Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4817

WHITE ELECTRONIC DESIGNS CORPORATION

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    x      No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K.[x]

     As of December 9, 2002, the aggregate market value of the Registrant’s Common Stock held by non-affiliates (based upon the closing price of the shares on the NASDAQ National Market on December 9, 2002) was approximately $166,390,000.

     On December 9, 2002, 20,119,432 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement prepared in connection with the 2003 Annual Meeting of Shareholders are incorporated by reference into PART III, Items 10, 11, 12 and 13 of this Annual Report.

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1 BUSINESS

GENERAL

White Electronic Designs Corporation is an Indiana corporation organized in 1951. On October 26, 1998, Bowmar Instrument Corporation (“Bowmar”) merged with Electronic Designs, Inc. (“EDI”). In connection with the merger, Bowmar changed its name to White Electronic Designs Corporation (the “Company”).

On January 29, 2001 the Company completed the acquisition by merger of Panelview, Inc., (“Panelview”), a manufacturer of display products located in Oregon. Panelview provides optical enhancements to display products sold to the transportation, medical and instrumentation markets. The operations of this subsidiary are included in the financial statements of White Electronic Designs Corporation from the date of the merger.

The Panelview acquisition was treated as a purchase for financial reporting purposes based on the following data.

The Company will adopt SFAS 142 in fiscal 2003, which will stop the amortization of the remaining goodwill. Instead, the remaining goodwill amount will be tested at least annually for impairment, and any adjustments to the carrying value of the goodwill will be taken as needed.

BUSINESS SEGMENTS AND CORPORATE ADDRESS

The Company has two business segments. Each of the two business segments requires different design and manufacturing resources and serves customers in different markets. The microelectronic business segment, which accounted for approximately 56% of total Company sales in fiscal 2002, manufactures high-density semiconductor memory and microprocessor products for use in telecommunications, data communications and defense industries. The display business segment, which accounted for approximately 44% of total Company sales in fiscal 2002, manufactures ruggedized liquid crystal displays, and enhanced viewing displays for customers in a variety of industries. The Company’s executive offices are located at 3601 E. University Drive, Phoenix, Arizona 85034, (602) 437-1520.

MICROELECTRONIC BUSINESS SEGMENT

Financial information for the microelectronic segment is disclosed in Note 16 of Notes to the Consolidated Financial Statements.

The microelectronic business segment manufactures a wide range of high-density semiconductors memory and microprocessor products for customers in the telecommunications, data communications, and defense industries. Microelectronic segment product sales generally fall into two product categories: high-reliability and commercial.

High-reliability products use various types of semiconductor components such as SRAM, EEPROM, SDRAM, Flash, and microprocessor chips combined in ceramic packages and laminated substrates to produce a high-density multichip or single chip monolithic product for use in adverse environmental conditions. Multichip packaging is a technique that places several semiconductor chips into a compact package. A monolithic product does the same

3

Table of Contents

using only one semiconductor chip. The Company’s high-reliability products are sold to both foreign and domestic government defense contractors and are used in military equipment such as aircraft, missiles, communications equipment, and other equipment where computerized electronics are required. High-reliability products are usually purchased by customers in the military defense industries for use in harsh environments, and we sometimes use the word “military” to describe our high-reliability products because they are built to meet certain United States military standards.

Commercial products use various types of semiconductor memory components such as SRAM, DRAM, and Flash chips combined on a substrate to produce a high-density memory module, or PCMCIA memory card. Commercial products are not designed for harsh environmental conditions. Our commercial products are used primarily in the telecommunications and data communications markets such as digital signal processing platforms, wireless base stations, broadband devices, modem pools, local area network backbone switches, wide area network backbone switches, network bridges, routers, servers, and hubs. Other uses include embedded systems, handheld processors, test and diagnostic equipment, portable scanners, and diskless network computers and workstations. Defense industry customers may occasionally purchase commercial products if they do not have harsh environmental requirements for the product.

The products designed, manufactured, and sold by the Company in its microelectronic segment are sold to original equipment manufacturers in the United States, Europe and Asia through the Company’s sales personnel and independent sales representatives and distributors. The Company’s microelectronic segment business is not seasonal. The Company does not provide extended payment terms to its customers. Products in the microelectronic segment are sold under a standard one-year warranty and may be subject to repair or replacement during the warranty period.

The backlog for microelectronic products, represented by purchase orders from our customers, was approximately $23,897,000 and $27,849,000 at the end of fiscal years 2002 and 2001, respectively. This decrease was primarily caused by a general business slowdown in the telecommunications equipment industry. Approximately 85% of the segment’s fiscal 2001 backlog was shipped during fiscal 2002 with the remaining backlog shippable in 2003 or beyond. Approximately 78% of the fiscal 2002 year-end backlog is expected to be shipped during fiscal 2003 with the remaining backlog shippable in fiscal 2004 and beyond. The backlog after fiscal 2003 is a result of customer scheduling requirements for high-reliability products, not capacity restraints.

Microelectronic Segment Competition

The Company’s principal competitors in the commercial product market, Smart Module Technology, a subsidiary of Solectron Corp., and Simple Technology, Inc. are larger than the Company and have substantially greater financial, technical, marketing, distribution and other resources. Smart Module Technology manufactures a broad range of memory modules in high volume. In addition, the Company competes with a number of smaller companies and larger semiconductor companies whom are now in the market or may in the future enter the market. The Company competes in this market on the basis of many factors, including access to advanced semiconductor products at competitive prices, successful and timely product introduction, design capability, lead times, quality, product specification, pricing and customer service.

The Company’s main competitor in the high-reliability product market is the microelectronics division of Aeroflex Corporation. Aeroflex is a larger business organization than the Company and may have greater financial and other resources. The Company also competes against Austin Semiconductor, which is a subsidiary of PMC Global Inc., a large privately held conglomerate. Companies compete for this business on the basis of many factors, including cost and quality systems (which allow for compliance with U.S. and foreign military standards), longer term access to advanced semiconductor products in die and wafer form, successful and timely product introduction, inclusion of products on standard military drawings, design capabilities, lead times, product specification, pricing and customer service.

DISPLAY BUSINESS SEGMENT

Financial information for the display segment is disclosed in Note 16 of Notes to the Consolidated Financial Statements.

4

Table of Contents

The display business segment manufactures liquid crystal flat panel display products, which improve the operating characteristics of commercial display products. This segment also performs higher level integration and enhancements on existing displays, which account for a high percentage of Panelview business. The Company offers a wide range of design and manufacturing capabilities and can produce custom or standard displays. These enhanced displays offer significant advantages over commercially available displays, because they are sunlight readable and can be used in extreme operating temperatures. The Company also re-manufactures commercially available liquid crystal displays to meet custom packaging and environmental requirements. The Company’s displays are also complemented by keyboards, touch screens, backlights, and electronic interfaces to provide flat panel display solutions to our customers. Display segment product sales generally fall into two categories: ruggedized and commercial.

Ruggedized displays are manufactured to perform in harsh environmental conditions. The manufacturing process uses commercial displays that are customized by strengthening their construction to withstand shock and vibrations, adding films and laminated glass to provide sunlight readability and expanded viewing angles, and adding temperature control devices so the display will continue working under operating temperatures ranging from –35 to +85 degrees Celsius. The Company’s ruggedized products are primarily sold to the commercial avionics industry and are also used by domestic and foreign defense contractors for use in aircraft or ground vehicles.

Commercial display products offer greater viewing performance and operating characteristics than off-the-shelf commercially available displays but are not designed for the harsh environmental conditions that may occur in a ruggedized display environment. The higher level integration process uses off-the-shelf commercial displays that are enhanced by using films, filters, and laminated glass to provide sunlight readability, improved backlighting to increase the display’s brightness, and that add temperature control devices so the display will continue working under normal outdoor conditions. This process is normally a high volume, low margin component of the display segment business. The Company’s commercial products are sold to customers in the medical, global positioning systems, marine navigation, outdoor point-of-sale, and instrumentation industries.

The display segment also manufactures and sells electromechanical components and instrument packages consisting of ruggedized keyboards, aircraft trim panels, rotating devices, including gear heads, mechanical counters, dial drives, mechanical packages and related devices. Specific applications for these products include controls for automatically tuning airborne radio transmitters and receivers, controls for fuel flow in jet engines, and selected automatic flight control servomechanisms. These products are sold principally to defense contractors in the aerospace industry and aircraft instrument manufacturers as information displays in aerospace and ground equipment.

The display segment backlog was approximately $18,521,000 and $19,983,000 at the end of fiscal years 2002 and 2001, respectively. Approximately 72% of this segment’s 2001 backlog was shipped during fiscal 2002 while the remaining backlog is shippable in fiscal year 2003 and beyond. Approximately 83% of the fiscal 2002 year-end backlog is expected to be shipped during fiscal 2003 with the remaining backlog shippable in fiscal 2004 and beyond. The backlog after 2003 is a result of customer scheduling requirements for ruggedized products, not capacity restraints. There are no seasonality factors affecting the display business.

Display Segment Competition

The principal elements of competition among display suppliers are display performance (e.g., brightness, color capabilities, contrast and viewing angle), size and weight, design flexibility, power usage, durability, ruggedness and cost. While the primary competition for the AMLCD is currently cathode ray tube displays, the Company’s products compete with other flat panel displays including gas plasma and electro-luminescent displays. The Company believes that price, product reliability and the ability to meet delivery schedules are key competitive factors. The Company competes with numerous other companies in the display segment such as Planar and Polarvision, many of which have greater financial resources, larger technical and marketing resources, and in some instances more advanced technology products than those of the Company.

5

Table of Contents

PRINCIPAL CUSTOMERS

In fiscal 2002, two customers accounted for more than 10% of the Company’s sales. General Electric Medical Division accounted for 11.5% of total Company sales, and Garmin International accounted for 10.8% of total Company sales. Both customers are display segment customers. Comparatively, fiscal 2001 sales for General Electric Medical Division and Garmin International were 0.0% and 2.2%, respectively. The loss of either of these customers would have a material effect on the sales of the Company.

As a percent of display segment sales, the General Electric Medical Division accounted for approximately 26%, and Garmin International accounted for approximately 24%. No other customer accounted for more than 10% of display or microelectronic segment sales, respectively.

The Company’s sales are split between original equipment manufacturers in the network and telecommunications industries, board assembly companies, and U.S. prime contractors in the defense industry. Sales to prime contractors can be for relatively large dollar amounts and sometimes call for deliveries over more than one year. The award of new contracts or the expiration of old contracts could have a significant short-term impact on sales and operating results. Sales of commercial memory products are usually based on high volume purchase orders with deliveries scheduled over several months. The award of new purchase orders is based upon the Company’s ability to supply the original equipment manufacturer or assembly company with products that meet current technological and quality requirements.

Total Company foreign sales for fiscal 2002, 2001, and 2000 were $28,804,000, $27,208,000, and $13,861,000, respectively.

RESEARCH, ENGINEERING AND PRODUCT DEVELOPMENT

Current product development activities are directed primarily toward the improvement of existing standard products. Some projects, however, are focused on the development of new products or processes. The Company devotes minimal resources to pure product development, but emphasizes the application of its engineering expertise to the development and refinement of proprietary products or technologies. Expenditures by the Company on product development for fiscal years 2002, 2001, and 2000 amounted to approximately $4,264,000, $5,302,000, and $5,014,000, respectively. Product development efforts are principally conducted by the Company’s engineering staff.

We believe that continued strategic investment in process technology and product development is essential for us to remain competitive in the markets we serve. We are committed to appropriate levels of expenditures for product development.

REGULATORY MATTERS

Government Contracting Regulation

A significant portion of the Company’s business in fiscal 2002 was derived from subcontracts with prime contractors of the U.S. Government. As a U.S. Government subcontractor, the Company is subject to Federal Government contracting regulations. Under these regulations, the U.S. Government is entitled for three years after final payment on certain negotiated contracts or contract modifications to examine all of the Company’s cost records with respect to such contracts to determine whether the Company furnished complete, accurate, and current cost or pricing data to the government in connection with the negotiation of the price of the contract or modification. The U.S. Government also has the right after final payment to seek a downward adjustment to the price of a contract or modification if it determines that the contractor failed to disclose complete, accurate and current data. Historically, the Company has not experienced downward adjustments.

In addition, the Federal Acquisition Regulations govern the allowability of costs incurred by the Company in the performance of U.S. Government contracts to the extent that such costs are included in its proposals or are allocated to U.S. Government contracts during performance of those contracts.

6

Table of Contents

The Company’s subcontracts provide that they may be terminated at the convenience of the U.S. Government. Upon such termination, the contractor is normally entitled to receive the purchase price for delivered items, reimbursement for allowable costs incurred and allocable to the contract, and an allowance for profit on the allowable costs incurred or adjustment for loss if completion of performance would have resulted in a loss. In addition, the Company’s subcontracts provide for termination for default if the Company fails to perform or breaches a material obligation of a subcontract. In the event of a termination for default, the customer may have the unilateral right at any time to require the Company to return unliquidated progress payments pending final resolution of the propriety of the termination for default. The Company may also have to pay the excess, if any, of the cost of purchasing a substitute item from a third party. If the customer has suffered other ascertainable damages as a result of a sustained default, the customer could demand payment of such damages by the Company.

In connection with the Company’s U.S. Government business, the Company is also subject to government investigations of its policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. The Company may be subject to downward contract price adjustments, refund obligations, or civil and criminal penalties. In certain circumstances in which a contractor has not complied with the terms of a contract or with regulations or statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time. Any such suspension or debarment of the Company would have a material adverse effect on the Company’s business.

It is the Company’s policy to cooperate with the Government in any investigations of which it has knowledge, but the outcome of any such Government investigations cannot be predicted with certainty. The Company believes it has complied in all material respects with applicable government requirements.

Environmental Protection

Compliance with federal, state and local laws or regulations, which govern the discharge of materials into the environment, has not had a material adverse effect upon the capital expenditures, earnings or competitive position of the Company.

RAW MATERIALS

The most significant raw materials that the Company purchases in its operations are memory devices in wafer, die and component forms and AMLCD panels. In a time of strong demand for memory integrated circuits and other products, the Company’s access to adequate supplies of wafers, dies and other components may be constrained or subject to shortages. In addition, AMLCD panels may also be in short supply at times. The Company is highly dependent on one SRAM semiconductor manufacturer for memory devices, one major display manufacturer of AMLCD panels, and one package manufacturer of ceramic packages for military components. The Company believes it has good relationships with its vendors and is not currently anticipating any difficulties in purchasing components. However, the Company does not have specific long-term contractual arrangements with its vendors, and the loss of any of its primary vendors or the loss of access to steady sources of supply could have an adverse effect on the Company’s business.

INTELLECTUAL PROPERTY

The products the Company sells from both its microelectronic segment and its display segment require a large amount of engineering design and manufacturing expertise. However, the majority of these technological capabilities are not protected by patents and licenses. The Company relies on the expertise of its employees and its learned experiences in both the design and manufacture of its products. It is possible, and it has occurred in the past, that a competitor may also learn to design and produce products with similar performance abilities as the Company’s products. If a competitor were to do so, it may result in increased competition and reduction of sales for the Company’s products.

The Company relies on trade secret protection for its technology, in part through confidentiality agreements with its employees, consultants, and third parties. However, these parties may breach these agreements, and, since many agreements are made with companies much larger than itself, the Company may not have adequate financial resources to adequately enforce its rights. Others may also come to know about or determine its trade secrets

7

Table of Contents

through a variety of methods. In addition, the laws of certain territories in which it develops, manufactures or sells its products may not protect its intellectual property rights to the same extent as the laws of the United States.

EMPLOYEES

The Company employs 312 people. Of such employees, 159 were employed in the microelectronic segment, 148 in the display segment, and 5 in corporate administration. A total of 30 of the Company’s employees in the display segment were employed pursuant to collective bargaining agreements covering workers at the Company’s display division in Fort Wayne, Indiana. This agreement is effective through November 15, 2004. The Company believes its labor relations are satisfactory.

FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENT

See Note 16 in Notes to the Consolidated Financial Statement for information relating to foreign sales by geographic segment.

FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS

This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Conditions and Result of Operations”, contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. The words “believe,” “expect,” “anticipate” and other similar statements of expectations identify forward-looking statements, and include expectations regarding the future demand for the Company’s products; the amount of backlog to be shipped in Fiscal 2003; expected changes in sales to certain industries; the market acceptance and profitability of the Company’s new products; expectations of future amortization expense or goodwill impairment from the Panelview division; future purchases of components; the need to draw on the Company’s line of credit; the effect of interest rate changes, expected levels of future product development and capital expenditures; the expectation that operations should be sufficient to fund cash needs in the short and long term; the economic recovery of the telecommunications industry; the expected strength of the defense industry and the economic and political environment relating to it and the resulting upward trend expected in high-reliability product sales; the Company’s dependency on General Electric Medical Division and Garmin International for display business; expectations of future product sales mix and gross margins; general economic conditions pertaining to sales of displays; future expected levels sales and other operating expenses; and the expected effect on the Company’s liquidity of funding the Company’s pension plan, all of which speak only as of the date the statement is made. These forward-looking statements are based largely on Management’s expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond the Company’s control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report, including the Notes to the Consolidated Financial Statement, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, and the “Risk Factors” section contained in Item 1, describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include the loss of a principal customer; the failure of customers to accept the Company’s tamper-resistant packaging or the development of improved tamper-resistant packaging by competitors; the inability to procure required components; any downturn in the semiconductor and telecommunications markets which could cause a decline in selling unit prices; reductions in military spending or changes in the acquisition requirements for military products; the ability to locate appropriate acquisition candidates, negotiate an appropriate purchase price, and integrate into the Company the people, operations, and products from acquired businesses; and changes or restrictions in the practices, rules and regulations relating to sales in international markets. In addition, new factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from forward-looking statements. The Company undertakes no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

8

Table of Contents

RISK FACTORS

Our Financial Results Could Be Seriously Harmed If The Markets In Which We Sell Our Products Do Not Grow.

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

	•		data communications and telecommunications equipment;
	•		computers and computer related peripherals;
	•		medical electronics and equipment;
	•		industrial controls;
	•		aviation electronics and equipment; and
	•		military equipment.

Approximately 17% of our fiscal year 2002 product sales and 45% of our fiscal year 2001 product sales were incorporated into data communications and telecommunications end-products. The telecommunications industry has declined, and it is reasonable to assume that the telecommunications industry could continue to experience declining or slow growth rates. Any decline in the demand for networking applications, mass storage, telecommunications, cellular base stations, cellular handsets and other personal communication devices that incorporate our products would reduce our sales revenue and possibly cause losses from that portion of our business, which could lead to layoffs or consolidation of the commercial product division into one of our other divisions. Slower growth in the other markets in which we sell our products would also lead to the same type of activity for any of our divisions.

We Cannot Adjust Expenses For Any Particular Quarter In Response To Revenue Shortfalls Because A Substantial Component Of Our Operating Expenses Are Fixed Costs.

Our need for continued significant expenditures for capital equipment purchases, product development and ongoing customer service and support, among other factors, make it difficult for us to reduce our operating expenses in a particular period if our net sales for a period are not met, because a substantial component of the operating expenses are fixed costs. Accordingly, we cannot assure you that we will be able to be profitable or that we will not sustain losses in future periods. Due to the foregoing factors, it is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. In such an event, the price of our common stock is likely to decline.

We May Fail To Meet Expectations Because Our Revenues, Gross Margins, and Profits Are Very Likely To Fluctuate From Period To Period.

In connection with our microelectronics memory business, a wide array of factors could cause our revenues, gross margins, and profits to fluctuate in the future from period to period. The primary factors that might affect our results of operations in this regard include the following:

	•		the cyclical nature of the semiconductor market;
	•		any loss of a principal customer or any short term loss of a customer due to product inventory accumulation by the customer;
	•		any inability to procure required components;
	•		any adverse changes in the mix of products that we sell; and
	•		any downturn of the semiconductor market which could cause a decline in selling unit prices, diminished inventory value, and less demand for commercial memory products as customers restrict inventory levels.

Even in the absence of cyclical conditions, the average selling prices of our products have historically decreased during the products’ lives, and we expect this trend to continue. In order to offset these average selling price decreases, we attempt to decrease manufacturing costs, and introduce new, higher priced products that incorporate advanced features. If these efforts are not successful, we will not be competitive in the marketplace and our sales and profits will decline, possibly leading to our exit from these markets.

9

Table of Contents

In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products, particularly commodity static RAM or SRAM products, fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. In the event we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. In addition, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could dramatically increase the worldwide supply of SRAM products and result in associated downward pressure on prices.

Downturns In The Semiconductor And Telecommunications Industries Could Reduce The Value Of Our Inventories And Cause A Reduction In Our Profits.

Historically, we have experienced reductions in value of our inventories due to unexpected demand declines, resulting from a softening of the semiconductor and telecommunications industries. Such declines in inventory valuation in the past have caused us to write down several million dollars worth of inventory, which greatly reduced our profits for the given period.

Our Future Operations Are Very Likely to Fluctuate And Therefore May Fail to Meet Expectations.

Our operating results have varied in the past and may continue to fluctuate in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fluctuate and fail to meet our expectations or those of others for a variety of reasons, including the following:

	•		the intense competitive pricing pressure to which our products are subject, which can lead to rapid and unexpected declines in average selling prices;
	•		the complexity of our manufacturing processes and the sensitivity of our production costs to declines in manufacturing yields, which make yield problems both possible and costly when they occur; and
	•		the need for constant, rapid new product introductions, which present an ongoing design and manufacturing challenge, which can be significantly impacted by even relatively minor errors, and which may result in products never achieving expected market demand.

As a result of these or other factors we could fail to achieve our expectations as to future revenues, gross profit and income from operations. Any downward fluctuation or failure to meet expectations will likely adversely affect the value of an investment in our securities. Also, the performance of the semiconductor industry as a whole is characterized by cyclical swings in revenue and profitability, and these swings may harm us.

We Are Dependent On Military Sales For A Large Portion Of Our Revenue, And Reductions In Military Spending Could Negatively Affect Our Sales And Profits.

Our current orders from defense-related companies account for a material portion of our overall revenue. Military capital expenditure levels depend on factors that are outside of our control. In addition, the U.S. defense industry is moving toward the purchase of commercial off-the-shelf products rather than those manufactured as compliant to specified military standards. Military related sales accounted for approximately 52% of our overall sales in fiscal year 2002 and 47% of our overall sales in fiscal year 2001. Changes in military spending and demand for microelectronics and display products have adversely affected our sales and profits in the past, and may have such an adverse effect in the future. Reductions in military spending could have a further adverse effect on our sales and profits.

Failure To Comply With U.S. Government Laws And Regulations Would Reduce Our Ability To Be Awarded Future Military Business.

In connection with our U.S. Government business, we are subject to government investigations of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. In certain circumstances in which a contractor has not complied with the terms of a contract, or with regulations or statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time. Since military sales accounted for approximately 52% of our business in fiscal year 2002, any debarment or suspension of

10

Table of Contents

our ability to obtain military sales would greatly reduce our overall revenue and profits, and would likely affect our ability to continue as a going concern.

We Are Dependent On International Markets For a Large Portion Of Our Sales and Purchases.

We anticipate that our international sales will continue to account for a significant portion of our net sales. In fiscal year 2002, foreign sales accounted for approximately 32% of our overall sales. In addition, the majority of the components we use in connection with products for military applications are acquired from foreign manufacturers, particularly those located in Asia. As a result, a significant portion of our sales and purchases are subject to the risks of international business such as:

	•		approximately $16 million of our fiscal year 2002 sales were to approved foreign military equipment manufacturers, and if the U.S. Government placed restrictions on exporting military technology using our products in countries where we have customers, it could cause a significant reduction in our sales and profits;
	•		fluctuations in foreign currencies;
	•		trade disputes;
	•		changes in regulatory requirements, tariffs and other barriers;
	•		the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of our products implemented by the United States’ government;
	•		the timing and availability of export licenses; and
	•		general economic conditions in the countries in which we sell our products.

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

Most Of Our Technological Capabilities Are Not Subject To Enforceable Patents Or Licenses.

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

We Rely on Proprietary Rights And Intellectual Property That May Not Be Adequately Protected.

We rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements, and, since many agreements are made with companies much larger than us, we may not have adequate financial resources to adequately enforce our rights. Also, others may come to know about or determine our trade secrets through a variety of methods. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States.

Interruptions In The Availability Of Raw Materials Can Seriously Harm Our Financial Performance.

The semiconductor industry has historically been characterized by wide fluctuations in the demand for and supply of semiconductors. These fluctuations have helped produce many occasions when supply and demand for semiconductors have not been in balance. In the past, our operating results have been harmed by these industry-wide fluctuations in the demand for semiconductors, which have resulted in under-utilization of our manufacturing capacity. In some cases, industry wide shortages have lasted more than a year. If these cycles continue, they may limit our ability to procure semiconductor products and meet our customer’s delivery schedules, which could lead to a loss of business. Also, higher prices for raw materials could reduce our profits on previously established purchase

11

Table of Contents

orders from our customers. Depending on the severity of the shortages, our sales and profits could be significantly reduced.

The display industry is dominated by several foreign glass suppliers. We are dependent on these foreign suppliers for glass for our commercial and industrial display products. Any disruption of glass supplies from these vendors would cause us to delay deliveries to our customers, which could lead to a loss of business and reduced profits from our display segment.

Our manufacturing operations require raw materials that must meet exacting standards. The most significant raw materials that we purchase are memory devices in wafer, die, and component forms and AMLCD panels. Shortages of wafers and other components may occur when there is a strong demand for memory integrated circuits and other related products. AMLCD panels may also be in short supply at times. We rely heavily on our ability to maintain access to steady sources of these products. We are highly dependent on one SRAM semiconductor manufacturer for memory devices, one major display manufacturer of AMLCD panels, and one package manufacturer of ceramic packages for military components. We do not have specific long-term contractual arrangements with our vendors but we believe we are on good terms with our vendors. We cannot assure you that we will continue to have access to our current sources of supply or that we will not encounter supply problems in the future. Any interruption in our sources of raw materials could reduce our sales in a given period, and possibly cause a loss of business to a competitor, if we could not reschedule the deliveries to our customers.

Our Inability To Retain Qualified Personnel Could Negatively Impact Our Operations.

Our operations are dependent upon our ability to attract and retain qualified employees in the areas of product design, engineering, operations management, manufacturing production and sales. The demand for people with expertise in these areas has been very high for the past several years and competition for qualified talent is intense. The loss of key personnel in any one of these areas could limit our ability to expand our business and could result in the inability to deliver products to our customers, leading to a loss of business from these customers.

Our Financial Results Could Be Adversely Impacted If We Fail To Develop, Introduce And Sell New Products Or Fail To Develop And Implement New Manufacturing Technologies.

We operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to improve and market existing products and to develop and introduce new products that customers choose to buy.

If we fail to complete and introduce new product designs in a timely manner or are unable to manufacture products according to the requirements of these designs, or if our customers do not successfully introduce new systems or products incorporating our products, or market demand for our new products do not develop as anticipated, our sales will be reduced either through loss of business to one of our competitors, or discontinuance of the product in the market. In particular, many of our display products have been developed based on products procured from Sharp Electronics Corporation. Our competitors in the flat panel display products market are investing substantial resources to develop flat panel displays using alternative technologies. If our competitors are successful in developing new products that offer significant advantages over Sharp Electronics’ and our products, and we are unable to improve our technology or develop or acquire alternative technology that is more competitive, we will lose business to our competitors and our sales, and profits, from the display segment will be greatly reduced.

The new products that the microelectronic and display markets require tend to be increasingly complex, incorporating more functions and operating at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generations of products substantially more difficult than prior products. Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing our products. If we are unable to design, develop, manufacture, market and sell new products successfully, we will lose business and possibly be forced to exit from the particular market.

12

Table of Contents

The Volatility Of Our Stock Price Could Negatively Affect The Market Price Or Liquidity Of Our Common Stock.

The market price of our common stock is subject to fluctuations in response to a number of factors, such as variations in our quarterly operating results, perceptions about market conditions in the microelectronics industry and general economic conditions. In addition, the stock market generally has experienced significant price and volume fluctuations. These market fluctuations could have a material adverse effect on the market price or liquidity of our common stock.

Our Board Of Directors Is Authorized To Issue Shares Of Preferred Stock That Could Have Rights Superior To Our Outstanding Shares Of Common Stock, And, If Issued, Could Adversely Impact The Value Of Our Common Stock.

Our amended and restated articles of incorporation permit our board of directors, in its sole discretion, to issue up to 500,000 shares of authorized but unissued preferred stock. These shares may be issued by our board of directors, without further action by our shareholders, and may include any of the following rights, among others, which may be superior to the rights of our outstanding common stock:

	•		voting rights, including the right to vote as a class on particular matters;
	•		preferences as to dividends and liquidation rights;
	•		conversion rights;
	•		anti-dilution protections, and
	•		redemption rights.

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

We May Engage In Acquisitions And We Cannot Assure You That Any Potential Acquisition Will Be Successful.

We are looking for opportunities to grow and diversify our product offerings through acquisitions. There can be no assurance that we will be successful in identifying appropriate candidates or in successfully combining operations with such candidates if they are identified.

Any such acquisitions could involve the dilutive issuance of equity securities and/or the incurrence of debt. In addition, acquisitions involve numerous risks, including difficulties in assimilation of the acquired company’s operations, particularly in the period immediately following consummation of an acquisition, the diversion of the attention of our management from other business concerns, risks of entering into markets and in producing products where he have limited experience, and the potential loss of key customers of the acquired company, all of which could materially, adversely affect our business. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.

Failure To Comply With Environmental Regulations Could Subject Us To Costs And Production Delays.

We currently use small quantities of hazardous materials common to our industry in the production of microelectronic and display products. We must follow Environmental Protection Agency (EPA) guidelines regarding the handling, storage and disposal of these materials. To our knowledge, we are currently in material compliance with all EPA and state requirements regarding the handling, storage and disposal of these materials. We could possibly be subject to fines, suspensions of production, alteration of our manufacturing processes or interruption or cessation of our operations if we fail to comply with present or future governmental regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in

13

Table of Contents

our manufacturing processes. These regulations could require us to acquire expensive remediation equipment or to incur other expenses to comply with environmental regulations. Our failure to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous substances could subject us to liabilities and production delays, which could cause us to temporarily miss our customer’s delivery schedules, thereby reducing our sales for a given period. We may also have to pay noncompliance fines or other remediation costs, which would reduce our profits for a given period.

ITEM 2 PROPERTIES

The Company leases a facility under an operating lease in Phoenix, Arizona consisting of approximately 53,000 square feet. The facility is used as the Company’s corporate offices and for all manufacturing of the high-reliability components of the microelectronic segment. The Company also leases a 33,000 square foot facility located in Westborough, Massachusetts for manufacturing and development of commercial microelectronic products. The Company owns a facility in Fort Wayne, Indiana consisting of a building with approximately 75,000 square feet of space used for the manufacture of electromechanical products. The Company also owns ten acres of vacant land adjacent to the building. The Company’s Panelview subsidiary leases approximately 68,000 square feet of office and manufacturing space in the suburban Portland, Oregon area for manufacturing ruggedized and industrial display products. Currently, all display manufacturing is done in a 43,000 square foot facility in Hillsboro, Oregon. The company combined its display operations in that facility during fiscal 2002. The Company is currently using the previous 17,000 square foot display manufacturing facility for warehouse space. An 8,000 square foot office, which was previously used for display management and sales personnel, is currently vacant while the Company attempts to sublease the space. All of the Company’s owned real property has been pledged as security for the Company’s line of credit and term loans with Bank One. Management considers these properties to be well maintained and adequate for their use. All properties have additional capacity, which could be utilized in the event of increased production requirements.

ITEM 3 LEGAL PROCEEDINGS

From time to time, the Company is subject to claims and litigation incident to its business. There are currently no material pending proceedings to which the Company is a party, or any of its property is the subject.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE COMPANY

The names, ages, positions and business experience of all of the executive officers of the Company are listed below. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the Annual Meeting of Shareholders and serve until the next annual election or until their successors have been elected and qualified or as otherwise provided in the Company’s by-laws.

There are no family relationships between any of the directors and executive officers of the Company nor any arrangement or understanding between any such executive officer and any other person pursuant to which he was elected as an executive officer.

14

Table of Contents

PART II

ITEM 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company’s common stock is currently traded on the NASDAQ National Market under the symbol WEDC. The following table sets forth the high and low sales prices for the common stock by quarter over the last two fiscal years.

Fiscal 2002

Fiscal 2001

As of December 9, 2002, there were approximately 10,777 holders of record of the common stock. The Company has not paid cash dividends on its common stock and does not expect to do so in the foreseeable future. The Company intends to retain all earnings to provide funds for the operation and expansion of its business. One of the Company’s credit agreements precludes the payment of cash dividends on the Company’s common stock.

ITEM 6 SELECTED FINANCIAL DATA

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

Note 1: As a result of the merger October 26, 1998 of White Electronic Designs Corporation (formerly Bowmar Instrument Corporation) and Electronic Designs, Inc. ,(EDI), which was accounted for as a purchase by EDI of Bowmar, the financials for the 1998 fiscal year ended include only the results of EDI.

Note 2 — In 1999 and 1998, diluted net income per share is considered to be the same as basic net income per share since the effect of the potentially dilutive convertible preferred stock is antidilutive. This table should be read in conjunction with the Consolidated Financial Statements provided elsewhere herein.

15

Table of Contents

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations Fiscal 2002 vs. Fiscal 2001

Revenues

Net sales decreased 6.5% to $90.5 million for the year ended September 28, 2002 compared to $96.8 million for the year ended September 29, 2001. Sales in the microelectronic segment declined by 31.6% and were partially offset by a 73.0% increase in display segment revenue.

Commercial sales in the microelectronic segment decreased 65.2% to $15.0 million in fiscal year 2002 from $43.2 million in fiscal year 2001. The decrease was directly related to the decline in the telecommunication and datacommunication markets, which began in the third quarter of fiscal year 2001. Cisco Systems and Lucent Technologies, telecommunication and datacommunication customers that accounted for 20.7% of microelectronic segment sales during fiscal year 2001, accounted for less than 1% of sales for the microelectronic segment in fiscal year 2002. The sales to Cisco and Lucent in fiscal 2001 occurred during the first two quarters of that year and were based on orders booked in fiscal 2000. These two customers alone accounted for half of the $28.0 million decrease in commercial microelectronic sales over the comparable periods, while the remaining decrease was attributable to lower purchases by other telecommunication and datacommunication customers. It is unknown when the telecommunication and datacommunication markets will recover, or if they will increase to, or exceed, historical levels.

The $28.0 million decline in commercial sales was offset by an approximate $5.0 million increase in high-reliability sales in the microelectronic segment. High-reliability revenues increased 16.2% and were $35.3 million for the year ended September 28, 2002 compared to $30.4 million for the year ended September 29, 2001. Sales of the newly developed tamper resistant coating technology totaled approximately $2.2 million in fiscal year 2002, while fiscal year 2001 did not have any sales, as the product was still under development. The increase in high-reliability sales included higher volume sales of high-density, multi-chip packages used in domestic and international defense and avionic applications. The upward trend of high-reliability sales is expected to continue because of the current economic and political environment relating to defense spending.

Display segment revenue increased 73.0% to $40.1 million for the year ended September 28, 2002 compared to $23.2 million for the year ended September 29, 2001. Ruggedized display sales decreased 20.5% to $7.4 million for the year ended September 28, 2002 from $9.3 million for the year ended September 29, 2001. Sales of interface and

16

Table of Contents

mechanical components remained flat from the comparable period at approximately $6.1 million. Sales of commercial display products increased $18.9 million, or 246%, to $26.6 million for the year ended September 28, 2002 from $7.7 million for the year ended September 29, 2001. The majority of the increase of commercial display sales was attributable to an increase of $17.5 million in sales to General Electric Medical Division and Garmin International. The sales volume from the previous year to General Electric and Garmin increased because of the introduction of new medical and global positioning system products that began production in fiscal 2002.

Excluding the sales to General Electric and Garmin, sales to other commercial display product customers increased $1.4 million in fiscal 2002 as compared to the prior year. The increase is due to the fact that fiscal 2002 includes twelve months of Panelview revenue while fiscal 2001 only includes eight months of Panelview revenue, since the acquisition of Panelview occurred February of 2001. The additional four-month period of October 2001 through January 2002 in fiscal year 2002 accounted for $1.8 million in revenue. Therefore, sales of commercial products to other customers actually decreased approximately $400,000 during the comparable period of February through September 2002 versus the same period in 2001.

Sales of commercial display products will continue to be dependent on the activities of General Electric and Garmin and the strength of their markets over the coming year. Sales of commercial display products to other customers are dependent on general economic conditions and the Company’s ability to penetrate other markets with enhanced viewing displays.

Gross Margin

Total company gross margin increased 9.5% to $28.9 million for the year ended September 28, 2002 from $26.4 million for the year ended September 29, 2001. Total company gross margin as a percentage of sales increased to 31.9% for the year ended September 28, 2002 from 27.3% for the year ended September 29, 2001.

Gross margin dollars for the microelectronic segment increased to $19.8 million for the year ended September 28, 2002 compared to $18.9 million for the year ended September 29, 2001. Gross margin as a percentage of microelectronic segment sales was 39.4% and 25.7% for the years ended September 28, 2002, and September 29, 2001, respectively. During fiscal 2002, sales of high-reliability products totaled approximately $35.3 million as compared to $30.4 million in fiscal 2001. Sales of commercial products were $15.0 million in fiscal 2002, as compared to $43.2 million in fiscal 2001. Because sales of high-reliability products made up the majority of microelectronic segment sales and their margins exceeded 40%, the overall segment margin improved by 13%, while the overall segment margin dollars only increased by $900,000, primarily as a result of the change in product mix. At the same time, sales of commercial microelectronic products, which have margins averaging around 20%, declined by $28 million from the previous year and made up a smaller percentage of sales in fiscal 2002. The decrease in margin dollars from the commercial products was offset by the increase in margin dollars from the high-reliability products.

During the second quarter of fiscal year 2001, based on numerous order cancellations and a severe decrease in demand for the Company’s products used in the telecommunications industry, the Company reviewed the major inventory items in raw materials that did not have a forecasted demand for usage. Approximately $6.2 million of inventory was identified that fell within this category. Of that $6.2 million of inventory, the Company identified items that were not expected to be used within the next twelve months and would probably become obsolete over that period. The Company reserved $3.0 million against this inventory based on its estimates of the parts most likely to go unused. In addition to the $3.0 million reserve, approximately $1.3 million of additional inventory was scrapped during that quarter because of poor yields or obsolescence. Therefore, the gross margin as a percentage of sales in fiscal year 2001 decreased 6% due to the approximate $4.3 million of inventory related charges taken in the microelectronic segment during the second quarter of fiscal year 2001.

During fiscal year 2002, approximately $420,000 of the inventory identified in fiscal year 2001 was scrapped and charged against the reserve. The amount of inventory in this excess category gradually decreased to approximately $2.5 million from $6.2 million, as of September 28, 2002. As this excess inventory was used, it was charged through cost of goods sold when it shipped. During this time, the Company completed quarterly inventory reviews and determined that a raw material reserve of approximately $2.1 million was still needed to account for possible inventory obsolescence of these remaining parts because of their age and lack of usage. Also during this period, an additional $350,000 of finished goods items were identified as slow moving and were placed on reserve. These

17

Table of Contents

additional items require the Company to maintain a $2.4 million reserve for raw materials and finished goods. In fiscal year 2002, these activities did not have a material impact on gross margins and operating results.

Gross margin as a percentage of commercial microelectronic sales for fiscal year 2001 totaled 14% after the previously mentioned inventory write-down. Gross margin as a percentage of commercial microelectronic sales for fiscal year 2002 was 20%, or 6% higher than the previous year. However, due to the decline in sales in fiscal year 2002 from fiscal year 2001, actual gross margin dollars on commercial microelectronic sales decreased $2.9 million. Gross margin for high-reliability sales for fiscal year 2002 increased to $16.8 million for the year ended September 28, 2002 compared to $13.0 million for the year ended September 29, 2001. The increase was due to lower component costs than in the previous year. Therefore, even though microelectronic segment revenue decreased from fiscal year 2001 to fiscal year 2002, gross margin dollars increased due to the higher sales and higher margin on high-reliability microelectronic sales compared to commercial microelectronic sales.

Gross margin as a percentage of display segment sales decreased to 22.6% for the year ended September 28, 2002 from 32.3% for the year ended September 29, 2001. The 9% decrease of gross margin as a percentage of display segment sales was due to significantly higher commercial product sales over the comparable period which have a much lower gross margin than ruggedized display sales. Gross margin as a percentage of commercial product sales was 18% for fiscal year 2002 compared to 21% for fiscal year 2001, due to high volume sales during fiscal year 2002 which had a slightly lower margin. Gross margin on ruggedized display sales also decreased in fiscal year 2002 from fiscal year 2001 mainly because of lower sales in 2002, but still averaged approximately 36% for the year. As a result, although display revenue increased 73% for the year ended September 28, 2002 compared to the year ended September 29, 2001, gross margin dollars only increased 21%, or $1.6 million.

Selling, General and Administrative Expenses

Total selling expenses for the year ended September 28, 2002 totaled $7.5 million, which was $1.4 million lower than the year ended September 29, 2001. The overall reduction was attributable to decreased selling expenses in the microelectronic segment due to lower commission expense on lower sales. The $2.4 million decrease in microelectronic segment selling expenses was offset by an increase of $1.0 million in display segment selling expenses, which was attributable to higher commission expense and an increase of sales personnel. Total Company commission expense totaled $2.9 million and $4.0 million for the years ended September 28, 2002 and September 29, 2001, respectively. Selling expense in fiscal year 2002 was 8.3% of sales, compared to 9.2% in the prior year. Total selling expenses are expected to remain consistent with changes in sales through the next fiscal year.

Total general and administrative expenses, including corporate expenses, totaled $6.4 million for the year ended September 28, 2002, which was consistent with general and administrative expenses for the year ended September 29, 2001. General and administrative expenses for the microelectronic segment totaled $1.6 million in fiscal year 2002, which accounted for a $500,000 decrease from fiscal year 2001 due to a reduction of administrative personnel and a reduction of spending. The decrease in the microelectronic segment was offset by a $438,000 increase in general and administrative expenses in the display segment, which related to an increase of spending in that segment. Corporate expenses for the comparable years were relatively the same. Total general and administrative expenses

18

Table of Contents

were 7.0% of sales for fiscal 2002, compared to 6.5% of sales in the prior year. Total general and administrative expenses may increase slightly because of increases in wages, corporate services, and other expenses related to corporate administration.

Product Development Expenses

Product development expenses for the year ended September 28, 2002 decreased 19.6%, or $1 million, as compared to the year ended September 29, 2001. A portion of the decrease was due to fewer commercial products under development in the microelectronic segment, accounting for a 36% decrease in commercial product development expenses, or $843,000, in fiscal year 2002 when compared to fiscal year 2001.

During fiscal year 2001, the Company began its product development on tamper resistant coating for certain high-reliability microelectronic devices. The tamper resistant coating development was complete by the end of fiscal year 2001, and the process went into production at the start of fiscal year 2002. Therefore, fiscal year 2001 included $312,000 of product development expenses for tamper resistant coating, while all tamper resistant coating expenses for fiscal year 2002 were a part of the cost of sales for the microelectronic segment.

Ongoing product development projects for the microelectronic division include new packaging designs for memory products to include SDRAM, SSRAM, microprocessor modules, and ball grid array products; continual development of tamper resistant coating technology; and qualification of new semiconductor products. Total microelectronic product development was $3.0 million for the year ended September 28, 2002.

The display segment increased product development expenses slightly, as new engineers were hired during the last part of fiscal year 2002 to expand display coating and enhancement technologies. Total display product development was $1.3 million for the year ended September 28, 2002.

For the Company as a whole, product development expenses were 4.7% and 5.5% of sales for the years ended September 28, 2002 and September 29, 2001, respectively. The Company expects product development expenses to remain at approximately the same percentage of sales in the future.

Interest Expense/Income

Interest expense for the year ended September 28, 2002 totaled $147,000, a $344,000 decrease from the year ended September 29, 2001. Interest expense during fiscal year 2001 was incurred on the Company’s line of credit and a Bank One term loan. The line of credit was paid of during the third quarter of 2001 and was not used during fiscal year 2002. The Bank One term loan was paid off during the second quarter of fiscal year 2002. Two additional bank notes totaling $3.1 million were secured for the purchase of capital equipment during the second quarter of fiscal year 2002. Both notes were paid off during September 2002 since there was available cash, and the Company could reduce its interest expense.

Once the Company paid off its line of credit, the Company began maintaining its excess cash in an interest-bearing money market account, which was opened during the fourth quarter of fiscal year 2001. Interest income on this account totaled $165,000 for the year ended September 28, 2002.

Amortization of Intangible Assets

Amortization expense for the year ended September 28, 2002 increased $443,000 when compared to the year ended September 29, 2001. Both years had amortization expense of $290,000 relating to the Electronic Designs and Bowmar merger of 1998. Fiscal year 2001 included eight months of amortization expense for the Panelview acquisition, while fiscal year 2002 includes twelve months of amortization expense. Thus, the $443,000 difference of amortization relates to the four additional months of Panelview amortization in fiscal year 2002.

Beginning in fiscal year 2003, the Company will adopt SFAS 142 (see Note 3 of Notes to the Consolidated Financial Statements, Newly Issued Accounting Standards). The effect of this accounting standard will be to stop amortization of goodwill. We expect the adoption of this standard for fiscal year 2003 will reduce amortization expense by $1.3 million for the year as compared to fiscal 2002.

19

Table of Contents

The intangible asset relating to the Electronic Designs and Bowmar merger has two components. The first component is an assembled workforce asset. The remaining assembled workforce asset amount of $17,083 will be subsumed into goodwill at the beginning of fiscal year 2003 upon adoption of FAS 142. The second component is a technology asset amortized at $7,117 per month and will be fully amortized as of October 2003. Therefore, amortization expense for fiscal year 2003 will total approximately $85,400. This intangible asset is not impaired and will continue to amortize through fiscal 2003 since it is not classified as goodwill.

Income Taxes

During the fourth quarter of fiscal year 2002, the Company reduced its valuation allowance of approximately $1.7 million operating loss carry forwards, as the Company believes it is more likely than not that it will realize a benefit for the deferred tax. The Company also reversed approximately $1.1 million of tax reserves that had been recorded in previous years. An additional $0.3 million of tax benefit was also recorded in the fourth quarter of fiscal year 2002 to recognize the extra-territorial exclusion credit for foreign sales this fiscal year. In total, a tax benefit of approximately $3.1 million attributable to the items mentioned above was recorded during the quarter ended September 28, 2002, reducing the annual tax liability to $388,000 and reducing the applied 38% tax rate to an effective rate of 4% for the year. The Company also recorded a $576,000 tax benefit from the exercise of stock options during the fiscal year.

Results of Operations Fiscal 2001 vs. Fiscal 2000

Revenues

Net sales increased 10.5% to $96.8 million for the year ended September 29, 2001 compared to $87.6 million for the year ended September 30, 2000. This increase was primarily due to a 74.3% increase in sales of the display segment to $23.2 million in fiscal year 2001 from $13.3 million in fiscal year 2000. The majority of the increase was due to the inclusion of Panelview’s $7.7 million of sales in fiscal 2001. The remaining $2.2 million increase included a $2.5 million increase in ruggedized display sales, offset by a slight decrease in electromechanical sales. Sales of ruggedized displays increased because of increased activity in the military aerospace industry, as well as new sales to industrial customers needing ruggedization for outdoor use, such as oilfield services. Panelview sales of display viewing enhancement systems accounted for $5.9 million of the revenue generated by that subsidiary. The outdoor recreation and medical instrumentation industries accounted for approximately $3.0 million of Panelview’s sales for fiscal year 2001.

Net sales for the microelectronic segment decreased slightly to $73.6 million for the year ended September 29, 2001 from $74.3 million in the year ended September 30, 2000. High-reliability microelectronic sales increased 13% to $30.4 million from $27.0 million, while commercial microelectronic sales declined 8.7% to $43.2 million, compared to $47.3 million in the prior year. A general increase in spending for the electronic components used in defense systems caused the increase in sales of high-reliability products, as order rates increased through the year. Sales of commercial components were hurt by the slowdown in the telecommunications and network equipment industry during 2001. Many of the Company’s customers experienced excess inventories when demand for their products slowed in early 2001. This excess inventory caused many of those customers to dramatically reduce their orders for the Company’s products, causing sales for the second half of fiscal 2001 to be approximately 55% lower than the first half.

20

Table of Contents

Gross Margin

Gross margin as a percentage of net sales was 27.3% for the year ended September 29, 2001, compared to 35.6% for the year ended September 30, 2000. The microelectronic segment saw a decline of margins to 25.7% from 34.6% of sales. In March 2001, based on numerous order cancellations and a severe decrease in demand for the Company’s products used in the telecommunications industry, the Company reviewed the major inventory items in raw materials that did not have a forecasted demand for usage. Approximately $6.2 million of inventory was identified that fell into this category. Of that $6.2 million of inventory, the Company identified items that were not expected to be used within the next twelve months and would probably become obsolete over that period. The Company reserved $3.0 million against this inventory based on its estimates of the parts most likely to go unused. During fiscal year 2001, approximately $750,000 of the identified inventory was scrapped and charged against the reserve. In addition to the $3.0 million reserve, approximately $1.3 million of additional inventory was scrapped during that quarter because of poor yields or obsolescence. Therefore, the decrease of gross margin as a percentage of sales in fiscal year 2001 compared to fiscal year 2000 was primarily caused by approximately $4.3 million of inventory related charges taken in the microelectronic segment during the second quarter of fiscal year 2001.

Fiscal 2001 was also a period of rapidly falling prices for some electronic memory components. This downward pricing pressure made it difficult to maintain margins for commercial microelectronic components. Gross margin as a percentage of sales for commercial products, including the effect of the inventory charges, decreased approximately 18% in fiscal 2001 compared to fiscal year 2000. Gross margin as a percentage of sales for high-reliability products over this same period increased approximately 3% from fiscal year 2000.

Gross margin for the display segment saw a decline to 32.3% from 41.2% in the previous year. Even though actual dollar gross margin on display sales increased by $2.0 million from the previous year, the percentage declined mainly because of the inclusion of Panelview display products that traditionally have margins approximating 20%, while ruggedized display products have margins of approximately 40%. Actual margins for ruggedized display products were 42% in fiscal 2001, compared to 46% in the prior year. The slight decrease was mainly because of new programs implemented in the second half of the year that required time to develop production efficiencies.

Selling, General and Administrative Expenses

Selling expenses for the year ended September 29, 2001 increased $293,000 from the previous year. Microelectronic sales expense declined $297,000; while display sales expense increased $590,000, due to the inclusion of Panelview expenses, which totaled $688,000 for the year. The decrease in the microelectronic selling expense was due to a decrease in commissions on lower sales, and a reduction of work force in commercial microelectronics. Overall selling expenses were also reduced due to a company-wide effort to reduce overall spending. Selling expense in fiscal 2001 was 9.2% of sales, compared to 9.9% in the prior year.

General and administrative expenses, including corporate expenses, increased $826,000 overall for the year ended September 29, 2001, of which $474,000 was due to the inclusion of expenses from the Panelview division. The remaining increase of general and administrative expense was due to an increase of corporate headcount and an increase in general corporate expenses such as legal, information services, accounting, and insurance expenses. Some

21

Table of Contents

administrative expenses, such as insurance, were generally higher due to the acquisition of Panelview during the year. Information services expenses were higher because of the installation of a new enterprise computer system at our commercial division. Total general and administrative expenses were 6.5% of sales in Fiscal 2001, compared to 6.2% in the prior year.

Research and Product Development Expenses

Research and development expenses for the year ended September 29, 2001 increased $288,000 from the previous year. These expenses totaled 5.4% of net sales for the current period, which was slightly lower than the 5.7% from the prior year. The main source of the increase came from the microelectronic segment, which increased spending $375,000 from the previous year. During this period, the microelectronic segment spent $312,000 to begin development of tamper resistant memory modules. Other major ongoing product development efforts in the microelectronic segment include SDRAM, SSRAM, microprocessor modules, ball grid array products, development of new packaging designs for memory products, and qualification of new semiconductor products. The display segment product development expenses were $87,000 less than last year due to a reduction in interface equipment development.

Interest Expense

Interest expense decreased $135,000 for the year ended September 29, 2001, when compared to the previous year. Borrowings against the line of credit declined during the third and fourth quarters due to increased cash flow because of collection of accounts receivable, a reduction of inventory purchases, a reduction of payroll due to a decreased headcount, and a reduction in overall company-wide spending. Interest rates in fiscal year 2001 decreased significantly since fiscal year 2000 with averages for the twelve-month period dropping to 7.98% from 8.9% and quarterly averages declining to 6.67% from 9.20%.

Amortization of Intangible Assets

Amortization expense increased $391,000 for the year ended September 29, 2001, when compared to the previous year. The amortization expense for Fiscal year 2000 included $39,000 per month of goodwill expense associated with the Electronic Designs and Crystallume merger. That intangible asset was fully amortized as of September 2000. Both comparable fiscal years had amortization expense of $290,000 relating to the Electronic Designs and Bowmar merger. Fiscal year 2001 included eight months monthly amortization expense of $106,745 for the Panelview acquisition that occurred January 29, 2001.

Seasonality and Inflation

The Company’s business is not seasonal in nature. Management believes that the Company’s operations have not been materially affected by inflation.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s consolidated financial statements include the following items:

•

Inventory represents a significant portion of the Company’s assets. Historically, the Company has experienced fluctuations in the demand for its products based on cyclical fluctuations in the microelectronic and display industries. These fluctuations in demand may cause our inventory on hand to lose value or become obsolete. Therefore, in order to present the appropriate inventory value on our financial statements, the Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions. These provisions are based on management’s comparison of the value of inventory on hand against expected future sales. If future actual sales are less favorable than those projected by management, additional inventory write-downs may be required.

22

Table of Contents

	•		The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management makes these estimates based on an analysis of accounts receivable using available information on our customers’ financial status and payment histories. Historically, bad debt losses have not been significant or have not differed materially from the Company’s estimates.
	•		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 Company maintains a pension plan for certain employees. To account for the expenses relating to this plan, the Company makes estimates concerning the expected rate of return on plan assets, and discount rates to be used to calculate future benefit obligations. Changes in the expected rate of return on plan assets affect the amount of income expected to be earned in the future. The Company bases its estimates on the expected rate of return using historical data on the rate of return from equities and fixed income investments, as well as financial industry projections for future returns on equities and fixed income investments. If the actual future rate of return on plan assets does not equal the estimated rate, the Company may have to fund future benefit obligations by contributing money from Company general assets into the plan. Changes in the discount rate affect the value of the future benefit obligations of the plan. A lower discount rate increases the liability of the plan because it raises the value of future benefit obligations. This will also cause an increase in pension expense recognized. The Company uses published bond yields to estimate the discount rate to use for calculating the value of future benefit obligations.
	•		In fiscal 2003, the Company will adopt SFAS 142, Goodwill and Other Intangible Assets. The adoption of this standard will require impairment testing of the goodwill recorded for the Panelview acquisition on an annual basis, or more often, if necessary. The Company will make estimates during the evaluation of the goodwill concerning the value of assets and liabilities and expected future cash flows to determine the validity of the goodwill amount on the balance sheet as compared to the business valuation placed on the Panelview subsidiary. If these estimates do not assign a valuation to the Panelview subsidiary that is higher than the balance sheet amount, a goodwill impairment charge will need to be taken through the income statement.
	•		The Company follows accounting standard SFAS 109, Accounting for Income Taxes. This standard requires the Company to recognize a deferred tax asset for the reduction of income taxes that will be applied using previous years’ operating loss carry forwards. The ability to recognize this asset is based on the expectations that the Company will be profitable in future periods. If these estimated future profits do not occur, the Company may not be able to use its operating loss carry forwards and the asset will become impaired. If the deferred tax asset becomes impaired, a charge will need to be taken through the income statement.
	•		The majority of the Company’s sales are recognized when the product ships to the customer. Some product shipments are to a distributor and may be returned based on conditions set forth in their distributor agreement. Therefore, actual sales on those shipments are not recognized until the distributor ships the product to its customer and notifies the Company of the shipment at the end of the month. This deferred revenue is included in accrued expenses on the balance sheet.

Liquidity and Capital Resources

Cash on hand as of September 28, 2002 totaled $12.1 million. During fiscal year 2002, cash provided by operations was approximately $12.5 million. The sum of net income, excluding the $3.1 million non-cash tax benefit item described below, depreciation, and amortization totaled approximately $9.5 million for the year. Capital expenditures for the year were approximately $4.8 million. Excluding the change in the Panelview purchase liability, accrued expenses increased approximately $2.3 million from the prior year. The $888,000 change in the Panelview purchase liability was a non-cash transaction.

23

Table of Contents

Accounts receivable increased $0.9 million from the fiscal year ended September 29, 2001. This increase is consistent with higher quarterly sales in the fourth quarter of fiscal year 2002 when compared to the fourth quarter of last year. Sales were $23.7 million in the fourth quarter of fiscal year 2002 versus $21.4 million in the fourth quarter of fiscal year 2001. The accounts receivable balance of $15.0 million at September 28, 2002 represents 63% of the current quarterly sales rate and is lower than the 66% ratio at September 29, 2001. The lower ratio is due to a higher collection rate in both the microelectronic segment and display segment.

Inventory levels decreased approximately $0.6 million during fiscal year 2002. This decrease is the result of lower purchases of inventory by the Company’s microelectronic segment, which offsets the additional inventory on hand for the display segment to support their increased revenues. The current inventory balances for both segments take into account projected first quarter fiscal year 2003 production requirements. Inventory amounts, when compared to the current quarterly sales rate, decreased to 68% of fourth quarter sales in fiscal year 2002 from 78% of fourth quarter sales in fiscal year 2001. The Company is currently managing its inventory levels to match projected production requirements. The Company will continue to review inventory levels against projected demand for obsolescence and the lower of cost or market factors and will make appropriate adjustments when needed.

Accounts payable as of September 28, 2002 were $0.2 million more than at the end of fiscal year 2001. Accrued expenses increased $2.3 million since the prior year-end. The change in accrued expenses includes a $971,000 increase in income taxes because of higher income in fiscal 2002, a $500,000 increase in payroll accruals relating to higher incentive compensation than the previous year, and a $642,000 increase in estimated warranty expenses mainly because of higher sales for the display business segment.

The Company maintains a pension plan for its union employees at its Fort Wayne, Indiana facility pursuant to a collective bargaining agreement. Mainly because of the severe decline in the equity markets during fiscal 2002, a higher than expected benefit payout rate based on a new contract with the union and a lower discount rate, the pension benefit obligation is currently under-funded by approximately $733,000. See Note 10 of Notes to Consolidated Financial Statements for additional financial details. The Company expects to fund its pension obligation through expected investment income on plan assets and cash contributions to the plan over the next several years. The actual amount of cash contributions will be dependent on the actual investment income during that period. The Company believes that funding the plan over the next several years will not have a material effect on the Company’s liquidity. Also, the Company recognized a minimum pension liability of $255,000, net of tax, and a long-term pension liability of $671,000 on its balance sheet for fiscal 2002 relating to the decrease in value of plan assets during the year. In fiscal 2003, the Company expects actual pension expense to increase from $132,000 in fiscal 2002 to approximately $180,000 in fiscal 2003.

Capital expenditures for the fiscal year ended September 28, 2002, totaled approximately $4.8 million. Approximately $2.0 million was spent on production equipment for the microelectronic manufacturing facilities, including $1.1 million spent on a specific piece of testing equipment for the high-reliability components. An additional $2.2 million was spent on production equipment for the display manufacturing facilities, including approximately $2.0 million spent on a specific piece of coating equipment for the display division. Approximately $0.2 million was spent on leasehold improvements for Panelview’s new building in Oregon. The remaining $0.4 million of capital expenditures related to computer equipment and various other office equipment purchased throughout the Company. Capital expenditures for fiscal 2003 are expected to be approximately the same as fiscal 2002. The Company believes future capital expenditures will be funded by cash from operations, line of credit borrowings, or operating lease financing.

24

Table of Contents

Financing activities used $604,000 of cash during fiscal year 2002. The Company secured two bank notes through Bank One N.A. totaling approximately $3.1 million for the purchase of capital equipment during the second quarter of fiscal year 2002. Due to the availability of cash on hand, both notes were paid off during September 2002. The Company also paid down the original Bank One note that had a balance of $1.5 million as of the beginning of this fiscal year. Therefore, the Company borrowed $3.1 million and repaid $4.6 million, bringing total Company debt down to zero as of September 28, 2002. Approximately $914,000 of cash was generated during fiscal year 2002 through the issuance of common stock. Of that $914,000, $724,000 of common stock was issued for the exercise of stock options, and $190,000 of common stock was issued through the employee stock purchase plan.

The Company had the use of a $12 million revolving credit agreement with Bank One for short-term financing needs, but amended that agreement as of March 28, 2002, to reduce the borrowing ability to a maximum of $8.0 million based on lower borrowing expectations and to reduce unused credit line fees. The Bank One amended revolving line of credit bears a variable interest rate, which was 4.75% as of September 28, 2002, and extends until March 29, 2004. As of the end of the fourth quarter, the Company was in compliance with all debt covenant requirements in the credit agreement. The revolving credit line has been fully paid since July 2001, and the Company is generating a level of internal cash flow sufficient to sustain the current level of day-to-day operations. The Company believes that cash generated by operations, in addition to its borrowing capability, should be sufficient to fund its cash needs for the next twelve months as well as over the long-term. If we are able to identify appropriate opportunities, the Company may need to incur debt and/or issue additional equity securities in connection with one or more acquisitions.

Recently Enacted Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets, collectively referred to as the “Standards.” SFAS 141 supersedes Accounting Principles Board Opinion (APB) No. 16, Business Combination. The provisions of SFAS 141 (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142, the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangibles assets be tested at least annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year.

25

Table of Contents

However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first step of the goodwill impairment test during the first quarter of fiscal 2003. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company’s fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process, which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year, and pursuant to the requirements of SFAS 142, will be completed during the first quarter of fiscal 2003. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003.

The Company adopted the provisions of SFAS 142 for fiscal year 2003, which began September 29, 2002. At that time, the Company stopped the monthly amortization of $108,600 for Panelview purchased goodwill and will assess the need for any changes in the remaining goodwill asset based on further valuation. The Company also stopped amortization on the assembled work force asset relating to the EDI and Bowmar merger, as this component was subsumed into goodwill upon adoption of SFAS 142. Because of the continuing goodwill amortization through the end of fiscal 2002 and the increasing sales and profits at the Panelview subsidiary, the Company, at this time, believes that an impairment charge will not be needed in the first quarter of fiscal 2003. The actual result will not be known until the completion of the impairment tests.

In June 2001, the FASB issued FAS 143 Accounting for Asset Retirement Obligations. FAS 143 changes the way in which long-lived asset retirement obligations are recognized on the balance sheet and income statement. The Company believes that adoption of this standard will have no material effect on the Company’s financial reporting and disclosure.

In August 2001, the FASB issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale. The Company believes that adoption of this standard will have no material effect on the Company's financial reporting and disclosure.

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 145 (SFAS 145), which rescinded and amended the Board’s position concerning gains and losses on the extinguishments of debt, intangible assets of motor carriers, and certain lease modifications. The Company believes that adoption of this standard will have no material effect on the Company’s financial reporting and disclosure.

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or Disposal Activities. This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, and removes the previous requirement to record a liability for the costs associated with exit activities when a company commits to an exit plan. SFAS 146 now requires a company to record a liability for costs associated with an exit activity, at fair value, only when a liability is incurred. The Company believes that adoption of this standard will have no material effect on the Company’s financial reporting and disclosure.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of the fiscal year ended September 28, 2002, the Company had no outstanding balance against its revolving line of credit with Bank One, nor did it borrow against the line of credit during the fiscal year. Should the Company have borrowed against the line, the interest charged against these borrowings would have been a combination of the Bank One “prime rate,” which is similar to the prime rate charged by major banking institutions in the United States, and the London Interbank Offering Rate (LIBOR) plus 2.25%. During fiscal 2002 the “prime rate” averaged 4.84%, and was 4.75% as of September 28, 2002.

The Company is subject to changes in prime rate based on Federal Reserve actions and general market interest fluctuations. The Company is also subject to fluctuations in the LIBOR rate. As of the end of September, 2002, the LIBOR rate was approximately 1.81%. Due to the average borrowing rate of zero dollars over the past fiscal year, a change in interest rate would not affect the Company’s results of operations or financial position. Should the Company begin borrowing against the credit line, a hypothetical increased rate change of 1% would increase interest expense by approximately $10,000 per average million dollars borrowed on an annual basis from current expense levels. The Company believes that moderate interest rate increases will not have a material adverse impact on its results of operations or financial position in the foreseeable future.

26

Table of Contents

The Company believes it is not subject in a material way to other forms of market risk, such as foreign currency exchange risk on foreign customer purchase orders (the Company accepts payment in U. S. dollars only), or commodity price risk.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by Regulation S-X are included in Part IV, Item 15 of the Annual Report on Form 10-K.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item for directors is set forth in the Company’s 2003 Proxy Statement (which will be filed with the Securities Exchange Commission no later than 120 days following year end) relating to the Company’s Annual Meeting of Shareholders to be held on February 27, 2003, (the “2003 Proxy Statement”), under the heading “Election of Directors” and the heading “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by this reference as if set forth in full.

27

Table of Contents

ITEM 11 EXECUTIVE COMPENSATION

The information required by this Item is set forth in the Company’s 2003 Proxy Statement under the heading “Executive Compensation” and is incorporated herein by this reference as if set forth in full. The information set forth under the headings “Report of the Compensation Committee” and “Stock Price Performance Graph” contained in the 2003 Proxy Statement are not incorporated by reference.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is set forth in the Company’s 2003 Proxy Statement under the heading “Principal Shareholders” and under the heading “Security Ownership by Management” and is incorporated herein by reference as if set forth in full.

Equity Compensation Plan Information

The following table provides information as of September 28, 2002, with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth in the Company’s 2003 Proxy Statement under the heading “Certain Transactions” and under the heading “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by this reference as if set forth in full.

28

Table of Contents

ITEM 14 CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing this Annual Report on 10-K, an evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our President and Chief Executive Officer and our Chief Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of our management’s evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.

PART IV

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)		Financial Statements and Supplementary Data
		Consolidated Financial Statements
(a)(2)		Financial Statement Schedules for the Years Ended September 28, 2002, September 29, 2001, and September 30, 2000
		Financial statement schedules have been omitted because either they are not required or are not applicable, or because the information has been included in the consolidated financial statements or notes thereto.
(a)(3)		Exhibits

29

Table of Contents

30

Table of Contents

(b)		Reports on Form 8-K
		None.
(c)		See (a)(3) above.
(d)		Not applicable.

31

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

32

Table of Contents

CERTIFICATIONS

I, Hamid R. Shokrgozar, certify that:

	1.		I have reviewed this annual report on Form 10-K of White Electronic Designs Corporation:
	2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

6.

The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 20, 2002

33

Table of Contents

CERTIFICATIONS (Continued)

I, William J. Rodes, certify that:

	1.		I have reviewed this annual report on Form 10-K of White Electronic Designs Corporation:
	2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

6.

The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 20, 2002

34

Table of Contents

Report of Independent Accountants

To the Shareholders and Board of Directors of
White Electronic Designs Corporation

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholder’s equity, and of cash flows present fairly, in all material respects, the financial position of White Electronic Designs Corporation and Subsidiaries at September 28, 2002 and September 29, 2001, and the results of their operations and their cash flows for each of the three years in the period ended September 28, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Phoenix, Arizona
November 6, 2002

35

Table of Contents

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

(In thousands of dollars, except share data)

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

36

Table of Contents

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands of dollars except and per share data)