Richardson Electronics, Ltd. Annual Report 2005

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FY2005 Annual Report · Richardson Electronics, Ltd.

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Company at a Glance

Richardson Electronics, Ltd. is a global provider of

engineered solutions, serving the RF and wireless

communications, industrial power conversion, security

and display systems markets. The Company delivers

engineered solutions for its customers’ needs through

product manufacturing, systems integration, prototype

design and manufacture, testing and logistics.

The Richardson Story

The year 1947 was filled with milestones. Charles “Chuck”

Radio Frequency (RF) and microwave semiconductor product

Yeager piloted the first airplane to fly faster than the speed of

offerings in response to the rise of solid-state technology.

sound, the first presidential address was telecast from the

Business continued to boom and by the early 1980s,

White House and ENIAC, one of the world’s first digital

Richardson Electronics was distributing RF and wireless

computers, was turned on.

communications, industrial power conversion, security and

display systems products.

That same year Arthur Richardson, Sr. began his own story.

After World War II, Arthur worked for Majestic Radio & Television

Under Ed’s direction, the Company flourished and opened

Corporation selling war assets. Upon leaving the company, Arthur

several offices in the USA, as well as distribution and design

collected his salary in radio tubes. Soon afterwards, he and his

centers in Latin America, Europe and Asia. Today the

wife, Florence, were selling tubes out of a barn on their farm in the

Company has over 70 locations worldwide, and in fiscal 2005,

rural town of Wayne, Illinois.

sales were made to approximately 37,000 customers. The

Company went public in 1983 and moved to its current location

During the day, Arthur would make sales calls and at night he

in LaFox, Illinois in 1986. Like Wayne, the birthplace of the

and his wife would pack and ship tubes. The couple worked hard,

Company, LaFox is a small, farming community about

but they enjoyed working together. Their diligence paid off and

50 miles west of Chicago.

their business grew. An office was established in Chicago, and

soon afterwards, the Richardsons moved their operations to a

Today, Richardson Electronics, Ltd., an ISO 9002 registered

warehouse in the Chicago suburb of Franklin Park.

supplier, continues to stay one step ahead of the competition by

In 1961, the Richardsons welcomed their youngest son, Ed,

global provider of “engineered solutions.” This term is used to

into the business. From picking and packing in the warehouse to

describe Richardson Electronics’ core engineering and

assisting in the front office, Ed worked side by side with his

manufacturing expertise in identifying and supporting

parents while learning the family business.

cost-effective and value-added solutions for its customers,

providing unique services and products. The Company is a

which may include product manufacturing, systems integration,

Ed was appointed president of the Company in 1974 and began

prototype design and manufacture, testing and logistics.

to expand the Company’s horizons. The Company acquired tube

manufacturing companies such as National Electronics and Cetron

The Company has come a long way from its humble beginnings

and added product lines from RCA, GE, Westinghouse and Philips

in a barn. It continues to thrive and evolve as the technology

to its ever-expanding line of products.

advances. The expertise, experience and relationships Richardson

In 1979, Arthur Richardson, Sr. died. After his father’s death,

the Company to provide customers with solutions for their needs

Electronics has acquired over the past five decades has positioned

Ed continued to build upon his parents’ legacy. Continuing with

for many years to come.

its plans for expansion, the Company established

To Our Stockholders

We are pleased to report that sales reached $579

we formed a joint venture, “VConex, LLC”, with Light Speed

million for the first time in the Company’s history in fiscal

Labs, LLP, an engineering company specializing in the

2005. Sales increased 11% from fiscal 2004 led by the

development of network video technologies. VConex is

RF and Wireless Communications Group (RFWC), up 15%

developing unique and proprietary security and display

to $266 million. The Display Systems Group (DSG)

solutions that are being marketed exclusively through DSG

achieved the highest percentage gain in sales of the

and SSD. By leveraging VConex design and development

strategic business units, up 18% to $78 million. DSG

capability, we will provide unique network security and

shipped over $6 million of custom engineered LCD displays

display solutions that take advantage of established IT

manufactured by Pixelink, our display integration facility in

components to lower ownership costs and improve

Boston, to the New York Stock Exchange (NYSE), as part

functionality. Developments in process include network

of the largest order received in DSG’s history. Pixelink’s

displays for public view, network digital recorders, high

sales increased 64% this year to $22 million. The Industrial

definition cameras, and a combination of all of these

Power Group’s (IPG) sales reached $123 million, up 9%

products to provide complete network solutions for video

from the previous year, and led the Company in gross

switching and control. We believe VConex will increase

margin, exceeding 30%. The Security Systems Division’s

the number of engineered solutions provided through

(SSD) sales reached $106 million, up 4% from the previous

DSG and SSD.

year. SSD’s sales were led by Canada where the Security

Systems Division increased sales by 13%, while increasing

In July 2004, we successfully completed an equity

product margin to 29.6% from the previous year.

offering raising $28 million in net proceeds. In February

2005, we completed the exchange of $45 million of

Geographically, the Asia/Pacific area led the sales

convertible debentures, extending the maturity to 2011.

growth, up 20% to $125 million. China led the growth, up

In May 2005, we completed the sale of land contiguous to

60% to $40 million. Sales in Europe reached $124 million,

our corporate headquarters in LaFox, Illinois with gross

up 6% with gross margin of 28.5%. Sales in North America

proceeds of $11 million and a capital gain of nearly $10

were up 10% led by DSG sales growth in the U.S.

million. As a result, we reduced total debt by $18 million

Latin America also showed improvement with sales up

compared to the prior year. The operating results of the

7% to $21 million. Sales in Colombia led the growth, up

Company were impacted by the cost associated with

50% versus a year ago.

restructuring, which we initiated in February 2005, as well

as over $2.4 million in expense to comply with Sarbanes-

Fiscal 2005 was the second consecutive year of record

Oxley requirements and the accounting fees related to the

sales growth. Our strategy of engineered solutions

restatement of foreign exchange accounting on

continues to be extremely well received by our customers

intercompany balances.

and vendors. In December 2004, we made a strategic

addition to our Industrial Power Group through the

Thanks to the efforts of our entire staff on a global

acquisition of Evergreen Trading Company, a leading

basis, we completed the installation of several modules of

distributor of power electronic components in China.

PeopleSoft and went “live” with the new system in

Evergreen has made an excellent addition to the

December 2004 with a nearly seamless transition from our

engineered solutions service we offer to the Chinese

legacy software system. The successful implementation of

market for power conversion products. We expect to

PeopleSoft software was the result of several years of

experience accelerated growth for our industrial power

extraordinary effort by our information systems team and

conversion products in China. Also in December 2004,

dedicated employees on a worldwide basis.

The implementation of the new PeopleSoft system has

given us the information technology resources to

accelerate the growth of the company for many years

to come.

In July 2005, after the close of our fiscal year, we

successfully completed the acquisition of ACT Kern GmbH

located in southern Germany, a leading display technology

company in Europe. We are extremely pleased to have

ACT Kern as part of the Richardson family of companies.

Kern’s engineering resources, combined with their ability

to design, develop, and produce LCD displays, will create

a European center of excellence that enables us to

provide a much broader range of customized display

solutions throughout Europe and the Middle East. The

combination of ACT Kern and Pixelink gives us the

technical resources to dramatically expand our display

sales on a global basis.

In June 2005, we appointed David DeNeve as Senior

Vice President and Chief Financial Officer to lead the

Company’s global Finance organization. Mr. DeNeve

spent ten years with Material Sciences Corporation where

he held numerous management positions of increasing

responsibility in finance and accounting, most recently as

Vice President and Controller. David’s experience in

dealing with change management will be a great asset to

Richardson as we transition the Company’s operations

further towards engineered solutions. We are extremely

pleased to have David join the senior management team

of Richardson Electronics.

We are convinced that our strategy of engineered

solutions combined with a reorganized and much more

efficient organization will continue to produce record sales

and return the Company to record levels of profitability in

the future. We appreciate your continued investment in

Richardson Electronics.

Edward J. Richardson
Chairman of the Board
& Chief Executive Officer

Bruce W. Johnson
President & Chief Operating Officer

July 31, 2005

Peregrine Semiconductor and
WJ Communications also contributed
to our sales growth.

Our transition into engineered solutions

has grown sales to over $266M over the
past three years. With this transition and
the ever growing brand awareness of
Richardson Electronics as a source for
RF and wireless components and products,
we are looking forward to continued growth
in fiscal 2006 and will continue to put the
infrastructure and global programs in
place to support this evolution into a true
technology based company. In the coming
year, RFWC will be implementing and
educating the field on program management
resources, global and regional alliance
partners, and RF Edge. These three
programs will help expedite our transition
into more engineered solutions opportunities
and revenue in fiscal 2006.

The RF and Wireless Communications
Group (RFWC) serves the expanding global
RF and wireless communications market,
including infrastructure and wireless
networks. Our design centers, product
managers and sales team of RF and

wireless engineers assist customers in
designing circuits, selecting cost-
effective components, reference
designs, prototype testing and
assembly.

We believe RFWC to be the world

leader in the design-in and technical
support of RF and wireless components.
RFWC represents a true extension of
our customers’ engineering departments
by offering complete engineering and
technical support from the design-in of
RF and wireless components to the
development of engineered solutions for
system requirements. We also offer global
visibility to our vendor partners to facilitate
improved forecasting and new product
development by tracking every identified
RFWC design opportunity worldwide by
application and supplying this information
to our vendor partners.

We have strategically located design
Centers Of Excellence (COE) worldwide,
with each focusing on specific products and
solutions using state-of-the-art technology.
The global relationships and programs
we have established with the most
technically advanced RF and wireless
vendors facilitate the continuous support of
our customers with solutions using the
newest, technologically advanced
components available. We know of no other
company that offers the design-to-production
visibility of RF and wireless programs on a
global basis like Richardson Electronics.

RFWC continues to have one of the

strongest and most unique business models
in the industry. As we continue to show
strong growth and out perform the market,
our reputation as one of the world’s premiere
service providers has led to new
relationships with suppliers seeking our
services. Continued relationships with such
leading suppliers as Aeroflex, Anaren, ATC,
Freescale, HUBER + SUHNER, M/A-COM,

Call CaptureTM
Cellular Signal
Enhancer.

6
6

The Industrial Power Group (IPG) is

dedicated to providing engineered solutions
for customers ranging across a wide
spectrum of today’s top high power, high
frequency markets, including: semiconductor
wafer fabrication equipment, industrial
heating, power supply, medical, transportation
and broadcast. Our sales and manufacturing
engineers design solutions for applications
such as plasma generation, dielectric &
induction heating, laser, welding, power
supplies, alternative energy and MRI.

From power semiconductors to electron
tubes, IPG’s strategy is to provide engineered
solutions and components as required for our
key customers. Many of our products are
designed to convert raw energy into a useful
form that is needed to operate machinery for
industrial applications. The principal
customers for IPG are leading original
equipment manufacturers (OEMs), contract
manufacturers (CMs), suppliers of electronic
equipment used in industrial power
applications and end users (MRO).

To properly support the markets’ needs,

IPG is divided into five Business Units:
Industrial Tubes, Broadcast Tubes,
CW-Microwave, Power Semiconductor
and Passives.

Our dual role as a global electronics
distributor and specialty manufacturer is
unique and promotes alignment and
enhanced participation with many of our
vendor partners to form integrated solutions
that perform to our customers’ requirements
in a given application. We differentiate
ourselves from our competitors by
leveraging our ability to fabricate,
integrate, and ultimately
manufacture products under
one umbrella while also
providing logistic services and
ongoing technical support. This
vertical integration not only gives
IPG enhanced control over our
processes, it also provides customers
with shortened lead times and low cost
subsystems. Our products must meet our
customer’s exacting specifications. In order
to maintain complete customer satisfaction,
IPG adheres to stringent quality control
standards and undergoes extensive
inspections of its manufacturing processes,
equipment and quality control systems.

Continued global expansion of our business

is contributing to both our vacuum tube and
solid-state sales growth. Over the past year,
IPG experienced sales growth in both product
areas. We continue to expand existing vendor
alliances and seek additional collaboration
on new efforts with the leading manufacturers
of electronics used in industrial power
applications. IPG currently partners with
and supports an array of suppliers, including:
Advanced Power Technology, Amperex,
Cornell-Dubilier, CPI- Eimac, General
Electric, International Rectifier, Jennings,
Litton, Mitsubishi, NJRC, National, Powerex,
Vishay Draloric, Wakefield and many
other recognized names in the industry.
The common thread within the IPG supplier
base is that each of these companies
offers niche products that are essential
components for high power high frequency
industrial applications.

IPG will remain focused on high-power and

high-frequency technologies allowing us to
participate in growth markets where new
applications are constantly being developed.
Our engineered solutions model enables us to
work with our customers as their technology
requirements evolve and then communicate
their needs to our vendor partners to assist in
the development of the appropriate new
products. Our ultimate goal is to continue to
facilitate growth at both our customers and
vendors. We will do this by developing and
introducing new technologies that will
enhance performance and open new
markets for our products.

A 500W, 40.68 MHz
Industrial RF Pallet.

DSG’s fiscal 2005 growth in the

marketplace was achieved through both
product and geographic diversity. Successful
ventures with medical software OEMs have
allowed us to provide display and systems
solutions to many of the hospitals in
North America. Additionally, noteworthy
ventures with 3M Microtouch allowed us
to be one of the select integrators for the
new Dispersive Signal Touch technology
which will drive large format public
information touch displays. Lastly, a
successful partnership with Intel
Corporation has allowed us to build
enterprise servers and very small form
factor digital signage players for the rapidly
growing signage market.

The outlook for DSG is bright. Our fiscal

2005 achievements have brought critical
mass and name recognition for Richardson
Electronics in the marketplace. Growth is
expected from driving consistency to the
company’s branding, capabilities, systems,
and processes, generating further
penetration into the existing customer base.
In addition, DSG will continue to leverage its
capabilities to expand the geographic
footprint of the current business model.

The Display Systems Group (DSG) is

a global provider of integrated display
products and systems to the public
information, financial, point-of-sale and
medical imaging markets. DSG partners
with leading hardware vendors to offer
the highest quality liquid crystal display

(LCD), plasma, cathode ray tube (CRT)
and customized display monitors.
Our engineers design custom display
solutions that include specialized

finishes, touch-screens, protective
panels, custom enclosures and
private branding.

DSG’s highly trained and
experienced workforce is dedicated
to increasing efficiencies within our

customers’ business through engineered
solutions. DSG customers benefit from
our technical knowledge and support of
the respective needs of each market
segment. Our team of experienced field
application engineers is unsurpassed in the
industry and we feel it is our responsibility to
provide the highest level of service to our
customers and ensure that systems
operate at specified performance levels.
By strategically selecting high-quality
products, hardware suppliers and
collaborating with leading software
vendors, we are able to offer a superior
display platform for a variety of integrated
software and hardware applications. We
remain confident in our ability to provide our
customers with the most cost-effective,
custom display solutions in the industry.

DSG’s unmatched engineered solutions
capabilities continue to drive above-average
industry growth. Keys to success include
superior vendor partnerships, a global
distribution platform, in-depth product
application knowledge and extensive logistics
and supply chain capabilities. Furthermore,
as a technical leader in the industry, DSG
will continue to aggressively pursue new
growth opportunities.

An integrated protective
panel on a 37 inch LCD
monitor with a custom
NOMADTM PC.

8
8

The Security Systems Division (SSD) is
a global provider of closed circuit television
(CCTV), fire, burglary, access control,
sound and communications products, and
accessories for the residential, commercial
and government markets. It sells its
products under the Richardson Electronics
name in the US, Latin America and Europe,
and as Burtek Systems in Canada. SSD
specializes in design-in support, offering
extensive expertise in applications requiring
digital technology. Our products are
primarily used for security and access
control purposes, but are also utilized in
industrial applications, mobile video and
traffic management. As a global leader and
provider of engineered solutions, SSD has
built a business model that leverages our
people, partnerships and products.

SSD offers one of the industry’s most
highly trained and experienced workforces.
Providing training, technical support and
service, while helping integrators qualify
their end-user requirements and design
customized solutions, has helped position
SSD as a market leader.

SSD partners with more than 100 of the
world’s leading CCTV, sound, fire, burglary
and access control vendors while also
supporting our own private label brands,
National ElectronicsTM, Capture®, Elite
National ElectronicsTM, and AudioTrak®.

Our suppliers trust SSD to stock an
extensive line of name brand
products and to help market these
to dealers and integrators. Our
customers count on us to
recommend high-quality
products, in addition to
staying abreast of new
products, trends and the skills
required to provide complete
solutions. Our focus on
meeting the product and
service demands of thousands
of customers, both
domestically and
internationally, allows us to
provide our global customers
with the most expansive
selection of cost-effective
engineered solutions within
the security industry.

SSD annual revenues contributed to the
financial successes of Richardson Electronics
through continued global sales, marketing
focus on its private label brands and the
launch of AudioTrak in the US in fiscal 2005.
SSD set the stage for improved sales and
profitability by organizing global marketing
and operations teams under the leadership of
Burtek’s senior management team. SSD also
formed a joint venture with Light Speed Labs
to create VConex, LLC with the objective of
developing proprietary technologies to create
new technological families which integrate
video acquisition, storage, retrieval
and display into single solutions with
secure global data access over
network infrastructures.

SSD will continue to strengthen its
infrastructure, add new product lines and
technological families, and provide
value-added services to our global market.
Additionally, we will continue to develop
strategic partnerships with technology
companies who offer exclusive relationships
and joint venture opportunities, while also
developing an outside sales strategy focused
on building demand for network solutions. We
expect the combination of these activities will
move SSD to the forefront of the market,
thereby facilitating continued growth.

The National Elite DVR is an easy-to-use
digital recording solution. Its ability to interface
with virtually any POS system sets it apart
from its competitors.

Five-Year Financial Review

(in thousands, except per share amounts)

This information should be read in conjunction with
the Company’s consolidated financial statements,
accompanying notes and Management’s Discussion
and Analysis of Financial Condition and Results of
Operations included elsewhere herein.

Fiscal Year Ended(1)

Statement of Operations Data

2005(2)

2004(3)

2003(4)

2002(5)

2001

Net sales(6)
Costs of products sold

Gross margin

Selling, general and administrative expenses(6)
(Gain) loss on disposal of assets(7)
Other expense, net
Income (loss) before income taxes and cumulative
effect of accounting change
Income tax provision (benefit)
Income (loss) before cumulative effect of

accounting change

Cumulative effect of accounting change, net of tax(8)
Net income (loss)
Income (loss) per share - basic:

Before cumulative effect of accounting change
$
Cumulative effect of accounting change, net of taxes
$

Net income (loss) per share - basic

Income (loss) per share - diluted:

Before cumulative effect of accounting change
$
Cumulative effect of accounting change, net of taxes
$
$

Net income (loss) per share - diluted

Dividends per common share(9)

$ 578,724
441,817
136,907
128,733
(9,918)
7,538

$ 519,823
392,117
127,706
108,299
579
10,258

$ 464,381
365,427
98,954
100,613
—
9,700

$ 443,415
349,326
94,089
98,993
—
12,695

$ 502,197
370,819
131,378
94,272
—
13,042

10,554
21,865

(11,311)
—
(11,311)

(.67)
—
(.67)

(.67)
—
(.67)
.16

$
$

8,570
2,537

6,033
—
6,033

(11,359)
(2,370)

(17,599)
(6,268)

24,064
7,819

(8,989 )
(17,862 )
$ (26,851 )

(11,331)
—
$ (11,331)

16,245
—
$ 16,245

.43
—
.43

.42
—
.42
.16

$
$

(.65 )
(1.29 )
(1.94 )

(.65 )
(1.29 )
(1.94 )
.16

$
$

(.83)
—
(.83)

(.83)
—
(.83)
.16

$
$

1.22
—
1.22

1.12
—
1.12
.16

Net Sales by Strategic Business Unit(10)
RF & Wireless Communications Group (RFWC)
Industrial Power Group (IPG)
Security Systems Division (SSD)
Display Systems Group (DSG)
Medical Glassware (MG) (11)
Corporate (12)

Consolidated

Balance Sheet Data
Cash and cash equivalents
Working capital
Property, plant and equipment, net
Total assets
Current maturities of long-term debt
Long-term debt
Stockholders’ equity

2005
$ 265,602
122,906
105,581
78,078
—
6,557
$ 578,724

2005
24,530
159,326
31,821
287,818
22,305
98,028
104,048

2004
$ 231,389
112,737
101,979
66,452
—
7,266
$ 519,823

2004
$ 16,927
174,369
30,589
282,945
4,027
133,813
88,167

2003
$ 204,427
95,508
92,090
64,191
—
8,165
$ 464,381

2003
$ 16,874
179,303
31,088
267,408
46
138,396
78,821

Fiscal Year Ended

2002

$ 181,969
95,018
85,087
60,697
12,940
7,704
$ 443,415

2001
$ 220,545
112,889
82,352
59,476
15,966
10,969
$ 502,197

Fiscal Year Ended

2002
$ 15,296
186,554
28,827
286,653
38
132,218
102,955

2001
$ 15,946
225,436
28,753
321,557
205
155,134
112,795

(1) Fiscal Year - The Company's fiscal year ends on the Saturday nearest the end of May. Each of the fiscal years presented contains 52/53 weeks. All references herein for the years 2005, 2004, 2003, 2002, and 2001

(2)

represent the fiscal years ended May 28, 2005, May 29, 2004, May 31, 2003, June 1, 2002, and June 2, 2001, respectively.
In the third quarter of fiscal 2005, the Company recorded a $2.2 million restructuring charge to selling, general and administrative expenses as the Company terminated over 60 employees. In addition, the Company recorded
incremental tax provisions of $13.1 million in fiscal 2005 to increase the valuation allowance related to its deferred tax assets in the United States ($12.3 million) and outside the United States ($0.8 million).

(3) The Company recorded incremental tax provisions of $2.5 million in fiscal 2004 to increase the valuation allowance related to its deferred tax assets outside the Unites States.
(4)

In the fourth quarter of fiscal 2003, the Company recorded a $16.1 million charge ($10.3 million net of tax) principally related to inventory write-downs and restructuring charges, including a $1.7 million restructuring
charge to selling, general and administrative expenses as the Company eliminated over 70 positions or approximately 6% of its workforce. In addition, the Company recorded incremental tax provisions of $1.6 million
to establish a valuation allowance related to its deferred tax assets outside the United States.
In the third quarter of fiscal 2002, the Company recorded a $4.6 million loss ($2.9 million net of tax) related to the disposition of its medical glassware business. In the fourth quarter of fiscal 2002, the Company
recorded a $15.3 million charge ($9.8 million net of tax) primarily related to inventory obsolescence.

(5)

(6) The Company reclassified customer discounts from selling, general and administrative expenses to net sales for fiscal 2004, 2003, 2002, and 2001 to conform to the fiscal 2005 presentation.
(7)
(8)

In the fourth quarter of fiscal 2005, the Company completed the sale of approximately 205 acres of undeveloped real estate adjoining its headquarter in LaFox, Illinois, resulting in a gain of $9.9 million before taxes.
In the second quarter of fiscal 2003, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" and as a result recorded a cumulative effect of accounting change of $17.9 million (net of tax of $3.7
million) to write off impaired goodwill. Additionally, effective at the beginning of fiscal 2003, the Company no longer amortizes goodwill. Income (loss) before income taxes included goodwill amortization of $577 in
fiscal 2002 and $612 in fiscal 2001.

(9) The dividend per Class B common share was 90% of the dividend per common share.
(10) Certain amounts in prior periods were reclassified to conform to the fiscal 2005 presentation.
(11) In the third quarter of fiscal 2002, the Company sold certain assets of its Medical Systems Group, specifically, inventory and other assets related to its medical glassware product line (MG). MG net sales of $390,

$547, and $1,269 in fiscal 2005, 2004 and 2003, respectively, have been reclassified into Corporate.

(12) Includes freight billed to customers.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Overview

Description of Business

For the second consecutive year, Richardson

Richardson Electronics, Ltd. is a global provider of

Electronics, Ltd. (the “Company”) achieved record sales
with all four strategic business units growing sales for the
third year in a row. Sales increased to $578.7 million in
fiscal 2005 with strong demand for custom display and
wireless products. Sales at all four of the Company’s
geographic areas increased over fiscal 2004 with continued
strength in Asia/Pacific where sales achieved double-digit
growth for the seventh consecutive year.

In fiscal 2005, the Company recorded a net loss of

$11.3 million, or $0.67 per diluted share, which included
incremental tax provisions, gain on sale of land,
restructuring and other charges. Incremental income tax
provisions of $13.1 million were recorded in fiscal 2005
primarily to increase the valuation allowance related to the
Company’s deferred tax assets. The Company sold
approximately 205 acres of undeveloped real estate
adjoining its headquarters in the fourth quarter of fiscal
2005, resulting in a realized gain of $9.9 million before
taxes. In addition, the Company implemented restructuring
actions at the end of the third quarter of fiscal 2005, which
included changes in management and a reduction in
workforce of over 60 employees, to accelerate the
alignment of operations with the Company’s engineered
solutions strategy and improve operating efficiency.
Restructuring charges of $2.2 million and incremental
inventory write-down charges of $0.9 million were recorded
in the fiscal year. The restructuring charges were recorded
to selling, general and administrative expenses.

In December 2004, the Company acquired the assets of

Evergreen Trading Company, a distributor of passive
components in China. The aggregate acquisition price was
$0.4 million, which was paid in cash. Evergreen Trading
Company has been integrated into the Industrial Power
Group (IPG). Evergreen Trading Company is similar to the
Company in that they also emphasize engineered solutions
by offering technical services and design assistance. This
acquisition is intended to provide IPG with an infrastructure
and a selling organization to more aggressively expand its
business throughout China.

Also in December 2004, the Company formed a joint
venture with Light Speed Labs, LP to support the Security
System Division and Display Systems Group. The joint
venture was organized as a limited liability company under
the name VConex, LLC and is expected to develop
distinctive and proprietary security and display solutions
which will be exclusively marketed through the Company.
This venture is expected to provide engineering resources
and expertise to develop network video technology
applications for large national accounts such as retail and
hospitality chains for security and display solutions needs.

engineered solutions and a distributor of electronic
components to the radio frequency (RF) and wireless
communications, industrial power conversion, security, and
display systems markets. Utilizing its core engineering and
manufacturing capabilities, the Company is committed to a
strategy of providing specialized technical expertise and
value-added products, or “engineered solutions,” in
response to customers’ needs. These solutions consist of
products which the Company manufactures or modifies and
products which are manufactured to its specifications by
independent manufacturers under the Company’s own
private labels. Additionally, the Company provides solutions
and adds value through design-in support, systems
integration, prototype design and manufacturing, testing,
and logistics for its customers’ end products. Design-in
support includes component modifications or the
identification of lower-cost product alternatives or
complementary products.

The Company’s products include RF and microwave

components, power semiconductors, electron tubes,
microwave generators, data display monitors, and electronic
security products and systems. These products are used to
control, switch or amplify electrical power or signals, or as
display, recording, or alarm devices in a variety of industrial,
communication, and security applications.

The Company’s marketing, sales, product management,

and purchasing functions are organized as four strategic
business units (SBUs): RF & Wireless Communications
Group (RFWC), Industrial Power Group (IPG), Security
Systems Division (SSD), and Display Systems Group
(DSG), with operations in the major economic regions
of the world: North America, Europe, Asia/Pacific, and
Latin America.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Results of Operations

Net Sales and Gross Margin Analysis

In fiscal 2005, consolidated net sales increased 11.3%
to $578.7 million as all four SBUs increased net sales over
the prior year with strong demand for custom display and
wireless products. Consolidated net sales in fiscal 2004
increased 11.9% to $519.8 million due to increased
demand across all SBUs. Net sales by SBU and percent
of consolidated net sales are presented in the following
table (in thousands):

Net Sales

RFWC
IPG
SSD
DSG
Other

Total

May 28,
2005
$ 265,602
122,906
105,581
78,078
6,557
$ 578,724

May 29,
2004*
$ 231,389
112,737
101,979
66,452
7,266
$ 519,823

May 31,
2003*

FY05 - 04
% Change

FY04 - 03
% Change

$ 204,427
95,508
92,090
64,191
8,165
$ 464,381

14.8 % 13.2 %
9.0 % 18.0 %
3.5 % 10.7 %
17.5 %
3.5 %
(9.8) % (11.0) %
11.9 %
11.3 %

*NOTE: The data has been reclassified to conform with the fiscal 2005
presentation. The modification includes reclassifying customer cash
discounts from selling, general and administrative expenses to net sales.
Other consists of freight, other non-specific sales and gross margins, and
customer cash discounts.

Gross margin for each SBU and margin as a percent of

each SBU’s net sales are shown in the following table.
Gross margin reflects the distribution product margin less
manufacturing variances, customer returns, scrap and cycle
count adjustments, engineering costs, and other provisions.
Gross margin on freight, inventory obsolescence provisions,
and miscellaneous costs are included under the caption
“Other” in fiscal 2004 and 2003. In fiscal 2005, the
Company allocated charges related to inventory overstock
directly to each SBU (in thousands):

Gross
Margin

RFWC
IPG
SSD
DSG

Subtotal

Other
Total

May 28, 2005

May 29, 2004*

May 31, 2003*

$ 58,162
37,005
26,889
17,865
139,921
(3,014)
$ 136,907

21.9 % $ 52,340 22.6 % $ 45,687 22.3 %
34,694 30.8 % 29,523 30.9 %
30.1 %
26,045 25.5 % 22,939 24.9 %
25.5 %
17,105 25.7 % 16,218 25.3 %
22.9 %
130,184 25.4 % 114,367 25.1 %
24.5 %

(2,478)

(15,413)

23.7 % $ 127,706 24.6 % $ 98,954 21.3 %

In fiscal 2005, the Company implemented restructuring

actions at the end of the third quarter, which included
changes in management and a reduction in workforce of
over 60 employees, in an effort to reduce its cost structure,
accelerate the alignment of operations with the Company’s
engineered solutions strategy, and improve operating
efficiency. As a result of the restructuring actions, a
restructuring charge of $2.2 million was recorded in selling,

general and administrative expenses (SG&A) in the third
quarter of fiscal 2005. During the fourth quarter of fiscal
2005, the employee severance and related costs were
adjusted resulting in a $0.2 million decrease in SG&A due to
the difference between estimated severance costs and
actual payouts. Severance costs of $1.1 million were paid in
fiscal 2005. The remaining balance payable in fiscal 2006
has been included in accrued liabilities. As of May 28, 2005,
the following tables depict the amounts associated with the
activity related to restructuring by reportable segment
(in thousands):

Fiscal 2003

Restructuring
Liability
June 1, 2002

Reserve
Recorded
Fiscal 2003

Payments
Fiscal 2003

Adjustment
to Reserve
Fiscal 2003

Restructuring
Liability
May 31, 2003

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

$ —
—
—
—
250
250

Lease termination costs:
SSD

—
$ 250

Total

Fiscal 2004

468
86
161
62
833
1,610

$ (125)
(5)
(40)
(24)
(474)
(668)

210
$ 1,820

—
$ (668)

$ —
—
—
—
—
—

—
$ —

343
81
121
38
609
1,192

210
$ 1,402

Restructuring
Liability
May 31, 2003

Reserve
Recorded
Fiscal 2004

Payments
Fiscal 2004

Adjustment
to Reserve
Fiscal 2004

Restructuring
Liability
May 29, 2004

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

343
81
121
38
609
1,192

Lease termination costs:
SSD

210
$ 1,402

Total

289
—
—
—
—
289

—
289

$ (632 )
(81)
(121 )
(38)
(321 )
(1,193)

$ —
—
—
—
(288)
(288)

—
$(1,193)

(210)
$ (498)

$ —
—
—
—
—
—

—
$ —

Fiscal 2005

Restructuring
Liability
May 29, 2004

Reserve
Recorded
Fiscal 2005

Payments
Fiscal 2005

Adjustment
to Reserve
Fiscal 2005

Restructuring
Liability
May 28, 2005

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

—
—
—
—
—
—

Lease termination costs:
SSD

Total

—
—

909
325
99
416
368
2,117

$ (392)
(142)
(90)
(186)
(298)
(1,108)

$ (199)
—
16
—
—
(183)

35
$ 2,152

—
$(1,108)

—
$ (183)

318
183
25
230
70
826

35
861

In addition to the restructuring charge, the Company
recorded inventory write-down charges of $0.9 million in
fiscal 2005. In fiscal 2003, the Company recorded a
provision of $13.8 million primarily for inventory
obsolescence, overstock, and shrink to write down
inventory to net realizable value as the Company aligned its
inventory and cost structure to current sales levels amid
continued economic slowdown and limited visibility.

Net sales and gross margin trends are analyzed for

each strategic business unit in the following sections.

RF & Wireless Communications Group

RF & Wireless Communications Group net sales

increased 14.8% in fiscal 2005 to $265.6 million. The sales
growth was driven by continued strength in the network
access and passive/interconnect product lines as net sales
grew 22.1% and 18.0% to $105.3 million and $53.3 million,
respectively. Net sales in Asia/Pacific increased 22.9% to
$94.2 million in fiscal 2005. In fiscal 2004, RFWC net sales
increased 13.2% to $231.4 million due to stronger demand
for network access and passive/interconnect products,
partially offset by weaker demand in some specialty and
broadcast products. The network access and passive/
interconnect product line posted net sales growth of 25.7%
and 29.1% to $86.4 million and $45.2 million, respectively,
in fiscal 2004. RFWC Canadian net sales increased 51.2%
to $11.0 million and its Asia/Pacific net sales increased
37.1% to $76.8 million in fiscal 2004.

Gross margins in fiscal 2005 decreased 70 basis points

primarily due to inventory write-downs of $1.3 million
recorded in the third quarter of fiscal 2005 when the
Company implemented restructuring actions. In fiscal 2004,
gross margins were up 30 basis points, led by the sales
growth of higher margin network access and passive/
interconnect product lines. Network access and passive/
interconnect product lines gross margins were 24.1% and
25.7% in fiscal 2004 and 24.9% and 27.1% in fiscal 2003,
respectively. Gross margins in Canada and Asia/Pacific
increased 45.6% and 31.7% in fiscal 2004, respectively.

Industrial Power Group

Industrial Power Group net sales in fiscal 2005 grew

9.0% to $122.9 million as power component net sales
increased 17.3% to $40.7 million. Tube net sales grew 4.3%
in fiscal 2005 to $80.8 million. In fiscal 2004, net sales
increased 18.0% to $112.7 million led by strong, broad-
based demand. IPG tube net sales in fiscal 2004 increased
14.8% to $77.4 million and power component net sales
increased 25.7% to $34.7 million.

Gross margins in fiscal 2005 decreased 70 basis points
to 30.1% primarily due to additional freight expenses of $0.5
million and sales growth of lower margin power component
products, which had gross margins of 26.1% in fiscal 2005.
Gross margins were relatively flat at 30.8% and 30.9% in
fiscal 2004 and 2003, respectively.

Security Systems Division

Net sales for the Security Systems Division increased

3.5% in fiscal 2005 to $105.6 million driven by stronger
demand in Canada, partially offset by weaker demand in the
U.S. and Europe. Net sales in Canada grew 12.9% to $58.5
million with net sales in the U.S. and Europe declining 8.7%
and 4.4% to $27.9 million and $14.2 million, respectively, in
fiscal 2005. Net sales in fiscal 2004 exceeded $100 million
for the first time, up 10.7% from fiscal 2003 to $102.0
million with strong growth in Canada and renewed growth in
the U.S., principally due to an increase in digital video
recorder sales. SSD net sales increased 10.5% in the U.S.
to $30.6 million and 14.2% in Canada to $51.8 million,
respectively, in fiscal 2004.

Gross margins were 25.5% in both fiscal 2005 and
2004. Inventory write-downs of $0.3 million recorded in
the third quarter of fiscal 2005 when the Company
implemented restructuring actions and additional freight
expenses of $1.0 million were partially offset by increased
sales growth of higher margin private label sales. In fiscal
2004, gross margins were up 60 basis points as higher
margin digital technology products represented a larger
percentage of net sales.

Display Systems Group

Display Systems Group net sales in fiscal 2005 grew
17.5% to $78.1 million as large orders drove custom display
net sales to increase by 63.7% to $22.0 million. DSG net
sales increased 3.5% in fiscal 2004 to $66.5 million as
medical monitor net sales increased 14.7% to $26.8 million,
reflecting the continued shift from a film-based environment
to digital systems. Due to the timing of large project based
business, custom display sales declined 18.3% in fiscal
2004 to $13.5 million.

Gross margins in fiscal 2005 decreased 280 basis
points primarily due to declining average selling prices for
medical monitors. In fiscal 2004, gross margins
increased 40 basis points as monitors and specialty
displays expanded margins, partially offset by slightly lower
margins in custom displays and cathode ray tubes.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Sales by Geographic Area

The Company has grown through a balanced emphasis
on investment in both North America and other areas of the
world and currently has 34 facilities in North America, 20 in
Europe, 16 in Asia/Pacific, and 5 in Latin America. On a
geographic basis, the Company primarily categorizes its
sales by destination: North America, Europe, Asia/Pacific,
Latin America, and Corporate. Net sales and gross margin,
as a percent of net sales, by geographic area are as follows
(in thousands):

Net Sales

North America
Europe
Asia/Pacific
Latin America
Corporate

Total

May 28,
2005

May 29,
2004*

$ 303,708 $ 275,491
116,714
104,068
20,065
3,485
$ 519,823

123,846
124,799
21,366
5,005
$ 578,724

May 31,
2003*

$ 259,606
103,029
78,146
20,521
3,079
$ 464,381

FY05 - 04
% Change
10.2 %

FY04 - 03
% Change
6.1 %
6.1 % 13.3 %
19.9 % 33.2 %
(2.2) %
43.6 % 13.2 %
11.9 %
11.3 %

6.5 %

Gross
Margin

May 28, 2005

May 29, 2004*

May 31, 2003*

North America $ 80,262 26.4 % $ 71,763 26.0 % $ 67,829 26.1 %
33,603 28.8 % 28,287 27.5 %
Europe
23,304 22.4 % 17,895 22.9 %
Asia/Pacific
5,272 25.7 %
Latin America
151,090 26.3 % 133,530 25.9 % 119,283 25.9 %
(14,183)

35,258 28.5 %
29,691 23.8 %
5,879 27.5 %

Subtotal
Corporate

4,860 24.2 %

(20,329)

(5,824)

Total

$136,907 23.7 % $127,706 24.6 % $ 98,954 21.3 %

*NOTE: The data has been reclassified to conform to the fiscal 2005
presentation. The modification includes reclassifying customer cash
discounts. Europe includes sales and gross margins to Middle East and
Africa. Corporate consists of freight and other non-specific sales and
gross margins.

Net sales in North America increased 10.2% to $303.7

million in fiscal 2005 led by strong display systems and
wireless demand in the U.S. and continued growth in
security systems sales in Canada. In fiscal 2004, net sales
in North America increased 6.1% to $275.5 million, primarily
from Canada’s sales growth of 18.6% to $69.7 million,
which was led by improved wireless demand and continued
strength in the security systems market. The U.S. had
limited sales growth in fiscal 2004 due to completion of a
large wireless infrastructure project in the prior year and a
trend of customers moving manufacturing to Asia. Gross
margins in North America improved 40 basis points in fiscal
2005 due to expanding margins in Canada for security
systems and wireless sales. In fiscal 2004, gross margins
remained relatively flat compared to fiscal 2003.

Net sales in Europe increased 6.1% to $123.8 million in

fiscal 2005 driven by continued wireless demand growth,
particularly in the United Kingdom, France, and Israel. In
fiscal 2004, net sales in Europe increased 13.3% to $116.7
million as all countries posted increases in sales, partially
due to the weakening U.S. dollar. Italy and Israel led the
sales growth in fiscal 2004 with strong wireless demand,
specifically network access gains in Italy and infrastructure
growth in Israel. Gross margins in Europe decreased 30
basis points in fiscal 2005 due to a decline in high margin

cathode ray tube sales in DSG. In fiscal 2004, gross
margins improved 130 basis points from 27.5% to 28.8%.

The Company experienced its seventh consecutive
year of double-digit growth in Asia/Pacific as net sales grew
19.9% to $124.8 million led by China’s on-going demand
growth. Net sales in China increased 60% in fiscal 2005 to
$40.4 million. In fiscal 2004, net sales in Asia/Pacific
advanced 33.2% in fiscal 2004 following a 13.6% increase
in fiscal 2003. Net sales in China continued to grow rapidly,
increasing 83.3% to $25.3 million in fiscal 2004 with RFWC
net sales more than doubling from the prior year to $21.0
million, as a result of strong infrastructure, network access,
and passive/interconnect demand. In fiscal 2005, the
Company’s gross margins in Asia/Pacific improved 140
basis points due to expanding margins for wireless sales,
particularly in Korea, partially offset by the large sales
growth in China at lower margins. Fiscal 2004 gross
margins in Asia/Pacific declined slightly from 22.9%
to 22.4%.

Net sales in Latin America grew 6.5% in fiscal 2005 to
$21.4 million as all four strategic business units increased
sales. In fiscal 2004, net sales in Latin America declined
2.2% to $20.1 million as decreased broadcast demand in
Colombia and Mexico was partially offset by increased
industrial power demand in Brazil and Colombia. Gross
margins in Latin America improved 330 basis points in fiscal
2005 as margins recovered for security systems and
industrial power sales.

Selling, General and
Administrative Expenses

Selling, general and administrative expenses increased
18.9% in fiscal 2005 to $128.7 million from $108.3 million in
fiscal 2004. The Company implemented restructuring
actions at the end of the third quarter of fiscal 2005, which
included changes in management and a reduction in
workforce, to accelerate the alignment of operations with
the Company’s engineered solutions strategy and improve
operating efficiency. Increases in expenses included $2.2
million of restructuring costs, $8.5 million of payroll-related
expenses, $2.4 million of audit, tax, and Sarbanes-Oxley
compliance fees, and incremental expenses related to bad
debt, facility costs, and travel. The increase in payroll-
related expenses, facility costs, and travel were mainly
attributable to supporting the growth in sales.

Selling, general and administrative expenses increased
$7.7 million in fiscal 2004 to $108.3 million. Payroll-related
expenses increased $4.6 million due primarily to increased
sales and additional headcount required to support the
sales growth. For fiscal 2004, total selling, general and
administrative expenses decreased to 20.8% of sales
compared to 21.7% in fiscal 2003.

(Gain) Loss on Disposal of Assets

On May 26, 2005, the Company completed the sale
of approximately 205 acres of undeveloped real estate
adjoining its headquarters in LaFox, Illinois. The sale
resulted in a gain of $9.9 million, before taxes, and was
recorded in gain on disposal of assets in the Consolidated
Statements of Operations in fiscal 2005.

Other Income and Expenses

Interest expense decreased to $8.9 million in fiscal
2005 as a result of payments made to reduce debt from the
proceeds received from an equity offering made in the first
quarter of fiscal 2005 and elimination of a fixed rate swap,
offset by interest on incremental borrowings to fund working
capital requirements. Interest expense decreased slightly in
fiscal 2004 to $10.3 million, partially due to lower interest on
revolving credit agreement and bank loans. The weighted
average interest rate was 6.38%, 5.98%, and 6.09% for
fiscal 2005, 2004, and 2003, respectively.

Other, net expenses included a foreign exchange gain

of $910 and investment income of $388 in fiscal 2005
compared to a foreign exchange loss of $363 and
investment income of $227 in fiscal 2004.

Income Tax Provision

At May 28, 2005, domestic net operating loss

carryforwards (NOL) amount to approximately $19.9 million.
These NOLs expire between 2023 and 2025. Foreign net
operating loss carryforwards total approximately $18.4
million with various or indefinite expiration dates. In fiscal
2005, the Company recorded an additional valuation
allowance of approximately $0.8 million relating to deferred
tax assets and net operating loss carryforwards relating to
certain foreign subsidiaries. Also, due to changes in the
level of certainty regarding realization, a valuation allowance
of approximately $12.3 million was established in fiscal
2005 to offset certain domestic deferred tax assets and
domestic net operating loss carryforwards. The Company
also has an alternative minimum tax credit carryforward at
May 28, 2005, in the amount of $1.2 million that has an
indefinite carryforward period.

Income taxes paid, including foreign estimated tax
payments, were $3.3 million, $1.7 million, and $2.7 million
in fiscal 2005, 2004, and 2003, respectively.

At the end of fiscal 2004, all of the cumulative positive
earnings of the Company’s foreign subsidiaries, amounting
to $35.1 million, were considered permanently reinvested
pursuant to APB No. 23, Accounting for Income Taxes-
Special Areas. As such, U.S. taxes were not provided on
these amounts. In fiscal 2005, the Company determined
that approximately $12.9 million of its foreign subsidiaries’
earnings may be distributed in future years. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S.
income tax and foreign withholding taxes. As such, the
Company has established a deferred tax liability of

approximately $4.9 million. The remaining cumulative
positive earnings of the Company’s foreign subsidiaries
were still considered permanently reinvested pursuant to
APB No. 23 and amounted to $29.1 million.

The effective income tax rates for the fiscal years ended

May 28, 2005 and May 29, 2004 were 36.7% and 29.6%,
respectively, excluding the establishment of the domestic
valuation allowance and deferred tax liabilities in fiscal
2005. Difference between the effective tax rate as
compared to the U.S. federal statutory rate of 34% primarily
results from the Company’s geographical distribution of
taxable income and losses, certain non-tax deductible
charges, and the Company’s extraterritorial income
exclusion on export sales, net of state income taxes.

On October 22, 2004, the President signed the
American Jobs Creation Act of 2004 (the Act). The Act
provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005
through 2010. In return, the Act also provides for a two-year
phase out ending December 31, 2006 of the existing
extraterritorial income exclusion (ETI) for foreign sales that
was viewed to be inconsistent with the international trade
protocols by the European Union. The tax benefit from the
current ETI exclusion was $166 and $491 for fiscal 2005
and 2004. When this benefit is fully phased out, it will have
a negative impact on the rate because the new deduction
for qualified domestic activity will be of minimal benefit to
the Company.

Another provision of the Act creates a temporary
incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends-
received deduction for certain dividends from controlled
foreign corporations. The calculation of the deduction is
subject to a number of limitations. This provision of the Act
has no material impact on the operations of the Company
for fiscal year 2005 and is expected to have no material
impact on the operations of the Company for fiscal year
2006, as the Company does not intend at this time to
repatriate earnings to the U.S. from foreign countries.

Future effective tax rates could be adversely affected by

lower than anticipated earnings in countries where the
Company has lower statutory rates, changes in the
valuation of certain deferred tax assets or liabilities, or
changes in tax laws or interpretations thereof. In addition,
the Company is subject to the examination of its income tax
returns by U.S. and foreign tax authorities and regularly
assesses the likelihood of adverse outcomes resulting from
these examinations to determine the adequacy of the
provision for income taxes.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Net Income and Per Share Data

In fiscal 2005, the Company reported a net loss of $11.3

million, or $0.67 per diluted share, compared to net income
of $6.0 million, or $0.42 per diluted share, in fiscal 2004. In
fiscal 2003, the Company reported a net loss of $26.9
million, or $1.94 per diluted share.

Net cash provided by financing activities was
$6.3 million in fiscal 2005. During the first quarter, the
Company had an equity offering for three million shares of
common stock that contributed $27.8 million in net proceeds
that was used to reduce debt by $17.5 million
and to fund working capital requirements.

Liquidity and Capital Resources

The Company has financed its growth and cash needs
largely through income from operations, borrowings under
the revolving credit facilities, an equity offering, issuance of
convertible senior subordinated notes, and sale of assets.
Liquidity provided by operating activities is reduced by
working capital requirements, debt service, capital
expenditures, dividends, and business acquisitions.
Liquidity is increased by proceeds from borrowings and
dispositions of businesses and assets.

Cash and cash equivalents were $24.5 million at
May 28, 2005. During fiscal 2005, the Company utilized
$2.0 million of cash in operating activities. The fiscal 2005
cash utilization was mainly due to the increase in
inventories related to the Company’s stocking levels
required for new exclusive supplier agreements. Cash and
cash equivalents were $16.9 million at May 29, 2004.
During fiscal 2004, the Company generated $12.6 million of
cash from operating activities. Working capital utilized $0.4
million in fiscal 2004 as receivables rose due to increased
sales, partially offset by increased accounts payable.

Inventory days were approximately 81 days at the end
of fiscal 2005, compared with 77 days at the end of fiscal
2004, primarily due to initial stocking packages required for
new exclusive supplier agreements in fiscal 2005. Inventory
management remains an area of focus as the Company
seeks to balance the need to maintain strategic inventory
levels to ensure competitive lead times against the risk of
inventory obsolescence because of rapidly changing
technology and customer requirements.

The Company provides engineered solutions, including

prototype design and assembly, in niche markets.
Additionally, the Company specializes in certain products
representing trailing-edge technology that may not be
available from other sources, and may not be currently
manufactured. In many cases, the Company’s products are
components of production equipment for which immediate
availability is critical to the customer. Accordingly, the
Company enjoys higher gross margins, but has larger
investments in inventory than those of a commodity
electronics distributor.

Days sales outstanding were approximately 59 days at

the end of fiscal 2005 as compared to approximately 52
days at the end of fiscal 2004. Days payable were
approximately 28 days at the end of fiscal 2005, compared
to 26 days at the end of fiscal 2004.

In October 2004, the Company renewed its multi-

currency revolving credit agreement with the current lending
group in the amount of $109.0 million. The agreement
matures in October 2009, when the outstanding balance at
that time will become due. At May 28, 2005, $53.3 million
was outstanding on the agreement. The new agreement is
principally secured by the Company’s trade receivables and
inventory. The agreement bears interest at applicable LIBOR
rates plus a margin, varying with certain financial
performance criteria. At May 28, 2005, the applicable margin
was 175 basis points. Outstanding letters of credit were $1.4
million at May 28, 2005, leaving an unused line of $54.3
million under the total agreement; however, this amount was
reduced to $2.6 million due to maximum permitted leverage
ratios. The commitment fee related to the agreement is
0.25% per annum payable quarterly on the average daily
unused portion of the aggregate commitment.

At May 28, 2005, the Company was not in compliance
with its credit agreement covenants with respect to the fixed
charge coverage ratio. On August 24, 2005, the Company
received a waiver from its lending group for the default and
executed an amendment to the credit agreement. The
amendment changed the maximum permitted leverage
ratios and the minimum required fixed charge coverage
ratios for each of the first three quarters of fiscal 2006 to
provide the Company additional flexibility for these periods.
The Company’s earnings before interest, taxes, depreciation,
and amortization (EBITDA), as defined in the credit
agreement, was reduced in the second half of fiscal 2005 by
restructuring charges, incremental inventory write-down
charges, and additional SG&A spending due to higher costs
related to audit, tax, and Sarbanes-Oxley compliance fees,
as compared to previous quarters in fiscal 2005. As the
Company continues to align operations with its engineered
solutions strategy and improve operating efficiency in fiscal
2006, EBITDA may be impacted by additional costs
associated with these initiatives. The Company anticipates
that the amended credit agreement covenants will allow the
Company flexibility to continue these initiatives while
remaining in compliance with the credit agreement
covenants. In addition, the amendment also provides
that the Company will maintain excess availability on the
borrowing base of not less than $23 million until
June 30, 2006 if a default or event of default does not exist
on or before this date. In addition, the applicable margin
pricing has been increased by 25 basis points. In addition,
the amendment extended the Company’s requirement to
refinance the remaining $22.3 million aggregate principal
amount of the 7¼% convertible subordinated debentures
and the 8¼% convertible senior subordinated debentures
from February 28, 2006 to June 10, 2006.

In February 2005, the Company issued $44.7 million of

7¾% convertible senior subordinated notes due 2011 in
exchange for $22.2 million of its 7¼% convertible
subordinated debentures due December 2006 and $22.5
million of its 8¼% convertible senior subordinated
debentures due June 2006. The new notes are convertible at
the holder’s option, at any time on or prior to maturity, into
shares of the Company’s common stock at a price equal to
$18.00 per share, subject to adjustments in certain
circumstances. On or after December 19, 2006, the
Company may elect to automatically convert the new notes
into shares of common stock if the trading prices of the
common stock exceeds 125% of the conversion price of the
new notes for at least twenty trading days during any thirty
trading day period ending within five trading days prior to the
date of the automatic conversion notice. Subsequent to the
exchange, the Company had outstanding $4.8 million of
7¼% convertible subordinated debentures due December
2006, $17.5 million of 8¼% convertible senior subordinated
debentures due June 2006, and $44.7 million of 7¾%
convertible senior subordinated notes due December 2011.
The amended credit agreement, however, requires the
Company to refinance the remaining $22.3 million
aggregate principal amount of the 8¼% convertible
senior subordinated debentures and the 7¼% convertible
subordinated debentures by June 10, 2006.

Annual dividend payments for fiscal 2005 amounted to

$2.7 million. The Company’s policy regarding payment of
dividends is reviewed periodically by the Board of Directors
in light of the Company’s operating needs and capital
structure. Over the last 18 years, the Company has been
in a position to regularly pay a quarterly dividend of $0.04
per common share and $0.036 per Class B common share.
The Company currently expects this trend to continue in
fiscal 2006.

The Company spent approximately $7.1 million on capital
projects during fiscal 2005, primarily related to implementing
PeopleSoft purchasing and inventory modules, facility
improvements at the Corporate headquarters, disaster
recovery equipment, and Sarbanes-Oxley remediation
software and hardware. The Company spent approximately
$5.4 million on capital projects in fiscal 2004. The fiscal 2004
amount primarily related to capitalized PeopleSoft
development costs, system hardware and disaster recovery,
storage area network, and software.

In May 2005, the Company completed the sale of

approximately 205 acres of undeveloped real estate
adjoining its headquarters in LaFox, Illinois for $10.9 million,
which was used to reduce debt.

The Company had interest rate exchange agreements to

convert approximately $36.4 million of floating rate debt to
an average fixed rate of 8.7%, which expired in July 2004.
Additional interest expense recorded in the Consolidated
Statement of Operations related to these agreements
was $102, $1,265, and $789 in fiscal 2005, 2004, and
2003, respectively.

See Item 7A for “Risk Management and Market Sensitive
Financial Instruments” for information regarding the effect on
net income of market changes in interest rates.

Contractual Obligations and Commitments

Certain contractual obligations and other commercial
commitments by expiration period are presented in the table
below (in thousands):

Payments Due by Period

Convertible debentures/notes(1)(2)$ 66,974
Convertible debentures/notes -

Total

Less Than
1 Year

1 - 3
Years

$ 22,291

—

interest(1)(2)

Floating-rate multi-currency

24,911

5,254

10,711

revolving credit agreement(3)

53,314

—

Floating-rate multi-currency

revolving credit agreement -
interest(3)

Lease obligations(4)
Performance bonds(5)
Other
Total

10,737
10,538
492
45
$ 167,011

2,431
5,092
—
14
$ 35,082

7,293
5,037
492
28
$ 23,561

Convertible debentures/notes(1)(2)
Convertible debentures/notes -

interest(1)(2)

Floating-rate multi-currency

revolving credit agreement(3)

Floating-rate multi-currency

revolving credit agreement -
interest(3)

Lease obligations(4)
Performance bonds(5)
Other
Total

Payments Due by Period

3 - 5
Years

More Than
5 Years

—

44,683

8,946

53,314

—

1,013
409
—
3
$ 63,685

—
—
—
—
44,683

(1) Convertible debentures consist of the 8¼% debentures, with principal

of $17.5 million due June 2006, and the 7¼% debentures, with
principal of $4.8 million due December 2006, both of which are
required by the Company’s amended credit agreement to be
refinanced by June 2006.

(2) Convertible notes consist of the 7¾% notes, with principal of

$44.7 million due December 2011.

(3) The floating rate multi-currency revolving credit facility matures in
October 2009 and bears interest at applicable LIBOR rates plus a
175 basis point margin. Interest in the table above is calculated using
4.56% interest rate and $53,314 principal amount as of May 28, 2005
for all periods presented.

(4) Lease obligations are related to certain warehouse and office facilities

and office equipment under non-cancelable operating leases.
(5) Certain French customers require a performance bond with an

expiration date of August 2006, renewable annually.

The Company believes that the existing sources of
liquidity, including current cash, as well as cash provided by
operating activities, supplemented as necessary with funds
available under credit arrangements, will provide sufficient
resources to meet known capital requirements and working
capital needs for the fiscal year ended June 3, 2006.
However, the Company will need to raise additional capital
through debt or equity financings, asset sales, or other
sources to refinance the remaining $22.3 million aggregate
principal amount of the 8¼% and 7¼% convertible
debentures by June 2006, as required by the amended
credit agreement.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Critical Accounting Policies
and Estimates

The Company’s consolidated financial statements have
been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial
statements requires the Company to make significant
estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, and expenses and related
disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates,
including those related to allowances for doubtful accounts,
inventories, intangible assets, income taxes, and
contingencies and litigation. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under
different assumptions or conditions.

The policies discussed below are considered by

management to be critical to understanding the Company’s
financial position and results of operations. Their application
involves more significant judgments and estimates in
preparation of the Company’s consolidated financial
statements. For all of these policies, management cautions
that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful

accounts for estimated losses resulting from the inability of
its customers to make required payments. The estimates
are influenced by the following considerations: continuing
credit evaluation of customers’ financial conditions; aging of
receivables, individually and in the aggregate; large number
of customers which are widely dispersed across geographic
areas; collectability and delinquency history by geographic
area; and the fact that no single customer accounts for 10%
or more of net sales. Material changes in one or more of
these considerations may require adjustments to the
allowance affecting net income and net carrying value of
accounts receivable. At May 28, 2005, the balance in the
account was $1.9 million as compared to $2.5 million at
May 29, 2004.

Impairment of Investments

The Company holds a portfolio of investment securities
and periodically assesses its recoverability. In the event of a
decline in fair value of an investment, the judgment is made
whether the decline is other-than-temporary. Management’s
assessment as to the nature of a decline is largely based on
the duration of that market decline, financial health of and
specific prospects for the issuer, and the Company’s cash
requirements and intent to hold the investment. If an

investment is impaired and the decline in market value is
considered to be other-than-temporary, an appropriate
write-down is recorded. The Company recognized
investment impairment in fiscal 2005, 2004, and 2003 of
$49, $226, and $72, respectively.

Inventories

In fiscal 2003, the Company carried its inventories at the

lower of cost or market using the last-in, first-out (LIFO)
method. Effective in fiscal 2004, the North American
operations, which represent a majority of its operations and
approximately 78% of its inventories, changed from the
LIFO method to the first-in, first-out (FIFO) method. All other
inventories were consistently stated at the lower of cost or
market using the FIFO method. The Company believes the
FIFO method is preferable in these circumstances because
it provides a better matching of revenue and expenses in
the Company’s business environment. The accounting
change was not material to the financial statements for any
of the periods, and accordingly, no retroactive restatement
of prior years’ financial statements was made.

Provisions for obsolete or slow moving inventories are

recorded based upon regular analysis of stock rotation,
obsolescence, and assumptions about future demand and
market conditions. If future demands, change in the
industry, or market conditions differ from management’s
estimates, additional provisions may be necessary.

The Company recorded inventory obsolescence and
overstock provisions of $3.9 million, $2.0 million, and $13.8
million in fiscal 2005, 2004, and 2003, respectively, which
was included in the cost of products sold. The provisions
were principally for obsolete and slow moving parts. The
parts were written down to estimated realizable value.

Beginning in fiscal 2004, the Company implemented
new policies and procedures to strengthen its inventory
management process while continuing to invest in system
technology to further enhance its inventory management
tools. These policy and procedure changes included
increased approval authorization levels for inventory
purchases, quarterly quantitative and qualitative inventory
aging analysis and review, changes in the budgeting
process to establish targets and metrics that relate to its
return on assets rather than only a revenue and profit
expectation, and realignment of incentive programs in
accordance with these targets and metrics. The Company
is committed to inventory management as an ongoing
process as the business evolves and technology changes.

Long-Lived and Intangible Assets

The Company periodically evaluates the recoverability

of the carrying amounts of its long-lived assets, including
software, property, plant and equipment. The Company
assesses in accordance with Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the possibility
of long-lived assets being impaired when events trigger
the likelihood.

Impairment is assessed when the undiscounted

expected cash flows derived from an asset are less than its
carrying amount. If impairment exists, the carrying value of
the impaired asset is written down and impairment loss is
recorded in operating results. In assessing the potential
impairment of the Company’s goodwill and other intangible
assets, management makes significant estimates and
assumptions regarding the discounted future cash flows to
determine the fair value of the respective assets on an
annual basis. These estimates and their related
assumptions include, but are not limited to, projected future
operating results, industry and economy trends, market
discount rates, indirect expense allocations, and tax rates.
If these estimates or assumptions change in the future as
a result of changes in strategy, Company profitability, or
market conditions, among other factors, this could
adversely affect future goodwill and other intangible assets
valuations and result in additional impairment charges.

Effective June 1, 2002, the Company adopted SFAS

No. 142, Goodwill and Other Intangible Assets. This
statement changed the accounting for goodwill and
indefinite lived assets from an amortization approach to an
impairment-only approach. As a result of the adoption of
SFAS No. 142, the Company recorded a transitional
impairment charge during the first quarter of fiscal 2003 of
$21.6 million ($17.9 million net of tax), presented as a
cumulative effect of accounting change. The Company
performed its impairment test during the fourth quarter of
each fiscal year. The Company did not find any indication
that additional impairment existed and, therefore, no
additional impairment loss was recorded in fiscal 2005.

Warranties

The Company offers warranties for specific products it

manufactures. The Company also provides extended
warranties for some products it sells that lengthen the
period of coverage specified in the manufacturer’s original
warranty. Terms generally range from one to three years.

based generally on knowledge of the manufacturers’
experience and are extrapolated to reflect the extended
warranty period, and are refined each quarter as
better information with respect to warranty experience
becomes known.

Warranty reserves are established for costs that are

expected to be incurred after the sale and delivery of
products under warranty. The warranty reserves are
determined based on known product failures, historical
experience, and other currently available evidence.

Income Taxes

The Company recognizes deferred tax assets and

liabilities based on the differences between financial
statement carrying amounts and the tax bases of assets
and liabilities. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation
allowance based on historical taxable income, projected
future taxable income, the expected timing of the reversals
of existing temporary differences, and the implementation of
tax planning strategies. If the Company is unable to
generate sufficient future taxable income in certain tax
jurisdictions, or if there is a material change in the actual
effective tax rates or time period within which the underlying
temporary differences become taxable or deductible, the
Company could be required to increase its valuation
allowance against its deferred tax assets resulting in an
increase in its effective tax rate and an adverse impact on
operating results.

At May 28, 2005 and May 29, 2004, the Company’s

deferred tax assets related to tax carryforwards were
$14.2 million and $14.9 million, respectively. The tax
carryforwards are comprised of net operating loss
carryforwards and other tax credit carryovers. A majority
of the net operating losses and other tax credits can be
carried forward for 20 years.

The Company has recorded valuation allowances for

the majority of its federal deferred tax assets, loss
carryforwards, and tax loss carryforwards of certain
non-U.S. subsidiaries. The Company believes that the
deferred tax assets for the remaining tax carryforwards are
considered more likely than not to be realizable based on
estimates of future taxable income and the implementation
of tax planning strategies.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards
Board (FASB) revised SFAS No. 123, Accounting for Stock-
Based Compensation. This Statement establishes
standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity
instruments. This statement focuses primarily on accounting
for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No.
123(R) is effective at the beginning of the next fiscal year
that begins after June 15, 2005, or the Company’s fiscal
year 2007. The Company is evaluating the impact of the
adoption of SFAS No. 123(R) on the financial statements.

Safe Harbor Statement Under
the Private Securities Litigation
Reform Act of 1995

Except for the historical information contained herein,
the matters discussed in this Annual Report (including the
Annual Report on Form 10-K) are forward-looking
statements relating to future events which involve certain
risks and uncertainties, including those identified herein and
in the Annual Report on Form 10-K. Further, there can be
no assurance that the trends reflected in historical
information will continue in the future.

Quantitative and Qualitative Disclosures
about Market Risk
Risk Management and Market Sensitive
Financial Instruments

The Company’s foreign denominated assets and

liabilities are cash, accounts receivable, inventory, accounts
payable, and intercompany receivables and payables,
primarily in Canada and member countries of the European
community and, to a lesser extent, in Asia/Pacific and
Latin America. The Company monitors its foreign exchange
exposures and has entered into forward contracts to

hedge significant transactions; however, this activity is
infrequent. The Company did not enter into any forward
contracts in fiscal 2005. In fiscal 2004, the Company entered
into one forward contract with an approximate value of $85.
Other tools that may be used to manage foreign exchange
exposures include the use of currency clauses
in sales contracts and the use of local debt to offset
asset exposures.

As discussed above, the Company’s debt financing, in
part, varies with market rates exposing the Company to the
market risk from changes in interest rates. Certain
operations, assets and liabilities of the Company are
denominated in foreign currencies subjecting the Company
to foreign currency exchange risk. In order to provide the
user of these financial statements guidance regarding the
magnitude of these risks, the Securities and Exchange
Commission requires the Company to provide certain
quantitative disclosures based upon hypothetical
assumptions. Specifically, these disclosures require the
calculation of the effect of a 10% increase in market interest
rates and a uniform 10% strengthening of the U.S. dollar
against foreign currencies on the reported net earnings and
financial position of the Company.

Under these assumptions, additional interest expense,
tax effected, would have increased the net loss by $185 in
fiscal 2005 and decreased income by $229 in fiscal 2004.
These amounts were determined by considering the impact
of the hypothetical 10% interest rate increase on the
Company’s variable rate outstanding borrowings.
Had the U.S. dollar strengthened 10% against various
foreign currencies, sales would have been lower by an
estimated $22.5 million in fiscal 2005 and $20.0 million
in fiscal 2004. Total assets would have declined by
$10.7 million and $8.2 million in fiscal 2005 and fiscal 2004,
respectively, while the total liabilities would have decreased
by $4.1 million and $5.0 million in fiscal 2005 and fiscal
2004, respectively. These amounts were determined by
considering the impact of the hypothetical 10% decrease in
average foreign exchange rates against the U.S. dollar on
the sales, assets and liabilities of the Company’s
international operations.

The interpretation and analysis of these disclosures
should not be considered in isolation since such variances in
interest rates and exchange rates would likely influence
other economic factors. Such factors, which are not
readily quantifiable, would likely also affect the
Company’s operations.

Consolidated Balance Sheets

(in thousands)

Assets
Current assets

Cash and cash equivalents

Receivables, less allowance of $1,934 and $2,516

Inventories

Prepaid expenses

Deferred income taxes

Total current assets

Property, plant and equipment, net

Goodwill

Other intangible assets, net

Non-current deferred income taxes

Other assets

Total assets

Liabilities and stockholders’ equity
Current liabilities

Accounts payable

Accrued liabilities

Current portion of long-term debt

Total current liabilities

Long-term debt, less current portion

Non-current liabilities

Total liabilities

Stockholders’ equity

May 28,
2005

May 29,
2004

$ 24,530

106,928

102,272

3,293

6,644

243,667

31,821

6,149

1,018

428

4,735

$ 16,927

106,130

92,297

3,817

15,922

235,093

30,589

5,778

531

6,733

4,221

$287,818

$282,945

$ 39,305

$ 33,473

22,731

22,305

84,341

98,028

1,401

183,770

23,224

4,027

60,724

133,813

241

194,778

Common stock, $.05 par value; issued 15,597 shares

at May 28, 2005 and 12,524 shares at May 29, 2004

780

626

Class B common stock, convertible, $.05 par value;

issued 3,120 shares at May 28, 2005

and 3,168 shares at May 29, 2004

Preferred stock, $1.00 par value, no shares issued

Additional paid-in capital

Common stock in treasury, at cost; 1,332 shares at

May 28, 2005 and 1,437 shares at May 29, 2004

Retained earnings (accumulated deficit)

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

156

—

121,591

(7,894)

(9,942)

(643)

104,048

$287,818

158

—

93,877

(8,515)

3,408

(1,387)

88,167

$282,945

Certain amounts in fiscal 2004 were reclassified to conform to the fiscal 2005 presentation; See accompanying notes to
consolidated financial statements.

Consolidated Statements of Operations

(in thousands, except per share amounts)

Net sales

Cost of products sold

Gross margin

Selling, general and administrative expenses

(Gain) loss on disposal of assets

Operating income (loss)

Other expense (income):

Interest expense

Investment income

Foreign exchange and other, net

Income (loss) before income taxes and

cumulative effect of accounting change

Income tax provision (benefit)

Income (loss) before cumulative effect

Fiscal Year Ended

May 28,
2005

May 29,
2004

May 31,
2003

$ 578,724

$ 519,823

$ 464,381

441,817

136,907

128,733

(9,918)

18,092

8,903

(388)

(977)

7,538

392,117

127,706

108,299

579

18,828

365,427

98,954

100,613

—

(1,659)

10,257

10,352

(227)

228

10,258

(124)

(528)

9,700

10,554

21,865

8,570

2,537

(11,359)

(2,370)

of accounting change

(11,311)

6,033

(8,989)

Cumulative effect of accounting change,

net of tax of $3,725

Net income (loss)

—

(17,862)

$ (11,311)

6,033

$ (26,851)

Average shares outstanding:

For basic EPS

For diluted EPS

Net income (loss) per share - basic:

Net income (loss) per share before

16,942

14,040

14,418

13,809

cumulative effect of accounting change

(0.67)

Cumulative effect of accounting change, net of tax

—

Net income (loss) per share - basic

(0.67)

Net income (loss) per share - diluted:

Net income (loss) per share before

cumulative effect of accounting change

(0.67)

Cumulative effect of accounting change, net of tax

—

Net income (loss) per share - diluted

Dividends per common share

(0.67)

0.16

0.43

—

0.43

0.42

—

0.42

0.16

(0.65)

(1.29)

(1.94)

(0.65)

(1.29)

(1.94)

0.16

Certain amounts in fiscal 2004 and 2003 were reclassified to conform to the fiscal
2005 presentation; See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(in thousands)

Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash

provided by (used in) operating activities:

(Gain) loss on disposal of assets
Depreciation
Amortization of intangibles and financing costs
Deferred income taxes
Provision for inventory obsolescence
Other charges
Goodwill and other intangible assets impairment, net of tax
Other non-cash items in net income (loss)
Other liabilities
Receivables
Inventories
Other
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities

Investing activities:

Capital expenditures
Proceeds from sale of assets
Business acquisitions
Proceeds from sales of available-for-sale securities
Purchases of available-for-sale securities
Other
Net cash provided by (used in) investing activities

Financing activities:

Proceeds from borrowings
Payments on debt
Proceeds from issuance of common stock
Cash dividends
Other (including financing charges)
Net cash provided by (used in) financing activities

May 28,
2005

May 29,
2004

Fiscal Year Ended
May 31,
2003

$ (11,311)

$ 6,033

$ (26,851 )

(9,918)
5,039
316
15,583
—
—
—
2,323
1,156
1,822
(8,917)
2,993
(1,118)
(2,032)

(7,086)
10,925
(971)
3,042
(3,042)
—
2,868

113,229
(131,624)
29,729
(2,719)
(2,364)
6,251

579
4,899
332
1,190
—
—
—
(90)
4,737
(19,306)
4,691
(207)
9,699
12,557

(5,434)
—
(6,196)
3,946
(3,946)
83
(11,547)

52,105
(53,416)
1,656
(2,206)
—
(1,861)

904
53

—
5,093
271
(1,183 )
10,037
6,041
17,862
(290 )
1,319
4,297
2,484
(3,054 )
(8,252 )
7,774

(6,125 )
—
(1,108 )
5,217
(5,217 )
(23 )
(7,256 )

41,880
(40,982 )
1,134
(2,694 )
(304 )
(966 )

2,026
1,578

15,296
16,874

10,246
2,657

$
$

Effect of exchange rate changes on cash and cash equivalents
Increase in cash and equivalents

516
7,603

Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

16,927
$ 24,530

16,874
$ 16,927

Supplemental Disclosures of Cash Flow Information:
Cash paid during the fiscal year for:

Interest
Income taxes

$
$

9,131
3,272

$ 10,404
$ 1,656

Certain amounts in fiscal 2004 and 2003 were reclassified to conform to the fiscal 2005 presentation; See accompanying notes to consolidated
financial statements.

Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss)

(in thousands except
per share amounts)

Comprehensive
Income (Loss)

Common

Class B
Common

Par
Value

Shares Issued

Additional
Paid-In
Capital

Treasury
Stock

12,144

3,207

767

90,291

(9,386 )

Retained
Earnings/
(Accumulated
Deficit)
$ 29,171

Accumulated
Other
Comprehensive
Income (Loss)
$ (7,888 ) $ 102,955

Total

Balance June 1, 2002
Comprehensive Income:
Net loss
Recognition of unearned

compensation
Currency translation
Fair value adjustments on

investment, net of
income tax effect

Cash flow hedges, net of

$ (26,851)

—
3,519

(96)

income tax effect

(147)
Comprehensive Income (Loss) $ (23,575)
Common stock issued
Dividends paid to:

Class A ($0.04 per share)
Class B ($0.036 per share)

Balance May 31, 2003
Reclassification - correction of error(1)
Comprehensive Income:

Net income

Recognition of unearned

compensation
Currency translation
Fair value adjustments on

investment, net of
income tax effect

Cash flow hedges, net of

income tax effect
Comprehensive Income
Common stock issued
Conversion of Class B

shares to common stock
Dividends paid to:
Class A ($0.04 per share)
Class B ($0.036 per share)

Balance May 29, 2004
Comprehensive Income (Loss):
Net loss
Recognition of unearned

compensation
Currency translation
Fair value adjustments on

investment, net of
income tax effect

Cash flow hedges, net of

6,033

—
1,258

329

732
8,352

$ (11,311)

—
557

121

income tax effect

66
Comprehensive Income (Loss) $ (10,567)
Common stock issued
Conversion of Class B

shares to common stock

Dividends paid to:

Class A ($0.04 per share)
Class B ($0.036 per share)

Balance May 28, 2005

—

—
—

—

112

—

—
—

—

—
—
12,256
—

—
—
3,207
—

—

—
—

—

229

—
—
12,524

—

—
—

—

3,025

—

—
—

—

(39)

—
—
3,168

—

—
—

—

(48)

—
—
15,597

—
—
3,120

—

—
—

—

—
—
773
—

—

—
—

—

—
—
784

—

—
—

—

152

—

—
—
936

—

181
—

—

949

—

—
—

—

464

—
—
91,421
—

—
—
(8,922 )
—

—

288
—

—

2,168

—

—
—
93,877

—

242
—

—

28,153

—

—
—

—

407

—

—
—
(8,515 )

—

—
—

—

621

—

(26,851 )

—

(26,851 )

—
—

—

(1,697 )
(462 )
161
(580 )

6,033

—
—

—

(1,747 )
(459 )
3,408

(11,311 )

—
—

—

—
3,519

181
3,519

(96 )

(147 )

—

—
—
(4,612 )
906

—

—
1,258

329

732

—

—
—
(1,387 )

—

—
557

121

—

(96 )

(147 )

1,419

(1,697 )
(462 )
78,821
326

6,033

288
1,258

329

732

2,586

—

(1,747 )
(459 )
88,167

(11,311 )

242
557

121

28,926

—

(568)
(113)
$ 121,591

—
—
$ (7,894 )

(1,699 )
(340 )
$ (9,942 )

—
—

(2,267 )
(453 )
(643 ) $ 104,048

(1) In the second quarter of fiscal 2005, an error was discovered with respect to the accounting treatment of certain foreign exchange gains and losses incurred during fiscal
2001 and 2002. These foreign exchange items related to the acquisition in fiscal 2001 of AVIV Electronics by one of the Company's subsidiaries, and the reporting of
subsequent intercompany transactions between the subsidiary and parent. The correction of this error amounted to $580 on a cumulative basis, net of taxes of $326,
which is recorded as an adjustment to retained earnings, accumulated other comprehensive loss, and deferred income taxes as of May 29, 2004.

Certain amounts in fiscal 2004 and 2003 were reclassified to conform to the fiscal 2005 presentation; See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Property, Plant and Equipment: Property, plant and equipment are

stated at cost. Improvements and replacements are capitalized while
expenditures for maintenance and repairs are charged to expense as
incurred. Provisions for depreciation are computed principally using
the straight-line method over the estimated useful life of the asset.
Depreciation expense was $5,039, $4,899, and $5,093 in fiscal 2005,
2004, and 2003, respectively. Property, plant and equipment consist
of the following:

Land and improvements
Buildings and improvements
Computer and communications equipment
Machinery and other equipment

Accumulated depreciation
Property, plant and equipment, net

May 28, 2005 May 29, 2004

1,347
18,966
27,024
18,558
65,895
(34,074)
31,821

2,363
18,274
17,612
21,581
59,830
(29,241)
$ 30,589

Supplemental disclosure information of
the estimated useful life of the asset:

Land improvements
Buildings and improvements
Computer and communications equipment
Machinery and other equipment

10 years
10 - 15 years
3 - 5 years
3 - 7 years

The Company is in the application development stage of
implementing certain modules of enterprise resource management
software (PeopleSoft). In accordance with Accounting Standards
Executive Committee (AcSEC) Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use, the Company capitalizes all direct costs associated with the
application development of this software including software acquisition
costs, consulting costs, and internal payroll costs. The Statement
requires these costs to be depreciated once the application development
stage is complete. The unamortized balance of the aforementioned
capitalized costs, included within computer and communications
equipment, is $5,036 and $9,672 at May 28, 2005 and May 29, 2004,
respectively. Depreciation expense for capitalized software costs that
relate to PeopleSoft in the post-application development stage was
$1,531, $1,239, and $776 in fiscal 2005, 2004, and 2003, respectively.

Note A — Significant Accounting Policies

Principles of Consolidation: Fiscal Year - Richardson Electronics,

Ltd. (the “Company”) fiscal year ends on the Saturday nearest the end
of May. Each of the fiscal years presented contains 52 weeks.
All references herein for the years 2005, 2004, and 2003 represent
the fiscal years ended May 28, 2005, May 29, 2004, and
May 31, 2003, respectively.

The consolidated financial statements include the Company and its

subsidiaries. Significant intercompany transactions and accounts have
been eliminated.

Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires the
Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contin-
gent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Reclassifications and Presentation: Certain amounts in the prior

years’ financial statements have been reclassified to conform to the
fiscal 2005 presentation.

Fair Values of Financial Instruments: The fair values of financial
instruments are determined based on quoted market prices and market
interest rates as of the end of the reporting period. The Company’s
financial instruments include accounts receivable, accounts payable,
accrued liabilities, and long-term debt. The fair values of these financial
instruments were, with the exception of long-term debt as disclosed in
Note F, not materially different from their carrying or contract values at
May 28, 2005 and May 29, 2004.

Cash Equivalents: The Company considers short-term
investments that have maturity of three months or less, when
purchased, to be cash equivalents. The carrying amounts reported
in the balance sheet for cash and cash equivalents approximate the
fair market values of these assets.

Inventories: At May 28, 2005, the Company’s worldwide

inventories were stated at the lower of cost or market using the first-in,
first-out (FIFO) method. Effective June 1, 2003, the North American
operations, which represent a majority of the Company’s operations and
approximately 78% of the Company’s inventories, changed from the last-
in, first-out (LIFO) method to the FIFO method. All other inventories were
consistently stated at the lower of cost or market using FIFO method.
The Company believes that the FIFO method is preferable because it
provides a better matching of revenue and expenses. The accounting
change was not material to the financial statements for any of the
periods presented, and accordingly, no retroactive restatement of prior
years’ financial statements was made. Inventories include material,
labor, and overhead associated with such inventories. Substantially all
inventories represent finished goods held for sale.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Other Assets: Other assets consist of the following:

Investments
Notes receivable
Other deferred charges, net
Other assets

May 28, 2005 May 29, 2004

$ 3,445
955
335
$ 4,735

$ 3,058
737
426
$ 4,221

The Company’s investments are primarily equity securities, all of

which are classified as available-for-sale and are carried at their fair
value based on the quoted market prices. Proceeds from the sale of the
securities were $3,042, $3,946, and $5,217 during fiscal 2005, 2004,
and 2003, respectively, all of which were consequently reinvested. Gross
realized gains on those sales were $372, $366, and $351 in fiscal 2005,
2004, and 2003, respectively. Gross realized losses on those sales were
$102, $59, and $412 in fiscal 2005, 2004, and 2003, respectively. Net
unrealized holding gains of $121, net unrealized holding gains of $329,
and net unrealized holding losses of $96 have been included in
accumulated comprehensive income (loss) for fiscal 2005, 2004 and
2003, respectively. The following table is the disclosure under Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, for the investment in
marketable equity securities with fair values less than cost basis:

Description
of Securities

Less than
12 months

More than
12 months

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

May 28, 2005
Common Stock $ 2,044

May 29, 2004
Common Stock $ 2,252

$ 33

$ — $ — $ 2,044

$ 33

$ 63

$ 2,349

$ 70

Deferred financing costs are amortized using the effective interest

rate method.

Goodwill and Other Intangible Assets: Effective June 2, 2002,
the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which requires that goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but are subject to annual
impairment testing. Intangible assets with finite lives are amortized over
their estimated useful lives on a straight line basis.

Accordingly, the Company discontinued amortization of goodwill
and certain intangible assets. Management reviews the valuation of
goodwill and intangible assets not subject to amortization at least
annually. The Company utilizes the comparison of reporting units’ fair
value derived by discounted cash flow analysis and their book value as
an indicator of potential impairment. The application of SFAS No. 142
transitional accounting provisions and the annual impairment test are
discussed in Note B.

Accrued Liabilities: Accrued liabilities consist of the following:

Compensation and payroll taxes
Interest
Income taxes
Warranty reserve
Other accrued expenses
Accrued liabilities

May 28, 2005 May 29, 2004

$ 9,543
2,261
7,401
1,439
2,087
$ 22,731

$ 9,828
2,752
6,306
802
3,536
$ 23,224

Warranties: The Company offers warranties for specific products
it manufactures. The Company also provides extended warranties for
some products it sells that lengthen the period of coverage specified in
the manufacturer's original warranty. Terms generally range from one to
three years.

The Company estimates the cost to perform under its warranty
obligation and recognizes this estimated cost at the time of the related
product sale. The Company reports this expense as an element of cost
of products sold in its Consolidated Statement of Operations. Each
quarter, the Company assesses actual warranty costs incurred, on a
product-by-product basis, as compared to its estimated obligation.
The estimates with respect to new products are based generally on
knowledge of the manufacturers’ experience and are extrapolated to
reflect the extended warranty period, and are refined each quarter as
better information with respect to warranty experience becomes known.
Warranty reserves are established for costs that are expected to be

incurred after the sale and delivery of products under warranty. The
warranty reserves are determined based on known product failures,
historical experience, and other currently available evidence.

Non-current Liabilities: Non-current liabilities of $1,401 at
May 28, 2005 represent the pension obligations for qualified Korea
and Italy employees and $241 at May 29, 2004 represent the pension
obligations for qualified Korea employees.

Foreign Currency Translation: Foreign currency balances are

translated into U.S. dollars at end-of-period rates. Revenues and
expenses are translated at the current rate on the date of the transac-
tion. Gains and losses resulting from foreign currency transactions are
included in income. Foreign currency transactions reflected in operations
was gain of $910 in fiscal 2005, loss of $363 in fiscal 2004, and gain of
$1,096 in fiscal 2003, respectively. Gains and losses resulting from
translation of foreign subsidiary financial statements are credited or
charged directly to accumulated other comprehensive income (loss),
a component of stockholders’ equity.

Revenue Recognition: The Company’s product sales are
recognized as revenue generally upon shipment, when title passes to
the customer, delivery has occurred or services have been rendered,
and collectibility is reasonably assured. The Company’s terms are
generally FOB shipping point and sales are recorded net of discounts,
rebates, and returns based on the Company’s historical experience. The
Company’s products are often manufactured to meet the specific design
needs of its customers’ applications. Its engineers work closely with
customers in ensuring that the product the Company seeks to provide
them will meet their needs, but its customers are under no obligation to
compensate the Company for designing the products it sells; the
Company retains the rights to its designs.

Shipping and Handling Fees and Costs: Shipping and handling
costs billed to customers are reported as revenue and the related costs
are reported as cost of products sold.

Income Taxes: Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences in the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those differences are expected to be recovered or settled. In
assessing the realizability of the deferred tax assets, management
considers whether it is more likely than not that some portion of or all of
the deferred tax assets will not be realized. A valuation allowance is
recorded for the portion of the deferred tax assets that are not expected

to be realized based on the level of historical taxable income, projections
for future taxable income over the periods in which temporary
differences are deductible, and allowable tax planning strategies.

In fiscal 2005, the Company determined that a portion of its foreign

subsidiaries’ cumulative positive earnings may be distributed in future
years. Upon distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income tax and
foreign withholding taxes. As such, the Company established a deferred
tax liability in fiscal 2005. The remaining portion of the foreign
subsidiaries’ cumulative positive earnings was considered permanently
reinvested pursuant to Accounting Principal Board Opinion (APB) No.
23, Accounting for Income Taxes - Special Areas. In fiscal 2004, all
of the foreign subsidiaries’ cumulative positive earnings were considered
permanently reinvested, and U.S. taxes were not provided on these
amounts (see Note I).

Stock-Based Compensation: The Company accounts for its stock

option plans in accordance with APB No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. However, the exercise price of all grants under the Company’s
option plans has been equal to the fair market value on the date of
grant. SFAS No. 123, Accounting for Stock-Based Compensation,
requires estimation of the fair value of options granted to employees.
Had the Company’s option plans and stock purchase plan been treated
as compensatory under the provisions of SFAS No. 123, the Company’s
net income (loss) and net income (loss) per share would have been
affected as follows (see Note J to Consolidated Financial Statements
for underlying assumptions):

May 28,
2005
$ (11,311)

Fiscal Year Ended

May 29,
2004
6,033

May 31,
2003
$ (26,851)

425

284

315

Net income (loss), as reported:
Add: Stock-based compensation
expense included in reported
net income (loss), net of taxes
Deduct: Stock-based compensation
expense determined under fair
value-based method for all awards,
net of taxes

Pro-forma net income (loss)
Net income (loss) per share - basic:
$
Reported net income (loss)
Pro-forma compensation expense,

net of taxes

Pro-forma net income (loss)

(1,834)
$ (12,720)

(0.67)

(0.08)

per share - basic

(0.75)

Net income (loss) per share - diluted:
Reported net income (loss)
Pro-forma compensation expense,

(0.67)

(1,273)
5,044

(1,561)
$ (28,097)

0.43

(1.94)

(0.07)

(0.09)

0.36

0.42

(2.03)

(1.94)

net of taxes

(0.08)

(0.07)

(0.09)

Pro-forma net income (loss)

per share - diluted

(0.75)

0.35

(2.03)

Earnings per Share: Basic earnings per share is calculated by
dividing net income by the weighted average number of common and
Class B common shares outstanding. Diluted earnings per share is
calculated by dividing net income, adjusted for interest savings, net
of tax, on assumed bond conversions, by the actual shares outstanding
and share equivalents that would arise from the exercise of stock
options, certain restricted stock awards, and the assumed
conversion of convertible bonds when dilutive. The per share amounts
presented in the Consolidated Statements of Operations are based on
the following amounts:

Fiscal Year Ended

May 28,
2005

May 29,
2004

May 31,
2003

Numerator for basic EPS:

Net income (loss)

$ (11,311) $

6,033 $ (26,851)

Denominator for basic EPS:

Weighted average shares outstanding 16,942

14,040

13,809

Numerator for diluted EPS:

Net income (loss)

$ (11,311) $

6,033

$ (26,851)

Denominator for diluted EPS:

Weighted average shares outstanding 16,942

14,418

13,809

In computation of diluted loss per share for the fiscal year ended
May 28, 2005, the assumed conversion of the Company’s 7¼% and 8¼%
convertible debentures, the 7¾% convertible notes, all stock options, and
all restricted stock awards were excluded because their inclusion would
have been antidilutive. In computation of diluted earnings per share for
the fiscal year ended May 29, 2004, the assumed conversion of the
Company’s 8¼% and 7¼% convertible debentures and 451 stock
options with exercise prices greater than the average market price of
the underlying stock were excluded because their inclusions would have
been antidilutive. In computation of diluted loss per share for the fiscal
year ended May 31, 2003, the assumed conversion of the Company's
8¼% and 7¼% convertible debentures, all stock options, and all
restricted stock awards were excluded because their inclusion would
have been antidilutive.

Derivatives and Hedging Activities: The Company accounts for

derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
standard requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivative value changes are recorded in
income for any contracts not classified as qualifying hedging instruments.
For derivatives qualifying as cash flow hedge instruments, the effective
portion of the derivative fair value change must be recorded through other
comprehensive income, a component of stockholders’ equity.

New Accounting Pronouncement: In December 2004, the
Financial Accounting Standards Board (FASB) revised SFAS No. 123,
Accounting for Stock-Based Compensation. This statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments
or that may be settled by the issuance of those equity instruments. This
statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) is effective at the beginning of the next fiscal year that
begins after June 15, 2005, or the Company’s fiscal year 2007. The
Company is evaluating the impact of the adoption of SFAS No. 123(R)
on the financial statements.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

The addition to goodwill during fiscal 2005 represents the acquisition
of Evergreen under IPG and additional consideration for the Pixelink (under
DSG) acquisition made in fiscal 1999 due to the acquired business
achieving certain targeted operating levels.

The following table provides changes in carrying value of other

intangible assets not subject to amortization:

Other intangible assets not subject to amortization

Balance at May 29, 2004
Foreign currency

translation

Balance at May 28, 2005

Reportable Segments

RFWC

IPG

SSD

DSG

Total

— $ 9 $ 248

$ — $ 257

30
—
—
— $ 9 $ 278

—

30
$ — $ 287

Intangible assets subject to amortization as well as amortization

expense are as follows:

Intangible assets subject to amortization as of

May 28,
2005

May 29,
2004

May 31,
2003

Gross amounts:

Deferred financing costs
Patents and trademarks
Total gross amounts

Accumulated amortization:
Deferred financing costs
Patents and trademarks

Total accumulated amortization $

2,968
478
3,446

2,241
474
2,715

2,192
478
2,670

1,935
461
2,396

$ 2,191
478
2,669

1,647
448
$ 2,095

Deferred financing costs increased during fiscal 2005 due to the
renewal of the Company’s multi-currency revolving credit agreement during
the second quarter of fiscal 2005 and the convertible debenture exchanges
made in the third quarter of fiscal 2005 (see Note F).

Amortization of intangible assets subject to amortization

Deferred financing costs
Patents and trademarks

Total

May 28,
2005

306
13
319

May 29,
2004

$ 288
13
$ 301

May 31,
2003

$ 261
12
$ 273

The amortization expense associated with the intangible assets
subject to amortization is expected to be $154, $136, $136, $136, $86,
$53, and $30 in fiscal 2006, 2007, 2008, 2009, 2010, 2011, and 2012,
respectively. The weighted average number of years of amortization
expense remaining is 5.34.

Note B — Goodwill and Other Intangible Assets
As discussed in Note A, the Company adopted the new rules on
accounting for goodwill and other intangible assets effective June 2, 2002,
and, accordingly, discontinued the amortization of goodwill and other
intangible assets not subject to amortization.

During the second quarter of fiscal 2003, the Company completed
both steps of the required impairment tests of goodwill and indefinite life
intangible assets for each of the reporting units as required under the
transitional accounting provisions of SFAS No.142. In identifying reporting
units, the Company evaluated its reporting structure as of June 2, 2002.
The Company concluded that the following operating segments and their
components qualified as reporting units: RF & Wireless Communications,
Broadcast, Display Systems Group, Industrial Power Group, Burtek, and
Security Systems Division excluding Burtek. The first step in the process of
goodwill impairment testing is a screen for potential impairment of the
goodwill and other long lived assets, while the second step measures the
amount of the impairment. The Company used a discounted cash flow
valuation (income approach) to determine the fair value of each of the
reporting units. Sales, net income, and EBITDA multiples (market ap-
proaches) were used as a check against the impairment implications
derived under the income approach. The first step indicated that goodwill
and other long lived assets of RF & Wireless Communications, Broadcast
and Security Systems Division excluding Burtek were impaired. In
evaluating the amount of impairment, it was determined that all goodwill
and other long lived assets were impaired for the aforementioned reporting
units. Consequently, the Company recorded, effective at the beginning of
fiscal 2003, an impairment loss of $21.6 million of which $21.5 million
related to goodwill with the balance attributable to other intangible assets
with indefinite useful lives. The impairment loss of $17.9 million, net of
tax of $3.7 million, was recorded as a cumulative effect of a change in
accounting principle.

The Company performed its annual impairment test during the fourth
quarter of fiscal 2005. The same methodology was employed in completing
the annual impairment test as in applying transitional accounting provisions
of SFAS No.142. The Company did not find any indication that additional
impairment existed and, therefore, no additional impairment loss was
recorded as a result of completing the annual impairment test.

The table below provides changes in carrying value of goodwill by
reportable segment which includes RF & Wireless Communications Group
(RFWC), Industrial Power Group (IPG), Security Systems Division (SSD),
and Display Systems Group (DSG):

Reportable Segments

RFWC

IPG

SSD

DSG

Total

Goodwill

Balance at May 29, 2004
—
Additions
Foreign currency translation —
Balance at May 28, 2005

$ — $ 876 $1,482 $ 3,420 $ 5,778
270
101
$ — $1,126 $1,577 $ 3,446 $ 6,149

244
6

26
—

—
95

During the fourth quarter of fiscal 2003, the Company took certain
actions to align its inventory and cost structure to current sales levels amid
continued weakness in the global economy and limited demand visibility.
As a result, the Company recorded a non-cash inventory write-down charge
of $13.8 million, a restructuring charge of $1.8 million, and other charges of
$0.6 million. In addition, a valuation allowance in the amount of $1.6 million
was established related to deferred income tax assets attributable to net
operating losses in certain foreign subsidiaries. The net of tax effect of the
aforementioned charges was $11.9 million on the Company’s results of
operations. The restructuring charge consisted of $1,610 for employee
severance and $210 lease breakage costs and was included in fiscal 2003
SG&A. Severance costs of $328 relating to the fiscal 2003 restructuring
were paid in fiscal 2003 with the remaining balance fully paid in fiscal 2004.
Terminations affected over 70 employees across various business
functions, operating units, and geographic regions. All terminations and
termination benefits were communicated to the affected employees prior to
fiscal 2003 year-end. During the second quarter of fiscal 2004, the
Company adjusted employee severance and related costs and lease
termination resulting in a $498 decrease in SG&A due to the difference
between the estimated severance costs and the actual payouts and was
recorded in the quarter ended November 29, 2003. All employees originally
notified were terminated. The lease termination did not occur as the
agreement for the replacement facility was not finalized. The lease
termination reversal was recorded in the quarter ended August 30, 2003.

Note C — Restructuring Charges

As a result of the Company’s fiscal 2005 restructuring initiative, a

restructuring charge, including severance and lease termination costs of
$2,152, was recorded in selling, general and administrative expenses
(SG&A) in the third quarter of fiscal 2005. During the fourth quarter of fiscal
2005, the employee severance and related costs were adjusted resulting in
a $183 decrease in SG&A due to the difference between estimated
severance costs and the actual payouts. Severance costs of $1,108 were
paid in fiscal 2005. The remaining balance payable in fiscal 2006 has been
included in accrued liabilities. Terminations affected over 60 employees
across various business functions, operating units and geographic regions.
As of May 28, 2005, the following tables depict the amounts associated with
the activity related to restructuring by reportable segments:

Fiscal 2003

Restructuring
Liability
June 1, 2002

Reserve
Recorded
Fiscal 2003

Payments
Fiscal 2003

Adjustment
to Reserve
Fiscal 2003

Restructuring
Liability
May 31, 2003

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

$ —
—
—
—
250
250

Lease termination costs:
SSD

—
$ 250

Total

Fiscal 2004

468
86
161
62
833
1,610

$ (125)
(5)
(40)
(24)
(474)
(668)

210
$ 1,820

—
$ (668)

—
—
—
—
—
—

—
—

343
81
121
38
609
1,192

210
$ 1,402

Restructuring
Liability
May 31, 2003

Reserve
Recorded
Fiscal 2004

Payments
Fiscal 2004

Adjustment
to Reserve
Fiscal 2004

Restructuring
Liability
May 29, 2004

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

343
81
121
38
609
1,192

Lease termination costs:
SSD

210
$ 1,402

Total

289
—
—
—
—
289

—
289

$ (632)
(81)
(121)
(38)
(321)
(1,193)

$ —
—
—
—
(288)
(288)

—
$ (1,193)

(210)
$ (498)

$ —
—
—
—
—
—

—
$ —

Fiscal 2005

Restructuring
Liability
May 29, 2004

Reserve
Recorded
Fiscal 2005

Payments
Fiscal 2005

Adjustment
to Reserve
Fiscal 2005

Restructuring
Liability
May 28, 2005

Employee severance and related costs:

RFWC
IPG
SSD
DSG
Corporate
Total

—
—
—
—
—
—

Lease termination costs:
SSD

Total

—
—

909
325
99
416
368
2,117

$ (392)
(142)
(90)
(186)
(298)
(1,108)

$ (199)
—
16
—
—
(183)

35
$ 2,152

—
$(1,108)

—
$ (183)

318
183
25
230
70
826

35
861

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Note D — Acquisitions

Fiscal 2005: The aggregate cash outlay in 2005 for business
acquisitions was $971. A $545 earn out payment was made in the first
quarter of fiscal 2005 associated with the Pixelink acquisition made in fiscal
1999 as the business unit achieved certain operating performance criteria.

In December 2004, the Company acquired the assets of Evergreen

Trading Company, a distributor of passive components in China. The
aggregate acquisition price was $426, which was paid in cash. Evergreen
Trading Company has been integrated into IPG.

Fiscal 2004: The aggregate cash outlay in 2004 for business
acquisitions was $6,196, representing additional consideration paid for
certain business acquisitions made in prior periods due to the acquired
businesses achieving certain targeted operating levels.

Fiscal 2003: The aggregate cash outlay in 2003 for business
acquisitions was $1,108, representing additional consideration paid for
certain business acquisitions made in prior periods due to the acquired
businesses achieving certain targeted operating levels.

The terms of certain of the Company’s acquisition agreements provide

for additional consideration to be paid if the acquired entity's results of
operations exceed certain targeted levels. Such amounts are paid in cash
and recorded when earned as additional consideration, and amounted to
$545, $6,196, and $1,108, in fiscal 2005, 2004, and 2003, respectively. The
Company does not expect to pay additional consideration in fiscal 2006 for
goals established in the remaining acquisition agreements outstanding at
May 28, 2005.

Note E — Disposal of Assets

On May 26, 2005, the Company completed the sale of approximately
205 acres of undeveloped real estate adjoining its headquarters in LaFox,
Illinois. The sale resulted in a gain of $9,907 before taxes and was recorded
in gain on disposal of assets in the Consolidated Statements of Operations
in fiscal 2005.

Note F — Debt Financing

Long-term debt consists of the following:

8¼% Convertible debentures,

due June 2006

7¼% Convertible debentures,

due December 2006
7¾% Convertible notes,
due December 2011

Floating-rate multi-currency revolving

credit agreement, due October 2009
(4.56% at May 28, 2005)

Financial instruments
Other
Total debt
Less current portion
Long-term debt

May 28,
2005

May 29,
2004

$ 17,538

$ 40,000

4,753

30,825

44,683

—

53,314
—
45
120,333
(22,305)
$ 98,028

66,797
149
69
137,840
(4,027)
$133,813

At May 28, 2005, the Company maintained $98,028 in long-term
debt, primarily in the form of one issuance of convertible notes and a
multi-currency credit agreement. The Company maintains two issues of
convertible debentures in short-term debt at May 28, 2005 in the amount
of $17,538 and $4,753 for the 8¼% and 7¼% convertible debentures,
respectively. This short-term classification resulted from an amended
credit agreement requiring the 8¼% and 7¼% convertible debentures to
be refinanced prior to February 28, 2006. On August 24, 2005, the
Company executed an amendment to the credit agreement which
extended the refinancing requirement of the two issues of convertible
debentures (the 8¼% and 7¼% convertible debentures) to June 10, 2006.
Interest payments on the debentures were $6,104 in fiscal 2005.
On February 14, 2005, the Company entered into separate
exchange agreements pursuant to which a small number of holders
of the Company’s existing 7¼% convertible subordinated debentures due
December 2006, or the 7¼% debentures, and 8¼% convertible senior
subordinated debentures due June 2006, or the 8¼% debentures,
agreed to exchange $22,221 in aggregate principal amount of 7¼%
debentures and $22,462 in aggregate principal amount of 8¼%
debentures for $44,683 in aggregate principal amount of newly-issued
7¾% convertible senior subordinated notes (the Notes) due
December 2011.

On February 15, 2005, the Company issued the Notes pursuant to
an indenture with J.P. Morgan Trust Company dated February 14, 2005.
The Notes bear interest at the rate of 7¾% per annum. Interest is due on
June 15 and December 15 of each year. The Notes mature on December
15, 2011. The Notes are convertible at the option of the holder, at any
time on or prior to maturity, into shares of the Company’s common stock
at a price equal to $18.00 per share, subject to adjustment in certain
circumstances. On or after December 19, 2006, the Company may elect
to automatically convert the Notes into shares of common stock if the
trading price of the common stock exceeds 125% of the conversion price
of the Notes for at least twenty trading days during any thirty trading
day period ending within five trading days prior to the automatic
conversion notice.

The indenture provides that on or after December 19, 2006, the
Company has the option of redeeming the Notes, in whole or in part, for
cash, at a redemption price equal to 100% of the principal amount of the
Notes to be redeemed, plus accrued and unpaid interest, if any, to, but
excluding, the redemption date. However, from December 19, 2006 until
December 19, 2007, the Notes will be redeemable only if the trading price
of the Company’s common stock exceeds 125% of the conversion price
of the Notes for at least twenty trading days during any thirty trading
day period.

Holders may require the Company to repurchase all or a portion of
their Notes for cash upon a change-of-control event, as described in the
indenture, at a repurchase price equal to 101% of the principal amount of
the Notes to be repurchased, plus accrued and unpaid interest, if any, to,
but excluding the repurchase date. The Company may, at its option, pay
the change of control purchase price in cash, shares of its common stock
(valued at 97.5% of the market price), or a combination thereof.

The Notes are unsecured and subordinated to the Company’s
existing and future senior debt and senior to the Company’s existing 7¼%
debentures and 8¼% debentures. The 7¼% debentures are unsecured
and subordinated to other long-term debt, including the 8¼% debentures.
Each $1 of the 7¼% debentures is convertible into the Company’s
common stock at any time prior to maturity at $21.14 per share and the
8¼% debentures are convertible at $18.00 per share.

The Notes were issued through a private offering to qualified
institutional buyers under Section 4(2) of the Securities Act of 1933 and
Rule 506 promulgated thereunder. In connection with the exchange, on
February 15, 2005, the Company also entered into a resale registration
rights agreement with the existing holders who participated in the
exchange offer. Pursuant to the resale registration rights agreement, the
Company filed a registration statement for the resale of the Notes and the
shares of common stock issuable upon conversion of the Notes on May
26, 2005. The Company agreed to keep the shelf registration statement
effective until two years after the latest date on which it issues Notes in
connection with the exchange, subject to certain terms and conditions.
Mr. Edward J. Richardson controls $1,122 principal amount of the

Company’s 7¼% debentures and $1,309 principal amount of the
Company’s 8¼% debentures at May 28, 2005.

In October 2004, the Company renewed its multi-currency revolving
credit agreement with the current lending group in the amount of $109.0
million. The agreement matures in October 2009, when the outstanding
balance at that time will become due. At May 28, 2005, $53.3 million was
outstanding on the agreement. The new agreement is principally secured
by the Company’s trade receivables and inventory. The agreement bears
interest at applicable LIBOR rates plus a margin, varying with certain
financial performance criteria. At May 28, 2005, the applicable margin
was 175 basis points. Outstanding letters of credit were $1.4 million at
May 28, 2005, leaving an unused line of $54.3 million under the total
agreement; however, this amount was reduced to $2.6 million due to
maximum permitted leverage ratios. The commitment fee related to the
agreement is 0.25% per annum payable quarterly on the average daily
unused portion of the aggregate commitment.

In the following table, the fair values of the Company’s 7¼% and
8¼% convertible debentures and 7¾% convertible notes are based on
quoted market prices at the end of the fiscal year. The fair values of the
bank term loans are based on carrying value.

May 28, 2005

May 29, 2004

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

$ 17,538

$ 17,713

$ 40,000 $ 40,000

4,753
44,683

4,777
44,460

30,825
—

53,314
—
45
120,333
(22,305)
$ 98,028

53,314
—
45
120,309
(22,504)
$ 97,805

66,797
149
69
137,840
(4,027)

66,797
149
69
137,840
(4,027)
$133,813 $133,813

8¼% Convertible
debentures
7¼% Convertible
debentures

7¾% Convertible notes
Floating-rate

multi-currency revolving
credit agreement
Financial instruments
Other

Total

Less current portion

Total

The credit agreement and debenture indentures contain financial

covenants which include benchmark levels for tangible net worth,
borrowing base, senior funded debt to cash flow, and annual debt service
coverage. At May 28, 2005, the Company was not in compliance with its
credit agreement covenants with respect to the fixed charge coverage
ratio. On August 24, 2005, the Company received a waiver from its
lending group for the default and executed an amendment to the credit
agreement. The amendment changed the maximum permitted leverage
ratios and the minimum required fixed charge coverage ratios for each of
the first three quarters of fiscal 2006 to provide the Company additional
flexibility for these periods. The amendment also provided that the
Company would maintain excess availability on the borrowing base of not
less than $23 million until June 30, 2006 if a default or event of default
does not exist on or before this date. In addition, the applicable margin
pricing has been increased by 25 basis points. In addition, the amend-
ment extended the Company’s requirement to refinance the remaining
$22.3 million aggregate principal amount of the 7¼% convertible
subordinated debentures and the 8¼% convertible senior subordinated
debentures from February 28, 2006 to June 10, 2006.

The Company’s ability to service its debt and meet its other
obligations as they come due is dependent on its future financial and
operating performance. This performance is subject to various factors,
including factors beyond the Company’s control such as changes in
global and regional economic conditions, changes in its industry or the
end markets for its products, changes in interest or currency exchange
rates, inflation in raw materials, energy and other costs. Although the
Company believes that there is available financing for the remaining
$22.3 million aggregate principal amount of the 8¼ % and 7¼ %
convertible debentures (due to be refinanced in June 2006 according to
the Company’s amended credit agreement) based on discussions with
various investment banking institutions, the Company cannot ensure that
it will have the ability to refinance the convertible debentures by June
2006 successfully or with favorable commercial terms.

The Company had interest rate exchange agreements to convert

approximately $36.4 million of floating rate debt to an average fixed rate
of 8.7% that expired July 2004. Additional interest expense recorded in
the Consolidated Statement of Operations related to theses agreements
was $102, $1,265, and $789 in fiscal 2005, 2004, and 2003, respectively.
The Company did not have any derivative instruments at May 28, 2005.
Aggregate maturities of debt during the next five years are: $22,305
in fiscal 2006, $14 in fiscal 2007, $14 in fiscal 2008, $3 in fiscal 2009, and
$97,997 thereafter. Cash payments for interest were $9,131, $10,404,
and $10,246 in fiscal 2005, 2004, and 2003, respectively.

The Company recorded $776 in deferred financing costs during
fiscal 2005 associated with the renewal of the Company’s multi-currency
revolving credit agreement during the second quarter and the convertible
debenture exchanges made in the third quarter. The deferred financing
costs are amortized over the life of the respective agreements using the
effective interest rate method.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Note G — Derivative Financial Instruments
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This standard requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivative
value changes are recorded in income for any contracts not classified
as qualifying hedging instruments. For derivatives qualifying as cash
flow hedge instruments, the effective portion of the derivative fair
value change must be recorded through other comprehensive income,
a component of stockholders' equity. In fiscal 2005, all of the Company’s
derivatives qualified as hedging instruments.

The Company entered into various LIBOR-based interest rate swap

arrangements from September 2000 through March 2001 to manage
fluctuations in cash flows resulting from interest rate risk attributable to
changes in the benchmark interest rate of LIBOR. The interest rate swap
changed the variable-rate cash flow exposure on the credit agreement to
fixed-rate cash flows by entering into a receive-variable, pay-fixed
interest rate swap. Under the interest rate swap, the Company received
LIBOR-based variable interest rate payments and made fixed interest
rate payments, thereby creating fixed-rate long-term debt. This swap
agreement was accounted for as a qualifying cash flow hedge of the
future variable-rate interest payments in accordance with SFAS No. 133,
whereby changes in the fair market value were reflected as adjustments
to the fair value of the derivative instrument as reflected on the accom-
panying Consolidated Balance Sheets.

The fair value of the interest rate swap agreement was determined
periodically by obtaining quotations from the financial institution that was
the counterparty to the Company’s swap arrangement. The fair value
represented an estimate of the net amount that the Company would
have received if the agreement was transferred to another party or
cancelled as of the date of the valuation. Changes in the fair value of the
interest rate swap were reported in accumulated other comprehensive
income, which is an element of stockholders’ equity. These amounts
were subsequently reclassified into interest expense as a yield adjust-
ment in the same period in which the related interest on the floating-rate
debt obligations affected earnings. During the fiscal year ended
May 28, 2005, the Company had interest rate exchange agreements
to convert approximately $36.4 million of floating rate debt to an average
fixed rate of 8.7% that expired July 2004. Additional interest expense
recorded in the Consolidated Statements of Operations related to these
agreements was $102, $1,265, and $789 in fiscal 2005, 2004, and 2003,
respectively. The Company did not have any derivative instruments
recorded in the consolidated balance sheet at May 28, 2005 and had
$300, reflecting the fair value of the swap agreement, recorded in
current liabilities at May 29, 2004.

Note H — Lease Obligations,
Other Commitments, and Contingency

The Company leases certain warehouse and office facilities and
office equipment under non-cancelable operating leases. Rent expense
for fiscal 2005, 2004, and 2003 was $5,101, $4,035, and $4,204,
respectively. At May 28, 2005, future lease commitments for minimum
rentals, including common area maintenance charges and property
taxes, are $5,092 in fiscal 2006, $3,140 in 2007, $1,371 in 2008, $526 in
2009, $268 in 2010, and $141 thereafter.

At May 28, 2005, the Company has several performance bonds
outstanding that were required by French customers. The total amount
of the bonds was $492 with expiration dates on August 2006.

The Company has been informed by one of its foreign subsidiaries

that its records may not be adequate to support the taxable revenues
and deductions included within income tax returns previously filed.
At this time, the Company has not received notification from any tax
authority regarding this matter. The Company will continue to investigate
this matter and take the appropriate actions necessary to minimize
any potential liability. As of August 18, 2005, the Company has not
developed or obtained specific and definitive information sufficient to
reasonably confirm the existence of a tax liability, determine a reason-
able range of a potential liability, or otherwise evaluate any exposure to
the Company. Although it is difficult to determine the ultimate exposure
due to the lack of sufficient information, an unfavorable outcome may be
material to the consolidated financial statements.

Note I — Income Taxes
The components of income (loss) before income taxes are:

United States
Foreign

Income (loss) before
income taxes

Fiscal Year Ended

May 28,
2005
$ (4,159)
14,713

May 29,
2004

(311)
8,881

May 31,
2003
$ (12,941)
1,582

$ 10,554

$ 8,570

$ (11,359)

The provision for income taxes differs from income taxes computed
at the federal statutory tax rate of 34% in fiscal 2005, 2004, and 2003 as
a result of the following items:

Federal statutory rate
Effect of:

State income taxes, net of

federal tax benefit

Export benefit
Foreign taxes at other rates
Valuation allowance for deferred
tax assets and net operating
loss carryforwards
Unrepatriated earnings
Other
Effective tax rate

Fiscal Year Ended

May 28,
2005

34.0 %

May 29,
2004

34.0 %

May 31,
2003

(34.0) %

(1.3)
(1.6)
5.8

—
(5.2)
0.8

(2.1)
(4.7)
1.6

123.9
46.6
(0.2)
207.2 %

—
—
—
29.6 %

12.1
—
6.2
(20.9) %

The provisions for income taxes consist of the following:

Current:

Federal
State
Foreign

Total current

Deferred:
Federal
State
Foreign

Total deferred

Income tax provision (benefit)

May 28,
2005

May 29,
2004

May 31,
2003

—
151
6,131
6,282

14,088
1,254
241
15,583
$ 21,865

—
(209)
1,556
1,347

(384)
147
1,427
1,190
$ 2,537

$ (2,111)
(464)
2,169
(406)

(930)
(214)
(820)
(1,964)
$ (2,370)

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax assets
and liabilities at May 28, 2005 and May 29, 2004 are as follows:

Deferred tax assets:

Intercompany profit in inventory
NOL carryforwards -

foreign and domestic

Inventory valuation
Goodwill
Alternative minimum tax credit
Other

Subtotal

Valuation allowance -

foreign and domestic

Net deferred tax assets after

valuation allowance

Deferred tax liabilities:

Accelerated depreciation
Unrepatriated earnings
Other

Subtotal

May 28,
2005

May 29,
2004

1,249

1,162

12,977
12,363
1,918
1,189
2,232
31,928

13,737
11,009
2,305
1,189
961
30,363

(17,116 )

(4,040)

14,812

26,323

(2,822)
(4,918)
—
(7,740 )
7,072
$

(3,646)
—
(22 )
(3,668)
$ 22,655

Net deferred tax assets
Supplemental disclosure of deferred tax asset information:

Domestic
Foreign

$ 25,523
6,405
$

$ 22,795
7,568
$

At May 28, 2005, domestic net operating loss carryforwards (NOL)

amount to approximately $19.9 million. These NOLs expire between
2023 and 2025. Foreign net operating loss carryforwards total
approximately $18.4 million with various or indefinite expiration dates.
In fiscal 2005, the Company recorded an additional valuation allowance
of approximately $0.8 million relating to deferred tax assets and net
operating loss carryforwards relating to certain foreign subsidiaries.
Also, due to changes in the level of certainty regarding realization, a
valuation allowance of approximately $12.3 million was established in
fiscal 2005 to offset certain domestic deferred tax assets and domestic
net operating loss carryforwards. The Company also has an alternative
minimum tax credit carryforward at May 28, 2005, in the amount of
$1,189 that has an indefinite carryforward period.

Income taxes paid, including foreign estimated tax payments,
were $3,272, $1,656, and $2,657 in fiscal 2005, 2004, and 2003,
respectively.

At the end of fiscal 2004, all of the cumulative positive earnings

of the Company’s foreign subsidiaries, amounting to $35.1 million,
were considered permanently reinvested pursuant to APB No. 23,
Accounting for Income Taxes-Special Areas. As such, U.S. taxes
were not provided on these amounts. In fiscal 2005, the Company
determined that approximately $12.9 million of its foreign
subsidiaries’ earnings may be distributed in future years. Upon
distribution of those earnings in the form of dividends or otherwise,
the Company would be subject to both U.S. income tax and foreign
withholding taxes. As such, the Company has established a deferred
tax liability of approximately $4.9 million. The remaining cumulative
positive earnings of the Company’s foreign subsidiaries were still
considered permanently reinvested pursuant to APB No. 23 and
amounted to $29.1 million.

The effective income tax rates for the fiscal years ended

May 28, 2005 and May 29, 2004 were 36.7% and 29.6%,
respectively, excluding the establishment of the domestic valuation
allowance and deferred tax liabilities in fiscal 2005. Difference
between the effective tax rate as compared to the U.S. federal
statutory rate of 34% primarily results from the Company’s geo-
graphical distribution of taxable income and losses, certain non-tax
deductible charges, and the Company’s extraterritorial income
exclusion on export sales, net of state income taxes.

On October 22, 2004, the President signed the American Jobs

Creation Act of 2004 (the Act). The Act provides a deduction for
income from qualified domestic production activities, which will be
phased in from 2005 through 2010. In return, the Act also provides
for a two-year phase out ending December 31, 2006 of the existing
extraterritorial income exclusion (ETI) for foreign sales that was
viewed to be inconsistent with the international trade protocols by the
European Union. The tax benefit from the current ETI exclusion was
$166 and $491 for fiscal 2005 and 2004. When this benefit is fully
phased out, it will have a negative impact on the rate because the
new deduction for qualified domestic activity will be of minimal
benefit to the Company.

Another provision of the Act creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned abroad
by providing an 85% dividends-received deduction for certain
dividends from controlled foreign corporations. The calculation of the
deduction is subject to a number of limitations. This provision of the
Act has no material impact on the operations of the Company for
fiscal year 2005 and is expected to have no material impact on the
operations of the Company for fiscal year 2006, as the Company
does not intend at this time to repatriate earnings to the U.S. from
foreign countries.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Note J — Stockholders’ Equity

The Company has authorized 30,000 shares of common stock,
10,000 shares of Class B common stock, and 5,000 shares of preferred
stock. The Class B common stock has ten votes per share. The Class B
common stock has transferability restrictions; however, it may be
converted into common stock on a share-for-share basis at any time.
With respect to dividends and distributions, shares of common stock and
Class B common stock rank equally and have the same rights, except
that Class B common stock is limited to 90% of the amount of common
stock cash dividends.

Total common stock issued and outstanding, excluding Class B
common stock at May 28, 2005, was 14,265 shares, net of treasury
shares of 1,332. An additional 9,378 shares of common stock have been
reserved for the potential conversion of the convertible debentures and
Class B common stock and for future issuance under the Employee
Stock Purchase Plan and Employee and Non-Employee Director Stock
Option Plans.

The Employee Stock Purchase Plan (ESPP) provides substantially

all employees an opportunity to purchase common stock of the Com-
pany at 85% of the stock price at the beginning or the end of the year,
whichever is lower. At May 28, 2005, the plan had 200 shares reserved
for future issuance.

The Employees’ 2001 Incentive Compensation Plan authorizes the

issuance of up to 900 shares as incentive stock options, non-qualified
stock options, or stock awards. Under this plan and predecessor plans,
2,133 shares are reserved for future issuance. The Plan authorizes the
granting of incentive stock options at the fair market value at the date of
grant. Generally, these options become exercisable over staggered
periods and expire up to ten years from the date of grant.

Under the 1996 Stock Option Plan for Non-Employee Directors and
a predecessor plan, at May 28, 2005, 238 shares of common stock have
been reserved for future issuance relating to stock options exercisable
based on the passage of time. Each option is exercisable over a period
from its date of grant at the market value on the grant date and expires
after ten years.

The Company applies APB No. 25 and related interpretations in

accounting for its option plans and, accordingly, has not recorded
compensation expense for such plans. SFAS No. 123 requires the
calculation of the fair value of each option granted. This fair value
is estimated on the date of grant using the Black-Scholes
option-pricing model with the assumptions indicated below
(see Note A - Stock-Based Compensation):

Fiscal Year Ended

May 28,
2005

May 29,
2004

May 31,
2003

3.8%
47%
5.0
.16

3.28
1.41

946

$
$

3.6%
47%
4.9
.16

2.9%
49%
5.1
.16

4.57
1.32

$ 4.12
$ 1.91

103

297

Risk-free interest rate
Volatility
Average expected life (years)
Annual dividend rate
Weighted average fair value

per option

Fair value of ESPP per share
Fair value of options granted

during the year

A summary of the share activity and weighted average exercise

prices for the Company’s option plans is as follows:

At June 1, 2002
Granted
Exercised
Cancelled
At May 31, 2003
Granted
Exercised
Cancelled
At May 29, 2004
Granted
Exercised
Cancelled
At May 28, 2005

Outstanding

Shares
1,866
72
(112)
(88)
1,738
23
(229)
(77)
1,455
313
(24)
(43)
1,701

Price
$ 9.14
9.83
6.75
9.62
$ 9.29
11.16
7.19
10.23
$ 9.58
7.75
6.96
4.05
$ 9.46

Exercisable

Shares
802

Price
$ 8.52

1,111

$ 9.08

1,045

$ 9.58

1,240

$ 9.69

The following table summarizes information about stock options

outstanding at May 28, 2005:

Exercise
Price Range
$ 5.38 to $ 7.50
$ 7.75 to $ 10.81
$11.00 to $13.81
Total

Outstanding

Shares Price
$ 6.97
591
8.39
550
560
13.14
1,701

Life
4.7
5.8
5.1

Exercisable

Shares Price
$6.95
8.78
13.28

462
339
439
1,240

Life
4.3
3.7
4.6

A summary of restricted stock award transactions was as follows:

Unvested at June 1, 2002
Granted
Vested
Cancelled
Unvested at May 31, 2003
Granted
Vested
Cancelled
Unvested at May 29, 2004
Granted
Vested
Cancelled
Unvested at May 28, 2005

69
29
(33)
(6)
59
10
(31)
(7)
31
18
(29)
(7)
13

Compensation effects arising from issuing stock awards were $425,
$403, and $400 in fiscal 2005, 2004, and 2003, and have been charged
against income and recorded as additional paid-in capital in the
Consolidated Balance Sheets.

Note K — Employee Retirement Plans

The Company’s domestic employee retirement plans consist of a

profit sharing plan and a stock ownership plan (ESOP). Annual
contributions in cash or Company stock are made at the discretion
of the Board of Directors. In addition, the profit sharing plan has a
401(k) provision whereby the Company matches 50% of employee
contributions up to 4% of base pay. Charges to expense for
discretionary and matching contributions to these plans were $729,
$1,274, and $660 for fiscal 2005, 2004, and 2003, respectively. Such
amounts included contributions in stock of $290 for 2004, based on the
stock price at the date contributed. Shares are included in the calculation
of earnings per share and dividends are paid to the ESOP from the date
the shares are contributed. Foreign employees are covered by a variety
of government mandated programs.

Note L — Segment and Geographic Information
The following disclosures are made in accordance with the SFAS

No. 131, Disclosures about Segments of an Enterprise and Related
Information. The Company’s strategic business units (SBUs) in fiscal
2005 were: RF & Wireless Communications Group (RFWC), Industrial
Power Group (IPG), Security Systems Division (SSD), and Display
Systems Group (DSG).

RFWC serves the voice and data telecommunications market and

the radio and television broadcast industry predominately for
infrastructure applications.

IPG serves a broad range of customers including the steel,
automotive, textile, plastics, semiconductor manufacturing, broadcast,
and transportation industries.

SSD provides security systems and related design services which
includes such products as closed circuit television (CCTV), fire, burglary,
access control, sound, and communication products and accessories.
DSG provides system integration and custom display solutions

for the public information, financial, point-of-sale, and medical
imaging markets.

Each SBU is directed by a Vice President and General Manager
who reports to the President and Chief Operating Officer. The President
evaluates performance and allocates resources, in part, based on
the direct operating contribution of each SBU. Direct operating
contribution is defined as gross margin less product management and
direct selling expenses.

Accounts receivable, inventory, and goodwill are identified by SBU.

Cash, net property, and other assets are not identifiable by SBU.
Operating results for each SBU are summarized in the following table:

Net
Sales

Gross
Margin

Contribution

Assets

$ 265,602
122,906
105,581
78,078
$ 572,167

58,162
37,005
26,889
17,865
$ 139,921

$ 29,006 $ 88,748
55,351
34,457
25,064
$ 75,006 $ 203,620

24,123
14,060
7,817

$ 231,389
112,737
101,979
66,452
$ 512,557

52,340
34,694
26,045
17,105
$ 130,184

$ 28,045 $ 87,097
50,403
33,257
23,358
$ 76,104 $ 194,115

24,218
14,373
9,468

$ 204,427
95,508
92,090
64,191
$ 456,216

45,687
29,523
22,939
16,218
$ 114,367

$ 21,103 $ 75,336
47,391
31,906
22,217
$ 65,312 $ 176,850

21,996
12,539
9,674

Fiscal 2005
RFWC
IPG
SSD
DSG
Total

Fiscal 2004
RFWC
IPG
SSD
DSG
Total

Fiscal 2003
RFWC
IPG
SSD
DSG
Total

Certain amounts in prior periods were reclassified to conform to the fiscal 2005 presentation.

A reconciliation of net sales, gross margin, direct operating
contribution and assets to the relevant consolidated amounts is as
follows. Other assets not identified include miscellaneous receivables,
manufacturing inventories, and other assets.

May 28,
2005

$ 572,167
6,557
$ 578,724
$ 139,921
—

(3,014)
$ 136,907
$ 75,006
—

Segment net sales
Corporate

Net Sales
Segment gross margin
Inventory charges
Manufacturing variances
and other costs
Gross Margin
Segment contribution
Inventory charges
Manufacturing variances
and other costs

(3,014)
(19,065)
Regional selling expenses
Administrative expenses
(44,753)
Gain (loss) on disposal of assets 9,918
Operating (loss) income $ 18,092
$ 203,620
24,530
21,953
31,821
5,894
$ 287,818

Segment assets
Cash and cash equivalents
Other current assets
Net property
Other assets

Total assets

May 29,
2004

$ 512,557
7,266
$ 519,823
$ 130,184
—

(2,478)
$ 127,706
76,104
$
—

(2,478)
(18,109)
(36,110)
(579)
$
18,828
$ 194,115
16,927
19,872
30,589
21,442
$ 282,945

May 31,
2003

$ 456,216
8,165
$ 464,381
$ 114,367
(13,810)

(1,603)
$ 98,954
$ 65,312
(13,810)

(1,603)
(17,444)
(34,114)
—
$ (1,659)
$ 176,850
16,874
26,596
31,088
16,000
$ 267,408

In fiscal 2005, the Company allocated charges related to inventory overstock directly
to each SBU.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

Geographic net sales information is primarily grouped by customer

Note M — Litigation

The Company is involved in several pending judicial proceedings
concerning matters arising in the ordinary course of its business. While
the outcome of litigation is subject to uncertainties, based on currently
available information, the Company believes that, in the aggregate, the
results of these proceedings will not have a material adverse effect on its
financial condition.

On December 20, 2002, the Company filed a complaint against
Signal Technology Corporation in the United States District Court for the
Northern District of Illinois, which the Company dismissed on February
27, 2003. On February 14, 2003, Signal Technology filed a declaratory
judgment suit against the Company in Superior Court, Boston,
Massachusetts, and on March 4, 2003, the Company filed a complaint
against Signal Technology Corporation in the Circuit Court of Cook
County, Illinois. On February 13, 2004, the Company dismissed its
complaint in Circuit Court of Cook County, Illinois. From November 6,
2000 through December 6, 2001, Signal Technology issued six purchase
orders to purchase low-frequency amplifiers and other electronic
components from the Company and subsequently refused to take
delivery of the components. The Company is claiming damages of
approximately $2.0 million resulting from Signal Technology’s refusal to
take delivery. Signal Technology's declaratory judgment suit in
Massachusetts seeks a ruling that it has no liability to the Company, but
Signal Technology has not asserted any claim against the Company.

In fiscal 2003, two customers of the Company’s German subsidiary
asserted claims against the Company in connection with heterojunction
field effect transistors the Company sold to them. In fiscal 2005, the
claim of one of the two customers was settled without any admission of
liability on the part of the Company, with a full release from liability and
without any material consideration from the Company, the settlement
amount being paid by the Company’s insurance carrier. The Company
acquired the heterojunction field effect transistors from the manufacturer
pursuant to a distribution agreement. The customers’ claims are based
on the heterojunction field effect transistors not meeting the specification
provided by the manufacturer. The Company has notified the
manufacturer and its insurance carrier of these claims. Because the
Company’s investigation has not been completed, it is unable to
evaluate the merits of the remaining claim or the prospects of recovery
from the manufacturer or insurance carrier. The Company intends to
vigorously defend the remaining claim and, if it should have any liability
arising from this claim, the Company intends to pursue a claim against
the manufacturer and the insurer. As of August 26, 2005, no proceedings
have been instituted regarding this claim.

destination into five areas: North America, Europe, Asia/Pacific, Latin
America, and Corporate. Europe includes sales to the Middle East and
Africa. Net sales to Mexico are included as part of Latin America.
Corporate consists of freight and non-area specific sales.

Net sales and long-lived assets (net property and other assets,

excluding investments) are presented in the table below.

Fiscal Year Ended

May 28,
2005

May 29,
2004

May 31,
2003

Net Sales
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total
Gross Margin
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total
Contribution
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Corporate
Total

Long-Lived Assets
United States
Canada
North America
Europe
Asia/Pacific
Latin America
Total

$ 245,228
58,480
303,708
123,846
124,799
21,366
5,005
$ 578,724

$ 63,504
16,758
80,262
35,258
29,691
5,879
(14,183)
$ 136,907

$ 29,615
7,721
37,336
9,036
17,028
280
(45,588)
$ 18,092

$ 31,086
2,641
33,727
3,671
1,266
2,042
$ 40,706

$ 205,810
69,681
275,491
116,714
104,068
20,065
3,485
$ 519,823

$ 57,998
13,765
71,763
33,603
23,304
4,860
(5,824)
$ 127,706

$ 28,870
5,647
34,517
12,093
12,838
(156)
(40,464)
$ 18,828

$ 32,033
2,545
34,578
4,206
918
1,035
$ 40,737

$ 200,878
58,728
259,606
103,029
78,146
20,521
3,079
$ 464,381

$ 56,696
11,133
67,829
28,287
17,895
5,272
(20,329)
$ 98,954

$ 29,492
4,243
33,735
10,581
9,156
(278)
(54,853)
$ (1,659)

$ 30,060
2,659
32,719
3,192
794
1,194
$ 37,899

Historically, the Company has not tracked capital expenditures and

depreciation by SBU as the majority of the spending is related to
Corporate projects. In fiscal 2005, capital expenditures were primarily
related to the Company’s Corporate initiative of implementing enterprise
resource planning software (PeopleSoft), facility improvements at the
Corporate headquarters, disaster recovery equipment, and Sarbanes-
Oxley remediation software and hardware.

The Company sells its products to companies in diversified
industries and performs periodic credit evaluations of its customers’
financial condition. Terms are generally on open account, payable net 30
days in North America, and vary throughout Europe, Asia/Pacific, and
Latin America. Estimates of credit losses are recorded in the financial
statements based on periodic reviews of outstanding accounts, and
actual losses have been consistently within management’s estimates.

Note P — Subsequent Events

On August 4, 2005, the Company entered into a contract to sell
approximately 1.5 acres of real estate and a building located in Geneva,
Illinois for $3,000. The contract is subject to a number of conditions,
including inspections, environmental testing, and other customary
conditions. Accordingly, the Company cannot give any assurance as to
the timing or successful completion of the transaction.

On July 18, 2005, the Company and Dario Sacomani, the former Chief

Financial Officer of the Company, entered into an employment agreement
pursuant to which Mr. Sacomani resigned as Chief Financial Officer, Senior
Vice President and member of the Board of Directors of the Company and
is now employed as an non-executive employee, effective through
December 30, 2005, subject to earlier termination as defined in the
agreement. As a result of entering into the non-executive employment
agreement, Mr. Sacomani’s original three year employment agreement,
entered into in May 2002, was terminated, effective July 18, 2005.
Mr. Sacomani had been on a medical leave of absence, as announced
on April 4, 2005.

On June 20, 2005, the Company and David J. DeNeve entered

into an employment, nondisclosure, and non-compete agreement
pursuant to which Mr. DeNeve agreed to serve as the Company’s
Chief Financial Officer.

Effective June 1, 2005, the Company acquired A.C.T. Kern GmbH &

Co. KG (Kern) located in Donaueschingen in southern Germany. The cash
outlay for Kern was 5,000 Euro (approximately $6,000). Kern is one of the
leading display technology companies in Europe with world wide customers
in manufacturing, OEM, medicine, multimedia, IT trading, system houses,
and other industries.

Note N — Valuation and Qualifying Accounts
The following table presents the valuation and qualifying account

activity for the fiscal years ended May 28, 2005, May 29, 2004, and
May 31, 2003:

Description

Balance at
beginning
of period

Charged
to
expenses

Balance
at end
of period

Deductions

Year ended May 28, 2005:
Allowance for
doubtful accounts $ 2,516
Inventory overstock

894 (1)

$ 1,476 (2) $

1,934

reserve

$ 26,533

$ 3,940 (3)

$ 2,350

$ 28,123

Deferred tax asset

valuation

Warranty reserves

$ 4,040
802
$

$ 13,076 (4)
$

958

$
$

— $ 17,116
1,439
$

321

Year ended May 29, 2004:
Allowance for
doubtful accounts $ 3,350
Inventory overstock

reserve

$ 33,971

Deferred tax asset

valuation

Warranty reserves

$ 1,586
672
$

$
$

(409) (1)

425 (2) $

2,516

2,128 (3)

$ 9,566 (5) $ 26,533

2,454
459

$
$

— $
$

329

4,040
802

Year ended May 31, 2003:
Allowance for
doubtful accounts $ 2,646
Inventory overstock

869 (1)

165 (2) $

3,350

reserve

$ 24,677

$ 11,361 (3)

$ 2,067

$ 33,971

Deferred tax asset

valuation

Warranty reserves

$
$

— $
$
47

1,586
846

$
$

— $
$

221

1,586
672

(1) Charges to bad debt expense
(2) Uncollectible amounts written off, net of recoveries and foreign currency translation
(3) Charges to cost of products sold
(4) Tax provisions recorded to increase the valuation allowance related to deferred tax

assets in the U.S. ($12.3 million) and outside the U.S. ($0.8 million)

(5) Inventory disposed of during period ($3.6 million), LIFO reversal ($4.0 million), and

reclassification to LCM ($2.0 million)

Note O — Selected Quarterly Financial Data
(Unaudited)

Summarized quarterly financial data for fiscal 2005 and 2004 follow:

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Fiscal 2005:
Net sales
Gross margin
Net income (loss)
Net income (loss) per share:

$138,447
33,529
807

0.05
0.05

$
$

- Basic
- Diluted
Fiscal 2004:
Net sales
Gross margin
Net income (loss)
Net income (loss) per share:

$ 119,264
29,073
(1,182)

$151,274
36,954
4,045

$141,700
33,667
(18,665)

$147,303
32,757
2,502

$
$

0.23
0.23

$
$

(1.08) $
(1.08) $

0.14
0.14

$127,992
30,883
3,151

$127,267
31,465
1,484

$145,300
36,285
2,580

- Basic
- Diluted

$
$

(0.08) $
(0.08) $

0.23
0.22

$
$

0.10
0.10

$
$

0.18
0.18

Certain amounts have been reclassified to conform to the fiscal

2005 presentation.

Report of Independent Registered Public Accounting Firm

Report of Independent Registered
Public Accounting Firm

The Board of Directors and Stockholders
Richardson Electronics, Ltd.:

We have audited the accompanying consolidated
statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows of
Richardson Electronics, Ltd. and subsidiaries for the year
ended May 31, 2003. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated results of operations of Richardson
Electronics, Ltd. and subsidiaries and their cash flows for
the year ended May 31 2003, in conformity with U.S.
generally accepted accounting principles.

As discussed in the Notes to the consolidated financial
statements, effective June 1, 2002, the Company changed
its method for accounting for goodwill and other intangible
assets to conform with SFAS No. 142, Goodwill and Other
Intangible Assets.

/s/ Ernst & Young LLP
Chicago, IL
July 2, 2003

We have audited the accompanying consolidated balance
sheets of Richardson Electronics, Ltd. and subsidiaries as
of May 28, 2005 and May 29, 2004, and the related
consolidated statements of operations, stockholders’ equity
and comprehensive income (loss), and cash flows for each
of the years in the two-year period ended May 28, 2005.
These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Richardson Electronics, Ltd. and
subsidiaries as of May 28, 2005 and May 29, 2004, and
the results of their operations and their cash flows for each
of the years in the two-year period ended May 28, 2005,
in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States), the effectiveness of Richardson Electronics, Ltd.’s
internal control over financial reporting as of May 28, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and
our report dated August 26, 2005, expressed an unqualified
opinion on management’s assessment of, and an adverse
opinion on the effective operation of, internal control over
financial reporting.

As discussed in Note A to the consolidated financial
statements, the Company changed its method of
accounting for certain inventories from the last-in, first-out
method to the first-in, first-out method as of June 1, 2003.

/s/ KPMG LLP
Chicago, Illinois
August 26, 2005

Report of Independent Registered Public Accounting Firm

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in
conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

A material weakness is a control deficiency, or
combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be
prevented or detected. The following material weaknesses
have been identified and included in management’s
assessment as of May 28, 2005:

1. Deficiencies in the Company’s Control Environment.

The Company did not maintain effective company-level
controls as defined in the Internal Control-Integrated
Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Specifically:

• The Company had inadequately trained finance,
accounting, and tax personnel with a lack of
appropriate expertise in U.S. generally accepted
accounting principles. Accordingly, in certain
circumstances, an effective secondary review of
technical accounting matters was not performed.
• The Company did not maintain proper segregation
of duties between the access to cash, accounts
receivable and inventory and the financial
accounting responsibility for such assets, nor did
the Company adopt appropriate policies to limit the
authority of those personnel responsible for
these duties.

• The Company did not maintain adequate controls
over end-user computing. Specifically, controls
over the access, completeness, accuracy, validity,
and review of certain spreadsheet information that
supports the financial reporting process were
either not designed appropriately or did not operate
as designed.

Report of Independent Registered
Public Accounting Firm

The Board of Directors and Stockholders
Richardson Electronics, Ltd.:

We have audited management’s assessment, included in
the accompanying Management’s Report on Internal
Control over Financial Reporting in Item 9A of Form 10-K,
that Richardson Electronics, Ltd. and subsidiaries
(the Company) did not maintain effective internal control
over financial reporting as of May 28, 2005, because of the
effect of material weakness identified in management’s
assessment, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Richardson Electronics, Ltd.’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on
management's assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as
we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are
being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on
the financial statements.

These deficiencies resulted in a more than remote likelihood
that a material misstatement of the Company’s annual or
interim financial statements would not be prevented or
detected, and contributed to the development of other
material weaknesses described below.

2. Inadequate controls associated with the accounting for
income taxes. The Company did not employ personnel
with the appropriate level of skill and experience to
prepare, document, and review its accounting for
income taxes. This lack of skill and experience resulted in
the Company’s inability to:

• Execute procedures to periodically reassess the

valuation of tax assets and liabilities;

• Effectively perform and document a periodic

evaluation of the reasonableness of assumptions
with respect to the recoverability of recorded deferred
tax assets and tax reserves;

• Provide appropriate oversight to ensure that the risks
and obligations with respect to the financial reporting
effects of tax planning strategies were appropriately
monitored and addressed;

• Execute policies and procedures to ensure that the
financial reporting and disclosure obligations related
to tax contingencies were appropriately understood
and considered; and

• Maintain policies and procedures to ensure that the
effects of deficiencies in the tax reporting process
associated with value added taxes were properly
reflected in the financial statements.

As a result of these deficiencies, material misstatements
were identified in the Company’s deferred tax assets and
liabilities, valuation allowance, and tax reserves.

3. Inadequate financial statement preparation and review
procedures. The Company did not maintain adequate
policies and procedures, or employ sufficiently
experienced personnel, to ensure that accurate and
reliable interim and annual consolidated financial
statements were prepared and reviewed on a timely basis.
Specifically, the Company did not have:

• Effective reconciliation of significant balance

sheet accounts;

• Effective reconciliation of subsidiary accounts to

consolidating financial information;

• Sufficient skills and experience in the application of

U.S. generally accepted accounting principles on the
part of certain subsidiaries;

• Policies and procedures relating to the origination and
maintenance of contemporaneous documentation to
support key accounting judgments made;

• Effective review of presentation and disclosure

requirements related to the financial statements;
• Procedures to provide support for accounting entries

submitted from the parent company and affiliates; and

• Adequate policies and procedures related to the

review and approval of accounting entries.

As a result of these deficiencies, misstatements were
identified in the Company’s consolidated financial
statements. These deficiencies in internal control over
financial reporting resulted in a more than remote likelihood
that a material misstatement of the Company’s interim or
annual financial statements would not be prevented or
detected.

4. Deficiency related to the application of accounting
literature. The Company did not maintain adequate
policies and procedures, or employ sufficiently
experienced personnel, to ensure appropriate application
of Financial Accounting Standards Board Statement No.
(SFAS) 52, Foreign Currency Translation.

This deficiency resulted in material errors in accounting
which required restatement of the Company’s consolidated
financial statements as of and for the years ended
June 1, 2002 and May 31, 2003 and for interim periods in
2003 and 2004 and the first and second quarters of fiscal
2005 to reflect the correction of their errors in accounting.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Richardson
Electronics, Ltd. and subsidiaries as of May 28, 2005 and
May 29, 2004, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income
(loss), and cash flows for each of the years in the two-year
period ended May 28, 2005. These aforementioned material
weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
May 28, 2005 consolidated financial statements, and this
report does not affect our report dated August 26, 2005,
which expressed an unqualified opinion on those
consolidated financial statements.

In our opinion, management’s assessment that Richardson
Electronics, Ltd. did not maintain effective internal control
over financial reporting as of May 28, 2005, is fairly stated, in
all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, because of the effect of the
material weakness described above on the achievement of
the objectives of the control criteria, Richardson Electronics,
Ltd. and subsidiaries have not maintained effective internal
control over financial reporting as of May 28, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

/s/ KPMG LLP
Chicago, Illinois
August 26, 2005

Stockholder Information

Market Price of Common Stock

The Company’s common stock is traded on The NASDAQ National
Market under the trading symbol “RELL.” There is no established public
trading market for the Company’s Class B common stock. As of
August 24, 2005, there were approximately 910 stockholders of record for
their common stock and approximately 18 stockholders of record for their
Class B common stock. The following table sets forth, for the periods
indicated, the high and low bid prices per share of “RELL” common stock
as reported on The NASDAQ National Market.

2005

2004

Fiscal Quarters
First
Second
Third
Fourth

High
$ 11.96
11.30
11.76
11.49

Low
$ 7.53
7.50
9.70
7.46

High
$ 10.79
12.57
14.00
14.08

Low
$ 7.83
9.65
10.00
9.41

Annual dividend payments for fiscal 2005 amounted to $2.7 million. All
future payments of dividends are at the discretion of the board of directors
and will depend on earnings, capital requirements, operating conditions,
and such other factors that the board of directors may deem relevant. In
each of the last 18 years, the Company has paid a quarterly dividend of
$0.04 per common share and $0.036 per class B common share.
Management currently expects this trend to continue in fiscal 2006.

Pursuant to the indentures governing the Company’s 7¼% Convertible
Subordinated Debentures due December 2006 and 8¼% Convertible Senior
Subordinate Debentures due June 2006 the Company is prohibited from
paying a dividend if it is in default under such indenture or if the payment of
such dividend would exceed the sum of the Company’s consolidated net
income since the end of the last fiscal year prior to issuance of such
debentures plus the net proceeds from the sale of Company stock and
indebtedness which has been converted into Company stock since the end
of the last fiscal year prior to issuance of such debentures plus $30,000,000
in the case of the indenture for the 8¼% Convertible Senior Subordinated
Debentures due June 2006 and $20,000,000 in the case of the indenture for
the 7¼% Convertible Subordinated Debentures due December 2006.
Pursuant to the credit agreement, the Company is prohibited from paying
dividends in excess of an annualized rate of $0.16 per share of common
stock and $0.144 per share of Class B common stock. In addition, the credit
agreement prohibits subsidiaries of the Company, other than wholly owned
subsidiaries, from paying dividends.

Corporate Office
Richardson Electronics, Ltd.
40W267 Keslinger Road • P.O. Box 393
LaFox, Illinois 60147-0393
(630) 208-2200
Internet: www.rell.com/investor.asp • E-mail: info@rell.com

Annual Meeting
We encourage stockholders to attend the annual meeting
scheduled for Tuesday, October 18, 2005, at 3:15 PM
at the Company’s corporate office. Further details are
available in your proxy materials.

Independent Auditors
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601

Tax Compliance Services
Ernst and Young LLP
233 South Wacker Drive
Chicago, IL 60606

Transfer Agent and Registrar
LaSalle Bank
135 South LaSalle Street
Chicago, IL 60603

Equity Research Reports
William Blair & Company
21st Century Equity Research
Jefferies & Company, Inc.
Craig-Hallum Capital Group

Market Makers
Knight Equity Markets, L.P.
Jefferies & Company, Inc.
Craig-Hallum Capital Group

Form 10K and Other Information
A copy of the Company’s Annual Report on Form 10K, filed
with the Securities and Exchange Commission, and the
Corporate Code of Conduct are available without charge
upon request. All inquiries should be addressed to the
Investor Relations Department, Richardson Electronics,
Ltd., 40W267 Keslinger Road, P.O. Box 393, LaFox, Illinois
60147-0393. Press releases and other information can be
found on the Internet at the Company’s home page at
http://www.rell.com/investor.asp

Officers and Directors

Corporate Officers

Edward J. Richardson

Chairman of the Board and Chief Executive Officer

Bruce W. Johnson

President and Chief Operating Officer

Larry Blaney

Vice President and General Manager,

Display Systems Group

Pierluigi Calderone

Vice President and Director, European Operations

Kevin M. Connor

Vice President of North American Sales,

RF & Wireless Communications Group

Board of Directors

Edward J. Richardson (1)

Arnold R. Allen

Management Consultant

Jacques Bouyer (3,4,6)

Retired CEO and COB of Philips Components - France

Scott Hodes (3,5)

Partner, Law Firm of Bryan Cave LLP

Bruce W. Johnson (1)

Ad Ketelaars (6)
CEO, Philips Business Communications

Gint Dargis

Vice President and Chief Information Officer

John R. Peterson (2,6)

Managing Director, Cleary Gull Inc.

David J. DeNeve

Harold L. Purkey (2)

Senior Vice President and Chief Financial Officer

Retired Managing Director, First Union Securities, Inc.

and Director, Reptron Electronics, Inc.

Samuel Rubinovitz (1,2,3,4,5,6)

Management Consultant, Director, LTX Corporation,

and Director, Kronos Corporation

(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee

(4) Stock Option Committee
(5) Executive Oversight Committee
(6) Strategic Planning Committee

Wendy Diddell

Vice President and General Manager,

Security Systems Division

Lawrence T. Duneske

Vice President, Worldwide Logistics

Alan Gray

Director of Tax & Compliance and Assistant Secretary

Joseph C. Grill

Senior Vice President, Human Resources

Robert J. Heise

Vice President, Program Management,

Engineered Solutions

Murray J. Kennedy

Executive Vice President and General Manager,

Industrial Power Group

Kathleen M. McNally

Senior Vice President, Marketing Operations and

Customer Support

Kelly Phillips

Corporate Controller

Gregory J. Peloquin

Executive Vice President and General Manager,

RF & Wireless Communications Group

Robert Prince

Executive Vice President, Worldwide Sales

William G. Seils

Senior Vice President, General Counsel and Secretary

40W267 Keslinger Road
P.O. Box 393
LaFox, Illinois 60147-0393
(630) 208-2200
www.rell.com