White Electronic Designs 10Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: June 28, 2008


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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero		Accelerated filerþ		Non-accelerated filero (Do not check if a smaller reporting company)		Smaller reporting companyo

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

The number of shares outstanding of the registrant’s common stock on August 4, 2008 was approximately 22,435,280.

WHITE ELECTRONIC DESIGNS CORPORATION
AND SUBSIDIARIES

Table of Contents


PART I FINANCIAL INFORMATION			3

Item 1. Financial Statements			3

Unaudited Consolidated Balance Sheets as of June 28, 2008 and September 29, 2007			3

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 28, 2008 and June 30, 2007			4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 28, 2008 and June 30, 2007			5

Notes to Unaudited Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22

Item 3. Quantitative and Qualitative Disclosures about Market Risk			39

Item 4. Controls and Procedures			39

PART II OTHER INFORMATION			40

Item 1. Legal Proceedings			40

Item 1A. Risk Factors			40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41

Item 5. Other Information			41

Item 6. Exhibits			42
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)


	June 28,			September 29,
	2008			2007
ASSETS
Current Assets
Cash and cash equivalents	$	49,816		$	48,652
Accounts receivable, less allowance for doubtful accounts of $218 and $223		12,136			13,200
Inventories		20,896			22,919
Prepaid expenses and other current assets		3,116			723
Deferred income taxes		4,026			2,767
Assets held for sale		9,141			13,835

Total Current Assets		99,131			102,096

Property, plant and equipment, net		10,936			10,685
Deferred income taxes		1,602			2,104
Goodwill		1,764			5,306
Other assets		117			118
Assets held for sale		987			4,470

Total Assets	$	114,537		$	124,779


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	2,527		$	4,385
Accrued salaries and benefits		1,570			1,155
Other accrued expenses		1,833			2,447
Deferred revenue		5,141			4,736
Liabilities related to assets held for sale		1,612			3,142

Total Current Liabilities		12,683			15,865

Accrued pension liability		210			271
Other liabilities		1,031			1,222
Liabilities related to assets held for sale		34			1,049

Total Liabilities		13,958			18,407


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, 24,899,651 and 24,841,586 shares issued		2,490			2,484
Treasury stock, 2,464,371 and 1,828,412 shares, at par		(246	)		(183	)
Additional paid-in capital		81,372			83,787
Retained earnings		16,871			20,228
Accumulated other comprehensive income		92			56

Total Shareholders’ Equity		100,579			106,372

Total Liabilities and Shareholders’ Equity	$	114,537		$	124,779

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

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION

(Unaudited)
(In thousands, except share and per share data)


	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Net sales	$	19,648		$	21,464		$	58,187		$	56,130
Cost of sales		12,399			13,963			37,871			36,536


Gross profit		7,249			7,501			20,316			19,594


Operating expenses:
Selling, general and administrative		4,496			4,248			13,113			12,651
Research and development		1,530			1,154			4,239			3,669
Goodwill impairment		3,542			—			3,542			—


Total operating expenses		9,568			5,402			20,894			16,320


Operating income (loss)		(2,319	)		2,099			(578	)		3,274
Interest income		242			590			1,267			1,892


Income (loss) from continuing operations before income taxes		(2,077	)		2,689			689			5,166

(Provision for) benefit from income taxes		610			(918	)		(187	)		(1,623	)


Income (loss) from continuing operations		(1,467	)		1,771			502			3,543


Discontinued operations (Note 11):
Income (loss) from discontinued operations, net of tax		224			(385	)		(840	)		(784	)
Loss on sale of discontinued operations, net of tax		(786	)		—			(3,019	)		—


Loss from discontinued operations		(562	)		(385	)		(3,859	)		(784	)


Net income (loss)	$	(2,029	)	$	1,386		$	(3,357	)	$	2,759


Income (loss) from continuing operations per common share:
Basic	$	(0.07	)	$	0.08		$	0.02		$	0.15

Diluted	$	(0.07	)	$	0.07		$	0.02		$	0.15


Loss from discontinued operations per common share:
Basic	$	(0.03	)	$	(0.02	)	$	(0.17	)	$	(0.03	)

Diluted	$	(0.03	)	$	(0.02	)	$	(0.17	)	$	(0.03	)


Net income (loss) per common share:
Basic	$	(0.09	)	$	0.06		$	(0.15	)	$	0.12

Diluted	$	(0.09	)	$	0.06		$	(0.15	)	$	0.11


Weighted average number of common shares and equivalents:
Basic		22,440,431			23,554,531			22,525,069			23,630,584
Diluted		22,440,431			23,970,142			22,866,801			24,112,875

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

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)


	Nine Months Ended
	June 28,			June 30,
	2008			2007
OPERATING ACTIVITIES:
Income from continuing operations	$	502		$	3,543
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		2,300			2,177
Goodwill impairment		3,542			—
Deferred income tax		(757	)		(693	)
Loss on disposition of property, plant, and equipment		5			—
Stock-based compensation expense related to employee stock awards		578			300
Tax benefit related to exercise of stock awards		58			209
Excess tax benefits from stock-based compensation		(2	)		(56	)
Pension costs		(25	)		—
Net changes in balance sheet accounts:
Accounts receivable		1,064			(2,466	)
Inventories		2,023			(6,809	)
Assets held for sale		—			390
Prepaid expenses and other current assets		(2,393	)		(758	)
Other assets		1			(1	)
Accounts payable		(2,000	)		3,258
Accrued expenses and deferred revenue		206			3,033
Other long-term liabilities		(191	)		65


Net cash provided by operating activities		4,911			2,192


INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(2,414	)		(1,379	)


Net cash used in investing activities		(2,414	)		(1,379	)


FINANCING ACTIVITIES:
Common stock issued for exercise of options and warrants		113			448
Repurchase of common stock		(3,221	)		(5,143	)
Excess tax benefits from stock-based compensation		2			56


Net cash used in financing activities		(3,106	)		(4,639	)


Net change in cash and cash equivalents from continuing operations		(609	)		(3,826	)


Cash flows from discontinued operations:
Net cash provided by (used in) operating activities		1,808			(2,717	)
Net cash used in investing activities		(35	)		(357	)

Net change in cash and cash equivalents from discontinued operations		1,773			(3,074	)


Net change in cash and cash equivalents		1,164			(6,900	)
Cash and cash equivalents at beginning of period		48,652			55,829


Cash and cash equivalents at end of period	$	49,816		$	48,929


SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of property, plant and equipment in accounts payable	$	142		$	69

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

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

1. INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of June 28, 2008, the consolidated statements of operations for the three and nine months ended June 28, 2008 and June 30, 2007, and the consolidated statements of cash flows for the nine months ended June 28, 2008 and June 30, 2007 have been prepared by the Company and are unaudited. The consolidated balance sheet as of September 29, 2007 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 29, 2007. 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 September 29, 2007. The results of operations for the three and nine months ended June 28, 2008 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 most significant estimates relate to revenue recognition, inventory obsolescence, bad debts, long-lived assets, stock-based compensation, income taxes and the loss on sale of discontinued operations. 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 shareholders 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 awards.

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

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


	Three Months Ended
	June 28, 2008									June 30, 2007
	Loss from			Loss from						Income from		Loss from
	Continuing			Discontinued						Continuing		Discontinued
	Operations			Operations			Net Loss			Operations		Operations			Net Income
Basic EPS
Income (loss) — (numerator)	$	(1,467,000	)	$	(562,000	)	$	(2,029,000	)	$	1,771,000	$	(385,000	)	$	1,386,000

Weighted average common shares outstanding — (denominator)		22,440,431			22,440,431			22,440,431			23,554,531		23,554,531			23,554,531

Earnings (loss) per share — Basic	$	(0.07	)	$	(0.03	)	$	(0.09	)	$	0.08	$	(0.02	)	$	0.06

Diluted EPS
Income (loss) — (numerator)	$	(1,467,000	)	$	(562,000	)	$	(2,029,000	)	$	1,771,000	$	(385,000	)	$	1,386,000

Weighted average common shares outstanding		22,440,431			22,440,431			22,440,431			23,554,531		23,554,531			23,554,531
Dilutive effect of stock options and restricted stock		—			—			—			415,611		—			415,611

Total diluted shares — (denominator)		22,440,431			22,440,431			22,440,431			23,970,142		23,554,531			23,970,142

Earnings (loss) per share — Diluted	$	(0.07	)	$	(0.03	)	$	(0.09	)	$	0.07	$	(0.02	)	$	0.06

Shares excluded from the calculation of diluted earnings per share (where applicable) were 1,046,648 and 797,757 for the three months ended June 28, 2008 and June 30, 2007, respectively, as the exercise price was greater than the average share price for the period. The effect of common stock equivalents is not included in the diluted loss per share calculations as their inclusion would be anti-dilutive. Shares of 315,767 and 415,611 for the three months ended June 28, 2008 and June 30, 2007, respectively, would have been included in the diluted earnings per share calculation had the Company reported net income.


	Nine Months Ended
	June 28, 2008								June 30, 2007
	Income from		Loss from						Income from		Loss from
	Continuing		Discontinued						Continuing		Discontinued
	Operations		Operations			Net Loss			Operations		Operations			Net Income
Basic EPS
Income (loss) — (numerator)	$	502,000	$	(3,859,000	)	$	(3,357,000	)	$	3,543,000	$	(784,000	)	$	2,759,000

Weighted average common shares outstanding — (denominator)		22,525,069		22,525,069			22,525,069			23,630,584		23,630,584			23,630,584

Earnings (loss) per share — Basic	$	0.02	$	(0.17	)	$	(0.15	)	$	0.15	$	(0.03	)	$	0.12

Diluted EPS
Income (loss) — (numerator)	$	502,000	$	(3,859,000	)	$	(3,357,000	)	$	3,543,000	$	(784,000	)	$	2,759,000

Weighted average common shares outstanding		22,525,069		22,525,069			22,525,069			23,630,584		23,630,584			23,630,584
Dilutive effect of stock options and restricted stock		341,732		—			—			482,291		—			482,291

Total diluted shares — (denominator)		22,866,801		22,525,069			22,525,069			24,112,875		23,630,584			24,112,875

Earnings (loss) per share — Diluted	$	0.02	$	(0.17	)	$	(0.15	)	$	0.15	$	(0.03	)	$	0.11

Shares excluded from the calculation of diluted earnings per share (where applicable) were 961,648 and 799,757 for the nine months ended June 28, 2008 and June 30, 2007, respectively, as the exercise price was greater than the average share price for the period. The effect of common stock equivalents is not included in the diluted loss per share calculations as their inclusion would be anti-dilutive. Shares of 341,732 and 482,291 for the nine months ended June 28, 2008 and June 30, 2007, respectively, would have been included in the diluted earnings per share calculation had the Company reported net income.

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

3. STOCK-BASED COMPENSATION

For the three and nine months ended June 28, 2008, the Company recorded compensation expense of $180,000 and $578,000, respectively, and cash flows from financing activities of $0 and $2,000, respectively, which reduced cash flows from operating activities by the same amounts. For the three and nine months ended June 30, 2007, the Company recorded compensation expense of $88,000 and $300,000, respectively, and cash flows from financing activities of $45,000 and $56,000, respectively, which reduced cash flows from operating activities by the same amounts. The compensation cost for share-based payment awards is included in selling, general and administrative expenses on our consolidated statements of operations.

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 through 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.

The Company accounts for its options in accordance with 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. 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.

A summary of the Company’s stock option activity for the three months ended June 28, 2008 follows (in thousands, except per share amounts):


			Options Outstanding
						Weighted Average
	Options Available		Options			Exercise Price
	for Grant		Outstanding			Per Share
As of March 29, 2008		632		2,192		$	4.83
Granted		—		—			—
Exercised		—		(2	)		3.83
Expired		2		(2	)		5.22
Forfeited		59		(59	)		4.94


As of June 28, 2008		693		2,129		$	4.83

Weighted average fair value of all options granted during the period — $0 (no grants)

A summary of the Company’s stock option activity for the nine months ended June 28, 2008 follows (in thousands, except per share amounts):

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


				Options Outstanding
							Weighted Average
	Options Available			Options			Exercise Price
	for Grant			Outstanding			Per Share
As of September 29, 2007		868			2,198		$	4.86
Granted		(55	)		55			4.64
Other Grants (1)		(210	)		—			—
Exercised		—			(34	)		3.40
Expired		27			(27	)		8.21
Forfeited		63			(63	)		4.95


As of June 28, 2008		693			2,129		$	4.83

Weighted average fair value of all options granted during the period — $2.49


(1)		Certain shares were granted from the 1994 Employee Stock Option Plan as Restricted Stock and Performance Shares during the period. These grants serve to decrease the number of shares available for grant, but are not presented as Stock Option activity. Of these grants, 75,000 shares were granted as Restricted Stock and 135,000 shares were granted as Performance Shares. Refer to the sections “Restricted Stock” and “Performance Shares” for more information.

The total pretax intrinsic value of options exercised during the three and nine months ended June 28, 2008 was $1,000 and $48,000, respectively.

The following table summarizes significant ranges of outstanding and exercisable options as of June 28, 2008 (in thousands, except years and per share amounts):


	Options Outstanding								Options Exercisable
			Weighted-		Weighted-						Weighted-		Weighted-
			Average		Average						Average		Average
			Remaining		Exercise		Aggregate				Remaining		Exercise		Aggregate
Range of	Number		Contractual		Price per		Intrinsic		Number		Contractual		Price per		Intrinsic
Exercise Prices	Outstanding		Life (in Years)		Share		Value		Exercisable		Life (in Years)		Share		Value
0.0000 - 1.6000		249		0.44	$	1.13				249			$	1.13
1.6001 - 3.2000		340		1.33		2.70				340				2.70
3.2001 - 4.8000		579		3.74		4.00				506				3.90
4.8001 - 6.4000		278		5.61		5.59				245				5.67
6.4001 - 8.0000		515		4.93		6.98				515				6.98
8.0001 - 9.6000		85		4.83		8.66				85				8.66
9.6001 - 11.2000		81		2.23		10.59				81				10.59
11.2001 - 12.8000		2		5.17		12.19				2				12.19


		2,129		3.49	$	4.83	$	1,935		2,023		3.23	$	4.83	$	1,935

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $4.66 on June 27, 2008, the last day of trading in the fiscal quarter, 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 June 28, 2008 was 1,057,553. As of September 29, 2007, 2,028,151 outstanding options were exercisable and the weighted average exercise price was $4.85.

As of June 28, 2008, total compensation cost related to unvested stock options not yet recognized was $0.2 million pre-tax, 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. SFAS123(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.

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

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:


	Three Months Ended
	June 28,			June 30,
	2008			2007
Weighted average expected stock price volatility		40	%		52	%
Weighted average expected option life (years)		7.25			5.27
Risk-free interest rate		3.74	%		4.97	%
Expected dividends		—			—

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.

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 of Shareholders that vest ratably over a three year period. The Company values these shares at fair value. The 37,500 shares granted on March 6, 2008 were valued at $4.00 per share, the closing price of the stock on the date of grant. The 37,500 shares granted on March 7, 2007 were valued at $6.76 per share, the closing price of the stock on that date.

In addition, on December 12, 2007, the Compensation Committee determined and approved an Equity Incentive Program for certain executive officers, namely Hamid Shokrgozar, President, Chairman and Chief Executive Officer; Dan Tarantine, Executive Vice President, Corporate Strategic Development; and Roger Derse, Vice President, Chief Financial Officer, Secretary and Treasurer (the “Executive Officers”), consisting of two types of equity compensation, restricted stock units (“RSUs”) and performance shares (discussed separately under “Performance Shares” below).

The Board of Directors granted and approved 50,000 RSUs for Mr. Shokrgozar and 25,000 RSUs for Mr. Derse. The RSUs will vest over a two-year period, with 50% of each RSU award vesting on the first-year anniversary of the date of grant and the remaining 50% of each RSU award vesting upon the second-year anniversary of the date of grant. The Company values these shares at fair value. The 75,000 shares granted on December 12, 2007 were valued at $4.64, the closing price of the stock on the date of grant.

The following table summarizes restricted stock unit activity for the three months ended June 28, 2008 (in thousands, except per share amounts):

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


	Number of		Weighted-
	Restricted		Average
	Stock		Grant-Date
	Units		Fair Value
Outstanding on March 29, 2008		150	$	4.93
Granted		—		—
Vested / Issued		—		—
Forfeited		—		—


Outstanding on June 28, 2008		150	$	4.93

The following table summarizes restricted stock unit activity for the nine months ended June 28, 2008 (in thousands, except per share amounts):


	Number of			Weighted-
	Restricted			Average
	Stock			Grant-Date
	Units			Fair Value
Outstanding on September 29, 2007		63		$	6.38
Granted		112			4.43
Vested / Issued		(25	)		6.29
Forfeited		—			—


Outstanding on June 28, 2008		150		$	4.93

As of June 28, 2008, there was $0.6 million pre-tax of total restricted stock unit compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over the next three years.

Performance Shares

As mentioned above, on December 12, 2007, the Compensation Committee granted and approved certain performance share awards. The performance share awards vest over a two-year period, subject to certain performance criteria of the Company. If the Company achieves an annual EBITDA amount that is 20% greater than the fiscal year 2008 base case set by the Compensation Committee, based on a fiscal year 2008 forecast approved by the Board of Directors (the “Performance Share Target”), then each Executive Officer would vest in an award as follows: (i) Mr. Shokrgozar — 100,000 performance shares, (ii) Mr. Derse — 25,000 performance shares, and (iii) Mr. Tarantine — 10,000 performance shares. If the Company achieves 90% of the Performance Share Target, then 50% of such performance share awards applicable to each Executive Officer would vest. Under this Equity Incentive Program, in the event that no performance shares vest in fiscal 2008, the Executive Officers have the same opportunity to achieve the performance criteria in fiscal 2009; provided, however, if the Company achieves 90% of the Performance Share Target in fiscal 2008 and 50% of such performance share awards were vested, then, the Company must achieve 100% of the Performance Share Target in fiscal 2009 to vest in the remaining 50% of each performance share award to each Executive Officer. Upon a “Change in Control” of the Company (as such term is defined in the 1994 Flexible Stock Plan), each performance share award will automatically and fully vest regardless of the achievement of the Performance Share Target. The Company values these shares at fair value. The 135,000 shares granted on December 12, 2007 were valued at $4.64 per share, the closing price of the stock on the date of grant.

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

The following table summarizes performance share activity for the three months ended June 28, 2008 (in thousands, except per share amounts):


			Weighted-
	Number of		Average
	Performance		Grant-Date
	Shares		Fair Value
Outstanding on March 29, 2008		135	$	4.64
Granted		—		—
Vested / Issued		—		—
Forfeited		—		—


Outstanding on June 28, 2008		135	$	4.64

The following table summarizes performance share activity for the nine months ended June 28, 2008 (in thousands, except per share amounts):


			Weighted-
	Number of		Average
	Performance		Grant-Date
	Shares		Fair Value
Outstanding on September 29, 2007		—	$	—
Granted		135		4.64
Vested / Issued		—		—
Forfeited		—		—


Outstanding on June 28, 2008		135	$	4.64

As of June 28, 2008, there was $0.4 million pre-tax of total compensation expense related to non-vested performance share awards not yet recognized, which is expected to be recognized over the next two years if certain performance criteria of the Company are met.

4. INVENTORIES

Inventories consisted of the following (in thousands):


	June 28,		September 29,
	2008		2007
Raw materials	$	13,828	$	15,916
Work-in-process		5,381		4,576
Finished goods		1,687		2,427

Total inventories	$	20,896	$	22,919

Raw materials included $3.5 million at June 28, 2008 and $4.3 million at September 29, 2007 for which the Company had received advance payment from customers. These advance payments are recorded as deferred revenue until the finished goods are delivered.

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

5. PROPERTY, PLANT, AND EQUIPMENT, NET

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


	June 28,			September 29,
	2008			2007
Land	$	247		$	247
Buildings and improvements		857			857
Machinery and equipment		20,694			17,930
Furniture and fixtures		4,444			4,105
Leasehold improvements		4,359			4,214
Construction in progress		380			1,304

Total, at cost		30,981			28,657
Less accumulated depreciation		(20,045	)		(17,972	)

Property, plant, and equipment, net	$	10,936		$	10,685

Depreciation expense was $0.8 million and $0.7 million for the three months ended June 28, 2008 and June 30, 2007, respectively. Depreciation expense was $2.3 million and $2.2 million for the nine months ended June 28, 2008 and June 30, 2007, respectively.

6. GOODWILL

Changes in the carrying amount of goodwill for the nine months ended June 28, 2008 are as follows (in thousands):


	Microelectronic		Display
	Segment		Segment			Total
Balance as of September 29, 2007	$	1,764	$	3,542		$	5,306
Goodwill impairment		—		(3,542	)		(3,542	)

Balance as of June 28, 2008	$	1,764	$	—		$	1,764

During the third quarter of fiscal 2008, we found indicators of impairment related to our display reporting unit in Oregon (Panelview). Panelview was purchased in January 2001. Based on the current and forecasted competitive market conditions, we lowered earnings and cash flow projections for this unit. The slowing economy has affected the demand from our convertible and tablet PC customers and there is limited visibility as to when a recovery may be anticipated. We performed a test for impairment under SFAS No. 142,Goodwill and Other Intangible Assets, (“SFAS 142”) and it was determined that the goodwill was fully impaired. Accordingly, we wrote down all of the remaining $3.5 million of goodwill related to this reporting unit in the display segment in the third quarter of fiscal 2008. The fair value was estimated using standard valuation techniques.

7. OTHER ACCRUED EXPENSES

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


	June 28,		September 29,
	2008		2007
Sales commissions		577		665
Warranty reserve		164		182
Income taxes		—		749
Other accruals		1,092		851

Total other accrued expenses	$	1,833	$	2,447

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

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 expense needed to account for the estimated cost of product returns.

The following table summarizes activity in the warranty reserve (in thousands):


	Nine Months Ended
	June 28,			June 30,
	2008			2007
Warranty reserve, beginning of period	$	182		$	228
Provision for warranty claims		125			23
Warranty claims charged against the reserve		(143	)		(101	)

Warranty reserve, end of period	$	164		$	150

8. CREDIT FACILITY

On April 3, 2007, the Company entered into a $30.0 million revolving line of credit agreement with JPMorgan Chase Bank, N.A. Borrowings under the revolving line of credit bear interest at the lower of the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the JPMorgan Chase Bank, N.A. “prime rate.” A commitment fee of 0.125% is charged on the unused portion of the line. The line expires on March 31, 2009. The Company is in compliance with all debt covenant requirements contained in the revolving line of credit agreement. As of June 28, 2008, there were no borrowings against the revolving line of credit, and the Company has not borrowed against any credit facility since April 2003.

9. 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):


	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Service cost	$	6		$	20		$	45		$	66
Interest cost		56			50			153			153
Expected return on plan assets		(53	)		(51	)		(155	)		(157	)
Amortization of unrecognized prior service cost		18			10			36			30

Total net periodic benefit cost	$	27		$	29		$	79		$	92

Contributions to the pension plan were $0.1 million during the nine months ended June 28, 2008. No contributions were made during the nine months ended June 30, 2007. The Company does not anticipate making any additional contributions to the pension plan in fiscal 2008.

10. INCOME TAXES

The Company’s effective tax rate was 29% and 34% for the three months ended June 28, 2008 and June 30, 2007, respectively. The decrease in the effective rate is primarily due to the release of tax reserves due to the passage of the statute of limitations on certain tax years.

The Company’s effective tax rate was 27% and 31% for the nine months ended June 28, 2008 and June 30, 2007, respectively. The decrease in the effective rate is primarily due to the true-up of our reserves in the first quarter of fiscal 2008, the release of tax reserves due to the passage of the statute of limitations on certain tax years and an increase in the manufacturers deduction offset by a decrease in the federal research and development credit. Due to the provisions of SFAS No. 109, we recorded a benefit in the first quarter of fiscal 2007 of $150,000 for the

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

reinstatement of the research and development credit back to January 1, 2006. The research and development credit expired December 31, 2005. Congress passed a bill in December 2006 reinstating the credit back to January 1, 2006. The federal research and development credit again expired December 31, 2007 and has not been reinstated. Accordingly, in our fiscal 2008 provision only one quarter of our expected annual credit has been included.

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 on September 30, 2007. The adoption of FIN 48 resulted in no cumulative effect adjustment to retained earnings.

As of September 29, 2007, the Company had unrecognized tax benefits of $506,000, $401,000 of which would favorably impact the Company’s effective tax rate if subsequently recognized. As of June 28, 2008, the Company had unrecognized tax benefits of $401,000, $314,000 of which would favorably impact the Company’s effective tax rate if subsequently recognized. The Company does not anticipate a significant change in the total amount of unrecognized tax benefits during the next twelve months.

The Company’s policy is to recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of September 29, 2007, the Company had accrued $34,000 of interest related to uncertain tax positions. As of June 28, 2008, the Company has accrued $24,000 of interest related to uncertain tax positions.

The Company and its subsidiaries are subject to the following significant taxing jurisdictions: U.S. federal, Arizona, Indiana, Ohio and Oregon. The statute of limitations for a particular tax year for examination by the Internal Revenue Service is three years, and three to four years for the states of Arizona, Indiana, Ohio and Oregon. Accordingly, there are multiple years open to examination.

11. DISCONTINUED OPERATIONS

On March 28, 2008, the Board of Directors authorized the disposal of the Interface Electronics Division (“IED”) and the commercial microelectronic product lines. The decision resulted from an effort to streamline the Company’s businesses to focus on product lines where the Company has superior technical knowledge, specialized manufacturing capabilities and an on-going commitment to research and development. We believe this course of action will increase shareholder value and allow us to focus on growing our business both organically and through other alternatives, including potential acquisitions. As a result of our decision to dispose of these product lines, we have accounted for them as discontinued operations in the accompanying condensed consolidated financial statements. In connection with this disposal, we recorded and paid out approximately $0.2 million in severance and retention costs in the third quarter of fiscal 2008. Based on market factors and the consideration being discussed in connection with the disposal of the product lines, we recorded a non-cash, pre-tax impairment charge of approximately $3.5 million in the second quarter of fiscal 2008 related to the customer relationship and existing technology intangibles of these reporting units and a write-down of inventory. After further market analysis and in light of declining economic factors, we recorded an additional non-cash, pre-tax charge of $1.1 million related to fixed assets and inventory during the third quarter of fiscal 2008. The total estimated loss on disposal is $3.0 million, net of tax. We ceased depreciation of discontinued operations upon committing to the disposal plan.

Income (loss) from discontinued operations consists of direct revenues and direct expenses of commercial microelectronics and IED product lines. The commercial microelectronics has historically been reported in the microelectronic segment, while IED has been included in the display segment. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results included in discontinued operations in the accompanying condensed consolidated statements of operations is as follows:

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


	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Commercial Microelectronics:
Net sales	$	2,368		$	4,029		$	8,824		$	13,710
Cost of sales		2,392			3,478			7,888			11,385

Gross profit		(24	)		551			936			2,325

Total operating expenses		135			1,103			1,259			3,467


Loss from operations before income taxes		(159	)		(552	)		(323	)		(1,142	)
Benefit from income taxes		100			234			89			486


Loss from discontinued operations		(59	)		(318	)		(234	)		(656	)
Loss on sale of discontinued operations, net of tax		(109	)		—			(1,041	)		—


Net loss	$	(168	)	$	(318	)	$	(1,275	)	$	(656	)


IED:
Net sales	$	2,052		$	2,972		$	6,672		$	7,878
Cost of sales		1,815			2,533			6,249			6,552

Gross profit		237			439			423			1,326

Total operating expenses		301			555			1,257			1,573


Loss from operations before income taxes		(64	)		(116	)		(834	)		(247	)
Benefit from income taxes		347			49			228			119


Income (loss) from discontinued operations		283			(67	)		(606	)		(128	)
Loss on sale of discontinued operations, net of tax		(677	)		—			(1,978	)		—


Net loss	$	(394	)	$	(67	)	$	(2,584	)	$	(128	)

Total loss from discontinued operations, net of tax	$	(562	)	$	(385	)	$	(3,859	)	$	(784	)

A summary of the assets and liabilities related to the discontinued operations of the commercial microelectronics and IED product lines classified as assets held for sale and liabilities related to assets held for sale in the accompanying condensed consolidated balance sheets is as follows:

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


	June 28,		September 29,
	2008		2007
Assets held for sale (current):
Accounts receivable, net	$	3,477	$	4,606
Inventories		4,146		8,294
Deferred income taxes and prepaid expenses		1,518		935

Total	$	9,141	$	13,835


Assets held for sale (long-term):
Property, plant and equipment, net	$	719	$	1,993
Deferred income taxes		268		—
Intangible assets, net		—		2,477

Total	$	987	$	4,470


Liabilities related to assets held for sale (current):
Accounts payable	$	1,171	$	2,333
Accrued expenses		416		692
Deferred revenue		25		117

Total	$	1,612	$	3,142


Liabilities related to assets held for sale (long-term):
Deferred income taxes	$	34	$	1,049

Total	$	34	$	1,049

12. 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. During the three and nine months ended June 28, 2008, the microelectronic segment accounted for 70% and 65%, respectively, of total Company net sales, while the display segment accounted for 30% and 35%, respectively, of total Company net sales. During the three and nine months ended June 30, 2007, the microelectronic segment accounted for 59% and 59%, respectively, of total Company net sales, while the display segment accounted for 41% and 41%, respectively, of total Company net sales.

The microelectronic segment manufactures semiconductor multi-chip packaged products primarily for aircraft, space, net-centric operations (NCO), ground, amphibious and marine vetronics and missile & ordinance applications. Few industries have products with the complexity, strict safety standards, and low error tolerance of defense and aerospace. The Company’s solutions provide the reliability, quality and precision for components used within aerospace projects. These higher performing products, also known as high-reliability products, 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 Company’s experience and expertise are uniquely suited to address these industries’ microelectronic needs for circuit board density, weight, durability and power savings for a range of precise and ruggedized applications. Products in the microelectronic segment are generally sold to military prime contractors and to both domestic and international original equipment manufacturers (“OEMs”). 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, delay or obfuscate chip level attacks and mitigate IP theft. These security technologies are cost effective and easy to implement and have little impact on system performance, while protecting Department of Defense’s critical technologies and helping to enable foreign military sales.

The display segment serves a number of markets with products and solutions that are incorporated into global positioning systems, automatic teller machines, point of service (“POS”) order confirmation displays, consumer

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

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 and sunlight readable displays can be used in either ruggedized or commercial applications. 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 consist of ruggedized keyboards, aircraft trim panels, rotating devices, mechanical packages, membrane keypads, silver flexible circuits, graphic overlays, control panels, and keypad/controller assemblies.

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

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

During the three months ended June 28, 2008, L3 Communications Corporation (“L-3 Communications”) and Arrow Electronics, Inc. (“Arrow Electronics”) accounted for $2.4 million and $2.0 million, or 12% and 10%, respectively, of total net sales. Within the microelectronic segment, L-3 Communications, Arrow Electronics and Raytheon Company accounted for $2.4 million, $1.8 million and $1.4 million, or 17%, 13% and 10%, respectively, of net sales. Within the display segment, Honeywell International, Inc. (“Honeywell”), Hewlett Packard International, Pte. Ltd. (“Hewlett Packard”) and Motion Computing, Inc. (“Motion Computing”) accounted for $0.6 million, $0.6 million and $0.6 million, or 10%, 10% and 10%, respectively, of net sales.

During the nine months ended June 28, 2008, Arrow Electronics accounted for $6.2 million, or 11%, of our total net sales. Within the microelectronic segment, Arrow Electronics and L-3 Communications accounted for $5.7 million and $4.3 million, or 15% and 11%, respectively, of net sales. Within the display segment, Motion Computing, Hewlett Packard and Honeywell accounted for $3.5 million, $2.6 million and $2.0 million, or 17%, 13% and 10%, respectively, of net sales.

During the three months ended June 30, 2007, Hewlett Packard accounted for $2.6 million, or 12%, of total net sales. Within the microelectronic segment, General Dynamics Corporation (“General Dynamics”) and L-3 Communications accounted for $1.4 million and $1.2 million, or 11% and 10%, respectively, of net sales. Within the display segment, Hewlett Packard and Motion Computing accounted for $2.6 million and $1.1 million, or 30% and 12%, respectively, of net sales.

During the nine months ended June 30, 2007, Hewlett Packard accounted for $5.6 million, or 10%, of our total net sales. Within the microelectronic segment, Arrow Electronics accounted for $3.4 million, or 10%, of net sales. Within the display segment, Hewlett Packard and Motion Computing accounted for $5.6 million and $3.1 million, or 24% and 13%, respectively, of net sales.

Foreign sales as a percentage of total net sales for the three months ended June 28, 2008 and June 30, 2007 were 30% and 36%, respectively. For the nine month periods, foreign sales as a percentage of total net sales were 31% and 38%, respectively.

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

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


	Three Months Ended				Nine Months Ended
	June 28,		June 30,		June 28,		June 30,
	2008		2007		2008		2007
United States	$	13,818	$	13,757	$	40,043	$	34,637
Europe and Middle East		2,439		2,619		7,302		8,099
Asia Pacific		2,525		4,008		8,430		10,633
Other		866		1,080		2,412		2,761


Net sales	$	19,648	$	21,464	$	58,187	$	56,130

A summary of results of operations by business segment follows:


	Three Months Ended					Nine Months Ended
	June 28,			June 30,		June 28,			June 30,
	2008			2007		2008			2007
Net sales
Microelectronic	$	13,704		$	12,625	$	37,935		$	32,843
Display		5,944			8,839		20,252			23,287

Total net sales	$	19,648		$	21,464	$	58,187		$	56,130

Income (loss) from continuing operations, before tax
Microelectronic	$	2,416		$	2,431	$	5,814		$	5,086
Display		(4,493	)		258		(5,125	)		80

Total income (loss) before tax	$	(2,077	)	$	2,689	$	689		$	5,166

Capital expenditures
Microelectronic	$	193		$	285	$	2,349		$	1,325
Display		59			30		207			123

Total capital expenditures	$	252		$	315	$	2,556		$	1,448

Depreciation
Microelectronic	$	592		$	499	$	1,678		$	1,576
Display		211			193		622			601

Total depreciation	$	803		$	692	$	2,300		$	2,177


	As of
	June 28,		September 29,
Identifiable assets	2008		2007
Microelectronic	$	43,435	$	44,079
Display		15,541		27,059
General corporate		55,561		53,641

Total identifiable assets	$	114,537	$	124,779

13. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes. The Company adopted FIN 48 on September 30, 2007. See Note 10 — Income Taxes for a discussion of the impact of FIN 48.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for the Company’s fiscal year 2009 beginning September 28, 2008. In

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

February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, delaying the effective date of SFAS No. 157 by one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. SFAS No. 157 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; however, additional disclosures may be required regarding the inputs used to develop the measurements and the effect of certain of the measurements on changes in net assets from period to period.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. Under this standard, entities are provided with an option to report selected financial assets and liabilities at fair value. Eligible financial instruments include, but are not limited to, held-to-maturity and available-for-sale investment securities, and financial liabilities (i.e., debt obligations). Entities are permitted to elect the fair value option on an instrument-by-instrument basis; once the election is made, it is irrevocable. SFAS No. 159 is effective for the Company’s fiscal year 2009 beginning September 28, 2008. The Company is currently evaluating SFAS No. 159 and the impact it may have on its financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141(R)”), which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. Changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income taxes. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008, which is the Company’s fiscal year 2010 beginning October 4, 2009, and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, which is the Company’s fiscal year 2010 beginning October 4, 2009, and will impact the accounting for noncontrolling interests after that date. The Company does not currently have an application for this statement.

In December 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-01,Accounting for Collaborative Arrangements, which prohibits companies from applying the equity method of accounting to activities performed outside a separate legal entity by a virtual joint venture. Instead, revenues and costs incurred with third parties in connection with the collaborative arrangement should be presented gross or net by the collaborators based on the criteria in EITF Issue No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, and other applicable accounting literature. The consensus should be applied to collaborative arrangements in existence at the date of adoption using a modified retrospective method that requires reclassification in all periods presented for those arrangements still in effect at the transition date, unless that application is impracticable. The consensus is effective for fiscal years beginning after December 15, 2008, which is the Company’s fiscal year 2010 beginning October 4, 2009. The Company is in the process of evaluating the potential financial statement impact of adopting EITF Issue No. 07-01.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities,enhancing disclosure requirements for derivative instruments and hedging activities. Affected entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of

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

underlying risk and accounting designation. This standard is intended to improve upon the existing disclosure framework in SFAS No. 133. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. It encourages retrospective application to comparative disclosure for earlier periods presented. The Company does not currently have an application for this statement.

In April 2008, the FASB issued FSP No. 142-3,Determination of the Useful Life of Intangible Assets, (“FSP 142-3”). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142,Goodwill and Other Intangible Assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, which is the Company’s fiscal year 2010 beginning October 4, 2009. The guidance in this FSP for determining the useful life of a recognized intangible shall be applied prospectively to intangible assets acquired after the effective date.

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (“FSP APB 14-1”). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, which is the Company’s fiscal year 2010 beginning October 4, 2009. Retrospective application to all periods presented is required. The Company does not currently have an application for this statement.

14. COMMITMENTS AND CONTINGENCIES

Contingencies

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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations regarding the three and nine month periods ended June 28, 2008 compared to the three and nine month periods ended June 30, 2007 should be read in conjunction with our unaudited consolidated financial statements and related notes for the same periods included elsewhere in this report and our audited consolidated financial statements and related notes for the fiscal year ended September 29, 2007 included in our most recent Annual Report on Form 10-K.

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,” contains “forward-looking statements” including financial projections regarding future events and our future results that are within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995, as amended, 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.

We intend to qualify both our written and/or oral forward-looking statements made from time to time in connection with filings with the Securities and Exchange Commission or in public news releases for protection under the safe harbors discussed above. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based largely on management’s expectations and because they are estimates, such statements 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 Form 10-Q, including those set forth in the Notes to the Unaudited Consolidated Financial Statements, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the sections entitled “Risk Factors” in this Form 10-Q and our most recent Annual Report on Form 10-K describe factors that could contribute to or cause actual results to differ materially from our expectations. Some factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, but are not limited to, the following:

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

	•		the inability to procure required components and raw materials;

	•		any downturn in the semiconductor, electronics, or other markets in which we operate, which could cause a decline in selling unit prices or volume;

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

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

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

	•		the inability to locate appropriate purchase candidates for our discontinued operations being held for sale and/or to negotiate an appropriate sales price;

	•		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, or implement other strategic alternatives; and

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

In addition, new factors, other than those identified in this Form 10-Q or our most recent Annual Report on Form 10-K, may emerge from time to time and it is not possible for management to predict all such factors, nor can we 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 revise any forward-looking statement contained in this 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.

Overview of Business

Through our two business segments, microelectronic and display, we design, develop and manufacture innovative 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.

On March 28, 2008, the Board of Directors authorized the disposal of IED and the commercial microelectronic product lines. This decision resulted from an effort to streamline the Company’s businesses to focus on product lines where the Company has superior technical knowledge, specialized manufacturing capabilities and an on-going commitment to research and development. We believe this course of action will increase shareholder value and allow us to focus on growing our business both organically and through other alternatives, including potential acquisitions. This decision to designate these product lines as discontinued operations in our consolidated financial statements did not require us to otherwise alter our two existing microelectronics and display segments. Commercial microelectronics has historically been reported in our microelectronic segment while IED has been included in the display segment.

Executive Summary

Our net sales for the third quarter ended June 28, 2008 decreased $1.9 million to $19.6 million, when compared to $21.5 million for the third quarter ended June 30, 2007. During the first nine months of fiscal 2008, net sales increased $2.1 million to $58.2 million from $56.1 million during the first nine months of fiscal 2007. Military sales increased $1.0 million for the three months ended June 28, 2008 when compared to the three months ended June 30, 2007. Military sales increased $4.9 million for the nine months ended June 28, 2008 when compared to the nine months ended June 30, 2007. The increases in military sales were due to the shipment of orders received over recent quarters, primarily in the microelectronic segment. The military market in the microelectronic segment is expected to continue its growth for the balance of fiscal year 2008. Commercial display segment sales decreased $2.8 million for the three and nine months ended June 28, 2008 when compared to the three and nine months ended June 30, 2007. The decreases primarily resulted from the decrease in sales of our displays in support of convertible PCs due to the end of life of one program and the customer delaying the next generation of product as it uses up its excess inventory. Additionally, we lost one of our medical customers for whom we supplied displays.

Loss from continuing operations for the three months ended June 28, 2008 was $1.5 million, or $0.07 per diluted share, compared to income of $1.8 million, or $0.07 per diluted share, for the same period in fiscal 2007. The decrease was primarily due to the goodwill impairment, which was only partially offset by lower income taxes. Income from continuing operations for the nine months ended June 28, 2008 was $0.5 million, or $0.02 per diluted share, compared to income of $3.5 million, or $0.15 per diluted share, for the first nine months of fiscal 2007. The decrease was primarily due to the goodwill impairment, increased operating expenses and lower interest income which more than offset the increase in sales and gross profit and lower income taxes.

Including the charges in connection with the disposal of the product lines discussed below, net loss for the three months ended June 28, 2008 was $2.0 million, or $0.09 per diluted share, compared to net income of $1.4 million, or $0.06 per diluted share, for the same period in fiscal 2007. For the nine months ended June 28, 2008, net loss was $3.4 million, or $0.15 per diluted share, compared to net income of $2.8 million, or $0.11 per diluted share, for the first nine months of fiscal 2007.

We received new orders during the quarter of $10.1 million for the microelectronic segment. We continue to experience consistent bookings from our military customers and expect this trend to continue for the remainder of the fiscal year. Backlog as of June 28, 2008 for the microelectronic segment was $31.6 million. New orders received in the display segment for the quarter were $1.7 million. The general economic downturn has affected the tablet and convertible PC markets. We are experiencing soft demand in the niche sectors, including criminal justice, as budgets are being reduced due to an eroding tax base, and medical applications. We also continue to see the slowdown of our customer’s GPS display orders for golf course applications. Backlog as of June 28, 2008 for the display segment was $12.3 million.

Our gross margins during the three months ended June 28, 2008 increased to 37% from 35% in the same period of fiscal year 2007. Gross margins during the nine months ended June 28, 2008 remained consistent at 35% when compared to the same period of fiscal year 2007. The microelectronic segment gross margins were 44% and 42%, respectively, for the three and nine months ended June 28, 2008, versus 43% and 43%, respectively, during the comparable periods of fiscal 2007. The increase for the three month period was primarily due to a slightly higher margin product mix. The decrease for the nine month period was primarily due to lower yields on new products introduced and a slightly lower margin product mix. The display segment gross margins were 20% and 22%, respectively, for the three and nine months ended June 28, 2008 versus 23% and 23%, respectively, for the comparable periods of fiscal 2007. The decrease for the three and nine month periods were primarily due to the lower absorption due to lower sales within the display segment.

On March 28, 2008, the Board of Directors authorized the disposal of the Interface Electronics Division (“IED”) and the commercial microelectronic product lines. The decision resulted from an effort to streamline the Company’s businesses to focus on product lines where the Company has superior technical knowledge, specialized manufacturing capabilities and an on-going commitment to research and development. We believe this course of action will increase shareholder value and allow us to focus on growing our business both organically and through other alternatives, including potential acquisitions. As a result of our decision to dispose of these product lines, we have accounted for them as discontinued operations in the accompanying unaudited condensed consolidated financial statements. In connection with this disposal, we recorded and paid out approximately $0.2 million in severance and retention costs in the third quarter of fiscal 2008. Based on market factors and the consideration being discussed in connection with the disposal of the product lines, we recorded a non-cash, pre-tax impairment charge of approximately $3.5 million in the second quarter of fiscal 2008 related to the customer relationship and existing technology intangibles of these reporting units and a write-down of inventory. After further market analysis and in light of declining economic factors, we recorded an additional non-cash, pre-tax charge of $1.1 million related to fixed assets and inventory during the third quarter of fiscal 2008. The total estimated loss on disposal is $3.0 million, net of tax.

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 generally increase and lead times lengthen. When supply exceeds demand, prices generally decrease and lead

times shorten. The Dynamic Random Access Memory (“DRAM”), including synchronous DRAM (“SDRAM”), and Double Data Rate (“DDR”) DRAM market supply is stable and we do not expect shortages in the near future. DRAM prices have continued to decrease during calendar year 2008 and we expect prices to remain at these levels over the next couple of quarters. More and more companies are transitioning from DDR to DDR II and the DDR II supply is expanding. The Flash memory supply has been generally stable. Prices have continued to decline slightly throughout the fiscal year as supplier inventory levels remain high amid sluggish demand. We expect prices to remain flat over the next couple of quarters. The availability of liquid crystal displays (“LCDs”) has stabilized as manufacturers continue to add capacity. While the market supply is stable, we expect LCD prices to remain flat or increase slightly over the next couple of quarters as demand increases for the high season in the fourth quarter of the calendar year.

Additionally, certain customers require us to buy from specific vendors due to product specifications. This, at times, subjects us to component supply issues due to disruptions in suppliers’ production.

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. Substantially all of our Max-Vu™ products are currently being produced in China. We anticipate moving the manufacturing of the new Max-Vu™ II process technology products to China, which we believe will result in increased value to the Company and our shareholders.

Listed below are our fiscal 2008 strategic initiatives and an update for each:

	•		Pursuit of Circuit Card Assembly (“CCA”) for military customers.Update:As previously disclosed, we have finalized the layout of a complete GPS receiver, including RF, power supplies, and signal conditioning. We have also recently acquired additional equipment which now gives us four high-end SMT lines. The original $0.8 million pre-production order for the delivery of prototypes of a complete CCA for use in a GPS communications receiver, which was received in fiscal year 2007, has been completed and field tests were positive. The design of the second phase of this program has also finished and pre-production is scheduled for completion in the first quarter of fiscal 2009. During the quarter we secured the first release of a complete GPS receiver build as well as an order for a very small form factor GPS receiver for radio applications for delivery in fiscal 2009 and beyond. We will continue our efforts to create CCA manufacturing partnerships with additional customers.

	•		Next generation Anti-Tamper (“AT”) technology.Update:The new coating process has passed the required qualification procedures and is expected to become part of the production process in the first or second quarter of fiscal 2009. Meanwhile, we continue to secure AT based production orders using our existing technology.

	•		Next generation display enhancement technology, Max-Vu™ II technology.Update:During the quarter we began pilot production and process validation with a high volume customer. Due to a lower cost structure, we believe we will be able to penetrate markets not previously served by our Max-Vu™ I process. We estimate that the new Max-Vu™ II process will be part of the production process by the first quarter of fiscal year 2009. While we continue to work with new customers to expand promotion of this technology into new industries requiring optically bonded displays, the softness in the marketplace may delay new opportunities.

	•		Fully integrated Touch Panel display products.Update:We continue to demonstrate sunlight readable (“SR”) display systems with integrated touch sensors to customers. We have developed SR touch prototypes for several leading PC manufacturers and have qualified a sensor-bonded LCD for one of these manufacturers. These displays have very low reflectance while retaining excellent brightness, enabling their use in very high brightness environments. By utilizing our Max-Vu™ optical bonding process, the clarity and contrast of these display systems are excellent and the stiffness and strength of the display system are substantially enhanced, increasing the ruggedness of the display and the quality of the touch or pen feel when using the touch sensor. We anticipate future orders from these demonstrations, samples and prototypes. However, the softness in the marketplace may delay new opportunities.

	•		Continue the stock repurchase program.Update:In April 2008, we announced our third repurchase program to acquire up to an additional 10%, or approximately 2.2 million shares, of the Company’s outstanding common stock. The duration of the program is twenty-four months and will be funded from available working capital. The timing and amount of any purchases under this program will depend on market conditions and corporate and regulatory considerations. During the quarter we purchased 13,179 shares at an average price of $4.73 per share.

	•		Pursuing strategic alternatives.Update:We believe our current decision to dispose of our IED and commercial microelectronics product lines will increase shareholder value. We will continue to evaluate various strategic alternatives to further increase shareholder value. This includes mergers and/or acquisitions that we believe could expand and augment our existing businesses, and other related activities.

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 small portion of our products are 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, as well as management’s judgments regarding the fair values of the elements used to determine relative fair values.

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 such inventories to the lower of cost or market. 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. These estimates are 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, “Goodwill and Other Intangible Assets” (“SFAS 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 142 requires amortization of purchased intangible assets other than goodwill 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. We also regularly evaluate intangible assets for impairment pursuant to SFAS No. 144,Accounting for the Impairment of Long-Lived Assets to be Disposed Of.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with Statement of Accounting Standards (“SFAS”) No. 123(R) (“SFAS 123(R)”), which requires that we 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. Consequently, expected stock price volatility and option life assumptions are considered critical accounting estimates.

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.

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), which became effective for the Company on September 30, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is 50 percent likely of being realized upon ultimate settlement.

Results of Operations

The following table sets forth certain financial data expressed as a percentage of net sales:


	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		63.1	%		65.1	%		65.1	%		65.1	%

Gross profit		36.9	%		34.9	%		34.9	%		34.9	%

Operating expenses:
Selling, general and administrative		22.9	%		19.6	%		22.5	%		22.6	%
Research and development		7.8	%		5.4	%		7.3	%		6.5	%
Goodwill impairment		18.0	%		—			6.1	%		—

Total operating expenses		48.7	%		25.0	%		35.9	%		29.1	%

Operating income (loss)		(11.8	%)		9.9	%		(1.0	%)		5.8	%
Interest income		1.2	%		2.7	%		2.2	%		3.4	%

Income (loss) from continuing operations
before income taxes		(10.6	%)		12.6	%		1.2	%		9.2	%
(Provision for) benefit from income taxes		3.1	%		(4.3	%)		(0.3	%)		(2.9	%)

Income (loss) from continuing operations		(7.5	%)		8.3	%		0.9	%		6.3	%


Discontinued operations
Income (loss) from discontinued operations, net of tax		1.1	%		(1.8	%)		(1.4	%)		(1.4	%)
Loss on sale of discontinued operations, net of tax		(3.9	%)		—			(5.3	%)		—

Loss from discontinued operations		(2.8	%)		(1.8	%)		(6.7	%)		(1.4	%)

Net income (loss)		(10.3	%)		6.5	%		(5.8	%)		4.9	%

Three Months ended June 28, 2008 compared to the Three Months ended June 30, 2007

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
	June 28,			June 30,
	2008			2007
Microelectronic Segment
Military/Industrial market	$	13,704		$	12,625

		13,704			12,625


Display Segment
Military/Industrial market		2,774			2,848
Commercial market		3,170			5,991

		5,944			8,839


Total	$	19,648		$	21,464


Microelectronic Segment
Military/Industrial market		70	%		59	%

		70	%		59	%


Display Segment
Military/Industrial market		14	%		13	%
Commercial market		16	%		28	%

		30	%		41	%


Total		100	%		100	%

Net sales were $19.6 million for the three months ended June 28, 2008, a decrease of $1.9 million, or 9%, from $21.5 million for the three months ended June 30, 2007.

Military/industrial sales in the microelectronic segment were $13.7 million for the three months ended June 28, 2008, an increase of $1.1 million, or 9%, from $12.6 million for the three months ended June 30, 2007. The increase is primarily due to the shipment of orders received in recent quarters. We expect fiscal 2008 military/industrial sales in the microelectronic segment to increase over fiscal 2007.

Military/industrial sales in the display segment were $2.8 million for the three months ended June 28, 2008, consistent with the $2.8 million for the three months ended June 30, 2007. We expect fiscal 2008 military/industrial sales in the display segment to decrease over fiscal 2007.

Commercial sales in the display segment were $3.2 million for the three months ended June 28, 2008, a decrease of $2.8 million, or 47%, from $6.0 million for the three months ended June 30, 2007. Sales of our displays in support of convertible PCs decreased due to the end of life of one program and the customer delaying the next generation of product as it uses up its excess inventory. Additionally, sales to a medical customer for whom we supplied displays decreased as a result of the program winding down. We expect fiscal 2008 commercial sales in the display segment to significantly decrease from fiscal 2007 as the slowing economy affects these markets.

During the three months ended June 28, 2008, L3 Communications Corporation (“L-3 Communications”) and Arrow Electronics, Inc. (“Arrow Electronics”) accounted for $2.4 million and $2.0 million, or 12% and 10%, respectively, of total net sales. Within the microelectronic segment, L-3 Communications, Arrow Electronics and Raytheon Company accounted for $2.4 million, $1.8 million and $1.4 million, or 17%, 13% and 10%, respectively, of net sales. Within the display segment, Hewlett Packard International, Pte. Ltd. (“Hewlett Packard”), Honeywell

International, Inc. (“Honeywell”) and Motion Computing, Inc. (“Motion Computing”) accounted for $0.6 million, $0.6 million and $0.6 million, or 10%, 10% and 10%, respectively, of net sales.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, military sales have historically been strongest during our fiscal fourth quarter.

Gross Profit

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


	Three Months Ended
	June 28,			June 30,
	2008			2007
Microelectronic Segment
Military/Industrial market		44	%		43	%

Microelectronic Segment Total		44	%		43	%

Display Segment
Military/Industrial market		44	%		43	%
Commercial market		(1	%)		14	%

Display Segment Total		20	%		23	%

Company Total		37	%		35	%

Gross profit was $7.2 million for the three months ended June 28, 2008, a decrease of $0.3 million, or 4%, from $7.5 million for the three months ended June 30, 2007. The decrease in gross profit was primarily the result of lower sales more than offsetting the increase in gross margin. For the three months ended June 28, 2008, gross margin as a percentage of total net sales was 37%, compared to 35% for the three months ended June 30, 2007.

Gross profit for the microelectronic segment was $6.1 million for the three months ended June 28, 2008, an increase of $0.6 million, or 11%, from $5.5 million for the three months ended June 30, 2007. The increase in gross profit was primarily the result of increased sales and a slightly higher margin product mix. Gross margin as a percentage of microelectronic segment net sales was 44% for the three months ended June 28, 2008, compared to 43% for the three months ended June 30, 2007.

Gross profit for the display segment was $1.2 million for the three months ended June 28, 2008, a decrease of $0.8 million, or 40%, from $2.0 million for the three months ended June 30, 2007. Gross margin as a percentage of display segment net sales was 20% for the three months ended June 28, 2008, compared to 23% for the three months ended June 30, 2007. Military/industrial gross profit in the display segment remained consistent at $1.2 million. Commercial gross profit in the display segment decreased $0.8 million due to the lower sales volume resulting in lower absorption of overhead as well as an increase in inventory reserve due to the shutdown of one of our customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense, selling expenses, including commissions, information technology expenses and corporate administrative expenses. Selling, general and

administrative expenses were $4.5 million for the three months ended June 28, 2008, an increase of $0.3 million, or 7%, from $4.2 million for the three months ended June 30, 2007. The increase was the result of an increase in selling expenses of $0.1 million and an increase in general and administrative expenses of $0.2 million. Selling expenses increased primarily due to severance costs related to a reduction in force in our display segment offset by a decrease in sales commissions. General and administrative expenses increased primarily due to higher stock-based compensation expense and higher accounting and tax fees, which more than offset lower legal fees.

Selling, general and administrative expenses as a percentage of net sales increased to 23% for the three months ended June 28, 2008 from 20% for the three months ended June 30, 2007 primarily due to higher expenses and lower sales. We expect selling, general and administrative expenses to average 20% to 22% 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 $1.5 million for the three months ended June 28, 2008, an increase of $0.3 million, or 25%, from $1.2 million for the three months ended June 30, 2007, primarily due to an increase in product development costs. We are committed to the research and development of new and existing products. Historically, research and development expenses have averaged 6% to 7% of net sales.

Ongoing product development projects for the microelectronic segment include new packaging designs for various types of memory products including DRAM, DDR II and the latest DDR III memory modules, mobile SDRAM ball grid array modules, flash and microprocessors, along with microprocessor modules and ball grid array packaging products using these semiconductors; development of secure compact flash, solid-state disks (“SSD”) with secure data scrubbing and thermal management in embedded systems; 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, high volume glass lamination for tablet PCs, and our new Max-Vu™ II process technology for tablet personal computers, next generation touch screen tablet PCs and display systems development. We are also working to develop our family of standard enhanced displays from our over twenty years of experience in developing rugged and optically enhanced AMLCD systems. These products are being derived from our many custom display engagements. Our design focus methodology when developing products is to, first and foremost, satisfy our customer’s requirements and then concentrate on retaining the original display manufacturer’s mechanical package dimensions. This allows the enhanced display to drop in the same socket as the original factory product.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in money market accounts. Interest income was $0.2 million for three months ended June 28, 2008, a decrease of $0.4 million, or 67%, from $0.6 million for the three months ended June 30, 2007. The decrease is due to a lower average invested balance and lower interest rates.

Income Taxes

We recorded an income tax benefit of $0.6 million for the three months ended June 28, 2008, compared to income tax expense of $0.9 million for the three months ended June 30, 2007. The Company’s effective tax rate was 29% for the three months ended June 28, 2008 and 34% for the three months ended June 30, 2007. The Company’s effective tax rate differs from the federal statutory tax rate of 34% due to the incremental impact of state income taxes offset by reductions for the manufacturers’ deduction and research and experimentation tax credits currently available for federal and state income tax purposes.

The decrease in the effective rate for the third quarter of fiscal 2008 when compared to the third quarter of 2007 is primarily due to the release of tax reserves due to the passage of the statute of limitations on certain tax years.

Discontinued Operations

As a result of our decision to dispose of the IED and commercial microelectronics product lines, we have accounted for these operations as discontinued operations. All prior periods have been reclassified to conform to the current period presentation.

Loss from discontinued operations consists of direct revenues and direct expenses of the commercial microelectronics and IED product lines. Commercial microelectronics has historically been reported in the microelectronic segment, while IED has been included in the display segment. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results included in discontinued operations in the accompanying condensed consolidated statements of operations is as follows:


	Three Months Ended
	June 28,			June 30,
	2008			2007
Commercial Microelectronics:
Net sales	$	2,368		$	4,029
Cost of sales		2,392			3,478

Gross profit		(24	)		551

Total operating expenses		135			1,103


Loss from operations before income taxes		(159	)		(552	)
Benefit from income taxes		100			234


Loss from discontinued operations		(59	)		(318	)
Loss on sale of discontinued operations, net of tax		(109	)		—


Net loss	$	(168	)	$	(318	)


IED:
Net sales	$	2,052		$	2,972
Cost of sales		1,815			2,533

Gross profit		237			439

Total operating expenses		301			555


Loss from operations before income taxes		(64	)		(116	)
Benefit from income taxes		347			49


Income (loss) from discontinued operations		283			(67	)
Loss on sale of discontinued operations, net of tax		(677	)		—


Net loss	$	(394	)	$	(67	)


Total loss from discontinued operations, net of tax	$	(562	)	$	(385	)

The total loss from discontinued operations, net of tax, for the three months ended June 28, 2008 was $0.6 million compared to a loss of $0.4 million for the three months ended June 30, 2007. Of the fiscal 2008 loss, $0.8 million, net of tax, was due to our revised estimates of the loss to be incurred on the sale of these operations and the resulting write-down of property, plant and equipment and inventory to lower of cost or market.

Commercial microelectronics product line’s loss from discontinued operations of $0.1 million for the three months ended June 28, 2008 compared to the loss of $0.3 million for the three months ended June 30, 2007 was primarily due to the decrease in operating expenses more than offsetting the decrease in net sales and gross profit and decrease in benefit from income taxes. Sales were impacted by the decreased demand as customers are finding alternate suppliers and new orders are not being taken and gross profit decreased due to lower volume and declining product margins. Operating expenses decreased primarily due to reduced headcount as a result of the reductions in work force in September 2007 and the third quarter of fiscal 2008 and reduced operations.

IED product line’s income from discontinued operations of $0.3 million for the three months ended June 28, 2008 compared to a loss from discontinued operations of $0.1 million for the three months ended June 30, 2007 was primarily due to the decrease in operating expenses and increase in the benefit from income taxes which more than offset the decrease in net sales and gross profit. The softening of the economy continued to decrease demand from our appliance customers and sales to one of our medical customers has slowed as their new owner is completing the integration of the acquisition. Gross profit was negatively affected by low volume variances due to the lower sales volume. Operating expenses decreased due to lower headcount and reduced commissions due to lower sales.

Nine Months ended June 28, 2008 compared to Nine Months ended June 30, 2007

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
	June 28,			June 30,
	2008			2007
Microelectronic Segment
Military/Industrial Market	$	37,935		$	32,843

		37,935			32,843


Display Segment
Military/Industrial Market		7,832			8,062
Commercial Market		12,420			15,225

		20,252			23,287


Total	$	58,187		$	56,130


Microelectronic Segment
Military/Industrial Market		65	%		59	%

		65	%		59	%


Display Segment
Military/Industrial Market		14	%		14	%
Commercial Market		21	%		27	%

		35	%		41	%

Total		100	%		100	%

Net sales were $58.2 million for the nine months ended June 28, 2008, an increase of $2.1 million, or 4%, from $56.1 million for the nine months ended June 30, 2007.

Military/industrial sales in the microelectronic segment were $37.9 million for the nine months ended June 28, 2008, an increase of $5.1 million, or 16%, from $32.8 million for the nine months ended June 30, 2007. The increase in sales is primarily due to the shipment of backlog due to orders received in recent quarters. We expect fiscal 2008 sales to increase over fiscal 2007.

Military/industrial sales in the display segment were $7.8 million for the nine months ended June 28, 2008, a decrease of $0.3 million, or 4%, from $8.1 million for the nine months ended June 30, 2007. The decrease was primarily due to the timing of orders and customer demands. We expect fiscal 2008 military/industrial sales in the display segment to decrease over fiscal 2007.

Commercial sales in the display segment were $12.4 million for the nine months ended June 28, 2008, a decrease of $2.8 million, or 18%, from $15.2 million for the nine months ended June 30, 2007. The decrease was primarily due to the end of life of one program and the customer delaying the next generation as it uses up its excess inventory. Additionally, sales to a medical customer for whom we supplied displays decreased as a result of the program winding down. We expect fiscal 2008 sales to significantly decrease from fiscal 2007 as the slowing economy affects these markets.

and $4.3 million, or 15% and 11%, respectively, of net sales. Within the display segment, Motion Computing, Hewlett Packard and Honeywell accounted for $3.5 million, $2.6 million and $2.0 million, or 17%, 13% and 10%, respectively, of net sales.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, military sales have historically been strongest during our fiscal fourth quarter.

Gross Profit

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


	Nine Months Ended
	June 28,			June 30,
	2008			2007
Microelectronic Segment
Military/Industrial Market		42	%		43	%

Microelectronic Segment Total		42	%		43	%

Display Segment
Military/Industrial Market		38	%		41	%
Commercial Market		11	%		14	%

Display Segment Total		22	%		23	%

Company Total		35	%		35	%

Gross profit was $20.3 million for the nine months ended June 28, 2008, an increase of $0.7 million, or 4%, from $19.6 million for the nine months ended June 30, 2007. For the nine months ended June 28, 2008, gross margin as a percentage of net sales was 35%, consistent with the 35% for the nine months ended June 30, 2007.

Gross profit for the microelectronic segment was $16.0 million for the nine months ended June 28, 2008, an increase of $1.8 million, or 13%, from $14.2 million for the nine months ended June 30, 2007. The increase in microelectronic segment gross profit was the result of higher sales volume partially offset by a slightly lower margin product mix. Gross margin as a percentage of microelectronic net sales was 42% for the nine months ended June 28, 2008, compared to 43% for the nine months ended June 30, 2007.

Gross profit for the display segment was $4.4 million for the nine months ended June 28, 2008, a decrease of $0.9 million, or 17%, from $5.3 million for the nine months ended June 30, 2007. This decrease in gross profit was the result of a decrease in the military/industrial products of $0.3 million and a decrease in the commercial products of $0.6 million. Gross margin as a percentage of display segment net sales was 22% for the nine months ended June 28, 2008, compared to 23% for the nine months ended June 30, 2007. The decrease in gross profit for the military/industrial market is the result of lower sales volume and reduced efficiencies as production slowed at our Ft. Wayne facility. The decrease in gross profit for the commercial market is the result of lower sales volume resulting in lower absorption of overhead as well as an increase in inventory reserve due to the shutdown of one of our customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense, selling expenses (including commissions), information technology expenses and corporate administrative expenses. Selling, general and

administrative expenses were $13.1 million for the nine months ended June 28, 2008, an increase of $0.4 million, or 3%, from $12.7 million for the nine months ended June 30, 2007. The increase in selling expenses of $0.3 million was primarily due to an increase in advertising and promotion expenses and the severance costs related to a reduction in force in our display segment. The increase in general and administrative expenses of $0.1 million was primarily due to an increase in stock-based compensation expense and higher accounting and tax fees, which was partially offset by lower legal fees.

Selling, general and administrative expenses as a percentage of net sales were 23% for the nine months ended June 28, 2008, consistent with the 23% for the nine months ended June 30, 2007. Due to the continued compliance requirements related to the Sarbanes-Oxley Act, the expense related to the adoption of SFAS 123(R) and our expanded sales force, we expect selling, general and administrative expenses to average 20% to 22% 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 $4.2 million for the nine months ended June 28, 2008, an increase of $0.5 million, or 14%, from $3.7 million for the nine months ended June 30, 2007. The increase is primarily attributable to additional headcount to support our display segment initiatives prior to the reduction in force at the end of the third quarter of fiscal 2008 and increased product development costs. We are committed to the research and development of new and existing products. Historically, research and development expenses have averaged 6% to 7% of net sales.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in money market accounts. Interest income was $1.3 million for the nine months ended June 28, 2008, a decrease of $0.6 million, or 32%, from $1.9 million for the nine months ended June 30, 2007. This decrease is attributable to the decrease in invested balances between periods, primarily as a result of the reinvestment of cash flows from operations, and lower interest rates.

Income Taxes

We recorded income tax expense of $0.2 million for the nine months ended June 28, 2008 compared to income tax expense of $1.6 million for the nine months ended June 30, 2007. The Company’s effective tax rate was approximately 27% for the nine months ended June 28, 2008 and 31% for the nine months ended June 30, 2007. The Company’s effective tax rate differs from the federal statutory tax rate of 34% due to the incremental impact of state income taxes offset by reductions for foreign sales exclusions, the manufacturer’s deduction and research and experimentation tax credits currently available for federal income tax purposes.

The decrease in the effective rate for the first nine months of fiscal 2008 when compared to the first nine months of fiscal 2007 is primarily due to the true-up of our reserves in the first quarter of fiscal 2008, the release of tax reserves due to the passage of the statute of limitations on certain tax years and an increase in the manufacturer’s deduction offset by a decrease in the research and development credit. Due to the provisions of SFAS No. 109, we recorded a benefit in the first quarter of fiscal 2007 of $150,000 for the reinstatement of the research and development credit back to January 1, 2006. The research and development credit expired December 31, 2005. Congress passed a bill in December 2006 reinstating the credit back to January 1, 2006. Additionally, the federal research and development credit again expired December 31, 2007 and has not been reinstated. Accordingly, in our fiscal 2008 provision only one quarter of our expected annual credit has been included. We expect our effective tax rate to be approximately 58% for fiscal 2008 due to the nondeductible write-down of goodwill in the third quarter.

Discontinued Operations

Loss from discontinued operations consists of direct revenues and direct expenses of commercial microelectronics and IED product lines. The commercial microelectronics has historically been reported in the microelectronic segment, while IED has been included in the display segment. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results included in discontinued operations in the accompanying condensed consolidated statements of operations is as follows:


	Nine Months Ended
	June 28,			June 30,
	2008			2007
Commercial Microelectronics:
Net sales	$	8,824		$	13,710
Cost of sales		7,888			11,385

Gross profit		936			2,325

Total operating expenses		1,259			3,467


Loss from operations before income taxes		(323	)		(1,142	)
Benefit from income taxes		89			486


Loss from discontinued operations		(234	)		(656	)
Loss on sale of discontinued operations, net of tax		(1,041	)		—


Net loss	$	(1,275	)	$	(656	)


IED:
Net sales	$	6,672		$	7,878
Cost of sales		6,249			6,552

Gross profit		423			1,326

Total operating expenses		1,257			1,573


Loss from operations before income taxes		(834	)		(247	)
Benefit from income taxes		228			119


Loss from discontinued operations		(606	)		(128	)
Loss on sale of discontinued operations, net of tax		(1,978	)		—


Net loss	$	(2,584	)	$	(128	)


Total loss from discontinued operations, net of tax	$	(3,859	)	$	(784	)

The total loss from discontinued operations, net of tax, for the nine months ended June 28, 2008 was $3.9 million compared to a loss of $0.8 million for the nine months ended June 30, 2007. Of the fiscal 2008 loss, $3.0 million, net of tax, was due to our estimates of the loss to be incurred on the sale of these operations and the resulting charge for the impairment of the customer relationships and existing technology intangible assets, as well as the write-downs of inventory and property, plant and equipment to lower of cost or market.

The commercial microelectronics product line’s loss from discontinued operations was $0.2 million for the nine months ended June 28, 2008, $0.5 million less than the $0.7 million loss for the same period in fiscal 2007. The increase was primarily due to the decrease in operating expenses more than offsetting the decrease in net sales and gross profit and decrease in the benefit from income taxes. Sales were impacted by the decreased demand as customers are finding alternate suppliers and new orders are not being taken and gross profit decreased due to lower volume and declining product margins. Operating expenses decreased primarily due to reduced headcount as a result of the reductions in work force in September 2007 and the third quarter of fiscal 2007 and reduced operations.

IED product line’s loss from discontinued operations was $0.6 million for the nine months ended June 28, 2008, $0.5 million more than the $0.1 million loss for the same period in fiscal 2007. The decline was primarily due to the decrease in sales and gross profit which more than offset the decrease in operating expenses and increase in benefit from income taxes. The softening of the economy continued to decrease demand from our appliance customers and sales to one of our medical customers has slowed as their new owner is completing the integration of the acquisition. Gross profit was negatively affected by unfavorable production efficiencies as well as lower absorbed overhead due to the lower sales volume. Operating expenses decreased due to lower headcount and reduced commissions due to lower sales.

Liquidity and Capital Resources

Cash and cash equivalents as of June 28, 2008 totaled $49.8 million. During the nine months ended June 28, 2008, $4.9 million was provided by operating activities compared to cash provided by operating activities of $2.2 million in the prior year period. The increase is primarily the result of the goodwill impairment and other non-cash charges, as well as decreases in inventory and accounts receivable, which more than offset the increase in prepaid expenses and other current assets and a decrease in accounts payable. Depreciation totaled $2.3 million for the current year compared to $2.2 million for the prior year period. We expect depreciation to remain consistent over the next few quarters.

Purchases of property, plant and equipment during the nine months ended June 28, 2008 totaled $2.6 million, with $0.1 million remaining in accounts payable at quarter-end. The microelectronic segment accounted for $2.3 million of the purchases, while the display segment accounted for $0.3 million.

Accounts receivable decreased $1.1 million from the end of fiscal year 2007. Days sales outstanding at June 28, 2008 were 57 days, lower than the 63 days at September 29, 2007. Our days sales outstanding typically approximates 62 days.

Inventories decreased $2.0 million from the end of fiscal 2007. Inventory of $20.9 million as of June 28, 2008 represented 151 days of inventory on hand, less than the 169 days on hand at September 29, 2007. The levels of inventory fluctuate based on changes in expected production requirements, the fulfillment of orders and availability of raw materials. 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 and to hold it for longer periods of time. This trend may increase 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 and other current assets increased $2.4 million from the end of fiscal 2007. This increase was primarily due to prepayment of income taxes and insurance.

Accounts payable decreased $2.0 million from the end of fiscal 2007, primarily due to the timing of cash disbursements.

Deferred revenue at June 28, 2008 was $5.1 million, an increase of $0.4 million, from $4.7 million at the end of fiscal 2007, primarily due to the purchase of inventory for a customer.

Accrued salaries and benefits were $0.4 million higher at June 28, 2008 compared to the end of fiscal 2007 primarily due to an additional week of accrued payroll. Other accrued expenses were $0.6 million lower at June 28, 2008 compared to the end of fiscal 2007 primarily due to lower income taxes payable.

On June 19, 2006, our Board of Directors authorized a stock repurchase program pursuant to which up to 5%, or 1,231,108 shares, of our outstanding common stock could be repurchased from time to time. On December 30, 2006, we completed the program as we had purchased all 1,231,108 shares of our common stock authorized for repurchase under the program for a total cost of $6.4 million, inclusive of commissions and fees. On February 3, 2007, the Board of Directors authorized the repurchase of up to an additional 5%, or 1,175,642 shares, of our outstanding common stock. On December 28, 2007, we had repurchased all 1,175,642 shares authorized under the second program for a total cost of $6.1 million, inclusive of commissions and fees. All repurchases were funded from our cash balances and operating cash flows.

On April 8, 2008, we announced our third repurchase program to acquire up to an additional 10%, or approximately 2.2 million shares, of our outstanding common stock. The timing and amount of any repurchases under the program will depend on market conditions and corporate and regulatory considerations. During the quarter ended June 28, 2008, we repurchased 13,179 shares for a total cost of $0.1 million, inclusive of commissions and fees. The duration of the program is twenty-four months and any purchases will be funded from our cash balances and operating cash flows.

On April 3, 2007, the Company entered into a $30.0 million revolving line of credit agreement with JPMorgan Chase Bank, N.A. Borrowings, if any, under the revolving line of credit bear interest at the lower of the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the JPMorgan Chase Bank, N.A. “prime rate.” A commitment fee of 0.125% is charged on the unused portion of the line. The line expires on March 31, 2009. We are in compliance with all debt covenant requirements contained in our revolving line of credit agreement. As of June 28, 2008, there were no borrowings against the revolving line of credit, and we have not borrowed against any credit facility 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 expected cash requirements for at least the next twelve months.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Contractual Obligations

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


	Payments Due by Period as of June 28, 2008
			Less than		1-3		3-5		More than
	Total		1 Year		Years		Years		5 Years
Operating leases	$	7,462	$	1,534	$	2,111	$	1,826	$	1,991
Pension funding (1)		—		—		—		—		—

Total Contractual Obligations	$	7,462	$	1,534	$	2,111	$	1,826	$	1,991


(1)		We are committed to meeting the annual minimum funding requirements relating to our pension plan, which covers 29 active employees at our Fort Wayne facility. We contributed $0.1 million to the pension plan in the first nine months of fiscal 2008. We do not expect minimum funding requirements to be material. We may also make contributions to the pension plan in excess of the minimum funding requirements during any year. We do not anticipate making any additional contributions to the pension plan in fiscal 2008.

Contingencies

See Part II. Item 1. “Legal Proceedings” for an update on our current contingencies.

Recently Enacted Accounting Pronouncements

See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements”, Note 13. “Recent Accounting Pronouncements” for an update on recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that we are not generally 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.

We may, in the future, be subject to interest rate risk as a result of our revolving line of credit. In this regard, we may be specifically subject to changes in the “prime rate” based on Federal Reserve actions and fluctuations in the LIBOR. As of June 28, 2008, we had no borrowings on our revolving line of credit with JPMorgan Chase Bank, N.A. In the event we borrow against our revolving line of credit, the interest charged on these borrowings would be at the lower of the bank’s “prime rate” or the LIBOR plus 1.5%. During the three months ended June 28, 2008, the bank’s “prime rate” averaged 5.09% and was 5.00% as of June 28, 2008. From September 29, 2007 to June 28, 2008, the banks “prime rate” decreased 2.75%. As of June 28, 2008, the LIBOR was 3.42%. In the event we begin borrowing against our revolving line of credit, quarterly interest expense (at 4.92%) would be $12,300 for every $1.0 million borrowed. A hypothetical interest rate increase of 1% would increase interest expense by $2,500 per $1.0 million borrowed on a quarterly basis. We believe that moderate interest rate increases would not have a material adverse impact on our consolidated results of operations or financial position.

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 evaluation process.

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 management, including our CEO and CFO, concluded that as of June 28, 2008 our disclosure controls and procedures were effective in ensuring that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management, including our CEO and CFO, has also concluded that our disclosure controls are designed to ensure such information is accumulated and communicated to our management, including our 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 significant 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.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

We refer you to “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K for the year ending September 29, 2007, which identifies important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the sub-section entitled “Note Regarding Forward-Looking Statements and Associated Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) of this quarterly report on Form 10-Q. MD&A and the consolidated financial statements and related notes should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Form 10-K and herein are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Below we set forth material updates to the risk factors contained in “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K:

Our goodwill and intangible assets have been impaired and may become impaired in the future.

We have goodwill and intangible assets resulting from our acquisitions, specifically Panelview and IDS. At least annually, we evaluate the 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. For instance, in the third quarter of fiscal 2008, we recorded an impairment of goodwill to our display reporting unit in Oregon. (See Note 6 of the Notes to the Consolidated Financial Statements for additional information.)

We also regularly evaluate intangible assets for impairment. In the second quarter of fiscal 2008, we recorded an impairment of our intangible assets related to customer relationships and existing technology recorded in 2003 as part of the Phoenix and Columbus-based IDS reporting units. This was in connection with our decision to discontinue these two product lines. In addition to any material adverse effects those impairments could have on our financial condition or results of operations, these material impairments may adversely affect, among other things, the trading price of our common stock. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.

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 35% of our net sales during the first nine months of fiscal 2008 and 25% of our net sales in fiscal 2007. 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, which could adversely affect our financial condition and results of operations. In addition, any difficulty in collecting amounts due from one or more key customers would negatively impact our results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Purchases under the program during the third quarter of fiscal 2008 were as follows:


					Total Number		Maximum
					of Shares		Number of
					Purchased as		Shares that
					Part of		May Yet Be
	Total Number		Average		Publicly		Purchased
	of Shares		Price Paid per		Announced		Under the
Period	Purchased		Share		Program		Program
March 30, 2008 - April 26, 2008		—	$	—		—		2,244,696
April 27, 2008 - May 24, 2008		13,179	$	4.73		13,179		2,231,517
May 25, 2008 - June 28, 2008		—	$	—		—		2,231,517


Total		13,179	$	4.73		13,179

ITEM 5. OTHER INFORMATION

Goodwill Impairment

Revolving Line of Credit Agreement

On August 5, 2008, we entered into the Second Modification Agreement to our Revolving Line of Credit Agreement with JPMorgan Chase Bank, N.A. (the “Amendment to the Credit Agreement”). Taking into account the Amendment to the Credit Agreement, we are in compliance with all debt covenant requirements contained in our revolving line of credit agreement. As of June 28, 2008, there were no borrowings against the revolving line of credit, and we have not borrowed against any credit facility since April 2003. The primary purpose of the Amendment to the Credit Agreement was to amend the definition of “Net Income,” which is used in one of our financial covenants, to provide that the impact of any extraordinary non-cash gains or losses, determined in accordance with GAAP and any non-cash goodwill impairments or non-cash gains or losses on sale of discontinued operations are excluded from the determination of “Net Income.”

ITEM 6. EXHIBITS


Exhibits

3.1		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 dated December 5, 2007 (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed December 7, 2007).

10.1*		Second Modification Agreement to Revolving Line of Credit Agreement with JPMorgan Chase Bank, N.A., dated August 5, 2008.

31.1*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith.

**		Furnished herewith.

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. Shokrgozar Hamid R. Shokrgozar
		President and Chief Executive Officer

		Date: August 7, 2008

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

		Date: August 7, 2008

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White Electronic Designs Inactive 10-Q2008 Q3 Quarterly report

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