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SECURITIES AND EXCHANGE COMMISSION  Form 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934  x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended: October 2, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 1-4817 WHITE ELECTRONIC DESIGNS CORPORATION  Indiana
    
    35-0905052(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3601 E. University DrivePhoenix, Arizona
    
    85034(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code:
    
    602/437-1520
 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock,
    
    NASDAQ National Marketstated value $.10 per share
 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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K.
 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2).   Yes x No o As of April 2, 2004, the aggregate market value of the Registrants Common
Stock held by non-affiliates (based upon the closing price of the shares on the
NASDAQ National Market on April 2, 2004) was approximately $187,776,000. On December 9, 2004, 24,379,251 shares of the Registrants Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS NOTE REGARDING FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
    
    
    3PART I
    
    
    5ITEM 1 BUSINESS
    
    
    5ITEM 2 PROPERTIES
    
    
    21ITEM 3 LEGAL PROCEEDINGS
    
    
    21ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    22EXECUTIVE OFFICERS OF THE COMPANY
    
    
    22PART II
    
    
    23ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
    
    
    23ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
    
    
    23ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
    
    25ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    35ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    35ITEM 9 CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    35ITEM 9A CONTROLS AND PROCEDURES
    
    
    35ITEM 9B OTHER INFORMATION
    
    
    35PART III
    
    
    36ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    36ITEM 11 EXECUTIVE COMPENSATION
    
    
    36ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    36ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    37ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    37PART IV
    
    
    38ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    38SIGNATURES
    
    
    41Report of Independent Registered Public Accounting Firm
    
    
    42Exhibit 10.16Exhibit 10.21Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2




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NOTE REGARDING FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS This Annual Report on Form 10-K, including the Managements Discussion and
Analysis of Financial Condition and Result of Operations and documents
incorporated herein by reference, contains forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
such forward-looking statements. The words believe, expect, estimate,
anticipate, intend, may, might, will, would, could, project and
predict, or similar words and phrases regarding expectations generally
identify forward looking statements. Forward looking statements contained
herein and in documents incorporated by reference herein include, but are not
limited to: our belief that consolidation of our Phoenix locations will be
completed in the first quarter of fiscal 2006; our expectations that
moving and rearrangement costs will not be significant and the amount
of capital expenditures the leasehold improvements will require; our
expectations regarding proceeds from the sale of the land and building; our future shipments of backlog;
our expectation regarding future display segment sales; our expectations
regarding sales, and profits, of microelectronic segment products in the
future; our expectations regarding future gross margins for the Company overall
and for display segment gross margins; our expectations that foreign sales will
continue to account for a significant portion of our sales; our expectations of
an increase in raw material lead times for ceramic packages, memory components,
and display glass materials which may impact net sales and gross margins; our
expectations regarding short supplies for memory components; our expectations
for continued growth for anti-tamper products; our expectations regarding a
trend of reduced weapons procurement by the military; our expectations
regarding the sale of a range of military microelectronic products and related
fluctuations in product mix; our expectations regarding future selling, general
and administrative expenses; our expectations for research and development
costs; our expectations of lower sales in the future compared to the previous
years corresponding quarters; our expectations regarding our effective tax
rate in the future; our expectations regarding future property, plant and equipment
expenditures and our ability to fund such expenditures from current balances
and operations; our expectations regarding the impact of changes in raw
material lead times on inventory levels and the number of days of inventory on
hand ratio; our expectations regarding the ability to fund sales growth
inventory increases from available cash balances and operating cash flows; our
expectations regarding our existing sources of liquidity and their sufficiency
to satisfy cash requirements over the next year; our anticipated use of foreign
sales income exclusions and research and development tax credits; expectations
regarding future amortization expense or goodwill impairment from our Panelview
and IDS reporting units; our expectations regarding the impact of the adoption
of new accounting pronouncements and the impact on our effective tax rate of changes in the law; our expectations regarding future demand for
our products; our expectations regarding the impact that the acquisition of IDS
will have on our business; our expectations regarding changes in sales to
certain industries; our expectations for sales of microelectronic products in
2005; our expectations regarding market acceptance and profitability of our new
products; our expectations regarding future purchases of components including
possible allocations of display and semiconductor components; our expectations
regarding the need to draw on our line of credit; our expectations regarding
the effect of interest rate changes; our expectations regarding the expected
levels of future product development and capital expenditures; our expectations
that cash flow from operations should be sufficient to fund cash needs in the
short and long term; our expectations that we will not pay cash dividends in
the future; our expectations regarding future minimum funding requirements for
our pension plan; our expectations for the future demands for our products,
including anti-tamper products; expectations of future product sales mix and
gross margins; and our expectations for future expected levels of sales and
other operating expenses. We may make additional written or oral forward-looking statements from time to
time in filings with the Securities and Exchange Commission (SEC) or in
public news releases. Such additional statements may include, but not be
limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact
of inflation and plans relating to our products or services, as well as
assumptions relating to the foregoing. Forward-looking statements are based
largely on managements expectations and are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified and are beyond
our control. Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
statements, each of which speaks only as of the date the statement is made.
Statements in this Annual Report on Form 10-K, including those set forth in the
Notes to the Consolidated Financial Statements and the sections entitled
Business and Managements Discussion and Analysis of Financial Condition and
Results of Operations, and under the subheading entitled Risk Factors,
describe factors that could contribute to or cause actual results to differ
materially from our expectations. Additional factors that could cause actual
results to differ materially from those expressed in such forward-looking
statements include the loss of one or more principal customers; the failure of
customers to accept our anti-tamper packaging or the development of improved
anti-tamper packaging by competitors; the inability to procure required
components and raw materials; any downturn in the semiconductor and
telecommunications markets which could cause a decline in selling unit prices;
reductions in military spending or changes in the acquisition requirements for
military products; the ability to locate appropriate acquisition candidates,
negotiate an appropriate purchase price, and integrate into our business the
people, operations, and products from acquired businesses; difficulties
associated with successfully integrating IDS into our business; the inability
to develop, introduce and sell new products or the inability to develop new
manufacturing technologies; changes or restrictions in the 3




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practices, rules and regulations relating to sales in international markets;
and a negative outcome in our current litigation or additional litigation complaints. In addition, new
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor
on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from forward-looking statements.
We do not undertake, and we specifically disclaim, any obligation to publicly
update or review any forward-looking statement contained in this Annual Report
on Form 10-K or in any document incorporated herein by reference, whether as a
result of new information, future events or otherwise. 4




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PART I 
 ITEM 1 BUSINESS 
 GENERAL We design, develop and manufacture innovative microelectronic and display
components and systems for inclusion in high technology products for military,
industrial and commercial markets. Our microelectronic solutions include
advanced semiconductor and state of the art multi-chip packaging, as well as
our proprietary process for applying anti-tamper protection to mission critical
semiconductor components in military applications. Our display solutions
include enhanced flat panel display products, interface devices and
electromechanical assemblies. Our customers, which include military prime
contractors in the United States and Europe as well as commercial original
equipment manufacturers (OEMs), outsource many of their microelectronic and
display components and systems to us as a result of the combination of our
design, development and manufacturing expertise. We are an Indiana corporation, originally incorporated in 1951 as Bowmar
Instrument Corporation (Bowmar). On October 26, 1998, Bowmar merged with
Electronic Designs, Inc. (EDI). In connection with the merger, Bowmar
changed its name to White Electronic Designs Corporation. At the time of the
merger, Bowmar was a manufacturer of high reliability electronic components and
interface and mechanical devices, mainly for military applications.

EDI was a manufacturer of commercial memory products for the telecommunications and data
communications markets and also had a small ruggedized
(manufactured to perform in harsh environments) display business serving
the military and industrial market. The merger provided us with a diversified
platform to expand our product offerings within both the military and
commercial markets. In order to complement our military/industrial display
business, we acquired Panelview, Inc. (Panelview) in January 2001. Panelview
was a designer and manufacturer of enhanced commercial flat panel display
products. Following the acquisition, we consolidated our display operations
into our Panelview subsidiary. In January 2003, we acquired Interface Data
Systems, Inc. (IDS), a designer and manufacturer of membrane keypads,
flexible circuits, sensors, control panels and handheld and desktop electronic
devices. This acquisition allowed us to expand our interface device product
offerings and enhance our subsystem solutions. In addition, with IDS design
and manufacturing capabilities we can offer fully integrated system level
solutions. In September 2003, we completed our consolidation of manufacturing
operations for our commercial memory microelectronic products by moving
operations from our former facility in Marlborough, Massachusetts to our
recently acquired IDS facility in Phoenix, Arizona. In October 2004, we made
the decision to consolidate our two Phoenix locations and sell the IDS
facility. In connection with this, we have signed an
amendment to renew our lease on the headquarters building for ten
years beginning in June 2005 and leasing an additional 31,000 square
feet.



 See our
discussion below under Item 2, Properties, for additional information
regarding the amendment to our headquarters lease. The IDS facility was
put on the market in October 2004. We believe the actual consolidation will be
completed in the first quarter of fiscal 2006. We are headquartered in Phoenix, Arizona. Our mailing address is 3601 E.
University Drive, Phoenix, Arizona, 85034, and our telephone number at that
location is (602) 437-1520. Our website, which contains links to our financial
information and our filings with the SEC, is www.wedc.com. Unless otherwise
indicated in this Annual Report on Form 10-K, White Electronic Designs, us,
we, our, the Company and similar terms refer to White Electronic Designs
Corporation and its subsidiaries as a whole. 
 BUSINESS SEGMENTS We have two business segments, each of which require different design and
manufacturing resources and generally serves customers in different markets.
The microelectronic segment accounted for approximately 56% of our total sales
in fiscal 2004, while the display segment accounted for approximately 44% of
our total sales in fiscal 2004. Financial information for our business
segments is disclosed in Note 17 of the Notes to the Consolidated Financial
Statements. 
 MICROELECTRONIC SEGMENT Our microelectronic segment manufactures semiconductor multichip
packaged products primarily for
memory storage. Our products in the microelectronic segment are generally sold
to military prime contractors and commercial OEMs in the aerospace, defense,
military equipment, computer networking and telecommunication/datacommunication
industries. Certain industries require these semiconductor parts to pass
specific qualifications due to the application requirements for those products.
A commercial grade product generally meets the standard of industries such as
the consumer electronic, computer networking and
telecommunication/datacommunication industries. Higher performing products,
also known as high-reliability products, 5




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are needed in certain industries, such as aerospace, defense, and military
equipment and systems, and are often referred to as military products.
Military products are designed to meet more stringent standards and are
resistant to adverse conditions, such as high and low temperature extremes.
High-reliability products can also be used in commercial and industrial
applications where products are exposed to harsh conditions. We address both military and commercial market opportunities with advanced
semiconductor packaging and microelectronic modules and assemblies. We believe
our microelectronic products generally provide our customers with the following
advantages over standard technology:  
    
    significant space savings and size advantages;
    
    improved power and electrical performance; and
    
    improved component compatibility. In addition, our microelectronic segment also includes our anti-tamper security
processing for mission critical semiconductor components in military
applications. We are one of a limited number of licensees for anti-tamper
technology for microelectronic products, and have developed a proprietary
process for applying anti-tamper protection for mission critical semiconductor
components in military applications. We believe our process offers greater
scalability and increased yields than those of our competitors. The following table describes the key products that we sell in the
microelectronic segment and some of their applications: PRODUCT
    
    SAMPLE APPLICATIONMilitary: System on a substrate
    
     Counter-measure suite of the F-16 Fighting
Falcon Microprocessor modules
    
     Air-to-air missiles, such as the Sidewinder
AIM-9X and AIM-120 AMRAAM Embedded computers used in the Apache
Helicopter, Advanced Amphibious Assault Vehicle
and the Abrams M1A2 Tank Memory modules
    
     Air-to-air missiles, such as the Sidewinder
AIM-9X and AIM-120 AMRAAM Embedded computers used in the Comanche
Helicopter, F-22 Raptor, Patriot PAC-3 Missile
System Radar used in the F/A-18 HornetAnti-tamper technology
    
    Various military programsCommercial: Multi-chip package
    
     Telephone, data, and video communications SDRAM memory module
    
     High-end servers for networking and ERP systems Wireless CDMA base stations Flash memory PC card
    
     Linear Flash PCMCIA Cards Microelectronic system boards
    
     Home entertainment consoles
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Backlog The backlog for microelectronic products, represented by customer purchase
orders, was approximately $28.8 million and $31.7 million at the end of fiscal
years 2004 and 2003, respectively. This decrease was primarily due to lower
military orders due to the shift in military spending priorities.
Approximately 79% of the segments fiscal 2003 backlog was shipped during
fiscal 2004 with the remaining backlog scheduled for shipment in 2005 or
beyond. Approximately 78% of the fiscal 2004 year-end backlog is planned for
shipment during fiscal 2005 with the remaining backlog scheduled for shipment
in fiscal 2006 and beyond. The backlog after fiscal 2005 is a result of
customer scheduling requirements for high-reliability products, and not
constraints on our capacity. Competition In all phases of our operations, we compete primarily based on performance,
quality, durability and price. We have a number of present and potential
competitors, including customers, many of which have greater financial,
technical, marketing, distribution and other resources than we do. Our principal competitors in the military markets are divisions of Aeroflex
Corporation, Austin Semiconductor and Teledyne Microelectronics Group. Our
principal competitors in the commercial microelectronic product markets are
Simple Technology, Smart Module Technology,

Crucial Technology, a division of Micron Semiconductor and Samsung
Memory Modules, a division of Samsung.


We also compete with manufacturers that provide single chip
microelectronic products. 
 DISPLAY SEGMENT The display segment serves a number of markets with products and solutions that
are incorporated into global positioning systems, home appliances, consumer
electronics, medical devices, transportation, outdoor displays, military and
commercial avionics and various military applications. Our products in the
display segment are generally sold to the high-end industrial markets,
including commercial avionics. Our display solutions include enhanced viewing
liquid crystal flat panel display products, interface devices and
electromechanical assemblies. Enhanced viewing liquid crystal displays and
sunlight readable displays can be used in either ruggedized or commercial
applications. Ruggedized displays are manufactured to perform in harsh
environmental conditions, while commercial display products offer greater
viewing performance than off-the-shelf displays, but are not designed for harsh
environmental conditions. Interface devices include electromechanical
components and instrument packages that can consist of ruggedized keyboards,
aircraft trim panels, rotating devices, mechanical packages, membrane keypads,
silver flexible circuits, graphic overlays, control panels and
keypad/controller assemblies. We enhance standard flat panel displays using patented, proprietary and
commercially available technology. We believe our enhanced display products
offer several benefits, including:  
    
    Increased visibility in bright light conditions; super bright low reflectance (SBLR)
    
    Ability to withstand heavy vibration and extreme temperatures; and
    
    Expanded viewing angles Additionally, we combine various display, keyboard, and other components and
their supporting electronics into fully integrated solutions for our customers. 7




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The following table describes key products that we sell in the display segment
and some of their applications: PRODUCT
    
    SAMPLE APPLICATIONMilitary: Mechanical components
    
     Impulse counters, altitude counters,
rounds counters, logicator F-16 trim
panel Super bright low reflectance
technology (SBLR)
    
     Ground based vehicles, such as the
Abrams M1A2 Tank Aircraft displays, such as the Apache
Helicopter, and the F-16 Fighting
FalconCommercial: Display module assembly
    
     Patient monitors Optically enhanced displays
    
     Drive-thru kiosks; medical
instruments; marine navigation;
notebook personal computers; cockpit
instrumentation; automotive test
equipment; Membrane keypads
    
     Home appliances Keypad modules
    
     Hand-held barcode applications
 Backlog The display segment backlog was approximately $22.7 million and $16.0 million
at the end of fiscal years 2004 and 2003, respectively. The increase from the
previous year is attributable to increased orders for our commercial display
products as we worked to replace the orders lost from General Electric Medical
(GE Medical) and Garmin International, Inc. (Garmin), as described below.
Approximately 81% of this segments 2003 backlog was shipped during fiscal 2004
while the remaining backlog is scheduled for shipment in fiscal year 2005 and
beyond. Approximately 90% of the fiscal 2004 year-end backlog is expected to
be shipped during fiscal 2005 with the remaining backlog scheduled for shipment
in fiscal 2006 and beyond. The backlog after 2005 is a result of customer
scheduling requirements for display and military interface products, and not
constraints on our capacity. Competition The principal elements of competition among display product suppliers are
display performance (e.g., brightness, color capabilities, contrast and viewing
angle), size and weight, design flexibility, power usage, durability,
ruggedness and cost. While the primary competition for the active matrix
liquid crystal display (AMLCD) is currently cathode ray tube displays, our
products compete with other flat panel displays including gas plasma and
electro-luminescent displays. We believe that price, product reliability and
the ability to meet delivery schedules are key competitive factors. In all
phases of our operations, we compete primarily based on performance, quality,
durability and price. We have a number of present and potential competitors,
including customers, many of which have greater financial, technical,
marketing, distribution and other resources than we do. In both the military and commercial markets for the display segment, we compete
with numerous companies, such as Global Display Solutions, Planar Systems, and
Polarvision, a division of E. I. Du Pont De Nemours & Co. We also experience
significant competition from the internal capabilities of our current and
potential customers. Commercial customers may also choose to use standard
commercially available display products rather than our enhanced display 8




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products. The marketplace for commercial interface components is highly
fragmented with numerous companies offering similar products, such as Molex and
Durell, as well as competition from companies in Asia. 
 SALES, MARKETING AND DISTRIBUTION We use an integrated sales approach to closely manage relationships at multiple
levels of the customers organization, including management, engineering and
purchasing personnel. This approach involves a team consisting of a senior
executive, a business development specialist, and members of our engineering
department. Our sales team consists of approximately 37 people, including 16
sales managers. Our use of experienced engineering personnel as part of the
sales effort enables close technical collaboration with our customers during
the design and qualification phase of new equipment. We believe that this is
critical to the incorporation of our products into our customers equipment.
Some of our executive officers are actively involved in key aspects of our
relationships with our major customers and work closely with our customers
senior management. We also use manufacturers representatives, independent
sales representatives and distributors as needed. The military sales cycle, and certain commercial product sales, tends to be
long in nature with a protracted design phase. Once a product is designed into
a military system, it is typically sole-sourced to a particular supplier. Due
to the extensive qualification process and potential redesign required for
using an alternative source, customers are reluctant to change the incumbent
supplier. The majority of our business is not affected by seasonality factors;
however, our membrane keypad business is subject to seasonal fluctuations
relating to home appliance sales. Our products are sold with a warranty which differs in terms and conditions
depending on the product and customer. Our products may be subject to repair
or replacement during the warranty period. 
 PRINCIPAL CUSTOMERS Our customers consist mainly of military prime contractors and commercial OEMs,
and the contract manufacturers who work for them, in the United States, Europe
and Asia. Our segments have common customers, mainly in the
aerospace defense industry. Sales to military customers accounted for
approximately $48.1 million, or 44%, of our sales in fiscal 2004 as compared to
approximately $53.7 million, or 47%, in fiscal 2003. Sales to our commercial
customers accounted for approximately $60.9 million, or 56%, of our sales in
fiscal 2004, as compared to approximately $59.8 million, or 53%, in fiscal
2003. In fiscal 2004 no customer accounted for more than 10% of our total net sales.
In fiscal 2004, Whirlpool Corporation accounted for 12% of display segment net
sales. No one customer accounted for more than 10% of microelectronic net
sales in fiscal 2004. In fiscal 2003, Garmin, a display segment customer,
accounted for 11.3% of our total net sales. In fiscal 2002, two customers each
accounted for more than 10% of our total net sales. GE Medical, also a display
segment customer, accounted for 11.5% of total net sales, and Garmin accounted
for 10.8% of total net sales. Due to a change in manufacturing strategies
during the fourth quarter of 2003, sales to GE Medical and Garmin decreased to
2.8% and 1.0% of total net sales, respectively, in fiscal 2004. Total foreign sales for fiscal 2004, 2003, and 2002 were approximately $18.4
million, $27.9 million and $26.8 million, respectively. Additional information
concerning sales by geographic area can be found in Note 17 of the Notes to the
Consolidated Financial Statements.
 Foreign sales decreased in fiscal 2004 primarily due to the loss of
sales to Garmin in Taiwan. 
 RESEARCH, ENGINEERING AND PRODUCT DEVELOPMENT Our research and development efforts primarily involve engineering and design
relating to:  
    
    developing new products;
    
    improving existing products;
    
    adapting existing products to new applications; and
    
    developing prototype components for specific programs. Some of our product development costs are recoverable under contractual
arrangements; however, the majority of these costs are self-funded. Our
research and development expenditures approximated $6.0 million, $6.0 million
and $4.3 million in fiscal 2004, 2003, and 2002, respectively. We believe that
strategic investment in process technology 9




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and product development is essential for us to remain competitive in the
markets we serve. We are committed to maintaining appropriate levels of
expenditures for product development. 
 REGULATORY MATTERS Government Contracting Regulations A significant portion of our business is derived from subcontracts with prime
contractors of the United States government. As a United States government
subcontractor, we are subject to federal contracting regulations. Our
extensive experience in the defense industry enables us to handle the strict
requirements that accompany these contracts. Under federal contracting regulations, the United States government is entitled
for three years after final payment on certain negotiated contracts or contract
modifications to examine all of our cost records with respect to such contracts
to determine whether we furnished complete, accurate, and current cost or
pricing data in connection with the negotiation of the price of the contract or
modification. The United States government also has the right after final
payment to seek a downward adjustment to the price of a contract or
modification if it determines that the contractor failed to disclose complete,
accurate and current data. Historically, we have not experienced any such
downward adjustments. In addition, the Federal Acquisition Regulations govern the allowability of
costs incurred by us in the performance of United States government contracts
to the extent that such costs are included in its proposals or are allocated to
United States government contracts during performance of those contracts. Our subcontracts provide that they may be terminated at the convenience of the
United States government. Upon such termination, the contractor is normally
entitled to receive the purchase price for delivered items, reimbursement for
allowable costs incurred and allocable to the contract, and an allowance for
profit on the allowable costs incurred or adjustment for loss if completion of
performance would have resulted in a loss. In addition, our subcontracts
provide for termination for default if we fail to perform or breach a material
obligation of a subcontract. In the event of a termination for default, the
customer may have the unilateral right at any time to require us to return
unliquidated progress payments pending final resolution of the propriety of the
termination for default. We may also have to pay the excess, if any, of the
cost of purchasing a substitute item from a third party. If the customer has
suffered other ascertainable damages as a result of a sustained default, the
customer could demand payment from us of such damages. Historically, we have
not experienced any such terminations. In connection with our United States government business, we are also subject
to government investigations of our policies, procedures, and internal controls
for compliance with procurement regulations and applicable laws. We may be
subject to downward contract price adjustments, refund obligations or civil and
criminal penalties. In certain circumstances in which a contractor has not
complied with the terms of a contract or with regulations or statutes, the
contractor might be debarred or suspended from obtaining future contracts for a
specified period of time. Any such suspension or debarment would have a
material adverse effect on our business. It is our policy to cooperate with the government in any investigations of
which we have knowledge, but the outcome of any such government investigations
cannot be predicted with certainty. We believe we have complied in all
material respects with applicable government requirements. Environmental Protection Our compliance with federal, state and local laws or regulations, which govern
the discharge of materials into the environment, has not had a material adverse
effect upon our capital expenditures, earnings or competitive position within
our markets. 10




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International Trade Regulations We must comply with laws concerning the export of material used exclusively for
military purposes. The export of those types of materials is covered under
International Traffic in Arms Regulations (ITAR) laws. We applied for and
received a two year license in December 2003 that allows us to export materials
covered under these regulations. 
 RAW MATERIALS The most significant raw materials that we purchase for our operations are
memory devices in wafer, die and packaged component forms for our microelectronic
segment and Active Matrix Liquid Crystal Displays (AMLCDs) for our display
segment. We are highly dependent on one static random access memory (SRAM)
semiconductor manufacturer for memory devices and one package manufacturer of
ceramic packages for military components. Despite the risks associated with
purchasing from single sources, or from a limited number of sources, we have
made the strategic decision to select single source or limited source suppliers
in order to obtain lower pricing, receive more timely delivery and maintain
quality control. We buy the same types of material components typically used
in the commercial commodity markets which we enhance through
packaging, testing, etc.. As a result, we have to monitor the supply
and demand and proactively plan our purchases. We have long-standing strategic
relationships with world class semiconductor and display suppliers. Because of
these capabilities and relationships, we believe we can continue to meet our
customers requirements. In cases where unanticipated customer demand or
supply shortages occur, we attempt to arrange, through strategic relationships
with our semiconductor suppliers, for alternative sources of supply, where
available, or defer planned production to meet anticipated availability of
critical components or materials. We do not have specific long-term
contractual arrangements with our vendors, but we believe we have good
relationships with our vendors. 
 INTELLECTUAL PROPERTY We rely upon trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. The products we
sell from both our microelectronic segment and our display segment require a
large amount of engineering design and manufacturing expertise. The majority
of these technological capabilities, however, are not protected by patents and
licenses. We rely on the expertise of our employees and our learned
experiences in both the design and manufacture of our products. It is
possible, and it has occurred in the past, that a competitor may also learn to
design and produce products with similar performance abilities as our products.
If a competitor were to do so, it may result in increased competition and a
reduction of sales for our products. Our trade secret protection for our technology, including our process for
applying anti-tamper protection to microelectronic products, is based in part
on confidentiality agreements that we enter into with our employees,
consultants and other third parties. However, these parties may breach these
agreements, and since many agreements are made with companies much larger than
us, we may not have adequate financial resources to adequately enforce our
rights. Others may also come to know about or determine our trade secrets. In
addition, the laws of certain territories in which we develop, manufacture or
sell our products may not protect our intellectual property rights to the same
extent as the laws of the United States. We have been issued a patent (patent #6181394B1) from the United States Patent
and Trademark Office for our Super Bright Low Reflectance (SBLR) technology.
This technology significantly reduces glare and reflections in liquid crystal
displays while simultaneously increasing brightness. This patent expires in
January 2018. We have applied for five patents, three of which relate to our
anti-tamper manufacturing process. 
 EMPLOYEES As of November 27, 2004, we had approximately 518 employees, including 54 in
sales and marketing, 59 in research, development and engineering, 355 in
manufacturing, purchasing and quality assurance, and 50 in general and administrative.
Approximately 38 of our employees in the display segment are employed pursuant
to a three year collective bargaining agreement covering workers at our Fort
Wayne, Indiana facility that was ratified on November 24, 2004. We believe
our relationship with our employees is good. 11




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FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT See Note 17 of the Notes to the Consolidated Financial Statement for
information relating to foreign sales by geographic segment. 
 RISK FACTORS We are dependent on sales to defense-related companies for a large portion of
our net sales and profits, and changes in military spending levels and patterns
could negatively affect us. Our current orders from defense-related companies account for a material
portion of our overall net sales. Military sales accounted for approximately
44%, 47% and 54% of our total net sales in fiscal 2004, 2003 and 2002,
respectively. Military spending levels depend on factors that are outside of
our control. Reductions or changes in military spending could have a material
adverse effect on our sales and profits.

During the second quarter of 2004, and throughout the balance of
fiscal 2004, we began to see delays in award releases for several
major programs. We believe that because of the unexpected length and

cost of the war in Iraq and as part of a broad overhaul of U.S.
priorities, funds from weapons and equipment have been reallocated in
support of the wars operations.

In addition, the United States
defense industry is moving toward the purchase of commercial off-the-shelf
products rather than those designed and manufactured to higher military
specifications. To the extent that our products are substituted with
commercial off-the-shelf products, our operations would suffer. Even if
military spending continues to increase, shifts in military 12




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spending away from high technology programs to areas that we do not supply,
such as personnel and infrastructure, would also negatively affect our sales
and profits. We have made and we may make other acquisitions and we cannot assure you that
any potential acquisition will be successful. We are looking for strategic opportunities to grow and diversify our product
offerings through acquisitions. There can be no assurance that we will be
successful in integrating the operations of IDS, identifying other appropriate
acquisition candidates, or integrating products and operations with any such
candidates, which we may acquire. Any such acquisitions could involve the
dilutive issuance of equity securities and/or the incurrence of debt. In
addition, acquisitions may involve numerous additional risks, including:  
    
    the diversion of the attention of our management team from
other business concerns;
    
    risks of entering into markets or producing products where we
have limited or no experience, including the integration of the
purchased technologies and products with our technologies and
products;
    
    the potential loss of key customers of an acquired company;
    
    the potential loss of key personnel of an acquired company;
    
    exposure to unanticipated liabilities of an acquired company; and
    
    the recording of goodwill and non amortizable intangible
assets that will be subject to impairment testing on a regular basis
and potential periodic impairment charges. Even when an acquired company has already developed and marketed products,
there can be no assurance that the products will continue to be successful,
that product enhancements will be made in a timely fashion or that
pre-acquisition due diligence will have identified all possible issues that
might arise with respect to the acquired company or its products. Our customers may cancel their orders, change production quantities or delay
production at any time, which could materially reduce our net sales and
operating results. We generally do not receive firm, long-term purchase commitments from our OEM
customers. Customers may cancel their orders, change production quantities or
delay production for a number of reasons. Many of our customers industries
are experiencing a significant decrease in demand for their products and
services. The generally uncertain economic condition of several of the
industries of our customers has resulted, and may continue to result, in some
of our customers delaying the delivery of some of the products we manufacture
for them, and placing purchase orders for lower volumes of products than
originally anticipated. Cancellations, reductions or delays by a significant
customer or by a group of customers would seriously harm our results of
operations for a period by reducing our net sales in that period. In addition,
because many of our costs and operating expenses are fixed, a reduction in
customer demand could harm our gross profit and operating income. We have a highly concentrated customer base and, as a result, our net sales
could decline significantly if we lose a major customer. A large portion of our net sales has been derived from sales to a small number
of our customers. Our five largest customers accounted for approximately 22%
and 32% of our net sales in fiscal year 2004 and fiscal year 2003,
respectively. Our customers are not subject to any minimum purchase
requirements and can discontinue the purchase of our products at any time. In
the event one or more of our major customers reduces, delays or cancels orders
with us, and we are not able to sell our services and products to new customers
at comparable levels, our net sales could decline significantly. In addition,
any difficulty in collecting amounts due from one or more key customers would
negatively impact our results of operations. 13




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We depend on military prime contractors and commercial OEM customers for the
sale of our products and the failure of these customers to achieve significant
sales of products incorporating our components would reduce our net sales and
operating results. We sell substantially all of our products to military prime contractors and
commercial OEMs. The timing and amount of sales to these customers ultimately
depend on sales levels and shipping schedules for the products into which our
components are incorporated. We have no control over the volume of products
shipped by our military prime contractors and commercial OEM customers or
shipping dates, and we cannot be certain that our military prime contractors
and OEM customers will continue to ship products that incorporate our
components at current levels or at all. Our business will be harmed if our
military prime contractors and OEM customers fail to achieve significant sales
of products incorporating our components or if fluctuations in the timing and
volume of such sales occur. Failure of these customers to inform us of changes
in their production needs in a timely manner could also hinder our ability to
effectively manage our business. We depend on the continuing trend of outsourcing by commercial OEMs and prime
military contractors. Our net sales and future growth in our net sales depend in part on outsourcing,
in which we assume additional manufacturing and supply chain management
responsibilities from commercial OEMs and military prime contractors. To the
extent that these opportunities are not available, either because commercial
OEMs or military prime contractors decide to perform these functions
internally, or because they use other providers of these services, our results
of operations may be adversely affected. Our failure to comply with United States government laws and regulations would
reduce our ability to be awarded future military business. We must comply with laws and regulations relating to the formation,
administration and performance of federal government contracts as passed down
to us by our customers in their purchase orders, which affects our military
business and may impose added cost on our business. We are subject to
government investigations of our policies, procedures, and internal controls
for compliance with procurement regulations and applicable laws. If a
government investigation uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative sanctions, including
the termination of our contracts, the forfeiture of profits, the suspension of
payments owed to us, fines, and our suspension or debarment from doing business
with federal government agencies. Since military sales accounted for
approximately 44% and 47% of our business in fiscal year 2004 and fiscal year
2003, respectively, any debarment or suspension of our ability to obtain
military sales would greatly reduce our overall net sales and profits, and
would likely affect our ability to continue as a going concern. We may have an adverse resolution of litigation which may harm our operating
results or financial condition. We are a party to lawsuits in the normal course of our business. In addition,
we are defendents in several shareholder class action lawsuits. Litigation can
be expensive, lengthy, and disruptive to normal business operations. Moreover,
the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of a particular lawsuit could have a material adverse
effect on our business, operating results, or financial condition. For
additional information regarding certain of the lawsuits in which we are
involved, see Item 3, Legal Proceedings, contained in Part I of this report. We may fail to meet expectations because our net sales, gross profits and net
income are very likely to fluctuate from period to period. Our operating results have varied in the past and will likely continue to
fluctuate. In connection with our business, a wide array of factors could
cause our net sales, gross profits and net income to fluctuate in the future
from period to period. In addition to other factors mentioned in this report,
primary factors that might affect our results of operations in this regard
include:  
    
    our inability to adjust expenses for any particular quarter
in response to net sales shortfalls because a substantial component
of our operating expenses are fixed costs;
    
    the cyclical nature of the markets in which we serve; 14




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
    
    any adverse changes in the mix of products and types of
manufacturing services that we provide (e.g., high volume and low
complexity commercial keypads have lower gross margins than high
complexity microelectronic devices for defense contractors);
    
    the complexity of our manufacturing processes and the
sensitivity of our production costs to declines in manufacturing
yields, which make yield problems both possible and costly when they
occur;
    
    expenses associated with acquisitions; and
    
    general economic conditions. As a result of any of these or other factors, we could fail to achieve our
expectations as to future net sales, gross profits and net income. Any
downward fluctuation or failure to meet expectations will likely adversely
affect the value of an investment in our securities. Due to the foregoing
factors, it is likely that in some future periods our operating results will be
below the expectations of public market analysts and investors and, as a
result, the market price of our common stock may decline. We have a lengthy sales cycle, which increases the likelihood that our
quarterly net sales will fluctuate and which may, in turn, adversely affect the
market price of our common stock. Due to the complexity of our technology, our customers perform, and require us
to perform, extensive process and product evaluation and testing, which results
in a lengthy sales cycle. Our sales cycles often last for several months, and
may last for up to a year or more. As a result of this lengthy sales cycle,
our net sales and operating results may vary unpredictably from period to
period. This fact makes it more difficult to forecast our quarterly results
and can cause substantial variations in operating results from quarter to
quarter that are unrelated to the long-term trends in our business. This lack
of predictability and variability in our results could adversely affect the
market price of our common stock in particular periods. Our failure to detect unknown defects in our products could materially harm our
relationship with customers, our reputation and our business. Notwithstanding the testing that we perform on our products, defects could be
found in our existing or new products. These defects could result in product
liability or warranty claims. In addition, any defects found in our products
could result in a loss of net sales or market share, failure to achieve market
acceptance, injury to our reputation, indemnification claims, litigation,
increased insurance costs and increased service costs, any of which could
discourage customers from purchasing our products. Although we maintain a
warranty reserve, we cannot be certain that this reserve will be sufficient to
cover our warranty or other expenses that could arise in the future as a result
of defects found in our products. Our operating results could be seriously harmed if the markets in which we sell
our products do not grow. Our continued success depends in large part on the continued growth of various
market sectors that use our products, including the following:  
    
    defense and aerospace equipment;
    
    computers and computer related peripherals;
    
    medical electronics and equipment;
    
    home appliances;
    
    consumer electronics;
    
    industrial controls; and 15




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
    
    telecommunication/datacommunication equipment. Approximately 16% of our product sales for fiscal year 2004 and 12% of our
product sales for fiscal year 2003 were incorporated into data communication
end products. The telecommunications industry is making a soft recovery, and
we believe this recovery will be slow as companies gradually use up their
excess network capacity. Slower growth in the other markets in which we sell
our products could reduce our sales, adversely affecting our business,
financial condition and results of operations. For example, decreases in
demand in the consumer electronics and home appliance markets, could negatively
impact our sales and profits for our recently acquired subsidiary, IDS. If our operating results decline or our reporting units do not generate
sufficient cash flow, our goodwill and intangible assets may become impaired. At October 2, 2004, we had approximately $22.7 million of goodwill and
intangible assets on our balance sheet. These assets are mainly the result of
our acquisitions of Panelview and IDS. If the actual cash flow from our
reporting units declines, or if our estimates of future cash flows for our
reporting units decline, the related goodwill and intangible assets may become
impaired. If the carrying amount of the reporting unit exceeds the fair value
of that reporting unit, an impairment loss would be recognized. Further downturns in the industries in which we operate could reduce the value
of our inventories and cause a reduction in our profits. We have experienced reductions in the value of our inventories due to
unexpected demand declines, resulting from a softening of the semiconductor and
telecommunications industries. Such declines have caused us to write down
several million dollars worth of inventory, which greatly reduced our profits
for the given period. In 2001, for example, we reserved approximately $4.3
million in excess inventory. If any of the markets in which our customers
operate suffers a decline, we may be forced to write down existing inventory,
which could adversely affect our results of operations. We utilize manufacturing resources in Asia and Mexico, which limits our control
of the manufacturing process. As part of our strategy to decrease manufacturing costs, we outsource some of
our manufacturing requirements to strategic partners in Taiwan, China, the
Philippines and Mexico. Outsourcing, particularly with international
manufacturers, carries certain risks, including:  
    
    the outsourcing contractors ability to manufacture products
that meet our technical specifications and that have minimal
defects;
    
    the outsourcing contractors ability to honor their product
warranties;
    
    the financial solvency, labor concerns and general business
condition of our outsourcing contractors;
    
    unexpected changes in and the burdens and costs of compliance
with a variety of foreign laws and regulatory requirements;
    
    increased chances of our intellectual property being
infringed as a result of the failure of foreign governments to
enforce the protection of intellectual property rights; and
    
    political and economic instability in overseas locations. We are dependent on international markets for a large portion of our purchases
and sales. Foreign suppliers of semiconductor and display related materials are regularly
threatened with, or involved in, pending trade disputes and sanctions. For
example, during the period between 1997 and 1999, we were forced to pay high
tariffs to import various semiconductor parts from Taiwan. If trade disputes
or sanctions arise that affect our suppliers, we may be unable to obtain access
to critical sources of raw materials that we need to produce our products, in
which event our business could be adversely affected. 16




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We anticipate that our foreign sales will continue to account for a significant
portion of our net sales. Foreign sales accounted for approximately 17% and
25% of our overall sales for fiscal year 2004 and fiscal year 2003,
respectively. Approximately $16.6 million of our fiscal year 2004 sales were
to prime military OEM contractors, and if the United States government placed
restrictions on exporting military technology using our products in countries
where we have customers, or vendors, it could cause a significant reduction in
our sales and profits. Our foreign sales are subject to the following risks:  
    
    fluctuations in foreign currencies, which may adversely
affect the prices of our products and the prices of raw materials
used in our products;
    
    trade disputes;
    
    changes in regulatory requirements, license requirements, tariffs and other trade barriers;
    
    the possibility of quotas, duties, taxes or other changes or
restrictions upon the importation or exportation of our products
implemented by the United States government or foreign governments;
    
    the timing and availability of export or other licenses;
    
    general political and economic conditions in the countries in which we sell our products;
    
    language and other cultural differences which may inhibit our sales and marketing efforts;
    
    costs of complying with a variety of foreign laws;
    
    difficulty of accounts receivable collections;
    
    increased chances of our intellectual property being
infringed as a result of the failure of foreign governments to
enforce the protection of intellectual property rights; and
    
    public health issues that could disrupt local economies. If we are unable to retain employees with key technical expertise or we are
otherwise unable to protect our intellectual property, or if we are found to
have infringed third party intellectual property rights, our financial
condition and future prospects could be materially harmed. The products that we sell from both our microelectronic segment and our display
segment require a large amount of engineering design and manufacturing
expertise. However, the majority of our technological capabilities are not
protected by patents and licenses. We rely on the expertise of our employees,
and our learned experiences in both the design and manufacture of our products.
If we were to lose one or more of our key employees, then we would likely lose
some portion of our institutional knowledge and technical know-how. It is
possible, and it has occurred in the past, that a competitor may also learn to
design and produce products with similar performance abilities as our products.
If a competitor were to do so, it may result in increased competition, and a
reduction of sales for our products. We rely on trade secret protection for most of our proprietary technology, in
part through confidentiality agreements with our employees, consultants and
third parties. If any of these agreements are found to be unenforceable, we
may be unable to adequately protect our technology. If any of these agreements
are breached, especially by companies much larger than us, we may not have
adequate financial resources to adequately enforce our rights. Also, others
may come to know about or determine our trade secrets. In addition, the laws
of certain territories in which we develop, manufacture or sell our products
may not protect our intellectual property rights to the same extent as the laws
of the United States. While we are currently not aware of any claims against us for the infringement
of intellectual property rights, any such claim could divert the efforts of our
technical and management personnel and require us to spend significant 17




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resources to develop or otherwise obtain non-infringing technology. Any
successful claim against us would likely require us to pay substantial damages
or cease the use and sale of infringing products, or both. Our business is dependent upon retaining key personnel and attracting new
employees. Our success depends to a significant degree upon the continued contributions of
Hamid R. Shokrgozar, our Chief Executive Officer, and other senior management
and key personnel. The loss of the services of Mr. Shokrgozar or any of our
senior management or key personnel could adversely affect our business. We may
not be able to retain these employees and searching for their replacements
could divert the attention of other senior management and increase our
operating expenses. Of our current executive officers, only Mr. Shokrgozar has
an employment contract with us. We currently do not maintain any key person
life insurance. To manage our operations effectively, we may need to hire and
retain additional qualified employees including in the areas of product design,
engineering, operations management, manufacturing production, sales, accounting
and finance. We may have difficulty recruiting these employees or integrating
them into our business. Our failure to comply with environmental regulations could subject us to costs
and production delays. We currently use limited quantities of hazardous materials common to our
industry in connection with the production of our products. We must follow
federal, state and local environmental laws and regulations regarding the
handling, storage and disposal of these materials. To our knowledge, we are
currently in material compliance with all federal, state and local
environmental laws and regulations regarding the handling, use, storage and
disposal of these materials. We could possibly be subject to fines,
suspensions of production, alteration of our manufacturing processes or
interruption or cessation of our operations if we fail to comply with present
or future laws or regulations related to the use, storage, handling, discharge
or disposal of toxic, volatile or otherwise hazardous chemicals used in our
manufacturing processes. These regulations could require us to acquire
expensive remediation equipment or to incur other expenses to comply with
environmental regulations. Our failure to control the handling, use, storage
or disposal of, or adequately restrict the discharge of, hazardous substances
could subject us to liabilities and production delays, which could cause us to
miss our customers delivery schedules, thereby reducing our sales for a given
period. We may also have to pay regulatory fines, penalties or other costs
(including remediation costs), which could materially reduce our profits. If our selling prices decline and we fail to reduce our costs, our sales and
operating results will decline. Even in the absence of cyclical conditions, the average selling prices of our
products have historically decreased during the products lives, and we expect
this trend to continue, especially with respect to sales in the commercial
markets. In order to offset these average selling price decreases, we attempt
to decrease manufacturing costs, and introduce new, higher priced products that
incorporate advanced features. If these efforts are not successful, we will
not be competitive because we will not be able to remain profitable at
decreased selling prices, possibly leading to our exit from certain market
sectors. In addition to following the general pattern of decreasing average selling
prices, the selling prices for certain products, particularly random access
memory (RAM), dynamic random access memory (DRAM), or SRAM products and
liquid crystal displays, fluctuate significantly with real and perceived
changes in the balance of supply and demand for these products. If we are
unable to decrease per unit manufacturing costs faster than the rate at which
average selling prices continue to decline, our business, financial condition
and results of operations will be seriously harmed. In addition, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These developments could
result in a dramatic increase in worldwide supply and result in associated
downward pressure on prices. If we fail to develop, introduce and sell new products or fail to develop and
implement new manufacturing technologies, our operating results could be
adversely affected. We operate in a highly competitive, quickly changing environment marked by
rapid obsolescence of existing products. The future success of our business
will depend in large part upon our ability to maintain and enhance our
technological capabilities, make required capital investments, design, develop,
manufacture, market and sell services and products that meet our customers
changing needs, and successfully anticipate or respond to technological 18




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changes on a cost effective and timely basis. Our sales will be reduced,
either through loss of business to our competitors or discontinuance of our
products in the market, if any of the following occur:  
    
    we fail to complete and introduce new product designs in a
timely manner;
    
    we are unable to design and manufacture products according to
the requirements of our customers;
    
    our customers do not successfully introduce new systems or products incorporating our products;
    
    market demand for our new products does not develop as anticipated; or
    
    we are unable to obtain raw materials in a timely manner or at favorable prices. In particular, many of our display products have been developed based on
products procured from Sharp Electronics Corporation. Our competitors in the
enhanced display products market are investing substantial resources to develop
flat panel displays using alternative technologies. If our competitors are
successful in developing new products that offer significant advantages over
our products, and we are unable to improve our technology or develop or acquire
alternative technology that is more competitive, we will lose business to our
competitors and our sales and profits from the display segment will be greatly
reduced. Increasing complexity in our microelectronic segment generally
requires the use of smaller geometries in semiconductor chips. This makes
manufacturing new generations of products substantially more difficult and
costly than prior products. Ultimately, whether we can successfully introduce
these and other new products depends on our ability to develop and implement
new ways of manufacturing our products. If we are unable to design, develop,
manufacture, market and sell new products successfully, we will lose business
and possibly be forced to exit from the particular market or sector. We depend on limited suppliers for certain critical raw materials. Our
inability to obtain sufficient raw materials at favorable prices could
increase our prices or otherwise harm our business. Our manufacturing operations require raw materials that must meet exacting
standards. The most significant raw materials that we purchase are memory
devices in wafer, die, and component forms and AMLCD panels. Shortages of
wafers and other raw materials may occur when there is a strong demand for
memory integrated circuits and other related products. AMLCD panels may also
be in short supply at times. We rely heavily on our ability to maintain access
to steady sources of these raw materials at favorable prices. We are highly
dependent on one SRAM semiconductor manufacturer for memory devices, and one
package manufacturer of ceramic packages for military components. We do not
have specific long-term contractual arrangements with our suppliers but we
believe we are on good terms with our suppliers. We cannot be certain that we
will continue to have access to our current sources of supply or that we will
not encounter supply problems in the future. Any interruption in our supply of
raw materials could reduce our sales in a given period, and possibly cause a
loss of business to a competitor, if we could not reschedule the deliveries of
our product to our customers. In addition, our gross profits could suffer if
the prices for raw materials increase, especially with respect to sales
associated with military contracts where prices are typically fixed. Our Board of Directors is authorized to issue shares of preferred stock that
could have rights superior to our outstanding shares of common stock, and, if
issued, could adversely impact the value of our common stock. Our amended and restated articles of incorporation permit our Board of
Directors, in its sole discretion, to issue up to 1,000,000 shares of
authorized but unissued preferred stock. These shares may be issued by our
Board of Directors, without further action by our shareholders, and may include
any of the following rights, among others, which may be superior to the rights
of our outstanding common stock: 19




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
    
    voting rights, including the right to vote as a class on particular matters;
    
    preferences as to dividends and liquidation rights;
    
    conversion rights;
    
    anti-dilution protections; and
    
    redemption rights. Since our Board of Directors has the authority to determine, from time to time,
the terms of our authorized preferred stock, there is no limit on the amount of
common stock that could be issuable upon conversion of any future series of
preferred stock that may be issued. The rights of holders of our common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any series of preferred stock that may be issued in the future. In
addition, the market price of our common stock may be adversely affected by the
issuance of any series of preferred stock with voting or other rights superior
to those of our common stock. The issuance of any series of preferred stock
could also have the effect of making it more difficult for a third party to
acquire a majority of our outstanding common stock. Our shareholders rights plan may make it more difficult for others to obtain
control of us. Pursuant to the terms of our shareholders rights plan, we have distributed a
dividend of one right for each outstanding share of common stock. These rights
will cause substantial dilution to the ownership of a person or group that
attempts to acquire us on terms not approved by our Board of Directors, and may
have the effect of deterring hostile takeover attempts. The practical effect
of these provisions is to require a party seeking control of us to negotiate
with our Board of Directors, which could delay or prevent a change in control.
These provisions could discourage a future takeover attempt which individual
shareholders might deem to be in their best interests or in which shareholders
would receive a premium for their shares over current prices. Our stock price has been volatile. The price of our common stock fluctuates significantly. The trading price of
our common stock could be subject to wide fluctuations in response to:  
    
    future announcements concerning our company, our competitors
or our principal customers, such as quarterly operating results,
adjustments to previously reported results, changes in earnings
estimates by analysts, technological innovations, new product
introductions, governmental regulations, or litigation;
    
    the liquidity within the market of our common stock;
    
    sales of common stock by our officers, directors and other insiders;
    
    investor perceptions concerning the prospects of our business;
    
    market conditions and investor sentiment affecting market
prices of equity securities of high technology companies in the
microelectronic or display industries;
    
    general economic, political and market conditions, such as
recessions or international currency fluctuations;
    
    market reaction to acquisitions, joint ventures or strategic
investments announced by us or our competitors; and
    
    lawsuits filed against the Company. 20




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ITEM 2 PROPERTIES The following table sets forth the locations and general characteristics of the
physical properties that we own or lease in connection with the conduct of our
business: Location
    
    Square Footage
    
    Primary Segment
    
    Own/LeasePhoenix, Arizona (Headquarters)
    
    
    74,000
    
    
    Microelectronic
    
    LeasePhoenix, Arizona (Flower)
    
    
    43,000
    
    
    Microelectronic
    
    OwnHillsboro, Oregon
    
    
    51,000
    
    
    Display
    
    LeaseFort Wayne, Indiana
    
    
    75,000
    
    
    Display
    
    OwnColumbus, Ohio
    
    
    41,000
    
    
    Display
    
    Own
 In addition to the above properties, we own 10 acres of vacant land adjacent to
the Fort Wayne, Indiana facility. In the latter half of fiscal 2003, we
consolidated all of our microelectronic product manufacturing into our Phoenix,
Arizona facilities and closed our Marlborough, Massachusetts facility. In
October 2004,

we announced that we would be closing our Phoenix, Arizona location on
Flower Street (acquired as part of the IDS acquisition) within the next twelve
months and relocating employees and the machinery and equipment to our leased
facility at our headquarter building. On November 5, 2004 we entered into an amendment of our headquarter lease
located on E. University Drive in Phoenix with Gus Enterprises-XII, L.L.C., as landlord, to add another 31,000
square feet of space in our headquarter facility which will be improved to accommodate the
additional manufacturing being relocated. Our amended
headquarter lease will cover up to approximately 74,000 square feet. The lease term will expire on July 31, 2015 and is subject to two five-year renewal options. Our monthly base rent amount will continue to be $37,945 through May 2005, $65,619 from June 2005 to May 2007, $68,863 from June 2007 to May 2009, $72,254 from June 2009 to May 2011, $75,941 from June 2011 to May 2013, and $79,627 from June 2013 to July 2015. We do not expect moving and
rearrangement costs to be significant and expect to incur
approximately $3.5
million in capital expenditures for the leasehold improvements.

 We intend to sell the
Flower Street land and building. We expect proceeds from the sale to exceed
our net book value of our land and building related to the Flower Street location which is approximately $2.2 million.
However, we do not expect any ultimate gain or loss to have a significant
impact on our consolidated results of operations. We expect the consolidation
to be completed in the first quarter of fiscal 2006. Our Panelview subsidiary
leases approximately 51,000 square feet of office and manufacturing space in
Hillsboro, Oregon for manufacturing ruggedized and industrial display
products. We consider all of our facilities to be well maintained and adequate for
current operations. All facilities have additional capacity, which could be
utilized in the event of increased production requirements. Our manufacturing
facilities that serve the military market must comply with stringent military
specifications. Our microelectronic module manufacturing facility in the headquarter building in Phoenix,
Arizona is certified ISO-9001 and Class B status. Class B status means that we
are qualified to manufacture compliant military products. All of our owned
real property has been pledged as security for our line of credit with Bank
One. 
 ITEM 3 LEGAL PROCEEDINGS On
July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004, shareholder class action
lawsuits entitled McJimsey v. White Electronic Designs Corporation, et al.
(Case No. CV04-1499-PHX-SRB), Afework v. White Electronic Designs Corporation, et al
(Case No. CV04-1558-PHX-JWS), Anders v. White Electronic Designs Corporation, et al.
(Case No. CV04-1632-PHX-JAT), and Sammarco v. White Electronic Designs Corporation,
et al.(Case No. CV04-1744-PHX-EHC), respectively, were filed in the United
States District Court for the District of Arizona against the Company and
certain of its current and former officers and directors. The complaints
allege, among other things, that between January 23, 2003 and June 9, 2004, the
Company made false and misleading statements concerning its financial results
and business, in violation of the federal securities laws. The
complaints seek unspecified monetary damages. The Court has
consolidated the four cases into one action. Plaintiffs motion
for appointment of lead plaintiffs and lead counsel is under
submission with the Court. We believe the claims made in the
complaints are without merit and we intend to vigorously defend ourselves in
these matters.

Although the outcome of this litigation is uncertain based on our current assessment of the merits of the complaints and
considering the amount of insurance we maintain covering
claims of this nature, we do not believe the ultimate
outcome of these matters will have a material adverse affect on our
consolidated results of our operations, liquidity or
financial condition. On August 12, 2004 and August 19, 2004, purported derivative actions entitled
Dodt v. Shokrgozar, et al.(Case No. CV04-1674-PHX-NVW) and Christ v.
Shokrgozar, et al.(Case No. CV04-1722-PHX-MHM), respectively, were filed in
the United States District Court for the District of Arizona against current
and former directors and officers of the Company. The Company is also named as
a nominal defendant in both actions. The complaints allege that between
January 2003 and the present, defendants breached their fiduciary duties to the
Company by causing the Company to misrepresent its financial results and
prospects. The complaints allege claims for breach of fiduciary duty, gross
mismanagement, abuse of control, waste of corporate assets, insider selling,
and unjust enrichment. The complaints seek unspecified damages, equitable
relief, and restitution as against the individual defendants. We
believe the claims made in the complaints are without merit and intend to
vigorously defend these 21




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##### Table of Contents



actions.
On October 22, 2004, we moved to dismiss both actions and,
in the alternative, moved to stay the Christ action. The motions are
pending.
Although the outcome of this litigation is uncertain, based on our current assessment of the merits of the complaints and
considering the amount of insurance we maintain covering
claims of this nature, we do not believe the ultimate
outcome of these matters will have a material adverse affect on our consolidated results of operations, liquidity or
financial condition. In addition, from time to time, we are subject to claims and litigation
incident to our business. There are currently no such material, pending
proceedings to which we are a party. 
 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fourth
quarter of fiscal 2004, through the solicitation of proxies or otherwise. 
 EXECUTIVE OFFICERS OF THE COMPANY The names, ages, positions and business experience of all of our executive
officers are listed below. There are no family relationships between any of
our directors and executive officers or any arrangement or understanding
between any of our executive officers and any other person pursuant to which
any executive officer was appointed to his office. Hamid R. Shokrgozar, 44
President,
Chief Executive Officer and Chairman
of the Board
    
    Mr. Shokrgozarhas been our
President and Chief Executive
Officer since October 1998 and
the Chairman of the Board since
August 2000. Mr. Shokrgozar
served as a director and as
President and Chief Executive
Officer of Bowmar from January
1998 until the merger of Bowmar
and EDI in October 1998. Mr.
Shokrgozar served as President of
White Microelectronics, the
largest division of Bowmar, from
June 1993 to December 1997 and as
its Vice President of Engineering
and Technology from July 1988 to
June 1993. Mr. Shokrgozar also
served as Chairman of American
Electronic Association (AEA),
Arizona Council, during fiscal
years 1999 and 2000. In
addition, Mr. Shokrgozar holds a
United States Patent for the
invention of Stacked Die Carrier
Assembly. Mr. Shokrgozar holds
a Bachelors of Science in
Electrical Engineering from
California State University
Fullerton.Roger A. Derse, 54
Vice President, Chief Financial Officer
    
    Roger A. Dersehas been our Vice
President and Chief Financial
Officer since March 2004. Mr.
Derse has over 25 years
experience in finance and
accounting. He previously served
as Consultant/Acting CFO for
Virtron Manufacturing from 2002
through February 2004 and was Executive
Vice President and Chief
Operating and Financial Officer
for Nanonics Corporation from
1998 to 2001. He was Chief Financial
Officer for the White
Microelectronics Division of
Bowmar Instrument Corporation
from 1993 to 1997. Mr. Derse
holds a Bachelors of Science in
Industrial Engineering from the
University of Michigan, a Masters
in Accounting from the University
of Arizona, and is a Certified
Public Accountant.Dante V. Tarantine, 51
Executive Vice President,
Sales & Marketing
    
    Dante V. Tarantinehas been our
Corporate Executive Vice
President, Sales and Marketing
since January 2003. Mr.
Tarantine served as our Senior
Vice President of Sales from
August 1998 to January 2003. He
previously served as our Senior
Vice President Sales and
Marketing from September 1991 to
August 1998 and as Vice President
of Marketing for White
Microelectronics from February
1987 to September 1991. Mr.
Tarantine holds a Bachelors of
Science in Electrical Engineering
from California State University
Northridge.
 22




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##### Table of Contents



PART II 
 ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is currently traded on the NASDAQ National Market under the
symbol WEDC. The following table sets forth the high and low sales prices for
the common stock by quarter during the fiscal years ended October 2, 2004 and
September 27, 2003. 2004Q1
    
    
    
    Q2
    
    
    
    Q3
    
    
    
    Q4Common stock market priceHigh
    
    $
    12.70
    
    
    $
    9.85
    
    
    $
    8.27
    
    
    $
    5.32Low
    
    $
    7.53
    
    
    $
    7.08
    
    
    $
    4.70
    
    
    $
    4.53
 2003Q1
    
    
    
    Q2
    
    
    
    Q3
    
    
    
    Q4Common stock market priceHigh
    
    $
    10.25
    
    
    $
    8.42
    
    
    $
    10.65
    
    
    $
    14.34Low
    
    $
    7.25
    
    
    $
    5.96
    
    
    $
    6.63
    
    
    $
    9.71
 As of December 9, 2004, our stock price was $6.38, and there were approximately
9,000 holders of record of our common stock. We have not paid cash
dividends on our common stock and do not expect to do so in the foreseeable
future. We intend to retain all earnings to provide funds for the operation
and expansion of our business. In addition, our credit agreement precludes the
payment of cash dividends on our common stock. 
 ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA (In thousands of dollars, except per share data) 2004
    
    2003
    
    2002
    
    2001
    
    2000Statement of Income Data:Net sales (Notes 1 and 2)
    
    $
    108,962
    
    
    $
    113,534
    
    
    $
    90,458
    
    
    $
    96,761
    
    
    $
    87,595Net income (Note 3)
    
    $
    4,807
    
    
    $
    10,150
    
    
    $
    8,740
    
    
    $
    3,272
    
    
    $
    6,561Earnings per share:Basic
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44
    
    
    $
    0.17
    
    
    $
    0.37Diluted
    
    $
    0.19
    
    
    $
    0.44
    
    
    $
    0.42
    
    
    $
    0.16
    
    
    $
    0.34Balance Sheet Data (at year end):Total assets
    
    $
    124,900
    
    
    $
    119,806
    
    
    $
    68,366
    
    
    $
    57,228
    
    
    $
    54,996Long-term obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    890
    
    
    $
    1,519Shareholders equity
    
    $
    107,215
    
    
    $
    101,028
    
    
    $
    54,770
    
    
    $
    43,780
    
    
    $
    31,623Preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
 This table should be read in conjunction with the Consolidated Financial Statements provided elsewhere herein. Notes to Selected
Consolidated Financial Data (1) In January 2003, the Company acquired IDS for a purchase price of
approximately $18.6 million. The effect of this transaction increased our
total assets by approximately $18.0 million and our shareholders equity by
approximately $9.0 million. Net sales for IDS in fiscal 2004 and fiscal 2003
totaled approximately $23.4 million and $16.1 million, respectively. See Note
3 to our consolidated financial statements for additional details. (2) In January 2001, the Company acquired Panelview Inc. for a purchase price
of approximately $9.1 million resulting in goodwill of $8.7 million. The
effect of the transaction increased our total assets by approximately $9.0
million as well as our shareholders equity by approximately $8.0 million. Net
sales for Panelview in fiscal 2004, fiscal 2003, fiscal 2002 and fiscal 2001
totaled approximately $25.2 million, $34.4 million, $27.8 million and $7.7
million, respectively. 23




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(3) In
fiscal 2003, the Company discontinued the amortization of its goodwill
with the adoption of the provisions of Statement of Financial
Accounting Standards (SFAS) 142. Goodwill amortization
expense, net of tax, was approximately $0.9 million and $0.8 million in fiscal
2002 and 2001, respectively. 24




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ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS In addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results may differ substantially from those referred to herein due to a number
of factors, including but not limited to risks described under Risk Factors,
and the consolidated financial statements and related notes included elsewhere
in this Annual Report on Form 10-K. 
 Overview We design, develop and manufacture innovative microelectronic and display
components and systems for inclusion in high technology products used in the
military, industrial, and commercial markets. Our microelectronic solutions
include advanced semiconductor and state of the art multi-chip packaging, as
well as our proprietary process for applying anti-tamper protection to mission
critical semiconductor components in military applications. Our display
solutions include enhanced flat panel display products, interface devices and
electromechanical assemblies. Our customers, which include military prime
contractors in the United States and Europe as well as commercial OEMs,
outsource many of their microelectronic and display components and systems to
us as a result of the combination of our design, development and manufacturing
expertise. We were formed as a result of the merger between Bowmar and EDI in October
1998. At the time of the merger, Bowmar was a manufacturer of high reliability
electronic components and interface and mechanical devices, mainly for military
applications. EDI was a manufacturer of commercial memory products for the
telecommunications and networking markets and also had a small ruggedized
display business serving the military and industrial markets. This merger
provided us with a diversified platform to expand our product offerings within
both the military and commercial markets. In order to complement our
military/industrial display business, we acquired Panelview, a designer and
manufacturer of enhanced commercial flat panel display products, in January
2001. Following the acquisition, we consolidated our display operations into
our Panelview subsidiary. In January 2003, we acquired IDS, a designer and
manufacturer of membrane keypads, flexible circuits, sensors, control panels,
and handheld and desktop electronic devices. This acquisition allowed us to
expand our interface device product offerings and enhance our subsystem
solutions. In addition, with IDSs design and manufacturing capabilities we
can now offer fully integrated system level solutions. Executive Summary Net sales for the fiscal year ended October 2, 2004 were approximately $109.0
million, compared to net sales of $113.5 million for fiscal 2003. The decrease
in fiscal 2004 was primarily caused by a decline of approximately $4.3 million
in sales of our commercial display products. The decline in commercial display
net sales was attributable to a reduction in orders from Garmin and GE Medical
as they changed their manufacturing strategies during the fourth quarter of
fiscal 2003. We have expanded our customer base to replace net sales to Garmin
and GE Medical. Our risk mitigation plan for our display business continues to
show the positive results we were expecting. Backlog for the display segment
increased $6.7 million to $22.7 million at October 2, 2004 as compared to $16.0
million at September 27, 2003. For
the year ended October 2, 2004, we had new orders of approximately $113 million, which equates to
a book-to-bill ratio of 1.04 for the year. Display segment orders were
approximately $53.2 million and orders for the microelectronic segment were
approximately $59.8 million. New orders for our microelectronic segments
anti-tamper process technology were approximately $6.2 million for the year and
we had sales of approximately $6.0 million. We currently expect to see growth
for anti-tamper technology products over the next several years. We believe
our financial results for the year, especially the latter half, were impacted
by a shift in military spending priorities. We believe a reallocation of
government funds to other military priorities resulted in a delay of orders of
military products for our microelectronic segment. This delay caused lower
year over year sales and profits for our microelectronic segment and may cause
lower year over year comparisons for the next several quarters. Our gross margins decreased year over year to approximately 29% for fiscal 2004
from approximately 34% for fiscal 2003. The primary reason for this decrease
was lower margins in our microelectronic segment, which decreased from 42% in
fiscal 2003 to 35% in 2004. The reason for the decline was due to a shift in
product mix to lower margin memory products from higher margin microprocessor
products, lower sales of military microelectronic 25




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##### Table of Contents



products, higher production costs for our military products, and a higher
percentage of commercial memory products as a percent of microelectronic
segment sales. The trend of lower margin percentages may continue in fiscal
2005 if sales of commercial products, both in the display and microelectronic
segment, increase during the year, and sales of military microelectronic
products stay the same, or decrease. Display segment gross margins also
decreased from 25% in fiscal 2003 to 21% in fiscal 2004. Gross margins for our
display segment products continue to come under pressure from both domestic and
Asian competition, and, while we are implementing manufacturing strategies to
improve our competitive position, it may be difficult to continue to maintain
current gross margins in the future. Our overall production has, at times, been affected by longer lead times for certain
components, which may affect the timing and cost of sales during the year.
The availability and price of memory components, based on supply and
demand, will go up and down on a monthly or quarterly basis. When
demand exceeds supply, prices will rise and lead times will lengthen.
When supply exceeds demands, prices will fall and lead times will
shorten. Overall, the semiconductor market is expected to be soft
through the first half of 2005 and is expected to rise slowly in the
second half of 2005. At this time, memory components are available
and prices have stablized. The availability of liquid crystal displays
has increased and prices have significantly decreased. This is
expected to last for the first half of fiscal 2005. Net income for fiscal year 2004 was approximately $4.8 million compared to net
income of approximately $10.2 million for fiscal 2003. The decline was
primarily due to the decline in net sales and gross margin described above. Segments Our product and market diversification as well as our broad customer base have
allowed us to maintain relative sales stability and profitability during the
recent economic downturn. The following table shows our historical net sales
and the percent of net sales by our two business segments and the markets they serve (in thousands): 2004
    
    2003
    
    2002Microelectronic SegmentMilitary/Industrial Market
    
    $
    36,294
    
    
    $
    42,426
    
    
    $
    35,322Commercial Market
    
    
    24,397
    
    
    
    19,007
    
    
    
    15,00960,691
    
    
    
    61,433
    
    
    
    50,331Display SegmentMilitary/Industrial Market
    
    
    11,764
    
    
    
    11,307
    
    
    
    13,126Commercial Market
    
    
    36,507
    
    
    
    40,794
    
    
    
    27,00148,271
    
    
    
    52,101
    
    
    
    40,127Total
    
    $
    108,962
    
    
    $
    113,534
    
    
    $
    90,458Microelectronic SegmentMilitary/Industrial Market
    
    
    33
    %
    
    
    37
    %
    
    
    39
    %Commercial Market
    
    
    23
    %
    
    
    17
    %
    
    
    17
    %56
    %
    
    
    54
    %
    
    
    56
    %Display SegmentMilitary/Industrial Market
    
    
    11
    %
    
    
    10
    %
    
    
    15
    %Commercial Market
    
    
    33
    %
    
    
    36
    %
    
    
    29
    %44
    %
    
    
    46
    %
    
    
    44
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 For the year ended October 2, 2004, IDS contributed approximately $11.5 million
of net sales to the commercial market of our microelectronic segment and
approximately $11.9 million of net sales to the commercial market of our
display segment. For the year ended September 27, 2003, IDS contributed
approximately $5.5 million of net sales to the commercial market of our
microelectronic segment and approximately $10.5 million of net sales to the
commercial market of our display segment. The foregoing information includes
IDSs net sales from the date of acquisition on January 22, 2003. 26




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Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
accounting estimates inherent in the preparation of our consolidated financial
statements include the following items:  
    
    We sell microelectronic and display products primarily to military prime
contractors and commercial original equipment manufacturers. A small
portion of our products are also sold through distributors or resellers.
We recognize revenue on product sales when persuasive evidence of an
arrangement with the customer exists, title to the product has passed to
the customer, which usually occurs at time of shipment, the sales price
is fixed or determinable, and collectibility of the related billing is
reasonably assured. Advance payments from customers are deferred and
recognized when the related products are shipped. Revenue relating to
products sold to distributors or resellers who either have return rights
or where the Company has a history of accepting product returns are
deferred and recognized when the distributor or reseller sells the
product to the end customer. We also provide limited design services
pursuant to related customer purchase orders and generally recognize the
associated revenue as such services are performed. However, it may be
deferred until certain elements are completed. We may from time to time enter into certain arrangements that contain
multiple elements such as performing limited design services
accompanied with
follow-on manufacturing of related products. We allocate revenue to
the elements based on relative fair value, and recognize revenue for
each element when the there is evidence of an arrangement, delivery
has occurred or services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured. Arrangements
with multiple elements that are not considered separate units of
accounting require deferral of revenue until certain other elements
have been delivered or the services have been performed. The amount
of the revenue recognized is impacted by our judgment as to whether
an arrangement includes multiple elements, and whether the elements
are considered separate units of accounting.
    
    Historically, we have experienced fluctuations in the demand
for our products based on cyclical fluctuations in the
microelectronic and display markets. These fluctuations may cause
inventory on hand to lose value or become obsolete. In order to
present the appropriate inventory value on our financial statements,
we identify slow moving or obsolete inventories and record
provisions to write
down such inventories to net realizable value. These provisions are
based on managements comparison of the value of inventory on hand
against expected future sales. If future sales are less favorable
than those projected by management, additional inventory write-downs
may be required.
    
    We record trade accounts receivable at the invoiced amount
and they do not bear interest. We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We make these estimates based on an analysis of
accounts receivable using available information on our customers
financial status and payment histories. Historically, bad debt
losses have not differed materially from our estimates. Write-offs
against the allowance totaled approximately $170,000 in fiscal 2004,
$145,000 in fiscal 2003 and $209,000 in fiscal 2002.
    
    We maintain a pension plan for eligible union employees at
our Fort Wayne, Indiana facility. To account for the cost of this
plan, we make estimates concerning the expected long-term rate of
return on plan assets, and discount rates to be used to calculate
future benefit obligations. Changes in the expected long-term rate
of return on plan assets affect the amount of investment income
expected to be earned in the future. We base our related estimates
using historical data on the rate of return from equities and fixed
income investments, as well as projections for future returns on
such investments. If the actual returns on plan assets do not equal
the estimated amounts, we may have to fund future benefit
obligations with additional contributions to the plan. Changes in
the discount rate affect the value of the plans future benefit
obligations. A lower discount rate increases the liabilities of the
plan because it raises the value of future benefit obligations.
This will also cause an increase in pension expense recognized. We
use published bond yields to estimate the discount rate used for
calculating the value of future benefit obligations.
    
    We account for goodwill and intangible assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, which requires goodwill
to be tested for impairment on an annual basis (and more frequently
in certain circumstances) and written down when impaired. We
completed our transitional testing for goodwill impairment upon
adoption of SFAS 142, and our annual testing for fiscal 2004 and
2003 and determined that our recorded goodwill was not impaired.
Goodwill recorded was $17.1 million and $17.0 million at October 2,
2004 and September 27, 2003, respectively. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined
to be indefinite. 27




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##### Table of Contents



Purchased intangible assets are carried at cost
less accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets, generally two to
fifteen years.  
    
    We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109) which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred tax
assets are recognized, net of any valuation allowance, for
deductible temporary differences and net operating loss and tax
credit carry forwards. We regularly review our deferred tax assets
for recoverability and, if necessary, establish a valuation
allowance. 
 Results of Operations The following table sets forth, for the periods indicated, certain operating
data expressed as a percentage of net sales: 2004
    
    2003
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    70.9
    %
    
    
    65.9
    %
    
    
    68.1
    %Gross profit
    
    
    29.1
    %
    
    
    34.1
    %
    
    
    31.9
    %Operating expenses:Selling,
general and administrative
    
    
    17.0
    %
    
    
    14.6
    %
    
    
    15.4
    %Research and development
    
    
    5.5
    %
    
    
    5.3
    %
    
    
    4.7
    %Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    1.7
    %Amortization of intangible assets
    
    
    0.6
    %
    
    
    1.0
    %
    
    
    0.1
    %Total operating expenses
    
    
    23.1
    %
    
    
    20.9
    %
    
    
    21.9
    %Operating income
    
    
    6.0
    %
    
    
    13.2
    %
    
    
    10.0
    %Interest expense
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.2
    %Interest (income)
    
    
    (0.4
    %)
    
    
    (0.2
    %)
    
    
    (0.2
    %)Income before income taxes
    
    
    5.6
    %
    
    
    12.9
    %
    
    
    9.6
    %Provision for income taxes
    
    
    2.0
    %
    
    
    4.4
    %
    
    
    0.4
    %Net income
    
    
    3.6
    %
    
    
    8.5
    %
    
    
    9.2
    %
 Fiscal Year ended October 2, 2004 compared to Fiscal Year ended September 27,
2003 Net Sales Net sales were $109.0 million for the year ended October 2, 2004, a decrease of
$4.5 million, or 4%, from $113.5 million for the year ended September 27, 2003.  
    
    Military/industrial sales in the microelectronic segment were
$36.3 million for the year ended October 2, 2004, a decrease of $6.1
million, or approximately 14%, from $42.4 million for the year ended
September 27, 2003. The decrease in sales was primarily due to a
significant
one time order of approximately $6.2 million in fiscal 2003 to a
military prime contractor related to the Falcon Edge program

and as a result of the shift in military spending priorities which
lowered the volume of sales. We expect sales to military customers to
remain flat or decrease slightly in fiscal 2005 as compared to fiscal
2004.  
    
    Commercial sales in the microelectronic segment were $24.4
million for the year ended October 2, 2004, an increase of $5.4
million, or approximately 28% from $19.0 million for the year ended
September 27, 2003. The growth was primarily attributable to
products used in the high-end server applications and product sold
to a hotel industry supplier for their entertainment video systems.

We expect Commercial sales in the microelectronic segment to grow in
fiscal 2005. 28




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
    
    Military/industrial sales in the display segment were $11.8
million for the year ended October 2, 2004, an increase of $0.5
million, or approximately 4%, from $11.3 million for the year ended
September 27, 2003. The increase was due to increased requirements
for products used in the commercial aviation industry, which resulted
in more product being sold.
We expect military/industrial sales in the display segment in fiscal
2005 to be consistent with sales in fiscal 2004.  
    
    Commercial sales in the display segment were $36.5 million
for the year ended October 2, 2004, a decrease of $4.3 million, or
approximately 11%, from $40.8 million for the year ended September
27, 2003. The decrease primarily comes from the loss of orders from
GE Medical and Garmin, both of whom changed their manufacturing
strategies in the fourth quarter of 2003. This was offset by
increases in sales of displays for portable patient monitors, tablet
personal computers and point of service terminals.

We expect commercial sales in the display segment to remain flat in
fiscal 2005. Northrup
Grumman accounted for approximately $2.6 million, or 4%, of our 2004
microelectronic segment sales compared to approximately
$6.2 million, or 10%, of
our 2003 microelectronic segment sales. No other customer accounted for more
than 10% of segment or total net sales for these periods. In
2004, approximately $5.8 million, or 12%, of our display segment net sales
came from Whirlpool Corporation. Approximately $1.1 million, or 2%, of 2004
net sales for our display segment came from Garmin, compared to
$12.8 million,
or 25%, of 2003 net sales while GE Medical accounted for approximately $3.0
million, or 6%, of 2004 display segment net sales compared to approximately
$7.7 million, or 15%, of 2003 display segment net sales. Our sales to Garmin and
GE Medical declined significantly during fiscal 2004 due to a shift in their
manufacturing strategies. The majority of our sales are not subject to seasonal fluctuations over the
course of a year. Sales of our membrane keypad products, which totaled
approximately $12.0 million in fiscal 2004 and $7.0 million in fiscal year 2003, are
subject to seasonal fluctuations relating to home appliance sales in the spring
and fall. Gross Profit Gross profit was $31.7 million for the year ended October 2, 2004, a decrease
of $7.0 million or approximately 18% from $38.7 million for the year ended
September 27, 2003. Gross margin as a percentage of net sales was
approximately 29% for the year ended October 2, 2004, compared to approximately
34% for the year ended September 27, 2003. Gross profit for the microelectronic segment was $21.4 million for the year
ended October 2, 2004, a decrease of $4.5 million, or approximately 17%, from
$25.9 million for the year ended September 27, 2003. The majority of the
decrease in gross profit came from a decrease in military/industrial sales in
the microelectronic segment. Gross margin as a percentage of microelectronic
segment sales was approximately 35% for the year ended October 2, 2004,
compared to approximately 42% for the year ended September 27, 2003. The
product mix in the microelectronic segment shifted to a greater number of
commercial products, which have a lower selling price and lower gross margin
than military products. Gross profit for the display segment was $10.2 million for the year ended
October 2, 2004, a decrease of $2.6 million, or approximately 20%, from $12.8
million for the year ended September 27, 2003. Gross margin as a percentage of
display segment sales was approximately 21% for the year ended October 2, 2004,
compared to approximately 25% for the year ended September 27, 2003. Gross
margins continue to come under pressure from both domestic and Asian
competition. Selling, General and Administrative Expenses Selling, general and administrative expenses consist mainly of compensation
expense, selling expenses, including commissions, information technology
expenses and corporate administrative expenses. Selling, general and 29




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administrative expenses were $18.5 million for the year ended October 2, 2004,
an increase of $1.9 million, or approximately 11%, from $16.6 million for the
year ended September 27, 2003. This increase was primarily due
to a $1.6
million increase in general and administrative expenses, and an increase in
selling expenses of $0.3 million over the comparable period. General and
administrative expenses increased mainly because of higher professional fees in
connection with Sarbanes-Oxley requirements, a $0.25 million insurance
deductible payment for legal fees charged in connection with the shareholder
litigation, a fixed asset write-off of $0.2 million, an accounts receivable
reserve of $0.3 million pertaining to display shipments to a commercial
customer, and $0.2 million incurred in residual transition costs
related to the shut down of our Massachusetts location. Selling, general and
administrative expenses as a percentage of net sales increased to approximately
17% for the year ended October 2, 2004 from 15% for the year ended September
27, 2003, the result of higher expenses and lower revenue.
We expect general and administrative expenses to increase in fiscal
2005 due to costs associated with Sarbanes-Oxley and to anticipated insurance premium adjustments as a result of
our shareholder litigation. Research and Development Expenses Research and development expenses consist primarily of compensation for our
engineering personnel, consulting expenses and project materials. Research and
development expenses were $6.0 million for the year ended October 2, 2004,
consistent with the $6.0 million for the year ended September 27, 2003.
Expenses in the microelectronic segment decreased by $0.5 million primarily due
to the closure of our Massachusetts location, and increased $0.5 million in the
display segment due to the continued investment in new products to offset the
loss of orders from GE Medical and Garmin. As a percentage of sales, research
and development expenses have remained consistent and average approximately 5%
of net sales. We are committed to research and development of new and existing
products and expect research and development expenses to remain at
approximately the same percentage of net sales in the future. Ongoing product development projects for the microelectronic segment include
new packaging designs for memory products including synchronous dynamic random
access memory (SDRAM), and synchronous static random access memory (SSRAM),
as well as the latest technology, double data rate (DDR)
II memory modules, along with microprocessor modules and ball grid array products; continuing
development of anti-tamper technology for microelectronic products; next
generation memory and power personal computer products assembled in various multichip packages
to be used in both commercial and military markets; and qualification of new
semiconductor products. Ongoing product development projects for the display
segment include glass lamination process technology, high volume glass
lamination (HVGL) for tablet personal computers, and display systems development. Interest Expense Interest expense primarily consists of interest expense on our long-term debt.
Interest expense was $2,000 for the year ended October 2, 2004, a decrease of
$86,000 from $88,000 for the year ended September 27, 2003. Interest expense
for the year ended September 27, 2003 related to our assumption of
approximately $6.9 million of debt in connection with the acquisition of IDS.
We paid off the IDS debt in the fourth quarter of fiscal 2003 and have no
borrowings outstanding as of October 2, 2004. Interest Income Interest income consists of interest earned on our cash balances in various
types of interest bearing accounts, and interest earned on investments in
short-term marketable securities. Interest income was $454,000 for the year
ended October 2, 2004, an increase of $204,000 compared to $250,000 for the
year ended September 27, 2003. This increase was attributable to the increase
in cash equivalents between periods primarily as a result of cash flows from operations and the proceeds received from our stock offering
which was completed in July 2003. Amortization of Intangible Assets We
adopted SFAS 142 on September 29, 2002, and discontinued
amortization of goodwill at that time. Intangible asset amortization for the
year ended October 2, 2004 totaled $0.7 million almost entirely related to
intangible assets acquired from IDS. 30




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Income Taxes Income tax expense consists of current and deferred federal and state income
taxes. Income tax expense was $2.1 million for the year ended October 2, 2004,
compared to $5.0 million for the year ended September 27, 2003. The effective
tax rate was approximately 31% for the year ended October 2, 2004, compared to
approximately 33% for the year ended September 27, 2003. The decrease in the
effective tax rate in 2004 was a result of additional available research and
development credits. In October 2004, President Bush signed into law the Working
Families Tax Relief Act of 2004 (the 2004 Act). Included
as part of the 2004 Act is a provision that reinstates the research tax
credit that expired on June 30, 2004. The reinstatement is
retroactive in June 30, 2004; however, since the 2004 Act was signed
subsequent to October 2, 2004, research tax credits subsequent to
June 30, 2004 will be recognized in the Companys first quarter
of fiscal 2005. This amount is not expected to be material. In October 2004, Congress passed the American Jobs Creation Act
of 2004 (the Act), which will eliminate the
extraterritorial income exclusion, and will provide a deduction from
taxable income equal to a stipulated percentage of qualified income
from domestic production activities, referred to as the manufacturer
deduction. The extraterritorial income exclusion will be phased out
through 2006, and the manufacturer deduction will be phased in
through 2010. The Company does not believe the Act will have a
significant impact on its effective rate in 2005. Fiscal Year ended September 27, 2003 compared to Fiscal Year ended September
28, 2002 Net Sales Net sales were $113.5 million for the year ended September 27, 2003, an
increase of $23.0 million, or 26%, from $90.5 million for the year ended
September 28, 2002. Net sales for the year ended September 27, 2003 included
$16.1 million from IDS.  
    
    Military/industrial sales in the microelectronic segment were
$42.4 million for the year ended September 27, 2003, an increase of
$7.1 million, or approximately 20%, from $35.3 million for the year
ended September 28, 2002. The growth in sales was mainly
attributable to increased sales of our ball grid array memory
products and microprocessor products.  
    
    Commercial sales in the microelectronic segment were $19.0
million for the year ended September 27, 2003, an increase of $4.0
million, or approximately 27% from $15.0 million for the year ended
September 28, 2002. Commercial sales in the microelectronic segment
for the year ended September 27, 2003 included $5.5 million from
IDS, which offset a $1.5 million decrease in sales to the
telecommunication and data communication markets.  
    
    Military/industrial sales in the display segment were $11.3
million for the year ended September 27, 2003, a decrease of $1.8
million, or approximately 14%, from $13.1 million for the year ended
September 28, 2002. The decrease was due to our decision to focus
our resources on our commercial display sales and to not pursue
military related orders that required a disproportionate amount of
our engineering resources when compared to the amount of the order.  
    
    Commercial sales in the display segment were $40.8 million
for the year ended September 27, 2003, an increase of $13.8 million,
or approximately 51%, from $27.0 million for the year ended
September 28, 2002. The increase was primarily due to the inclusion
of $10.5 million of net sales from IDS, and an increase of $3.3
million of net sales of commercial display products from our
Panelview division mainly from sales of products into new markets,
such as automotive test equipment. Northrup Grumman accounted for approximately $6.2 million or 10%, of our 2003
microelectronic segment sales. No other customer accounted for more than 10%
of segment or total net sales for this period. Approximately $12.8 million, or 25%, of 2003 net sales for our display segment

came from Garmin, while GE Medical accounted for approximately $7.7 million, or
15%, of 2003 display segment sales. As expected, our sales to Garmin and GE
Medical declined significantly during fiscal 2004 due to a shift in their
manufacturing strategies. Gross Profit Gross profit was $38.7 million for the year ended September 27, 2003, an
increase of $9.8 million or approximately 34% from $28.9 million for the year
ended September 28, 2002. For the year ended September 27, 2003, IDS
contributed $2.7 million in gross profit. Gross margin as a percentage of net
sales was approximately 34% for the year ended September 27, 2003, compared to
approximately 32% for the year ended September 28, 2002. 31




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Gross profit for the microelectronic segment was $25.9 million for the year
ended September 27, 2003, an increase of $6.1 million, or approximately 31%,
from $19.8 million for the year ended September 28, 2002. The majority of the
increase in gross profit came from an increase in military/industrial sales in
the microelectronic segment. Gross margin as a percentage of microelectronic
segment sales was approximately 42% for the year ended September 27, 2003,
compared to approximately 39% for the year ended September 28, 2002. The
product mix in the microelectronic segment shifted to a greater number of
military products, which have a higher selling price and higher gross margin
than commercial products. Gross profit for the microelectronic segment for the
year ended September 27, 2003 included approximately $1.0 million from IDS. Gross profit for the display segment was $12.8 million for the year ended
September 27, 2003, an increase of $3.7 million, or approximately 41%, from
$9.1 million for the year ended September 28, 2002. Gross profit for the
display segment for the year ended September 27, 2003 included approximately
$1.7 million from IDS. Gross margin as a percentage of display segment sales
was approximately 25% for the year ended September 27, 2003, compared to
approximately 23% for the year ended September 28, 2002. Gross profits in 2003
included the reversal of $0.7 million of accrued costs relating to a completed
customer order. Selling, General and Administrative Expenses Selling, general and administrative expenses consist mainly of compensation
expense, selling expenses, including commissions, information technology
expenses and corporate administrative expenses. Selling, general and
administrative expenses were $16.6 million for the year ended September 27,
2003, an increase of $2.7 million, or approximately 19%, from $13.9 million for
the year ended September 28, 2002. This increase was due to a $1.1 million
increase in general and administrative expenses, and an increase in selling
expenses of $1.6 million over the comparable period mainly because of higher
commission and payroll expenses, and the inclusion of IDS. Selling, general
and administrative expenses as a percentage of net sales decreased slightly to
approximately 14.6% for the year ended September 27, 2003 from 15.4% for the
year ended September 28, 2002. IDS contributed approximately $0.7 million of general and administrative
expenses and approximately $1.1 million of selling expenses for the year ended
September 27, 2003 accounting for $1.8 million of the $2.7 million increase in
selling, general and administrative expenses for the year. IDS selling,
general and administrative expenses as a percentage of sales have historically
been consistent with our selling, general and administrative expenses. Research and Development Expenses Research and development expenses consist primarily of compensation for our
engineering personnel, consulting expenses and project materials. Research and
development expenses were $6.0 million for the year ended September 27, 2003,
an increase of $1.7 million, or approximately 40%, from $4.3 million for the
year ended September 28, 2002. This increase was attributable to increases of
$1.0 million in the microelectronic segment and $0.7 million in the display
segment. The year ended September 27, 2003 included $0.6 million of research
and development expenses for IDS. Interest Expense Interest expense consists of interest expense on our long-term debt. Interest
expense was $88,000 for the year ended September 27, 2003, a decrease of
$59,000 from $147,000 for the year ended September 28, 2002. Interest expense
for the year ended September 28, 2002 related to amounts outstanding on our
term loan, which was paid off during fiscal year 2002. Interest expense for
the year ended September 27, 2003 related to our assumption of approximately
$6.9 million of debt in connection with the acquisition of IDS. We paid off
the IDS debt in the fourth quarter of fiscal 2003. 32




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Interest Income Interest income consists of interest earned on our cash balances in various
types of interest bearing accounts, and interest earned on investments in
short-term marketable securities. Interest income was $250,000 for the year
ended September 27, 2003; an increase of $85,000 compared to $165,000 for the
year ended September 28, 2002. This increase was attributable to the increase
in cash equivalents between periods primarily as a result of cash flows from operations, and the proceeds received from our stock
offering which was completed in July 2003. Amortization of Goodwill and Intangible Assets We adopted SFAS 142 on September 29,
2002 and discontinued amortization of goodwill at that time. Goodwill
amortization for the year ended September 28, 2002 totaled $1.5 million. Intangible asset amortization for the year ended September 27, 2003
totaled $1.1 million, of which approximately $1.0 million related to intangible
assets acquired from IDS. Income Taxes Income tax expense consists of current and deferred federal and state income
taxes. Income tax expense was $5.0 million for the year ended September 27,
2003, compared to $0.4 million for the year ended September 28, 2002. The
effective tax rate was approximately 33% for the year ended September 27, 2003,
compared to approximately 4% for the year ended September 28, 2002. The
increase in the effective tax rate in 2003 was a result of $3.1 million of
income tax benefits in 2002 relating to the reversal of a valuation allowance
on deferred tax assets as we believed it was more likely than not that we would
realize the related tax benefits, as well as the reversal of an income tax
reserve as a result of the completion of certain prior years tax returns. 
 Liquidity and Capital Resources Cash on hand as of October 2, 2004 totaled approximately $38.0 million and was
primarily invested in a money market account. During fiscal year 2004, cash
provided by operating activities was approximately $4.2 million
versus $18.0
million in fiscal 2003. The decrease in cash provided by operating activities
of $13.6 million was primarily due to lower net income of $5.3 million, an
increase in inventory by $6.0 million, and fewer stock options being exercised
which lowered the tax benefit by $2.4 million. Depreciation and amortization
totaled approximately $4.4 million for fiscal 2004. Accounts receivable decreased approximately $0.7 million from fiscal year 2003.
However, days-sales-outstanding at October 2, 2004 was
64 days, which was higher than
the 57 days at September 27, 2003 due to revised terms to some of our
customers in fiscal year 2004. Inventories increased approximately $6.0 million from fiscal year 2003.
Inventory of approximately $24.7 million as of October 2, 2004 represents 117
days of inventory on hand, an increase from 93 days on hand at September 27,
2003. Inventory levels are based on projected production requirements for the
first half of fiscal 2005. Accounts payable as of October 2, 2004 were approximately $1.0 million higher
than at the end of fiscal 2003 due primarily to the timing of inventory
purchases. Accrued expenses as of October 2, 2004 decreased approximately $3.5
million from the end of fiscal 2003. The decrease in accrued expenses was
mainly due to a $1.4 million decrease in deferred revenue, a $1.1 million
decrease in accrued salaries and benefits due in part to the severance accrual
as a result of the closure of our Massachusetts facility and the timing of
payroll, a $0.3 million decrease in accrued commissions, and a $0.4 million
lower income tax payable than last year. Deferred revenue at October 2, 2004
was approximately $1.6 million, and consisted of approximately $1.4 million of
advance payments from customers and approximately $0.2 million of revenue
relating to inventory held at a reseller. We maintain a pension plan for eligible union employees at our Fort Wayne,
Indiana facility pursuant to a collective bargaining agreement. Mainly because
of a lower discount rate used to value expected future benefit obligations, the
pension plan is currently under funded by approximately $0.5 million. See Note
12 to the consolidated financial statements for additional information. We
expect to fund our pension obligation through expected returns on plan assets
and Company contributions to the plan over the next several years. Actual
contributions will be dependent on 33




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the actual investment returns during that period. During fiscal 2004, we did
not contribute to the plan. We believe that funding the plan over the next
several years will not significantly impact our liquidity. Purchases of property, plant and equipment for the year ended October 2, 2004
totaled approximately $2.3 million. Approximately $1.1 million was spent on
production equipment for our microelectronic manufacturing facilities. In
addition, approximately $1.2 million was spent on production equipment for our
display and interface products manufacturing facilities. In connection with
the decision to consolidate the Phoenix locations, we have put the Flower
Street land and building on the market and entered into a new ten-year lease in
the headquarters building. We expect to incur approximately $3.5 million in
capital expenditures for tenant improvements. We expect proceeds from the sale
to exceed our net book value, approximately $2.2 million as of
October 2, 2004. However, we do not expect
any ultimate gain or loss to have a significant impact on our consolidated
results of operations. We have a $12.0 million revolving line of credit with Bank One. Borrowings
under the line of credit bear interest at either the London Interbank Offered
Rate (LIBOR) plus 1.5%, or the Bank One prime rate. The line of credit was
renewed on March 19, 2004 for an additional two years, at similar terms and
conditions as the previous credit facility, and now expires March 28, 2006. As
of October 2, 2004, there were no borrowings against the line of credit and we
have not borrowed against the line of credit since April 2003. An additional $0.9 million of cash was received pursuant to common stock
options exercised and shares purchased through our employee stock purchase plan
throughout fiscal year 2004. We are in compliance with all material debt covenant requirements of our loan
agreement. We believe that our existing sources of liquidity, including
expected cash flows from operating activities, existing cash balances, and
existing credit facilities will satisfy our cash requirements for at least the
next twelve months. 
 Contractual Obligations We have entered into certain long-term contractual obligations that will
require various payments over future periods as follows: Payments due by Period as of October 2, 2004(in thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 year
    
    1 - 3 years
    
    4 - 5 years
    
    5 yearsOperating leases
    
    $
    3,837
    
    
    $
    1,085
    
    
    $
    2,054
    
    
    $
    698
    
    
    $
    Pension funding (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    $
    3,837
    
    
    $
    1,085
    
    
    $
    2,054
    
    
    $
    698
    
    
    $
    
 (1) The Company is committed to meeting the annual minimum funding
requirements relating to our pension plan. The Company cannot estimate
expected minimum funding requirements at this time. The Company may also make
contributions to the pension fund in excess of the minimum funding
requirements during any year. See Note 12 to the Consolidated Financial
Statements for additional information regarding the pension fund. Contingencies On
July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004,
shareholder class action lawsuits entitled McJimsey v. White
Electronic Designs Corporation, et al. (Case No.
CV04-1499-PHX-SRB), Afework v. White Electronic Designs
Corporation, et al(Case No. CV04-1558-PHX-JWS),Anders v.
White Electronic Designs Corporation, et al. (Case No.
CV04-1632-PHX-JAT), and Sammarco v. White Electronic Designs
Corporation, et al. (Case No.
CV04-1744-PHX-EHC), respectively, were filed in the United States
District Court for the District of Arizona against the Company and
certain of its current and former officers and directors. The
complaints allege, among other things, that between January 23, 2003
and June 9, 2004, the Company made false and misleading statements
concerning its financial results and business, in violation of the
federal securities laws. The complaints seek unspecified
monetary damages. The Court has consolidated the four cases into one
action. Plaintiffs motion for appointment of lead plaintiffs
and lead counsel is under submission with the Court. We believe the claims made in the complaints are
without merit and we intend to vigorously defend ourselves in these
matters. Although the outcome of this litigation is uncertain, based
on our current assessment of the merits of the complaints and
considering the amount of insurance we maintain covering
claims of this nature, we do not believe the ultimate
outcome of these matters will have a material adverse affect on our consolidated results of operations, liquidity or
financial condition. On
August 12, 2004 and August 19, 2004, purported derivative actions
entitled Dodt v. Shokrgozar, el al. (Case No. CV04-1674-PHX-NVW)
and Christ v. Shokrgozar, el al. (Case No. CV04-1722-PHX-MHM),
respectively, were filed in the United States District Court for the
District of Arizona against current and former directors and officers
of the Company. The Company is also named as a nominal defendant in
both actions. The complaints allege that between January 2003 and the
present, defendants breached their fiduciary duties to the Company by
causing the Company to misrepresent its financial results and
prospects. The complaints allege claims for breach of fiduciary duty,
gross mismanagement, abuse of control, waste of corporate assets,
insider selling, and unjust enrichment. The complaints seek
unspecified damages, equitable relief, and restitution as against the
individual defendants. The Company believes the claims made in the
complaints are without merit and intends to vigorously defend these
actions. On October 22, 2004, the Company moved to dismiss both
actions and, in the alternative, moved to stay the Christ action. The
motion is pending. Although the outcome of this litigation is
uncertain, based on our current assessment of the merits of the
complaints and considering the amount of insurance we maintain
covering claims of this nature, we do not believe the ultimate outcome
of these matters will have a material adverse affect on our
consolidated results of operations, liquidity or financial condition. In
addition, from time to time, we are subject to claims and litigation
incident to our business. There are currently no such material,
pending proceedings to which we are a party. 
 Recent Accounting Pronouncements In
December 2003, the Financial Accounting Standards Board
(FASB) issued FIN No. 46R, Consolidation of Variable Interest
Entities  an interpretation of ARB 51. This Interpretation, which replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
provides guidance on the identification of entities of which control is
achieved through means other than voting rights (variable interest entities
or VIEs) and how to determine when and which business enterprise should
consolidate the VIE (the primary beneficiary). Special provisions apply to
enterprises that have fully or partially applied Interpretation 46 prior to
issuance of this Interpretation. Otherwise, application of this Interpretation
(or Interpretation 46) is required in financial statements of public entities
that have interests in variable interest entities or potential variable
interest entities commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities (other than
small business issuers) for all other types 34




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of entities is required in
financial statements for periods ending after March 15, 2004. In some
instances, enterprises have the option of applying or continuing to apply
Interpretation 46 for a short period of time before applying this
Interpretation. The implementation of this Interpretation did not have a
material impact on the Companys financial condition or results of operations. In December 2004, FASB issued SFAS 151, Inventory Costs 
an amendment of ARB No. 43, Chapter 4. This Statement amends
the guidance in ARB No. 43, Chapter 4, Inventory Pricing,
to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage).
This Statement requires that those items be recognized as
current-period charges regardless of whether they  meet the criterion
of abnormal. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this
Statement shall be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The implementation of
this Statement is not expected to have a material impact on the
Companys financial condition or results of operations. 
 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of October 2, 2004, we had no borrowings on our revolving line of credit
with Bank One. Should we borrow against the line, interest charged on these
borrowings would be at either the banks prime rate or LIBOR plus 1.5%. During
fiscal 2004, the banks prime rate averaged 4.25% and was 4.75% as of October
2, 2004. We are subject to changes in the prime rate based on Federal Reserve actions
and general market interest fluctuations. We are also subject to fluctuations
in the LIBOR rate. As of October 2, 2004, the LIBOR rate was approximately
2.17%. Should we begin borrowing against the credit line, annual interest
expense (at 4.75%) would be approximately $47,500 for every $1.0 million
borrowed. A hypothetical increased rate change of 1% would increase interest
expense by approximately $10,000 per $1.0 million borrowed on an annual basis.
We believe that moderate interest rate increases will not have a material
adverse impact on our results of operations, liquidity or financial position. We believe that we are not subject in any material way to other forms of market
risk, such as foreign currency exchange risk on foreign customer purchase
orders (we accept payment in U.S. dollars only) or commodity price risk. 
 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Regulation S-X are
included under Part IV, Item 15 of this Annual Report on Form 10-K. 
 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A CONTROLS AND PROCEDURES Evaluation
of Disclosure Controls and Procedures. We have evaluated, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer,
the effectiveness of the design and operation of our disclosure controls and
procedures (as that term is defined under Rule 13a-15(e) and Rule 15d-15(e) of
the Securities Exchange Act of 1934). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the fiscal
year ended October 2, 2004, our disclosure controls and procedures are
effective. Changes in Internal Control over Financial Reporting. There were no
changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting. 
 ITEM 9B OTHER INFORMATION On November 5, 2004, we
entered into an amendment of our headquarter lease located on E.
University Drive in Phoenix with Gus Enterprises-XII, L.L.C., as
landlord, to add another 31,000 square feet of space in our
headquarter facility which will be improved to accommodate the
additional manufacturing being relocated. Our amended headquarter
lease will cover up to approximately 74,000 square feet. The lease
term will expire on July 31, 2015 and is subject to two five-year
renewal options. Our monthly base rent amount will continue to be
$37,945 through May 2005, $65,619 from June 2005 to May 2007, $68,863
from June 2007 to May 2009, $72,254 from June 2009 to May 2011,
$75,941 from June 2011 to May 2013, and $79,627 from June 2013 to
July 2015.
A copy of the amendment is filed as an Exhibit to this  report. On December 14, 2004, we entered into a new employment agreement with Mr. Shokrgozar, who is employed as our President and Chief Executive Officer.
Mr.
Shokrgozars agreement provides a term ending December
13, 2007,
and renews automatically for subsequent two-year terms unless 90 days prior to the
renewal date, either we or Mr. Shokrgozar notifies the other of its intention not to
renew. The agreement provides for an annual base salary of $500,000, which may be
increased at the discretion of our Compensation Committee, an annual bonus to be
determined by our Compensation Committee and participation by Mr. Shokrgozar in our
fringe benefit programs generally available to our senior executives. In the event
of a termination for cause, we are required to pay Mr. Shokrgozar only his unpaid salary
and those amounts earned by or accrued for his benefit under our plans to the date of termination.
In the event of a termination without cause, or if we elect not to renew the agreement,
we are required to pay to Mr. Shokrgozar
a lump sum  severance payment equal to two times the sum of Mr.
Shokrgozars highest annual base salary and highest annual bonus/incentive compensation.
The agreement also provides in such circumstance for the continuation
of his benefits for a period of at least 18 months, provision of
executive-level outplacement services and the immediate vesting of
his options then exercisable for a period of 18 months after
termination. Mr. Shokrgozars agreement includes special
provisions in the event of a Change in Control (as
defined in the agreement). Specifically, Mr. Shokrgozars
employment term would automatically extend for a period of 18
months. During that term, Mr. Shokrgozar could terminate his
agreement if his duties were materially changed, his annual
compensation was decreased, he was required to relocate or if our
successor failed to assume our obligation under the agreement. In the
event of such a termination, Mr. Shokrgozar is entitled to a lump sum
severance payment equal to three times his highest annual base salary and
highest annual bonus/incentive compensation as well as the continuing benefits
provided in the event of a termination without cause by us. A copy of
the agreement is filed as an Exhibit to this report. 35




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PART III 
 ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item for our directors is set forth in our
Proxy Statement (which will be filed with the Securities Exchange Commission no
later than 120 days following our 2004 fiscal year-end) relating to our annual
meeting of shareholders to be held on March 10, 2005 (the 2005 Proxy
Statement), under the heading Election of Directors and under the heading
Section 16(a) Beneficial Ownership Reporting Compliance, and is incorporated
herein by this reference as if set forth in full. The information required by this Item for our executive officers is set forth
under Part I, Item 1, of this Annual Report on Form 10-K, under the subheading
Executive Officers of the Company. We have adopted a Code of Ethics and Business Conduct that applies to all of
our executive officers, corporate controller and division controllers. A copy
of the Code of Ethics and Business Conduct is posted on our internet web site
at www.wedc.com. If we make any amendment to, or grant any waivers of, a
provision of the Code of Ethics and Business Conduct that applies to our
principal executive officer, principal financial officer, corporate controller
or division controllers where such amendment or waiver is required to be
disclosed under applicable SEC rules, we intend to disclose such amendment or
waiver and the reasons therefore on our internet web site. 
 ITEM 11 EXECUTIVE COMPENSATION The information required by this Item is set forth in the 2005 Proxy Statement
under the heading Executive Compensation and is incorporated herein by this
reference as if set forth in full. The information set forth under the
headings Report of the Compensation Committee and Stock Price Performance
Graph contained in the 2005 Proxy Statement are not incorporated herein by
this reference. 
 ITEM
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K under this Item is set
forth in the 2005 Proxy Statement under the heading Principal Shareholders
and under the heading Security Ownership by Management and is incorporated
herein by reference as if set forth in full. Equity Compensation Plan Information The following table provides information as of October 2, 2004, with respect to
the shares of the Companys common stock that may be issued under the Companys
existing equity compensation plans: 36




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Number of securities to be
    
    Weighted average exerciseissued upon exercise of
    
    price of outstanding
    
    Number of securitiesoutstanding options,
    
    options, warrants, and
    
    remaining available forPlan category
    
    warrants and rights
    
    rights
    
    future issuanceEquity compensation plans approved
by security holders (1)
    
    
    1,242,014
    
    
    $
    4.03
    
    
    
    1,257,996Equity compensation plans not
approved by security holders (2)
    
    
    974,471
    
    
    $
    4.68
    
    
    
    183,715Total
    
    
    2,216,485
    
    
    $
    4.32
    
    
    
    1,441,711
 (1) Equity compensation plans approved by security holders include
approved stock option plans and the approved employee stock purchase
plan. (2) Equity compensation plans not approved by security holders include
the following plans: Shokrgozar Plan  During fiscal 2000, the Companys Board of Directors approved
an independent grant to M r. Shokrgozar for a nonqualified stock option to
purchase up to 125,000 shares of common stock at an exercise price of $2.75 per
share, vesting over four years. At October 2, 2004, 125,000 shares from this
independent option right were still under option. 2000 Broad Based Non-qualified Stock Plan  During fiscal 2001, the Companys
Board of Directors approved the 2000 Broad Based Non-qualified Stock Plan,
which provides for the issuance of options to purchase shares of Common Stock
at an exercise price equal to the fair market value at the date of grant. As of
October 2, 2004, 183,715 shares were available for grant and 597,532 granted
options were unexercised. IDS Plan  The Company assumed the IDS Stock Option Plan and 169,000 warrants
with the acquisition of IDS in January, 2003. As of October 2, 2004, 83,089
granted options were unexercised and no shares were available for grant, and
all of the warrants were unexercised. 
 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in the 2005 Proxy Statement
under the heading Certain Transactions and under the heading Compensation
Committee Interlocks and Insider Participation and is incorporated herein by
this reference as if set forth in full. 
 ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is set forth in the 2005 Proxy Statement
under the heading Independent Registered Public Accounting
Firms Fees and Services and is
incorporated herein by this reference as if set forth in full. 
 37




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PART IV ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    42Consolidated Balance Sheet as of October 2,
2004 and September 27, 2003
    
    
    43Consolidated Statement of Income for the years
ended October 2, 2004, September 27, 2003
and September 28, 2002
    
    
    44Consolidated Statement of Shareholders Equity
for the years ended October 2, 2004, September 27, 2003, and September 28, 2002
    
    
    45Consolidated Statement of Cash Flow for the years
ended October 2, 2004, September 27, 2003
and September 28, 2002
    
    
    46Notes To Consolidated Financial Statements
    
    
    47
 (a)(2) Financial Statement Schedules INDEX TO FINANCIAL STATEMENT SCHEDULES Financial Schedule
    
    PageSchedule II Valuation and Qualifying Accounts and Reserves
    
    
    69
 (a)(3) Exhibits  2.1
    
    Agreement and Plan of Merger dated May 3, 1998 by and among Bowmar
Instrument Corporation and Electronic Designs, Inc. and Bravo Acquisition
Subsidiary, Inc. (incorporated herein by reference to Exhibit 2 to the
current Report on Form 8-K filed on May 6, 1998.)2.2
    
    Amendment to Agreement and Plan of Merger dated June 9, 1998
(incorporated herein by reference to Exhibit 2.1A to the Registration
Statement on Form S-4 filed on June 11, 1998, Registration No. 333-56565).2.3
    
    Amendment to Agreement and Plan of Merger dated August 24, 1998
(incorporated herein by reference to Exhibit 2.1B to the Registration
Statement on Form S-4, filed on September 2, 1998, Registration No.
333-56565).2.4
    
    Agreement and Plan of Reorganization dated as of January 22, 2003 by and
among White Electronic Designs Corporation, IDS Reorganization Corp., and
Interface Data, Systems, Inc. (incorporated herein by reference to Exhibit
2.1 to the Current Report on Form 8-K filed January 24, 2003.2.5
    
    Agreement and Plan of Reorganization dated January 29, 2001, by and among
White Electronic Designs Corporation, PV Acquisition Corporation,
Panelview, Inc. and Panelview Partners L.P. (incorporated herein by
reference to Exhibit 10.29 to the Companys Quarterly Report on Form 10-Q,
filed on February 13, 2001).3.1
    
    Amended and Restated Articles of Incorporation of White Electronic
Designs Corporation (incorporated herein by reference to Exhibit 3.1 on
Form 10-K filed December 24, 1998).3.2
    
    Amended and Restated Code of By-Laws of White Electronic Designs
Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-3
filed June 2, 2003).4.1
    
    Shareholder Rights Agreement, effective December 6, 1996, (incorporated
herein by reference to Exhibit 5 on Form 8-K, filed on December 19, 1996).4.2
    
    Amendment No. 1 to Rights Agreement, effective as of May 3, 1998
(incorporated herein by reference to Exhibit 4.3 to the Registration
Statement on Form S-4, filed on June 11, 1998, Registration No.
333-56565).10.1
    
    Agreement to be Bound by Registration Rights Agreements, dated as
of May 3, 1998, by and between Bowmar Instrument Corporation and
Electronic Designs, Inc. (incorporated herein by reference to Exhibit
10.1 to the Registration Statement on Form S-4, filed on Jun 11, 1998,
Registration No. 333-56565).** 10.2
    
    Agreement to be Bound by Severance Agreements and Employment
Agreement, dated as of May 3, 1998, by and between Bowmar Instrument
Corporation and Electronic Designs, Inc. (incorporated herein by 38




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##### Table of Contents



reference to Exhibit 10.2 to the Registration Statement on Form S-4,
filed on June 11, 1998, Registration No. 333-56565).10.3
    
    1994 Flexible Stock Plan (incorporated herein by reference to Exhibit A
to the Companys definitive Proxy Statement prepared in connection with
the 1994 Annual Meeting of Shareholders).10.4
    
    Amendment to Companys 1994 Flexible Stock Plan, effective May 7, 2001
(incorporated herein by reference to Exhibit 99 to the Registration
Statement on Form S-8, filed on May 9, 2001, Registration No. 333-60544).10.5
    
    Revolving Credit and Term Loan Agreement by and between Bank One, Texas
and White Electronic Designs Corporation, an Indiana Corporation, dated
January 7, 2000. (Incorporated herein by reference to Exhibit 10.27 to
the Companys 10-Q for the quarter ended January 1, 2000).10.6
    
    First Amendment to Revolving Credit Agreement by and between Bank One
effective as of June 3, 2000; Promissory Note effective June 3, 2000,
Notice of Final Agreement effective June 3, 2000 (incorporated herein by
reference to Exhibit 10.28 to the Companys Quarterly Report on Form 10-Q
for the quarter ended July 1, 2000).10.7
    
    Third Modification agreement between Bank One N.A. and White Electronic
Designs Corporation, effective March 28, 2002 (incorporated herein by
reference to Exhibit 10.38 to the Companys Quarterly Report on Form 10-Q
filed on May 13, 2002).10.8
    
    Fourth Modification agreement between Bank One N.A. and White Electronic
Designs Corporation, effective January 13, 2003 (incorporated herein by
reference to Exhibit 10.41 to the Companys Quarterly Report on Form 10-Q
filed on February 11, 2003).10.9
    
    Fifth Modification agreement between Bank One N.A. and White Electronic
Designs Corporation, effective March 13, 2003 (incorporated herein by
reference to Exhibit 10.42 to the Companys Quarterly Report on Form 10-Q
filed on May 13, 2003).10.10
    
    Term Loan Agreement between Bank One N.A. and White Electronic Designs
Corporation, effective March 13, 2003 (incorporated herein by reference to
Exhibit 10.43 to the Companys Quarterly Report on Form 10-Q filed on May
13, 2003).10.11
    
    Modification letter to term loan agreement between Bank One N.A. and
White Electronic Designs Corporation, effective April 24, 2003
(incorporated herein by reference to Exhibit 10.43 to the Companys
Quarterly Report on Form 10-Q filed on May 13, 2003).**10.12
    
    White Electronic Designs Corporation 2001 Director Stock Plan
(incorporated herein by reference to Exhibit 99 to the Registration
Statement on Form S-8, filed on May 9, 2001, Registration No. 333-60536).**10.13
    
    White Electronic Designs Corporation 2000 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 99 to the Registration
Statement on Form S-8, filed May 9, 2001, Registration No. 333-60546).**10.14
    
    Amendment to Companys Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to Exhibit 99 to the Registration
Statement on Form S-8, filed on May 9, 2001, Registration No. 333-60548).**10.15
    
    White Electronic Designs Corporation 2000 Broad Based Employee Stock
Option Plan (incorporated herein by reference to Exhibit 99 to the
Registration Statement on Form S-8, filed on May 9, 2001, Registration No.
333-60542).**10.16
    
    Executive Employment Agreement made as of December 14, 2004 between
White Electronic Designs Corporation and Hamid R. Shokrgozar. 39




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##### Table of Contents



**10.17
    
    Non-Qualified Stock Option Agreement between White Electronic Designs
Corporation and Donald McGuinness dated December 3, 1998 (incorporated
herein by reference to Exhibit 10.41 to the Companys Annual Report on
Form 10-K filed on December 23, 2002).**10.18
    
    Non-Qualified Stock Option Agreement between White Electronic Designs
Corporation and Hamid Shokrgozar dated November 10, 1999 (incorporated
herein by reference to Exhibit 10.42 to the Companys Annual Report on
Form 10-K filed on December 23, 2002).10.19
    
    Industrial Real Estate Lease dated February 4, 1997 between
Bowmar Instrument Corp., as tenant, and Allred Phoenix
Properties, L.L.C., as landlord (incorporated herein by reference to
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the
fiscal year ended September 27, 1997).10.20
    
    Sixth Modification Agreement between Bank One N.A. and White
Electronic Designs Corporation, effective March 19, 2004
(incorporated here in by reference to Exhibit 10.1 on Form 10-Q,
filed on May 14, 2004).*10.21
    
    First Amendment to certain Industrial Real Estate Lease
dated February 4, 1997 between White Electronic Designs Corporation
(as successor - in - interest of Bowmar Instrument Corp.) and Gus
Enterprises - XII, L.L.C. (as successor - in - interest of Allred
Phoenix Properties, L.L.C.) dated November 5, 2004.*21.1
    
    Subsidiaries of White Electronic Designs Corporation.*23.1
    
    Consent of PricewaterhouseCoopers LLP.*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant
To Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant
To Section 906 of the Sarbanes-Oxley Act of 2002.   *
    
    Filed herewith.**
    
    Management compensatory contract, plan or arrangement. 40




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. WHITE ELECTRONIC DESIGNS CORPORATIONDate:
    
    December 16, 2004
    
    /s/ Roger A. DerseRoger A. DerseChief Financial Officer, Secretary
and Treasurer
 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 Company
and in the capacities and on the date indicated: /s/Hamid R. Shokrgozar
    
    /s/Edward A. WhiteHamid R. Shokrgozar
    
    Edward A. WhitePresident, Chief Executive Officer
and Chairman of the Board
    
    Vice Chairman of the Board of DirectorsDate: December 16, 2004
    
    Date: December 16, 2004/s/Thomas M. Reahard
    
    /s/Thomas J. ToyThomas M. Reahard
    
    Thomas J. ToyDirector
    
    DirectorDate: December 16, 2004
    
    Date: December 16, 2004/s/Jack A. Henry
    
    /s/ Roger A. DerseJack A. Henry
    
    Roger A. DerseDirector
    
    Chief Financial Officer, Secretary and TreasurerDate: December 16, 2004
    
    Date: December 16, 2004/s/Paul D. QuadrosPaul D. QuadrosDirectorDate: December 16, 2004
 41




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of
White Electronic Designs Corporation: In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of White Electronic Designs Corporation and its subsidiaries
at October 2, 2004 and September 27, 2003, and the results of their operations
and their cash flows for each of the three years in the period ended October 2,
2004 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements 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. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As described in Note 2, the Company changed its method of accounting for
goodwill and other intangible assets effective September 29, 2002. /s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
December 14, 2004 42




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (In thousands of dollars, except share data) October 2,
    
    September 27,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    38,030
    
    
    $
    30,176Marketable securities
    
    
    
    
    
    
    5,080Accounts receivable, less allowance for
doubtful accounts of $560 and $397
    
    
    19,039
    
    
    
    19,689Inventories, net
    
    
    24,744
    
    
    
    18,718Prepaid expenses and other current assets
    
    
    1,584
    
    
    
    1,727Deferred income taxes
    
    
    4,652
    
    
    
    5,222Total Current Assets
    
    
    88,049
    
    
    
    80,612Property, plant and equipment, net
    
    
    13,975
    
    
    
    15,689Goodwill
    
    
    17,105
    
    
    
    17,040Intangible assets
    
    
    5,643
    
    
    
    6,310Other assets, net
    
    
    128
    
    
    
    155Total Assets
    
    $
    124,900
    
    
    $
    119,806LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    9,070
    
    
    $
    8,074Accrued salaries and benefits
    
    
    1,396
    
    
    
    2,496Accrued expenses
    
    
    2,258
    
    
    
    3,251Deferred revenue
    
    
    1,646
    
    
    
    3,048Total Current Liabilities
    
    
    14,370
    
    
    
    16,869Accrued long-term pension liability
    
    
    522
    
    
    
    712Deferred income taxes
    
    
    1,175
    
    
    
    503Other long term liabilities
    
    
    1,618
    
    
    
    694Total Liabilities
    
    
    17,685
    
    
    
    18,778Shareholders EquityPreferred stock, 1,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    Common stock, $0.10 stated value,
60,000,000 shares authorized,
24,335,310 and 24,067,184 shares
issued
    
    
    2,433
    
    
    
    2,406Treasury stock, 44,442 and 44,442
shares, at cost
    
    
    (4
    )
    
    
    (4
    )Additional paid-in capital
    
    
    90,347
    
    
    
    89,129Unearned compensation
    
    
    (8
    )
    
    
    (34
    )Retained earnings
    
    
    14,664
    
    
    
    9,857Accumulated other comprehensive loss
    
    
    (217
    )
    
    
    (326
    )Total Shareholders Equity
    
    
    107,215
    
    
    
    101,028Total Liabilities and
Shareholders Equity
    
    $
    124,900
    
    
    $
    119,806
 The accompanying notes are
an integral part of these consolidated financial statements. 43




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME

(In thousands of dollars, except share data and per share data)

Year endedOctober 2,
    
    September 27,
    
    September 28,2004
    
    2003
    
    2002Net sales
    
    $
    108,962
    
    
    $
    113,534
    
    
    $
    90,458Cost of sales
    
    
    77,297
    
    
    
    74,847
    
    
    
    61,558Gross profit
    
    
    31,665
    
    
    
    38,687
    
    
    
    28,900Operating expenses:Selling, general and administrative
    
    
    18,498
    
    
    
    16,607
    
    
    
    13,939Research and development
    
    
    6,036
    
    
    
    6,015
    
    
    
    4,264Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    1,503Amortization of intangible assets
    
    
    641
    
    
    
    1,106
    
    
    
    84Total operating expenses
    
    
    25,175
    
    
    
    23,728
    
    
    
    19,790Operating income
    
    
    6,490
    
    
    
    14,959
    
    
    
    9,110Interest expense
    
    
    2
    
    
    
    88
    
    
    
    147Interest (income)
    
    
    (454
    )
    
    
    (250
    )
    
    
    (165
    )Income before income taxes
    
    
    6,942
    
    
    
    15,121
    
    
    
    9,128Provision for income taxes
    
    
    2,135
    
    
    
    4,971
    
    
    
    388Net income
    
    $
    4,807
    
    
    $
    10,150
    
    
    $
    8,740Earnings per share  basic
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Earnings per share  diluted
    
    $
    0.19
    
    
    $
    0.44
    
    
    $
    0.42Weighted average number of common
shares and equivalents:Basic
    
    
    24,201,436
    
    
    
    21,320,307
    
    
    
    19,815,162Diluted
    
    
    25,001,906
    
    
    
    22,920,209
    
    
    
    20,922,434


The accompanying notes are an integral part of these consolidated financial statements.

44



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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (In thousands of dollars, except share data) AdditionalCommon
    
    Common
    
    Treasury
    
    Paid-inShares
    
    Stock
    
    Stock
    
    CapitalBalance, September 29, 2001
    
    
    19,594,124
    
    
    $
    1,959
    
    
    $
    (4
    )
    
    $
    50,858Net incomeMinimum pension liabilityComprehensive incomeStock options exercised
    
    
    343,585
    
    
    
    35
    
    
    
    
    
    
    
    689Common stock issued through
employee stock purchase plan
    
    
    43,646
    
    
    
    4
    
    
    
    
    
    
    
    185Common stock issued for Panelview acquisition
    
    
    110,187
    
    
    
    11
    
    
    
    
    
    
    
    1,005Tax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576Balance, September 28, 2002
    
    
    20,091,542
    
    
    $
    2,009
    
    
    $
    (4
    )
    
    $
    53,313Net incomeMinimum pension liabilityComprehensive incomeStock options exercised
    
    
    964,963
    
    
    
    96
    
    
    
    
    
    
    
    2,127Common stock issued in
public offering
    
    
    2,402,874
    
    
    
    240
    
    
    
    
    
    
    
    21,718Common stock issued through
employee stock purchase plan
    
    
    30,210
    
    
    
    3
    
    
    
    
    
    
    
    193Common stock issued for IDS acquisition
    
    
    577,595
    
    
    
    58
    
    
    
    
    
    
    
    4,557Options and warrants issued for IDS acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,457Stock compensation earned during the yearTax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,764Balance, September 27, 2003
    
    
    24,067,184
    
    
    $
    2,406
    
    
    $
    (4
    )
    
    $
    89,129Net incomeMinimum pension liabilityComprehensive incomeStock options exercised
    
    
    220,956
    
    
    
    22
    
    
    
    
    
    
    
    575Common stock issued through
employee stock purchase plan
    
    
    47,170
    
    
    
    5
    
    
    
    
    
    
    
    264Stock compensation earned during the yearTax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379Balance, October 2, 2004
    
    
    24,335,310
    
    
    $
    2,433
    
    
    $
    (4
    )
    
    $
    90,347
 Retained Earnings
    
    Accumulated
    
    
    
    
    
    TotalUnearned
    
    (Accumulated
    
    Other Compre-
    
    
    
    
    
    ShareholdersCompensation
    
    Deficit)
    
    hensive Loss
    
    
    
    
    
    EquityBalance, September 29, 2001
    
    
    
    
    
    $
    (9,033
    )
    
    $
    
    
    
    
    
    
    
    $
    43,780Net income
    
    
    
    
    
    
    8,740
    
    
    
    
    
    
    
    
    
    
    
    8,740Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    (255
    )
    
    
    
    
    
    
    (255
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,485Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724Common stock issued through
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Common stock issued for Panelview acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,016Tax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576Balance, September 28, 2002
    
    
    
    
    
    $
    (293
    )
    
    $
    (255
    )
    
    
    
    
    
    $
    54,770Net income
    
    
    
    
    
    
    10,150
    
    
    
    
    
    
    
    
    
    
    
    10,150Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    
    
    
    
    (71
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,079Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,223Common stock issued in
public offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,958Common stock issued through
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Common stock issued for IDS acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,615Options and warrants issued for IDS acquisition
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,406Stock compensation earned during the year
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Tax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,764Balance, September 27, 2003
    
    $
    (34
    )
    
    $
    9,857
    
    
    $
    (326
    )
    
    
    
    
    
    $
    101,028Net income
    
    
    
    
    
    
    4,807
    
    
    
    
    
    
    
    
    
    
    
    4,807Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,916Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    597Common stock issued through
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269Stock compensation earned during the year
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Tax benefits related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379Balance, October 2, 2004
    
    $
    (8
    )
    
    $
    14,664
    
    
    $
    (217
    )
    
    
    
    
    
    $
    107,215
 The accompanying notes are an integral part of these consolidated financial statements. 45




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS Year EndedOctober 2,
    
    September 27,
    
    September 28,2004
    
    2003
    
    2002OPERATING ACTIVITIES:Net income
    
    $
    4,807
    
    
    $
    10,150
    
    
    $
    8,740Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,416
    
    
    
    4,846
    
    
    
    3,814Amortization of premium on marketable securities
    
    
    80
    
    
    
    
    
    
    
    Premium on marketable securities
    
    
    (120
    )
    
    
    
    
    
    
    Deferred income tax expense (benefit)
    
    
    1,188
    
    
    
    32
    
    
    
    (2,285
    )Tax benefits related to exercise of stock options
    
    
    379
    
    
    
    2,764
    
    
    
    576Loss on sale of property, plant, and equipment
    
    
    264
    
    
    
    52
    
    
    
    2Net changes in balance sheet accounts:Accounts receivable
    
    
    650
    
    
    
    (1,607
    )
    
    
    (896
    )Inventories
    
    
    (6,026
    )
    
    
    (43
    )
    
    
    600Prepaid expenses
    
    
    143
    
    
    
    (1,073
    )
    
    
    19Other assets
    
    
    (40
    )
    
    
    794
    
    
    
    12Accounts payable
    
    
    996
    
    
    
    1,026
    
    
    
    239Accrued expenses
    
    
    (3,494
    )
    
    
    1,042
    
    
    
    2,289Other long-term liabilities
    
    
    924
    
    
    
    (8
    )
    
    
    (646
    )Net cash provided by operating activities
    
    $
    4,167
    
    
    $
    17,975
    
    
    $
    12,464INVESTING ACTIVITIES:Acquisition of property, plant and equipment
    
    
    (2,299
    )
    
    
    (3,862
    )
    
    
    (4,798
    )Cash received in sale of property, plant, and equipment
    
    
    
    
    
    
    
    
    
    
    3Purchase of marketable securities
    
    
    
    
    
    
    (5,080
    )
    
    
    Proceeds from maturity of marketable security
    
    
    5,120
    
    
    
    
    
    
    
    Cash payments for acquisition, net of cash acquired
    
    
    
    
    
    
    (8,391
    )
    
    
    Net cash provided by (used in) investing activities
    
    $
    2,821
    
    
    $
    (17,333
    )
    
    $
    (4,795
    )FINANCING ACTIVITIES:Borrowings on line of credit
    
    
    
    
    
    
    6,128
    
    
    
    Repayments on line of credit
    
    
    
    
    
    
    (6,128
    )
    
    
    Borrowings of long-term debt
    
    
    
    
    
    
    6,000
    
    
    
    3,083Repayments of long-term debt
    
    
    
    
    
    
    (12,940
    )
    
    
    (4,601
    )Common stock issued for exercise of options
    
    
    598
    
    
    
    2,223
    
    
    
    724Common stock issued in public offering
    
    
    
    
    
    
    21,958
    
    
    
    Common stock issued through employee purchase plan
    
    
    268
    
    
    
    196
    
    
    
    190Net cash provided by (used in) financing activities
    
    $
    866
    
    
    $
    17,437
    
    
    $
    (604
    )Net change in cash
    
    
    7,854
    
    
    
    18,079
    
    
    
    7,065Cash at beginning of year
    
    
    30,176
    
    
    
    12,097
    
    
    
    5,032Cash at end of year
    
    $
    38,030
    
    
    $
    30,176
    
    
    $
    12,097SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    2
    
    
    $
    88
    
    
    $
    147Cash paid for income taxes
    
    $
    167
    
    
    $
    3,911
    
    
    $
    2,277NONCASH
INVESTING AND FINANCING ACTIVITIES:Common stock issued for acquisition
    
    $
    
    
    
    $
    4,615
    
    
    $
    1,016Options and warrants issued for acquisition
    
    $
    
    
    
    $
    4,457
    
    
    $
    
 The accompanying notes are an integral part of these financial statements. 46




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##### Table of Contents



WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS White Electronic Designs Corporation designs, develops and manufactures
innovative microelectronic and display components and systems for high
technology products used in the military/industrial and commercial markets.
The Companys microelectronic solutions include advanced semiconductor and
state of the art multi-chip packaging, as
well as a proprietary process for applying anti-tamper protection to mission
critical semiconductor components in military applications. The Companys
display solutions include enhanced flat panel display products, interface
devices and electromechanical assemblies. The Companys customers, which
include military prime contractors in the United States and Europe as well as
commercial original equipment manufacturers (OEMs), outsource many of their
microelectronic and display components and systems to us as a result of the
combination of our design, development and manufacturing expertise. The
Companys operations include two reportable segments: microelectronics and
display, with the majority of sales and operating income generated by the
microelectronic segment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  a.
    
    Principles of Consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owed subsidiaries. All significant inter-company accounts
and transactions have been eliminated. Certain amounts in prior fiscal
years consolidated financial statements have been reclassified to
conform to the current year presentation.  b.
    
    Fiscal Year-End The Companys fiscal year ends on the Saturday nearest September 30.  c.
    
    Cash and Cash Equivalents The Company considers all highly liquid debt instruments and money market
funds purchased with an initial maturity of three months or less to be
cash equivalents.  d.
    
    Marketable Securities Marketable securities at September 27, 2003 consisted of a short-term
corporate note which matured on January 30, 2004. It was recorded at
cost which approximated fair value.  e.
    
    Inventories Inventories are valued at the lower of cost or market with cost
determined using the average or standard cost methods, with standard
costs approximating actual costs.  f.
    
    Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is
determined on a straight-line basis over the estimated useful lives
ranging from 5 to 20 years for buildings and improvements and 3 to 7
years for machinery and equipment. Leasehold improvements are amortized
over the lives of the leases or estimated useful lives of the assets,
whichever is shorter. When assets are sold or otherwise retired, the
cost and accumulated depreciation are removed from the books and the
resulting gain or loss is included in operating results. The
Company, upon triggering events, evaluates the carrying value of its property, plant, and
equipment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, based upon the estimated cash flows
to be generated by the related assets. 47




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  g.
    
    Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 supersedes
Accounting Principles Board (APB) Opinion No. 17, Intangible Assets, and was effective for fiscal
years beginning after December 15, 2001. SFAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets and
require that such assets be tested annually for impairment (and in
interim periods if events or circumstances indicate that the related
carrying amount may be impaired), require that reporting units be
identified for purposes of assessing potential impairments, and remove
the forty-year limitation on the amortization period of intangible assets
that have finite lives. SFAS 142 requires that goodwill be tested for impairment using a two-step
process. The first step of the goodwill impairment test, which is used
to identify potential impairment, compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the fair value of
a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is not considered to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment
test must be performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair
value of reporting unit goodwill with the carrying amount of that
goodwill. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination.
If the carrying amount of the reporting unit goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The Company adopted SFAS 142 as of September 29, 2002 and completed the
first step impairment test for goodwill relating to its Panelview
reporting unit as of that date. The fair value of the reporting unit
exceeded its carrying value, therefore, an impairment was not indicated. As of October
2, 2004 and September 27, 2003 the Company completed the first step impairment
tests for the goodwill relating to its Panelview and IDS reporting units.
The fair value of each reporting unit exceeded the related carrying
value and, therefore, impairments of the related goodwill were not
indicated. If actual cash flows for these reporting units are less
than projected, the related goodwill may become impaired and an
impairment charge will be required. Goodwill recorded was $17.1 million and $17.0 million at October 2, 2004
and September 27, 2003, respectively. Furthermore, SFAS 142 requires
purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
Purchased intangible assets are carried at cost less accumulated
amortization. Amortization is computed over the estimated useful lives
of the respective assets, generally two to fifteen years. Pro forma net income for fiscal year 2002 excluding goodwill amortization
is as follows (in thousands of dollars, except per share data): 48




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Year2002Net income  as reported
    
    $
    8,740Add back: goodwill amortization expense, net of
tax effect
    
    
    932Net income  as adjusted
    
    $
    9,672Earnings per share  basic:Reported net income
    
    $
    0.44Goodwill amortization
    
    
    0.05Adjusted earnings per share-basic
    
    $
    0.49Earnings per share  diluted:Reported net income
    
    $
    0.42Goodwill amortization
    
    
    0.04Adjusted earnings per share-diluted
    
    $
    0.46
  h.
    
    Product Warranties Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related
revenue is recognized. The Company establishes a reserve for warranty
obligations based on its historical warranty experience.  i.
    
    Revenue Recognition The Company sells its microelectronic and display products
primarily to military prime contractors and commercial original
equipment manufacturers. A small portion of the Companys products
are also sold through distributors or resellers. The Company
recognizes revenue on product sales when persuasive evidence of an
arrangement with the customer exists, title to the product has
passed to the customer, which usually occurs at time of shipment, the
sales price is fixed or determinable, and collectibility of the
related billing is reasonably assured. Advance payments from
customers are deferred and recognized when the related products are
shipped. Revenue relating to products sold to distributors or
resellers who either have return rights or where the Company has a
history of accepting product returns are deferred and recognized
when the distributor or reseller sells the product to the end
customer. The Company also provides limited design services
pursuant to related customer purchase orders and recognizes the
associated revenue generally as such services are performed. However, it may be deferred until certain elements are completed.

The Company may from time to time enter into certain arrangements
that contain multiple elements such as performing limited design
services accompanied with follow-on manufacturing of related
products. The Company allocates revenue to the elements based on
relative fair value, and recognizes revenue for each element when the
there is evidence of an arrangement, delivery has occurred or
services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured. Arrangements with multiple
elements that are not considered separate units of accounting require
deferral of revenue until certain other elements have been delivered
or the services have been performed. Trade accounts receivable are
recorded at the invoiced amount and do not bear interest.



The Company maintains an allowance for doubtful accounts to cover
potential credit losses relating to its trade accounts receivable.
The allowance is based on the Companys historical collection
experience as well as an analysis of specific past due accounts.
Write-offs against the allowance totaled approximately $170,000 in
fiscal 2004, $145,000 in fiscal 2003 and $209,000 in fiscal 2002. The Companys contracts with military
prime contractors provide that they may be terminated at the convenience
of the U.S. Government. Upon such termination, the Company is normally
entitled to receive the purchase price for delivered items, reimbursement
for allowable costs incurred and allocable to the contract and an
allowance for profit on the allowable costs incurred or adjustment for
loss if completion of performance would have resulted in a loss.  j.
    
    Shipping Costs Shipping costs include charges associated with delivery of goods from the
Companys facilities to its customers and are reflected in costs of goods
sold. Shipping costs paid to the Company by our customers are classified
as revenue.  k.
    
    Research and Development Research and development costs are expensed as incurred. 49




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  l.
    
    Income Taxes The Company accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes, which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. Deferred
tax assets are recognized, net of any valuation allowance, for deductible
temporary differences and net operating loss and tax credit carry
forwards.  m.
    
    Fair Value of Financial Instruments The Company values financial instruments as required by SFAS 107,
Disclosures about Fair Value of Financial Instruments. The carrying
amounts of cash and cash equivalents and bank notes payable approximate
fair value due to the short maturity of those instruments. The carrying
amounts of account receivables and accounts payable approximate their
fair value due to the relatively short maturity of these items.  n.
    
    Accounting Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  o.
    
    Earnings per Share Basic earnings per share are computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are similar to
basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued. A reconciliation of the numerator and denominator of basic and diluted
earnings per share is as follows: 2004Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountEarnings per share-basicNet Income
    
    $
    4,807,000
    
    
    
    24,201,436
    
    
    $
    0.20Earnings available to common stockholders
    
    $
    4,807,000
    
    
    
    24,201,436
    
    
    $
    0.20Effects of Dilutive SecuritiesStock options and warrants
    
    
    
    
    
    
    800,470
    
    
    $
    (0.01
    )Earnings per share-dilutedEarnings available to common stockholders
    
    $
    4,807,000
    
    
    
    25,001,906
    
    
    $
    0.19
 Options excluded from the calculation of diluted earnings per share were 333,000, as the exercise price of those options was greater than the rice for the period. 50




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2003Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountEarnings per share-basicNet Income
    
    $
    10,150,000
    
    
    
    21,320,307
    
    
    $
    0.48Earnings available to common stockholders
    
    $
    10,150,000
    
    
    
    21,320,307
    
    
    $
    0.48Effects of Dilutive SecuritiesStock options
    
    
    
    
    
    
    1,599,902
    
    
    $
    (0.04
    )Earnings per share-dilutedEarnings available to common stockholders
    
    $
    10,150,000
    
    
    
    22,920,209
    
    
    $
    0.44
 Options excluded from the calculation of diluted earnings per share were 156,000, as the exercise price
of those options was greater than the price for the period. 2002Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountEarnings per share-basicNet Income
    
    $
    8,740,000
    
    
    
    19,815,162
    
    
    $
    0.44Earnings available to common stockholders
    
    $
    8,740,000
    
    
    
    19,815,162
    
    
    $
    0.44Effects of Dilutive SecuritiesStock options
    
    
    
    
    
    
    1,107,272
    
    
    $
    (0.02
    )Earnings per share  dilutedEarnings available to common stockholders
    
    $
    8,740,000
    
    
    
    20,922,434
    
    
    $
    0.42
 Options excluded from the calculation of diluted earnings per share were 366,000, as the exercise price of those
options was greater than the average share price for the period.  p.
    
    Stock-Based Compensation The Company
 accounts for employee stock options relating to its common
stock in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and provides the
pro forma disclosures required by SFAS 123 Accounting for Stock Based
Compensation (SFAS 123). Had the Company determined employee stock compensation expense in
accordance with SFAS 123, the Companys net income for fiscal years 2004,
2003, and 2002 would have been reduced to the pro forma amounts indicated
below (in thousands of dollars, except per share data): Net income  as reported
    
    $
    4,807
    
    
    $
    10,150
    
    
    $
    8,740Less: Total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects
    
    
    (730
    )
    
    
    (988
    )
    
    
    (1,895
    )Net income  pro forma
    
    $
    4,077
    
    
    $
    9,162
    
    
    $
    6,845Earnings per share-basic as reported
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Earnings per share-basic pro forma
    
    $
    0.17
    
    
    $
    0.43
    
    
    $
    0.35Earnings per share-diluted as reported
    
    $
    0.19
    
    
    $
    0.44
    
    
    $
    0.42Earnings per share-diluted pro forma
    
    $
    0.16
    
    
    $
    0.40
    
    
    $
    0.33
 51




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option grant has been determined using the
Black-Scholes option-pricing model with the following weighted average
assumptions: Employee Stock Options
    
    2004
    
    2003
    
    2002Expected options term (years)
    
    
    4.7
    
    
    
    5.0
    
    
    
    6.3Risk free interest rate
    
    
    3.35
    %
    
    
    2.98
    %
    
    
    4.75
    %Volatility
    
    
    81
    %
    
    
    92
    %
    
    
    146
    %
 Employee Stock Purchase Plan
    
    2004
    
    2003
    
    2002Expected options term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk free interest rate
    
    
    1.79
    %
    
    
    0.94
    %
    
    
    2.00
    %Volatility
    
    
    58
    %
    
    
    50
    %
    
    
    55
    %
 The weighted-average estimated fair value of employee stock options
granted during fiscal years 2004, 2003 and 2002 was $7.33, $6.55, and
$5.94 per share, respectively. The weighted-average estimated fair value
of the discount on the shares sold under the Employee Stock Purchase Plan
during fiscal years 2004, 2003 and 2002 was $1.05, $1.14 and $0.77,
respectively.  q.
    
    Newly Issued Accounting Standards In December 2003, FASB issued FIN No. 46R, Consolidation of Variable Interest
Entities  an interpretation of ARB 51. This Interpretation, which replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
provides guidance on the identification of entities of which control is
achieved through means other than voting rights (variable interest entities
or VIEs) and how to determine when and which business enterprise should
consolidate the VIE (the primary beneficiary). Special provisions apply to
enterprises that have fully or partially applied Interpretation 46 prior to
issuance of this Interpretation. Otherwise, application of this Interpretation
(or Interpretation 46) is required in financial statements of public entities
that have interests in variable interest entities or potential variable
interest entities commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities (other than
small business issuers) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. In some
instances, enterprises have the option of applying or continuing to apply
Interpretation 46 for a short period of time before applying this
Interpretation. The implementation of this Interpretation did not have a
material impact on the Companys financial condition or results of operations. In
December
2004, FASB issued SFAS 151, Inventory Costs  an amendment of
ARB No. 43, Chapter 4. This Statement amends the guidance in
ARB No.  43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). This Statement
requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of abnormal. In
addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this Statements shall be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The
implementation of this Statement is not expected to have a material
impact on the Companys financial condition or results of
operations. 3. MERGER AND ACQUISITIONS On January 22, 2003, the Company acquired the outstanding stock of Interface
Data Systems, Inc. (IDS), a privately held corporation headquartered in
Phoenix, Arizona. IDS designs and manufactures membrane keypads, silver
flexible circuits, graphic overlays, sensors, electro luminescent lamps,
control panels, keypad/controller assemblies, and handheld and desktop
electronic devices for original equipment manufacturers. IDS sells to the home
appliance, consumer electronics, industrial process controls, medical and
communications markets. IDS has manufacturing facilities in Phoenix, Arizona
and Columbus, Ohio and has strategic manufacturing alliances in China and
Taiwan. The acquisition of IDS expanded the Companys product offerings and
allows the Company to provide system and subsystem level solutions to its
customers. The net sales from the Columbus, Ohio location have been included in the
Companys display segment, while the net sales from the IDS Phoenix, Arizona
location have been included in both the display and microelectronic segments.
The IDS acquisition was treated as a purchase business combination and its
results of operations have been included in the Companys consolidated
financial statements since the acquisition date. 52




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The purchase price of the IDS acquisition was approximately $18.6 million,
which included a cash payment of $9.0 million; 577,595 shares of the Companys
common stock valued at $4.6 million; the assumption of certain IDS employee
stock options and warrants with a value of $4.5 million; and $0.5 million of
acquisition costs. The Company issued approximately 469,000 options and
169,000 warrants to purchase its common stock in exchange for
IDS options and warrants that were outstanding at the date of the acquisition.
Approximately 38,000 of the options were unvested at the date of the
acquisition and the related unearned compensation of approximately $51,000 is
being recognized over the remaining vesting period. The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the acquisition date. The Company used
independent appraisers to assist in the determination of certain of these fair
values (in thousands of dollars): Current assets
    
    $
    7,909Property, plant and equipment
    
    
    5,121Intangible assets
    
    
    7,100Goodwill
    
    
    10,507Other
    
    
    764Total assets acquired
    
    
    31,401Current liabilities
    
    
    4,012Long-term debt
    
    
    5,980Deferred income taxes
    
    
    3,387Total liabilities assumed
    
    
    13,379Net assets acquired
    
    $
    18,022
 The breakdown of acquired goodwill and intangible assets by business segment is
as follows: (In thousands of dollars)
    
    Amortization
    
    
    
    
    Micro-Asset
    
    Period (in years)
    
    Display
    
    Electronics
    
    TotalGoodwill
    
    
    

    
    
    $
    1,953

    
    
    $
    8,554
    
    

    $
    10,507Intangible assets:Non-compete agreements
    
    
    2.5
    
    
    
    200
    
    
    
    200
    
    
    
    400Contracted backlog
    
    
    0.67
    
    
    
    194
    
    
    
    406
    
    
    
    600Existing technology
    
    
    10
    
    
    
    1,319
    
    
    
    681
    
    
    
    2,000Customer relationships
    
    
    15
    
    
    
    2,704
    
    
    
    1,396
    
    
    
    4,100$
    4,417
    
    
    $
    2,683
    
    
    $
    7,100
 The accompanying unaudited pro forma statement of income information gives
effect to the IDS acquisition as if it had occurred at the beginning of each
period presented. The pro forma information is included only for purposes of
illustration, and does not necessarily indicate what the Companys operating
results would have been had the acquisition of IDS been completed on the date
indicated. (In thousands of
dollars, except per share data)Year endedSeptember 27,
    
    September 28,2003
    
    2002Net sales
    
    $
    120,767
    
    
    $
    116,267Net income
    
    $
    9,722
    
    
    $
    8,213Earnings per share-basic
    
    $
    0.45
    
    
    $
    0.40Earnings per share-diluted
    
    $
    0.42
    
    
    $
    0.38
 53




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 29, 2001, the Company acquired Panelview, Inc., a manufacturer of
display products located in Oregon. Panelview provides optical enhancements to
display products sold to the transportation, medical and instrumentation
markets. Panelviews operating results have been included in the financial
statements from the date of the acquisition. The purchase price of the Panelview acquisition was approximately $9.1
million and included 905,000 shares of common stock, and $142,000 of direct
acquisition costs. In addition, the former shareholders of Panelview had the
potential to earn up to an additional $1 million of the Companys common stock
if certain revenue and operating contribution targets were met over the
twelve-month period from February 2001 through January 2002. The Company
issued 19,687 additional shares of its common stock valued at $128,000 on March
7, 2002 in connection with these provisions of the purchase agreement. 4. PLANT CLOSURE Subsequent to October 2, 2004, the
Company announced that it would be closing the
Flower Street building in Phoenix, Arizona (acquired as part of the IDS
acquisition) within the next twelve months and relocating employees and
the machinery and equipment to the Companys leased facility in the
headquarters building. On November 5, 2004 the Company entered into an
amendment of its headquarter lease located on E. University Drive in
Phoenix with Gus Enterprise - XII, L.L.C., as landlord, to add
another 31,000 square
feet of space in this facility which will be improved to accommodate the
additional manufacturing being relocated. The amended
headquarters lease will cover up to approximately 74,000 square
feet. The lease term will expire on July 31, 2015 and is subject to
two five-year renewal options. The monthly base rent amount will
continue to be $37,945 through May 2005, $65,619 from June 2005 to
May 2007, $68,863 from June 2007 to May 2009, $72,254 from June 2009
to May 2011, $75,941 from June 2011 to May 2013, and $79,627 from
June 2013 to July 2015. The Company does not expect moving
and rearrangement costs to be significant and expects to incur approximately
$3.5 million in capital expenditures for the leasehold improvements. The
Company intends to sell the Flower Street land and building and expects
proceeds from the sale to exceed the net book value based on a recent market
appraisal it has obtained. However, the Company does not expect any ultimate
gain or loss to have a significant impact on the consolidated results of
operations. The consolidation is expected to be completed in the first quarter
of fiscal 2006. In May 2003, the Company announced plans to close its Marlboro, Massachusetts
facility and move the related operations to the Companys two Arizona
facilities in an effort to reduce costs and consolidate the microelectronic
segment. The move was substantially completed by September 27, 2003. The
Company accelerated the depreciation of leasehold improvements at the
Massachusetts facility so that such assets were fully depreciated by September
27, 2003. Remaining production assets were relocated to the Arizona facilities
and will continue to be used. Therefore, a related impairment charge was not
required. Approximately $250,000 of transition costs were incurred during
fiscal 2004 to complete the relocation. Employee severance expense of approximately $462,000 was recorded during 2003.
The Company also recorded approximately $137,000 during 2003 related to the
remaining building lease expense which has expired. 54




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVENTORIES Inventories consist of the following (in thousands of dollars): October 2, 2004
    
    September 27, 2003Gross inventories:Raw materials
    
    $
    17,059
    
    
    $
    13,221Work-in-process
    
    
    7,583
    
    
    
    6,286Finished goods
    
    
    4,451
    
    
    
    4,069Total gross inventories
    
    
    29,093
    
    
    
    23,576Less reserve for excess
and obsolete inventories
    
    
    (4,349
    )
    
    
    (4,858
    )Total net inventories
    
    $
    24,744
    
    
    $
    18,718
 Raw materials include approximately $1.4 million and $2.4 million at year end
2004 and 2003, respectively, for which the Company has received advance payment
from the customer. 6. INTANGIBLE ASSETS AND GOODWILL The Companys acquired intangible assets, all of which are subject to
amortization, consist of the following as of October 2, 2004 and September 27,
2003 (in thousands of dollars): Accumulated
    
    NetIntangible Assets
    
    Gross Amount
    
    Amortization
    
    AmountOctober 2, 2004Customer relationships
    
    $
    4,100
    
    
    $
    (456
    )
    
    $
    3,644Existing technology
    
    
    2,427
    
    
    
    (760
    )
    
    
    1,667Other
    
    
    1,199
    
    
    
    (867
    )
    
    
    332Total intangible assets
    
    $
    7,726
    
    
    $
    (2,083
    )
    
    $
    5,643September 27, 2003Customer relationships
    
    $
    4,100
    
    
    $
    (182
    )
    
    $
    3,918Existing technology
    
    
    2,427
    
    
    
    (553
    )
    
    $
    1,874Other
    
    
    1,225
    
    
    
    (707
    )
    
    
    518Total intangible assets
    
    $
    7,752
    
    
    $
    (1,442
    )
    
    $
    6,310
 55




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the carrying amount of acquired intangible assets during fiscal 2004
and 2003 (in thousands of dollars): October 2,
2004
    
    September 27,
2003Balance at beginning of year
    
    $
    6,310
    
    
    $
    353Additions
    
    
    
    
    
    
    7,100Change in intangible pension asset
    
    
    (26
    )
    
    
    (37
    )Amortization
    
    
    (641
    )
    
    
    (1,106
    )Balance at end of year
    
    $
    5,643
    
    
    $
    6,310
 Estimated Aggregate Amortization Expense
for the Next Five Fiscal Years (in thousands ): 2005
    
    $
    6072006
    
    
    4732007
    
    
    4732008
    
    
    4732009
    
    
    473Thereafter
    
    
    2,945$
    5,444
 Changes in the carrying amount of goodwill for the years ended October 2, 2004
and September 27, 2003 are as follows (in thousands of dollars): Microelectronic
    
    DisplaySegment
    
    Segment
    
    TotalBalance as of September 28, 2002
    
    $
    17
    
    
    $
    6,516
    
    
    $
    6,533Goodwill
acquired - IDS acquisition
    
    
    8,554
    
    
    
    1,953
    
    
    
    10,507Balance as of September 27, 2003
    
    
    8,571
    
    
    
    8,469
    
    
    
    17,040Purchase price adjustment
    
    
    65
    
    
    
    
    
    
    
    65Balance as of October 2, 2004
    
    $
    8,636
    
    
    $
    8,469
    
    
    $
    17,105
 56




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands of dollars): October 2, 2004
    
    September 27, 2003Land
    
    $
    697
    
    
    $
    697Buildings and improvements
    
    
    3,922
    
    
    
    3,897Machinery and equipment
    
    
    15,774
    
    
    
    14,254Furniture and fixtures
    
    
    3,227
    
    
    
    2,820Leasehold improvements
    
    
    2,224
    
    
    
    1,936Construction in progress
    
    
    60
    
    
    
    719Total, at cost
    
    $
    25,904
    
    
    $
    24,323Less accumulated depreciation and amortization
    
    
    (11,929
    )
    
    
    (8,634
    )Net property, plant, and equipment
    
    $
    13,975
    
    
    $
    15,689
 Depreciation expense was $3.7 million, $3.7 million and $2.2 million for fiscal
years 2004, 2003 and 2002, respectively. The net book value of the land and
building related to the Flower Street location in Phoenix that is
expected to be sold is approximately
$2.2 million. 8. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands of dollars): October 2, 2004
    
    September 27, 2003Sales commissions
    
    $
    895
    
    
    $
    1,212Income taxes
    
    
    
    
    
    
    542Warranty
    
    
    640
    
    
    
    783Other accruals
    
    
    723
    
    
    
    714Total accrued expenses
    
    $
    2,258
    
    
    $
    3,251
 The following table
summarizes activity in the warranty reserve for the years
ended October 2, 2004 and September 27, 2003 (in thousands of dollars): October 2, 2004
    
    September 27, 2003Warranty reserve, September 27, 2003
    
    $
    783
    
    
    $
    798Reduction of provision for warranty claims
    
    
    (126
    )
    
    
    (15
    )Warranty claims charged against the reserve
    
    
    (17
    )
    
    
    Warranty reserve, October 2, 2004
    
    $
    640
    
    
    $
    783
 9. LONG-TERM DEBT The Company has a $12.0 million line of credit with Bank One that was renewed
on March 19, 2004 for an additional two years, at similar terms and conditions
as the previous credit facility and now expires March 28, 2006. Borrowings
against the line are limited to eligible accounts receivable and inventories
and bear interest at the Bank One prime rate or LIBOR plus 1.5%. A
commitment fee of 0.25% is charged on the unused portion of the line. At
October 2, 2004, 57




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS there were no borrowings outstanding against the line of
credit and the Company has not borrowed against the line of credit
since April 2003.
The agreement requires the Company to maintain compliance with certain
financial covenants and the Company is in material compliance with these
covenants at October 2, 2004. The weighted average interest rate on the Companys borrowings for fiscal 2003
and 2002 was approximately 4.25% and 4.84%, respectively. 10. PUBLIC OFFERING OF COMMON STOCK In July 2003, the Company completed a public offering of its common stock which
resulted in net proceeds (after deducting underwriting discounts and
commissions and offering expenses) of approximately $22.0 million. The Company
initially sold 2,200,000 common shares on July 8, 2003 and an additional
202,874 shares on August 1, 2003, following the exercise by the underwriters of
an over-allotment option. Two selling shareholders also participated in the
offering and sold 2,772,126 shares of common stock held by them. The Company
did not receive any proceeds from the sale of the selling shareholders shares.
In July 2003, the Company used a portion of the proceeds from the offering to
repay all outstanding amounts owing under its term loan with Bank One. The
Company expects to use the remaining net proceeds for potential acquisitions
and general corporate purposes, including expansion of research and development
relating to new products and anti-tamper technology for microelectronic
products. 11. INCOME TAXES The provision for income taxes consists of the following (in thousands of
dollars): 2004
    
    2003
    
    2002CurrentFederal
    
    $
    803
    
    
    $
    4,252
    
    
    $
    2,408State
    
    
    144
    
    
    
    845
    
    
    
    265Total current
    
    
    947
    
    
    
    5,097
    
    
    
    2,673DeferredFederal
    
    
    1,190
    
    
    
    (62
    )
    
    
    (2,111
    )State
    
    
    (2
    )
    
    
    (64
    )
    
    
    (174
    )Total deferred
    
    
    1,188
    
    
    
    (126
    )
    
    
    (2,285
    )Income tax provision
    
    $
    2,135
    
    
    $
    4,971
    
    
    $
    388
 During the fourth quarter of
fiscal year 2002, the Company reversed its
valuation allowance of $1.7 million relating to its net operating loss carry
forwards, as the Company determined that it was more likely than not that it
would realize the related deferred tax benefits. In addition, the Company
reversed approximately $1.1 million of income tax reserves that had been
recorded in previous years as a result of the completion of certain prior
years tax returns. 58




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the income tax provision calculated at the U.S. federal
statutory tax rate of 34% to the actual tax provision is as follows (in
thousands of dollars): 2004
    
    2003
    
    2002Income tax provision at statutory rate
    
    $
    2,361
    
    
    $
    5,141
    
    
    $
    3,104State taxes, net of federal benefit
    
    
    257
    
    
    
    559
    
    
    
    365Federal and state credits
    
    
    (415
    )
    
    
    (376
    )
    
    
    (504
    )Extraterritorial income exclusion
    
    
    (30
    )
    
    
    (377
    )
    
    
    (365
    )Non-deductible goodwill amortization
    
    
    
    
    
    
    
    
    
    
    493Valuation allowance and reserves
    
    
    
    
    
    
    
    
    
    
    (2,773
    )Other
    
    
    (38
    )
    
    
    24
    
    
    
    68Income tax provision
    
    $
    2,135
    
    
    $
    4,971
    
    
    $
    388
 The income tax effect of loss carryforwards, tax credit carryforwards and
temporary differences between financial and tax reporting give rise to the
deferred income tax assets and liabilities. Such deferred income tax assets
and liabilities consisted of the following (in thousands of dollars): October 2, 2004
    
    September 27, 2003Deferred tax assets:Tax credits
    
    $
    1,070
    
    
    $
    504Allowance for doubtful accounts
    
    
    220
    
    
    
    158Inventories
    
    
    3,146
    
    
    
    2,901Deferred revenue
    
    
    566
    
    
    
    985Accrued expenses and other liabilities
    
    
    305
    
    
    
    696Pension
    
    
    107
    
    
    
    161Net operating loss carry forwards
    
    
    1,836
    
    
    
    3,157Deferred tax assets
    
    $
    7,250
    
    
    $
    8,562Deferred tax liabilities:Property, plant, and equipment
    
    $
    (1,510
    )
    
    $
    (1,386
    )Intangible assets
    
    
    (2,146
    )
    
    
    (2,398
    )Other
    
    
    (117
    )
    
    
    (59
    )Deferred tax liabilities
    
    $
    (3,773
    )
    
    $
    (3,843
    )Net deferred tax asset
    
    $
    3,477
    
    
    $
    4,719
 As of October 2, 2004, the Company had federal net operating loss carryforwards of approximately $5.4 million, which expire at various dates through
2018. There were federal and state tax credit carryforwards of approximately
$1.1 million as of October 2, 2004, which expire at various dates through 2019. Ownership changes, as defined in Internal Revenue Code Section 382, have
limited the amount of net operating loss and tax credit carryforwards that can
be utilized by the Company annually to offset future taxable income and
liability. On October 4, 2004, President
Bush signed into law the Working Families Tax Relief Act of 2004
(the 2004 Act). Included as part of the 2004 Act is a
provision that reinstates the research tax credit that expired on
June 30, 2004. The reinstatement is retroactive to June 30,
2004; however, since the 2004 Act was signed subsequent to October 2,
2004, research tax credits subsequent to June 30, 2004 will be
recognized in the Companys first quarter of fiscal 2005. This
amount is not expected to be material. On October 11, 2004, Congress
passed the American Jobs Creation Act of 2004 (the Act),
which will eliminate the extraterritorial income exclusion, and will
provide a deduction from taxable income equal to a stipulated
percentage of qualified income from domestic production activities,
referred to as the manufacturer deduction. The extraterritorial
income exclusion will be phased out through
2006, and the manufacturer deduction will be phased in through 2010.
The Company does not believe the Act will have a significant impact
on its effective rate in 2005. 59




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BENEFIT PLANS Defined Benefit Plan The Company has a non-contributory pension plan for eligible union
employees at its Fort Wayne, Indiana facility pursuant to a collective
bargaining agreement. Benefits are based primarily on a benefits multiplier
and years of service. The Company funds an amount equal to the minimum funding
required plus additional amounts which may be approved by the Company from time
to time. Contributions were $0 in 2004 and $400,000 in 2003. The expected long-term rate of return on plan assets is updated annually taking
into consideration the related asset allocation, historical returns on the
types of assets held in the plan, and the current economic environment. Based
on these factors, the Company expects its plan assets to earn a long-term rate
of return of 7.00%. Changes in the mix of plan assets could impact the amount
of recorded pension income or expense, the funded status of the plan and the
need for future cash contributions. The discount rate used to calculate the
expected present value of future benefit obligations as of October 2, 2004 was
5.92%. The Company periodically reviews the plan asset mix, benchmark discount
rate, expected rate of return and other actuarial assumptions and adjusts them
as deemed necessary. 60




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars)October 2,
    
    September 27,2004
    
    2003Defined Benefit PlanReconciliation of Projected Benefit ObligationBenefit obligation beginning of year
    
    $
    3,087
    
    
    $
    2,759Service cost
    
    
    56
    
    
    
    56Interest cost
    
    
    172
    
    
    
    175Benefits paid
    
    
    (142
    )
    
    
    (130
    )Actuarial (gain) loss
    
    
    (88
    )
    
    
    227Benefit obligation end of year
    
    
    3,085
    
    
    
    3,087Reconciliation of Fair Value of Plan AssetsPlan assets at fair market value beginning of year
    
    $
    2,542
    
    
    
    2,026Actual return on plan assets
    
    
    222
    
    
    
    271Employer contributions
    
    
    
    
    
    
    400Benefits paid
    
    
    (142
    )
    
    
    (130
    )Expenses
    
    
    (12
    )
    
    
    (25
    )Plan assets at fair market value end of year
    
    $
    2,610
    
    
    $
    2,542Funded Status
    
    $
    (475
    )
    
    $
    (544
    )Unrecognized prior service cost
    
    
    199
    
    
    
    225Unrecognized actuarial loss
    
    
    323
    
    
    
    487Net amount recognized
    
    $
    47
    
    
    $
    168Amounts recognized in the consolidated balance sheetAccrued benefit liability
    
    
    (475
    )
    
    
    (544
    )Intangible assets
    
    
    199
    
    
    
    225Accumulated other comprehensive income
    
    
    323
    
    
    
    487Net amount recognized
    
    $
    47
    
    
    $
    168
 2004
    
    2003
    
    2002Components
of Net Periodic Benefit Cost (in thousands of dollars)Service cost
    
    $
    83
    
    
    $
    82
    
    
    $
    77Interest cost
    
    
    172
    
    
    
    175
    
    
    
    172Expected return on market-related plan assets
    
    
    (172
    )
    
    
    (136
    )
    
    
    (156
    )Amortization of prior service cost
    
    
    27
    
    
    
    35
    
    
    
    38Recognized actuarial loss
    
    
    11
    
    
    
    14
    
    
    
    Net periodic benefit cost
    
    $
    121
    
    
    $
    170
    
    
    $
    131
 2004
    
    2003
    
    2002Additional InformationIncrease (decrease) in minimum liability included in
other comprehensive income
    
    
    (109
    )
    
    
    71
    
    
    
    255
 The Companys weighted-average assumptions used to determine net periodic
benefit cost for the years ended October 2, 2004 and September 27, 2003 are as
follows: October 2,
    
    September 27,2004
    
    2003Weighted-Average AssumptionsDiscount Rate
    
    
    5.92
    %
    
    
    5.87
    %Expected return on plan assets
    
    
    7.00
    %
    
    
    7.00
    %
 61




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected long-term rate of return on pension assets is selected by taking
into account the expected duration of the Projected Benefit
Obligation (PBO)
for the plan, and the asset mix of the plan. SFAS 87 calls for the rate of
return to be the rate to be earned over the period until the benefits
represented by the current PBO are paid. The expected return on plan assets is
based on the Companys expectation of historical long-term average rates of
return on the different asset classes held in the pension fund. This is
reflective of the current and projected asset mix of the funds and considers
the historical returns earned on asset allocation and the duration of the
plan liabilities. Thus, the Company has taken a historical approach to the development
of the expected return on asset assumption. The Company believes that
fundamental changes in the markets cannot be predicted over the long-term.
Rather, historical returns, realized across numerous economic cycles, should be
representative of the market return expectations applicable to the funding of a
long-term benefit obligation. Based
on the Companys target asset allocation and the review of historical returns of
the respective asset classes less investment management fees and
expenses, the Companys expected long-term rate of return for
fiscal 2004 was 7%. Actual year-by-year returns can deviate substantially from the long-term
expected return assumption. However, over time it is expected that the amount
of over performance will equal the amount of under performance. The Companys pension plan weighted-average asset allocations at October 2,
2004 and September 27, 2003 are as follows (in thousands of
dollars): Asset Category
    
    2004
    
    2003Cash and cash equivalents
    
    $
    223
    
    
    $
    257Fixed income mutual funds
    
    
    1,018
    
    
    
    982Equity mutual funds
    
    
    1,364
    
    
    
    1,298Other
    
    
    5
    
    
    
    5Total
    
    $
    2,610
    
    
    $
    2,542
 In determining the asset allocation, our investment manager recognizes the Companys desire for funding and expense stability, the long-term nature of the pension
obligation and current and projected cash needs for retiree benefit payments.
Based on the Companys criteria, it determined the Companys present target asset allocation to be
approximately 40%  60% in equity securities and 40%  60% in debt securities.
The pension fund is actively managed within the target asset allocation ranges. As of October 2, 2004 and September 27, 2003, the Companys pension plan assets
did not hold any direct investment in the Companys common stock. The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands of dollars): PensionBenefits2005
    
    $
    1662006
    
    
    1692007
    
    
    1802008
    
    
    1822009
    
    
    185Years 2010-2014
    
    
    1,103
 62




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company expects to contribute approximately $90,000 to its pension plan in
fiscal 2005. 401(k) Plan The Company has an Incentive Savings 401(k) Plan covering its non-union
employees who have completed six months of service. During fiscal 2004, the
Company matched employee contributions equal to 50% of the first 6% of the
participants wage base. During fiscal 2004, 2003 and 2002, the Company made
contributions to the plan of approximately $293,000, $271,000 and $248,000,
respectively. 13. STOCK OPTIONS, WARRANTS, AND STOCK PURCHASE PLANS Stock Options Plans Executives and other key employees have been granted options to purchase common
shares under stock option plans adopted during the period 1987 through 2001.
The option exercise price generally equals the fair market value of the
Companys common shares on the day of the grant. Options generally vest
ratably over a four-year period and have a maximum term of ten years. The Company issued approximately 469,000 options and 169,000 warrants to
purchase its common stock in connection with the IDS acquisition. The stock
options had a weighted average exercise price of $2.32 per share and expire in
2012, while the warrants have a weighted average exercise price of $2.96 and
expire December 31, 2006. Approximately 38,000 of the options were unvested at
the time of the acquisition, and the related unearned compensation of
approximately $51,000 is being recognized over the remaining vesting period of
two years. A summary of the Companys stock option activity and related information is as
follows: 2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedShares
    
    Average
    
    Shares
    
    Average
    
    Shares
    
    AverageUnder
    
    Exercise
    
    Under
    
    Exercise
    
    Under
    
    ExerciseOption
    
    Price
    
    Option
    
    Price
    
    Option
    
    PriceBeginning balance outstanding
    
    
    2,215,382
    
    
    $
    4.15
    
    
    
    2,678,032
    
    
    $
    3.67
    
    
    
    2,993,839
    
    
    $
    3.40Issued in IDS acquisition
    
    
    
    
    
    
    
    
    
    
    469,277
    
    
    
    3.90
    
    
    
    
    
    
    
    Granted
    
    
    179,000
    
    
    
    7.33
    
    
    
    155,132
    
    
    
    9.11
    
    
    
    129,000
    
    
    
    6.33Canceled
    
    
    (114,149
    )
    
    
    7.05
    
    
    
    (123,050
    )
    
    
    7.16
    
    
    
    (104,845
    )
    
    
    4.30Exercised
    
    
    (232,598
    )
    
    
    2.76
    
    
    
    (964,009
    )
    
    
    2.31
    
    
    
    (339,962
    )
    
    
    2.11Ending balance outstanding
    
    
    2,047,635
    
    
    $
    4.43
    
    
    
    2,215,382
    
    
    $
    4.15
    
    
    
    2,678,032
    
    
    $
    3.67Options exercisable at year end
    
    
    1,690,859
    
    
    $
    3.92
    
    
    
    1,598,233
    
    
    $
    3.45
    
    
    
    1,674,193
    
    
    $
    2.92Shares available for future grant
    
    
    1,441,711
    
    
    
    
    
    
    
    1,511,839
    
    
    
    
    
    
    
    1,545,620Weighted average fair value of all
options granted during the year
    
    
    
    
    
    $
    7.33
    
    
    
    
    
    
    $
    6.55
    
    
    
    
    
    
    $
    5.94
 63




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes additional information about the Companys stock
options outstanding as of October 2, 2004. Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedShares
    
    Average
    
    Average
    
    
    
    
    
    AverageUnder
    
    Exercise
    
    Remaining
    
    Exercisable
    
    ExerciseOption
    
    Price
    
    Contractual Life
    
    Shares
    
    PriceRange of exercise price:$0.0000    $1.6000
    
    
    300,615
    
    
    $
    1.04
    
    
    
    3.7
    
    
    
    300,615
    
    
    $
    1.04$1.6001    $3.2000
    
    
    508,767
    
    
    
    2.50
    
    
    
    4.0
    
    
    
    508,767
    
    
    
    2.50$3.2001    $4.8000
    
    
    571,327
    
    
    
    3.83
    
    
    
    6.2
    
    
    
    490,954
    
    
    
    3.82$4.8001    $6.4000
    
    
    161,753
    
    
    
    6.21
    
    
    
    7.5
    
    
    
    78,938
    
    
    
    6.17$6.4001    $8.0000
    
    
    276,750
    
    
    
    7.44
    
    
    
    7.3
    
    
    
    165,500
    
    
    
    7.24$8.0001    $9.6000
    
    
    102,132
    
    
    
    8.67
    
    
    
    8.6
    
    
    
    38,799
    
    
    
    8.66$9.6001    $11.2000
    
    
    114,291
    
    
    
    10.52
    
    
    
    5.7
    
    
    
    104,037
    
    
    
    10.56$11.2001    $12.8000
    
    
    12,000
    
    
    
    12.19
    
    
    
    8.9
    
    
    
    3,249
    
    
    
    12.192,047,635
    
    
    $
    4.43
    
    
    
    5.6
    
    
    
    1,690,859
    
    
    $
    3.92
 Stock Purchase Plans In February 2001, the Companys Board of Directors adopted the White Electronic
Designs Corporation 2000 Employee Stock Purchase Plan. This plan provides for
the purchase by employees of up to 300,000 shares of common stock at 85% of the
fair market value on the first or last day of the offering period (as defined
in the plan), whichever is lower. This plan began July 1, 2001; however, it is
being terminated effective December 31, 2004. The final offering period is
from July 1, 2004 through December 31, 2004. There were 47,170 shares issued
under this plan in fiscal 2004, 30,210 shares issued under this plan in fiscal
year 2003 and 43,646 shares issued in fiscal year 2002. 14. COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment under non-cancelable lease
agreements some of which include renewal options of up to five years. Total
rent expense for 2004, 2003, and 2002 was $1,272,000, $2,215,000 and $1,799,000,
respectively. Future minimum annual fixed rentals required under
non-cancelable operating leases having an original term of more than one year
are $1,085,000 in 2005, $1,090,000 in 2006, $964,000 in 2007, $562,000 in 2008,
and $136,000 in 2009. As part of mergers, acquisitions and other transactions entered into during the
ordinary course of business (including public offerings of our stock), from
time to time, the Company has indemnified certain sellers, buyers or other
parties related to the transaction from and against certain liabilities
associated with conditions in existence (or claims associated with actions
taken) prior to the closing of the transaction. These indemnity provisions
generally require the Company to indemnify the party against certain
liabilities that may arise in the future from the pre-closing activities of the
Company. The indemnity classifications include certain operating liabilities,
such as patent infringement, claims existing at closing, or other obligations.
Given the nature of these indemnity obligations, it is not possible to estimate
the maximum potential exposure. We do not consider any of such obligations as
having a probable likelihood of payment that is reasonably estimable, and
accordingly, we have not recorded any obligations associated with these
indemnities. On
July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004,
shareholder class action lawsuits entitled McJimsey v. White
Electronic Designs Corporation, et al. (Case No.
CV04-1499-PHX-SRB), Afework v. White Electronic Designs
Corporation, et al(Case No. CV04-1558-PHX-JWS),Anders v.
White Electronic Designs Corporation, et al. (Case No.
CV04-1632-PHX-JAT), and Sammarco v. White Electronic Designs
Corporation, et al. (Case No.
CV04-1744-PHX-EHC), respectively, were filed in the United States
District Court for the District of Arizona against the Company and
certain of its current and former officers and directors. The
complaints allege, among other things, that between January 23, 2003
and June 9, 2004, the Company made false and misleading statements
concerning its financial results and business, in violation of the
federal securities laws. The complaints seek unspecified
monetary damages. The Court has consolidated the four cases into one
action. Plaintiffs motion for appointment of lead Plaintiffs and lead
counsel is under submission with the Court. The Company believes the claims made in the complaints are
without merit and we intend to vigorously defend ourselves in these
matters. Although the outcome of this litigation is uncertain, based on the
Companys current assessment of the merits of the complaints
and considering the amount of insurance the Company maintains
covering claims of this nature, the Company does not believe the
ultimate outcome of these matters will have a material adverse affect
on the Companys consolidated results of operations, liquidity
or financial condition. On
August 12, 2004 and August 19, 2004, purported derivative actions
entitled Dodt v. Shokrgozar, et al. (Case No. CV04-1674-PHX-NVW)
and Christ v. Shokrgozar, et al. (Case No. CV04-1722-PHX-MHM),
respectively, were filed in the United States District Court for the
District of Arizona against current and former directors and officers
of the Company. The Company is also named as a nominal defendant in
both actions. The complaints allege that between January 2003 and the
present, defendants breached their fiduciary duties to the Company by
causing the Company to misrepresent its financial results and
prospects. The complaints allege claims for breach of fiduciary duty,
gross mismanagement, abuse of control, waste of corporate assets,
insider selling, and unjust enrichment. The complaints seek
unspecified damages, equitable relief, and restitution as against the
individual defendants. The Company believes the claims made in the
complaints are without merit and intends to vigorously defend these
actions. On October 22, 2004, the Company moved to dismiss both
actions and, in the alternative, moved to stay the Christ action. The
motions are pending. Although the outcome of this litigation is uncertain, based on the
Companys current assessment of the merits of the complaints
and considering the amount of insurance the Company maintains
covering claims of this nature, the Company does not believe the
ultimate outcome of these matters will have a material adverse affect
on the Companys consolidated results of operations, liquidity
or financial condition. In
addition, from time to time, we are subject to claims and litigation
incident to our business. There are currently no such material,
pending
proceedings to which we are a party. 64




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. CONCENTRATIONS OF CREDIT RISK Our customers consist mainly of military prime contractors and commercial OEMs
and contract manufacturers who work for them, in the United States, Europe and
Asia. We perform ongoing credit evaluations of our customers financial
condition and, generally, require no collateral from our customers. Our losses
from bad debts totaled approximately $170,000 in fiscal 2004, $145,000 in
fiscal 2003, and $209,000 in fiscal 2002. Sales to military customers
accounted for approximately $48.1 million, or 44%, of our sales in fiscal 2004,
as compared to approximately $53.7 million, or 47%, of our sales in fiscal
2003. Sales to our commercial customers accounted for approximately $60.9
million, or 56%,of our sales in fiscal 2004, as compared to $59.8 million, or
53%, of our sales in fiscal 2003. In fiscal 2004, there were no customers that accounted for more than 10% of our
net sales. In fiscal 2003, Garmin International, Inc. (Garmin), a display
segment customer, accounted for 11.3% of our net sales. In fiscal 2002,
General Electric Medical Division (GE Medical), also a display segment
customer, accounted for 11.5% of net sales, and Garmin International accounted
for 10.8% of total net sales. Foreign sales for fiscal 2004, 2003 and 2002,
were approximately $18.4 million, $27.9 million, and $26.8 million,
respectively. Additional information concerning sales by geographic area can
be found in Note 17. At certain times throughout the year, the Company may maintain certain bank
accounts in excess of the FDIC insured limits. 16. SHAREHOLDERS RIGHTS PLAN On December 6, 1996, the Board of Directors adopted a shareholder rights plan
to protect shareholders against unsolicited attempts to acquire control of the
Company, which do not offer what the Company believes to be an adequate price
for all shareholders. The plan will expire on December 5, 2006 unless extended
or unless the rights under the plan are earlier redeemed by the Company. 17. FINANCIAL DATA BY BUSINESS SEGMENT The Company has two business segments, each of which requires different design
and manufacturing resources and generally serves customers in different
markets. The microelectronic segment accounted for approximately 56% of total
Company sales in fiscal 2004, while the display segment accounted for
approximately 44% of total Company sales in fiscal 2004. Our microelectronic segment packages semiconductor products mainly for memory
storage. Our products are sold to military prime contractors and commercial
OEMs in the aerospace, defense, military equipment, computer networking and
telecommunication industries. Certain industries require these semiconductor
parts to pass specific qualifications due to the application requirements for
those products. A commercial grade product generally meets the standard of
industries such as the consumer electronic, computer networking and
telecommunication/datacommunication industries. Higher performing products,
also known as high-reliability products, are needed in certain industries, such
as aerospace, defense, and military equipment, and are often referred to as
military products. Military products are designed to meet more stringent
standards and are resistant to adverse conditions, such as high and low extreme
temperatures. High-reliability products can also be used in industrial
applications where products are exposed to harsh conditions. Our
microelectronic segment also includes our anti-tamper security coating for
mission critical semiconductor components in military applications. The display segment serves a number of markets with products and solutions that
are incorporated into global positioning systems, home appliances, consumer
electronics, medical devices, outdoor displays, military avionics and various
military applications. Our display segment manufactures enhanced viewing
liquid crystal flat panel display products, interface devices and
electromechanical assemblies. Enhanced viewing liquid crystal displays and
sunlight readable displays can be used in either ruggedized or commercial
applications. Ruggedized displays are manufactured to perform in harsh
environmental conditions, while commercial display products offer greater
viewing performance than off-the-self displays, but are not designed for harsh
environmental conditions. Interface devices 65




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS include electromechanical components and instrument packages that can consist
of ruggedized keyboards, aircraft trim panels, rotating devices, mechanical
packages, membrane keypads, silver flexible circuits, graphic overlays, control
panels, and keypad/controller assemblies. The Companys segments have common customers, mainly in the aerospace defense
industry. Different purchasing groups within the customers parent company,
however, usually purchase the products from each segment. There are no
inter-segment sales. Transfers of inventory between segments are made at cost,
and are treated as transfers between locations. The assets identified by segment are those assets used in the Companys
operations and do not include general corporate assets such as cash, goodwill,
or deferred tax assets. Capital expenditures exclude equipment under operating
leases. In fiscal 2004, Whirlpool Corporation accounted for 12.0% of display segment
sales. No one customer accounted for more than 10% of microelectronic net
sales in fiscal 2004. In fiscal 2003, Garmin accounted for 25% of display segment net sales, while GE
Medical accounted for approximately 15% of display segment net sales. Northrup
Grumman accounted for approximately 10% of microelectronic net sales in fiscal
2003. A significant portion of the Companys business activity in each segment is
from contractors who have contracts with the United States Department of
Defense. A significant portion of the Companys sales were shipped to foreign customers.
Export sales as a percent of total sales in fiscal 2004, 2003, and 2002 were
17%, 25%, and 30%, respectively. A summary of net sales by geographic region
is as follows (in thousands of dollars): 2004
    
    2003
    
    2002United States of America
    
    $
    90,529
    
    
    $
    85,637
    
    
    $
    63,681Taiwan
    
    
    358
    
    
    
    12,156
    
    
    
    9,230Europe and Middle East
    
    
    11,360
    
    
    
    11,931
    
    
    
    14,003Asia Pacific excluding Taiwan
    
    
    4,407
    
    
    
    3,604
    
    
    
    3,492Other
    
    
    2,308
    
    
    
    206
    
    
    
    52Total sales
    
    $
    108,962
    
    
    $
    113,534
    
    
    $
    90,458
 66




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OPERATIONS BY BUSINESS SEGMENTS  2004
    
    2003
    
    2002Net salesMicroelectronic
    
    $
    60,691
    
    
    $
    61,433
    
    
    $
    50,331Display
    
    
    48,271
    
    
    
    52,101
    
    
    
    40,127Total net sales
    
    $
    108,962
    
    
    $
    113,534
    
    
    $
    90,458Income before taxMicroelectronics
    
    $
    10,596
    
    
    $
    12,568
    
    
    $
    8,783Display
    
    
    804
    
    
    
    2,553
    
    
    
    345Total income before tax
    
    $
    11,400
    
    
    $
    15,121
    
    
    $
    9,128Identifiable assetsMicroelectronics
    
    $
    44,760
    
    
    $
    43,902
    
    
    $
    25,909Display
    
    
    37,330
    
    
    
    35,271
    
    
    
    23,857General corporate
    
    
    42,810
    
    
    
    40,633
    
    
    
    18,600Total assets
    
    $
    124,900
    
    
    $
    119,806
    
    
    $
    68,366Capital expendituresMicroelectronics
    
    $
    1,125
    
    
    $
    2,533
    
    
    $
    2,186Display
    
    
    1,175
    
    
    
    1,329
    
    
    
    2,612Total capital expenditures
    
    $
    2,300
    
    
    $
    3,862
    
    
    $
    4,798Depreciation and amortization expenseMicroelectronics
    
    $
    2,467
    
    
    $
    2,992
    
    
    $
    2,016Display
    
    
    1,949
    
    
    
    1,854
    
    
    
    1,797Total depreciation and amortization expense
    
    $
    4,416
    
    
    $
    4,846
    
    
    $
    3,813
 67




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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousand of dollars, except per share data) Fiscal 2004Year
    
    Oct 2 (1)
    
    Jul 3
    
    Apr 3
    
    Jan 3Net sales
    
    $
    108,962
    
    
    $
    28,773
    
    
    $
    25,390
    
    
    $
    28,944
    
    
    $
    25,855Gross profit
    
    $
    31,665
    
    
    $
    7,693
    
    
    $
    6,933
    
    
    $
    8,510
    
    
    $
    8,529Income before income taxes
    
    $
    6,941
    
    
    $
    1,278
    
    
    $
    893
    
    
    $
    2,324
    
    
    $
    2,446Net income
    
    $
    4,807
    
    
    $
    905
    
    
    $
    565
    
    
    $
    1,663
    
    
    $
    1,674Earnings per share-basic
    
    $
    0.20
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.07Earnings per share-diluted
    
    $
    0.19
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.07
 Fiscal 2003Year(2)
    
    Sep 27(3)
    
    Jun 28
    
    Mar 29(2)
    
    Dec 28Net sales
    
    $
    113,534
    
    
    $
    30,194
    
    
    $
    31,522
    
    
    $
    28,462
    
    
    $
    23,356Gross profit
    
    $
    38,687
    
    
    $
    11,013
    
    
    $
    9,998
    
    
    $
    9,381
    
    
    $
    8,295Income before income taxes
    
    $
    15,121
    
    
    $
    4,818
    
    
    $
    3,612
    
    
    $
    3,538
    
    
    $
    3,153Net income
    
    $
    10,150
    
    
    $
    3,235
    
    
    $
    2,426
    
    
    $
    2,353
    
    
    $
    2,136Earnings per share-basic
    
    $
    0.48
    
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.11Earnings per share-diluted
    
    $
    0.44
    
    
    $
    0.13
    
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.10
 (1) During the quarter
ended October 2, 2004, we incurred $0.25 million in
legal fees related to the shareholder litigation, $0.2 million in fixed asset
write-offs, and $0.3 million in the reserve of an accounts receivable
pertaining to display shipments to a commercial start-up company. (2) The Company acquired Interface Data System Inc. on January 22, 2003. (3) During the quarter
ended September 27, 2003, we incurred expenses relating
to the closure of our Marlboro, Massachusetts facility of approximately $0.8
million. During that same quarter we reversed accrued costs relating to a
completed customer order at our display segment of approximately $0.7 million. 68




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Schedule II White Electronic Designs Corporation and Subsidiaries
Valuation and Qualifying Accounts and Reserves The following reserves were deducted in the balance sheet from the asset to
which applicable (in thousands of dollars): Charged/Balance at
    
    (credited) to
    
    
    
    
    
    
    
    
    
    Balancebeginning
    
    costs and
    
    
    
    
    
    
    
    
    
    at endFiscal year ended
    
    of period
    
    expenses
    
    Other
    
    Deductions
    
    of periodAccounts ReceivableOctober 2, 2004
    
    $
    397
    
    
    $
    333
    
    
    $
    
    
    
    $
    (170
    )
    
    $
    560September 27, 2003
    
    
    626
    
    
    
    (226
    )
    
    
    142
    (1)
    
    
    (145
    )
    
    
    397September 28, 2002
    
    
    638
    
    
    
    197
    
    
    
    
    
    
    
    (209
    )
    
    
    626InventoriesOctober 2, 2004
    
    $
    4,858
    
    
    $
    1,011
    
    
    $
    (643
    ) (2)
    
    $
    (876
    )
    
    $
    4,350September 27, 2003
    
    
    4,876
    
    
    
    537
    
    
    
    1,076
    (1)
    
    
    (1,631
    )
    
    
    4,858September 28, 2002
    
    
    5,084
    
    
    
    781
    
    
    
    
    
    
    
    (989
    )
    
    
    4,876Deferred Tax AssetOctober 2, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    September 27, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 28, 2002
    
    
    1,717
    
    
    
    (1,717
    ) (3)
    
    
    
    
    
    
    
    
    
    
    
 (1)  Addition related to IDS acquisition. (2)  Relates primarily to the closure of the Massachusetts facility
and the related disposal of inventory. (3)  Represents a reversal of a valuation allowance relating to our
net operating loss carry forwards. 69




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##### Table of Contents



Exhibit Index ExhibitNumber
    
    Description21.1
    
    Subsidiaries of White Electronic Designs Corporation.23.1
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002.