SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

     (Mark One)

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

     For the quarterly period ended: April 3, 2004

OR

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

     For the transition period from            to           

Commission File Number 1-4817

WHITE ELECTRONIC DESIGNS CORPORATION

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  [X]  No  [  ]

At May 11, 2004, 24,225,686 shares of the Registrant’s Common Stock were outstanding.

WHITE ELECTRONIC DESIGNS CORPORATION
AND SUBSIDIARIES

Table of Contents

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

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

3

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

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

* See Note 2; Restatement of Interim Consolidated Financial Statements

4

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

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

* See Note 2; Restatement of Interim Consolidated Financial Statements

5

WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

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

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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES

1. INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of April 3, 2004, the consolidated statements of operations for the three and six months ended April 3, 2004, and March 29, 2003, the consolidated statements of cash flows for the six months ended April 3, 2004 and March 29, 2003, and the consolidated statement of shareholder’s equity for the six months ended April 3, 2004 have been prepared by the Company and are unaudited. The consolidated balance sheet as of September 27, 2003 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 27, 2003. The Company’s fiscal year end is the Saturday nearest to September 30^th. It is the Company’s policy to adjust its annual calendar to include an additional week in the first quarter of its fiscal year when necessary. Such adjustment was required in fiscal 2004, and as a result, the six months ended April 3, 2004 includes twenty seven (27) weeks of activity while the six months ended March 29, 2003, includes twenty six (26) weeks of activity. The Company believes that this additional week of activity in the first six months of fiscal 2004 did not have a material impact on its quarterly results of operations. It is the opinion of management that all adjustments, which are of a normal recurring nature necessary to present fairly such financial statements, have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003. The results of operations for the three and six months ended April 3, 2004 are not necessarily indicative of the operating results for the full year.

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

Certain amounts in the consolidated financial statements and notes thereto have been reclassified to conform to current classifications.

2. RESTATEMENT OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS

As a result of a change in the way the Company conducted business with a reseller that began in fiscal 2003, it was determined that revenue related to shipments to that reseller should be recognized at the time the reseller sells the product to its end customers rather than at the time the goods are shipped to the reseller. As a consequence, the Company restated its unaudited interim financial information for the three and six months ended March 29, 2003 to reflect the effects of this change. As a result, the previously reported unaudited operating results for the three and six months ended March 29, 2003 have been restated as follows (in thousands, except per share data):

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

As a result of the restatement, $424,000 of net sales and $314,000 of related gross profit were deferred as of March 29, 2003.

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

3. MERGERS AND ACQUISITIONS

The Company acquired Interface Data Systems (“IDS”) in January 2003 for approximately $18.6 million. The accompanying pro forma statement of operations information gives effect to the IDS acquisition as if it had occurred at the beginning of fiscal 2003 and its results of operations were included in the three and six months ended March 29, 2003. The pro forma information is included only for purposes of illustration, and does not necessarily indicate what the Company’s operating results would have been had the acquisition of IDS been completed at the beginning of fiscal 2003.

(In thousands of dollars except share data)

4. EARNINGS PER SHARE

SFAS 128 requires the presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all potential dilutive common shares that were outstanding during the period unless they are antidilutive. Potential dilutive common shares consist of the incremental common shares that would be issued upon exercise of stock options.

In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows:

Options excluded from the calculation of diluted earnings per share were 255,257 and 213,256, respectively, as the exercise price was greater than the average share price for the period.

* See Note 2; Restatement of Interim Consolidated Financial Statements

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

Options excluded from the calculation of diluted earnings per share were 138,125 and 203,256, respectively, as the exercise price was greater than the average share price for the period.

* See Note 2; Restatement of Interim Consolidated Financial Statements

5. STOCK BASED COMPENSATION

The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (SFAS 148). As allowed by SFAS 123, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) in accounting for its stock option plans. Accordingly, since all options are issued with exercise prices greater than or equal to the market price on the grant date, no compensation cost has been recognized for the stock option plans.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The pro forma information required under SFAS 123 for the three and six months ended April 3, 2004 and March 29, 2003 is as follows (in thousands of dollars except per share information):

*

See Note 2; Restatement of Interim Consolidated Financial Statements

Stock compensation expense was estimated using the Black-Scholes option pricing model under the following weighted average assumptions:

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

6. INVENTORIES

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

Raw materials included approximately $1.5 million and $2.4 million at April 3, 2004 and September 27, 2003, respectively, for which the Company had received advance payment from the customer. Approximately $0.3 and $1.0 million of inventories were written off against the reserve during the three and six months ended April 3, 2004.

7. INTANGIBLE ASSETS

The Company’s acquired intangible assets, all of which are subject to amortization, consist of the following as of April 3, 2004 and September 27, 2003 (in thousands of dollars):

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

Changes in the carrying amount of acquired intangible assets during the six months ended April 3, 2004 (in thousands of dollars):

Estimated Aggregate Future Amortization Expense:

8. PROPERTY, PLANT, AND EQUIPMENT, NET

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

Depreciation expense was $956,000, and $911,000, for the three months ended April 3, 2004, and March 29, 2003, respectively. Depreciation expense was $1,921,000, and $1,545,000, for the six months ended April 3, 2004, and March 29, 2003, respectively.

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

9. ACCRUED EXPENSES

Accrued expenses consist of the following major categories (in thousands of dollars):

The following table summarizes activity in the warranty reserve for the six months ended April 3, 2004 (in thousands of dollars):

10. PUBLIC OFFERING OF COMMON STOCK

In July 2003, the Company completed a public offering of its common stock, which resulted in net proceeds (after deducting underwriting discounts, commissions, and offering expenses) of approximately $22.0 million. The Company initially sold 2,200,000 common shares on July 8, 2003 and an additional 202,874 shares on August 1, 2003, following the exercise by the underwriters of an over-allotment option. In July 2003, the Company used a portion of the proceeds from the offering to repay all outstanding amounts owing under its term loan with Bank One. The Company expects to use the remaining net proceeds for potential acquisitions and general corporate purposes, including expansion of research and development relating to new products and our anti-tamper technology for microelectronic products.

11. CREDIT FACILITY

The Company maintains a $12.0 million revolving line of credit with Bank One. Borrowings under the line of credit bear interest at either the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the Bank One “prime rate”. The line of credit was renewed on March 19, 2004 for an additional two years, at similar terms and conditions as the previous credit facility, and now expires on March 28, 2006. As of April 3, 2004 there were no borrowings against the line of credit, and the Company has not borrowed against the line of credit since April 2003.

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

12. PENSION PLAN

The Company has a non-contributory pension plan for eligible union employees at its Fort Wayne, Indiana facility pursuant to a collective bargaining agreement. Benefits are based primarily on a benefits multiplier and years of service. The Company funds an amount equal to the minimum funding required plus additional amounts which may be approved by the Company from time to time. Pension expense was $44,000 and $45,000 for the three months ended April 3, 2004 and March 29, 2003, respectively. For the six months ended April 3, 2004 and March 29, 2003, pension expense was $76,000 and $90,000, respectively. The Company does not expect to make any contributions to the plan in fiscal year 2004.

13. FINANCIAL DATA BY BUSINESS SEGMENT

The Company has two business segments each of which requires different design and manufacturing resources and generally serves customers in different markets. The microelectronic segment accounted for approximately 54% and 56% of total Company sales during the three and six months ended April 3, 2004, while the display segment accounted for 46% and 44% of total Company sales during the respective periods of 2004.

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

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

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

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

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

During the three and six months ended April 3, 2004 no customer accounted for more than 10% of total sales. However, during the three months ended April 3, 2004, Lowrance Corp. and Whirlpool Corp. accounted for approximately 17% and 12%, respectively, of display segment net sales. For the six months ended April 3, 2004 Lowrance Corp. and Whirlpool Corp. accounted for approximately 12% and 13%, respectively, of display segment net sales.

During the three months ended March 29, 2003 Garmin International, Inc., accounted for approximately 14% of total sales and 29% of total display segment sales. In addition, General Electric Medical Division contributed approximately 15% of display segment sales while Raytheon Co. accounted for 13% of the microelectronic segment sales during the three months ended March 29, 2003. No other customer accounted for more than 10% of segment, or total, sales for the second quarter of 2003. For the six months ended March 29, 2003 Garmin International, Inc., accounted for approximately 14% of total sales and 31% of total display segment sales. During the six months ended March 29, 2003 General Electric Medical Division accounted for approximately 18% of display segment sales while Raytheon accounted for approximately 10% of microelectronic segment sales. No other customer accounted for more than 10% of segment, or total, sales for the first six months of 2003.

A significant portion of the Company’s business activity in each segment is from contractors who have contracts with the United States Department of Defense. Military sales were $12.7 million and $12.9 million for the quarters ended April 3, 2004 and March 29, 2003, respectively, and $25.8 million and $25.3 million for the first half of fiscal 2004 and 2003, respectively.

Foreign sales as a percentage of total sales in the three months ended April 3, 2004 and March 29, 2003 were 18% and 27%, respectively. Foreign sales as a percentage of total sales for the six months ended April 3, 2004 and March 29, 2003 were 18% and 31%, respectively. The decrease in sales to Taiwan was caused by a reduction of sales to Garmin International from the previous year. A summary of net sales by geographic region is as follows (in thousands of dollars):

* See Note 2; Restatement of Interim Consolidated Financial Statements

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

A summary of results of operations by business segment is as follows:

* See Note 2; Restatement of Interim Consolidated Financial Statements

14. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 132® replaces SFAS No. 132, and requires certain additional disclosures that become effective for periods beginning after December 15, 2003. See Note 12 for information relating to the Company’s pension plan. The Company does not provide other postretirement benefits.

In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). In December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which supercedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities (VIEs). FIN 46 clarifies when a company should consolidate in its financial statements the assets, liabilities and activities of a VIE. FIN 46 provides general guidance as to the definition of a VIE and requires it to be consolidated if a party with an ownership, contractual or other financial interest absorbs the majority of the VIE’s expected losses, or is entitled to receive a majority of the residual returns, or both. A variable interest holder that consolidates the VIE is the primary

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

beneficiary, and is required to consolidate the VIE’s assets, liabilities and non-controlling interests at fair value at the date the interest holder first becomes the primary beneficiary of the VIE. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003 and for variable interest entities created prior to February 1, 2003 no later than at the end of the first reporting period after March 15, 2004. The adoption of FIN 46 and FIN 46-R did not impact the Company’s financial condition or results of operations.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED APRIL 3, 2004 COMPARED TO THE THREE AND SIX MONTH PERIODS ENDED MARCH 29, 2003

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto as of and for the year ended September 27, 2003 included in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those discussed below and in Exhibit 99.1 to this Report on Form 10-Q.

Overview

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

In January 2003, we acquired Interface Data Systems, Inc. (“IDS”), a designer and manufacturer of membrane keypads, flexible circuits, sensors, control panels, and handheld and desktop electronic devices. This acquisition allowed us to expand our interface device product offerings and enhance our subsystem solutions. In addition, with IDS’ design and manufacturing capabilities we can now offer fully integrated system level solutions.

Executive Summary

Our net sales for the quarter ended April 3, 2004 increased by approximately $0.4 million, to $28.9 million from $28.5 million, as compared to the quarter ended March 29, 2003. During the first six months of fiscal 2004, net sales increased by $3.0 million to $54.8 million compared to $51.8 million during the first six months of fiscal 2003. The primary reason for this increase during the first six months of fiscal 2004 was the inclusion of approximately $6.2 million of net sales from our IDS subsidiary, which was acquired in January 2003 and therefore not included in our results for the first four months of fiscal 2003, partially offset by a $4.8 million decline in commercial display net sales. The decline in commercial display net sales was attributable to a reduction in orders from Garmin International, Inc. (“Garmin”) and General Electric Medical Division (“GE Medical”) as they changed their manufacturing strategies during the fourth quarter of fiscal 2003. We expect this trend, of reduced commercial display net sales as compared to the previous year, to continue into the next quarter. However, we are working to replace these sales by adding new customers, and we expanded our customer base during the current quarter.

A key indicator of our future sales is the amount of new orders received compared to current net sales, known as the book-to-bill ratio. During the quarter ended April 3, 2004, we had new orders of approximately $30 million, which equates to a book-to-bill ratio of 1.05 for the period. Display segment orders were approximately $18 million during the quarter resulting in a segment book-to-bill ratio of 1.35

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for the quarter. Orders for the microelectronic segment were approximately $12 million during the quarter resulting in a segment book-to-bill ratio of 0.79. We believe a reallocation of government funds to other military priorities resulted in a delay of orders of military products for our microelectronic segment. This delay may cause lower year over year sales, and profits, for our microelectronic segment over the next several quarters compared to the previous year, and we expect sales of these products to decrease somewhat in the third quarter of fiscal 2004.

Our gross margins decreased during both the three and six months ended April 3, 2004 to 29% and 31%, respectively, from 33% and 34%, respectively, during the comparable periods of fiscal year 2003. The primary reason for this decrease was lower margins in our microelectronic segment, which decreased from 44% in the second quarter of 2003 to 36% during the second quarter of 2004, and from 44% for the first 6 months of 2003 to 37% for the same six month period of 2004. The reason for the decline was due to a shift in product mix to lower margin memory products from higher margin microprocessor products, higher production costs for our military products, and a higher percentage of commercial memory products as a percent of microelectronic segment sales. The trend of lower margin percentages may continue for the balance fiscal 2004 if sales of commercial products, in both the display and microelectronic segment, increase during the year, and sales of military microelectronic products stay the same, or decrease, over the next several quarters. Display segment gross margins were unchanged at 22% for the second quarters of fiscal years 2004 and 2003; and for the first six months of fiscal years 2004 and 2003, gross margins increased slightly to 24% from 22% in the previous year. Gross margins for our display segment products continue to come under pressure from both domestic and Asian competition, and, while we are implementing manufacturing strategies to improve our competitive position, it may be difficult to continue to maintain current gross margins in the future.

Our overall production has been affected by longer lead times for certain components, which may affect the timing and cost of sales during the year. The lead-time for ceramic packages has increased to 4 weeks and may impact sales over the balance of the current fiscal year. Memory components, including synchronous dynamic random access memory (“SDRAM”) and Flash memory, are in short supply compared to previous years. This condition is expected to continue for the balance of the fiscal year. Additionally, the allocation of display glass materials has caused raw material prices to increase, which may affect our cost of sales, and lead times to increase by 4-5 weeks, which may affect the timing of our sales during the year. We expect this trend of reduced supplies of display glass materials to continue for the balance of fiscal 2004 and our net sales and gross margins may be impacted.

Orders for our microelectronic segment’s anti-tamper process technology products were approximately $3.8 million for the six months ended April 3, 2004. This six-month order rate is slightly higher than the previous year’s rate, since our anti-tamper products orders totaled approximately $6.7 million for all of fiscal 2003. We expect to see increasing orders for these products over the next several years as the government’s mandate for anti-tamper protection affects more military programs.

Restatement of Interim Consolidated Financial Statements

As a result of a change in the way we do business with a reseller that began in fiscal 2003, we determined that revenue related to shipments to that reseller should be recognized at the time the reseller sells the product to its end customers rather than at the time the goods are shipped to the reseller. As discussed in Note 2 to the consolidated financial statements included under Item 1, we have restated our consolidated financial statements for the three and six month periods ended March 29, 2003. The restatement adjustments resulted in the deferral of $176,000 of net sales and $176,000 of related gross profit for the three months ended March 29, 2003. For the six months ended March 29, 2003 we deferred $424,000 of net sales and $314,000 of related gross profit.

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Critical Accounting Policies and Estimates

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

We sell microelectronic and display products primarily to military prime contractors and commercial original equipment manufacturers. A small portion of our products is also sold through distributors or resellers. We recognize revenue on product sales when persuasive evidence of an arrangement with the customer exists, title to the product has passed to the customer, which usually occurs at time of shipment, the sales price is fixed or determinable, and collectibility of the related billing is reasonably assured. Advance payments from customers are deferred and recognized when the related products are shipped. Revenue relating to products sold to distributors or resellers who either have return rights or where we have a history of accepting product returns are deferred and recognized when the distributor or reseller sells the product to the end customer. We also provide limited design services pursuant to related customer purchase orders and recognize the associated revenue as such services are performed.

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

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

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

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Results of Operations

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

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Three Months ended April 3, 2004 compared to Three Months ended March 29, 2003

Net Sales

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

*See Note 2 of the Notes to Unaudited Consolidated Financial Statements;

Restatement of Interim Consolidated Financial Statements

Net sales were $28.9 million for the three months ended April 3, 2004, an increase of approximately $0.4 million, or 2%, from $28.5 million for the three months ended March 29, 2003.

	•		Military/industrial sales in the microelectronic segment slightly decreased to $10.1 million for the three months ended April 3, 2004 from $10.2 million for the comparable quarter in the previous year. Sales were stable from the previous year, however, the product mix in the current quarter consisted of a higher percentage of memory products than the previous year, which had a higher percentage of microprocessor products. We expect to sell a range of military microelectronic products throughout fiscal 2004, but cannot anticipate the product mix for any particular quarter.
	•		Commercial sales in the microelectronic segment were $5.5 million for the three months ended April 3, 2004, an increase of $1.0 million, or approximately 22% from $4.5 million from the three months ended March 29, 2003. Approximately $0.2 million of this increase is attributable to three months of IDS sales in the second quarter of 2004, as compared to two months of such sales in the second quarter of 2003. An additional $0.4 million of the increase was attributable to increased sales to Unisys.

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	•		Military/industrial sales in the display segment were $2.6 million for the quarter ended April 3, 2004, a decrease of $0.1 million, or approximately 4%, from $2.7 million for the quarter ended March 29, 2003. This decrease was due to a $0.1 million decrease in sales of our interface/mechanical products.
	•		Commercial sales in the display segment were $10.7 million for the three months ended April 3, 2004, a decrease of $0.3 million, or approximately 2%, from $11.0 million for the three months ended March 29, 2003. The decrease was due to the combined effects of approximately $1.0 million of additional net sales from IDS as compared to last year, offset by a decrease of $1.3 million in commercial display net sales. Commercial display net sales declined primarily because of a $4.8 million decrease in sales to Garmin and GE Medical from the prior year, offset by increased sales to other customers during the period.

During the three months ended April 3, 2004, no customer accounted for more than 10% of total sales. However, during the three months ended April 3, 2004, Lowrance Corp. and Whirlpool Corp. accounted for approximately 17% and 12%, respectively, of display segment net sales.

During the second quarter of fiscal year ended 2003, Garmin , accounted for approximately 14% of total sales and 29% of total display segment sales. General Electric Medical Division and Whirlpool Corp. accounted for approximately 15% and 10%, respectively, of our display segment sales for the second quarter of 2003 while Raytheon Co. accounted for 13% of our microprocessor segment sales during the second quarter of 2003. No other customer accounted for more than 10% of segment, or total, sales for the second quarter of 2003.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, sales of our membrane keypad products, which totaled approximately $3.2 million in three months ended April 3, 2004, are subject to seasonal fluctuations relating to increased home appliance sales in the spring and fall.

Gross Profit

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

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Gross profit was $8.5 million for the three months ended April 3, 2004 a decrease of $0.9 million or approximately 9% from $9.4 million for the three months ended March 29, 2003. For the three months ended April 3, 2004, gross margin as a percentage of net sales was approximately 29%, compared to approximately 33% for the three months ended March 29, 2003.

Gross profit for the microelectronic segment was $5.5 million for the three months ended April 3, 2004, a decrease of $0.9 million, or approximately 14%, from $6.4 million for the three months ended March 29, 2003. Gross margin as a percentage of microelectronic segment sales was approximately 36% for the three months ended April 3, 2004, compared to approximately 44% for the three months ended March 29, 2003. The $0.9 million decline in microelectronic segment gross profit was caused by a $1.0 million reduction in our military products gross profit offset by a $0.1 million increase in gross profits from our commercial products. The decrease in gross profit for our military products was the result of changes in product mix and higher manufacturing costs. The increase in our commercial products gross profit was primarily the result of slightly higher sales combined with savings achieved from the consolidation of our Massachusetts facility into our Phoenix facilities. We expect to see continued savings throughout fiscal 2004 as the result of this consolidation.

Gross profit for the display segment was $3.0 million for both the three months ended April 3, 2004 and the three months ended March 29, 2003. Gross margin as a percentage of display segment sales was approximately 22% for both the three months ended April 3, 2004 and March 29, 2003.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense, selling expenses, including commissions, information technology expenses and corporate administrative expenses. Selling, general and administrative expenses were $4.4 million for the three months ended April 3, 2004, an increase of $0.3 million, or approximately 8%, from $4.1 million for the three months ended March 29, 2003. Expenses increased by approximately $0.3 million primarily due to small increases for various expenses, including approximately $0.1 million of expenses incurred for implementation of Sarbanes Oxley Act requirements.

Selling, general and administrative expenses as a percentage of net sales increased slightly to 15% for the three months ended April 3, 2004 from 14% for the three months ended March 29, 2003. As part of our overall management planning and analysis process, we have traditionally targeted approximately 15% of net sales for selling, general and administrative expenses. However, it is possible that selling, general and administrative expenses may fluctuate above, or below, our target over the next several quarters as we expect to incur additional expenses for Sarbanes-Oxley compliance, however, the exact timing of these future expenses is not yet determined because of the delay in implementation date, until next year, of these requirements for the Company.

Research and Development Expenses

Research and development expenses consist primarily of compensation for our engineering personnel, consulting expenses and project materials. Research and development expenses were $1.7 million for the three months ended April 3, 2004, an increase of $0.3 million, or approximately 18%, from $1.4 million for the three months ended March 29, 2003. The increase was primarily attributable to development projects for our commercial display products. Research and development expenses as a percentage of net sales have remained consistent and averaged between 5% and 6% of net sales over the past four quarters.

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We are committed to research and development of new and existing products and expect research and development expenses to average approximately 5-6% of net sales in the future.

Ongoing product development projects for the microelectronic segment include new packaging designs for memory products including SDRAM, and synchronous static random access memory (“SSRAM”), along with Power PC microprocessor based modules and ball grid array packaging products using these semiconductors; continuing development of anti-tamper technology for microelectronic products; and qualification of new semiconductor products. Ongoing product development projects for the display segment include glass lamination process technology and display systems development.

Interest Income

Interest income consists of interest earned on our cash balances in various types of interest bearing accounts, and interest earned on marketable securities. Interest income was $109,000 for three months ended April 3, 2004 an increase of $66,000 compared to $43,000 for the three months ended March 29, 2003. This increase was attributable to the increase in invested balances between periods primarily as a result of the reinvestment of cash flows from operations, and the proceeds received from our stock offering which was completed in July 2003.

Amortization of Intangible Assets

Intangible asset amortization for the three months ended April 3, 2004 and March 29, 2003 totaled $159,000 and $277,000, respectively. The $118,000 decrease was attributable to intangible assets acquired as part of the IDS acquisition, which stopped amortizing as of September 2003.

Income Taxes

Income tax expense totaled $0.7 million for the three months ended April 3, 2004 compared to $1.2 million for the three months ended March 29, 2003 primarily as a result of lower pre-tax income. The Company’s effective tax rate approximated 28% for the three months ended April 3, 2004 and 33% for the three months ended March 29, 2003. The Company’s effective tax rate differs from the federal statutory tax rate of 35% due to the incremental impact of state income taxes offset by reductions for foreign sales exclusions and research and experimentation tax credits currently available for federal income tax purposes. Our effective tax rate may increase in the future if Congress does not renew the research and experimentation tax credit program which is currently scheduled to expire June 30, 2004 or if our ability to exclude foreign sales is reduced or eliminated.

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Six Months ended April 3, 2004 compared to Six Months ended March 29, 2003

Net Sales

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

*See Note 2 of the Notes to Unaudited Consolidated Financial Statements;

Restatement of Interim Consolidated Financial Statements

Net sales were $54.8 million for the six months ended April 3, 2004, an increase of $3.0 million, or 6%, from $51.8 million for the six months ended March 29, 2003.

	•		Military/industrial sales in the microelectronic segment declined by $0.2 million to $19.9 million for the six months ended April 3, 2004 from $20.1 million for the six months ended March 29, 2003. While sales were basically even with the previous year, lower order rates in the second quarter of fiscal 2004 may cause lower year-over-year sales in this market over the next several quarters compared to the previous year.
	•		Commercial sales in the microelectronic segment were $10.5 million for the six months ended April 3, 2004, an increase of $2.3 million, or approximately 28% from $8.2 million for the six months ended March 29, 2003. Approximately $1.2 million of this increase is attributable to

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			four months of sales from IDS included in this period, as compared to two months in fiscal 2003. An additional $1.3 million of the increase was primarily attributable to increased sales to Unisys.
	•		Military/industrial sales in the display segment were $5.9 million for the six months ended April 3, 2004, an increase of $0.6 million, or approximately 12%, from $5.3 million for the six months ended March 29, 2003. The increase was due to small increases in sales of our display and interface/mechanical products.
	•		Commercial sales in the display segment were $18.5 million for the six months ended April 3, 2004, an increase of $0.2 million, or approximately 1%, from $18.3 million for the six months ended March 29, 2003. The increase was due to the combined effects of $5.0 million of additional net sales from IDS, offset by a decrease of $4.8 million in commercial display net sales. Commercial display net sales declined primarily because of a $9.1 million decrease in sales to Garmin and GE Medical from the prior year, offset by increased sales to other customers during the period.

During the six months ended April 3, 2004, no customer accounted for more than 10% of our total sales. For the six months ended April 3, 2004, Lowrance Corp. and Whirlpool Corp. accounted for approximately 12% and 13%, respectively, of our display segment net sales.

For the six months ended March 29, 2003 Garmin , accounted for approximately 14% of total sales and 31% of total display segment sales. General Electric Medical Division accounted for approximately 18% of display segment sales for the six months ended March 29, 2003. One microelectronic customer, Raytheon, accounted for approximately 10% of microelectronic segment sales during the six months ended March 29, 2003. No other customer accounted for more than 10% of segment, or total, sales for the first six months of 2003.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, sales of our membrane keypad products, which totaled approximately $5.8 million in six months ended April 3, 2004, are subject to seasonal fluctuations relating to increased home appliance sales in the spring and fall.

Gross Profit

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

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Gross profit was $17.0 million for the six months ended April 3, 2004, a decrease of $0.7 million or approximately 4% from $17.7 million for the six months ended March 29, 2003. For the six months ended April 3, 2004, gross margin as a percentage of net sales was approximately 31%, compared to approximately 34% for the six months ended March 29, 2003.

Gross profit for the microelectronic segment was $11.2 million for the six months ended April 3, 2004, a decrease of $1.3 million, or approximately 10%, from $12.5 million for the six months ended March 29, 2003. The $1.3 million decline in microelectronic segment gross profit was caused by a $1.6 million reduction in our military memory products gross profit partially offset by a $0.3 million increase in gross profits from our commercial products. The decrease in gross profit for our military products was the result of changes in product mix and higher manufacturing costs. The increase in our commercial products gross profit was mainly the result of slightly higher sales combined with savings achieved from the consolidation of our Massachusetts facility into our Phoenix facilities. We expect to see continued savings throughout fiscal 2004 as the result of this consolidation.

Gross profit for the display segment was $5.8 million for the six months ended April 3, 2004, an increase of $0.6 million, or approximately 13%, from $5.2 million for the six months ended March 29, 2003. This increase in gross profit was the result of higher margins on military products than in the previous year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist mainly of compensation expense, selling expenses, including commissions, information technology expenses and corporate administrative expenses. Selling, general and administrative expenses were $9.0 million for the six months ended April 3, 2004 an increase of $0.9 million, or approximately 11%, from $8.1 million for the six months ended March 29, 2003. Expenses increased by approximately $0.8 million primarily because of the inclusion of IDS for four months of fiscal 2004 during the period, as compared to two months during the same period in fiscal 2003. Other expenses were approximately the same as last year as increases in the microelectronic segment were offset by savings incurred from the consolidation of our Massachusetts facility into our Phoenix facility.

Selling, general and administrative expenses as a percentage of net sales were 16% for both the six months ended April 3, 2004 and March 29, 2003. As part of our overall management planning and analysis process, we have traditionally targeted approximately 15% of net sales for selling, general and administrative expenses. Actual expenses will fluctuate based on normal changes in activity.

Research and Development Expenses

Research and development expenses consist primarily of compensation for our engineering personnel, consulting expenses and project materials. Research and development expenses were $3.2 million for the six months ended April 3, 2004 an increase of $0.6 million, or approximately 21%, from $2.6 million for the six months ended March 29, 2003. The increase was primarily attributable to an increase of $0.3 million in our display segment for work on new product development projects. The remainder of the increase was primarily attributable to the inclusion of IDS for four months during the fiscal 2004 period, as compared to two months of expenses during the fiscal 2003 period. Research and development expenses as a percentage of net sales have remained consistent and averaged between 5% and 6% of net sales over the past four quarters. We are committed to research and development of new and existing products and expect research and development expenses to average approximately 5-6% of net sales in the future.

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Ongoing product development projects for the microelectronic segment include new packaging designs for memory products including SDRAM, and synchronous static random access memory (“SSRAM”), along with Power PC microprocessor based modules and ball grid array packaging products using these semiconductors; continuing development of anti-tamper technology for microelectronic products; and qualification of new semiconductor products. Ongoing product development projects for the display segment include glass lamination process technology and display systems development.

Interest Income

Interest income consists of interest earned on our cash balances in various types of interest bearing accounts, and interest earned on marketable securities. Interest income was $222,000 for six months ended April 3, 2004, an increase of $113,000 compared to $109,000 for the six months ended March 29, 2003. This increase was attributable to the increase in invested balances between periods primarily as a result of the reinvestment of cash flows from operations, and the proceeds received from our stock offering which was completed in July 2003.

Amortization of Intangible Assets

Intangible asset amortization for the six months ended April 3, 2004 and March 29, 2003 totaled $324,000 and $299,000, respectively. During the six months ended April 3, 2004, approximately $317,000 related to intangible assets acquired from IDS, and during the six months end March 29, 2003, approximately $256,000 related to intangible assets acquired from IDS.

Income Taxes

Income tax expense totaled $1.4 million for the six months ended April 3, 2004 compared to $2.2 million for the six months ended March 29, 2003 primarily as a result of lower pre-tax income. The Company’s effective tax rate was approximately 30% for the six months ended April 3, 2004 and 33% for the six months ended March 29, 2003. The Company’s effective tax rate differs from the federal statutory tax rate of 35% due to the incremental impact of state income taxes offset by reductions for foreign sales exclusions and research and experimentation tax credits currently available for federal income tax purposes. Our effective tax rate may increase in the future if Congress does not renew the research and experimentation credit program which is currently scheduled to expire June 30, 2004 or if our ability to exclude foreign sales is reduced or eliminated.

Liquidity and Capital Resources

Cash on hand as of April 3, 2004 totaled approximately $35.9 million. In January 2004, we received proceeds from a $5.0 million short-term corporate note and transferred the proceeds to our cash account. During the six months ended April 3, 2004, cash provided by operating activities was approximately $1.6 million. Depreciation and amortization totaled approximately $2.3 million for the six months ended April 3, 2004, and we expect will remain approximately at this rate through fiscal 2004. Net income, exclusive of non-cash charges, was the primary source of positive cash flow during the six months ended April 3, 2004. Payments of accrued expenses and accounts payable, and increases in inventories were the primary uses of cash during the period.

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Purchase of property, plant and equipment during the six months ended April 3, 2004, totaled approximately $1.4 million. During the six months ended April 3, 2004, the purchases included $0.5 million for our microelectronic manufacturing facilities and $0.8 million for our display and interface manufacturing facilities. We currently do not have any material commitments for additional purchases of property, plant and equipment. Purchases are made throughout the year based on our manufacturing, product development, and administrative requirements. Our annual purchases have averaged approximately $3.4 million over the last three fiscal years. We expect expenditures during fiscal 2004 to be similar to our recent history, and we expect to fund these purchases from our cash balances and operating cash flows.

Accounts receivable decreased approximately $0.8 million from the fiscal year ended September 27, 2003. The change reflects an overall decline in net sales from the quarter ended September 27, 2003 as a result of lower sales of our military microelectronic products. Days sales outstanding at April 3, 2004 were 60 days, which is equal to the 60 days as of September 27, 2003. Our days sales outstanding typically approximates 60 days.

Inventories increased approximately $1.1 million from the end of fiscal 2003. Inventory of approximately $19.8 million as of April 3, 2004 represented 89 days of inventory on hand, the same as the 89 days on hand at September 27, 2003. The levels of inventory fluctuate based on changes in expected production requirements and availability of raw materials. Inventory amounts will generally take several quarters to adjust to significant changes in future sales. Also, as lead times for raw materials increase, we are required to buy larger amounts of inventory per purchase and hold it for longer periods of time. This would have the effect of increasing our days of inventory on hand. We expect to fund any increases in inventory caused by sales growth or manufacturing planning requirements from our cash balances and operating cash flows.

Accounts payable as of April 3, 2004 declined by approximately $1.4 million from the end of fiscal 2003 primarily related to our payment for inventory purchased during the fourth quarter of fiscal 2003. Deferred revenue at April 3, 2004 was approximately $1.6 million and consisted of approximately $1.5 million of advance payments from customers. Additionally, accrued income taxes were approximately $0.6 million higher than at year-end as a result of the timing of estimated tax payments. Accrued commissions were approximately $0.3 million lower than the previous year-end because of a lower amount of sales to customers covered by our manufacturers’ representatives.

Accrued salaries and benefits were approximately $1.0 million lower at April 3, 2004 compared to the end of fiscal 2003 mainly because of a lower accrual for employee payroll and incentive expenses.

We have a $12.0 million revolving line of credit with Bank One. Borrowings under the line of credit bear interest at either the London Interbank Offered Rate (“LIBOR”) plus 1.5%, or the Bank One “prime rate”. The line of credit was renewed on March 19, 2004 for an additional two years, at similar terms and conditions as the previous credit facility, and now expires on March 28, 2006. As of April 3, 2004 there were no borrowings against the line of credit, and we have not borrowed against the line of credit since April 2003.

We are in compliance with all debt covenant requirements contained in our loan agreement. We believe that our existing sources of liquidity, including expected cash flows from operating activities, existing cash balances, existing credit facilities and other financing sources, will satisfy our cash requirements for at least the next twelve months.

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Contractual Obligations

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