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Article by DailyStocks_admin    (09-09-08 05:44 AM)

Filed with the SEC from Aug 28 to Sep 03:

White Electronic Designs (WEDC)
Wynnefield Partners Small Cap Value wants Brian Kahn to be appointed to White Electronic's board, to fill the vacancy created by Hamid Shokrgozar's resignation. Wynnefield owns about 1.28 million shares (5.7%).

BUSINESS OVERVIEW

GENERAL

We design, develop and manufacture innovative microelectronic and display components and systems for inclusion in high technology products for 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 in military applications. Our display solutions include enhanced flat panel display products, interface devices and electromechanical assemblies. Our customers, which include military prime contractors in the United States and Europe as well as commercial original equipment manufacturers (“OEMs”), outsource many of their microelectronic and display components and systems to us as a result of the combination of our design, development and manufacturing expertise.

We are an Indiana corporation, originally incorporated in 1951 as Bowmar Instrument Corporation (“Bowmar”). On October 26, 1998, Bowmar merged with Electronic Designs, Inc. (“EDI”). In connection with the merger, Bowmar changed its name to White Electronic Designs Corporation. At the time of the merger, Bowmar was a manufacturer of high reliability electronic components and interface and mechanical devices, mainly for military applications. EDI was a manufacturer of commercial memory products for the telecommunications and data communications markets and also had a small “ruggedized” (manufactured to perform in harsh environments) display business serving the military and industrial markets. The merger provided us with a diversified platform to expand our product offerings within both the military and commercial markets. In order to complement our military/industrial display business, we acquired Panelview, Inc. (“Panelview”) in January 2001. Panelview was a designer and manufacturer of enhanced commercial flat panel display products. Following the acquisition, we consolidated our display operations into our Panelview subsidiary. 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 offer fully integrated system level solutions. In September 2003, we completed our consolidation of manufacturing operations for our commercial memory microelectronic products by moving operations from our former facility in Marlborough, Massachusetts to our IDS facility in Phoenix, Arizona. In October 2004, we made the decision to consolidate our two Phoenix locations and sell the IDS facility and land. We completed the consolidation in the second quarter of fiscal 2006 and sold the facility and land in September 2007.

We are headquartered in Phoenix, Arizona. Our mailing address is 3601 E. University Drive, Phoenix, Arizona, 85034, and our telephone number at that location is (602) 437-1520. Our website, which contains links to our financial information and our filings with the SEC, is www.whiteedc.com . Unless otherwise indicated in this Form 10-K, “White Electronic Designs,” “us,” “we,” “our,” “the Company” and similar terms refer to White Electronic Designs Corporation and its subsidiaries as a whole.

BUSINESS SEGMENTS

We have two business segments, each of which requires different design and manufacturing resources and generally serves customers in different markets. The microelectronic segment accounted for 58% of our total net sales in fiscal 2007, while the display segment accounted for 42% of our total net sales in fiscal 2007. Financial information for our business segments is disclosed in Note 16 of the Notes to the Consolidated Financial Statements.

MICROELECTRONIC SEGMENT

Our microelectronic segment manufactures semiconductor multi-chip packaged products primarily for memory storage. Our products in the microelectronic segment are generally sold to military prime contractors and commercial OEMs in the aerospace, defense, military equipment, computer networking and telecommunication/ datacommunication industries. Certain industries require these semiconductor parts to pass specific qualifications due to the application requirements for those products. A commercial grade product generally meets the standard of industries such as the consumer electronic, computer networking and telecommunication/datacom munication industries. Higher performing products, also known as high-reliability products, are needed in certain industries such as aerospace, defense, and military equipment and systems, 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 high and low temperature extremes. High-reliability products can also be used in commercial and industrial applications where products are exposed to harsh conditions.

We address both military and commercial market opportunities with advanced semiconductor packaging and microelectronic modules and assemblies. We believe our microelectronic products generally provide our customers with the following advantages over standard technology:


• significant space savings and size advantages;

• improved power and electrical performance; and

• improved component compatibility.

In addition, our microelectronic segment includes our anti-tamper security processing for mission critical semiconductor components in military applications. We are one of a limited number of licensees for anti-tamper technology for microelectronic products and have developed a proprietary process for applying anti-tamper protection for such applications. We believe our process offers greater scalability and higher yields than those of our competitors.

Backlog

The backlog for microelectronic products, represented by firm customer purchase orders, was $46.0 million and $33.4 million at the end of fiscal years 2007 and 2006, respectively. The increase over the previous year was primarily due to additional orders of $13.2 million as shipments in fiscal 2007 were consistent with those in fiscal 2006. Approximately 73% of the segment’s fiscal year-end 2006 backlog was shipped during fiscal 2007, with the remaining backlog scheduled for shipment in fiscal 2008 and beyond. Approximately 60% of the fiscal 2007 year-end backlog is planned for shipment during fiscal 2008, with the remaining backlog scheduled for shipment in fiscal 2009 and beyond. The backlog after fiscal 2008 is a result of customer scheduling requirements for our products and not constraints on our capacity.

Competition

In the microelectronic product markets, we compete primarily based on performance, quality, durability and price. We have a number of present and potential competitors, including customers, many of which have greater financial, technical, marketing, distribution and other resources than we do.

Our principal competitors in the military microelectronic product markets are divisions of Aeroflex Corporation, Austin Semiconductor and Teledyne Microelectronics Group. Our principal competitors in the commercial microelectronic product markets are Simple Technology, Smart Module Technology, Crucial Technology, a division of Micron Semiconductor and Samsung Memory Modules, a division of Samsung. We also compete with manufacturers that provide single chip microelectronic products.

DISPLAY SEGMENT

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

We enhance standard flat panel displays using patented, proprietary and commercially available technology. We believe our enhanced display products offer several benefits, including:


• Increased viewability (anywhere viewable); increased visibility in bright light conditions (Max-Vu tm );

• Increased visibility in bright light conditions; super bright low reflectance (SBLR tm );

• Ability to withstand heavy vibration and extreme temperatures; and

• Wider viewing angles.

Additionally, we combine various display, keyboard, and other components and their supporting electronics into fully integrated solutions for our customers.

Backlog

The display segment backlog, represented by firm customer purchase orders, was $28.5 million and $19.2 million at the end of fiscal years 2007 and 2006, respectively. The increase from the previous year was attributable to an overall increase in orders of $5.4 million and the timing of orders and shipments as we shipped $5.2 million more in the fourth quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2007. Approximately 96% of this segment’s fiscal 2006 year-end backlog was shipped during fiscal 2007, while the remaining backlog is scheduled for shipment in fiscal 2008 and beyond. Approximately 63% of the fiscal 2007 year-end backlog is expected to be shipped during fiscal 2008, with the remaining backlog scheduled for shipment in fiscal 2009 and beyond. The backlog after fiscal 2008 is a result of customer scheduling requirements for display and military mechanical products and not constraints on our capacity.

Competition

The principal elements of competition among display product suppliers are display performance (i.e., brightness, color capabilities, contrast and viewing angle), size and weight, design flexibility, power usage, durability, ruggedness and cost. While the primary competition for the active matrix liquid crystal display (“AMLCD”) is currently cathode ray tube displays, our products compete with other flat panel displays including gas plasma and electro-luminescent displays. We believe that price, product reliability and the ability to meet delivery schedules are key competitive factors. In all phases of our operations, we compete primarily based on performance, quality, durability and price. We have a number of present and potential competitors, including customers, many of which have greater financial, technical, marketing, distribution and other resources than we do.

In both the military and commercial markets for the display segment, we compete with numerous companies, such as Global Display Solutions, Planar Systems, and Polarvision, a division of E. I. Du Pont De Nemours & Co. We also experience significant competition from the internal capabilities of our current and potential customers. Commercial customers may also choose to use standard commercially available display products rather than our enhanced display products. The marketplace for commercial interface components is highly fragmented with numerous companies offering similar products, such as Molex and Durell, as well as competition from companies in Asia.

SALES, MARKETING AND DISTRIBUTION

We use an integrated sales approach to closely manage relationships at multiple levels of the customer’s organization, including management, engineering and purchasing personnel. This approach involves a team consisting of a senior executive, a business development specialist, and members of our engineering department. Our sales team consists of approximately 32 people, including 7 sales managers. Our use of experienced engineering personnel as part of the sales effort enables close technical collaboration with our customers during the design and qualification phase of new equipment. We believe that this is critical to the incorporation of our products into our customers’ equipment. Some of our executive officers are actively involved in key aspects of our relationships with our major customers and work closely with our customers’ senior management. We also use manufacturers’ representatives, independent sales representatives and distributors as needed.

The military sales cycle, and certain commercial product sales, tends to be long in nature with a protracted design phase. Once a product is designed into a military system, it is typically sole-sourced to a particular supplier. Due to the extensive qualification process and potential redesign required for using an alternative source, customers are reluctant to change the incumbent supplier. Our business is affected by certain seasonality factors. Our membrane keypad business is subject to seasonal fluctuations relating to home appliance sales. Additionally, our military orders tend to follow the government’s fiscal year, which is consistent with ours, with lower orders in the first half of the fiscal year and higher orders in the second half of the fiscal year.

Our products are sold with a warranty which differs in terms and conditions depending on the product and customer. Our products may be subject to repair or replacement during the warranty period.

PRINCIPAL CUSTOMERS

Our customers consist mainly of military prime contractors and commercial OEMs, and the contract manufacturers who work for them, in the United States, Europe and Asia. Our segments have common customers, mainly in the aerospace defense industry. Sales to military customers accounted for $57.2 million, or 55%, of our net sales in fiscal 2007 as compared to $52.3 million, or 48%, in fiscal 2006. Sales to our commercial customers accounted for $47.1 million, or 45%, of our net sales in fiscal 2007, as compared to approximately $56.6 million, or 52%, in fiscal 2006.

In fiscal 2007, 2006 and 2005, no customer accounted for more than 10% of our total net sales. However, in fiscal 2007, Arrow Electronics accounted for 11% of microelectronic segment net sales, while Hewlett Packard Company, Motion Computing and General Electric accounted for 14%, 10% and 10% of display segment net sales, respectively. In fiscal 2006, On Command Corporation accounted for 12% of microelectronic segment net sales, while Hewlett Packard Company accounted for 18% of display segment net sales. And in fiscal 2005, On Command Corporation accounted for 15% of microelectronic net sales, while NCR Corporation accounted for 18% of display segment net sales.

Total foreign sales for fiscal 2007, 2006 and 2005 were approximately $30.4 million, $31.1 million and $20.7 million, respectively. Additional information concerning sales by geographic area and business segments can be found in Note 16 of the Notes to the Consolidated Financial Statements.

FOREIGN OPERATIONS

For information regarding risks associated with our foreign operations, see Part I, Item 1A “Risk Factors.” Our international operations subject us to risks inherent in doing business on an international level that could adversely impact our results of operations.

RESEARCH, ENGINEERING AND PRODUCT DEVELOPMENT

Our research and development efforts primarily involve engineering and design relating to:


• developing new products;

• improving existing products;

• adapting existing products to new applications; and

• developing prototype components for specific programs.

Some of our product development costs are recoverable under contractual arrangements; however, the majority of these costs are self-funded. Our research and development expenditures approximated $6.8 million, $6.6 million and $5.6 million in fiscal 2007, 2006 and 2005, respectively. We believe that strategic investment in process technology and product development is essential for us to remain competitive in the markets we serve. We are committed to maintaining appropriate levels of expenditures for product development.

REGULATORY MATTERS

Government Contracting Regulations

A significant portion of our business is derived from subcontracts with prime contractors of the United States government. As a United States government subcontractor, we are subject to federal contracting regulations. Our extensive experience in the defense industry enables us to handle the strict requirements that accompany these contracts.

Under federal contracting regulations, the United States government is entitled to examine all of our cost records with respect to certain negotiated contracts or contract modifications for three years after final payment on such contracts to determine whether we furnished complete, accurate, and current cost or pricing data in connection with the negotiation of the price of the contract or modification. The United States 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, we have not experienced any such downward adjustments.

In addition, the Federal Acquisition Regulations govern the allowability of costs incurred by us in the performance of United States government contracts to the extent that such costs are included in its proposals or are allocated to United States government contracts during performance of those contracts.

Our subcontracts provide that they may be terminated at the convenience of the United States 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, our subcontracts provide for termination for default if we fail to perform or breach 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 us to return unliquidated progress payments pending final resolution of the propriety of the termination for default. We 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 from us of such damages. Historically, we have not experienced any such terminations.

In connection with our United States government business, we are also subject to government investigations of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws. We 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 would have a material adverse effect on our business.

It is our policy to cooperate with the government in any investigations of which we have knowledge, but the outcome of any such government investigations cannot be predicted with certainty. We believe we have complied in all material respects with applicable government requirements.

Environmental Protection

Our 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 our capital expenditures, earnings or competitive position within our markets.

International Trade Regulations

We must comply with laws concerning the export of material used exclusively for military purposes. The export of these types of materials is covered under International Traffic in Arms Regulations (“ITAR”) laws. We applied for and received a two-year license, which expires in July 2008, which allows us to export materials covered under these regulations.

RAW MATERIALS

The most significant raw materials that we purchase for our operations are memory devices in wafer, die and component forms for our microelectronic segment and AMLCDs for our display segment. We are highly dependent on one static random access memory (“SRAM”) and one dynamic random access memory (“DRAM”) semiconductor manufacturer for memory devices and one package manufacturer of ceramic packages for military components. We are also highly dependent on certain suppliers for our AMLCDs and DRAM for particular customers due to their product specifications. Despite the risks associated with purchasing from single sources, or from a limited number of sources, we have made the strategic decision to select single source or limited source suppliers in order to obtain lower pricing, receive more timely delivery and maintain quality control. We buy the same types of material components typically used in the commercial commodity markets which we enhance through packaging, testing, and other processes. As a result, we have to monitor the supply and demand and proactively plan our purchases. We have long-standing strategic relationships with world class semiconductor and display suppliers. Because of these capabilities and relationships, we believe we can continue to meet our customers’ requirements. In cases where unanticipated customer demand or supply shortages occur, we attempt to arrange, through strategic relationships with our semiconductor suppliers, for alternative sources of supply, where available, or defer planned production to meet anticipated availability of critical components or materials. We do not have specific long-term contractual arrangements with our vendors but believe we have good relationships with them.

INTELLECTUAL PROPERTY

We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. The products we sell from both our microelectronic segment and our display segment require a large amount of engineering design and manufacturing expertise. The majority of these technological capabilities, however, 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. An increase in the sophistication of our competitors’ products may result in increased competition and a reduction of sales for our products.

Our trade secret protection for our technology, including our process for applying anti-tamper protection to microelectronic products, is based in part on confidentiality agreements that we enter into with our employees, consultants and other 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. Others may also come to know about or determine our trade secrets. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States.

We were granted one new patent from the United States Patent and Trademark Office during fiscal 2007 for our Spray Coating Apparatus and Fixtures technology. This patent expires in January 2023. We were also granted one new patent from the Taiwan Patent and Trademark Office and the China Patent and Trademark Office for our Super Bright Low Reflectance technology. The Taiwan patent expires in January 2020 and the China patent expires in February 2027. We have applied for ten other patents, five of which relate to our anti-tamper manufacturing process, which are currently under review.

EMPLOYEES

As of November 30, 2007, we had approximately 395 employees, including 32 in sales, 9 in marketing, 58 in research, development and engineering, 246 in manufacturing and quality assurance, and 50 in general and administrative. Approximately 29 of our active employees in the display segment are employed pursuant to a three-year collective bargaining agreement covering workers at our Fort Wayne, Indiana facility that was ratified on November 20, 2007. The contract will expire on November 15, 2010. We believe our relationship with our employees is good.

CEO BACKGROUND

Jack A. Henry (64)
Jack A. Henry has served on our Board since January 2004 and currently serves as the Chairman of our Audit Committee. He began his career with Arthur Andersen in 1966, and in 2000 retired as the managing partner of the Phoenix office. He then formed Sierra Blanca Ventures LLC, a private investment and advisory firm. He currently serves on the Boards of Directors of VistaCare, Inc., Point Blank Solutions, Inc. and three private companies. He has previously served on the Boards of Directors of four other public-reporting companies. Additionally, he serves as President of the Arizona Chapter of the National Association of Corporate Directors. Mr. Henry holds a Bachelor of Business Administration degree and a Master of Business Administration degree from the University of Michigan.

Paul D. Quadros (61)
Paul D. Quadros has served on our Board since January 2004 and currently serves as the Chairman of the Compensation Committee and is a member of the Audit Committee. He is a co-founder and former Chairman of the Board of Corautus Genetics, a cardiovascular gene therapy Corporation. In 1995, he co-founded GenStar Therapeutics and served as its President and Chief Executive Officer through a milestone partnering agreement with Baxter Healthcare in 1998. He also served as Chief Financial Officer of GenStar, a public-reporting Corporation, from inception through 2003. Corautus was formed through the merger of GenStar with Vascular Genetics in 2003. He served as the Chairman of GenStar from 1998 and of the merged Corporation until 2004. From 1986 to 1995, he was a General Partner of Technology Funding, a venture capital fund. While at Technology Funding, Mr. Quadros assisted Crystallume, one of the companies that merged to form White Electronic Designs Corporation, with its IPO. He is currently Managing Partner of Tenex Greenhouse Ventures Ltd., a venture capital fund. He also serves as a director of several private companies. He was co-founder and served at various times from 1991-2001 as Chairman of the Board and Audit and Compensation Committee Chairman of Cardiac Science (NASDAQ: CSCX). Mr. Quadros holds a Bachelor of Arts degree in Finance from California State University, Fullerton and a Master of Business Administration degree from the Anderson School of Management at the University of California, Los Angeles.

Thomas M. Reahard (56)
Thomas M. Reahard has served on our Board since November 1995 and currently serves as the Lead Director and is a member of the Corporate Governance and Nominating Committee and the Compensation Committee. He has been the Chairman and Chief Executive Officer of Symmetry Software Corporation, a computer software development corporation, since 1984. He is the founder of Scottsdale.com, a cofounder of the Arizona Technology Council and current Chairman of the Barrow Neurological Foundation. Mr. Reahard holds a Bachelor of Science degree in Industrial Engineering from Cornell University and a Master of Science degree in Industrial Engineering from the University of Missouri.

Hamid R. Shokrgozar (47)
Hamid R. Shokrgozar has been our President and Chief Executive Officer since October 1998 and the Chairman of our Board since August 2000. He served as a Director and as President and Chief Executive Officer of Bowmar Instrument Corporation (“Bowmar”) from January 1998 until the merger of Bowmar and EDI in October 1998. Since 1998, he has completed three acquisitions and a $52 million secondary offering. He served as President of White Microelectronics, the largest division of Bowmar, from June 1993 to December 1997 and as its Vice President of Engineering and Technology from July 1988 to June 1993. He also served as Chairman of the American Electronic Association (AEA), Arizona Council, during fiscal years 1999 and 2000. In addition, he holds a United States Patent for the invention of “Stacked Silicon Die Carrier Assembly.” Mr. Shokrgozar holds a Bachelor of Science degree in Electrical Engineering from California State University, Fullerton.

Thomas J. Toy (52)
Thomas J. Toy has served on our Board since October 1998, and currently serves as the Chairman of our Corporate Governance and Nominating Committee and is a member of the Audit Committee. He is Managing Director of PacRim Venture Partners, a venture capital firm he co-founded in 1999, and a Partner at SmartForest Ventures, also a venture capital firm. Previously, he was a Partner at Technology Funding, a venture capital firm he worked for from 1987 to 1999. He also serves as Chairman of the Board of UTStarcom, a manufacturer of wireless communications equipment, a Director of Solarfun Power Holdings, a producer of solar energy cells and modules, as well as a Director of several private companies. Mr. Toy holds a Bachelor of Arts degree and a Master of Management degree from Northwestern University.

Edward A. White (80)
Edward A. White has served on our Board since we were founded as Bowmar in September 1951. He is currently the Vice Chairman of the Board and is a member of the Corporate Governance and Nominating Committee and the Compensation Committee. He previously served as Chairman of the Board from September 1983 to October 1998. He founded us in September 1951 and served as our President and Chief Executive Officer from June 1980 to May 1986. Mr. White holds a Bachelor of Science degree in Engineering from Tufts University.



MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We design, develop and manufacture innovative microelectronic and display components and systems for inclusion in 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 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.

We were formed as a result of the merger between Bowmar and EDI in October 1998. At the time of the merger, Bowmar was a manufacturer of high reliability electronic components and interface and mechanical devices, mainly for military applications. EDI was a manufacturer of commercial memory products for the telecommunications and networking markets and also had a small ruggedized display business serving the military and industrial markets. This merger provided us with a diversified platform to expand our product offerings within both the military and commercial markets. In order to complement our military/industrial display business, we acquired Panelview, a designer and manufacturer of enhanced commercial flat panel display products, in January 2001. Following the acquisition, we consolidated our display operations into our Panelview subsidiary. In January 2003, we acquired 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

Net sales for the fiscal year ended September 29, 2007 were approximately $104.2 million, compared to net sales of $108.9 million for fiscal 2006. Microelectronic segment net sales increased $0.2 million. Military/industrial net sales in the microelectronic segment increased $5.3 million, or 13%, from fiscal 2006 as we shipped increased orders received in recent quarters. Commercial net sales in the microelectronic segment decreased $5.1 million, or 26%, from fiscal 2006 due to decreased sales to our high-end institutional server customers and decreased demand from a customer in the hotel entertainment systems industry as their business slowed and they were acquired by their competitor. Display segment net sales decreased $4.9 million, or 10% from fiscal 2006. Commercial net sales in the display segment decreased by $4.4 million, or 12%, from fiscal 2006 due to decreased sales to our tablet PC and our appliance customers as the economy softened, and was additionally impacted by the delay of shipments by our golf course global positioning system (GPS) customer, which was somewhat offset by an increase in sales to a medical customer. Display segment net sales to military/industrial customers decreased $0.5 million, or 4%, over fiscal 2006.

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. For the year, we had new orders of approximately $126.6 million, which equates to a book-to-bill ratio of 1.21:1 for the year. Microelectronic segment orders for the year were approximately $73.4 million, which equates to a book-to-bill ratio of 1.22:1 for the year. Bookings from our military customers continued their positive trend throughout the year and we expect bookings to continue at this level in fiscal 2008. Bookings from our commercial customers also increased over the prior fiscal year and we expect modest growth in fiscal 2008. However, with the slowing economy, we are experiencing a slower turn of our backlog as commercial customers are pushing out shipments, resulting in higher backlog. We expect this trend to continue during fiscal 2008. New orders for our microelectronic segment’s anti-tamper process technology were approximately $14.0 million for the year and we had sales of approximately $5.8 million. We currently expect to see growth for anti-tamper technology products over the next several years. Display segment orders for the year were approximately $53.2 million, which equates to a book-to-bill ratio of 1.21:1 for the year. We expect display segment orders to increase in fiscal 2008 over fiscal 2007. However, as with the commercial microelectronic customers, as a result of the softening economy, we expect a slower turn of our display commercial backlog in fiscal 2008 than we have historically experienced.

Our gross margins were approximately 30% for fiscal 2007 as compared to approximately 31% for fiscal 2006. Gross margins in our microelectronic segment were 37% for fiscal 2007 as compared to 38% in fiscal 2006. Military/industrial margins in our microelectronics segment remained consistent at 48%. However, due to lower sales volume, underabsorbed overhead and a lower margin product mix, our commercial margins in this segment decreased to 3% in fiscal 2007 from 18% in fiscal 2006. Due to the fact that many of our costs are fixed, if we are unable to utilize our manufacturing facilities at a high level, these fixed costs will not be fully absorbed, resulting in lower gross margins. Gross margins in our display segment were 20% in fiscal 2007 as compared to 21% in fiscal 2006. Commercial margins in our display segment remained consistent at approximately 13%. Military/industrial margins in this segment decreased to 40% in fiscal 2007 from 44% in fiscal 2006, primarily as a result of a lower margin product mix.

Our overall production has, at times, been affected by longer lead times for certain components, which may affect the timing and cost of sales during the year. The availability and price of memory and display components, based on supply and demand, will increase and decrease on a monthly or quarterly basis. When demand exceeds supply, prices generally increase and lead times lengthen. When supply exceeds demand, prices generally decrease and lead times shorten. The Dynamic Random Access Memory (“DRAM”), including synchronous DRAM (“SDRAM”), and Double Data Rate (“DDR”) DRAM market supply has increased and we do not expect shortages in the near future. DRAM prices decreased steadily during fiscal 2007 due to the oversupply of inventories. More and more companies are transitioning from DDR to DDR II and the DDR II supply is expanding. We expect prices to remain at these lower levels unless there is a scaling back of production over the next couple of quarters. There could be a further reduction in prices as a demand-driven downcycle is experienced due to adverse economic conditions such as a recession. The Flash memory supply has stabilized over the last few months. Prices have been volatile, increasing and decreasing throughout fiscal 2007. Prices began declining again in September 2007 and we expect prices to stabilize or decrease slightly over the next couple of quarters. The availability of LCDs has stabilized as manufacturers continue to add capacity. We experienced a modest decline in prices during fiscal 2007. LCD prices are expected to remain flat or rise slightly during the first half of fiscal 2008.

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

We have purchased and placed duplicate equipment for our Max-Vu tm process technology in a manufacturing company located in China in order to be more competitive in the commercial display market for our tablet PC products. Production using this equipment began in the second quarter of fiscal 2006 and substantially all of our Max-Vu tm products are currently being produced in China. We anticipate moving manufacturing of other related products to China, which we believe will result in value to the Company and our stockholders.

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

In the fourth quarter of fiscal 2007, we found indicators of impairment related to our customer relationships intangible asset recorded as part of the 2003 Interface Data Systems acquisition. The primary portion of the write-down was in the microelectronic segment’s commercial related products as a result of a key customer’s decreased demand for its hotel entertainment systems and the acquisition of this customer by their competitor, which represented a high concentration of the legacy customer base at the time of the acquisition. The remainder resulted from the realignment of the display printing business from Phoenix to Columbus which was completed in the fourth quarter. We wrote down all of the $1.4 million of the unamortized customer relationships intangible asset related to the reporting unit.

As a result of the tightening economy and the slowdown in both our microelectronic and display segments’ commercial markets, we took some proactive steps at the end of the fiscal year to reduce expenses going forward. A reduction in force was taken at the end of the fourth quarter which will result in annual savings of approximately $1.5 million, primarily in operating expenses. We incurred approximately $0.2 million in severance costs in the fourth quarter of fiscal 2007 as a result of this measure. Should these markets not improve as expected, further reductions could be made in the future.

Below are our fiscal 2007 strategic initiatives and a fourth quarter update of their progress:


• Class K certification to allow the Company to provide military products intended for space applications. Update: We successfully completed the formal Class K audit with the Defense Supply Center Columbus (DSCC). The Company is officially a certified Class K manufacturer. The first K level kit has gone through line test and is moving through assembly and final test. Radiation shielding methods using high density metals are being investigated for microelectronic packaging. During the quarter we booked a small order totaling $0.1 million for a custom multi-chip package for a space application and also quoted three new Class K custom products. We continue to visit potential customers.

• Pursuit of Circuit Card Assembly (CCA) for military customers. Update: Our engineering team finalized the layout of a complete GPS receiver, including RF, power supplies, and signal conditioning. An initial $0.8 million contract is for the delivery of prototypes of a complete CCA for use in a GPS communications receiver. The Company expects to begin delivering these prototypes in February 2008. Our surface mount lines have been upgraded with new equipment to make them more capable and flexible in production. We will continue our discussions to create CCA manufacturing partnerships with additional customers.


• Next generation Anti-Tamper (AT) technology for military and commercial applications. Update: This new coating process is developing on schedule. We are currently setting up additional equipment and process development for new material sets. We estimate completion in the summer of 2008.

• New applications for industrial grade Compact Flash (CF) in ruggedized embedded computing systems including medical, flight systems, factory automation, test and measurement and instrumentation. Update: The complete family of CF cards from 128MB to 8GB are available and are tested at industrial temperatures. During the fourth quarter we continued promoting our CF cards and received a $0.3 million order. During fiscal 2007 our CF orders totaled over $1.5 million. We will continue to promote this new line of flash products to the industrial and medical markets.

• Next generation display enhancement technology, Max-Vu tm II technology. Update: We developed proof of concept glass-bonded LCD prototypes using two new optical bonding processes. We developed a preliminary mass production cost model and we also initiated design validation testing on one process. This will allow us to penetrate markets previously not served by our Max-Vu tm I process. We estimate that the new Max-Vu tm II process will be production ready by the middle of fiscal year 2008.

• Fully integrated Touch Panel display products. Update: During the fourth quarter we continued to demonstrate sunlight readable display systems with integrated touch sensors to various customers. These displays have very low reflectance while retaining excellent brightness, enabling their use in very high brightness environments. By utilizing our Max-Vu tm optical bonding process, the clarity and contrast of these display systems are excellent and the stiffness and strength of the display system are substantially enhanced, increasing the ruggedness of the display and the quality of the touch or pen feel when using the touch sensor. The positive feedback from our product demonstrations has resulted in samples being sent to multiple customers.

• Continue the stock repurchase program. Update: On February 3, 2007, the Board of Directors authorized the second repurchase program to acquire up to an additional 5%, or 1,175,642 shares, of our outstanding common stock. The program is being implemented through a Rule 10b5-1 stock purchase plan and the plan will expire when all authorized shares have been purchased or in April 2008, whichever occurs first. The plan authorized the repurchase of shares beginning in July 2007. As of November 27, 2007, we have purchased a total of 932,727 shares at an average price of $5.27, for approximately $4.9 million, including commissions and fees.

• Pursuing strategic acquisitions. Update: We have and will continue to evaluate various strategic acquisitions. We continue to search for and evaluate companies that we believe could expand and augment our existing businesses.

Net income for fiscal year 2007 was approximately $3.1 million compared to net income of approximately $6.0 million for fiscal 2006. The primary factors causing the decrease were lower gross profit of $2.3 million primarily due to lower sales, higher selling expenses of $2.3 million, higher research and development expenses of $0.2 million and the $1.4 million non-cash write-down of intangibles. These factors were somewhat offset by an increase in interest income of $0.4 million and decreased income tax expense of $2.4 million. We invested in our sales force this year, hiring additional sales executives to support the long term growth of the organization, and, while we did not benefit from higher sales in fiscal 2007, increases in our bookings and backlog are positive signs that this investment will lead to increased sales in the future.

Results of Operations

Fiscal Year ended September 29, 2007 compared to Fiscal Year ended September 30, 2006

Net Sales

Net sales were $104.2 million for the year ended September 29, 2007, a decrease of $4.7 million, or approximately 4%, from $108.9 million for the year ended September 30, 2006.


• Military/industrial net sales in the microelectronic segment were $45.8 million for the year ended September 29, 2007, an increase of $5.4 million, or approximately 13%, from $40.4 million for the year ended September 30, 2006. The increase was due to the shipment of increased orders received in recent quarters as we have experienced a higher demand for our products. We expect net sales to military/industrial customers to increase in fiscal 2008 as compared to fiscal 2007.

• Commercial net sales in the microelectronic segment were $14.6 million for the year ended September 29, 2007, a decrease of $5.2 million, or approximately 26%, from $19.8 million for the year ended September 30, 2006. Approximately $1.7 million of the decrease was due to softness in the high-end server business and the resulting lower demand for our products. We expect this trend to continue. We also experienced decreased demand for a customer’s hotel entertainment systems due to a slowdown in their business and the acquisition of this customer by their competitor. We shipped all remaining backlog during the fourth quarter and are uncertain at this time of expected future sales volume as they continue their integration. However, we expect increased net sales in fiscal 2008 to our commercial microelectronic customers.

• Military/industrial net sales in the display segment were $11.4 million for the year ended September 29, 2007, a decrease of $0.4 million, or approximately 4%, from $11.8 million for the year ended September 30, 2006. The decrease was primarily due to programs reaching their end of life which have been partially offset by new orders. We expect military/industrial net sales in the display segment in fiscal 2008 to grow slightly from sales in fiscal 2007.

• Commercial net sales in the display segment were $32.4 million for the year ended September 29, 2007, a decrease of $4.5 million, or approximately 12%, from $36.9 million for the year ended September 30, 2006. The decrease from the prior year is attributable to decreased sales to our tablet PC and our appliance customers as the economy softened, and was additionally decreased by the delay of shipments from a golf course GPS customer, which was somewhat offset by an increase in sales to our medical customers. While we expect to lose one of our medical customers in fiscal 2008 due to pricing pressure, we expect commercial net sales in the display segment to increase slightly in fiscal 2008.

Arrow Electronics accounted for approximately $6.8 million, or 11%, of our fiscal 2007 microelectronic segment net sales as compared to $4.6 million, or 8%, and $5.0 million, or 8%, of fiscal 2006 and fiscal 2005 microelectronic segment net sales, respectively. On Command Corporation accounted for $3.5 million, or 6%, of our fiscal 2007 microelectronic segment net sales as compared to $7.4 million, or 12%, and $9.3 million, or 15%, of fiscal 2006 and fiscal 2005 microelectronic segment net sales, respectively.

Hewlett Packard Company accounted for approximately $6.2 million, or 14%, of our fiscal 2007 display segment net sales as compared to $8.6 million, or 18%, of fiscal 2006 display segment net sales. There were no sales to Hewlett Packard in fiscal 2005. There were no sales to NCR in fiscal 2007. However, NCR accounted for approximately $0.6 million, or 1%, and $9.3 million, or 18%, of fiscal 2006 and fiscal 2005 display segment net sales, respectively. Motion Computing accounted for approximately $4.4 million, or 10%, of our fiscal 2007 display segment net sales as compared to $4.4 million, or 9%, and $4.0 million, or 8%, of fiscal 2006 and fiscal 2005 display segment net sales, respectively. General Electric accounted for approximately $4.2 million, or 10%, of our fiscal 2007 display segment net sales as compared to $3.2 million, or 7%, and $2.9 million, or 5%, of fiscal 2006 and fiscal 2005 display segment net sales, respectively.

The majority of our commercial sales are not subject to seasonal fluctuations over the course of a year. Sales of our membrane keypad products, which totaled approximately $6.8 million in fiscal 2007 and $8.0 million in fiscal 2006, are subject to seasonal fluctuations relating to home appliance sales in the spring and fall. Our military sales tend to follow the government’s fiscal year, which ends in September, and are typically less in the first quarter of our fiscal year and more in the fourth quarter of our fiscal year.

Gross Profit

Gross profit was $30.9 million for the year ended September 29, 2007, a decrease of $2.3 million, or 7%, from $33.2 million for the year ended September 30, 2006. Gross margin as a percentage of net sales was approximately 30% for the year ended September 29, 2007, compared to approximately 31% for the year ended September 30, 2006.

Gross profit for the microelectronic segment was $22.2 million for the year ended September 29, 2007, a decrease of $0.9 million, or approximately 4%, from $23.1 million for the year ended September 30, 2006. The decrease resulted from a decrease in commercial gross profit as a result of lower sales volume and a corresponding lower absorbtion of overhead as well as a lower margin product mix. This was offset by an increase in military gross profit fueled by an increase in sales volume slightly offset by a lower margin product mix. Gross margin as a percentage of microelectronic segment net sales was approximately 37% for the year ended September 29, 2007, compared to approximately 38% for the year ended September 30, 2006. The higher percentage of military/industrial sales, which historically have a higher selling price and higher gross margin than commercial products, helped to maintain the overall gross margin percentage in fiscal 2007.

Gross profit for the display segment was $8.7 million for the year ended September 29, 2007, a decrease of $1.4 million, or 14%, from $10.1 million for the year ended September 30, 2006. Gross margin as a percentage of display segment net sales was approximately 20% for the year ended September 29, 2007, compared to approximately 21% for the year ended September 30, 2006. Commercial margins remained consistent at approximately 13%. Military/industrial margins decreased to approximately 40% in fiscal 2007 from approximately 44% in fiscal 2006, primarily as a result of a lower margin product mix.

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 $21.1 million for the year ended September 29, 2007, an increase of $2.1 million, or approximately 11%, from $19.0 million for the year ended September 30, 2006. This increase was due to an increase in selling expenses of $2.3 million, offset by a $0.2 million decrease in general and administrative expenses over the comparable period. Selling expenses increased primarily due to the hiring of additional sales executives to support the long-term growth of the organization and higher commissionable sales. General and administrative expenses decreased mainly because of a $0.2 million gain recorded on the sale of the Flower Street land and building.

As a percentage of net sales, s elling, general and administrative expenses were approximately 20% as compared with 17% for the prior year. The increase was caused by the increase in expenses combined with lower overall net sales. Due to the continued compliance requirements related to the Sarbanes-Oxley Act, our expanded sales force and the expense related to the adoption of SFAS 123(R), we expect selling, general and administrative expenses to average between 18% and 20% of net sales.

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 $6.8 million for the year ended September 29, 2007, an increase of $0.2 million, or 3%, as compared to $6.6 million for the year ended September 30, 2006. The increase was primarily attributable to increased expenditures for our next generation anti-tamper technology. Research and development expenses as a percentage of net sales have been approximately 5% to 6% of net sales over the past three years. We are committed to the research and development of new and existing products and expect research and development expenses to remain at approximately the same percentage of net sales in the future.

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

Amortization of Intangible Assets

Intangible asset amortization for the years ended September 29, 2007 and September 30, 2006 totaled $0.5 million each year, entirely related to intangible assets acquired from IDS.

Goodwill Impairment

Due to the less than expected financial performance in our interface electronics product line in Columbus, Ohio, we tested the goodwill for impairment in the third quarter of fiscal 2006. As a result of this testing, we found indicators of impairment related to this reporting unit. Accordingly, we wrote down all $0.4 million of the unamortized IDS acquisition goodwill related to the interface electronics reporting unit in the display segment.

See Notes 2 and 6 of the Notes to the Consolidated Financial Statements for information relating to the goodwill impairments.

Intangible Asset Impairment

In the fourth quarter of fiscal 2007, we found indicators of impairment related to our customer relationships intangible asset recorded as part of the 2003 Interface Data Systems acquisition. The primary portion of the write-down was in the microelectronic segment’s commercial related products, as a result of a key customer’s decreased demand for its hotel entertainment systems and the acquisition of this customer by its competitor, which represented a high concentration of the legacy customer base at the time of the acquisition. The remainder resulted from the realignment of the display printing business from Phoenix to Columbus which was completed in the fourth quarter. We wrote down all of the $1.4 million of the unamortized customer relationships intangible asset related to the reporting unit.

See Notes 2 and 6 of the Notes to the Consolidated Financial Statements for information relating to the intangible asset impairment.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in money market accounts. Interest income was $2.5 million for the year ended September 29, 2007, an increase of $0.3 million, or 14%, from $2.2 million for the year ended September 30, 2006. This increase was primarily attributable to increased interest rates as our average invested balances decreased approximately $1.2 million. The cash used to repurchase our common stock and purchases of property, plant and equipment more than offset our cash provided by operations.

Income Taxes

Income tax expense consists of current and deferred federal and state income taxes. Income tax expense was $0.6 million for the year ended September 29, 2007, compared to $3.0 million for the year ended September 30, 2006. The effective tax rate was approximately 16% for the year ended September 29, 2007, compared to 33% for the year ended September 30, 2006. The Company’s effective tax rate was increased from the federal statutory tax rate of 34% by the impact of state taxes and is decreased by reductions for the manufacturers’ deduction, research and experimentation tax credits, and a reduction in the tax reserve. See Note 10 to the Consolidated Financial Statements.

For fiscal 2006, the effective rate of 33% differed from the statutory tax rate of 34% due to the impact of state taxes and the $0.4 million goodwill impairment which has no income tax benefit, and was decreased by reductions for foreign sales exclusions, a new manufacturer’s deduction and research and experimentation tax credits.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

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

Net sales were $19.6 million for the three months ended June 28, 2008, a decrease of $1.9 million, or 9%, from $21.5 million for the three months ended June 30, 2007.
Military/industrial sales in the microelectronic segment were $13.7 million for the three months ended June 28, 2008, an increase of $1.1 million, or 9%, from $12.6 million for the three months ended June 30, 2007. The increase is primarily due to the shipment of orders received in recent quarters. We expect fiscal 2008 military/industrial sales in the microelectronic segment to increase over fiscal 2007.
Military/industrial sales in the display segment were $2.8 million for the three months ended June 28, 2008, consistent with the $2.8 million for the three months ended June 30, 2007. We expect fiscal 2008 military/industrial sales in the display segment to decrease over fiscal 2007.
Commercial sales in the display segment were $3.2 million for the three months ended June 28, 2008, a decrease of $2.8 million, or 47%, from $6.0 million for the three months ended June 30, 2007. Sales of our displays in support of convertible PCs decreased due to the end of life of one program and the customer delaying the next generation of product as it uses up its excess inventory. Additionally, sales to a medical customer for whom we supplied displays decreased as a result of the program winding down. We expect fiscal 2008 commercial sales in the display segment to significantly decrease from fiscal 2007 as the slowing economy affects these markets.
During the three months ended June 28, 2008, L3 Communications Corporation (“L-3 Communications”) and Arrow Electronics, Inc. (“Arrow Electronics”) accounted for $2.4 million and $2.0 million, or 12% and 10%, respectively, of total net sales. Within the microelectronic segment, L-3 Communications, Arrow Electronics and Raytheon Company accounted for $2.4 million, $1.8 million and $1.4 million, or 17%, 13% and 10%, respectively, of net sales. Within the display segment, Hewlett Packard International, Pte. Ltd. (“Hewlett Packard”), Honeywell International, Inc. (“Honeywell”) and Motion Computing, Inc. (“Motion Computing”) accounted for $0.6 million, $0.6 million and $0.6 million, or 10%, 10% and 10%, respectively, of net sales.
During the three months ended June 30, 2007, Hewlett Packard accounted for $2.6 million, or 12%, of total net sales. Within the microelectronic segment, General Dynamics Corporation (“General Dynamics”) and L-3 Communications accounted for $1.4 million and $1.2 million, or 11% and 10%, respectively, of net sales. Within the display segment, Hewlett Packard and Motion Computing accounted for $2.6 million and $1.1 million, or 30% and 12%, respectively, of net sales.
The majority of our sales are not subject to seasonal fluctuations over the course of a year. However, military sales have historically been strongest during our fiscal fourth quarter.
Gross Profit

Gross profit was $7.2 million for the three months ended June 28, 2008, a decrease of $0.3 million, or 4%, from $7.5 million for the three months ended June 30, 2007. The decrease in gross profit was primarily the result of lower sales more than offsetting the increase in gross margin. For the three months ended June 28, 2008, gross margin as a percentage of total net sales was 37%, compared to 35% for the three months ended June 30, 2007.
Gross profit for the microelectronic segment was $6.1 million for the three months ended June 28, 2008, an increase of $0.6 million, or 11%, from $5.5 million for the three months ended June 30, 2007. The increase in gross profit was primarily the result of increased sales and a slightly higher margin product mix. Gross margin as a percentage of microelectronic segment net sales was 44% for the three months ended June 28, 2008, compared to 43% for the three months ended June 30, 2007.
Gross profit for the display segment was $1.2 million for the three months ended June 28, 2008, a decrease of $0.8 million, or 40%, from $2.0 million for the three months ended June 30, 2007. Gross margin as a percentage of display segment net sales was 20% for the three months ended June 28, 2008, compared to 23% for the three months ended June 30, 2007. Military/industrial gross profit in the display segment remained consistent at $1.2 million. Commercial gross profit in the display segment decreased $0.8 million due to the lower sales volume resulting in lower absorption of overhead as well as an increase in inventory reserve due to the shutdown of one of our customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist mainly of compensation expense, selling expenses, including commissions, information technology expenses and corporate administrative expenses. Selling, general and administrative expenses were $4.5 million for the three months ended June 28, 2008, an increase of $0.3 million, or 7%, from $4.2 million for the three months ended June 30, 2007. The increase was the result of an increase in selling expenses of $0.1 million and an increase in general and administrative expenses of $0.2 million. Selling expenses increased primarily due to severance costs related to a reduction in force in our display segment offset by a decrease in sales commissions. General and administrative expenses increased primarily due to higher stock-based compensation expense and higher accounting and tax fees, which more than offset lower legal fees.
Selling, general and administrative expenses as a percentage of net sales increased to 23% for the three months ended June 28, 2008 from 20% for the three months ended June 30, 2007 primarily due to higher expenses and lower sales. We expect selling, general and administrative expenses to average 20% to 22% in the future.
Research and Development Expenses
Research and development expenses consist primarily of compensation for our engineering personnel, consulting expenses and project materials. Research and development expenses were $1.5 million for the three months ended June 28, 2008, an increase of $0.3 million, or 25%, from $1.2 million for the three months ended June 30, 2007, primarily due to an increase in product development costs. We are committed to the research and development of new and existing products. Historically, research and development expenses have averaged 6% to 7% of net sales.
Ongoing product development projects for the microelectronic segment include new packaging designs for various types of memory products including DRAM, DDR II and the latest DDR III memory modules, mobile SDRAM ball grid array modules, flash and microprocessors, along with microprocessor modules and ball grid array packaging products using these semiconductors; development of secure compact flash, solid-state disks (“SSD”) with secure data scrubbing and thermal management in embedded systems; continuing development of anti-tamper technology for microelectronic products; next generation memory and power personal computer products assembled in various multi-chip packages to be used in both commercial and military markets; and qualification of new semiconductor products. Ongoing product development projects for the display segment include glass lamination process technology, high volume glass lamination for tablet PCs, and our new Max-Vu™ II process technology for tablet personal computers, next generation touch screen tablet PCs and display systems development. We are also working to develop our family of standard enhanced displays from our over twenty years of experience in developing rugged and optically enhanced AMLCD systems. These products are being derived from our many custom display engagements. Our design focus methodology when developing products is to, first and foremost, satisfy our customer’s requirements and then concentrate on retaining the original display manufacturer’s mechanical package dimensions. This allows the enhanced display to drop in the same socket as the original factory product.
Interest Income
Interest income consists of interest earned on our cash balances invested primarily in money market accounts. Interest income was $0.2 million for three months ended June 28, 2008, a decrease of $0.4 million, or 67%, from $0.6 million for the three months ended June 30, 2007. The decrease is due to a lower average invested balance and lower interest rates.
Income Taxes
We recorded an income tax benefit of $0.6 million for the three months ended June 28, 2008, compared to income tax expense of $0.9 million for the three months ended June 30, 2007. The Company’s effective tax rate was 29% for the three months ended June 28, 2008 and 34% for the three months ended June 30, 2007. The Company’s effective tax rate differs from the federal statutory tax rate of 34% due to the incremental impact of state income taxes offset by reductions for the manufacturers’ deduction and research and experimentation tax credits currently available for federal and state income tax purposes.
The decrease in the effective rate for the third quarter of fiscal 2008 when compared to the third quarter of 2007 is primarily due to the release of tax reserves due to the passage of the statute of limitations on certain tax years.

Discontinued Operations
As a result of our decision to dispose of the IED and commercial microelectronics product lines, we have accounted for these operations as discontinued operations. All prior periods have been reclassified to conform to the current period presentation.
Loss from discontinued operations consists of direct revenues and direct expenses of the commercial microelectronics and IED product lines. Commercial microelectronics has historically been reported in the microelectronic segment, while IED has been included in the display segment.

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