UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedMarch 31, ~~2005~~2006


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

For the transition period ~~from______________to ______________~~
fromto

Commission File number 1-1000

SPARTON CORPORATION

(Exact Name of Registrant as Specified in its Charter)

OHIO

(State or Other Jurisdiction of Incorporation or Organization)

38-1054690

(I.R.S. Employer Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
(Address of Principal Executive Offices, Zip Code)
(517) 787-8600

(Registrant’s Telephone Number, Including Area Code)
Indicate by checkmark 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.þ Yeso No
Indicate by ~~checkmark~~check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined by~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange ~~Act).~~
Act. (Check one):
Large accelerated filero ~~Yes~~ Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yeso No
þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest ~~practical~~practicable date.

Shares Outstanding at
Class of Common Stock April ~~29, 2005~~30, 2006
$1.25 Par Value
~~8,821,464~~ 9,395,919
1

~~INDEX~~
~~Part I~~
~~Financial Information~~TABLE OF CONTENTS

Part I. Financial Information
Item 1. Financial Statements (Interim, Unaudited)

Condensed Consolidated Balance Sheets
At March 31, ~~2005~~2006 and June 30, ~~2004~~2005
3

Condensed Consolidated Statements of Operations
~~Three-Month~~ Three Months and ~~Nine-Month Periods ended~~Nine Months Ended March 31, ~~2005~~2006 and ~~2004~~2005
4

Condensed Consolidated Statements of Cash Flows
~~Nine-Month Periods ended~~ Nine Months Ended March 31, ~~2005~~2006 and ~~2004~~2005
5

~~Notes to~~
Condensed Consolidated ~~Financial~~ Statements of Shareowners’ Equity Nine Months Ended March 31, 2006 and 2005
6

Notes to Condensed Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1113

Item 3. Quantitative and Qualitative Disclosures About Market Risk
1720

Item 4. Controls and Procedures
17
~~Part II~~
~~Other Information~~
~~Item 1. Legal Proceedings~~ 1820

~~Item 4. Submission of Matters to a Vote of Security Holders~~
Part II. Other Information
19
Item 1. Legal Proceedings
20

Item ~~6. Exhibits~~2. Unregistered Sales of Equity Securities and Use of Proceeds
1922

~~Signatures~~
Item 6. Exhibits
1922
Signatures
22
EX-31.1 CERTIFICATION 302 - CEO
EX-31.2 CERTIFICATION 302 - CFO
EX-32.1 CERTIFICATIONS 906 - CEO AND CFO
2
PART I
Item 1. Financial Statements
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
~~March 31, 2005 and June 30,2004~~

March 31 June 30

March 31, 2006 June 30, 2005

Assets

Assets
Assets
Current assets:
Cash and cash equivalents $ 10,687,328 $ 10,820,461 $ 13,195,036 $ 9,368,120
Investment securities 20,703,129 18,641,792
Short-term investments 23,095,196 20,659,621
Accounts receivable 20,547,356 21,267,459 20,058,502 26,004,945
Income taxes recoverable — 559,706
Environmental settlement receivable — 5,455,000
Inventories and costs on contracts in progress 36,486,265 37,210,259 35,532,585 36,847,385
Prepaid expenses 2,860,286 2,859,016
Deferred taxes 2,087,059 2,640,561
Prepaid expenses and other current assets 884,003 631,132

Total current assets 91,284,364 91,358,693 94,852,381 101,606,764

Pension asset 5,088,622 5,448,968 4,557,826 4,968,507
Other assets 5,741,811 5,570,773 6,917,382 6,454,526
Property, plant and equipment, net 15,923,578 12,041,062 15,336,204 16,430,989

Total assets $ 118,038,375 $ 114,419,496 $ 121,663,793 $ 129,460,786

Liabilities and Shareowners’ Equity

Liabilities and Shareowners’ Equity
Liabilities and Shareowners’ Equity
Current liabilities:
Accounts payable $ 9,939,297 10,052,854 $ 10,054,875 $ 12,694,057
Salaries and wages 3,442,830 3,387,490 3,416,839 4,435,089
Accrued health benefits 1,034,421 1,044,810 1,264,325 1,041,850
Other accrued liabilities 4,539,530 4,526,234 4,382,753 5,518,920
Income taxes payable 583,294 — 160,265 2,414,294

Total current liabilities 19,539,372 19,011,388 19,279,057 26,104,210

Environmental remediation — noncurrent portion 6,334,842 6,542,009 5,977,090 6,184,590

Shareowners’ equity:
Preferred stock, no par value; 200,000 shares authorized, none outstanding — — — —
Common stock, $1.25 par value; 15,000,000 shares authorized, 8,821,464 and 8,351,538 shares outstanding at March 31, 2005 and June 30, 2004, respectively 11,026,830 10,439,423
Common stock, $1.25 par value; 15,000,000 shares authorized, 9,391,822 shares outstanding at March 31, 2006 and 8,830,428 shares outstanding at June 30, 2005 11,739,778 11,038,035
Capital in excess of par value 10,521,129 7,134,149 15,060,785 10,558,757
Accumulated other comprehensive income (loss) (65,579 ) 62,368
Accumulated other comprehensive loss (170,180 ) (44,198 )
Retained earnings 70,681,781 71,230,159 69,777,263 75,619,392

Total shareowners’ equity 92,164,161 88,866,099 96,407,646 97,171,986

Total liabilities and shareowners’ equity $ 118,038,375 $ 114,419,496 $ 121,663,793 $ 129,460,786

See accompanying ~~notes.~~notes to condensed consolidated financial statements.
3

SPARTON CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)
~~For the Three-Month and Nine-Month~~

Periods ~~ended~~Ended March 31, ~~2005~~2006 and ~~2004~~2005


	Three-Month Periods						Nine-Month Periods						Three Months Ended						Nine Months Ended
	2005			2004			2005			2004			2006			2005			2006			2005

Net sales	$	41,561,001		$	43,566,394		$	121,276,223		$	113,230,967		$	45,303,199		$	41,561,001		$	120,302,471		$	121,276,223
Costs of goods sold		38,238,550			39,985,009			108,010,683			107,775,123			40,651,519			38,238,550			110,173,163			108,010,683


Gross profit		3,322,451			3,581,385			13,265,540			5,455,844			4,651,680			3,322,451			10,129,308			13,265,540

Selling and administrative expenses		3,158,980			3,345,108			9,822,128			10,574,176			3,930,958			3,158,980			11,694,855			9,822,128

EPA related — net environmental remediation		123,315			103,012			282,348			239,959			29,994			123,315			796			282,348

Loss on sale of property, plant and equipment		42,342			266			42,342			266
Loss (gain) on sale of property, plant and equipment														(5,693	)		42,342			98,898			42,342


Operating income (loss)		(2,186	)		132,999			3,118,722			(5,358,557	)		696,421			(2,186	)		(1,665,241	)		3,118,722

Other income (expense):
Interest and investment income		231,095			157,079			653,336			510,325			293,008			231,095			820,835			653,336
Equity income (loss) in investment		(5,000	)		4,000			(10,000	)		16,000			3,000			(5,000	)		2,000			(10,000	)
Other — net		(29,602	)		(65,065	)		647,488			(374,490	)		77,903			(29,602	)		298,597			647,488

		196,493			96,014			1,290,824			151,835
														373,911			196,493			1,121,432			1,290,824


Income (loss) before income taxes		194,307			229,013			4,409,546			(5,206,722	)		1,070,332			194,307			(543,809	)		4,409,546
Provision (credit) for income taxes		(114,000	)		73,000			1,235,000			(1,666,000	)		343,000			(114,000	)		(174,000	)		1,235,000


Net income (loss)	$	308,307		$	156,013		$	3,174,546		$	(3,540,722	)	$	727,332		$	308,307		$	(369,809	)	$	3,174,546


Basic earnings (loss) per share⁽¹⁾	$	0.04		$	0.02		$	0.36		$	(0.40	)
Basic and diluted earnings (loss) per share⁽¹⁾													$	0.08		$	0.03		$	(0.04	)	$	0.34

Diluted earnings (loss) per share⁽¹⁾	$	0.03		$	0.02		$	0.36		$	(0.40	)

⁽¹⁾ ~~All share and per share information have been adjusted to reflect the impact of the 5% stock dividend declared in November 2004.~~


(1)		All share and per share information have been adjusted to reflect the impact of the 5% stock dividend declared in October 2005.

See accompanying ~~notes.~~notes to condensed consolidated financial statements.

SPARTON CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
~~For the Nine-Month Periods ended March 31,2005 and 2004~~


	2005			2004			Nine Months Ended March 31,
							2006			2005

Cash flows provided (used) by Operating Activities:
Cash flows from Operating Activities:
Net income (loss)	$	3,174,546		$	(3,540,722	)	$	(369,809	)	$	3,174,546
Add (deduct) noncash items affecting operations:
Depreciation, amortization and accretion		1,241,533			1,271,644			1,490,979			1,241,533
Change in pension asset		360,346			545,338
Loss on sale of property, plant & equipment		42,342			266
Deferred income taxes (benefit)								679,731			(635,706	)
Pension expense								410,681			360,346
Share-based compensation								253,420			—
Loss on sale of property, plant and equipment								98,898			42,342
Loss on sale of investment securities		34,510			51,284			25,432			34,510
Equity (income) loss on investment		10,000			(16,000	)
Equity (gain) loss in investment								(2,000	)		10,000
Other, primarily changes in customer and vendor claims								(391,396	)		—
Add (deduct) changes in operating assets and liabilities:
Accounts receivable		720,103			8,995,471			5,946,443			720,103
Environmental settlement receivable								5,455,000			—
Income taxes recoverable		559,706			(1,195,706	)		—			559,706
Inventories and prepaid expenses		823,956			(6,671,942	)		1,061,929			823,956
Accounts payable, salaries and wages, accrued liabilities and income taxes		320,818			96,345
Accounts payable and accrued liabilities								(7,032,653	)		972,522

Net cash provided (used) by operating activities		7,287,860			(464,022	)
Net cash provided by operating activities								7,626,655			7,303,858

Cash flows provided (used) by Investing Activities:
Cash flows from Investing Activities:
Purchases of investment securities		(8,870,255	)		(1,508,720	)		(7,052,763	)		(8,870,255	)
Proceeds from sale of investment securities		6,500,722			7,352,848			1,677,746			5,535,722
Purchases of property, plant and equipment, net		(5,166,303	)		(5,410,649	)
Proceeds from maturity of investment securities								2,583,602			965,000
Purchases of property, plant and equipment								(459,895	)		(5,166,303	)
Other, principally noncurrent other assets		(136,618	)		56,049			(26,460	)		(152,618	)

Net cash provided (used) by investing activities		(7,672,454	)		489,528
Net cash used by investing activities								(3,277,770	)		(7,688,454	)

Cash flows provided (used) by Financing Activities:
Cash flows from Financing Activities:
Proceeds from exercise of stock options		254,399			23,451			571,251			254,400
Stock dividends — cash in lieu of fractional shares		(2,938	)		(3,687	)
Tax effect from stock transactions								70,029			—
Stock dividends — cash paid in lieu of fractional shares								(3,654	)		(2,937	)
Repurchases of common stock								(270,186	)		—
Cash dividend								(889,409	)		—

Net cash provided by financing activities		251,461			19,764
Net cash (used) provided by financing activities								(521,969	)		251,463


Increase (decrease) in cash and cash equivalents		(133,133	)		45,270			3,826,916			(133,133	)
Cash and cash equivalents at beginning of period		10,820,461			10,562,222			9,368,120			10,820,461

Cash and cash equivalents at end of period	$	10,687,328		$	10,607,492		$	13,195,036		$	10,687,328


Supplemental disclosures of cash paid during the period:
Income taxes — net	$	115,000		$	247,000		$	1,395,000		$	95,000

SPARTON CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-— The following is a summary of the Company’s significant accounting policies not discussed elsewhere within this report.

Basis of presentation-— The accompanying unaudited Condensed Consolidated Financial Statements of Sparton Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. All significant intercompany transactions and accounts have been eliminated. The Condensed Consolidated Balance Sheet at March 31, ~~2005,~~2006, and the related Condensed Consolidated Statements of Operations, ~~and~~ Cash Flows and Shareowners’ Equity for the ~~nine-month periods~~nine months ended March 31, ~~2005~~2006 and ~~2004,~~2005 are unaudited, but include all adjustments (consisting only of normal recurring accruals), which the Company considers necessary for a fair presentation of such financial statements. Certain reclassifications of prior period amounts have been made to conform to the current presentation. Operating results for the ~~nine-month period~~nine months ended March 31, ~~2005,~~2006 are not necessarily indicative of the results that may be expected for the fiscal year ~~ended~~ending June 30, ~~2005.~~
2006.

The balance sheet at June 30, ~~2004,~~2005, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. ~~For further information, refer to~~It is suggested that these condensed consolidated financial statements be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, ~~2004.~~
2005.

Operations-— The Company provides design and electronic manufacturing services, which include a complete range of engineering, pre-manufacturing and post-manufacturing services. Capabilities range from product design and development through ~~after-market~~aftermarket support. All facilities ~~with the exception of Vietnam which is currently under-going the evaluation process,~~ are ~~certified~~registered to ISO 9001, with ~~many~~most having additional certifications. The ~~Company’s operations are~~Company operates in one line of business, electronic contract manufacturing services (EMS). Products and services include complete “Box Build” products for Original Equipment Manufacturers, microprocessor-based systems, transducers, printed circuit boards and assemblies, sensors and electromechanical devices. Markets served are in the medical/scientific instrumentation, aerospace, and ~~industrial/~~other industries, with a focus on regulated markets. The Company also develops and manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S. Navy and other free-world countries. Many of the physical and technical attributes in the production of sonobuoys are the same as those required in the production of the Company’s other electrical and electromechanical products and assemblies.

Use of estimates- — Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the disclosure of assets and liabilities and the amounts reported in ~~the~~these interim financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue recognition-— The Company’s net sales are comprised primarily of product sales, with supplementary revenues earned from engineering and design services. Standard contract terms are FOB shipping point. Revenue from product sales is generally recognized upon shipment of the goods; service revenue is recognized as the service is performed or under the percentage of completion method, depending on the nature of the arrangement. Long-term contracts relate principally to government defense contracts. These contracts are accounted for based on completed units accepted and their estimated average contract cost per unit. ~~Development contracts are accounted for based on percentage of completion.~~ Costs and fees billed under cost-reimbursement-type contracts are recorded as sales. A provision for the entire amount of a loss on a contract is charged to operations as soon as the loss is identified and determinable. Shipping and handling costs are included in costs of goods sold.

Short-term investments— Investments in debt securities that are not cash equivalents or marketable equity securities have been designated as available for sale. These securities, all of which are investment grade, are reported at fair value, with net unrealized gains and losses included in accumulated other comprehensive income or loss, net of applicable taxes. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses on investments are determined using the specific identification method.

Other investment— The Company has an active investment in Cybernet Systems Corporation, which is accounted for under the equity method, as more fully discussed in Note 5.

Market risk exposure-— The Company manufactures its products in the United States and Canada, and most recently in Vietnam. Sales of the Company’s products are in the U.S. and Canada, as well as other foreign markets. The Company is potentially subject to foreign currency exchange rate risk relating to intercompany activity and balances, receipts from customers, and payments to suppliers in foreign currencies. Also, adjustments related to the translation of the Company’s Canadian and Vietnamese financial statements into U.S. dollars are included in current earnings. ~~The Company’s Vietnamese translation gains and losses are carried in accumulated other comprehensive income (loss) within the shareowners’ equity section of the Company’s balance sheet.~~ As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange rates or ~~weak~~ economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currency and the related market risk exposure is considered to be immaterial. Historically, foreign currency gains and losses related to intercompany activity and balances have not been significant. However, ~~recently~~ due to the ~~strengthening~~strengthened Canadian dollar, the impact of transaction and translation gains has increased. ~~While a reversal of these recent gains is not anticipated, if~~If the exchange rate were to ~~decline~~materially change, the Company’s financial position could be significantly affected.
6

The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, ~~the~~ interest rate risk is not considered to be material.

New accounting standards-— In ~~December 2004,~~May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3” (SFAS No. 154). SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement is effective for the Company as of July 1, 2006. The Company does not expect the adoption of SFAS No. 154 will have a significant impact on the manner of display of its results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123(R), ~~“Share-Based~~“Share-based Payment”, which replaces SFAS No. 123, “Accounting for ~~Stock-Based~~Share-based Compensation”, and supersedes ~~APB~~Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). The Statement requires that the calculated cost resulting from all share-based payment transactions be recognized in the financial statements. The Statement also establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. The Statement iswas effective for the Company beginning July 1, ~~2005, and is required to be adopted using a~~2005. The “modified prospective” ~~method.~~method was required upon adoption; accordingly, results of prior periods have not been restated. Under the modified prospective method, the Statement applies to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the unvested portion of awards as of the effective date is required to be recognized after the effective date as the awards ~~vest after~~vest. As of July 1, 2005, the ~~effective date. The~~ Company ~~does not expect the requirements of this Statement will have a significant impact on its results of operations or financial position.~~
~~In November 2004, the FASB issued~~implemented SFAS No. ~~151, “Inventory Costs” (SFAS No. 151)~~l23(R), ~~which amends~~with share-based compensation expense now reflected in the ~~guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”. The Statement requires that~~Company’s interim statements of operations. See the ~~accounting~~“Stock options” note below for ~~abnormal amounts~~additional information regarding the adoption of idle facility expense, freight handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, the Statement requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Statement is effective for the Company for inventory costs incurred beginning July 1, 2005. The Company does not expect the requirements of this Statement will have any impact on its results of operations or financial position.
~~In December 2004, the FASB issued~~ SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29” (SFAS No. 153), which addresses the measurement of exchanges of nonmonetary assets. The Statement eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchange of nonmonetary assets that do not have commercial substance. It also specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Statement is effective for the Company beginning July 1, 2005. The Company does not expect the requirements of the Statement will have a significant impact on its results of operations or financial position.
During fiscal 2004, the Company purchased a manufacturing facility in Albuquerque, New Mexico, that replaced an existing plant in Rio Rancho, New Mexico, which was subsequently sold. Because these transactions were reported separately, at fair market value, there would have been no change to how these transactions were recorded for financial reporting purposes had SFAS No. 153 been in effect during fiscal 2004. The tax treatment for the sale and purchase of these facilities was as a like-kind exchange.
~~Recently there have been official discussions and clarifications of certain provisions of FASB Statement No. 13, “Accounting for Leases”~~123(R). The Company does not have any capital leases. All leases are operating leases, mainly for the lease of machinery and equipment, with monthly payments over a fixed term in equal, non-escalating amounts. The Company does not expect these clarifications to have any impact on its results of operations or financial position.

Periodic benefit cost-— The Company follows the disclosure requirements of SFAS No. 132(R)., “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” For the three months and nine months ended March 31, 2006 and 2005, $137,000 and ~~2004,~~ $96,000, and ~~$481,000~~$411,000 and $360,000, ~~and $545,000~~respectively, of expense has been recorded, respectively. Total net periodic benefit cost for fiscal 2005 will be $480,000, compared to total net periodic benefit cost reported for fiscal 2004 of $727,000. For the three months and nine months ended March 31, 2005 and 2004, respectively, net periodic benefit cost includes the effect of changes resulting from the actuarial valuations performed as of the periods’ closing. Fiscal 2005 and 2004 anticipated and actual annual reported expense amount to $480,000 and $727,000, respectively. The decrease from prior year is primarily due to improved interest rates, and return on and valuation of plan assets.recorded. The components of net periodic pension expense for each of the periods presented were as follows:


	Three Months Ended						Nine Months Ended						Three Months						Nine Months
	2005			2004			2005			2004			2006			2005			2006			2005

Service cost	$	110,000		$	358,000		$	412,000		$	406,000		$	128,000		$	110,000		$	410,000		$	412,000
Interest cost		154,000			446,000			498,000			505,000			163,000			154,000			511,000			498,000
Expected return on plan assets		(228,000	)		(566,000	)		(734,000	)		(642,000	)		(227,000	)		(228,000	)		(726,000	)		(734,000	)
Amortization of prior service cost		24,000			64,000			72,000			73,000			24,000			24,000			75,000			72,000
Amortization of net loss		36,000			179,000			112,000			203,000			49,000			36,000			141,000			112,000

Net periodic benefit cost	$	96,000		$	481,000		$	360,000		$	545,000		$	137,000		$	96,000		$	411,000		$	360,000

Stock options~~- Pending the effective date~~— As of July 1, 2005, SFAS No. 123(R), became effective for the Company. The Company ~~continues to follow~~had previously followed APB No. 25 and related Interpretations in accounting for its employee stock options. Under APB No. 25, no compensation expense iswas recognized, as the exercise price of the Company’s employee stock options ~~equals~~equaled the market price of the underlying stock on the date of grant. Under SFAS No. 123(R), compensation expense is now recognized in the Company’s financial statements. Share-based compensation cost is measured on the grant date, based on the fair value of the award calculated at that date, and is recognized over the employee’s requisite service period, which generally is the options’ vesting period. Fair value is calculated using the Black-Scholes option pricing model. The ~~Company follows~~Black-Scholes calculation performed for the ~~disclosure requirements of~~three months and nine months ended March 31, 2006, utilized the methodology and assumptions consistent with those used in prior periods under SFAS No. 123, which were disclosed in the Company’s previously filed Annual Report on Form 10-K for the year ended June 30, 2005.

Employee stock options granted by the Company are structured to qualify as ~~amended by~~“incentive stock options” (ISOs). Under current federal income tax regulations, the Company does not receive a tax deduction for the issuance, exercise or disposition of ISOs if the employee meets certain holding period requirements. If the employee does not meet the holding period requirement a disqualifying disposition occurs, at which time the Company can receive a tax deduction. The Company does not record tax benefits related to ISOs unless and until a disqualifying disposition occurs. In the event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income tax expense. In accordance with SFAS No. ~~148.~~
123(R), excess tax benefits (where the tax deduction exceeds the recorded compensation expense) are credited to “capital in excess of par value” in the consolidated statement of shareowners’ equity and tax benefit deficiencies (where the recorded compensation expense exceeds the tax deduction) are charged to “capital in excess of par value.”

The Company has an incentive stock option plan under which ~~760,000~~912,142 common shares, which includes 760,000 original shares adjusted by 152,142 shares for the declaration of stock dividends, were reserved for option grants to key employees and directors at the fair market value of the stock at the date of the grant. Options granted have either a five or ten-year term and become vested and exercisable cumulatively beginning one year after the grant date, in four equal annual installments. Options may terminate before their expiration dates if the optionee’s status as an employee is terminated, or upon death. No stock options were granted during the nine months ended March 31, 2006. During the nine months ended March 31, 2005, 2,000 stock options were granted with a per option fair value (the exercise price) of $8.91. Assumptions utilized in the proforma expense reporting of stock options during those periods were in place and disclosed in the Company’s previously filed Annual Report on Form 10-K for the year ended June 30, 2005.

Share-based compensation expense totaled $78,000 and $253,000 for the three months and nine months ended March 31, 2006, respectively, all of which relates to awards granted prior to July 1, 2005. The related tax benefit of this expense for the three month and nine month periods ended March 31, 2006, was $2,000 and $4,000, respectively. Basic and diluted earnings (loss) per share were impacted by approximately $.01 and $(.03), respectively, for each of the same periods.

As of March 31, ~~2005, there were 533,442 shares outstanding under option, with prices ranging from $3.24~~2006, unrecognized compensation costs related to ~~$8.90,~~nonvested awards amounted to $654,000 and will be recognized over a weighted average ~~remaining contractual life~~period of ~~2.2 years, and a weighted average exercise price of $5.89. The following table summarizes information about stock options outstanding and exercisable at March 31, 2005:~~

Options Outstanding Options Exercisable
Range of Wtd. Avg. Remaining Wtd. Avg. Wtd. Avg.
Exercise Prices Number Outstanding Contractual Life (years) Exercise Price Number Exercisable Exercise Price
$3.24 to $6.06 384,489 $1.44 $5.34 317,126 $5.19
$6.26 to $8.90 148,953 $4.21 $7.33 63,051 $7.30
~~Under the plan at March 31, 2005, exercisable options and the per share weighted average exercise price were 380,177 and $5.54, respectively, with 159,561 remaining shares available for grant.~~
approximately 1.84 years. The following sets forth a reconciliation of net income ~~(loss)~~ and earnings ~~(loss)~~ per share information for the three months and nine months ended March 31, 2005, ~~and 2004,~~ as if the Company had recognized compensation expense based on the fair value at the grant date for awards under the plan. ~~For purposes~~

Three Months Nine Months
Net income, as reported $ 308,000 $ 3,175,000
Deduct:
Total share-based compensation expense determined under the fair value method for all awards, net of tax effects 42,000 125,000

Pro forma net income $ 266,000 $ 3,050,000

Pro forma basic and diluted earnings per share — after stock dividends $0.03 $0.33

The following table summarizes additional information about stock options outstanding and exercisable at March 31, 2006:

Options Outstanding Options Exercisable
Range of Wtd. Avg. Remaining Wtd. Avg. Wtd. Avg.
Exercise Prices Number Outstanding Contractual Life (years) Exercise Price Number Exercisable Exercisable Price

$5.77 to $6.99 372,546 1.57 $6.17 330,551 $6.08
$8.08 to $9.00 157,957 9.06 $8.97 1,295 $8.31

530,503 3.80 $7.01 331,846 $6.09

4. COMPREHENSIVE INCOME (LOSS)-— Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net of tax, on investment securities owned and investment securities held by an investee accounted for by the equity method, which are excluded from net income. ~~In addition, translation gains and losses on the Company’s Vietnam subsidiary are included in comprehensive income (loss).~~ Unrealized gains and losses, net of tax, are excluded from net income but are reflected as a direct charge or credit to shareowners’ equity. ~~Total comprehensive~~Comprehensive income (loss) and the related components are disclosed in the accompanying condensed consolidated statements of shareowners’ equity for the nine months ended March 31, 2006 and 2005, respectively. Comprehensive income (loss) is as follows for the three months and nine months ended March 31, 2006 and 2005, ~~and 2004, respectively:~~respectively.

Three Months Ended Nine Months Ended
2005 2004 2005 2004

Net income (loss) $ 308,000 $ 156,000 $ 3,175,000 $ (3,541,000 )
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) — investment securities owned (138,000 ) 59,000 (172,000 ) (156,000 )
Net unrealized gains (losses) — investment securities held by investee accounted for by the equity method (59,000 ) 74,000 44,000 281,000
Net translation gains (losses) on Vietnam subsidiary — — — —

Comprehensive income (loss) $ 111,000 $ 289,000 $ 3,047,000 $ (3,416,000 )

Three Months Nine Months
2006 2005 2006 2005

Net income (loss) $ 727,000 $ 308,000 $ (370,000 ) $ 3,175,000

Other comprehensive income (loss), net of tax
Investment securities owned (48,000 ) (138,000 ) (208,000 ) (172,000 )
Investment securities held by investee accounted for by the equity method 26,000 (59,000 ) 82,000 44,000

(22,000 ) (197,000 ) (126,000 ) (128,000 )

Comprehensive income (loss) $ 705,000 $ 111,000 $ (496,000 ) $ 3,047,000

At March 31, ~~2005~~2006 and June 30, ~~2004,~~2005, shareowners’ equity includes accumulated other comprehensive income (loss) of ~~$(66,000)~~$(170,000) and ~~$62,000,~~$(44,000), respectively, net of tax. The components of these amounts are as follows:


	March 31, 2005			June 30, 2004		March 31, 2006			June 30, 2005

Accumulated other comprehensive income (loss), net of tax:
Investment securities owned	$	(156,000	)	$	16,000	$	(299,000	)	$	(91,000	)
Investment securities held by investee accounted for by the equity method		90,000			46,000		129,000			47,000
Translation gains (losses) — Vietnam subsidiary		—			—

Accumulated other comprehensive income (loss)	$	(66,000	)	$	62,000
Accumulated other comprehensive loss						$	(170,000	)	$	(44,000	)

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

The following is management’s discussion and analysis of certain significant events affecting the Company’s earnings and financial condition during the periods included in the accompanying financial statements. Additional information regarding the Company can be accessed via Sparton’s website at www.sparton.com. Information provided at the website includes, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, and the Code of Business Conduct and Ethics, as well as the various committee ~~charters of the Board of Directors.~~charters. These ~~items~~documents are also available, free of charge, by contacting the Company’s Shareowners’ Relations department. The Company’s operations are in one line of business, electronic contract manufacturing services (EMS). Sparton’s capabilities range from product design and development through aftermarket support, specializing in total business solutions for government, medical/scientific instrumentation, aerospace and ~~industrial/other~~industrial markets. These include the design, development and/or manufacture of electronic parts and assemblies for both government and commercial customers worldwide. Governmental sales are mainly sonobuoys.

The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the disclosures of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This report on Form 10-Q contains forward-looking statements within the scope of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,” “plans,” and similar expressions, and the negatives of such expressions, are intended to identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (SEC). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below. Accordingly, Sparton’s future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. The Company notes that a variety of factors could cause the actual results and experience to differ materially from anticipated results or other expectations expressed in the Company’s forward-looking statements.

Sparton, as a high-mix, low to medium-volume supplier, provides rapid product turnaround for customers. High-mix ~~pertains to~~describes customers needing multiple product types with generally ~~lower~~low volume manufacturing runs. As a contract manufacturer with customers in a variety of markets, the Company has substantially less visibility to end user demand and, therefore, forecasting sales can be problematic. Customers may cancel their orders, change production quantities and/or reschedule production for a number of reasons. Depressed economic conditions may result in customers delaying delivery of product, or the placement of purchase orders for lower volumes than previously anticipated. Unplanned cancellations, reductions, or delays by customers negatively impact the Company’s results of operations. As many of the Company’s costs and operating expenses are relatively fixed within given ranges of production, a reduction in customer demand can disproportionately affect the Company’s gross margins and operating income. The majority of the Company’s sales have historically come from a limited number of customers. Significant reductions in sales to, or a loss of, one of these customers could materially impact business if the Company were not able to replace those lost sales with new business.

Other risks and uncertainties that may affect operations, performance, growth forecasts and business results include, but are not limited to, timing and fluctuations in U.S. and/or world economies, competition in the overall EMS business, availability of production labor and management services under terms acceptable to the Company, Congressional budget outlays for sonobuoy development and production, Congressional legislation, foreign currency exchange rate risk, uncertainties associated with the costs and benefits of new facilities, including the new plant in Vietnam, and the closing of others, uncertainties associated with the outcome of litigation, changes in the interpretation of environmental laws and the uncertainties of environmental ~~remediation. A further~~remediation, and uncertainties related to defects discovered in certain of the Company’s aerospace circuit boards. Further risk ~~factor is~~factors are the availability and cost of materials. A number of events can impact these, including potential escalating utility and other related costs due to natural disasters, as well as political uncertainties such as the conflict in Iraq. The Company has encountered availability and extended lead time issues on some electronic components in the past when market demand has been ~~strong,~~strong; this resulted in higher prices and late deliveries. Additionally, the timing of sonobuoy sales to the U.S. Navy is dependent upon access to the test range and successful passage of product tests performed by the U.S. Navy. Reduced governmental budgets have made access to the test range less predictable and less frequent than in the past. Finally, the Sarbanes-Oxley Act of 2002 ~~has~~ required changes in, and formalization of, some of the Company’s corporate governance and compliance practices. The SEC and New York Stock Exchange ~~have~~(NYSE) also passed ~~new~~ rules and regulations requiring additional compliance activities. Compliance with these rules has increased administrative costs, and it is expected that certain of these costs will continue indefinitely. Management cautions readers not to place undue reliance on forward-looking statements, which are subject to influence by the enumerated risk factors as well as unanticipated future events.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.

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31, 2006. The remainder of the increase in selling and administrative expenses relates to minor and planned increases in various categories, such as wages, employee benefits, insurance, and other items.

Interest and investment income for the three months ended March 31, 2006, increased ~~$74,000~~slightly from the prior year, mainly due to ~~$231,000~~higher interest rates. Other income-net for the three months ended March 31, 2006, was $78,000, versus other expense-net of $30,000 in fiscal 2005. ~~This increase was mainly due to increased funds available for investment and improved interest rates. Other expense-net in fiscal 2005 was $30,000, versus $65,000 in fiscal 2004.~~ Translation adjustments, along with gains and losses from foreign currency transactions, are included in other income and, in the aggregate, ~~amounted to a loss~~resulted in gains of ~~$12,000~~$77,000 and ~~$10,000~~$12,000 during the three months ended March 31, 2006 and 2005, ~~and 2004,~~ respectively. During the third quarter, the Company’s annual effective tax rate was estimated to be 28%, rather than the previously anticipated 32%. The Company’s recorded adjustment to the currently estimated rate resulted in a credit to third quarter income tax expense of $168,000. This, combined with normal third quarter income tax expense of $54,000, resulted in a net income tax credit of $114,000 for the third quarter. Variables affecting the effective tax rate include, but are not limited to, extraterritorial tax credits, Canadian tax loss carryforwards, effect of translation income and loss, and utilization of contribution carryforwards. This estimated tax rate, while based on the Company’s knowledge and expectations at this point in time, may change based on actual fourth quarter activity and results of operations.
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~~Due to the factors described above,~~Overall, the Company reported net income of ~~$308,000~~$727,000 ($~~0.04~~0.08 per share, basic and ~~$0.03 per share,~~ diluted) for the three months ended March 31, ~~2005, versus $156,000~~2006, compared to net income of $308,000 ($~~0.02~~0.03 per share, basic and diluted) for the corresponding period last year.


	Nine Months Ended March 31													Nine Months Ended March 31
YEAR-TO-DATE														2006						2005
	2005					2004										%					%			%
			%					%			%
	Sales		of Total			Sales		of Total			Change

MARKET														Net sales		of Total			Net sales		of Total			Change

Government	$	24,510,000		20.2	%	$	30,746,000		27.2	%		(20.3	)%	$	27,889,000		23.2	%	$	24,510,000		20.2	%		13.8	%
Industrial/Other		35,042,000		28.9			29,089,000		25.7			20.5			43,513,000		36.2			35,042,000		28.9			24.2
Aerospace		51,729,000		42.7			39,899,000		35.2			29.6			38,363,000		31.9			51,729,000		42.7			(25.8	)
Medical/Scientific Instrumentation		9,995,000		8.2			13,497,000		11.9			(25.9	)		10,537,000		8.7			9,995,000		8.2			5.4

Totals	$	121,276,000		100.0	%	$	113,231,000		100.0	%		7.1		$	120,302,000		100.0	%	$	121,276,000		100.0	%		(0.8	)%

Net sales for the ~~nine-month period~~nine months ended March 31, ~~2005,~~2006 totaled ~~$121,276,000, an increase~~$120,302,000, a decrease of ~~$8,045,000 (7.1%~~$974,000 (0.8%) from the same period last year. Government sales ~~decreased, and included $4.7 million of a delayed sonobuoy sale originally anticipated to ship in fiscal 2004. Government sales were lower than anticipated~~increased by $3,379,000, primarily due to production interruptions at the Company’s Florida facilities, as several tropical storms disrupted operations in the first quarter of fiscal 2005. In addition, rescheduling of engineering redesign work, failed sonobuoy drop tests,increased availability and ~~lack of~~ access to the ~~U.S. Navy’s~~sonobuoy test ~~site further depressed sales. Government~~range and accepted lots. Industrial sales, ~~are anticipated~~which include gaming, improved significantly. This improvement is reflective of continued strong sales to ~~improve~~existing customers. Sales in the final quarter of this fiscal year. Industrial market sales increased from the same period last year. This increase was attributed to increased demand from two existing customers, it is uncertain if this demand will continue for the balance of this fiscal year. Sales to the aerospace markets continue to grow, increasing 29.6% over the prior year. In general, this reflects stronger demand in the commercial aerospace market ~~primarily increased demand for products related~~decreased 25.8% in fiscal 2006, due principally to ~~aircraft~~strong sales of collision avoidance systems ~~mandated~~in fiscal 2005. The level of sales for installation in all commercial aircraft. Approximately $6.9 million of the aerospace increase was attributable to increased orders from one customer, to which the Company supplies product to six manufacturing facilities. The increased demand for the collision avoidancethese products ishad not ~~anticipated~~been expected to continue ~~throughout~~into fiscal 2006. However, the ~~final quarter. Medical/Scientific Instrumentation~~negative trend is expected to reverse during the next fiscal year. Medical sales ~~declined~~improved slightly from the prior ~~year. This decrease resulted from overall lower demand from existing customers~~year, primarily due to new program start-ups. Growth in this ~~market~~ area, ~~and new program delays.~~ however, has not occurred as quickly as originally anticipated.

These programs are now expected to be loss contracts and the ~~minor damage that was experienced~~Company recognized the entire estimated losses as of March 31, 2006. These programs, which are anticipated to be completed and ~~unproductive wages, resulted~~shipped during the remainder of this fiscal year, have a backlog of $5.6 million. Additional changes in ~~costs~~estimates on these government contracts are not anticipated at this time. Included for the nine months ended March 31, 2006, are the results from the Company’s new Vietnam facility, the start-up of ~~approximately $500,000 being charged~~which adversely impacted gross profit by $1,275,000. A number of new programs are scheduled to commence in Vietnam during the summer months of 2006. In addition, the prior year’s gross profit benefited by the inclusion of delayed government sales of $4.7 million. These sales carried a higher than usual margin, contributing $1.7 million in the first quarter of fiscal ~~2005. Also included~~
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2005, which sales were unable to match in fiscal 2006. The current year’s depressed gross profit also includes several medical programs, which are operating in a loss or breakeven position due to their current status in the ~~current year’s gross profit was~~start-up phase. One of these programs had a ~~settlement in~~negative margin which, for the ~~second quarter of fiscal 2005~~nine months ended March 31, 2006, totaled $242,000. The issues related to these losses are being addressed. Finally, discussions and resolution with a customer ~~which resulted in~~regarding the ~~Company’s~~ recovery of ~~$500,000~~past material component costs, $183,000 of ~~prior~~which were previously deferred in fiscal 2005, were not completed during the period ~~start-up expenses.~~and as a result, $378,000 was charged to expense during the nine months ended March 31, 2006. The ~~prior year’s depressed margin reflects~~Company is continuing its efforts to resolve this issue with the ~~inclusion~~customer and fully recover these costs.

A portion of ~~costs on~~ the start-up phase of several major programs, as well as final charges incurred at the completion of one sonobuoy contract that had experienced technical problems. In addition, the prior year’s margin included a redesign effort on an existing product line, which resultedincrease in ~~a charge to operations of $519,000. The lowered~~ selling and administrative expenses, ~~are primarily~~as a percentage of net sales, was due to the ~~result of decreased bid and proposal and research and development expenses for fiscal 2005, which were approximately $1.7 million below~~decrease in sales during the ~~same~~ nine ~~month~~months ended March 31, 2006, compared to the same period last year. ~~These cost reductions are not indicative~~Selling and administrative expenses in fiscal 2006 also include approximately $525,000 of ~~reduced bid and proposal activity,~~litigation expenses related to the NRTC litigation, which is ~~currently at an all time high, but primarily~~further discussed in Part II, Item 1 — “Other Information-Legal Proceedings” of this report. In addition, beginning in fiscal 2006 the Company was required to expense the vested portion of the fair value of stock options. Share-based compensation expense recorded for the nine months ended March 31, 2006, totaled $253,000, the majority of which, approximately 83% or $211,000, is included in selling and administrative expense. Additional expense is also being incurred as a result of ~~a one time sonobuoy engineering project which~~compliance activity due to increased SEC and other regulatory requirements. These compliance costs have increased in several areas, both internally and externally. In addition to increased audit fees and other costs, the Company has ~~been completed.~~
outsourced some of its preparation for these new regulations to an independent consulting firm, resulting in additional costs of $253,000 during the nine months ended March 31, 2006. The remainder of the increase in selling and administrative expenses relates to minor and expected increases in various categories, such as wages, employee benefits, insurance, and other items.

Interest and investment income for the nine months ended March 31, 2006, increased ~~$143,000~~slightly from the prior year, mainly due to ~~$653,000~~higher interest rates. Other income-net for the nine months ended March 31, 2006 was $299,000, versus $647,000 in fiscal 2005. ~~This increase was due to increased funds available for investment and improving investment rates. Other income-net in fiscal 2005 was $647,000, versus an expense of $374,000 in fiscal 2004.~~ Translation adjustments, along with gains and losses from foreign currency transactions, are included in other income and, in the aggregate, ~~amounted to a gain~~resulted in gains of ~~$644,000~~$299,000 and ~~$163,000~~$644,000 during the nine months ended March 31, 2006 and 2005, ~~and 2004,~~ respectively. ~~Other expense-net~~This change in the ~~prior year included~~amount of gain between the two periods is principally a ~~charge~~result of ~~$538,000 for workers’ compensation insurance adjustments related~~a slowdown in the strengthening of the Canadian dollar relative to the ~~Company’s previously owned automotive segment.~~
U.S. dollar.

Due principally to the factors described above, the Company reported a net ~~income~~loss of ~~$3,175,000~~$370,000 ($~~0.36~~(0.04) per share, basic and diluted) for the nine months ended March 31, ~~2005,~~2006, versus ~~a loss~~net income of ~~$3,541,000~~$3,175,000 ($~~(0.40)~~0.34 per share, basic and diluted) for the corresponding period last year.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company’s primary source of liquidity and capital resources has been from operations. Short-term credit facilities have not been used in recent years. Certain government contracts provide for interim progress billings based on costs incurred. These progress billings reduce the amount of cash that would otherwise be required during the performance of these contracts. As the volume of U.S. defense-related contract work declines, so has the relative importance of progress billings as a liquidity resource. At the present time, the Company plans on using its portfolio of investment securities to provide working capital and to strategically invest in additional property, plant and equipment to accommodate growth. Growth is expected to be achieved through internal expansion and/or acquisition or joint venture. In addition, the Company’s previously announced $4,000,000 stock repurchase program is expected to utilize a portion of the Company’s investments. As of March 31, 2006, approximately 28,000 shares, at a cost of approximately $270,000, have been repurchased. These repurchased shares are now retired.

For the ~~nine-month period~~nine months ended March 31, ~~2005,~~2006, cash and cash equivalents ~~decreased $133,000~~increased $3,827,000 to ~~$10,687,000.~~$13,195,000. Operating activities provided ~~$7,288,000~~$7,627,000 in net cash flows. The primary source of cash for the nine months ended March 31, 2006 and 2005 was significant receipts from ~~operations, compared to a loss~~the collection of sales recognized in ~~fiscal 2004 resulting in a use~~the last quarter of ~~cash,~~the prior years, which is reflected as ~~well as the adjustment for depreciation. The primary source of cash in fiscal 2004 was~~ a decrease in accounts receivable. In addition, a significant source of cash for the nine months ended March 31, 2006, was the collection of $5.5 million in July 2005 from a legal settlement with insurance carriers related to the reimbursement of remediation expenses at the Company’s Coors Road (New Mexico) facility. The ~~decrease~~primary use of cash for the nine months ended March 31, 2006, was a net settlement in accounts ~~receivable in both~~payable and accrued liabilities, which reflects the $2.4 million of income taxes payable from fiscal ~~2005 and 2004 was reflective of the receipt of payments for the large volume of sales recognized in June 2004 and 2003. The change in~~2005.

Net cash flow related to inventory and prepaid expenses from the prior year is reflective of a large increase at June 30, 2004, of inventory due to delayed customer delivery schedules, as well as increased inventory for new customer contracts. Inventory levels at March 31, 2005, reflect a decrease in inventory, as these customers’ schedules were no longer delayed, as well as the start of several new customer contracts.
~~Cash~~ flows used by investing activities ~~for~~during the ~~nine-month period~~nine months ended March 31, ~~2005,~~2006, totaled ~~$7,672,000, primarily for purchases~~$3,278,000, the primary use of ~~property, plant and equipment,~~ which ~~is discussed below. The~~was the purchase ~~of, and proceeds from the sale~~or reinvestment of investment securities, ~~are generally reflective of activity within the various investment options. In fiscal 2004 proceeds~~which had previously matured or been sold. Net cash flows used by financing activities were $522,000, principally from ~~the sale of investments were also used to fund purchases of property, plant and equipment.~~
cash dividends paid, as discussed below.

Historically, the Company’s market risk exposure to foreign currency exchange and interest rates on third party receivables and payables has not been considered to be material, principally due to their ~~short term~~short-term nature and the minimal amount of receivables and payables designated in foreign currency. However, due to the ~~recently strengthening~~strengthened Canadian dollar, the impact of transaction and translation gains on intercompany activity and balances has increased. ~~While a reversal of these recent gains is not anticipated, if~~If the exchange rate were to materially ~~decline~~change, the Company’s financial position could be significantly affected. The Company has had no short-term bank debt since December 1996, and currently has the availability of an unused informal line of credit totaling $20 million.

At March 31, ~~2005~~2006 and June 30, ~~2004,~~2005, the aggregate government funded EMS backlog was approximately ~~$52~~$51 million and ~~$41~~$42 million, respectively. ~~Current backlog includes the recent U.S. Navy sonobuoy contract awards, which totaled $21.7 million.~~ A majority of the March 31, ~~2005,~~2006, backlog is expected to be realized in the next 12-15 months. Commercial EMS orders are not included in the backlog. The Company does not believe the amount of commercial activity covered by firm purchase orders is a meaningful measure of expected future sales, as such orders may be rescheduled or cancelled without significant penalty.

Construction of the Company’s new plant in Vietnam is ~~substantially complete. Preliminary prototype product is currently being produced, with~~complete, and regular production ~~beginning~~started in ~~May.~~May 2005. This new facility is anticipated to provide increased growth opportunities for the Company, in current as well as new markets. As the Company has not previously done business in this emerging market, there are many uncertainties and risks inherent in this venture. ItTo date, the Company’s total investment is ~~estimated that the total Company investment will approximate $5-$7~~approximately $7 million, which includes land, building, and initial operating ~~expenses. To date,~~expenses, with approximately ~~$2.0~~$3 million ~~has~~having been ~~expended~~paid for the construction of the new facility, primarily in fiscal 2005. The new ~~company~~venture operates under the name Spartronics.

The Company is also continuing a program of identifying and evaluating potential acquisition candidates primarily in ~~both~~ the defense and medical markets.
14

~~The Company~~ Due diligence procedures are currently underway for the potential acquisition of Astro Instrumentation, LLC (Astro). A non-binding letter of intent has ~~purchased~~been signed by Sparton and Astro. While there are no assurances that a ~~manufacturing facility~~transaction will be completed, if all of the necessary conditions, including the due diligence review, are satisfied, it is anticipated that the transaction will close prior to June 30, 2006. Astro designs, manufactures, and sells a variety of specialized medical products. Astro, currently privately owned and located in ~~Albuquerque, New Mexico. This facility replaced an existing plant~~Strongsville, Ohio, has been in ~~Rio Rancho, New Mexico. The facility was purchased~~business approximately five years, and had approximately $33.6 million in sales volume for the year ended December ~~2003 for approximately $4.5 million. The cost of additional remodeling~~31, 2005. It would be the Company’s intent to continue to operate the business as a wholly owned subsidiary at its present location and ~~facility upgrades totaled approximately $2.0 million~~with its current operating management and were incurred, primarily in 2005, as the Company transitioned between facilities. The Rio Rancho plant was sold in June 2004 for approximately $1.7 million ($1.6 million after expenses related to the sale), resulting in a $844,000 gain. The Company leased the Rio Rancho facility until the transition to the new facility was completed in December 2004. The new facility is expected to provide economic benefits to the Company, accommodating customer products with higher technical requirements, as well as providing additional and more efficient manufacturing space in the Southwest.

staff.

No cash dividends were ~~declared~~paid in ~~either period presented.~~fiscal 2005. In ~~November 2004, the Company approved~~fiscal 2006, a cash dividend totaling $889,000, $0.10 per share, was paid to shareowners on October 5, 2005. In addition, a 5% stock ~~dividend. This~~ dividend was declared in October 2005, and distributed ~~December 15, 2004, to shareowners of record on November 23, 2004.~~ in January 2006.

At March 31, ~~2005,~~2006, the Company had ~~$92,164,000~~$96,408,000 in shareowners’ equity ($~~10.45~~10.27 per share), ~~$71,745,000~~$75,573,000 in working capital, and a ~~4.67:~~4.92:1.00 working capital ratio. For the foreseeable future (12-18 months), the Company believes it has sufficient liquidity, including cash, investments and its line of credit, for its anticipated needs, ~~unless~~including a ~~significant~~ business acquisition ~~is identified and completed for cash.~~
such as Astro, as described above.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Information regarding the Company’s environmental liability payments, operating lease payments, and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2004.~~2005. There have been no material changes in the Company’s contractual obligations since June 30, ~~2004.~~
2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2004.~~2005. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported for assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are regularly evaluated and are based on historical

experience and on various other assumptions believed to be reasonable under the circumstances. Actual results could differ from these estimates. The Company believes that of its significant accounting policies, the following areas involve a higher degree of judgment and complexity.

Environmental Contingencies

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been the subject of ongoing investigations and remediation efforts conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). Sparton has accrued its estimate of the minimum future non-discounted financial liability. The estimate was developed using existing technology and excludes legal and related consulting costs. The minimum cost estimate includes equipment, operating and monitoring costs for both onsite and offsite remediation. Sparton recognizes legal and consulting services in the periods incurred and reviews its EPA accrual activity quarterly. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. It is possible that cash flows and results of operations could be materially affected by the impact of changes in these estimates.

Government Contract Cost Estimates

Government production contracts are accounted for based on completed units accepted with respect to revenue recognition and their estimated average cost per unit regarding costs. Losses for the entire amount of a contract are recognized in the period when such losses are determinable. Significant judgment is exercised in determining estimated total contract costs including, but not limited to, cost experience to date, estimated length of time to contract completion, costs for materials, production labor and support services to be expended, and known issues on remaining units to be completed. Estimated costs developed in the early stages of contracts can change significantly as the contracts progress, and events and activities take place. Significant changes in estimates can also occur when new designs are initially placed into production. The Company formally reviews its costs incurred-to-date and estimated costs to complete on all significant contracts on a quarterly basis and revised estimated total contract costs are reflected in the financial statements. Depending upon the circumstances, it is possible that the Company’s financial position, results of operations, and cash flows could be materially affected by changes in estimated costs to complete on one or more significant contracts.
15

Commercial Inventory Valuation Allowances

Inventory valuation allowances for commercial customer inventories require a significant degree of judgment and are influenced by the Company’s experience to date with both customers and other markets, prevailing market conditions for raw materials, contractual terms and customers’ ability to satisfy these obligations, environmental or technological materials obsolescence, changes in demand for customer products, and other factors resulting in acquiring materials in excess of customer product demand. Contracts with some commercial customers may be based upon estimated quantities of product manufactured for shipment over estimated time periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demand for products frequently changes, sometimes creating excess and obsolete inventories.

The Company regularly reviews raw material inventories by customer for both excess and obsolete quantities, with adjustments made accordingly. Wherever possible, the Company attempts to recover its full cost of excess and obsolete inventories from customers or, in some cases, through other markets. When it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income and a valuation allowance is established for the difference between the carrying cost and the estimated realizable amount. Conversely, should the disposition of adjusted excess and obsolete inventories result in recoveries in excess of these reduced carrying values, the remaining portion of the valuation allowances are reversed and taken into income when such determinations are made. It is possible that the Company’s financial position, results of operations and cash flows could be materially affected by changes to inventory valuation allowances for commercial customer excess and obsolete inventories.

Allowance for ~~Possible~~Probable Losses on Receivables

The accounts receivable balance is recorded net of allowances for amounts not expected to be collected from customers. The allowance is estimated based on historical experience of write-offs, the level of past due amounts, information known about specific customers with respect to their ability to make payments, and future expectations of conditions that might impact the collectibility of accounts. Accounts receivable are generally due under normal trade terms for the industry. Credit is granted, and credit evaluations are periodically performed, based on a customers’ financial condition and other factors. Although the Company does not generally require collateral, cash in advance or letters of credit may be required from customers in certain circumstances,

including some foreign customers. When management determines that it is probable that an account will not be collected, it is charged against the allowance for ~~possible~~probable losses. The Company regularly reviews the adequacy of its ~~allowance monthly.~~allowance. The allowance for doubtful accounts was ~~$16,000~~$39,000 and ~~$46,000~~$6,000 at March 31, ~~2005~~2006 and June 30, ~~2004,~~2005, respectively. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payment, an additional allowance may be required. Given the Company’s relatively significant balance of government receivables and letters of credit from foreign customers, collection risk is considered minimal. Historically, uncollectible accounts have been generally insignificant and the minimal allowance is deemed adequate.

Pension Obligations

The Company calculates the cost of providing pension benefits under the provisions of SFAS No. ~~87.~~87, “Employers’ Accounting for Pensions.” The key assumptions required within the provisions of SFAS No. 87 are used in making these calculations. The most significant of these assumptions are the discount rate used to value the future obligations and the expected return on pension plan assets. The discount rate is consistent with market interest rates on high-quality, fixed income investments. The expected return on assets is based on long-term returns and assets held by the plan, which is influenced by historical averages. If actual interest rates and returns on plan assets materially differ from the assumptions, future adjustments to the financial statements would be required. While changes in these assumptions can have a significant effect on the pension benefit obligations reported in the Condensed Consolidated Balance Sheets and the unrecognized gain or loss accounts, the effect of changes in these assumptions is not expected to have the same relative effect on net periodic pension expense in the near term. While these assumptions may change in the future based on changes in long-term interest rates and market conditions, there are no known expected changes in these assumptions as of March 31, ~~2005. As indicated above, to~~2006. To the extent the assumptions differ from actual results, as indicated above, or if there are changes made to accounting standards for these costs, there would be a future impact on the financial statements. The extent to which ~~this~~these factors will result in future recognition or acceleration of expense is not determinable at this time as it will depend upon a number of variables, including trends in interest rates and the actual return on plan assets. For example, an increase in the return on the plan assets due to improved market conditions would reduce the unrecognized loss account and thus reduce future expense. While net periodic pension expense has increased during the past two years, noNo cash payments are expected to be required for the next several years due to the plan’s funded status.
16

OTHER

~~LITIGATION~~

Litigation

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico, has been the subject of ongoing investigations conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). The investigation began in the early 1980’s and involved a review of onsite and offsite environmental impacts.

At March 31, ~~2005,~~2006, Sparton has accrued ~~$6,962,000~~$6.5 million as its estimate of the future undiscounted minimum financial liability ~~related~~with respect to this ~~site.~~matter. The Company’s cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as ~~incurred.~~incurred and is anticipated to cover approximately the next 25 years. The Company’s estimate includes equipment and operating costs for onsite and offsite operations and is based on existing methodology. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable over a continuum of events and activities that help to frame and define a liability. It is possible that cash flows and results of operations could be affected by the impact of the ultimate resolution of this contingency.

Some of the printed circuit boards supplied to the Company for its ~~Aerospace~~aerospace sales have been discovered to ~~have intermittent defects.~~be defective. The defect occurred during production at the board manufacturer’s facility, prior to shipment to Sparton for further processing. ~~All of the lots involved have yet to be identified and Sparton,~~Sparton; the board manufacturer, Electropac Co., Inc.; and ~~the end~~our customer who received the defective boards ~~are working to contain~~have contained the defective boards. While investigations are underway, $2.8 million of related product and associated expenses have been classified in Sparton’s balance sheet within other long-term assets as of March 31, 2006. As of this date, ~~no claims have been~~Sparton has made ~~or litigation commenced regarding this matter.~~a demand on the board manufacturer for reimbursement of all costs and expenses incurred. In addition, in August 2005, Sparton Electronics Florida, Inc. filed an action in U.S. District Court of Florida against Electropac Co., Inc. to recover these costs. The likelihood that the claim will be resolved and the extent of Sparton’s exposure, if any, is unknown at this ~~time, thus nothing~~time. No loss contingency has been ~~accrued related to this contingency~~established at March 31, ~~2005.~~
2006.

In September 2002, Sparton ~~is currently involved~~Technology, Inc, (STI) filed an action in the U.S. District Court for the Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationship with two ~~legal actions,~~entities, Util-Link, LLC (Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October

21, 2002, the defendants filed a counterclaim seeking money damages alleging that STI breached its duties in the manufacture of products for the defendants. The defendant NRTC asked for damages in the amount of $20 million for the loss of its investment in and loans to Util-Link. In addition, the defendant Util-Link had asked for damages in the amount of $25 million for lost profits. Sparton had reviewed these claims and believed they were duplicative. Util-Link did not pursue its claim at trial.

The jury trial commenced on September 19, 2005 and concluded on November 9, 2005. The jury awarded Sparton damages in the amount of $3.6 million, of which approximately $1.9 million represented costs related to the acquisition of raw materials. These costs were deferred and are ~~disclosed~~included in ~~Part II — “Other Information, Item 1. Legal Proceedings”~~other assets on the Company’s balance sheet. As expected there were post-trial proceedings, including motions by the defendant NRTC for judgment as matter of ~~this report. At this time,~~law on its counterclaim and a motion for new trial. On March 27, 2006, the trial court denied the defendant NRTC’s motion for judgment as a matter of law on its counterclaim and granted the motion for new trial unless Sparton accepted a reduction of the judgment. Sparton accepted the reduction, which reduced the collective judgment in its favor to $1.9 million, which will enable the Company ~~is unable~~ to ~~predict~~recover the ~~outcome~~deferred costs and, accordingly, there will be no significant impact on operating results. An amended judgment was entered for $ 1.9 million in Sparton’s favor on April 5, 2006. Additional post trial proceedings may be conducted. On May 1, 2006, NRTC filed an appeal of ~~either of these claims.~~
the judgment, which could impact the ultimate result.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manufactures its products in the United States and Canada, and most recently in Vietnam. Sales are to customers in the U.S. and Canada, as well as in other foreign markets. The Company is potentially subject to foreign currency exchange rate risk relating to intercompany activity and balances and to receipts from customers and payments to suppliers in foreign currencies. Also, adjustments related to the translation of the Company’s Canadian and Vietnamese financial statements into U.S. dollars are included in current earnings. ~~The Company’s Vietnamese translation gains and losses are carried in accumulated other comprehensive income (loss) within the shareowners’ equity section of the Company’s balance sheet.~~ As a result, the Company’s financial results could be affected by factors such as changes in foreign currency exchange rates or ~~weak~~ economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currency and the related market risk exposure is considered to be immaterial. Historically, foreign currency gains and losses related to intercompany activity and balances have not been significant. However, ~~recently~~ due to the ~~strengthening~~recent strengthened Canadian dollar, the impact of transaction and translation gains has increased. ~~While a reversal of these recent gains is not anticipated, if~~If the exchange rate were to materially ~~decline~~change, the Company’s financial position could be significantly affected.

The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, the interest rate risk is not considered to be material.

Item 4. CONTROLS AND PROCEDURES

The Company maintains internal control over financial reporting intended to provide reasonable assurance that all material transactions are executed in accordance with Company authorization, are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. The Company also maintains a system of disclosure controls and procedures to ensure that information required to be disclosed in Company reports, filed or submitted under the Securities Exchange Act of 1934, is properly reported in the Company’s periodic and other reports.
17

As of March 31, ~~2005,~~2006, an evaluation was updated by the Company’s management, including the CEO and CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures continue to be effective as of March 31, ~~2005.~~2006. There have been no changes in the Company’s internal ~~controls~~control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been involved with ongoing environmental remediation since the early 1980’s. At March 31, ~~2005,~~2006, Sparton has accrued ~~$6,962,000~~$6,500,000 as its estimate of the minimum future undiscounted financial liability, of which ~~$627,000~~$523,000 is classified as a current liability and included in accrued liabilities. The Company’s minimum cost estimate is based upon existing technology and excludes legal and related consulting

costs, which are expensed as incurred. The Company’s estimate includes equipment, operating, and continued monitoring costs for onsite and offsite pump and treat containment ~~systems.~~
systems, as well as periodic reporting requirements.

Factors which cause uncertainties with respect to the Company’s estimate, include, but are not limited to, the effectiveness of the current work plans in achieving targeted results and proposals of regulatory agencies for desired methods and outcomes. It is possible that cash flows and results of operations could be significantly affected by the impact of changes associated with the ultimate resolution of this contingency. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable over a continuum of events and activities that help to frame and define a liability. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of this contingency.

In fiscal 2003, Sparton reached an agreement with the United States Department of Energy (DOE) and others to recover certain remediation costs. Under the settlement terms, Sparton received cash and the DOE agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred from the date of settlement.

In 1995, Sparton Corporation and Sparton Technology, Inc. (STI) filed a Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance Company demanding reimbursement of expenses incurred in connection with its remediation efforts at the Coors Road facility based on various primary and excess comprehensive general liability policies in effect between 1959 and 1975. In 1999, the Complaint was amended to add various other excess insurers, including certain London market insurers and Fireman’s Fund Insurance Company. ~~The case remains~~In June 2005, Sparton reached an agreement under which Sparton received $5,455,000 in ~~pretrial activity.~~
cash in July 2005. This agreement recovers a portion of past costs the Company incurred in its investigation and site remediation efforts, which began in 1983, and was recorded as income in June 2005.

In September 2002, ~~STI~~Sparton Technology, Inc, (STI) filed an action in the U.S. District Court for the Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October 21, 2002, the defendants filed a counterclaim seeking money damages alleging that STI breached its duties in the manufacture of products for the defendants. The defendant NRTC asked for damages in the amount ~~$20,000,000~~of $20 million for the loss of its investment in and loans to Util-Link. In addition, the defendant Util-Link had ~~previously~~ asked for damages in the amount of ~~$25,000,000~~$25 million for lost ~~profits,~~profits. Sparton had reviewed these claims and felt they were duplicative. Util-Link did not pursue its claim at trial.

The jury trial commenced on September 19, 2005 and concluded on November 9, 2005. The jury awarded Sparton damages in the amount of $3.6 million, of which itapproximately $1.9 million represented costs related to the acquisition of raw materials. These costs were deferred and are included in other assets on the Company’s balance sheet. As expected there were post-trial proceedings, including motions by the defendant NRTC for judgment as matter of law on its counterclaim and a motion for new trial. On March 27, 2006, the trial court denied the defendant NRTC’s motion for judgment as a matter of law on its counterclaim and granted the motion for new trial unless Sparton accepted a reduction of the judgment. Sparton accepted the reduction, which reduced the collective judgment in its favor to $1.9 million, which will enable the Company to recover the deferred costs and, accordingly, there will be no ~~longer appears~~significant impact on operating results. An amended judgment was entered for $1.9 million in Sparton’s favor on April 5, 2006. Additional post trial proceedings may be conducted. On May 1, 2006, NRTC filed an appeal of the judgment, which could impact the ultimate result.

Some of the printed circuit boards supplied to the Company for its aerospace sales have been discovered to be ~~pursuing.~~defective. The defect occurred during production at the board manufacturer’s facility, prior to shipment to Sparton for further processing. Sparton; the board manufacturer, Electropac Co., Inc.; and our customer who received the defective boards have contained the defective boards. While investigations are underway, $2.8 million of related product and associated expenses have been classified in Sparton’s balance sheet within other long-term assets as of March 31, 2006. As of this date, Sparton has ~~reviewed~~made a demand on the ~~respective claims~~board manufacturer for reimbursement of all costs and ~~believes~~expenses incurred. In addition, in August 2005, Sparton Electronics Florida, Inc. filed an action in U.S. District Court of Florida against Electropac Co., Inc. to recover these costs. The likelihood that the ~~damages sought by NRTC~~claim will be resolved and the extent of Sparton’s exposure, if any, is unknown at this time. No loss contingency has been established at March 31, 2006.

The foregoing proceedings were ~~included in Util-Link’s claim for damages and, as such, were duplicative. Sparton believes the counterclaim to be without merit and intends to vigorously defend against it. These claims are now~~disclosed in the ~~pretrial stage, with jury trial scheduled~~Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005. Developments in ~~Detroit, Michigan,~~these proceedings during the current quarter relate to the change in status of the ~~September 2005 time-frame.~~
NRTC matter described above.

~~At this time, the Company is unable to predict the outcome of either of these two claims.~~

1821

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

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

(c) Issuer Repurchases of Equity Securities

As of March 31, 2006, the Company had one publicly-announced share repurchase program outstanding. Announced August 29, 2005, effective September 14, 2005, the program provides for the repurchase of up to $4.0 million of shares of the Company’s outstanding common stock in open market transactions. The program expires September 14, 2007, and the timing and amount of daily purchases are subject to certain limitations. Through December 31, 2005, the Company had purchased 20,237 shares at an average price paid per share of $9.88.

Information on shares repurchased in the most recently completed quarter is as follows:

Total number Maximum number
of shares (or approximate dollar value)
Total number purchased as of shares that may
of shares Average price part of publicly yet be purchased
Period purchased paid per share announced programs under the program

January 1-31 — — — $ 3,800,000
February 1-28 3,600 8.72 3,600 3,769,000
March 1-31 4,400 8.64 4,400 3,730,000

Total 8,000 8,000 3,730,000

In February 2006, the Company made a change in policy concerning the status of repurchased shares. Initially, it was contemplated that such treasury shares would be available for ongoing issuances under the employee stock incentive plan and other general corporate purposes. Repurchased shares are now retired.

~~None.~~

Item 6. Exhibits


		~~3.1~~	~~Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the three-month period ended September 30, 2004, and are incorporated herein by reference.~~

		~~3.2~~	~~Amended Code of Regulation of the Registrant were filed on Form 10-Q for the three-month period ended September 30, 2004, and are incorporated herein by reference.~~

		~~3.3~~	~~The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month period ended March 31, 2004, and are incorporated herein by reference.~~

		~~31.1~~
3.1	Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the three-month period ended September 30, 2004, and are incorporated herein by reference.

3.2	Amended Code of Regulation of the Registrant were filed on Form 10-Q for the three-month period ended September 30, 2004, and are incorporated herein by reference.

3.3	The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month period ended March 31, 2004, and are incorporated herein by reference.

31.1	Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		~~31.2~~	~~Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002.~~

		~~32.1~~	~~Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

~~SIGNATURES~~


						Weighted Average
	Shares			Weighted Average		Remaining		Aggregate
	Under Option			Exercise Price		Contractual Term		Intrinsic Value

Outstanding at June 30, 2005⁽¹⁾		709,004			$6.38		3.75
Granted		—			—
Exercised		(156,621	)		$4.40			$	789,000
Forfeited or expired		(21,880	)		$6.59

Outstanding at March 31, 2006		530,503			$7.01		3.80	$	944,000


Exercisable at March 31, 2006		331,846			$6.09			$	896,000

Shares remaining available for grant at March 31, 2006		162,384


	March 31, 2005		June 30, 2004		March 31, 2006		June 30, 2005

Raw materials	$	26,845,000	$	23,641,000	$	21,123,000	$	23,463,000
Work in process and finished goods		9,641,000		13,569,000		14,410,000		13,384,000

	$	36,486,000	$	37,210,000	$	35,533,000	$	36,847,000


	Three Months Ended				Nine Months Ended
	2005		2004		2005		2004

Basic — weighted average shares outstanding		8,792,440		8,763,076		8,778,657		8,762,106
Effect of dilutive stock options		126,058		132,623		121,114		—

Weighted average diluted shares outstanding		8,918,498		8,895,699		8,899,771		8,762,106


Basic earnings (loss) per share — after stock dividend	$	0.04	$	0.02	$	0.36	$	(0.40	)

Diluted earnings (loss) per share — after stock dividend	$	0.03	$	0.02	$	0.36	$	(0.40	)


	Three Months				Nine Months
	2006		2005		2006			2005

Weighted average basic shares outstanding		9,322,647		9,232,062		9,320,181			9,217,590
Effect of dilutive stock options		39,173		132,361		—			127,170

Weighted average diluted shares outstanding		9,361,820		9,364,423		9,320,181			9,344,760


Basic and diluted earnings (loss) per share — after stock dividends		$0.08		$0.03		$(0.04	)		$0.34


	Years												Years
	Within 1		1 to 5		5 to 10		Over 10		Total		Within 1			1 to 5		5 to 10		Over 10		Total

Debt securities:
Corporate — primarily U.S.	$	1,182,682	$	3,805,238	$	158,298	$	270,390	$	5,416,608	$	1,258,000		$	3,721,000	$	193,000	$	143,000	$	5,315,000
U.S. government and federal agency		601,565		2,544,979		1,742,742		1,810,853		6,700,139		513,000			3,882,000		1,537,000		1,997,000		7,929,000
State and municipal		109,967		3,293,659		974,438		—		4,378,064		1,051,000			2,892,000		698,000		200,000		4,841,000
Bond fund												5,010,000			—		—		—		5,010,000

Total debt securities		1,894,214		9,643,876		2,875,478		2,081,243		16,494,811	$	7,832,000		$	10,495,000	$	2,428,000	$	2,340,000	$	23,095,000
Equity securities — primarily preferred stock		4,208,318		—		—		—		4,208,318

Total investment securities	$	6,102,532	$	9,643,876	$	2,875,478	$	2,081,243	$	20,703,129


	Shares Outstanding at
Class of Common Stock	April ~~29, 2005~~30, 2006
$1.25 Par Value		~~8,821,464~~	9,395,919


Part I. Financial Information

Item 1. Financial Statements (Interim, Unaudited)

Condensed Consolidated Balance Sheets At March 31, ~~2005~~2006 and June 30, ~~2004~~2005			3

Condensed Consolidated Statements of Operations ~~Three-Month~~ Three Months and ~~Nine-Month Periods ended~~Nine Months Ended March 31, ~~2005~~2006 and ~~2004~~2005			4

Condensed Consolidated Statements of Cash Flows ~~Nine-Month Periods ended~~ Nine Months Ended March 31, ~~2005~~2006 and ~~2004~~2005			5

~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Shareowners’ Equity Nine Months Ended March 31, 2006 and 2005			6

Notes to Condensed Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1113

Item 3. Quantitative and Qualitative Disclosures About Market Risk			1720

Item 4. Controls and Procedures			17


~~Item 1. Legal Proceedings~~			1820

~~Item 4. Submission of Matters to a Vote of Security Holders~~ Part II. Other Information
			19
Item 1. Legal Proceedings			20

Item ~~6. Exhibits~~2. Unregistered Sales of Equity Securities and Use of Proceeds			1922

~~Signatures~~ Item 6. Exhibits			1922

Signatures			22
EX-31.1 CERTIFICATION 302 - CEO
EX-31.2 CERTIFICATION 302 - CFO
EX-32.1 CERTIFICATIONS 906 - CEO AND CFO


		March 31			June 30

								March 31, 2006			June 30, 2005
Assets	Assets						Assets
Current assets:
Cash and cash equivalents		$	10,687,328		$	10,820,461		$	13,195,036		$	9,368,120
Investment securities			20,703,129			18,641,792
Short-term investments									23,095,196			20,659,621
Accounts receivable			20,547,356			21,267,459			20,058,502			26,004,945
Income taxes recoverable			—			559,706
Environmental settlement receivable									—			5,455,000
Inventories and costs on contracts in progress			36,486,265			37,210,259			35,532,585			36,847,385
Prepaid expenses			2,860,286			2,859,016
Deferred taxes									2,087,059			2,640,561
Prepaid expenses and other current assets									884,003			631,132

Total current assets			91,284,364			91,358,693			94,852,381			101,606,764

Pension asset			5,088,622			5,448,968			4,557,826			4,968,507
Other assets			5,741,811			5,570,773			6,917,382			6,454,526
Property, plant and equipment, net			15,923,578			12,041,062			15,336,204			16,430,989


Total assets		$	118,038,375		$	114,419,496		$	121,663,793		$	129,460,786



Liabilities and Shareowners’ Equity	Liabilities and Shareowners’ Equity						Liabilities and Shareowners’ Equity
Current liabilities:
Accounts payable		$	9,939,297			10,052,854		$	10,054,875		$	12,694,057
Salaries and wages			3,442,830			3,387,490			3,416,839			4,435,089
Accrued health benefits			1,034,421			1,044,810			1,264,325			1,041,850
Other accrued liabilities			4,539,530			4,526,234			4,382,753			5,518,920
Income taxes payable			583,294			—			160,265			2,414,294

Total current liabilities			19,539,372			19,011,388			19,279,057			26,104,210

Environmental remediation — noncurrent portion			6,334,842			6,542,009			5,977,090			6,184,590

Shareowners’ equity:
Preferred stock, no par value; 200,000 shares authorized, none outstanding			—			—			—			—
Common stock, $1.25 par value; 15,000,000 shares authorized, 8,821,464 and 8,351,538 shares outstanding at March 31, 2005 and June 30, 2004, respectively			11,026,830			10,439,423
Common stock, $1.25 par value; 15,000,000 shares authorized, 9,391,822 shares outstanding at March 31, 2006 and 8,830,428 shares outstanding at June 30, 2005									11,739,778			11,038,035
Capital in excess of par value			10,521,129			7,134,149			15,060,785			10,558,757
Accumulated other comprehensive income (loss)			(65,579	)		62,368
Accumulated other comprehensive loss									(170,180	)		(44,198	)
Retained earnings			70,681,781			71,230,159			69,777,263			75,619,392

Total shareowners’ equity			92,164,161			88,866,099			96,407,646			97,171,986


Total liabilities and shareowners’ equity		$	118,038,375		$	114,419,496		$	121,663,793		$	129,460,786


	Nine Months Ended March 31, 2006
							Capital			Accumulated other
	Common Stock						in excess			comprehensive			Retained
	Shares			Amount			of par value			income (loss)			earnings			Total

Balance at July 1, 2005		8,830,428		$	11,038,035		$	10,558,757		$	(44,198	)	$	75,619,392		$	97,171,986

Repurchases of common stock as part of 2005 share repurchase program		(28,237	)		(35,296	)		(34,199	)					(200,691	)		(270,186	)
Cash dividend ($0. 10 per share)														(889,409	)		(889,409	)
Stock options exercised, net of common stock surrendered to facilitate exercise		143,294			179,118			392,133									571,251
Share-based compensation								253,420									253,420
Tax effect from stock transactions								70,029									70,029
Stock dividend (5% declared October 25, 2005)		446,337			557,921			3,820,645						(4,382,220	)		(3,654	)

Comprehensive income (loss), net of tax:
Net loss														(369,809	)		(369,809	)
Net unrealized loss on investment securities owned											(224,767	)					(224,767	)
Reclassification adjustment for net loss realized and reported in net loss											16,785						16,785
Net unrealized gain on equity investment											82,000						82,000

Comprehensive loss																	(495,791	)


Balance at March 31, 2006		9,391,822		$	11,739,778		$	15,060,785		$	(170,180	)	$	69,777,263		$	96,407,646


	Nine Months Ended March 31, 2005
					Capital		Accumulated other
	Common Stock				in excess		comprehensive			Retained
	Shares		Amount		of par value		income (loss)			earnings			Total

Balance at July 1, 2004		8,351,538	$	10,439,423	$	7,134,149	$	62,368		$	71,230,159		$	88,866,099

Stock options exercised		52,419		65,524		188,876								254,400
Stock dividend (5% declared November 9, 2004)		417,507		521,883		3,198,104					(3,722,924	)		(2,937	)

Comprehensive income (loss), net of tax:
Net income											3,174,546			3,174,546
Net unrealized loss on investment securities owned								(194,724	)					(194,724	)
Reclassification adjustment for net loss realized and reported in net income								22,777						22,777
Net unrealized gain on equity investment								44,000						44,000

Comprehensive income														3,046,599


Balance at March 31, 2005		8,821,464	$	11,026,830	$	10,521,129	$	(65,579	)	$	70,681,781		$	92,164,161


	Options Outstanding			Options Exercisable
Range of		Wtd. Avg. Remaining	Wtd. Avg.		Wtd. Avg.
Exercise Prices	Number Outstanding	Contractual Life (years)	Exercise Price	Number Exercisable	Exercise Price
$3.24 to $6.06	384,489	$1.44	$5.34	317,126	$5.19
$6.26 to $8.90	148,953	$4.21	$7.33	63,051	$7.30


	Three Months		Nine Months
Net income, as reported	$	308,000	$	3,175,000
Deduct:
Total share-based compensation expense determined under the fair value method for all awards, net of tax effects		42,000		125,000

Pro forma net income	$	266,000	$	3,050,000


Pro forma basic and diluted earnings per share — after stock dividends		$0.03		$0.33


⁽¹⁾		Options at June 30, 2005, have been adjusted to reflect the impact of the 5% stock dividend declared in October 2005.


	Three Months Ended March 31													Three Months Ended March 31
CURRENT QUARTER														2006					2005
	2005					2004										%					%			%
			%					%			%
	Sales		of Total			Sales		of Total			Change

MARKET														Net sales		of Total			Net sales		of Total			Change

Government	$	10,143,000		24.4	%	$	14,061,000		32.3	%		(27.9	)%	$	10,785,000		23.8	%	$	10,143,000		24.4	%		6.3	%
Industrial/Other		11,641,000		28.0			11,169,000		25.6			4.2			16,147,000		35.6			11,641,000		28.0			38.7
Aerospace		16,741,000		40.3			13,885,000		31.9			20.6			14,531,000		32.1			16,741,000		40.3			(13.2	)
Medical/Scientific Instrumentation		3,036,000		7.3			4,451,000		10.2			(31.8	)		3,840,000		8.5			3,036,000		7.3			26.5

Totals	$	41,561,000		100.0	%	$	43,566,000		100.0	%		(4.6	)	$	45,303,000		100.0	%	$	41,561,000		100.0	%		9.0	%