White Electronic Designs 10-Q 2006 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended: July 1, 2006

OR

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

For the transition period from                    to                    

Commission File Number 1-4817

WHITE ELECTRONIC DESIGNS CORPORATION

(Exact name of registrant as specified in its charter)

Indiana	35-0905052
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3601 East University Drive
Phoenix, Arizona	85034
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:	602/437-1520

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

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero      Accelerated filerþ      Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of August 8, 2006 24,640,950 shares of the Registrant’s Common Stock were outstanding.

WHITE ELECTRONIC DESIGNS CORPORATION
AND SUBSIDIARIES

Table of Contents

PART I FINANCIAL INFORMATION
Item 1: Financial Statements
Unaudited Consolidated Balance Sheets as of July 1, 2006 and October 1, 2005	3
Unaudited Consolidated Statements of Operations for the Three and Nine Months ended July 1, 2006 and July 2, 2005	4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended July 1, 2006 and July 2, 2005	5
Notes to Unaudited Consolidated Financial Statements	6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3: Quantitative and Qualitative Disclosures about Market Risk	36
Item 4: Controls and Procedures	36
PART II OTHER INFORMATION	37
Item 1: Legal Proceedings	37
Item 1A: Risk Factors	38
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6: Exhibits	49
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of dollars, except share data)

	July 1, 2006			October 1, 2005
ASSETS
Current Assets
Cash and cash equivalents	$	51,518		$	51,008
Accounts receivable, less allowance for doubtful accounts of $247 and $250		18,720			19,457
Inventories, net		21,998			19,609
Assets held for sale		1,924			—
Prepaid expenses and other current assets		1,071			825
Deferred income taxes		4,481			4,508
Total Current Assets		99,712			95,407
Property, plant and equipment, net		14,068			14,952
Goodwill		5,306			5,670
Intangible assets, net		4,766			5,121
Other assets		117			118
Total Assets	$	123,969		$	121,268
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	5,103		$	5,712
Accrued salaries and benefits		2,482			2,356
Other accrued expenses		2,399			3,701
Deferred revenue		1,767			1,797
Total Current Liabilities		11,751			13,566
Accrued long-term pension liability		547			547
Deferred income taxes		1,244			1,725
Other long-term liabilities		1,341			1,210
Total Liabilities		14,883			17,048
Commitments and Contingencies
Shareholders’ Equity
Preferred stock, 1,000,000 shares authorized, no shares issued		—			—
Common stock, $0.10 stated value, 60,000,000 shares authorized, 24,672,390 and 24,479,276 shares issued		2,467			2,448
Treasury stock, 62,940 and 44,442 shares, at par		(6	)		(4	)
Additional paid-in capital		91,692			90,829
Retained earnings		15,115			11,129
Accumulated other comprehensive loss		(182	)		(182	)
Total Shareholders’ Equity		109,086			104,220
Total Liabilities and Shareholders’ Equity	$	123,969		$	121,268

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

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

	Three months ended						Nine months ended
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Net sales	$	26,944		$	30,329		$	79,203		$	87,055
Cost of sales		18,496			21,159			54,520			61,695
Gross profit		8,448			9,170			24,683			25,360
Operating expenses:
Selling, general and administrative		4,609			5,192			14,337			14,662
Research and development		1,661			1,363			5,061			4,290
Amortization of intangible assets		118			158			355			474
Goodwill impairment		364			—			364			—
Total operating expenses		6,752			6,713			20,117			19,426
Operating income		1,696			2,457			4,566			5,934
Interest (income)		(588	)		(290	)		(1,547	)		(722	)
Income before income taxes		2,284			2,747			6,113			6,656
Provision for income taxes		825			677			2,127			1,870
Net income	$	1,459		$	2,070		$	3,986		$	4,786
Earnings per share — basic	$	0.06		$	0.08		$	0.16		$	0.20
Earnings per share — diluted	$	0.06		$	0.08		$	0.16		$	0.19
Weighted average number of common shares and equivalents:
Basic		24,576,464			24,459,807			24,496,754			24,424,182
Diluted		24,916,279			24,963,098			24,936,377			24,992,593

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

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands of dollars)

	Nine months ended
	July 1, 2006			July 2, 2005
OPERATING ACTIVITIES:
Net income	$	3,986		$	4,786
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,013			3,116
Goodwill impairment		364			—
Deferred income tax (benefit) expense		(454	)		1,783
Loss on disposition of property, plant, and equipment		25			3
Stock-based compensation expense related to employee stock awards		346			—
Tax benefit related to exercise of stock options		166			52
Excess tax benefits from stock-based compensation		(99	)		—
Net changes in balance sheet accounts:
Accounts receivable		737			114
Inventories		(2,389	)		1,654
Prepaid expenses		(246	)		(742	)
Other assets		1			3
Accounts payable		(767	)		(2,373	)
Accrued expenses and deferred revenue		(1,206	)		1,060
Other long-term liabilities		131			41
Net cash provided by operating activities		3,608			9,497
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(3,619	)		(1,893	)
Proceeds from disposition of property, plant and equipment		54			—
Net cash used in investing activities		(3,565	)		(1,893	)
FINANCING ACTIVITIES:
Common stock issued for exercise of options		462			297
Common stock issued through employee purchase plan		—			106
Repurchase of common stock		(94	)		—
Excess tax benefits from stock-based compensation		99			—
Net cash provided by financing activities		467			403
Net change in cash		510			8,007
Cash at beginning of period		51,008			38,030
Cash at end of period	$	51,518		$	46,037
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of property, plant and equipment in accounts payable	$	158		$	—

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

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of July 1, 2006, the consolidated statements of operations for the three and nine months ended July 1, 2006, and July 2, 2005, and the consolidated statements of cash flows for the nine months ended July 1, 2006 and July 2, 2005 have been prepared by the Company and are unaudited. The consolidated balance sheet as of October 1, 2005 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended October 1, 2005. The Company’s fiscal year end is the Saturday nearest to September 30^th.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is the opinion of management that all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results are reflected in the interim periods presented. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 1, 2005. The results of operations for the three and nine months ended July 1, 2006 are not necessarily indicative of the operating results for the full year.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as net sales and expenses reported for the periods presented. The Company regularly assesses these estimates and, while actual results may differ, management believes that the estimates are reasonable.

2. EARNINGS PER SHARE

Statement of Financial Accounting Standards (“SFAS”) No. 128 requires the presentation of basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all potential dilutive common shares that were outstanding during the period unless they are antidilutive. Potential dilutive common shares consist of the incremental common shares that would be issued upon exercise of stock options, warrants and restricted stock.

In accordance with the disclosure requirements of SFAS No. 128, a reconciliation of the numerator and denominator of basic and diluted EPS follows:

	Three months ended
	July 1, 2006						July 2, 2005
	Income		Shares		Per share		Income		Shares		Per share
	(Numerator)		(Denominator)		amount		(Numerator)		(Denominator)		amount
Net Income	$	1,459,000					$	2,070,000
Basic EPS
Earnings available to common stockholders	$	1,459,000		24,576,464	$	0.06	$	2,070,000		24,459,807	$	0.08
Effects of Dilutive Securities
Dilutive effect of stock options				339,815						503,291
Diluted EPS
Earnings available to common stockholders	$	1,459,000		24,916,279	$	0.06	$	2,070,000		24,963,098	$	0.08

Options excluded from the calculation of diluted earnings per share were 829,959 and 943,344, respectively, as the exercise price was greater than the average share price for the period.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Nine months ended
	July 1, 2006						July 2, 2005
	Income		Shares		Per share		Income		Shares		Per share
	(Numerator)		(Denominator)		amount		(Numerator)		(Denominator)		amount
Net Income	$	3,986,000					$	4,786,000
Basic EPS
Earnings available to common stockholders	$	3,986,000		24,496,754	$	0.16	$	4,786,000		24,424,182	$	0.20
Effects of Dilutive Securities
Dilutive effect of stock options				439,623						568,411
Diluted EPS
Earnings available to common stockholders	$	3,986,000		24,936,377	$	0.16	$	4,786,000		24,992,593	$	0.19

Options excluded from the calculation of diluted earnings per share were 829,959 and 859,344, respectively, as the exercise price was greater than the average share price for the period.

3. STOCK BASED COMPENSATION

Stock Options

Executives and other key employees have been granted options to purchase common shares under stock option plans adopted during the period from 1987 to 2001. The option exercise price equals the fair market value of the Company’s common shares on the day of the grant. The vesting periods of our stock option awards generally range from three to four years. Options generally vest ratably over the period and have a maximum term of ten years.

Prior to fiscal 2006, the Company applied the intrinsic value method as outlined in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options granted. In accordance with APB Opinion No. 25, no compensation expense was recognized in the accompanying consolidated statements of operations prior to fiscal year 2006 on stock options granted to employees, since all options granted under the Company’s share incentive programs had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective October 2, 2005, the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense in the financial statements for all share-based payment awards made to employees and directors based on estimated fair values. This statement was adopted using the modified prospective method of application, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been granted in prior periods. SFAS 123(R) also requires that excess tax benefits (i.e., tax benefits resulting from share-based compensation deductions in excess of amounts reported for financial reporting purposes) be reflected as financing cash inflows instead of operating cash inflows on our consolidated statements of cash flows. For the three months ended July 1, 2006, the Company recorded compensation expense of $117,000 and cash flows from financing activities of $42,000, which reduced cash flows from operating activities by the same amount. For the nine months ended July 1, 2006, the Company recorded compensation expense of $346,000 and cash flows from financing activities of $99,000, which reduced cash flows from operating activities by the same amount. The compensation cost for share-based payment awards is included in selling, general and administrative expenses on our consolidated statements of operations.

Prior to the Company’s adoption of SFAS 123(R), SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) required that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company’s stock-based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

portion of SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” requiring quarterly SFAS 123 pro forma disclosure. The pro forma charge for compensation cost related to stock-based awards was recognized over the service period.

The pro forma information required under SFAS 123 for the three and nine months ended July 2, 2005 follows (in thousands, except per share amounts):

	Three months ended			Nine months ended
	July 2, 2005			July 2, 2005
Net income — as reported	$	2,070		$	4,786
Employee stock compensation expense-net of tax		(202	)		(578	)
Net income — pro forma	$	1,868		$	4,208
Basic earnings per share — as reported	$	0.08		$	0.20
Basic earnings per share — pro forma	$	0.08		$	0.17
Diluted earnings per share — as reported	$	0.08		$	0.19
Diluted earnings per share — pro forma	$	0.07		$	0.17

A summary of the Company’s stock option activity for the three months ended July 1, 2006 follows (in thousands, except per share amounts):

				Options Outstanding
							Weighted Average
	Options Available			Options			Exercise Price
	for Grant			Outstanding			Per Share
Balance at April 1, 2006		1,127			2,151		$	4.78
Granted		(40	)		40			4.99
Exercised		—			(65	)		2.37
Expired		—			(27	)		9.22
Balance at July 1, 2006		1,087			2,099		$	4.81
Weighted average fair value of all options granted during the period							$	2.69

A summary of the Company’s stock option activity for the nine months ended July 1, 2006 follows (in thousands, except per share amounts):

				Options Outstanding
							Weighted Average
	Options Available			Options			Exercise Price
	for Grant			Outstanding			Per Share
Balance at October 1, 2005		1,167			2,208		$	4.70
Granted		(80	)		80			5.07
Exercised		—			(137	)		2.29
Expired		—			(27	)		9.22
Forfeited		—			(25	)		5.15
Balance at July 1, 2006		1,087			2,099		$	4.81
Weighted average fair value of all options granted during the period							$	2.85

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The total pretax intrinsic value of options exercised during the three and nine months ended July 1, 2006 was approximately $193,000 and $442,000, respectively.

The following table summarizes significant ranges of outstanding and exercisable options as of July 1, 2006 (in thousands, except years and per share amounts):

	Options Outstanding								Options Exercisable
			Weighted-		Weighted-						Weighted-
			Average		Average						Average
			Remaining		Exercise		Aggregate				Exercise		Aggregate
Range of	Number		Contractual		Price per		Intrinsic		Number		Price per		Intrinsic
Exercise Prices	Outstanding		Life (in Years)		Share		Value		Exercisable		Share		Value
0.0000 — 1.6000		253		2.40	$	1.13				253	$	1.13
1.6001 — 3.2000		384		3.07		2.63				384		2.63
3.2001 — 4.8000		493		4.92		3.83				493		3.83
4.8001 — 6.4000		273		7.71		5.66				174		5.99
6.4001 — 8.0000		516		6.92		6.98				490		6.94
8.0001 — 9.6000		87		6.84		8.67				87		8.67
9.6001 — 11.2000		81		4.30		10.59				81		10.59
11.2001 — 12.8000		12		7.16		12.19				12		12.19
Total		2,099		5.20	$	4.81	$	2,564		1,974	$	4.75	$	2,561

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $5.08 on June 30, 2006, which would have been received by the option holders had all option holders exercised their in-the-money options as of that date. The total number of in-the-money options exercisable as of July 1, 2006 was approximately 1,130,000. As of October 1, 2005, 2,071,000 outstanding options were exercisable, and the weighted average exercise price was $4.58.

As of July 1, 2006, total compensation cost related to unvested stock options not yet recognized was approximately $0.4 million which is expected to be recognized over the next four years.

We recognize compensation expense using the straight-line method for stock option awards that vest ratably over the vesting period.SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma information required under SFAS 123 for periods prior to fiscal 2006, we only accounted for forfeitures as they occurred.

The fair value of each option granted during the period was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	July 1,			July 2,
	2006			2005
Weighted average expected stock price volatility		56	%		119	%
Weighted average expected option life (years)		5.10			8.32
Risk-free interest rate		5.18	%		3.84	%
Expected dividends	none			none

The Company used historical volatility as the expected volatility in the Black-Scholes model. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The risk-free interest rate assumption is based upon observed interest rates appropriate for the weighted average expected option life of the Company’s employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock

Effective March 24, 2006, the White Electronic Designs Corporation 2006 Director Restricted Stock Plan was approved by the shareholders. Under this plan, non-employee directors receive an annual grant of 7,500 shares at the Annual Meeting that vest ratably over a three year period. The Company values these shares using the intrinsic method. The 37,500 shares granted on March 24, 2006 were valued at $5.81 per share, the closing price of the stock on the date of grant.

The following table summarizes restricted stock unit activity for the three months ended July 1, 2006 (in thousands, except per share amounts):

	Number		Weighted
	of		-Average
	Restricted		Grant-
	Stock		Date Fair
	Units		Value
Outstanding on April 1, 2006		38	$	5.81
Granted		—		—
Vested		—		—
Forfeited		—		—
Outstanding on July 1, 2006		38	$	5.81

The following table summarizes restricted stock unit activity for the nine months ended July 1, 2006 (in thousands, except per share amounts):

	Number		Weighted
	of		-Average
	Restricted		Grant-
	Stock		Date Fair
	Units		Value
Outstanding on October 1, 2005		—	$	—
Granted		38		5.81
Vested		—		—
Forfeited		—		—
Outstanding on July 1, 2006		38	$	5.81

As of July 1, 2006, there were $0.2 million pre-tax of total restricted stock unit compensation expense related to nonvested awards not yet recognized, which is expected to be recognized over the next three years.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. INVENTORIES, NET

Inventories consisted of the following (in thousands of dollars):

	July 1, 2006			October 1, 2005
Gross inventories:
Raw materials	$	14,914		$	12,933
Work-in-process		6,805			6,603
Finished goods		3,254			3,354
Total gross inventories		24,973			22,890
Less reserve for excess and obsolete inventories		(2,975	)		(3,281	)
Total net inventories	$	21,998		$	19,609

Raw materials included approximately $1.5 million at July 1, 2006 and $1.3 million at October 1, 2005 for which the Company had received advance payment from the customer. These advance payments are recorded as deferred revenue until the finished goods are delivered. The Company maintains reserves for excess and obsolete inventory. Approximately $0.1 million and $0.5 million of inventories were written off against the reserve during the three and nine months ended July 1, 2006, respectively.

5. ASSETS HELD FOR SALE

Assets held for sale consisted of the following (in thousands of dollars):

	July 1, 2006		October 1, 2005
Land	$	300	$	—
Building and improvements		1,624		—
	$	1,924	$	—

The Company has land and a building in Phoenix, Arizona on the market as a result of the consolidation of the microelectronics segment and the relocation of the employees to the headquarters facility. The net book value of the land and building is presented as assets held for sale and depreciation of the building was discontinued in the second quarter of fiscal 2006.

6. PROPERTY, PLANT, AND EQUIPMENT, NET

Property, plant, and equipment consisted of the following (in thousands of dollars):

	July 1, 2006			October 1, 2005
Land	$	397		$	697
Buildings and improvements		1,806			3,738
Machinery and equipment		17,308			16,129
Furniture and fixtures		4,037			3,432
Leasehold improvements		6,299			2,225
Construction/assets in progress		781			3,020
Total, at cost		30,628			29,241
Less accumulated depreciation and amortization		(16,560	)		(14,289	)
Property, plant, and equipment, net	$	14,068		$	14,952

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Depreciation expense was approximately $0.9 million for the three months ended July 1, 2006 and July 2, 2005. Depreciation expense was approximately $2.7 million and $2.6 million for the nine months ended July 1, 2006 and July 2, 2005, respectively.

7. GOODWILL AND INTANGIBLE ASSETS, NET

Changes in the carrying amount of goodwill for the three months ended July 1, 2006 are as follows (in thousands of dollars):

	Microelectronic		Display
	Segment		Segment			Total
Balance as of April 1, 2006	$	1,492	$	4,178		$	5,670
Goodwill impairment		—		(364	)		(364	)
Balance as of July 1, 2006	$	1,492	$	3,814		$	5,306

Due to the less than expected financial performance in our interface electronics product line in Columbus, Ohio, the Company tested the goodwill for impairment in the third quarter of fiscal 2006. As a result of this testing, the Company found indicators of impairment related to this reporting unit. The reporting unit in Ohio was purchased as part of the IDS acquisition in January 2003. Based on the current and forecasted competitive market conditions, the Company has lowered earnings and cash flow projections for this division and expects it to grow more slowly than had previously been projected. Revenue and profitability have not met management’s expectations in fiscal 2006 primarily due to reduced demand in this market.

Accordingly, the Company wrote down all $0.4 million of the unamortized IDS acquisition goodwill related to the interface electronics reporting unit in the display segment. The fair value of this reporting unit was estimated using standard valuation techniques weighted 65% to a discounted cash flow method, 25% to a market multiples method and 10% to a transaction cost method.

The Company’s acquired intangible assets, almost all of which are subject to amortization, consisted of the following as of July 1, 2006 and October 1, 2005 (in thousands of dollars):

	Gross		Accumulated			Net
Intangible Assets	Amount		Amortization			Amount
July 1, 2006
Customer relationships	$	4,100	$	(934	)	$	3,166
Existing technology		2,427		(1,110	)		1,317
Other		1,283		(1,000	)		283
Total intangible assets	$	7,810	$	(3,044	)	$	4,766
October 1, 2005
Customer relationships	$	4,100	$	(729	)	$	3,371
Existing technology		2,427		(960	)		1,467
Other		1,283		(1,000	)		283
Total intangible assets	$	7,810	$	(2,689	)	$	5,121

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Changes in the carrying amount of acquired intangible assets during the nine months ended July 1, 2006 are as follows (in thousands of dollars):

Balance as of October 1, 2005	$	5,121
Amortization		(355	)
Balance as of July 1, 2006	$	4,766
Estimated Aggregate Future Amortization Expense:
Remaining three months of 2006	$	119
2007		473
2008		474
2009		473
2010		473
Thereafter		2,471
	$	4,483

The unamortized intangible asset relates to the Company’s non-contributory pension plan at its Fort Wayne, Indiana facility.

8. OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following major categories (in thousands of dollars):

	July 1, 2006		October 1, 2005
Sales commissions	$	536	$	914
Income taxes		383		1,308
Warranty reserve		565		622
Other accruals		915		857
Total accrued expenses	$	2,399	$	3,701

The Company estimates potential warranty obligations for its products based on annual product sales and historical customer product return data. Based on this data, the Company records estimated warranty reserves and expenses needed to account for the estimated cost of product returns.

The following table summarizes activity in the warranty reserve for the nine months ended July 1, 2006 and July 2, 2005 (in thousands of dollars):

	Nine months ended
	July 1, 2006			July 2, 2005
Warranty reserve, beginning of period	$	622		$	640
Provision for warranty claims		219			434
Warranty claims charged against the reserve		(276	)		(530	)
Warranty reserve, end of period	$	565		$	544

9. CREDIT FACILITY

The Company maintains a $12.0 million revolving line of credit with JPMorgan Chase. Borrowings under the line of credit bear interest at the lower of the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the JPMorgan Chase “prime rate”. The line of credit expired March 28, 2006, but has been extended until September 28, 2006. We expect to renew the line of credit in the fourth quarter of fiscal 2006. As of July 1, 2006, there were no borrowings against the line of credit, and we have not borrowed against the line of credit since April 2003. The agreement requires the Company to maintain compliance with certain financial covenants and we are in compliance with these covenants as of July 1, 2006.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. PENSION PLAN

The Company has a non-contributory pension plan for eligible union employees at its Fort Wayne, Indiana facility pursuant to a collective bargaining agreement. The following table summarizes the components of net periodic benefit cost recognized (in thousands of dollars):

	Three months ended						Nine months ended
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Service cost	$	15		$	21		$	71		$	63
Interest cost		32			46			146			131
Expected return on plan assets		(33	)		(42	)		(151	)		(128	)
Amortization of prior service cost		7			12			31			25
Amortization of net loss		—			(3	)		—			3
Net periodic benefit cost	$	21		$	34		$	97		$	94

11. FINANCIAL DATA BY BUSINESS SEGMENT

The Company has two business segments, each of which requires different design and manufacturing resources and generally serves customers in different markets. The microelectronic segment accounted for approximately 59% and 58% of total Company net sales, while the display segment accounted for approximately 41% and 42% during the three and nine months ended July 1, 2006, respectively.

The microelectronic segment manufactures semiconductor multi-chip packaged products primarily for memory storage and are mainly used in embedded systems, including single board computers, hand held processors, test equipment, servers and data loggers. Our products in the microelectronic segment are generally sold to military prime contractors and commercial original equipment manufacturers (“OEMs”) in the aerospace, defense, military equipment, computer networking and telecommunication/data communication industries. A commercial grade product generally meets the standard of industries such as the consumer electronics, computer networking and telecommunication and data communication industries. Higher performing products, also known as high-reliability products, are needed in certain industries, such as aerospace, defense, and military equipment, and are often referred to as “military” products. Military products are designed to meet more stringent standards and are resistant to adverse conditions, such as extremely high and low temperatures. High-reliability products can also be used in industrial applications where products are exposed to harsh conditions. The microelectronic segment also includes anti-tamper security coating for mission critical semiconductor components in military applications, to prevent reverse engineering of secure electronic circuits.

The display segment serves a number of markets with products and solutions that are incorporated into tablet PCs, global positioning systems, automatic teller machines, point of service (“POS”) order confirmation displays, home appliances, consumer electronics, medical devices, outdoor displays, military and industrial avionics and various military applications. Our display segment manufactures enhanced viewing liquid crystal displays, interface devices and electromechanical assemblies. Enhanced viewing liquid crystal displays can be either ruggedized or commercial. Ruggedized displays are manufactured to perform in harsh environmental conditions, primarily in military and high-end industrial applications, while commercial display products offer greater viewing performance than off-the-shelf displays, but are not designed for harsh environmental conditions. Interface devices include electromechanical components and instrument packages that can consist of ruggedized keyboards, aircraft trim panels, rotating devices, mechanical packages, membrane keypads, silver flexible circuits, graphic overlays, control panels, and keypad/controller assemblies.

The Company’s segments have common customers, mainly in the aerospace defense industry. Different purchasing groups within the customers’ parent company, however, usually purchase the products from each segment. There are no inter-segment sales. Transfers of inventory between segments are made at cost, and are treated as transfers between locations.

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The assets identified by segment are those assets used in the Company’s operations and do not include general corporate assets such as cash and deferred tax assets. Capital expenditures exclude equipment under operating leases.

During the three months and nine months ended July 1, 2006, no one customer accounted for more than 10% of total net sales. During the three months ended July 1, 2006, both Motion Computing and Hewlett Packard accounted for approximately 11% of display segment net sales, while On Command Corporation and Arrow Electronics accounted for approximately 16% and 14%, respectively, of microelectronic segment net sales. During the nine months ended July 1, 2006, both Motion Computing and Whirlpool accounted for approximately 10% of display segment net sales, while On Command Corporation accounted for approximately 13% of microelectronic segment net sales.

During the three months ended July 2, 2005, NCR Corporation accounted for approximately 12% of total net sales and approximately 25% of display segment net sales, while On Command Corporation accounted for approximately 17% of microelectronic segment net sales. During the nine months ended July 2, 2005, no one customer accounted for more than 10% of total net sales. However, NCR Corporation accounted for approximately 19% of display segment net sales, while On Command Corporation accounted for approximately 14% of microelectronic segment net sales.

A significant portion of the Company’s business activity in each segment is from contractors who have contracts with the United States Department of Defense. Military net sales were $14.2 million and $12.2 million for the quarters ended July 1, 2006 and July 2, 2005, respectively, and $39.8 million and $35.1 million for the first nine months of fiscal 2006 and 2005, respectively.

Foreign sales as a percentage of total net sales in the three months ended July 1, 2006 and July 2, 2005 were 26% and 17%, respectively. Foreign sales as a percentage of total net sales for the nine months ended July 1, 2006 and July 2, 2005 were 24% and 18%, respectively.

A summary of net sales by geographic region is as follows (in thousands of dollars):

	Three months ended				Nine months ended
	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
United States of America	$	19,890	$	25,202	$	60,463	$	71,477
Europe and Middle East		2,658		2,273		7,708		7,558
Asia Pacific		3,414		2,230		8,496		6,216
Other		982		624		2,536		1,804
Net sales	$	26,944	$	30,329	$	79,203	$	87,055

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Three months ended					Nine months ended
	July 1, 2006			July 2, 2005		July 1, 2006			July 2, 2005
Net sales
Microelectronic	$	15,805		$	15,459	$	46,314		$	47,036
Display		11,139			14,870		32,889			40,019
Net sales	$	26,944		$	30,329	$	79,203		$	87,055
Income (loss) before tax
Microelectronic	$	3,205		$	2,547	$	7,586		$	7,498
Display		(921	)		200		(1,473	)		(842	)
Total income before income taxes	$	2,284		$	2,747	$	6,113		$	6,656
Capital expenditures
Microelectronic	$	781		$	901	$	3,366		$	1,649
Display		118			70		411			244
Total capital expenditures	$	899		$	971	$	3,777		$	1,893
Depreciation and amortization expense
Microelectronic	$	614		$	582	$	1,723		$	1,784
Display		422			448		1,290			1,332
Total depreciation and amortization	$	1,036		$	1,030	$	3,013		$	3,116

	As of
	July 1, 2006		October 1, 2005
Identifiable assets
Microelectronic	$	38,642	$	38,780
Display		29,211		26,853
General corporate		56,116		55,635
Total assets	$	123,969	$	121,268

12. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes”. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes”. FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold in determining if a tax position should be reflected in the financial statements. Only tax positions that meet the “more likely than not” recognition threshold may be recognized. The interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements for uncertain tax positions. FIN No. 48 will be effective for the Company’s fiscal year beginning September 30, 2007. The Company is currently evaluating the impact FIN No. 48 will have on the Company’s financial condition and results of operations.

In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 will be effective for the Company’s fiscal year beginning October 1, 2006. FIN No. 47 is currently being evaluated by the Company and is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of

16

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

this Statement are now in effect for inventory costs incurred in fiscal 2006. The implementation of this Statement has not had a material impact on the Company’s financial condition or results of operations.

13. COMMITMENTS AND CONTINGENCIES

Contingencies

On July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004, shareholder class action lawsuits entitledMcJimsey v. White Electronic Designs Corporation, et al.(Case No. CV04-1499-PHX-SRB),Afework v. White Electronic Designs Corporation, et al(Case No. CV04-1558-PHX-JWS),Anders v. White Electronic Designs Corporation, et al.(Case No. CV04-1632-PHX-JAT), andSammarco v. White Electronic Designs Corporation, et al.(Case No. CV04-1744-PHX-EHC), respectively, were filed in the United States District Court for the District of Arizona against the Company and certain of its current and former officers and directors (the “defendants”). The actions were consolidated and the Wayne County Employees’ Retirement System was appointed as lead plaintiff. A consolidated complaint was filed on or about February 14, 2005. The defendants’ motions to dismiss that complaint were granted on February 14, 2006. The plaintiffs filed an amended complaint on April 17, 2006 (the “Complaint”). Like the dismissed complaint, the new Complaint alleges, among other things, that between January 23, 2003 and June 9, 2004, the Company made false and misleading statements concerning its financial results and business, and issued a misleading registration statement and prospectus in connection with the Company’s July 2003 secondary offering. The Complaint seeks unspecified monetary damages. Defendants filed a motion to dismiss the new Complaint in June 2006. The plaintiffs’ response to the motion is due in August 2006. The Court has not set a date for a hearing on the motion to dismiss. The Company believes plaintiffs’ claims are without merit and it intends to vigorously defend itself in the consolidated matter. Although the outcome of this litigation is uncertain, based on the Company’s current assessment of the merits of the Complaint and considering the amount of insurance the Company maintains covering claims of this nature, the Company does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.

On August 12, 2004 and August 19, 2004, purported derivative actions entitledDodt v. Shokrgozar, et al.(Case No. CV04-1674-PHX-NVW) andChrist v. Shokrgozar, et al.(Case No. CV04-1722-PHX-MHM), respectively, were filed in the United States District Court for the District of Arizona against current and former directors and officers of the Company. The Company was also named as a nominal defendant in both actions. The complaints alleged that between January 2003 and the date the complaints were filed, defendants breached their fiduciary duties to the Company by causing the Company to misrepresent its financial results and prospects. The complaints alleged claims for breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets, insider selling, and unjust enrichment, and sought unspecified damages, equitable relief, and restitution against the individual defendants. On June 7, 2005, the Court dismissed the Dodt action and on June 15, 2005, the Court dismissed the Christ action. Mr. Dodt has appealed the dismissal of his complaint. Mr. Dodt filed an appellate brief in June 2006. The Company’s response to Mr. Dodt’s brief was filed on July 28, 2006. A hearing date for Mr. Dodt’s appeal has not been scheduled by the Court. The Company believes the claims made in the complaints are without merit and, in the event that the plaintiff’s appeal is successful, intends to vigorously defend these actions. Although the outcome of this litigation is uncertain, based on the Company’s current assessment of the merits of the complaints and considering the amount of insurance the Company maintains covering claims of this nature, the Company does not believe the ultimate outcome of these matters will have a material adverse effect on its consolidated results of operations, liquidity or financial condition.

In addition, from time to time, the Company is subject to claims and litigation incident to its business. There are currently no such pending proceedings to which the Company is a party that the Company believes will have a material adverse effect on the Company’s consolidated results of operations, liquidity, or financial condition.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 1, 2006 COMPARED TO THE THREE AND NINE MONTH PERIODS ENDED JULY 2, 2005

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto as of and for the fiscal year ended October 1, 2005 included in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including, but not limited to, those discussed below and in Part II, Item 1A of this Report on Form 10-Q.

Overview

We design, develop and manufacture innovative microelectronic and display components and systems for high technology products used in the military, industrial, and commercial markets. Our microelectronic solutions include advanced semiconductor and state of the art multi-chip packaging, as well as our proprietary process for applying anti-tamper protection to mission critical semiconductor components used in military applications. Our display solutions include enhanced flat panel display products, interface devices and electromechanical assemblies. Our customers, which include military prime contractors in the United States and Europe as well as commercial original equipment manufacturers (“OEMs”), outsource many of their microelectronic and display components and systems to us as a result of the combination of our design, development and manufacturing expertise.

Executive Summary

Our net sales for the quarter ended July 1, 2006 decreased approximately $3.4 million, to $26.9 million from $30.3 million for the quarter ended July 2, 2005. During the first nine months of fiscal 2006, net sales decreased approximately $7.9 million to $79.2 million from $87.1 million during the first nine months of fiscal 2005. Military sales in both our microelectronic and display segments saw the benefit of strong bookings in the second half of fiscal 2005, as sales increased approximately $2.0 million and $4.6 million for the three and nine months ended July 1, 2006 as compared to the same prior year periods. Commercial sales in both segments decreased approximately $5.4 million and $12.5 million for the three and nine months ended July 1, 2006 as compared to the same prior year periods. In the third quarter of fiscal 2005, we made a strategic business decision in our display segment not to pursue future business in low margin products. In connection with this decision, our contract with NCR Corporation ended in our fourth quarter of fiscal 2005 which resulted in a decrease in net sales of $3.7 million and $6.9 million for the three and nine months ended July 1, 2006, respectively. Additionally, shipments slowed to our interface customers. As anticipated, commercial sales in our microelectronic segment were impacted by a customer’s reduced demand for their high-end server applications which affected shipments of our commercial memory modules.

A key indicator of our future sales is the amount of new orders received compared to current net sales, known as the book-to-bill ratio. During the quarter ended July 1, 2006, we had new orders of approximately $28.9 million, which equates to a book-to-bill ratio of 1.07 for the period. Display segment orders were approximately $14.5 million during the quarter, resulting in a segment book-to-bill ratio of 1.31 for the quarter. Approximately 50%, or $7.2 million, of these orders were for our Max Vu™ technology to a leading manufacturer of specialty PC applications. Orders for the microelectronic segment were approximately $14.4 million during the quarter, resulting in a segment book-to-bill ratio of 0.91.

Our gross margins increased during the three months ended July 1, 2006 to 31% from 30% during the comparable period of fiscal year 2005. Gross margins increased for the nine months ended July 1, 2006 to 31% from 29% for the comparable period of fiscal year 2005. The primary reason for the increase for the three months ended July 1, 2006 was the higher microelectronic segment gross margin which more than offset the decrease in the display segment gross margin. The microelectronic segment gross margin increased to 41% in the third quarter of fiscal 2006 compared to 39% during the comparable period of fiscal 2005 due to increased military sales which carry a higher margin than our commercial sales. The display segment gross margin decreased to 18% for the three months ended July 1, 2006 from 21% for the comparable period of fiscal 2005, primarily due to lower sales which affected our

18

ability to absorb overhead due to the reduced demand for our interface electronic products and a decline in current customer orders in this market. However, on a nine month basis, the display segment margin increased to 20% from 18%. This increase was directly related to a favorable shift in product mix.

Our overall production has, at times, been affected by longer lead times for certain components, which may affect the timing and cost of sales during the year. The availability and price of memory and display components, based on supply and demand, will increase and decrease on a monthly or quarterly basis. When demand exceeds supply, prices will generally increase and lead times will lengthen. When supply exceeds demand, prices will generally decrease and lead times will shorten. Since Intel Corporation did not launch the Double Data Rate II (“DDR II”) system as analysts were anticipating, the Dynamic Random Access Memory (“DRAM”) and DDR II market continues to be soft due to high levels of supply, and accordingly, prices decreased in early 2006. However, there has been a general trend towards price increases that is expected to continue until at least the end of the year. The Flash memory market is in a growth mode and its prices are also expected to increase. The availability of liquid crystal displays (“LCDs”) has stabilized with prices up slightly over the last few quarters. Management expects there to be no price increase in LCDs for the balance of the year for the industrial market (non PC and notebook) based in part on analysts’ expectations.

We have purchased and placed duplicate equipment for our Max-Vu™ process technology in a manufacturing company located in China in order to be more competitive in the commercial display market for our tablet personal computer products. We began production using this equipment in the second quarter of fiscal 2006 and will continue to migrate other related business to China.

We continue to invest further in the anti-tamper process technology as we expect to secure additional opportunities in the years to come.

In the third quarter of fiscal 2006, as a result of the less than expected financial performance of our interface electronics product line in Columbus, Ohio, we performed a goodwill impairment test on this reporting unit in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Based on our testing, we found indicators of impairment in the reporting unit. Based on the current and forecasted competitive market conditions, the Company has lowered earnings and cash flow projections for this division and expects it to grow more slowly than had been previously projected. The revenue and profitability of this display segment unit has not met management’s expectations in fiscal 2006 primarily due to reduced demand in this market. Accordingly, we wrote down all of the $0.4 million of the unamortized IDS acquisition goodwill related to the interface electronics reporting unit. The fair value of this reporting unit was estimated using standard valuation techniques weighted 65% to a discounted cash flow method, 25% to a market multiples approach and 10% to a transaction or cost method.

Net income for the three months ended July 1, 2006 was approximately $1.5 million compared to $2.1 million for the same period in fiscal 2005. The goodwill impairment, decrease in gross profit and the increase in research and development expenses more than offset the decrease in selling, general and administrative expenses and increase in interest income. Net income for the nine months ended July 1, 2006 was approximately $4.0 million compared to $4.8 million for the same period in fiscal 2005. The goodwill impairment, decrease in gross profit and the increase in research and development expenses primarily accounted for the decline.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include the following items:

Revenue Recognition

We sell microelectronic and display products primarily to military prime contractors and commercial OEMs. A

19

small portion of our products is also sold through distributors or resellers. We recognize revenue on product sales when persuasive evidence of an arrangement with the customer exists, title to the product has passed to the customer (usually occurring at time of shipment), the sales price is fixed or determinable, and collectibility of the related billing is reasonably assured. Advance payments from customers are deferred and recognized when the related products are shipped. Revenue relating to products sold to distributors or resellers who either have return rights or where we have a history of accepting product returns are deferred and recognized when the distributor or reseller sells the product to the end customer. We also provide limited design services pursuant to related customer purchase orders and generally recognize the associated revenue as such services are performed. However, it may be deferred until certain elements are completed. We may from time to time enter into certain arrangements that contain multiple elements such as performing limited design services accompanied with follow-on manufacturing of related products. We allocate revenue to the elements based on relative fair value, and recognize revenue for each element when there is evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Arrangements with multiple elements that are not considered separate units of accounting require deferral of revenue until certain other elements have been delivered or the services have been performed. The amount of the revenue recognized is impacted by our judgment as to whether an arrangement includes multiple elements and whether the elements are considered separate units of accounting.

Reserve for Excess and Obsolete Inventory

Historically, we have experienced fluctuations in the demand for our products based on cyclical fluctuations in the microelectronic and display markets. These fluctuations may cause inventory on hand to lose value or become obsolete. In order to present the appropriate inventory value on our financial statements, we identify slow moving or obsolete inventories and record provisions to write down those inventories to net realizable value. These provisions are based on our comparison of the value of inventory on hand against expected future sales. If future sales are less favorable than those projected, additional inventory provisions may be required.

Accounts Receivable and Allowance for Doubtful Accounts

We record trade accounts receivable at the invoiced amount, and they do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make these estimates based on an analysis of accounts receivable using available information on our customers’ financial status and payment histories. Historically, bad debt losses have not differed materially from our estimates.

Goodwill and Intangible Assets

We account for goodwill and intangible assets in accordance with SFAS No. 142, which requires goodwill to be tested for impairment on an annual basis (and more frequently in certain circumstances) and written down when impaired.

Furthermore, SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to fifteen years.

Stock-Based Compensation Expense

With the adoption of SFAS 123(R) on October 2, 2005, we are required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates.

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Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and net operating loss and tax credit carry forwards. We regularly review our deferred tax assets for recoverability and, if necessary, establish a valuation allowance.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of net sales:

	For the three months ended						For the nine months ended
	July 1,			July 2,			July 1,			July 2,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		68.6	%		69.8	%		68.8	%		70.9	%
Gross profit		31.4	%		30.2	%		31.2	%		29.1	%
Operating expenses:
Selling, general and administrative		17.1	%		17.1	%		18.1	%		16.8	%
Research and development		6.2	%		4.5	%		6.4	%		4.9	%
Amortization of intangible assets		0.4	%		0.5	%		0.4	%		0.5	%
Goodwill impairment		1.4	%		0.0	%		0.5	%		0.0	%
Total operating expenses		25.1	%		22.1	%		25.4	%		22.3	%
Operating income		6.3	%		8.1	%		5.8	%		6.8	%
Interest (income)		(2.2	%)		(1.0	%)		(2.0	%)		(0.8	%)
Income before income taxes		8.5	%		9.1	%		7.7	%		7.6	%
Provision for income taxes		3.1	%		2.2	%		2.7	%		2.1	%
Net income		5.4	%		6.9	%		5.0	%		5.5	%

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Three Months ended July 1, 2006 compared to Three Months ended July 2, 2005

Net Sales

The following table shows our net sales by our two business segments and the markets they serve (in thousands, except percentages):

	Three months ended
	July 1,			July 2,
	2006			2005
Microelectronic Segment
Military/Industrial Market	$	11,101		$	9,188
Commercial Market		4,704			6,271
		15,805			15,459
Display Segment
Military/Industrial Market		3,134			3,004
Commercial Market		8,005			11,866
		11,139			14,870
Total	$	26,944		$	30,329
Microelectronic Segment
Military/Industrial Market		41	%		30	%
Commercial Market		18	%		21	%
		59	%		51	%
Display Segment
Military/Industrial Market		11	%		10	%
Commercial Market		30	%		39	%
		41	%		49	%
Total		100	%		100	%

Net sales were approximately $26.9 million for the three months ended July 1, 2006, a decrease of $3.4 million, or 11%, from $30.3 million for the three months ended July 2, 2005.

Military/industrial sales in the microelectronic segment were approximately $11.1 million for the three months ended July 1, 2006, an increase of $1.9 million, or 21%, from $9.2 million for the three months ended July 2, 2005. Strong bookings in the second half of fiscal 2005 coupled with consistent bookings in fiscal 2006 led to the increase. We expect fiscal 2006 sales to be higher than fiscal 2005.

Commercial sales in the microelectronic segment were approximately $4.7 million for the three months ended July 1, 2006, a decrease of $1.6 million, or 25%, from $6.3 million for the three months ended July 2, 2005. The decline was primarily due to a general decrease in sales to customers as well as in orders of commercial memory modules from a high-end server customer as they experienced a reduction in sales. We expect fiscal 2006 sales to be lower than fiscal 2005.

Military/industrial sales in the display segment were approximately $3.1 million for the three months ended July 1, 2006, an increase of $0.1 million, or 4%, from $3.0 million for the quarter ended July 2, 2005. The increase was due to a general increase in overall order activity and the timing of customer requirements. We expect sales to be flat for the remainder of fiscal 2006.

Commercial sales in the display segment were approximately $8.0 million for the three months ended July 1, 2006, a decrease of $3.9 million, or 33%, from $11.9 million for the three months ended July 2, 2005. The decrease was primarily due to decreased sales to NCR Corporation of $3.7 million and decreased sales of our interface products. We made a strategic business decision in the third quarter of fiscal 2005 not to pursue future orders of this type with NCR Corporation due to the margins on this business, and their contract ended in the fourth quarter of fiscal 2005. While we expect the tablet PC and Max-Vu™ technology products to assist in replacing our lost sales, this is slower than anticipated and we expect fiscal 2006 sales to be lower than fiscal 2005.

During the three months ended July 1, 2006, no one customer accounted for more than 10% of total net sales.

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Motion Computing and Hewlett Packard each accounted for approximately 11% of display segment net sales. On Command and Arrow Electronics accounted for approximately 16% and 14%, respectively, of microelectronic segment net sales.

During the three months ended July 2, 2005, NCR Corporation accounted for approximately 12% of total net sales and approximately 25% of display segment net sales. On Command accounted for approximately 17% of microelectronic segment net sales.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, sales of our membrane keypad products, which totaled approximately $2.2 million for the three months ended July 1, 2006, are subject to seasonal fluctuations relating to increased home appliance sales in the spring and fall. Historically, military sales have been strongest during our fiscal fourth quarter.

Gross Profit

The following table illustrates our two segments’ gross margin percentages by the markets they serve:

	Three months ended
	July 1,			July 2,
	2006			2005
Microelectronic Segment
Military/Industrial Market		51	%		52	%
Commercial Market		17	%		21	%
Microelectronic Segment Total		41	%		39	%
Display Segment
Military/Industrial Market		37	%		42	%
Commercial Market		10	%		15	%
Display Segment Total		18	%		21	%
Company Total		31	%		30	%

Gross profit was approximately $8.4 million for the three months ended July 1, 2006, a decrease of $0.8 million, or 8%, from $9.2 million for the three months ended July 2, 2005. For the three months ended July 1, 2006, gross margin as a percentage of net sales was approximately 31%, compared to 30% for the three months ended July 2, 2005.

Gross profit for the microelectronic segment was approximately $6.5 million for the three months ended July 1, 2006, an increase of $0.4 million, or 7%, from $6.1 million for the three months ended July 2, 2005. Gross margin as a percentage of microelectronic segment sales was approximately 41% for the three months ended July 1, 2006, compared to 39% for the three months ended July 2, 2005. The $0.4 million increase in microelectronic segment gross profit was due to the increase in gross profit from our military/industrial products primarily as a result of higher sales volume, which offset the lower sales volume and lower margin sales in our commercial market. Gross margins in the commercial market decreased due to an unfavorable product mix, lower sales and under absorption of overhead.

Gross profit for the display segment was approximately $2.0 million for the three months ended July 1, 2006, a decrease of $1.1 million, or 36%, from $3.1 million for the three months ended July 2, 2005. Gross margin as a percentage of display segment net sales was approximately 18% for the three months ended July 1, 2006 , compared to 21% for the three months ended July 2, 2005. Gross profit for commercial products decreased $1.0 million and gross profit for military/industrial products decreased $0.1 million. The decrease in commercial gross profit was due to lower sales and under absorption of overhead, primarily in our interface electronics product line. The decrease in military/industrial gross profit was due to lower sales volume and overall product mix. Gross margins

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for our display segment products continue to come under pressure from both domestic and Asian competition, and while we are implementing manufacturing strategies to improve our competitive position, it may be difficult to improve current gross margins in the future.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense (including bonuses in accordance with Compensation Committee policies), selling expenses (including commissions), information technology expenses and corporate administrative expenses. Selling, general and administrative expenses were approximately $4.6 million for the three months ended July 1, 2006, a decrease of $0.6 million, or 11%, from $5.2 million for the three months ended July 2, 2005. The decrease related entirely to general and administrative expenses primarily due to reductions in accrued compensation and bad debt expense, partially offset by increased compensation expense related to the adoption of SFAS 123(R).

Selling, general and administrative expenses as a percentage of net sales remained consistent at 17% for the three months ended July 1, 2006 and July 2, 2005. As part of our overall management planning and analysis process, we have traditionally targeted approximately 15% of net sales for selling, general and administrative expenses. Because of the continued compliance requirements related to the Sarbanes-Oxley Act and the adoption of SFAS 123(R), we are expecting selling, general and administrative expenses to average between 16% and 18% in the future.

Research and Development Expenses

Research and development expenses consist primarily of compensation for our engineering personnel, consulting expenses and project materials. Research and development expenses were approximately $1.7 million for the three months ended July 1, 2006, an increase of $0.3 million, or 22%, from $1.4 million for the three months ended July 2, 2005. The increase was primarily attributable to higher expenditures for our next generation anti-tamper, tablet personal computer and touch screen tablet personal computer technologies and increased headcount. Research and development expenses as a percentage of net sales have remained consistent and averaged between 5% and 6% of net sales over the past several quarters. However, as a result of our additional investment in research and development related to the above mentioned technologies, we expect research and development expenses to average 6% to 7% of net sales for fiscal 2006.

Ongoing product development projects for the microelectronic segment include new packaging designs for various types of memory products including DRAM, DDR II, flash/compact flash and microprocessors, along with microprocessor modules and ball grid array packaging products using these semiconductors; continuing development of anti-tamper technology for microelectronic products; next generation memory and power personal computer products assembled in various multi-chip packages to be used in both commercial and military markets; and qualification of new semiconductor products. Ongoing product development projects for the display segment include glass lamination process technology, our new Max-Vu™ process technology for tablet personal computers, next generation touch screen tablet personal computer technology and display systems development.

Goodwill Impairment

Due to the decreased performance in our interface electronics division in Columbus, Ohio, we tested the goodwill for impairment in the third quarter in accordance with SFAS No. 142. As a result of this testing, we found indicators of impairment for this display segment reporting unit. Accordingly, we wrote down goodwill by $0.4 million in the third quarter. See Note 7 of the Notes to the Consolidated Financial Statements for information relating to the goodwill impairment.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in a money market account. Interest income was approximately $588,000 for the three months ended July 1, 2006, an increase of $298,000 compared to $290,000 for the three months ended July 2, 2005. This increase was attributable to the increase in invested balances between periods, primarily as a result of the reinvestment of cash flows from operations, and increased interest rates.

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Amortization of Intangible Assets

Intangible asset amortization for the three months ended July 1, 2006 and July 2, 2005 totaled approximately $118,000 and $158,000, respectively.

Income Taxes

Income tax expense totaled $0.8 million for the three months ended July 1, 2006 compared to $0.7 million for the three months ended July 2, 2005, an increase of $0.1 million. The Company’s effective tax rate approximated 36% for the three months ended July 1, 2006 and 25% for the three months ended July 2, 2005. The Company’s effective tax rate was increased from the federal statutory tax rate of 35% due to the incremental impact of state income taxes and the goodwill impairment, and was decreased by reductions for foreign sales exclusions, a new manufacturers’ deduction and research and experimentation tax credits available for federal income tax purposes. The unfavorable effect on our rate of the partial phasing out of federal foreign sales exclusions was offset by the phasing in of a new manufacturing deduction.

The increase in the effective rate from the three months ended July 2, 2005 is primarily due to the impact of the $0.4 million goodwill impairment which had no income tax benefit and the changes in the tax law related to the research and development credit. The research and development credit expired December 31, 2005, thereby increasing our effective rate in fiscal 2006. It is anticipated that Congress may again reinstate the credit. However, there is uncertainty as to the effective date. We expect our effective rate tax rate to be approximately 35% in the fourth quarter without reinstatement of the credit.

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Nine Months ended July 1, 2006 compared to Nine Months ended July 2, 2005

Net Sales

The following table shows our net sales by our two business segments and the markets they serve (in thousands, except percentages):

	Nine months ended
	July 1,			July 2,
	2006			2005
Microelectronic Segment
Military/Industrial Market	$	30,972		$	27,149
Commercial Market		15,341			19,887
		46,313			47,036
Display Segment
Military/Industrial Market		8,844			7,999
Commercial Market		24,046			32,020
		32,890			40,019
Total	$	79,203		$	87,055
Microelectronic Segment
Military/Industrial Market		39	%		31	%
Commercial Market		20	%		23	%
		59	%		54	%
Display Segment
Military/Industrial Market		11	%		9	%
Commercial Market		30	%		37	%
		41	%		46	%
Total		100	%		100	%

Net sales were approximately $79.2 million for the nine months ended July 1, 2006, a decrease of $7.9 million, or 9%, from $87.1 million for the nine months ended July 2, 2005.

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Military/industrial sales in the microelectronic segment were approximately $31.0 million, an increase of $3.8 million, or 14%, for the nine months ended July 1, 2006 from $27.2 million for the nine months ended July 2, 2005. Strong bookings in the second half of fiscal 2005 coupled with consistent bookings in fiscal 2006 led to the increase. We expect fiscal 2006 sales to be higher than fiscal 2005.

Commercial sales in the microelectronic segment were approximately $15.3 million for the nine months ended July 1, 2006, a decrease of $4.6 million, or 23%, from $19.9 million for the nine months ended July 2, 2005. The decline was due to the transition of a major product to offshore production which just passed qualification this quarter, shipments for a customer’s hotel entertainment delivery system being delayed due to the hurricanes in the Gulf Coast, which had a significant effect on their business, and an overall decrease in order activity. We expect fiscal 2006 sales to be lower than fiscal 2005.

Military/industrial sales in the display segment were $8.8 million for the nine months ended July 1, 2006, an increase of $0.8 million, or 11%, from $8.0 million for the nine months ended July 2, 2005. The increase was due to increased orders and the timing of customer requirements. We expect sales to be flat for the remainder of fiscal 2006.

Commercial sales in the display segment were approximately $24.0 million for the nine months ended July 1, 2006, a decrease of $8.0 million, or 25%, from $32.0 million for the nine months ended July 2, 2005. The decrease was primarily due to decreased sales to NCR Corporation of $6.9 million as well as decreased orders of our interface products. We made a strategic business decision in the third quarter of fiscal 2005 not to pursue future orders of this type with NCR Corporation due to the margins on this business, and their contract ended in the fourth quarter of fiscal 2005. While we expect the tablet PC and Max-Vu™ technology products to assist in replacing our lost sales, this is slower than anticipated and we expect fiscal 2006 sales to be lower than fiscal 2005.

During the nine months ended July 1, 2006, no one customer accounted for more than 10% of our total net sales. Motion Computing and Whirlpool each accounted for approximately 10% of display segment net sales, while On Command Corporation accounted for approximately 13% of microelectronic segment net sales.

During the nine months ended July 2, 2005, no one customer accounted for more than 10% of our total net sales. NCR Corporation accounted for approximately 19% of display segment net sales, while On Command accounted for approximately 14% of microelectronic segment net sales.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, sales of our membrane keypad products, which totaled approximately $7.5 million in the nine months ended July 1, 2006, are subject to seasonal fluctuations relating to increased home appliance sales in the spring and fall. Historically, military sales have been strongest during our fiscal fourth quarter.

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Gross Profit

The following table illustrates our two segments’ gross margin percentages by the markets they serve:

	Nine months ended
	July 1,			July 2,
	2006			2005
Microelectronic Segment
Military/Industrial Market		49	%		51	%
Commercial Market		20	%		22	%
Microelectronic Segment Total		39	%		38	%
Display Segment
Military/Industrial Market		40	%		31	%
Commercial Market		13	%		15	%
Display Segment Total		20	%		18	%
Company Total		31	%		29	%

Gross profit was approximately $24.7 million for the nine months ended July 1, 2006, a decrease of $0.7 million, compared to $25.4 million for the nine months ended July 2, 2005. For the nine months ended July 1, 2006, gross margin as a percentage of net sales was approximately 31%, compared to approximately 29% for the nine months ended July 2, 2005.

Gross profit for the microelectronic segment was approximately $18.1 million for the nine months ended July 1, 2006, consistent with the nine months ended July 2, 2005. Gross margin as a percentage of microelectronic segment net sales was approximately 39% for the nine months ended July 1, 2006, compared to 38% for the nine months ended July 2, 2005. Gross profit is highly driven by product mix and volume; therefore it will fluctuate on a quarterly basis as the percentage of military versus commercial as a percentage of the total changes.

Gross profit for the display segment was approximately $6.6 million for the nine months ended July 1, 2006, a decrease of $0.7 million, or 10%, from $7.3 million for the nine months ended July 2, 2005. This decrease in gross profit was the result of a decrease in the commercial products of $1.7 million, partially offset by an increase in the military/industrial products of $1.0 million. Gross margin as a percentage of display segment net sales was approximately 20% for the nine months ended July 1, 2006, compared to 18% for the nine months ended July 2, 2005. The increase in gross profit for the military/industrial market is the result of higher sales volume and higher margin products. The decrease in the commercial gross profit was primarily driven by the decrease in sales volume and under absorption of overhead.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense (including bonuses in accordance with Compensation Committee policies), selling expenses (including commissions), information technology expenses and corporate administrative expenses. Selling, general and administrative expenses were approximately $14.3 million for the nine months ended July 1, 2006, a decrease of $0.4 million, or 2%, from $14.7 million for the nine months ended July 2, 2005. The decrease in selling expenses of $0.9 million was offset by an increase in general and administrative expenses of $0.5 million. Selling expenses decreased due to lower commissions as a result of lower sales and changes in the commission structure. General and administrative expenses increased primarily due to compensation expense related to the adoption of SFAS 123(R) and moving expenses related to the consolidation of our microelectronics segment.

Selling, general and administrative expenses as a percentage of net sales were 18% for the nine months ended July 1, 2006 and 17% for the nine months ended July 2, 2005. The increase in the percentage is primarily the result of lower sales during the nine month period. As part of our overall management planning and analysis process, we have traditionally targeted approximately 15% of net sales for selling, general and administrative expenses. Because of the continued compliance requirements related to the Sarbanes-Oxley Act and the adoption ofSFAS 123(R), we are expecting selling, general and administrative expenses to average between 16% and 18% in the future.

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Research and Development Expenses

Research and development expenses consist primarily of compensation for our engineering personnel, consulting expenses and project materials. Research and development expenses were approximately $5.1 million for the nine months ended July 1, 2006, an increase of $0.8 million, or 18%, from $4.3 million for the nine months ended July 2, 2005. The increase was primarily attributable to increased expenditures for our next generation anti-tamper, tablet personal computer and touch screen tablet personal computer technologies and increased headcount. Research and development expenses have generally averaged between 5% and 6% of net sales. However, as a result of our additional investment in research and development related to the above mentioned technologies, we expect research and development expenses to average between 6% and 7% of net sales for fiscal 2006.

Ongoing product development projects for the microelectronic segment include new packaging designs for various types of memory products including DRAM, DDR II, flash and microprocessors, along with microprocessor modules and ball grid array packaging products using these semiconductors; continuing development of anti-tamper technology for microelectronic products; next generation memory and power personal computer products assembled in various multi-chip packages to be used in both commercial and military markets; and qualification of new semiconductor products. Ongoing product development projects for the display segment include glass lamination process technology, our new Max-Vu™ process technology for tablet personal computers, next generation touch screen tablet personal computers and display systems development.

Goodwill Impairment

Due to the decreased performance in our interface electronics division in Columbus, Ohio, we tested the goodwill for impairment in the third quarter of fiscal 2006 in accordance with SFAS No. 142. As a result of this testing, we found indicators of impairment for this display segment reporting unit. Accordingly, we wrote down goodwill by $0.4 million in the third quarter. See Note 7 of the Notes to the Consolidated Financial Statements for information relating to the goodwill impairment.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in a money market account. Interest income was approximately $1.5 million for the nine months ended July 1, 2006, an increase of $0.8 million compared to $0.7 million for the nine months ended July 2, 2005. This increase was attributable to the increase in invested balances between periods, primarily as a result of the reinvestment of cash flows from operations, and increased interest rates.

Amortization of Intangible Assets

Intangible asset amortization for the nine months ended July 1, 2006 and July 2, 2005 totaled $355,000 and $474,000, respectively.

Income Taxes

Income tax expense totaled $2.1 million for the nine months ended July 1, 2006 compared to $1.9 million for the nine months ended July 2, 2005. The Company’s effective tax rate was approximately 35% for the nine months ended July 1, 2006 and 28% for the nine months ended July 2, 2005. The Company’s effective tax rate was increased from the federal statutory tax rate of 35% due to the incremental impact of state income taxes and the goodwill impairment, and was decreased by reductions for foreign sales exclusions, a new manufacturers’ deduction and research and experimentation tax credits available for federal income tax purposes. The unfavorable effect on our rate of the partial phasing out of federal foreign sales exclusions was offset by the phasing in of a new manufacturing deduction.

The increase in the effective rate from the nine months ended July 2, 2005 is primarily due to changes in the tax law

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related to the research and development credit and the $0.4 million goodwill impairment which had no income tax benefit. Due to the provisions of SFAS No. 109, we recorded an adjustment in the first quarter of fiscal 2005 for the fourth quarter of fiscal 2004 for the reinstatement of the research and development credit back to July 1, 2004. The research and development credit again expired December 31, 2005, thereby increasing our effective rate in fiscal 2006. It is anticipated that Congress may again reinstate the credit. However, there is uncertainty as to the effective date. We expect our effective rate to be approximately 35% for fiscal 2006 without reinstatement of the credit.

Liquidity and Capital Resources

Cash on hand as of July 1, 2006 totaled approximately $51.5 million. During the nine months ended July 1, 2006, cash provided by operating activities was approximately $3.6 million compared to $9.5 million in the prior year period. The decrease was primarily due to lower net income and changes in deferred income tax and working capital items. Deferred income tax decreased approximately $2.2 million primarily due to amended returns filed in fiscal 2005 which resulted in tax refunds. The increase in inventory and decrease in accrued expenses and deferred revenue were the primary uses of cash during the 2006 period. Inventory increased primarily as a result of raw material purchased for fourth quarter customer requirements and the overall timing of large purchases which can cause fluctuations in the balances. The decrease in accrued expenses and deferred revenue is the result of the timing of income tax payments. Net income, non-cash charges and a decrease in accounts receivable were the primary sources of cash during the 2006 period. Depreciation and amortization totaled approximately $3.0 million for the 2006 period and $3.1 million for the 2005 period. We expect depreciation and amortization to increase now that we have completed the leasehold improvements related to the consolidation of our two Phoenix locations.

Purchases of property, plant and equipment during the nine months ended July 1, 2006 totaled approximately $3.8 million, with $0.2 million remaining in accounts payable at quarter-end. During the nine months ended July 1, 2006, the purchases included $3.4 million for our microelectronic manufacturing facilities, primarily for tenant improvements, and $0.4 million for our display and interface manufacturing facilities.

In connection with our decision to consolidate our two Phoenix locations, we entered into a ten-year operating lease for the expanded headquarters/microelectronics building in fiscal 2005. The project and the consolidation were completed in the second quarter of fiscal 2006 and we incurred approximately $4.1 million in improvements. We also put the Flower Street land and building in Phoenix on the market. We expect proceeds from the sale of the land and building to exceed our net book value of approximately $1.9 million as of July 1, 2006; however, we do not expect any ultimate gain or loss to have a material impact on our consolidated results of operations.

Accounts receivable decreased approximately $0.7 million from the fiscal year ended October 1, 2005, primarily due to an overall net sales decrease of $3.0 million from the quarter ended October 1, 2005. Days sales outstanding at July 1, 2006 were 63 days compared to 61 days as of October 1, 2005. Our days sales outstanding typically approximate 62 days.

Inventories increased approximately $2.4 million from the end of fiscal 2005. Inventory of approximately $22.0 million as of July 1, 2006 represented 109 days of inventory on hand, more than the 87 days on hand at October 1, 2005. The levels of inventory fluctuate based on changes in expected production requirements, the fulfillment of orders and availability of raw materials. We received some raw material at quarter end to fulfill some fourth quarter shipments which increased our inventory balance. Inventory amounts will generally take several quarters to adjust to significant changes in future sales. Also, as lead times for raw materials increase, we are required to buy larger amounts of inventory per purchase and hold it for longer periods of time. This would have the effect of increasing our days of inventory on hand. We expect to fund any increases in inventory caused by sales growth or manufacturing planning requirements from our cash balances and operating cash flows.

Prepaid expenses increased approximately $0.2 million from the end of fiscal 2005. This increase was primarily due to the prepayment of insurance and royalties.

Accounts payable as of July 1, 2006 decreased approximately $0.6 million from the end of fiscal 2005, primarily due to the timing of inventory receipts and payments. Additionally, accrued income taxes were approximately $0.9 million lower than at year-end as a result of the timing of estimated tax payments. Accrued commissions were

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approximately $0.4 million lower than the previous year-end because of lower sales volume to customers covered by our manufacturers’ representatives.

Accrued salaries and benefits were approximately $0.1 million higher at July 1, 2006 compared to the end of fiscal 2005 due to an additional week of accrued payroll, partially offset by the payment of accrued compensation.

On June 19, 2006, the Company’s Board of Directors authorized a stock repurchase program pursuant to which up to 5%, or 1,231,108 shares, of its outstanding common stock may be repurchased from time to time. The duration of the repurchase program is open-ended and is being implemented through a Rule 10b5-1 Stock Purchase Plan. Under the program, the Company can purchase shares of common stock through the open market on a daily basis at prices equal to or less than $5.50 per share without further approval by the Board. The timing and amount of repurchase transactions under this program will depend on market conditions and corporate and regulatory considerations. Through July 1, 2006, we purchased 18,498 shares of our common stock for $94,000 under the program. We expect to fund all stock purchases from our cash balances and operating cash flows.

We have a $12.0 million revolving line of credit with JPMorgan Chase. Borrowings under the line of credit bear interest at the lower of the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the JPMorgan Chase “prime rate”. The line of credit expired March 28, 2006, but has been extended until September 28, 2006. We expect to renew the line of credit in the fourth quarter of fiscal 2006. We are in compliance with all debt covenant requirements contained in our line of credit agreement. As of July 1, 2006 there were no borrowings against the line of credit, and we have not borrowed against the line of credit since April 2003.

We believe that our existing sources of liquidity, including expected cash flows from operating activities, existing cash balances, and existing credit facilities will satisfy our cash requirements for at least the next twelve months.

Contractual Obligations

We have entered into certain long-term contractual obligations that will require various payments over future periods as follows (in thousands of dollars):

	Payments due by period as of July 1, 2006
			Less than						After
	Total		1 year		1 - 3 years		4 - 5 years		5 years
Operating leases	$	10,377	$	1,482	$	2,968	$	2,110	$	3,817
Pension funding (1)		—		—		—		—		—
Total Contractual Cash Obligations	$	10,377	$	1,482	$	2,968	$	2,110	$	3,817

(1) We are committed to meeting the annual minimum funding requirements relating to our pension plan, which covers approximately 37 employees at our Ft. Wayne facility. There were no contributions to the pension plan in the first nine months of fiscal 2006. The Company does not expect minimum funding requirements to be material. The Company may also make contributions to the pension fund in excess of the minimum funding requirements during any year.

Contingencies

On July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004, shareholder class action lawsuits entitledMcJimsey v. White Electronic Designs Corporation, et al.(Case No. CV04-1499-PHX-SRB),Afework v. White Electronic Designs Corporation, et al(Case No. CV04-1558-PHX-JWS),Anders v. White Electronic Designs Corporation, et al.(Case No. CV04-1632-PHX-JAT), andSammarco v. White Electronic Designs Corporation, et al.(Case No. CV04-1744-PHX-EHC), respectively, were filed in the United States District Court for the District of Arizona against us and certain of our current and former officers and directors (the “defendants”). The actions were consolidated and the Wayne County Employees’ Retirement System was appointed as lead plaintiff. A consolidated complaint was filed on or about February 14, 2005. The defendants’ motions to dismiss that complaint were granted on February 14, 2006. The plaintiffs filed an amended complaint on April 17, 2006 (the “Complaint”). Like the dismissed complaint, the new Complaint alleges, among other things, that between January 23, 2003 and

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June 9, 2004, we made false and misleading statements concerning our financial results and business, and issued a misleading registration statement and prospectus in connection with our July 2003 secondary offering. The Complaint seeks unspecified monetary damages. Defendants filed a motion to dismiss the new Complaint in June 2006. The plaintiffs’ response to the motion is due in August 2006. The Court has not set a date for a hearing on the motion to dismiss. We believe plaintiffs’ claims are without merit and we intend to vigorously defend ourselves in the consolidated matter. Although the outcome of this litigation is uncertain, based on our current assessment of the merits of the Complaint and considering the amount of insurance we maintain covering claims of this nature, we do not believe the ultimate outcome of these matters will have a material adverse effect on our consolidated results of operations, liquidity or financial condition.

On August 12, 2004 and August 19, 2004, purported derivative actions entitledDodt v. Shokrgozar, et al.(Case No. CV04-1674-PHX-NVW) andChrist v. Shokrgozar, et al.(Case No. CV04-1722-PHX-MHM), respectively, were filed in the United States District Court for the District of Arizona against current and former directors and officers of the Company. We were also named as a nominal defendant in both actions. The complaints alleged that between January 2003 and the date the complaints were filed, defendants breached their fiduciary duties to us by causing us to misrepresent our financial results and prospects. The complaints alleged claims for breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets, insider selling, and unjust enrichment, and sought unspecified damages, equitable relief, and restitution against the individual defendants. On June 7, 2005, the Court dismissed the Dodt action and on June 15, 2005, the Court dismissed the Christ action. Mr. Dodt has appealed the dismissal of his complaint. Mr. Dodt filed an appellate brief in June 2006. The Company’s response to Mr. Dodt’s brief was filed on July 28, 2006. A hearing date for Mr. Dodt’s appeal has not been scheduled by the Court. We believe the claims made in the complaints are without merit and, in the event that the plaintiff’s appeal is successful, we intend to vigorously defend these actions. Although the outcome of this litigation is uncertain, based on our current assessment of the merits of the complaints and considering the amount of insurance we maintain covering claims of this nature, we do not believe the ultimate outcome of these matters will have a material adverse effect on our consolidated results of operations, liquidity or financial condition.

In addition, from time to time, we are subject to claims and litigation incident to our business. There are currently no such pending proceedings to which we are a party that we believe will have a material adverse effect on our consolidated results of operations, liquidity, or financial condition.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes”. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes”. FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold in determining if a tax position should be reflected in the financial statements. Only tax positions that meet the “more likely than not” recognition threshold may be recognized. The interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements for uncertain tax positions. FIN No. 48 will be effective for the Company’s fiscal year beginning September 30, 2007. The Company is currently evaluating the impact FIN No. 48 will have on the Company’s financial condition and results of operations.

In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 will be effective for the Company’s fiscal year beginning October 1, 2006. FIN No. 47 is currently being evaluated by the Company and is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of

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whether they meet the criterion of abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are now in effect for inventory costs incurred in fiscal 2006. The implementation of this Statement has not had a material impact on the Company’s financial condition or results of operations.

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Note Regarding Forward Looking Statements and Associated Risks

This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and documents incorporated herein by reference, contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. The words “believe”, “expect”, “estimate”, “anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”, “project” and “predict”, or similar words and phrases regarding expectations generally identify forward looking statements. Forward looking statements contained herein and in documents incorporated by reference herein include, but are not limited to:

• our expectations regarding our overall future sales, profits and gross margins, as well as bookings, for our display and microelectronic segments;

• our expectations regarding proceeds from the sale of the land and building;

• our expectations regarding future depreciation and amortization;

• Our expectations regarding future purchases of common stock in connection with our stock repurchase program;

• our expectations of an increase in raw material lead times for ceramic packages, memory components, and display glass materials, which may impact net sales and gross margins, and of short supplies for liquid crystal displays and memory components and future purchases of components including possible allocations of display and semiconductor components;

• our expectations of increases or decreases in raw material prices;

• our expectations for the future demands for our products and future product sales mix, including our expectations for continued growth for our anti-tamper products, the slowdown of shipments to our interface customers, and our expectations regarding changes in sales to certain industries;

• our expectations regarding future demand for our products, our ability to continue to meet our customers’ requirements and with regard to market acceptance and profitability of our new products;

• our expectations regarding the sale of a range of military microelectronic products and fluctuations in product mix;

• our expectations regarding our product production times, future shipments of backlog, and the impact of changes in raw material lead times on pricing, sales and inventory levels and the number of days of inventory on hand ratio;

• our expectations regarding our effective tax rate in the future and the adequacy of our tax reserves, future goodwill impairment, the impact of the adoption of new accounting pronouncements and changes in the law on our effective tax rate, and our anticipated use of manufacturer’s deduction and research and development tax credits;

• our expectations regarding future research and development costs, expenses and risks associated with product development, including the levels of future product development in fiscal 2006 and beyond for products related to our Max-Vu™ process technology;

• our plans to introduce new products and technologies and our expectations regarding sales from these products and technologies;

• our estimates regarding selling, general and administrative expenses, including minimum funding requirements for our pension plan;

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• our expectations regarding future property, plant and equipment expenditures and capital expenditures;

• our expectations regarding our existing sources of liquidity and their sufficiency to satisfy cash requirements over the next twelve months, including our expectations that cash flow from operations should be sufficient to fund cash needs in the short and long term and our belief that we are able to fund sales growth inventory increases and manufacturing planning requirements, common stock repurchases and other operating expenses from available cash balances and operating cash flows;

• our expectations regarding the need to draw on and renew our line of credit and any related effect of interest rate changes; and

• our belief that we will not pay cash dividends in the future.

We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission (“SEC”) or in public news releases. Such additional statements may include, but not be limited to, projections of revenues, income or loss, capital expenditures, acquisitions, plans for future operations, financing needs or plans, the impact of inflation and plans relating to our products or services, as well as assumptions relating to the foregoing. Forward-looking statements are based largely on management’s expectations and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements, each of which speaks only as of the date the statement is made. Statements in this Quarterly Report on Form 10-Q, including those set forth in the Notes to the Consolidated Financial Statements and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 1A of this report, describe factors that could contribute to or cause actual results to differ materially from our expectations. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, but are not limited to:

• the loss of one or more principal customers or delays or cancellations of orders due to the impact of adverse weather conditions on one or more principle customers;

• the failure of customers to accept our anti-tamper packaging or the development of improved anti-tamper packaging by competitors;

• the inability to procure required components and raw materials;

• any downturn in the semiconductor and telecommunications markets which could cause a decline in selling unit prices;

• reductions in military spending or changes in the acquisition requirements for military products;

• the ability to locate appropriate acquisition candidates, negotiate an appropriate purchase price, and integrate into our business the people, operations, and products from acquired businesses;

• the inability to develop, introduce and sell new products or the inability to develop new manufacturing technologies;

• changes or restrictions in the practices, rules and regulations relating to sales in international markets; and

• a negative outcome in our current litigation or additional litigation complaints.

In addition, new factors emerge from time to time and it is not possible for management to predict all of these factors, nor can it assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from forward-looking statements. We do not undertake, and we specifically disclaim, any obligation to publicly update or review any forward-looking statement contained in

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this Quarterly Report on Form 10-Q or in any document incorporated herein by reference, whether as a result of new information, future events or otherwise, except as required by applicable law.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of July 1, 2006, we had no borrowings on our revolving line of credit with JPMorgan Chase. Should we borrow against the line, interest charged on these borrowings would be at the lower of the bank’s “prime rate” or the London Interbank Offered Rate (“LIBOR”) plus 1.5%. During the three months ended July 1, 2006, the bank’s “prime rate” averaged 7.90% and was 8.25% as of July 1, 2006. From October 1, 2005 to July 1, 2006, the bank’s “prime rate” increased approximately 1.5%.

We are subject to changes in the “prime rate” based on Federal Reserve actions and general market interest fluctuations. We are also subject to fluctuations in the LIBOR. As of July 1, 2006, the LIBOR was approximately 5.77%. Should we begin borrowing against the credit line, quarterly interest expense (at 8.25%) would be approximately $20,625 for every $1.0 million borrowed. A hypothetical interest rate increase of 1% would increase interest expense by approximately $2,500 per $1.0 million borrowed on a quarterly basis. We believe that moderate interest rate increases will not have a material adverse impact on our consolidated results of operations or financial position.

We believe that we are not subject to any material forms of market risk, such as foreign currency exchange risk (our sales to foreign customers and purchases from foreign suppliers are denominated in U.S. dollars) or commodity price risk.

ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Attached as exhibits to this Form 10-Q are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics.

We have evaluated, under the supervision and with the participation of management, including our CEO and CFO, the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our CEO and CFO concluded that as of July 1, 2006 our disclosure controls and procedures were effective in ensuring that information that is required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management has also concluded that our disclosure controls are designed to reasonably assure such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Furthermore, our disclosure controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States.

Changes in Internal Control over Financial Reporting.There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

On July 22, 2004, July 29, 2004, August 6, 2004 and August 20, 2004, shareholder class action lawsuits entitledMcJimsey v. White Electronic Designs Corporation, et al.(Case No. CV04-1499-PHX-SRB),Afework v. White Electronic Designs Corporation, et al(Case No. CV04-1558-PHX-JWS),Anders v. White Electronic Designs Corporation, et al.(Case No. CV04-1632-PHX-JAT), andSammarco v. White Electronic Designs Corporation, et al.(Case No. CV04-1744-PHX-EHC), respectively, were filed in the United States District Court for the District of Arizona against the Company and certain of its current and former officers and directors (the ‘defendants”). The actions were consolidated and the Wayne County Employees’ Retirement System was appointed as lead plaintiff. A consolidated complaint was filed on or about February 14, 2005. The defendants’ motions to dismiss that complaint were granted on February 14, 2006. The plaintiffs filed an amended complaint on April 17, 2006 (“the Complaint”). Like the dismissed complaint, the new Complaint alleges, among other things, that between January 23, 2003 and June 9, 2004, the Company made false and misleading statements concerning its financial results and business, and issued a misleading registration statement and prospectus in connection with the Company’s July 2003 secondary offering. The Complaint seeks unspecified monetary damages. Defendants filed a motion to dismiss the new Complaint in June 2006. The plaintiffs’ response to the motion is due in August 2006. The Court has not set a date for a hearing on the motion to dismiss. The Company believes plaintiffs’ claims are without merit and it intends to vigorously defend itself in the consolidated matter. Although the outcome of this litigation is uncertain, based on the Company’s current assessment of the merits of the Complaint and considering the amount of insurance the Company maintains covering claims of this nature, the Company does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s consolidated results of operations, liquidity or financial condition.

On August 12, 2004 and August 19, 2004, purported derivative actions entitledDodt v. Shokrgozar, et al.(Case No. CV04-1674-PHX-NVW) andChrist v. Shokrgozar, et al.(Case No. CV04-1722-PHX-MHM), respectively, were filed in the United States District Court for the District of Arizona against current and former directors and officers of the Company. The Company was also named as a nominal defendant in both actions. The complaints alleged that between January 2003 and the date the complaints were filed, defendants breached their fiduciary duties to the Company by causing the Company to misrepresent its financial results and prospects. The complaints alleged claims for breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets, insider selling, and unjust enrichment, and sought unspecified damages, equitable relief, and restitution against the individual defendants. On June 7, 2005, the Court dismissed the Dodt action and on June 15, 2005, the Court dismissed the Christ action. Mr. Dodt has appealed the dismissal of his complaint. Mr. Dodt filed an appellate brief in June 2006. The Company’s response to Mr. Dodt’s brief was filed on July 28, 2006. A hearing date for Mr. Dodt’s appeal has not been scheduled by the Court. The Company believes the claims made in the complaints are without merit and, in the event that the plaintiff’s appeal is successful, intends to vigorously defend these actions. Although the outcome of this litigation is uncertain, based on the Company’s current assessment of the merits of the complaints and considering the amount of insurance the Company maintains covering claims of this nature, the Company does not believe the ultimate outcome of these matters will have a material adverse effect on its consolidated results of operations, liquidity or financial condition.

In addition, from time to time, the Company is subject to claims and litigation incident to its business. There are currently no such pending proceedings to which the Company is a party that the Company believes will have a material adverse effect on the Company’s consolidated results of operations, liquidity, or financial condition.

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ITEM 1A RISK FACTORS

We are dependent on sales to defense-related companies for a large portion of our net sales and profits, and changes in military spending levels and patterns could negatively affect us.

Our current orders from defense-related companies account for a material portion of our overall net sales. Military sales accounted for approximately 42%, 44% and 47% of our total net sales in fiscal 2005, 2004 and 2003, respectively. Military spending levels depend on factors that are outside of our control. Reductions or changes in military spending could have a material adverse effect on our sales and profits. Although we had strong bookings in the second half of fiscal 2005, they have leveled off in fiscal 2006, and we do not have a level of visibility that indicates to us how this will trend going forward. We believe that because of the unexpected length and cost of the war in Iraq and as part of a broad overhaul of U.S. priorities, funds for weapons and equipment have been reallocated in support of the war’s operations. In addition, the United States defense industry is moving toward the purchase of commercial off-the-shelf products rather than those designed and manufactured to higher military specifications. To the extent that our products are substituted with commercial off-the-shelf products, our operations would suffer. Even if military spending continues to increase, shifts in military spending away from high technology programs to areas that we do not supply, such as personnel and infrastructure, would also negatively affect our sales and profits.

Our goodwill has been, and may become, impaired in the future.

We have goodwill resulting from our acquisitions, specifically Panelview and IDS. At least annually, we evaluate this goodwill for impairment based on the fair value of the related reporting units. This estimated fair value could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or a permanent change to the market capitalization of our company. These changes have in the past, and may in the future, result in an impairment that would require a material non-cash charge to our results of operations. Our annual review of goodwill in the fourth quarter of fiscal 2005 resulted in the impairment of goodwill to our commercial microelectronics product line in Phoenix and our display product line in Oregon. In the third quarter of fiscal 2006, we recorded an impairment of goodwill to our interface electronics reporting unit in Columbus, Ohio. See Notes 2 and 6 of the Notes to the Consolidated Financial Statements in the fiscal 2005 Annual Report on Form 10-K and Note 7 of the Notes to the Consolidated Financial Statements in this Form 10-Q for additional information. As of July 1, 2006, we have $5.3 million of goodwill recorded.

We have made and may make other acquisitions, and cannot assure you that any potential acquisition will be successful.

We are looking for strategic opportunities to grow and diversify our product offerings through acquisitions. There can be no assurance that we will be successful in identifying appropriate acquisition candidates or integrating products and operations with any such candidates that we may acquire. Any such acquisitions could involve the dilutive issuance of equity securities and/or the incurrence of debt. In addition, acquisitions may involve numerous additional risks, including:

• exposure to unanticipated liabilities of an acquired company;

• the potential loss of key customers or key personnel of an acquired company;

• the recording of goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;

• the diversion of the attention of our management team from other business concerns;

• the risk of entering into markets or producing products where we have limited or no experience, including the integration of the purchased technologies and products with our technologies and products; and

• our ability to assess, integrate and implement internal controls of an acquired company in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

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Even when an acquired company has already developed and marketed products, there can be no assurance that the products will continue to be successful, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to the acquired company or its products.

Our customers may cancel their orders, change production quantities or delay production at any time, which could materially reduce our net sales and operating results.

We generally do not receive firm, long-term purchase commitments from our OEM customers. Customers may cancel their orders, change production quantities or delay production for a number of reasons. At times, our customers’ industries experience significant decreases in demand for their products and services. The generally uncertain economic condition of several of the industries of our customers has resulted, and may continue to result, in some of our customers delaying the delivery of some of the products we manufacture for them, and placing purchase orders for lower volumes of products than originally anticipated. Cancellations, reductions or delays by a significant customer or by a group of customers would seriously harm our results of operations for a period by reducing our net sales in that period. In addition, because many of our costs and operating expenses are fixed, a reduction in customer demand could harm our gross profit and operating income.

We have a concentrated customer base and, as a result, our net sales could decline significantly if we lose a major customer.

A large portion of our net sales has been derived from sales to a small number of our customers. Our five largest customers accounted for approximately 28% and 22% of our net sales in fiscal 2005 and fiscal 2004, respectively. However, no one customer accounted for more than 10% of our net sales in fiscal 2005 or fiscal 2004. Our customers are not subject to any minimum purchase requirements and can discontinue the purchase of our products at any time. In the event one or more of our major customers reduces, delays or cancels orders with us, and we are not able to sell our services and products to new customers at comparable levels, our net sales could decline significantly. In addition, any difficulty in collecting amounts due from one or more key customers would negatively impact our results of operations.

We depend on military prime contractors and commercial OEM customers for the sale of our products and the failure of these customers to achieve significant sales of products incorporating our components would reduce our net sales and operating results.

We sell substantially all of our products to military prime contractors and commercial OEMs. The timing and amount of sales to these customers ultimately depend on sales levels and shipping schedules for the products into which our components are incorporated. We have no control over the volume of products shipped by our military prime contractors and commercial OEM customers or shipping dates, and we cannot be certain that our military prime contractors and OEM customers will continue to ship products that incorporate our components at current levels or at all. Our business will be harmed if our military prime contractors and OEM customers fail to achieve significant sales of products incorporating our components or if fluctuations in the timing and volume of such sales occur. Failure of these customers to inform us of changes in their production needs in a timely manner could also hinder our ability to effectively manage our business.

We depend on the continuing trend of outsourcing by commercial OEMs and prime military contractors.

Our net sales and future growth in our net sales depend in part on outsourcing, in which we assume additional manufacturing and supply chain management responsibilities from commercial OEMs and military prime contractors. To the extent that these opportunities are not available, either because commercial OEMs or military prime contractors decide to perform these functions internally, or because they use other providers of these services, our results of operations may be adversely affected.

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Our failure to comply with United States government laws and regulations would reduce our ability to be awarded future military business.

We must comply with laws and regulations relating to the formation, administration and performance of federal government contracts as passed down to us by our customers in their purchase orders, which affects our military business and may impose added cost on our business. We are subject to government investigations of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including the termination of our contracts, the forfeiture of profits, the suspension of payments owed to us, fines, and our suspension or debarment from doing business with federal government agencies. Since military sales accounted for approximately 42% and 44% of our business in fiscal 2005 and fiscal 2004, respectively, any debarment or suspension of our ability to obtain military sales would greatly reduce our overall net sales and profits, and would likely affect our ability to continue as a going concern.

We may have an adverse resolution of litigation which may harm our operating results or financial condition.

We are a party to lawsuits in the normal course of our business. In addition, we are defendants in several shareholder class action lawsuits. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results, or financial condition. For additional information regarding certain of the lawsuits in which we are involved, see Item 1, “Legal Proceedings,” contained in Part II of this report.

We may fail to meet expectations because our net sales, gross profits and net income will fluctuate from period to period.

Our operating results have varied in the past and will likely continue to fluctuate. In connection with our business, a wide array of factors could cause our net sales, gross profits and net income to fluctuate in the future from period to period. In addition to other factors mentioned in this report, primary factors that might affect our results of operations in this regard include:

• our inability to adjust expenses for any particular quarter in response to net sales shortfalls because a substantial component of our operating expenses are fixed costs;

• the cyclical nature of the markets in which we serve;

• any adverse changes in the mix of products and types of manufacturing services that we provide (e.g., high volume and low complexity commercial keypads have lower gross margins than high complexity microelectronic devices for defense contractors);

• the complexity of our manufacturing processes and the sensitivity of our production costs to declines in manufacturing yields, which make yield problems both possible and costly when they occur;

• expenses associated with acquisitions; and

• general economic conditions.

As a result of any of these or other factors, we could fail to achieve our expectations as to future net sales, gross profits and net income. Any downward fluctuation or failure to meet expectations will likely adversely affect the value of an investment in our securities. Due to the foregoing factors, it is likely that in some future periods our operating results will be below the expectations of public market analysts and investors and, as a result, the market price of our common stock may decline.

Changes in stock compensation accounting rules will affect our future results of operations and could cause the trading price of our common stock to decline.

On October 2, 2005 we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“SFAS

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123(R)”) which requires the measurement and recognition of compensation expense in the financial statements for all share-based payment awards made to employees and directors based on estimated fair values. As a result, our operating results for the first nine months of fiscal 2006 contain, and our operating results for the future will contain, a charge for share-based compensation related to employee stock options.

We have a lengthy sales cycle, which increases the likelihood that our quarterly net sales will fluctuate and which may, in turn, adversely affect the market price of our common stock.

Due to the complexity of our technology, our customers perform, and require us to perform, extensive process and product evaluation and testing, which results in a lengthy sales cycle. Our sales cycles often last for several months, and may last for up to a year or more. As a result of this lengthy sales cycle, our net sales and operating results may vary unpredictably from period to period. This fact makes it more difficult to forecast our quarterly results and can cause substantial variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability and variability in our results could adversely affect the market price of our common stock in particular periods.

Our failure to detect unknown defects in our products could materially harm our relationship with customers, our reputation and our business.

Notwithstanding the testing that we perform on our products, defects could be found in our existing or new products. These defects could result in product liability or warranty claims. In addition, any defects found in our products could result in a loss of net sales or market share, failure to achieve market acceptance, injury to our reputation, indemnification claims, litigation, increased insurance costs and increased service costs, any of which could discourage customers from purchasing our products. Although we maintain a warranty reserve, we cannot be certain that this reserve will be sufficient to cover our warranty or other expenses that could arise in the future as a result of defects found in our products.

Our operating results could be seriously harmed if the markets in which we sell our products do not grow.

Our continued success depends in large part on the continued growth of various market sectors that use our products, including the following:

• defense and aerospace equipment;

• computers and computer related peripherals;

• medical electronics and equipment;

• home appliances and consumer electronics;

• industrial controls; and

• telecommunication/data communication equipment.

Approximately 12% of our product sales for fiscal year 2005 and 16% of our product sales for fiscal year 2004 were incorporated into data communication end products. The telecommunications industry is making a gradual recovery, and we believe this recovery will be slow as companies gradually use up their excess network capacity. Slower growth in the other markets in which we sell our products could reduce our sales, adversely affecting our business, financial condition and results of operations. For example, decreases in demand in the consumer electronics and home appliance markets, could negatively impact our sales and profits for our subsidiary, IDS.

Further downturns in the industries in which we operate could reduce the value of our inventories and cause a reduction in our profits.

In the past, we have experienced reductions in the value of our inventories due to unexpected demand declines,

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resulting from a softening of the semiconductor and telecommunications industries. Such declines have caused us to write down several million dollars worth of inventory, which greatly reduced our profits for the given period. In 2001, for example, we reserved approximately $4.3 million in excess inventory. If any of the markets in which our customers operate suffers a decline, we may be forced to write down existing inventory, which could adversely affect our results of operations.

We use manufacturing resources in Asia and Mexico, which limits our control of the manufacturing process.

As part of our strategy to decrease manufacturing costs, we outsource some of our manufacturing requirements to strategic partners in Taiwan, China, the Philippines and Mexico. Outsourcing, particularly with international manufacturers, carries certain risks, including:

• the outsourcing contractors’ ability to manufacture products that meet our technical specifications and that have minimal defects;

• the outsourcing contractors’ ability to honor their product warranties;

• the financial solvency, labor concerns and general business condition of our outsourcing contractors;

• unexpected changes in and the burdens and costs of compliance with a variety of foreign laws and regulatory requirements;

• increased chances of our intellectual property being infringed as a result of the failure of foreign governments to enforce the protection of intellectual property rights;

• political and economic instability in overseas locations; and

• global health related matters, such as SARS, Avian Flu and other factors.

We are dependent on international markets for a large portion of our purchases and sales.

Foreign suppliers of semiconductor and display related materials are regularly threatened with, or involved in, pending trade disputes and sanctions. If trade disputes or sanctions arise that affect our suppliers, we may be unable to obtain access to critical sources of raw materials that we need to produce our products, in which event our business could be adversely affected.

We anticipate that our foreign sales will continue to account for a significant portion of our net sales. Foreign sales accounted for approximately 18% and 17% of our overall sales for fiscal year 2005 and fiscal year 2004, respectively. Approximately $49.3 million of our fiscal year 2005 sales were to prime military contractors, and if the United States government placed restrictions on exporting military technology using our products in countries where we have customers, or vendors, it could cause a significant reduction in our sales and profits. Our foreign sales are subject to the following risks:

• fluctuations in foreign currencies, which may adversely affect the prices of our products and the prices of raw materials used in our products;

• trade disputes;

• changes in regulatory requirements, license requirements, tariffs and other trade barriers;

• the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of our products implemented by the United States government or foreign governments;

• the timing and availability of export or other licenses;

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• general political and economic conditions in the countries in which we sell our products;

• language and other cultural differences which may inhibit our sales and marketing efforts;

• costs of complying with a variety of foreign laws;

• difficulty of accounts receivable collections;

• increased chances of our intellectual property being infringed as a result of the failure of foreign governments to enforce the protection of intellectual property rights; and

• public health issues that could disrupt local economies.

If we are unable to retain employees with key technical expertise or we are otherwise unable to protect our intellectual property, or if we are found to have infringed third party intellectual property rights, our financial condition and future prospects could be materially harmed.

The products that we sell from both our microelectronic segment and our display segment require a large amount of engineering design and manufacturing expertise. However, the majority of our technological capabilities are not protected by patents and licenses. We rely on the expertise of our employees, and our learned experiences in both the design and manufacture of our products. If we were to lose one or more of our key employees, then we would likely lose some portion of our institutional knowledge and technical know-how. It is possible, and it has occurred in the past, that a competitor may also learn to design and produce products with similar performance abilities as our products. If a competitor were to do so, it may result in increased competition, and a reduction of sales for our products.

We rely on trade secret protection for most of our proprietary technology, in part through confidentiality agreements with our employees, consultants and third parties. If any of these agreements are found to be unenforceable, we may be unable to adequately protect our technology. If any of these agreements are breached, especially by companies much larger than us, we may not have adequate financial resources to adequately enforce our rights. Also, others may come to know about or determine our trade secrets. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States.

While we are currently not aware of any claims against us for the infringement of intellectual property rights, any such claim could divert the efforts of our technical and management personnel and require us to spend significant resources to develop or otherwise obtain non-infringing technology. Any successful claim against us would likely require us to pay substantial damages or cease the use and sale of infringing products, or both.

Our business is dependent upon retaining key personnel and attracting new employees.

Our success depends to a significant degree upon the continued contributions of our senior management and key personnel. The loss of the services of any of our senior management or key personnel could adversely affect our business. We may not be able to retain these employees and searching for their replacements could divert the attention of other senior management and increase our operating expenses. Of our current executive officers, only Hamid Shokrgozar, our Chief Executive Officer, has an employment contract with us. We currently do not maintain any key person life insurance. To manage our operations effectively, we may need to hire and retain additional qualified employees including in the areas of product design, engineering, operations management, manufacturing production, sales, accounting and finance. We may have difficulty recruiting these employees or integrating them into our business.

Our failure to comply with environmental regulations could subject us to costs and production delays.

We currently use limited quantities of hazardous materials common to our industry in connection with the production of our products. We must follow federal, state and local environmental laws and regulations regarding the handling, storage and disposal of these materials. To our knowledge, we are currently in material compliance with all federal, state and local environmental laws and regulations regarding the handling, use, storage and disposal of these materials.

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We could be subject to fines, suspensions of production, alteration of our manufacturing processes or interruption or cessation of our operations if we fail to comply with present or future laws or regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. These regulations could require us to acquire expensive remediation equipment or to incur other expenses to comply with environmental regulations. Our failure to control the handling, use, storage or disposal of, or adequately restrict the discharge of, hazardous substances could subject us to liabilities and production delays, which could cause us to miss our customer’s delivery schedules, thereby reducing our sales for a given period. We may also have to pay regulatory fines, penalties or other costs (including remediation costs), which could materially reduce our profits.

If our selling prices decline and we fail to reduce our costs, our sales and operating results will decline.

Even in the absence of cyclical conditions, the average selling prices of our products have historically decreased during the products’ lives, and we expect this trend to continue, especially with respect to sales in the commercial markets. In order to offset these average selling price decreases, we attempt to decrease manufacturing costs, and introduce new, higher priced products that incorporate advanced features. If these efforts are not successful, we will not be competitive because we will not be able to remain profitable at decreased selling prices, possibly leading to our exit from certain market sectors.

In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products, particularly dynamic random access memory (“DRAM”), Double Data Rate II (“DDR II”) products and liquid crystal displays (“LCDs”), fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. If we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. In addition, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could result in a dramatic increase in worldwide supply and result in associated downward pressure on prices.

If we fail to develop, introduce and sell new products or fail to develop and implement new manufacturing technologies, our operating results could be adversely affected.

We operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, make required capital investments, design, develop, manufacture, market and sell services and products that meet our customers’ changing needs, and successfully anticipate or respond to technological changes on a cost effective and timely basis. Our sales will be reduced, either through loss of business to our competitors or discontinuance of our products in the market, if any of the following occur:

• we fail to complete and introduce new product designs in a timely manner;

• we are unable to design and manufacture products according to the requirements of our customers;

• our customers do not successfully introduce new systems or products incorporating our products;

• market demand for our new products does not develop as anticipated;

• we are unable to obtain raw materials in a timely manner or at favorable prices; or

• we are unable to maintain pricing to sustain or grow our gross margins.

In particular, many of our display products have been developed based on products procured from Sharp Electronics Corporation. Our competitors in the enhanced display products market are investing substantial resources to develop flat panel displays using alternative technologies. If our competitors are successful in developing new products that offer significant advantages over our products, and we are unable to improve our technology or develop or acquire alternative technology that is more competitive, we will lose business to our competitors and our sales and profits from the display segment will be greatly reduced. Increasing complexity in our microelectronic segment generally requires

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the use of smaller geometries in semiconductor chips. This makes manufacturing new generations of products substantially more difficult and costly than prior products. Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing our products. If we are unable to design, develop, manufacture, market and sell new products successfully, we will lose business and possibly be forced to exit from the particular market or sector.

We depend on limited suppliers for certain critical raw materials. Our inability to obtain sufficient raw materials at favorable prices could increase our prices or otherwise harm our business.

Our manufacturing operations require raw materials that must meet exacting standards. Additionally, certain customers require us to buy from particular vendors due to their product specifications. The most significant raw materials that we purchase are memory devices in wafer, die, and component forms and active matrix liquid crystal display (“AMLCD”) panels. Shortages of wafers and other raw materials may occur when there is a strong demand for memory integrated circuits and other related products. AMLCD panels may also be in short supply at times. We rely heavily on our ability to maintain access to steady sources of these raw materials at favorable prices. We are highly dependent on one or two semiconductor manufacturers for memory devices, such as SRAM, SDRAM, DDR II, flash, etc. and one package manufacturer of ceramic packages for military components. We do not have specific long-term contractual arrangements, but we believe we are on good terms with our suppliers. We cannot be certain that we will continue to have access to our current sources of supply or that we will not encounter supply problems in the future. Any interruption in our supply of raw materials could reduce our sales in a given period, and possibly cause a loss of business to a competitor, if we could not reschedule the deliveries of our product to our customers. In addition, our gross profits could suffer if the prices for raw materials increase, especially with respect to sales associated with military contracts where prices are typically fixed.

United States’ and global responses to terrorism, the unsettled world political situations and perceived nuclear threats increase uncertainties with respect to many of our businesses and may adversely affect our business and results of operations.

United States’ and global responses to terrorism, the unsettled world political situations and perceived nuclear threats increase uncertainties with respect to U.S. and other business and financial markets. Several factors associated, directly or indirectly, with terrorism, the Iraq situation and perceived nuclear threats and responses may adversely affect us.

Various U.S. government responses to these factors could realign government programs and affect the composition, funding or timing of the government programs in which we participate. Government spending could shift to programs in which we may not participate or may not have current capabilities. The influence of any of these factors, which are largely beyond our control, could adversely affect our business.

While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Our Board of Directors is authorized to issue shares of preferred stock that could have rights superior to our outstanding shares of common stock, and, if issued, could adversely impact the value of our common stock.

Our amended and restated articles of incorporation permit our Board of Directors, in its sole discretion, to issue up to 1,000,000 shares of authorized but unissued preferred stock. These shares may be issued by our Board of Directors, without further action by our shareholders, and may include any of the following rights, among others, which may be superior to the rights of our outstanding common stock:

• voting rights, including the right to vote as a class on particular matters;

• preferences as to dividends and liquidation rights;

• conversion rights and anti-dilution protections; and

• redemption rights.

Since our Board of Directors has the authority to determine, from time to time, the terms of our authorized preferred stock, there is no limit on the amount of common stock that could be issuable upon conversion of any future series of preferred stock that may be issued. The rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock that may be issued in the future. In addition, the market price of our common stock may be adversely affected by the issuance of any series of preferred stock with voting or other rights superior to those of our common stock. The issuance of any series of preferred stock could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding common stock.

Our shareholders’ rights plan may make it more difficult for others to obtain control of us.

Pursuant to the terms of our shareholders rights plan, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors, and may have the effect of deterring hostile takeover attempts. The practical effect of these provisions is to require a party seeking control of us to negotiate with our Board of Directors, which could delay or prevent a change in control. These provisions could discourage a future takeover attempt which individual shareholders might deem to be in their best interests or in which shareholders would receive a premium for their shares over current prices.

Our stock price has been volatile.

The price of our common stock fluctuates significantly. The trading price of our common stock could be subject to wide fluctuations in response to:

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• future announcements concerning our company, our competitors or our principal customers, such as quarterly operating results, adjustments to previously reported results, changes in earnings estimates by analysts, technological innovations, new product introductions, governmental regulations, or litigation;

• the liquidity within the market of our common stock;

• sales of common stock by our officers, directors and other insiders;

• investor perceptions concerning the prospects of our business;

• market conditions and investor sentiment affecting market prices of equity securities of high technology companies in the microelectronic or display industries;

• general economic, political and market conditions, such as recessions or international currency fluctuations;

• market reaction to acquisitions, joint ventures or strategic investments announced by us or our competitors;

• lawsuits filed against the Company; and

• compliance with the Sarbanes-Oxley Act.

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ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

					Total
					Number of		Maximum
					Shares		Number of
					Purchased		Shares that
	Total				as Part of		May Yet Be
	Number of		Average		Publicly		Purchased
	Shares		Price Paid		Announced		Under the
Period	Purchased		per Share		Plan		Plan
May 28, 2006 - July 1, 2006		18,498	$	5.06		18,498		1,212,610
Total		18,498	$	5.06		18,498

On June 19, 2006, the Company’s Board of Directors authorized a stock repurchase program pursuant to which up to 5%, or 1,231,108 shares, of its outstanding common stock may be repurchased from time to time. The duration of the repurchase program is open-ended and is being implemented through a Rule 10b5-1 Stock Purchase Plan. Under the program, the Company can purchase shares of common stock through the open market on a daily basis at prices equal to or less than $5.50 per share, without further approval by the Board. The timing and amount of repurchase transactions under this program will depend on market conditions and corporate and regulatory considerations. The purchases will be funded from available working capital.

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ITEM 6 EXHIBITS

Exhibits

2.1	Agreement and Plan of Merger dated May 3, 1998 by and among Bowmar Instrument Corporation and Electronic Designs, Inc. and Bravo Acquisition Subsidiary, Inc. (incorporated herein by reference to Exhibit 2 to the current Report on Form 8-K filed on May 6, 1998.)
2.2	Amendment to Agreement and Plan of Merger dated June 9, 1998 (incorporated herein by reference to Exhibit 2.1A to the Registration Statement on Form S-4 filed on June 11, 1998, Registration No. 333-56565).
2.3	Amendment to Agreement and Plan of Merger dated August 24, 1998 (incorporated herein by reference to Exhibit 2.1B to the Registration Statement on Form S-4, filed on September 2, 1998, Registration No. 333-56565).
2.4	Agreement and Plan of Reorganization dated as of January 22, 2003 by and among White Electronic Designs Corporation, IDS Reorganization Corp., and Interface Data, Systems, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed January 24, 2003.
2.5	Agreement and Plan of Reorganization dated January 29, 2001, by and among White Electronic Designs Corporation, PV Acquisition Corporation, Panelview, Inc. and Panelview Partners L.P. (incorporated herein by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q, filed on February 13, 2001).
3.1	Amended and Restated Articles of Incorporation of White Electronic Designs Corporation (incorporated herein by reference to Exhibit 3.1 on Form 10-K filed on December 24, 1998).
3.2	Amended and Restated Code of By-Laws of White Electronic Designs Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-3 filed on June 2, 2003).
4.1	Shareholder Rights Agreement, effective December 6, 1996, (incorporated herein by reference to Exhibit 5 on Form 8-K, filed on December 19, 1996).
4.2	Amendment No. 1 to Rights Agreement, effective as of May 3, 1998 (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-4, filed on June 11, 1998, Registration No. 333-56565).
10.1	Amendment effective March 28, 2006 to JPMorgan Chase Bank, N.A. Loan and Security Agreement, dated January 7, 2000 (incorporated herein by reference to Exhibit 10.2 on Form 10-Q, filed on May 11, 2006).
10.2*	Amendment effective June 28, 2006 to JPMorgan Chase Bank, N.A. Loan and Security Agreement, dated January 7, 2000.
10.3*	Rule 10b5-1 Stock Purchase Plan, dated June 21, 2006.
31.1*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes- Oxley Act of 2002.

* Filed or furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

WHITE ELECTRONIC DESIGNS CORPORATION

/s/ Hamid R. ShokrgozarHamid R. Shokrgozar

Chief Executive Officer

/s/ Roger A. DerseRoger A. Derse
Vice President and Chief Financial Officer

Dated: August 10, 2006

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EXHIBIT INDEX

2.1	Agreement and Plan of Merger dated May 3, 1998 by and among Bowmar Instrument Corporation and Electronic Designs, Inc. and Bravo Acquisition Subsidiary, Inc. (incorporated herein by reference to Exhibit 2 to the current Report on Form 8-K filed on May 6, 1998.)
2.2	Amendment to Agreement and Plan of Merger dated June 9, 1998 (incorporated herein by reference to Exhibit 2.1A to the Registration Statement on Form S-4 filed on June 11, 1998, Registration No. 333-56565).
2.3	Amendment to Agreement and Plan of Merger dated August 24, 1998 (incorporated herein by reference to Exhibit 2.1B to the Registration Statement on Form S-4, filed on September 2, 1998, Registration No. 333-56565).
2.4	Agreement and Plan of Reorganization dated as of January 22, 2003 by and among White Electronic Designs Corporation, IDS Reorganization Corp., and Interface Data, Systems, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed January 24, 2003.
2.5	Agreement and Plan of Reorganization dated January 29, 2001, by and among White Electronic Designs Corporation, PV Acquisition Corporation, Panelview, Inc. and Panelview Partners L.P. (incorporated herein by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q, filed on February 13, 2001).
3.1	Amended and Restated Articles of Incorporation of White Electronic Designs Corporation (incorporated herein by reference to Exhibit 3.1 on Form 10-K filed on December 24, 1998).
3.2	Amended and Restated Code of By-Laws of White Electronic Designs Corporation (incorporated herein by reference to Exhibit 3.1 on Form S-3 filed on June 2, 2003).
4.1	Shareholder Rights Agreement, effective December 6, 1996, (incorporated herein by reference to Exhibit 5 on Form 8-K, filed on December 19, 1996).
4.2	Amendment No. 1 to Rights Agreement, effective as of May 3, 1998 (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-4, filed on June 11, 1998, Registration No. 333-56565).
10.1	Amendment effective March 28, 2006 to JPMorgan Chase Bank, N.A. Loan and Security Agreement, dated January 7, 2000 (incorporated herein by reference to Exhibit 10.2 on Form 10-Q, filed on May 11, 2006).
10.2*	Amendment effective June 28, 2006 to JPMorgan Chase Bank, N.A. Loan and Security Agreement, dated January 7, 2000.
10.3*	Rule 10b5-1 Stock Purchase Plan, dated June 21, 2006.
31.1*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes- Oxley Act of 2002.

* Filed or furnished herewith.

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