In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described under "Risk Factors," and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

We are a defense electronics manufacturer and supplier that designs, develops and manufactures innovative electronic components and systems for inclusion in high technology products for the defense and aerospace markets. Our defense electronics solutions include advanced semiconductor and state of the art multi-chip packaged components, circuit card assemblies and electromechanical assemblies, as well as our proprietary process for applying anti-tamper protection to mission critical semiconductor components. Our customers, which include military prime contractors and the contract manufacturers who work for them in the United States, Europe and Asia, outsource many of their defense electronic components and systems to us as a result of the combination of our design, development and manufacturing expertise.

Executive Summary

Continuing Operations

Net sales for the fiscal year ended September 27, 2008 were approximately $56.4 million, compared to net sales of $52.1 million for fiscal 2007. Net sales increased $4.3 million, or 8%, from fiscal 2007 primarily due to higher sales of our anti-tamper and ball grid array ("BGA") products which more than offset decreases in modules and power PC products, as well as our electromechanical assemblies.

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 year, we received new orders of approximately $56.2 million, which equates to a book-to-bill ratio of 1.0:1. Bookings were consistent throughout the year and we expect bookings to increase in fiscal 2009. New orders for our anti-tamper process technology were approximately $4.8 million for the year and we had sales of approximately $12.0 million. We currently expect to see continued growth for anti-tamper technology products over the next several years.

Our gross margins were approximately 41% for fiscal 2008 compared to approximately 43% for fiscal 2007. The decrease is due to a lower margin product mix and higher costs associated with product yield as well as startup costs associated with circuit card assembly introduction. Our gross margin historically has been a blend of margins derived from custom and standard microelectronic components and electromechanical assemblies. We have traditionally experienced a range of margins in the 40% to 43% range depending on the custom versus standard concentration. As we move vertical with the introduction of military grade circuit card assemblies, which are more price sensitive, we expect overall margins to center around 40%.

Income from continuing operations for the fiscal year ended September 27, 2008 was $2.5 million, or $0.11 per diluted share, compared to income of $5.2 million, or $0.21 per diluted share, for fiscal 2007. The $2.7 million decrease was primarily due to the $2.8 million in expenses related to severance costs and expenses in connection with the departure of our CEO.

On August 28, 2008, we announced the resignation of Hamid Shokrgozar, Chairman, Chief Executive Officer and Director to pursue other opportunities. We recorded severance-related costs in the fourth quarter of fiscal 2008. Following his departure, Edward A. White, the Company's founder, was elected Chairman of the Board and the Board of Directors appointed Roger A. Derse, Vice President and Chief Financial Officer, and Dante V. Tarantine, Executive Vice President, Sales and Marketing to perform the duties of the Office of the President. The Office of the President reports to a committee of the Board headed by Mr. White. The Board also formed a Special Committee to evaluate all possible strategic alternatives.

Discontinued Operations

On March 28, 2008, the Board of Directors authorized the disposal of the Interface Electronics Division ("IED") and the commercial microelectronic product lines. On September 26, 2008, the Board of Directors authorized the disposal of the Display Systems Division ("DSD"). These decisions resulted from an effort to streamline the Company's businesses to focus on product lines where the Company has superior technical knowledge, specialized manufacturing capabilities and an ongoing commitment to research and development. With the streamlining of our business operations, we are now reporting one segment - Defense Electronics. We believe this course of action will increase shareholder value and allow us to focus on growing our business both organically and through other alternatives, including potential acquisitions. As a result of our decision to dispose of these product lines, we have accounted for them as discontinued operations for all periods presented in the accompanying consolidated financial statements and the assets and liabilities of the discontinued operations are classified as assets and liabilities held for sale.

Our discontinued operations generated $40.1 million in revenues in fiscal 2008 compared to $52.2 million in fiscal 2007. The decrease in revenue of $12.1 million, or 23%, was primarily due to the economic downturn which affected demand for our tablet PC, appliance, and other consumer products. Gross profit for fiscal 2008 was $5.4 million, or 14%, compared to $8.6 million, or 16%, in fiscal 2007. The decrease was a result of lower revenues and lower overhead absorption. Loss from discontinued operations was $5.0 million in fiscal 2008 compared to $2.1 million in fiscal 2007. The increase in the loss was due to the lower gross profit and the $3.5 million write-off of goodwill related to our DSD reporting unit which more than offset the $1.4 million write-down of customer relationship intangibles related to our IDS acquisition and the savings from our reductions in force and other cost reductions taken in fiscal 2007.

In fiscal 2008, we also recorded $3.5 million, net of tax, for loss on sale of discontinued operations. Based on market factors and the consideration being discussed in connection with the disposal of the product lines, we recorded impairment charges related to the customer relationship and existing technology intangibles of the IED and commercial microelectronics reporting units, fixed assets at IED and inventory at IED and in our commercial microelectronic product lines.

We currently expect to complete the disposal of our IED and commercial product lines by the end of the second quarter of fiscal 2009 and DSD by the end of fiscal 2009.

Including the charges in connection with the disposal of the product lines discussed above, net loss for the fiscal year ended September 27, 2008 was $6.0 million, or $0.27 per diluted share, compared to net income of $3.1 million, or $0.13 per diluted share, for fiscal 2007.

Fiscal 2008 strategic initiatives for continuing operations and a fourth quarter update of their progress:

• Pursuit of Circuit Card Assembly ("CCA") for military customers. Update:
Expansion in CCA for defense customers continued with several advanced design and development orders as well as production orders. Quoting activity for the fourth quarter also increased over the third quarter of fiscal 2008.

• Next generation Anti-Tamper ("AT") technology. Update: AT technology development has continued with advances in protection of sensitive data. As this business involves classified programs, these programs are generally not discussed. Quoting activity increased during the fourth quarter over the previous quarter, with several production orders booked.

• Continue the stock repurchase program. Update: In April 2008, we announced our third repurchase program to acquire up to an additional 10%, or approximately 2.2 million shares, of the Company's outstanding common stock. The duration of the program is twenty-four months and will be funded from available working capital. The timing and amount of any purchases under this program will depend on market conditions and corporate and regulatory considerations. During the third quarter we purchased 13,179 shares at an average price of $4.73 per share. No further purchase activity occurred during the fourth quarter. Resumption of the program is under evaluation.

• Pursuing strategic alternatives. Update: The Company's previously announced exploration of strategic alternatives under the supervision of the independent special committee of its Board is actively underway.

The Company continues to work closely with its financial advisor Jefferies Quarterdeck, a division of Jefferies Co. to identify opportunities to enhance stockholder value. Wilson Sonsini Goodrich & Rosati, Professional Corporation, is acting as legal advisor.

As previously indicated, the process involves a thorough review of strategic alternatives, including WEDC continuing as an independent public company, merging with or acquiring another public or private defense electronics company, or being acquired by a strategic or financial investor. The special committee is giving due consideration and deliberation with respect to all opportunities that are available to the Company with the goal of identifying what it believes is the best strategy for the Company.

We believe the Company's realignment to be exclusively focused as a defense electronics manufacturer and supplier - coupled with its positive cash flow, substantial cash reserves and lack of debt - allows the Company substantial flexibility to conduct a thorough process with a focus on creating long term shareholder value. The committee is committed to completing the process expeditiously as possible, while ensuring that all alternatives are given appropriate consideration.

Results of Operations

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

                                                                       Fiscal Year Ended
                                                   September 27,         September 29,         September 30,
                                                       2008                  2007                  2006

Net sales                                                   100.0 %               100.0 %               100.0 %
Cost of sales                                                59.4 %                57.1 %                55.8 %

Gross profit                                                 40.6 %                42.9 %                44.2 %

Operating expenses:
Selling, general and administrative                          30.6 %                27.0 %                25.6 %
Research and development                                      6.4 %                 6.5 %                 6.6 %

Total operating expenses                                     37.0 %                33.5 %                32.2 %

Operating income                                              3.6 %                 9.4 %                12.0 %
Interest income                                               2.8 %                 4.9 %                 4.5 %

Income from continuing operations, before
income taxes                                                  6.4 %                14.3 %                16.5 %
Provision for income taxes                                   (2.0 )%               (4.4 )%               (5.3 )%

Income from continuing operations                             4.4 %                 9.9 %                11.2 %

Discontinued operations:
Income (loss) from discontinued operations, net
of tax                                                       (8.8 )%               (4.0 )%                1.1 %
Loss on sale of discontinued operations, net of
tax                                                          (6.2 )%                  -                     -

Income (loss) from discontinued operations                  (15.0 )%               (4.0 )%                1.1 %

Net income (loss)                                           (10.6 )%                5.9 %                12.3 %

Fiscal Year ended September 27, 2008 compared to Fiscal Year ended September 29, 2007

Net Sales

Net sales were $56.4 million for the year ended September 27, 2008, an increase of $4.3 million, or approximately 8%, from $52.1 million for the year ended September 29, 2007. The increase was due to higher sales

of our anti-tamper and BGA products which more than offset decreases in modules and Power PC products, as well as our electromechanical assemblies. We expect net sales to increase in fiscal 2009 as compared to fiscal 2008.

L-3 Communications and Arrow Electronics accounted for approximately $7.7 million and $6.6 million, or 14% and 12%, respectively, of our fiscal 2008 net sales as compared to $3.4 million and $5.9 million, or 7% and 11%, respectively, of fiscal 2007 net sales and $4.0 million and $4.6 million, or 8% and 9%, respectively, of fiscal 2006 net sales.

The majority of our sales are not subject to seasonal fluctuations over the course of a year. 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 $22.9 million for the year ended September 27, 2008, an increase of $0.5 million, or 2%, from $22.4 million for the year ended September 29, 2007. Gross margin as a percentage of net sales was approximately 41% for the year ended September 27, 2008, compared to approximately 43% for the year ended September 29, 2007. The increase in gross profit resulted from higher sales partially offset by a decrease in gross margin due to product mix. The lower gross margin as a percentage of net sales was due to lower margin product mix and higher costs associated with product yield as well as startup costs associated with circuit card assembly introduction.

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 $17.3 million for the year ended September 27, 2008, an increase of $3.3 million, or approximately 24%, from $14.0 million for the year ended September 29, 2007. This increase resulted from an increase in general and administrative expenses of $3.5 million, offset by a decrease in selling expenses of $0.2 million over the comparable period. General and administrative expenses increased mainly because of $2.8 million in severance-related costs in connection with the departure of our CEO and $0.6 million of payroll-related expenses. Selling expenses decreased primarily due to a decrease in commissions as the commission percentage decreased from fiscal 2007.

As a percentage of net sales, selling, general and administrative expenses were approximately 31% as compared with 27% for the prior year. The increase was caused by the higher expenses in fiscal 2008. Due to the continued compliance requirements related to the Sarbanes-Oxley Act, the expense related to the adoption of SFAS 123(R) and the restructuring of our business, we expect selling, general and administrative expenses to average between 24% and 26% 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 $3.6 million for the year ended September 27, 2008, an increase of $0.2 million, or 6%, as compared to $3.4 million for the year ended September 29, 2007. The increase was primarily attributable to increased payroll costs. Research and development expenses as a percentage of net sales have been approximately 6% to 7% 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 include new product designs for various types of memory products including DDR II, DDR III, FLASH and microprocessors, and ball grid arrays using these semiconductors; continuing development of anti-tamper technologies; and advanced custom designs for use in defense markets.

Interest Income

Interest income consists of interest earned on our cash balances invested primarily in money market accounts. Interest income was $1.6 million for the year ended September 27, 2008, a decrease of $0.9 million, or 36%, from

$2.5 million for the year ended September 29, 2007. This decrease was primarily attributable to decreased interest rates as our average invested balances increased approximately $4.0 million.

Income Taxes

Income tax expense consists of current and deferred federal and state income taxes. Income tax expense was $1.1 million for the year ended September 27, 2008, compared to $2.3 million for the year ended September 29, 2007. The effective tax rate was approximately 31% for both the year ended September 27, 2008 and September 29, 2007. The Company's effective tax rate is 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 7 to the Consolidated Financial Statements.

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

Net Sales

Net sales were $52.1 million for the year ended September 29, 2007, an increase of $3.3 million, or approximately 7%, from $48.8 million for the year ended September 30, 2006. The increase was primarily attributable to the shipment of increased orders received in recent quarters as we experienced a greater demand for our products.

In fiscal 2007, Arrow Electronics accounted for approximately $5.9 million, or 11%, of our net sales as compared to $4.6 million, or 9%, of our fiscal 2006 net sales. No other customer accounted for 10% or more of our net sales for these periods.

Gross Profit

Gross profit was $22.4 million for the year ended September 29, 2007, an increase of $0.8 million, or approximately 4%, from $21.6 million for the year ended September 30, 2006. Gross margin as a percentage of net sales was approximately 43% for the year ended September 29, 2007 compared to approximately 44% for the year ended September 30, 2006. The increase in gross profit came from higher sales volume partially offset by 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 $14.0 million for the year ended September 29, 2007, an increase of $1.6 million, or approximately 13%, from $12.4 million, for the year ended September 30, 2006. This increase was due to an increase in selling expenses of $1.7 million, offset by a decrease in general and administrative expenses of $0.1 million over the comparable period. Selling expenses increased primarily due to the hiring of additional sales executives to support our long-term growth and higher commissionable sales. General and administrative expenses decreased mainly because of lower compensation expense.

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 $3.4 million for the year ended September 29, 2007, an increase of $0.2 million, or 6%, as compared to $3.2 million for the year ended September 30, 2006. The increase was primarily attributable to increased expenditures for our next generation anti-tamper technology.

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, compared to $2.2 million for the year ended September 30, 2006. This increase was attributable to increased interest rates.

Income Taxes

Income tax expense consists of current and deferred federal and state income taxes. Income tax expense was $2.3 million for the year ended September 29, 2007, compared to $2.6 million for the year ended September 30, 2006. The effective tax rate was approximately 31% for the year ended September 29, 2007, compared to 32% for the year ended September 30, 2006. The Company's effective tax rate is increased from the federal statutory tax rate of 34% due to the impact of state taxes and is decreased by reductions for foreign sales exclusions, a new manufacturers' deduction and research and experimentation tax credits. See Note 7 to the Consolidated Financial Statements.

Liquidity and Capital Resources

Cash on hand as of September 27, 2008 totaled approximately $52.6 million and was primarily invested in money market accounts. During fiscal year 2008, cash provided by operating activities was approximately $3.5 million versus $4.3 million in fiscal 2007. The decrease was primarily due to a decrease in net income offset by an increase in stock-based compensation expense related to employee stock awards, primarily as a result of the $2.8 million of severance costs in connection with the departure of our CEO. Depreciation totaled approximately $2.5 million and $2.3 million for fiscal 2008 and 2007, respectively. We expect depreciation to remain consistent with the 2008 level in fiscal 2009.

Accounts receivable in fiscal 2008 increased approximately $0.4 million from fiscal 2007, primarily as a result of the timing of invoicing and receipts. Days sales outstanding at September 27, 2008 was 68 days, which was lower than the 71 days at September 29, 2007. Our days sales outstanding typically approximates 66 days.

Inventories increased approximately $0.3 million from fiscal year 2007. Inventory of approximately $15.4 million as of September 27, 2008 represents 168 days of inventory on hand, a decrease from 185 days on hand at September 29, 2007. The levels of inventory fluctuate based on changes in expected production requirements, the fulfillment of orders and availability of raw materials. Inventory amounts will generally take several quarters to adjust to significant changes in future sales. Also, as lead times for raw materials increase, we are required to purchase larger amounts of inventory per order and hold it for longer periods of time. This has the effect of increasing the number of days of inventory on hand. We expect to fund any increases in inventory caused by sales growth or manufacturing planning requirements from our cash balances and operating cash flows.

Prepaid expenses and other current assets increased approximately $1.4 million from the end of fiscal 2007. This was primarily due to the prepayment of income taxes.

Accrued expenses as of September 27, 2008 decreased approximately $1.1 million from the end of fiscal 2007. Accrued salaries and benefits were approximately $0.5 million higher at September 27, 2008 compared to the end of fiscal 2007 due to higher accrued compensation. Other accrued expenses were approximately $1.0 million lower, primarily due to the decrease in income taxes payable and accrued commissions. Deferred revenue at September 27, 2008 was approximately $4.0 million, and included approximately $3.4 million of advance payments from customers.

Purchases of property, plant and equipment during the year ended September 27, 2008 totaled approximately $3.0 million, with $0.1 million remaining in accounts payable at year-end.

In connection with our decision to consolidate our Phoenix locations, we entered into a new ten-year operating lease for the expanded headquarters/microelectronic building in fiscal 2005. The project and the consolidation were completed in the second quarter of fiscal 2006 and we incurred approximately $4.1 million in improvements.

We maintain a pension plan for eligible union employees at our Fort Wayne, Indiana facility pursuant to a collective bargaining agreement. See Note 8 to the Consolidated Financial Statements for additional information. We expect to fund our pension obligation through returns on plan assets and our contributions to the plan over the next several years. Actual contributions will be dependent on the actual investment returns during that period. While the current market conditions could have an adverse effect on our plan investments, any additional required contribution is not expected to have a material effect on our consolidated financial statements and we expect to fund such contributions from our cash balances and operating cash flows. We contributed $0.1 million to the pension plan in fiscal year 2008. We believe that funding the plan over the next several years will not significantly impact our liquidity.

An additional $0.3 million of cash was received pursuant to common stock options exercised throughout fiscal year 2008.

We purchased, pursuant to two separate stock repurchase programs, a total of approximately 2.4 million shares, or 10%, of our then outstanding common stock. The number of shares repurchased under these programs in fiscal 2008, 2007 and 2006 was 0.6 million, 1.5 million and 0.3 million, respectively. All repurchases were funded from our cash balances and operating cash flows.

On April 8, 2008, we announced our third repurchase program to acquire up to an additional 10%, or approximately, 2.2 million shares, of our then outstanding common stock. The timing and amount of any repurchases under the program will depend on market conditions and corporate and regulatory considerations. During the fiscal year ended September 27, 2008, we repurchased 13,179 shares under this program for a total cost of $0.1 million, inclusive of commissions and fees. The duration of the program is twenty-four months and any repurchases will be funded from our cash balances and operating cash flows.

On April 3, 2007, we entered into a $30.0 million revolving line of credit agreement with JPMorgan Chase Bank, N.A. Borrowings, if any, under the revolving line of credit bear interest at the lower of the London Interbank Offered Rate ("LIBOR") plus 1.5%, or the JPMorgan Chase Bank, N.A. "prime rate." A commitment fee of 0.125% is charged on the unused portion of the line. The line of credit expires on March 31, 2009. This agreement replaced the previous JPMorgan Chase Bank, N.A. Loan and Security Agreement that expired on March 31, 2007. On August 5, 2008, we entered into a Second Modification Agreement to our Revolving Line of Credit Agreement (the "Amendment to the Credit Agreement"). The primary purpose of the Amendment to the Credit Agreement was to amend the definition of . . .