISCONTINUED OPERATIONS (continued)

          credit (See Note F). The  balance of the  purchase  consideration  was
          satisfied  through the  delivery  of a  $2,750,000  subordinated  note
          issued by the purchaser. This note has a maturity date of September 1,
          2009 and bears interest at the lower of the prime rate or 7%. The note
          is payable by the  purchaser in quarterly  cash  installments  ranging
          from $156,250 to $500,000  commencing  September  2006 (which  initial
          payment was not made) and continuing for each quarter thereafter until
          maturity.  Prepayment of the principal of and accrued  interest on the
          note is permitted.  In  accordance  with the purchase  agreement,  the
          Company determined that it was owed an additional $500,000 pursuant to
          a working capital adjustment provided for in the agreement,  which has
          been recorded in the Company's financial statements. The Purchaser has
          disputed the Company's claim to the working capital adjustment and has
          informed the Company that it believes that the Company owes a $500,000
          working  capital  adjustment  to the  purchaser.  Since  this  dispute
          remains  unresolved,   there  has  to  date  been  no  purchase  price
          adjustment  between the Company and Sagamore  that has been agreed to.
          Additionally,   the  Company  is   entitled   to  receive   additional
          consideration  in the form of a six-year  earn-out  based on 5% of the
          annual net sales of Nexus after the closing  date, up to $1,000,000 in
          the aggregate.  As of June 30, 2006, the Company has not earned any of
          the additional consideration.

          On September  19,  2006,  Nexus Nano  Electronics,  Inc.  ("NNE"),  as
          successor  to  Sagamore,  and its  subsidiary  filed suit  against the
          Company in the U.S.  District  Court for the Southern  District of New
          York  alleging  fraud  and   misrepresentations   by  the  Company  in
          connection with the sale of Nexus and seeking an unspecified amount of
          damages.  The Company believes that the plaintiffs' claims are without
          merit  and  intends  to  contest  them  vigorously  as well as  assert
          counterclaims  for amounts owed to it in connection with such sale, if
          this matter is not settled. Subsequent to the filing of this suit, the
          parties  entered  into  settlement  discussions  and have  reached  an
          agreement in principle to settle this matter for,  among other things,
          a mutual release of all disputed claims  relating to this  transaction
          and the  cancellation  of the purhcaser's  $2.75 million  subordinated
          note held by the Company in  consideration  for NNE's  issuance to the
          Company of shares of its preferred stock. The  documentation  relating
          to this proposed  settlement has not yet been finalized or approved by
          the  parties'  respective  boards of  directors  and,  therefore,  the
          Company cannot assure you that this  settlement will be completed upon
          the terms described above or at all.

         Pursuant to the purchase agreement, the purchaser has also entered into
         a contract that designates the Company as a key supplier of electronic
         components to Nexus for a period of five years following the closing
         date. The Company's sales to Nexus were approximately $333,000 and
         $680,000 for the fiscal years ended June 30, 2006, and June 30, 2005,
         respectively, subsequent to the date of sale.

         As a result of the sale of Nexus, the Company no longer engages in
         contract manufacturing. In accordance with the provisions of SFAS No,
         144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
         ("SFAS No. 144"), the Company has accounted for the results of
         operations of Nexus as discontinued in the accompanying consolidated
         statements of operations.


                                      F-19
<PAGE>







                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE C - DISCONTINUED OPERATIONS  (continued)

         A summary of operating results of Nexus for the fiscal years ended June
         30, 2005 and June 30, 2004 were as follows:
<TABLE>

                                                                        2005          2004
                                                                        ----          ----

<S>                                                             <C>              <C>
         Net sales                                              $ 5,208,184      $22,427,191
         Income (loss) from operations before income taxes      $  (103,452)     $  1,135,857
         Gain on sale of net assets before income taxes         $ 1,080,494

</TABLE>


<TABLE>

NOTE D - PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consist of:

                                                                         Useful
                                                                          Life                      June 30,
                                                                                                   ---------
                                                                        in years           2006               2005
                                                                       --------------- -------------      --------

<S>                                                                      <C>  <C>        <C>                <C>
       Machinery and equipment                                           3 to 7          $ 8,526,149        $ 8,312,493
       Internally developed software costs                                 7               2,224,345          2,213,035
       Transportation equipment                                          3 to 5               76,942             76,942
       Leasehold improvements                                            5 to 10             601,218            601,218
                                                                                           ---------           --------

                                                                                          11,428,654         11,203,688

       Less accumulated depreciation and amortization (including
          $120,898 in 2006 and $65,334 in 2005 of capitalized
          lease amortization)                                                             (9,662,187)        (8,922,879)
                                                                                          -----------        -----------

                                                                                        $  1,766,467       $  2,280,809
                                                                                         ===========        ===========
</TABLE>






                                      F-20
<PAGE>





                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


NOTE D - PROPERTY, PLANT AND EQUIPMENT (continued)

     Included in machinery and equipment are assets recorded under capitalized
     leases at June 30, 2006 and 2005 of $202,721 and $130,669, respectively.
     Accumulated amortization of internally developed software costs at June 30,
     2006 and 2005 aggregated $2,022,355 and $1,831,999, respectively.


 NOTE E - INCOME TAXES

     The components of the Company's benefit for income taxes are as follows:
<TABLE>

                                                 Year Ended June 30,
                                             -----------------------
                               2006                  2005                   2004
                          --------------        --------------         ---------
      Federal
<S>                                    <C>                               <C>
         Current                       $            $ (443,067)          $  (394,000)
         Deferred              6,394,449            (2,431,201)             (196,000)
                           -------------        ---------------         -------------

                               6,394,449            (2,874,268)             (590,000)

      State                       73,021                60,693                37,000
                               ---------             ---------              ---------

                            $  6,467,470         $  (2,813,575)            $(553,000)
                               ==========           ==========              ========
</TABLE>

<TABLE>

     The Company's effective income tax rate differs from the statutory U.S.
     Federal income tax rate as a result of the following:

                                                                                     Year Ended June 30,
                                                                                    -----------------------
                                                                           2006               2005              2004
                                                                         --------           ---------         ------

<S>                                                                      <C>                <C>                 <C>
      Statutory U.S. Federal tax rate                                    (34.0)%            (34.0)%             (34.0)%
      State income taxes, net of Federal tax benefit                       9.7               (1.4)                1.4
      Sales expense for which no tax benefit arises                       13.6                1.0                 3.6
      Other                                                                                   0.3                (1.0)
      Valuation Allowance                                              1,317.4               ____                 _____
                                                                       -------             -------              -------

      Effective tax rate                                               1,306.7%             (34.1)%             (30.0)%
                                                                       ========             =====               =====

</TABLE>




                                      F-21
<PAGE>


<TABLE>

                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004



 NOTE E - INCOME TAXES (continued)

     Deferred income tax assets and liabilities resulting from differences
     between accounting for financial statement purposes and tax purposes are
     summarized as follows:

                                                                                        2006                   2005
                                                                                     -----------           --------

       Deferred tax assets
<S>                                                                                    <C>                  <C>
            Net operating loss and other carryforwards                                 $3,590,000           $  2,773,000
            Allowance for bad debts                                                       187,000                210,000
            Inventory valuation                                                         2,514,000              2,855,000
            Deferred compensation                                                         618,000                649,000
            Other deferred tax assets                                                     175,000                172,000
                                                                                          -------             ----------

            Total deferred tax assets                                                   7,084,000              6,659,000

       Deferred tax liabilities
           Depreciation                                                                  (259,000)              (265,000)
                                                                                         ---------              ---------
            Total deferred tax liabilities                                               (259,000)              (265,000)
           Valuation Allowance                                                         (6,825,000)              ________
                                                                                       -----------
       Net deferred tax assets                                                                                 6,394,000


            Less: Current portion                                                                             (3,269,000)
                                                                                         --------             -----------

            Long term deferred tax asset                                                                      $ 3,125,000
                                                                                         $==========           ==========

</TABLE>

     At June 30, 2006, the Company, had available Federal net operating loss
     carry-forwards of approximately $8,180,000, which expire during the fiscal
     years 2024 through 2026.

     In addition, the Company had various state net operating loss carry
     forwards that expire in varying amounts during the fiscal years 2007
     through 2026.

     Realization of the net deferred tax assets would require the Company to
     achieve earnings before taxes of approximately $17,000,000 during the carry
     forward periods. The Company has considered all positive and negative
     factors in determining if the deferred tax asset is realizable. Based on
     these factors, management could not conclude that it is more likely than
     not that the net deferred tax asset will be realized and has established a
     valuation allowance for the full amount of the deferred tax asset at June
     30, 2006 to bring the carrying value of the net deferred tax asset to zero.





                                      F-22
<PAGE>




                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


<TABLE>



NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS

     Debt and capitalized lease obligations are as follows:

                                                                            June 30,
                                                                  2006                    2005
                                                             --------------          ---------

<S>                                                             <C>                    <C>
     Revolving line of credit (a)                               $35,096,088            $33,205,111
     Capitalized lease obligations (b)                              162,888                134,234
                                                                    -------                -------

                                                                 35,258,976             33,339,345

     Less amounts representing interest on capitalized
         lease obligations                                          (29,163)               (15,709)
                                                                    --------               --------

                                                                 35,229,813             33,323,636

     Less current maturities                                    (35,141,702)           (33,266,185)
                                                                ------------           ------------

                                                                    $88,111                $57,451
                                                                    =======                =======
</TABLE>

     (a)   Revolving Line of Credit Facility

           To provide liquidity and flexibility in funding its operations, the
           Company borrows amounts under credit facilities and other external
           sources of financing. On December 22, 2003, the Company entered into
           a Third Restated and Amended Loan and Security Agreement with GMAC
           Commercial Finance LLC and PNC Bank, National Association originally
           providing for a $50,000,000 (which has subsequently been reduced to
           $40,000,000) revolving secured line of credit. This credit facility
           currently has a maturity date of December 31, 2006. Based on
           preliminary discussions with our lenders, we believe we will be able
           to renew our credit facility on similar terms. Borrowings under the
           credit facility are based principally on eligible accounts receivable
           and inventories of the Company, as defined in the credit agreement,
           and are collateralized by substantially all of the assets of the
           Company. At June 30, 2006, the outstanding balance on this revolving
           line of credit facility was $35.1 million, with an additional $1.3
           million available. At June 30, 2006, the Company also had outstanding
           $2.5 million of stand-by letters of credit on behalf of certain
           vendors. The interest rate on the outstanding borrowings at June 30,
           2006 was approximately 9.44%.



                                      F-23
<PAGE>






                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004



NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)

      Under the credit agreement, as amended, the Company is required to comply
      with the following financial covenants: maintain a Fixed Charge Coverage
      Ratio (as defined therein) of 1.2 to 1.0 for the six months ending June
      30, 2006, nine months ending September 30, 2006 and for each of the twelve
      months ending each quarterly period thereafter; maintain minimum Net Worth
      (as defined therein), commencing August 31, 2005, of not less than
      $40,500,000, increasing as of the end of each fiscal quarter thereafter by
      65% of the net profit for such quarter, if any, reduced by the amount of
      specified Special Charges and Write-offs (as defined therein), which
      includes the establishment of a valuation allowance on deferred taxes of
      up to $6.4 million, and a limitation on capital expenditures of $300,000
      for the fiscal year ending June 30, 2006 and for each fiscal year there
      after. The credit agreement also restricts the Company's ability to pay
      dividends. In addition, the credit agreement includes a subjective
      acceleration clause and requires the deposit of customer receipts to be
      directed to a blocked account and applied directly to the repayment of
      indebtedness outstanding under the credit facility.
      Accordingly, this debt is classified as a current liability.

      On September 28, 2005, the Company's credit facility was amended to waive
      its non-compliance with certain bank covenants, including maintenance of
      minimum Earnings Before Interest, Taxes, Depreciation and Amortization
      ("EBITDA") and minimum Net Worth, for the quarter ended June 30, 2005. The
      Company's credit facility was also amended to reduce the maximum available
      loan amount from $50,000,000 to $40,000,000, and modify the existing
      covenants and add additional covenants, including, among other things, to
      (i) modify the Availability Formula (as defined therein), (ii) reset
      existing covenants for Fixed Charge Coverage Ratio, minimum Net Worth and
      Capital Expenditures (each as defined therein), and (iii) add a new
      covenant regarding maintenance of Operating Cash Flow, which replaced its
      former bank covenant regarding minimum EBITDA.

      Commencing with the week ended October 28, 2005, the Company failed to be
      in compliance with its four week minimum sales covenant (to which it is no
      longer subject). On November 14, 2005, the Company received a waiver from
      its lenders to cure its non-compliance.

      At December 31, 2005, the Company was in violation of its Fixed Charge
      Coverage Ratio covenant contained in the credit agreement. On February 13,
      2006, the Company's credit facility was further amended, among other
      things, to (i) retroactively reset the amounts under its existing Fixed
      Charge Coverage Ratio covenant (as described above), (ii) increase the
      interest rates on outstanding borrowings by 0.25%, (iii) modify the
      Availability Formula, (iv) provide for a temporary additional availability
      amount of up to $1,500,000 from February 13, 2006 through and including
      February 20, 2006, of up to $800,000 from February 21, 2006 through and
      including March 20, 2006, and $0 thereafter, and (v) require the Company's
      inventory to be appraised on a semi-annual (rather than annual) basis by
      an appraiser designated by its lenders at the cost of the Company.


                                      F-24
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)


      On March 31, 2006, PNC Bank, National Association, one of the original
      lenders under the credit agreement, assigned all of its rights and
      interest in the credit agreement to The CIT Group/Business Credit, Inc. On
      May 2, 2006 the Company's credit agreement was further amended effective
      as of April 24, 2006, to increase the sublimit on the aggregate amount of
      letters of credit permitted to be outstanding thereunder from $2,000,000
      to $3,000,000.

      As of June 30, 2006, the Company was in compliance with all of its
      covenants contained in the credit agreement.

      In the event that in the future we were to fail to remain in compliance
      with our bank covenants and were not able to obtain an amendment or waiver
      with respect to such noncompliance, the lenders under our credit facility
      could declare us to be in default under the facility, requiring all
      amounts outstanding under the facility to be immediately due and payable
      and/or limit the Company's ability to borrow additional amounts under the
      facility. If we did not have sufficient available cash to pay all such
      amounts that become due and payable, we would have to seek additional debt
      or equity financing through other external sources, which may not be
      available on acceptable terms, or at all. Failure to maintain financing
      arrangements on acceptable terms would have a material adverse effect on
      our business, results of operations and financial condition.

     (b)   Capitalized Lease Obligations

           The Company leases certain equipment under agreements accounted for
           as capital leases. The aggregate obligations for the equipment
           require the Company to make monthly payments through January 19,
           2009, with an implicit interest rate of 15.38%.


                                      F-25
<PAGE>






                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

NOTE F - DEBT AND CAPITALIZED LEASE OBLIGATIONS (continued)

The following is a summary of the aggregate annual maturities of debt and
capitalized lease obligations as of June 30, 2006:

                                                                     Capitalized
                                                 Debt                  Leases
                                                 ----                  ------

                   Year ending June 30,
                       2007                      35,096,088               63,053
                       2008                                               99,835
                                                -------------         ----------

                                                $35,096,088           $  162,888
                                                 ==========            =========


NOTE G - COMMITMENTS AND CONTINGENCIES

     1.  Leases

         The Company leases certain office and warehouse facilities under
         noncancellable operating leases. The leases also provide for the
         payment of real estate taxes and other operating expenses of the
         buildings. The minimum annual lease payments under such leases are as
         follows:

                          Year ending June 30,
                              2007                        $1,371,550
                              2008                         1,205,498
                              2009                           934,008
                              2010                           784,913
                              2011                           824,159
                              Thereafter                   2,239,400
                                                        ------------

                                                          $7,359,528
                                                          ==========


         Included in the above are office and warehouse facilities leased from a
         partnership owned by two officers and directors of the Company. The
         lease expires in December 2013 and requires minimum lease payments of
         $678,000 during the fiscal year ended June 30, 2007. The Company's rent
         expense was approximately $755,000, $755,000 and $678,000 for the years
         ended June 30, 2006, 2005 and 2004, respectively, in connection with
         this lease.

         Rent expense on all office and warehouse facilities leases for the
         years ended June 30, 2006, 2005 and 2004 was approximately $1,565,000,
         $1,791,000 and $1,874,000, respectively.




                                      F-26
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004



NOTE G - COMMITMENTS AND CONTINGENCIES (continued)

     2.  Other Leases

         The Company also leases various office equipment and automobiles under
         noncancellable operating leases expiring through June 2009. The minimum
         rental commitments required under these leases at June 30, 2006 are as
         follows:

                          Year ending June 30,
                              2007                $103,049
                              2008                  60,237
                              2009                  14,053
                                                    ------

                                                  $177,339
                                                  --------

     3.  Employment Agreements

         The Company has entered into employment agreements with three executive
         officers, which provide for annual base salaries aggregating $785,000
         through June 30, 2008 and contain provisions for severance payments in
         the event of change of control as defined in the agreements. The
         Company's agreements with its Chairman and Executive Vice President
         provide for cash bonuses equal to 4% and 2%, respectively, of the
         Company's earnings before income taxes for each fiscal year in which
         such earnings are in excess of $1,000,000, or 6% and 3%, respectively,
         of the Company's earnings before income taxes if such earnings are in
         excess of $2,500,000 up to a maximum annual cash bonus of $720,000 and
         $360,000, respectively. In addition, the Company's agreement with its
         Chairman provides for deferred compensation which accrues at a rate of
         $50,000 per year and becomes payable in its entirety no later than
         January 15 of the year next following his cessation of employment for
         any reason.

         The Company is obligated to provide health insurance to its Chairman
         and Executive Vice President, and their respective spouses, commencing
         upon their termination of employment with Jaco and ending on the later
         to occur of (i) their death or (ii) the death of their respective
         spouses. The Company has adopted Statement of Financial Accounting
         Standards No. 106, "Employer's Accounting for Postretirement Benefits
         Other Than Pension," which requires the Company to recognize the cost
         of providing postretirement benefits over the employees' service
         periods. The recorded liabilities for these postretirement benefits,
         none of which has been funded, amounted to $244,500 at June 30, 2006.
         The weighted-average discount rate used in determining the liability
         was 5.5%, and the annual percentage increase in health costs was 7%.





                                      F-27
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


NOTE G - COMMITMENTS AND CONTINGENCIES (continued)

     4.  Other Matters

         The Company is a party to legal matters arising in the general conduct
         of business. The ultimate outcome of such matters is not expected to
         have a material adverse effect on the Company's business, results of
         operations or financial condition.

5.       Guarantees

         The Company has not entered into any third-party guarantees subsequent
         to December 31, 2002, nor has the Company modified any existing
         third-party guarantees subsequent to that date.


NOTE H - RETIREMENT PLAN

     The Company maintains a 401(k) Plan that is available to all employees, to
     which the Company contributes up to a maximum of 1% of each employee's
     salary. For the years ended June 30, 2006, 2005 and 2004, the Company
     contributed to this plan approximately $98,000, $108,000 and $139,000,
     respectively.


NOTE I - SHAREHOLDERS' EQUITY

     In December 1992, the Board of Directors approved the adoption of a
     nonqualified stock option plan, known as the "1993 Non-Qualified Stock
     Option Plan," hereinafter referred to as the "1993 Plan." The Board of
     Directors or Compensation Committee is responsible for the granting and
     pricing of options under the 1993 Plan. Such price shall be equal to the
     fair market value of the common stock subject to such option at the time of
     grant. The options expire five years from the date of grant and are
     exercisable over the period stated in each option. In December 1997, the
     shareholders of the Company approved an increase in the amount of shares
     reserved for the 1993 plan to 900,000 from 440,000, of which there are no
     outstanding options at June 30, 2006.

     In October 2000, the Board of Directors approved the adoption of the "2000
     Stock Option Plan," hereinafter referred to as the "2000 Plan." The 2000
     Plan, as amended, provides for the grant of up to 1,200,000 incentive stock
     options ("ISOs") and nonqualified stock options ("NQSOs") to employees,
     officers, directors, consultants and advisers of the Company. The Board of
     Directors or Compensation Committee is responsible for the granting and
     pricing of these options. Such price shall be equal to the fair market
     value of the common stock subject to such option at the time of grant. In
     the case of ISOs granted to shareholders owning more than 10% of the




                                      F-28
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


     NOTE I - SHAREHOLDERS' EQUITY (continued)

     Company's voting securities, the exercise price shall be no less than 110%
     of the fair market value of the Company's common stock on the date of
     grant. All options shall expire ten years from the date of grant of such
     option (five years in the case of an ISO granted to a 10% shareholder) or
     on such earlier date as may be prescribed by the Committee and set forth in
     the option agreement, and are exercisable over the period stated in each
     option. Under the 2000 Plan, 1,200,000 shares of the Company's common stock
     are reserved, of which 499,750 are outstanding at June 30, 2006.


     Outstanding options granted to employees, directors and officers for the
     last three fiscal years are summarized as follows:
<TABLE>

                                                                                                               Weighted-
                                                                            Nonqualified                        average
                                                                            stock options                      exercise
                                                                  --------------------------------
                                                                    Price range            Shares                price
                                                                    -----------            ------                -----

<S>                       <C>                                       <C>     <C>          <C>                    <C>
      Outstanding at July 1, 2003                                   $1.79 - $13.71       1,117,250              $3.94

      Granted                                                       $6.70 - $8.31           85,000               6.98
      Expired                                                      $2.75 - $13.71          (28,000)              6.05
      Exercised                                                     $1.79 - $3.25         (429,500)              2.27
                                                                                          ---------

      Outstanding at June 30, 2004                                  $2.35 - $13.71         744,750               5.17

      Expired                                                       $3.25 - $13.71        (140,250)              7.31

      Exercised                                                     $2.35 - $2.50          (72,500)              2.49
                                                                                           ---------
      Outstanding at June 30, 2005                                  $2.35 - $8.31          532,000               4.97

      Expired                                                       $8.00                   (5,750)              8.00
      Exercised                                                     $2.35                  (26,500)              2.35
                                                                                           --------

      Outstanding at June 30, 2006                                  $2.35 - $8.31          499,750              $5.07
                                                                                           =======

      Options exercisable at June 30, 2006                                                 499,750              $5.07
                                                                                           =======

      Options exercisable at June 30, 2005                                                 532,000              $4.97
                                                                                           =======

      Options exercisable at June 30, 2004                                                 659,750              $4.93
                                                                                           =======

</TABLE>



                                      F-29
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004



NOTE I - SHAREHOLDERS' EQUITY (continued)

     The following table summarizes information concerning currently outstanding
     and exercisable nonqualified stock options:
<TABLE>

                                                Options outstanding                         Options exercisable
                                      ----------------------------------------    --------------------------------------
                                                       Weighted-                                 Weighted-
                                                        Average      Weighted-                    average      Weighted-
                                                       Remaining      average                    remaining      average
                                        Number        contractual     exercise      Number      contractual     exercise
       Range of exercise prices       outstanding    life (months)      price    exercisable   life (months)      Price
       ------------------------       -----------    -------------  ----------   -----------   -------------  ---------

<S>        <C>                         <C>                <C>           <C>        <C>               <C>          <C>
           $2.35                       246,000            76            $2.35      246,000           76           $2.35

           $6.01 - $8.31               253,750            63            $7.71      253,750           63           $7.71

</TABLE>


     The Board of Directors of the Company had authorized the purchase of up to
     375,000 shares of its common stock under a stock repurchase program. In
     fiscal 1998, the Board of Directors authorized the repurchase of up to an
     additional 600,000 shares of the Company's common stock. The purchases were
     made by the Company from time to time on the open market at the Company's
     discretion and were dependent on market conditions. The Company had made
     purchases of 618,300 shares of its common stock from July 31, 1996 through
     September 13, 2000 for aggregate consideration of $2,204,515. On September
     14, 2000, the Board of Directors passed a resolution to terminate the stock
     repurchase program.

     On September 18, 2001, the Company announced that its Board of Directors
     authorized the repurchase of up to 250,000 shares of its outstanding common
     stock. Purchases could be made from time to time in open market or private
     transactions at prevailing market prices. The Company made purchases of
     41,600 shares of its common stock for aggregate consideration of $110,051
     during fiscal 2003. The Company made no such purchases of shares of its
     common stock during fiscal 2006, 2005 and 2004.

NOTE J - RELATED PARTY TRANSACTIONS

     During the fiscal years ended June 30, 2006, 2005 and 2004, the Company
     recorded sales of $206,966, $1,065,391 and $5,515,450, respectively, from a
     customer, Frequency Electronics, Inc. ("Frequency"). The Company's Chairman
     of the Board of Directors and President also serves on the Board of
     Directors of Frequency. Such sales transactions with Frequency are in the
     normal course of business. Amounts included in accounts receivable from
     Frequency at June 30, 2006 and 2005 aggregate $17,068 and $206,
     respectively.




                                      F-30
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004


NOTE J - RELATED PARTY TRANSACTIONS (continued)

     A law firm of which one of our directors is a partner in provides legal
     services on behalf of the Company. Fees paid to such firm amounted to
     $63,471, $101,949 and $116,411 for the fiscal years ended June 30, 2006,
     2005 and 2004.

     The son-in-law of the Company's Chairman and President was a partner of a
     law firm during the year ended June 30, 2006, which provides legal services
     on behalf of the Company. Fees paid to such firm amounted to $96,518,
     $315,980 and $142,060 for the fiscal years ended June 30, 2006, 2005, and
     2004, respectively.

     The Company leases office and warehouse facilities lease from a partnership
     owned by two officers and directors of the Company (See Note G). As of June
     30, 2005, this Partnership had advanced the Company $125,000 to fund the
     construction of a new LCD Integration Center. This amount is included as a
     component of accrued expenses and other current liabilities in the
     accompanying balance sheet.


NOTE K - GEOGRAPHIC AND PRODUCT INFORMATION


        Electronic components distribution sales include exports made
        principally to customers located in Western Europe, Canada, Mexico, and
        the Far East. For the years ended June 30, 2006, 2005 and 2004, export
        sales amounted to approximately $75,665,510, $80,584,000 and
        $58,028,000, respectively. Information pertaining to the Company's
        operations in individual geographic areas for fiscal years 2006, 2005
        and 2004 is not considered material to the financial statements.


   The following table provides information regarding product sales to external
customers:


                                                   Year ended June 30,
                                            2006           2005            2004
                                            ----           ----            ----

        Semiconductors              $ 114,674,000    $133,532,000   $132,259,000
        Flat Panel Displays            60,626,000      38,946,000     51,533,000
        Passive components             35,822,000      40,106,000     47,395,000
        Electromechanical devices      17,399,000      19,241,000     17,913,000
                                       ----------      ----------     ----------

        Total                        $ 228,521,000   $231,825,000   $249,100,000
                                       ===========    ===========    ===========



                                      F-31
<PAGE>

                     Jaco Electronics, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                          June 30, 2006, 2005 and 2004

        NOTE L - SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>

                                                                        Quarter ended
                                         June 30,       March 31,   December 31, September      June 30,
                                            2006          2006          2005         2005         2005
                                            ----          ----          ----         ----         ----


<S>                                      <C>          <C>             <C>         <C>          <C>
Net sales                                $67,046,409  $60,905,905     $48,107,541 $52,461,032  $59,083,327
                                         ============ ============

Gross profit                              $8,640,801   $7,781,596      $6,664,660  $7,117,418 $5,051,526(a)
                                          ===========  ===========

Income (Loss) from continuing                $416,132      $83,533 $(7,362,609)(b)  $(99,473) $(1,784,523)
operations
(Loss) earnings from discontinued                                                               $(199,617)
operations
Net Income (loss)                           $416,132       $83,533 $(7,362,609)(b)  $(99,473) $(1,984,140)
                                            =========      =======

Income (Loss) from continuing operations
Basic                                           $0.07        $0.01        $(1.17)     $(0.02)      $(0.29)
Diluted                                         $0.07        $0.01        $(1.17)     $(0.02)      $(0.29)

(Loss) earnings from discontinued operations
Basic                                                                                              $(0.03)
Diluted                                                                                            $(0.03)

Income (Loss) Earnings Per Share
Basic                                           $0.07        $0.01        $(1.17)     $(0.02)      $(0.32)
Diluted                                         $0.07        $0.01        $(1.17)     $(0.02)      $(0.32)

Basic                                       6,294,332    6,293,115      6,275,480   6,267,832    6,267,832
Diluted                                     6,381,941    6,387,780      6,275,480   6,267,832    6,267,832

</TABLE>

<TABLE>

                                                       Quarter ended
                                         March 31,   December 31, September 30,
                                           2005          2004          2004
                                           ----          ----          ----


<S>                                      <C>          <C>            <C>
Net sales                                $60,537,075  $51,967,477    $60,236,637


Gross profit                              $6,666,541   $6,581,012     $7,601,372


Income (Loss) from continuing           $(1,092,847) $(1,535,466)   $(1,014,330)
operations
(Loss) earnings from discontinued                                       $766,923
operations
Net Income (loss)                       $(1,092,847) $(1,535,466)     $(247,407)


Income (Loss) from continuing operations
Basic                                        $(0.17)      $(0.25)        $(0.16)
Diluted                                      $(0.17)      $(0.25)        $(0.16)

(Loss) earnings from discontinued operations
Basic                                                                      $0.12
Diluted                                                                    $0.12

Income (Loss) Earnings Per Share
Basic                                        $(0.17)      $(0.25)        $(0.04)
Diluted                                      $(0.17)      $(0.25)        $(0.04)

Basic                                      6,264,954    6,262,832      6,203,403
Diluted                                    6,264,954    6,262,832      6,203,403

</TABLE>

(a) During the fourth  quarter of fiscal  2005,  an  adjustment  to increase the
reserve for slow-moving and obsolete  inventory of $2,182,660 was recorded.  The
adjustment  primarily  relates to products  that sell due to changes in the U.S.
market  conditions,  and our change in  business  model,  which  focuses on core
product, that we do not expect to sell at the previous carrying values.

(b) During the second quarter of fiscal 2006, the Company recorded a provision
for income taxes of $6,629,000 consisting mainly of a $6,610,500 deferred tax
write-off. The adjustment was made because the Company could no longer conclude
that, based upon the weight of available evidence, it was "more likely than not"
that the deferred tax asset of $6,610,500 would be realized.


                                      F-32
<PAGE>








             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                            ON SUPPLEMENTAL SCHEDULE



Board of Directors and Shareholders
     Jaco Electronics, Inc.

We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of Jaco Electronics, Inc. and Subsidiaries referred to in our report dated
September 28, 2006, which is included in this annual report on Form 10-K. Our
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.



GRANT THORNTON LLP

Melville, New York
September 28, 2006



                                      F-33
<PAGE>



                     Jaco Electronics, Inc. and Subsidiaries

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                    Years ended June 30, 2006, 2005 and 2004
<TABLE>





              Column A                    Column B                  Column C                  Column D            Column E
              --------                    --------         ----------------------------       --------            --------
                                                                   Additions
                                                               (1)            (2)
                                                                            Charged to
                                         Balance at        Charged to          other                              Balance
                                         beginning         costs and        accounts -        Deductions -       at end of
            Description                   of period         expenses         describe           describe           period
            -----------               ------------------   ----------     ------------        -----------        --------

Allowance for doubtful accounts
<S>                 <C> <C>             <C>               <C>               <C>             <C>                 <C>
    Year ended June 30, 2006            $  554,000        $  88,000         $10,000 (a)     $   161,000 (b)     $  491,000
                                         ==========        =========         =======          ==========         =========

    Year ended June 30, 2005             $ 695,000       $  366,000         $89,000 (a)       $ 596,000 (b)     $  554,000
                                           =======        ==========        =======            ========          =========

    Year ended June 30, 2004            $1,288,000       $  624,000         $10,000 (a)     $ 1,227,000 (b)       $695,000
                                         =========        ==========        =======           ==========          ========


Reserve for slow-moving and
   obsolete inventory
    Year ended June 30, 2006             $6,875,000           -                             $   760,000 (c)      $6,115,000
                                         ==========       ==========                         ==========           =========

    Year ended June 30, 2005            $4,732,000       $2,416,000                            $273,000 (c)      $6,875,000
                                         =========       ==========                            ========          ==========

    Year ended June 30, 2004            $4,632,000       $1,532,000                          $1,432,000 (c)      $4,732,000
                                         =========        =========                           =========           =========
    Deferred tax asset
      valuation allowance
    Year ended June 30, 2006          $      -           $6,394,000       $      -          $      -             $6,394,000
                                       =============     ==========        =============     =============       ==========

</TABLE>


(a) Recoveries of accounts.
(b) Represents write-offs of uncollectible accounts. (c) Disposal and sale of
slow-moving and obsolete inventory.




                                      F-34
<PAGE>


<TABLE>



                                   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.

                             JACO ELECTRONICS, INC.
                             By:_/s/ Joel H. Girsky
                         Joel H. Girsky, Chairman of the
                         Board, President and Treasurer

Dated:  September 28, 2006

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

                 Name                                    Title                                  Date

<S>                                                                                                <C> <C>
/s/ Joel H. Girsky                       Chairman of the Board,                          September 28, 2006
-------------------------------------
Joel H. Girsky                           President and Treasurer
                                         (Principal Executive Officer)

/s/ Jeffrey D. Gash                      Executive Vice President-                       September 28, 2006
-------------------------------------
Jeffrey D. Gash                          Finance and Secretary
                                         (Principal Financial and
                                         Accounting Officer)

/s/ Joseph F. Oliveri                    Vice Chairman of the Board                      September 28, 2006
-------------------------------------
Joseph F. Oliveri                        and Executive Vice President

/s/ Charles B. Girsky                    Executive Vice President and                    September 28, 2006
-------------------------------------
Charles B. Girsky                        Director

/s/ Stephen A. Cohen                                                                     September 28, 2006
-------------------------------------
Stephen A. Cohen                         Director

/s/ Edward M. Frankel                    Director                                        September 28, 2006
-------------------------------------

Edward M. Frankel

/s/ Neil Rappaport                       Director                                        September 28, 2006
-------------------------------------
Neil Rappaport

/s/ Robert J. Waldman                    Director                                        September 28, 2006
-------------------------------------
Robert J. Waldman



</TABLE>