UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10–K/A

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

ASTRONICS CORPORATION

New York (State or other jurisdiction of incorporation or organization)		16-0959303 (I.R.S. Employer Identification No.)

130 Commerce Way, East Aurora, N.Y. 14052
(Address of principal executive office)

$.01 par value Common Stock; $.01 par value Class B Stock
(Title of Class)

     Indicate by checkmark if the registrant is a well- known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by checkmark if the registrant is not required to file report pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

     Indicate by checkmark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of March 17, 2006, 7,909,101 shares were outstanding, consisting of 6,423,523 shares of Common Stock $.01 Par Value and 1,485,578 shares of Class B Stock $.01 Par Value. The aggregate market value, as of the last business day of the Company’s most recently completed second fiscal quarter, of the shares of Common Stock and Class B Stock of Astronics Corporation held by non-affiliates was approximately $62,500,000 (assuming conversion of all of the outstanding Class B Stock into Common Stock and assuming the affiliates of the Registrant to be its directors, executive officers and persons known to the Registrant to beneficially own more than 10% of the outstanding capital stock of the Corporation).

Portions of the Company’s Proxy Statement for the 2006 Annual Meeting of Shareholders to be held May 12, 2006 are incorporated by reference into Part III of this Report.

 

 

EXPLANATORY NOTE

This amendment on Form 10-K/A (“Form 10-K/A”) to the Company’s Annual Report on Form 10-K for the period ended December 31, 2005, initially filed with the Securities and Exchange Commission on March 27, 2006 (the “Original Filing”), reflects 2005 restated consolidated financial statements and related footnote disclosures to correct an error relating to a bill and hold arrangement which overstated sales reported on the income statement for the year ended December 31, 2005 by $1.0 million and net income by $0.4 million.

As required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, Astronic’s principal executive officer and principal financial officer are providing Rule 13a-14(a) certifications dated March 14, 2007 in connection with this Form 10-K/A (but otherwise identical to their prior certifications) and are also furnishing, but not filing, written statements pursuant to section 906 of the Sarbanes-Oxley Act of 2002 dated March 14, 2007 (but otherwise identical to their prior statements); and Astronics is re-filing the Consent of Independent Registered Public Accounting Firm dated March 14, 2007 (identical to the previously filed consent).

On March 5, 2007, the Company concluded that its financial statements for the year ended December 31, 2005 should be restated to correct an error whereby the Company incorrectly reported revenue from a bill and hold arrangement with one customer.

This correction resulted in the following:

		December 31,
(In thousands except per share amounts)		2005
a) A reduction in Sales		$	998
b) A reduction in Cost of Products Sold associated with the reduction in Sales			368
c) A reduction in Income Before Taxes from Continuing Operations			630
d) A reduction in Income Tax Expense associated with the reduction in Income Before Taxes from Continuing Operations			214
e) A reduction in Net Income			416
f) A reduction of Basic Earnings Per Share			.06
g) A reduction of Diluted Earnings Per Share			.05
h) An increase in Deferred Revenue due to the related decrease in Sales			998
i) An increase in Finished Goods Inventory due to the related decrease in Cost of Products Sold			368
j) A increase in Current Deferred Tax Assets associated with the reduction in Income Before Taxes from Continuing Operations			214
k) A reduction in Retained Earnings associated with the correction			416

This Amendment No. 1 amends only the following portions of the 10-K; the remainder of the form 10K is unchanged and is not reproduced in the Amendment No. 1. The Amendment No. 1 does not reflect the events occurring after the original filing date of the Form 10-K. Also, the Original Filing has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act (See Exhibits 31 and 32).

This Amendment No. 1 contains changes to the following disclosures:

ITEM 6. SELECTED FINANCIAL DATA (RESTATED)

Five-Year Performance Highlights

		2005(1)
(dollars in thousand, except for per share data)		(Restated)				2004				2003				2002				2001
PERFORMANCE (continuing operations)
Sales — Core Business		$	74,354			$	34,696			$	32,452			$	32,866			$	32,491
Sales — Original F-16 NVIS Program			—				—				730				10,074				20,100
Sales			74,354				34,696				33,182				42,940				52,591
Income (Loss) from Continuing Operations		$	2,237			$	(734	)		$	782			$	4,047			$	5,821
Net Margin			3.0	%			(2.1	)%			2.4	%			9.4	%			11.1	%
Diluted Earnings (Loss) per Share, Continuing Operations		$	0.28			$	(0.09	)		$	0.10			$	0.49			$	0.70
Weighted Average Shares Outstanding — Diluted			8,038				7,766				7,815				8,208				8,346
Return on Average Assets			4.0	%			(1.6	)%			1.7	%			8.8	%			13.7	%
Return on Average Equity			9.3	%			(3.2	)%			3.4	%			21.5	%			45.5	%
YEAR-END FINANCIAL POSITION (continuing operations)
Working Capital		$	13,349			$	18,104			$	18,767			$	13,834			$	11,863
Total Assets			66,439				45,236				45,474				46,607				45,579
Long Term Debt			10,304				11,154				12,482				13,110				15,529
Shareholders’ Equity			25,418				22,660				22,940				22,550				15,177
Book Value Per Share		$	3.22			$	2.91			$	2.96			$	2.87			$	1.88
OTHER YEAR-END DATA (continuing operations)
Depreciation and Amortization		$	2,373			$	1,273			$	1,212			$	1,269			$	1,441
Capital Expenditures		$	2,498			$	1,136			$	420			$	397			$	838
Shares Outstanding			7,901				7,800				7,742				7,870				8,085
Number of Registered Shareholders			777				829				812				834				876
Number of Employees			702				424				369				412				437

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)

OVERVIEW

     The financial information presented for the year ended December 31, 2005 has been restated to reflect the correction of an error related to a bill and hold arrangement. See “Explanatory Note” at the beginning of this filing and Footnote 13 in Item 8. The 2005 financial information has been updated for this correction.

     Astronics Corporation, through its subsidiaries Luminescent Systems Inc. and Luminescent Systems Canada Inc. and most recently with the February 2005 acquisition of Astronics Advanced Electronic Systems Corp., designs and manufactures lighting systems and components, electrical power generation, in-flight control and power distribution systems for aircraft. We operate four principal facilities located in New York State, New Hampshire, Washington State and Quebec, Canada. We serve the three primary aircraft markets which are the military, commercial transport and the business jet markets. In 2005, sales to the military accounted for 37% of total sales. Sales to the commercial transport market and the business jet market were 41% and 21%, respectively. Astronics strives to offer comprehensive lighting and electrical systems for aircraft which we believe make the Company unique in our ability to serve our customers.

     On February 3, 2005, the Company acquired substantially all of the assets of the General Dynamics — Airborne Electronic Systems (AES) business unit from a subsidiary of General Dynamics. Astronics acquired the business for $13.0 million in cash. The Company financed the acquisition and related costs by borrowing $7.0 million on its revolving line of credit and used $6.4 million of cash on hand. For the year ended December 31, 2005, AES had sales of $27.6 million and a pre tax profit of $2.4 million. In 2004, AES had a pre tax loss of approximately $8 million. The loss was primarily a result of costs relating to a development program that included significant termination fees. See Note 10 of Item 8 Financial Statements and Supplementary Data for pro forma financial information. AES produces a wide range of products related to electrical power generation, in-flight control, and power distribution on military, commercial transport, business jet and missile platforms.

     Key factors affecting Astronics’ growth are our ability to be designed into new aircraft, the rate at which new aircraft are produced, government funding of military programs, and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. Once designed into a new aircraft, the spare parts business is frequently retained by the Company. Astronics’ strategy is to increase the amount of content on aircraft platforms, evolving the Company from our historic role of a components supplier to a turn key provider of complete systems.

     One of the principal markets we serve is the commercial transport market. The addition this year of Astronics AES has increased our exposure to the commercial transport market. As the financial condition of the world’s airlines improves and stabilizes, the airlines are beginning to increase investments in new aircraft purchases and cabin improvements. Many airlines are expanding the number of seats equipped with in-flight entertainment systems and in-seat power. We are in a strong position to benefit from this trend with our power and data technology acquired in the Astronics AES acquisition. We believe we will benefit from the expected continued strength of this market. Our increased exposure to this market also means we have greater down side risk should the commercial transport market enter a period of retraction as it did for several years beginning in 2001. If that were to occur, it is likely that commercial airlines would reduce spending on these types of programs and have a significant negative impact on our business. The power and data business accounted for 21% of our sales and 46% of our bookings in 2005.

     The business jet market continued to be strong in 2005. We provide a wide range of products to the business jet market including air frame power, cockpit and exterior lighting products. Our products are found on many of the aircraft manufactured by Cessna, Raytheon and Bombardier. Our exterior lighting products have received notable interest from the business jet OEM’s. Among our more significant initiatives during 2005 was the continued development of products for Eclipse Aviation’s Eclipse 500 and Cessna’s Mustang business jets. There is risk involved with any new aircraft such as the Eclipse 500 and the Cessna Mustang as neither aircraft has been certified by the FAA. Eclipse is expecting certification of the Eclipse 500 during mid 2006 and Cessna in late 2006 for its Mustang. Should certification be delayed or not achieved it would impact Astronics growth opportunities and expected profits. We believe that the business jet markets will continue to provide opportunities for growth provided the economy remains healthy.

     Our Military market sales are typically comprised of several significant “programs” such as the power converter for the Tactical Tomahawk and Taurus missiles, with 2005 sales of $3.0 million and the Korean F-16 night vision program, with 2005 sales of $4.8 million. In addition, because our component parts are found on many different aircraft, we have many smaller program sales for upgrade programs and spares as well as new build aircraft. A large development effort over the past several years has been the exterior lighting suite for the F-35 Joint Strike Fighter. This aircraft is expected to enter low rate production in 2008. The Military market is dependent on governmental funding which can change from year to year. Risks are that overall spending may be reduced in the future and that specific programs may be eliminated. Astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss. We believe that we will continue to have opportunities similar to past years regarding this market.

     We continue to look for opportunities to capitalize on our core competencies of power generation and distribution and lighting to expand our existing business and to grow through strategic acquisitions.

     In 2005, Astronics continued to commit significant resources for the engineering and design of next generation products which in many cases will not enter production until late 2006 or beyond. Some of the more significant efforts during 2005 were products for the various OEM’s developing very light business jets such as Cessna Aircraft and Eclipse Aviation. For the military markets our larger design and development efforts have been for the exterior lighting suite for the F-35 (Joint Strike Fighter) and multiple smaller programs. In 2005 our seat power module which provides power for in flight entertainment (IFE) systems and in seat power was selected by several airlines for installation in their cabin upgrades. For the foreseeable future we expect that we will continue to have opportunities requiring levels of engineering resources comparable to 2005.

     We are anticipating 2006 revenue to increase over 2005. Our 2006 plan projects revenues of about $85 to $90 million, however the year is difficult to predict. A large number of the major aircraft programs in which we are involved are nearing critical stages of their certification process. If, during 2006, these programs achieve certification and transition to production smoothly, we could potentially exceed our expectations. If these programs encounter challenges and delays, our delivery schedule could be delayed, and our 2006 shipments and profitability will be affected.

     We ended the year with a backlog of $96.1 million of which approximately $58 million is expected to be delivered during 2006. Provided that the economy maintains its strength we anticipate that new aircraft build rates will continue to increase over the next several years providing increased opportunities to grow revenue and profits. We expect discretionary spending by the airlines will continue as the global commercial transport market continues its recovery. We expect that the military market will continue to offer opportunities for us to increase the value of the content that we provide on a growing base of aircraft platforms.

     Challenges facing us include improving shareholder value through increased profitability. Increasing profitability is dependent on many things such as increased build rates for existing aircraft, successful certification of new aircraft such as the Cessna Mustang and Eclipse 500 business jets, continued government funding of defense programs such as the F-35 Joint Strike Fighter and V-22 Osprey and the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for these programs. In addition we are faced with increasing costs for health care and corporate governance, particularly those required by Sarbanes-Oxley legislation. Finally, many of our newer development programs are based on new and unproven technology. We are challenged to develop the technology on a schedule that is consistent with specific aircraft development programs. We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.

CRITICAL ACCOUNTING POLICIES

     Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company’s financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management’s application of accounting policies, which are discussed in Note 1 of Item 8, Financial Statements and Supplementary Data of this report. The critical accounting policies have been reviewed with the audit committee of our board of directors.

Revenue Recognition

     Revenue is recognized on the accrual basis, principally as units are delivered. The Company manufactures most of its products on a build to order basis and ships products upon completion or shortly thereafter. There are no significant contracts allowing for right of return. The Company does evaluate and record an allowance for any potential returns based on experience and any known circumstances. For the years ended December 31, 2005, 2004 and 2003 no allowances were recorded for contracts allowing for right of return. A trade receivable is recorded at the value of the sale.

Accounts Receivable and Allowance for Doubtful Accounts

     The Company records a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on Management’s knowledge of the business and specific customers and review and analysis of accounts receivable agings. At December 31, 2005, the Company’s allowance for doubtful accounts for accounts receivable was $0.4 million, or 3% of gross accounts receivable. At December 31, 2004, the Company’s allowance for doubtful accounts was $0.3 million, or 4% of gross accounts receivable. In addition, at December 31, 2005 and 2004, the Company fully reserved the balance of a non-current note receivable in the amount of $0.6 million.

Inventory Valuation

     The Company records valuation reserves to provide for slow moving or obsolete inventory or to reduce inventory to the lower of cost or market value. In determining the appropriate reserve, Management considers overall inventory levels in relation to forecasted demands. At December 31, 2005, the Company’s reserve for inventory valuation was $4.8 million, or 19.8% of gross inventory. This is an increase of $4.1 million from $0.7 million at December 31, 2004 which represented 9% of gross inventories. Approximately $4.0 million of the increase was added as result of the AES acquisition on February 3, 2005.

Deferred Tax Asset Valuation Allowances

     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. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. We consider recent earnings projections, allowable tax carry forward periods, tax planning strategies and historical earnings performance to determine the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expense when we determine that these factors have changed.

     As of December 31, 2005, the Company had a net deferred tax asset of $0.8 million, net of a $0.3 million valuation allowance, net of federal tax benefit. These assets relate principally to liabilities or asset valuation reserves that result in timing difference between generally acceptable accounting principles recognition and treatment for income tax purposes, as well as a state investment tax credit carry-forward.

     Negatively impacting net income was an income tax charge of approximately $0.3 million related to a change in New York State tax law, net of federal tax benefit, which makes it unlikely the company will be able to utilize certain tax credit carry-forwards. Based on historical earnings and current projections of future taxable income, the valuation allowance was recorded in the second quarter of 2005.

Goodwill

     The Company’s goodwill is the result of the excess of purchase price over net assets acquired from acquisitions. As of December 31, 2005, the Company had $2.7 million of goodwill. There was no goodwill recognized as a result of the acquisition of Astronics AES in February 2005. The Company tests goodwill for impairment at least annually, during the fourth quarter, and whenever events occur or circumstances change that indicates there may be impairment. The process of evaluating the Company’s goodwill for impairment is subjective and requires significant estimates. These estimates include judgments about future cash flows that are dependent on internal forecasts, long-term growth rates and estimates of the weighted average cost of capital used to discount projected cash flows. Based on the discounted projected cash flows, management has concluded that there is no impairment of the Company’s goodwill.

Supplemental Retirement Plan

     The Company maintains a supplemental retirement plan for certain executives. The accounting for this plan is based in part on certain assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used. The assumptions for increases in compensation and the discount rate for determining the cost recognized in 2005 were 5.0% and 5.75% respectively. The discount rate used for the projected benefit obligation as of December 31, 2005 was 5.50%. The assumption for compensation increases takes a long-term view of inflation and performance based salary adjustments based on the Company’s approach to executive compensation. For determining the discount rate the Company considers long-term interest rates for high-grade corporate bonds.

RESULTS OF OPERATIONS

Sales

     Sales for 2005 increased by $39.7 million to $74.4 million, up from $34.7 million in 2004, an increase of 114%. The increase was the result of the 2005 acquisition of Astronics AES, contributing $27.6 million and an increase in organic sales of $12.1 million. Organic sales increased in the business jet market by $4.0 million, the commercial transport market by $1.2 million and the military market by $7.0 million. These were offset partially by a $0.1 million decrease in sales to other markets. The increase in organic sales to the business jet market was primarily a result of increased production rates for new aircraft. The increase in organic sales to the military market was primarily the result of the Korean F-16 night vision retro-fit program which accounted for $4.8 million and an increase in overall volume on a wide variety of programs. Astronics AES 2005 sales were $0.7 million to the business jet market, $22.4 million to the commercial transport market and $4.5 million to the military market.

     Sales for 2004 increased by $1.5 million to $34.7 million, up from $33.2 million in 2003, an increase of 4.6%. The increase was the result of an increase in sales to the business jet market of $2.5 million, an increase in sales to the commercial transport market of $0.1 million and an increase in other sales of $0.2 million offset partially by a $1.3 million decrease in sales to the military market. The increase in sales to the business jet market was primarily a result of increased production rates for new aircraft. The decrease of sales to the military was the result of lower demand for spare parts by the U.S. government.

Expenses

     Cost of sales as a percentage of sales decreased by 6.7 percentage points to 80.0 % in 2005 from 86.7% in 2004. This decrease was due to improved margins for the organic business and the addition of Astronics AES that had 2005 cost of sales totaling 72.0% of sales. Cost of sales, for the organic business as a percentage of sales decreased two percentage points to 84.7% in 2005 from 86.7% in 2004. This was a result of leverage provided by the increased revenues somewhat offset by an increase for engineering and design costs of $1.4 million to $7.2 million in 2005 as compared with $5.8 million in 2004. This increase in spending was due to the Company’s continued development of exterior lighting products, cabin lighting and higher value added cockpit lighting opportunities. It is our intention to continue investing in capabilities and technologies as needed that allows us to execute our strategy to increase the ship set content and value we provide on aircraft in all markets that we serve. The rate of spending on these activities, however, will largely be driven by opportunities that the market presents.

     Cost of sales as a percentage of sales increased seven percentage points to 86.7% in 2004 from 79.7% in 2003. Engineering and design spending related primarily to product development increased by $2.2 million to $5.8 million in 2004 as compared with $3.6 million in 2003. This increase in spending was a result of additional engineering personnel and increased costs for goods and services supplied by vendors for qualification testing, outsourced testing and design work for the Company’s pursuit of exterior lighting, cabin lighting and higher value added cockpit lighting opportunities.

     Selling, general and administrative expenses increased $4.7 million to $10.2 million in 2005 from $5.5 million in 2004 primarily as a result the incremental selling, general and administrative costs of $4.7 million from Astronics AES. Organic selling, general and administrative costs remained flat when compared to 2004. A $0.3 million decrease in bad debt expense offset a similar increase in professional services, principally related to increased accounting and audit costs.

     Selling, general and administrative expenses were $5.5 million in both 2004 and 2003. During 2004, a $0.5 million increase in the provision for doubtful accounts caused primarily by the write off of a note receivable the Company held relating to the sale in 2001 of a former production facility was offset by a reduction in professional services, labor, overall spending and a reduction in the loss from foreign currency exchange.

Income from Continuing Operations Before Taxes

     Income from Continuing Operations Before Taxes in 2005 increased by $5.4 million to a profit of $4.2 million from a loss of $1.2 million in 2004. This increase was a result of both the acquisition of Astronics AES, which contributed $2.4 million and improved margins in Astronics organic business. Leverage created by increased organic sales volume was somewhat offset by our increased engineering costs in 2005 which were a result of an increase in personnel as well as increased costs for goods and services supplied by vendors for qualification testing, outsourced testing and design work.

     Income from Continuing Operations Before Taxes in 2004 decreased by $2.2 million to a loss of $1.2 million from a profit of 1.0 million in 2003. This decrease was a result of the increase in engineering costs referred to in preceding paragraphs.

Income Taxes

     The effective tax rate was 46.3% in 2005, 8.4 percentage points higher than the effective tax rate of 37.9% in 2004. The majority of the increase was due to a reserve that we recorded to reduce our deferred tax assets relating to New York State investment tax credit carry forwards. In 2005, new tax legislation was passed that we expect will reduce the allocation of future taxable income to New York State. As a result, we expect our future tax liability to be significantly reduced and do not expect to utilize all of these credits before they expire. In the second quarter of 2005, the Company recorded a valuation allowance reducing the Company’s $0.3 million deferred tax asset relating to these state tax credits to $0.03 million. As a result of this valuation allowance, the Company recorded a non-cash charge to income tax expense of $0.3 million, net of federal taxes. We expect our effective tax rate for future years to be closer to the statutory rates in effect at those times.

     The effective tax rate was 37.9% in 2004, 12.3 percentage points higher than the effective tax rate of 25.5% in 2003. The increase was primarily due to recognition in 2003 of research and development tax credits from prior years which reduced the effective tax rate for that year.

Contractual Obligations

(in thousands)		Payments due by period
		Total				2006				2007-2008				2009-2010				After 2010
Note Payable		$	7,000			$	7,000			$	—			$	—			$	—
Long-Term Debt			11,217				914				1,830				1,832				6,641
Interest on Long-Term Debt			1,108				173				305				249				381
Operating Leases			2,937				1,314				1,620				3				—
Purchase Obligations			14,567				11,687				2,880				—				—
Other Long Term Liabilities*			1,420				242				518				373				287
Total Contractual Obligations		$	38,249			$	21,330			$	7,153			$	2,457			$	7,309

Notes to Contractual Obligations Table

Note Payable and Long-Term Debt — See item 8, Financial Statements and Supplementary Data, Note 2, Long-Term Debt and Note Payable in this report.

Interest on Long-Term Debt — Interest on Long-Term Debt consists of payments on Industrial Revenue Bonds issued through the Erie County, New York Industrial Development Agency taking into account the interest rate swap entered into on February 6, 2006 which effectively fixes the interest rate on this obligation at 3.99% through January 2016. We have excluded the variable rate interest on our note payable and other long-term debt.

Operating Leases — Operating lease obligations are primarily related to facility and equipment leases for our Astronics AES operations and facility leases for our Canadian operations.

Purchase Obligations — These are comprised of the Company’s commitments for goods and services in the normal course of business.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow from operating activities was $5.1 million in 2005 compared with $0.1 million in 2004. The increase in 2005 relates to higher earnings adjusted for non-cash charges such as depreciation and amortization, offset somewhat by slight increase in working capital components.

     Cash flow from operating activities was $0.1 million in 2004 compared with $2.1 million in 2003. The decrease of $2.0 million as compared with 2003 was mainly a result of a decrease in income from continuing operations of $1.5 million to a loss of $0.7 million in 2004 from income in 2003 of $0.8 million and an increase in investment in working capital components.

     Cash used for investing activities was $15.0 million in 2005 compared with $2.4 million in 2004, a $12.6 million increase. The increase was primarily due to the Astronics AES acquisition of $13.4 million. Cash used for investing activities in 2003 was $0.7 million.

     Pursuant to the March 14, 2003 spin-off of its wholly owned subsidiary, MOD-PAC CORP., the Company received a one-time dividend that resulted in net cash proceeds totaling $4.8 million in 2003.

     The Company’s cash flows from operations are primarily dependent on its sales, profit margins and the timing of collections of receivables and payments to suppliers. Sales are influenced significantly by the build rates of new aircraft, which amongst other things are subject to general economic conditions, government appropriations and airline passenger travel. Over time, sales will also be impacted by the Company’s success in executing its strategy to increase ship set content and obtain production orders for programs currently in the development stage. A significant change in new aircraft build rates could be expected to impact the Company’s profits and cash flow. A significant change in government procurement and funding and the overall health of the worldwide airline industry could be expected to impact the Company’s profits and cash flow as well.

     The Company’s cash required for capital equipment purchases for the last three years ranged between $0.4 million and $2.5 million. Our expectation for 2006 is that capital equipment expenditures will increase to over $4.0 million. This expected increase is primarily a result of machinery and equipment purchases to increase our production capacity. Additionally, we are in the exploratory stages of evaluating the possibility of expanding our available production square footage to accommodate projected future growth. Should we choose to expand the facility, it would likely be financed with additional debt.

     Future capital requirements depend on numerous factors, including expansion of existing product lines and introduction of new product lines. Management believes that cash, together with the Company’s cash flow from operations and current borrowing arrangements will provide for these necessary capital expenditures.

     In March, 2005 the Company received an amended agreement from HSBC Bank USA to increase its available revolving credit facility to $15 million. The amendment also extended the revolving credit facility through June 30, 2006. We expect that the existing facility will be renewed. We believe that should our facility with HSBC not be renewed we will be able to obtain alternative senior debt financing arrangements. At December 31, 2005, the Company was in compliance with all of the covenants pursuant to this credit facility with HSBC Bank USA. These covenants are measured on an annual basis at December 31.

     The Company’s cash needs for debt service for 2006 are not expected to change significantly from 2005 levels. For its February 2005 acquisition of AES the Company borrowed $7.0 million through the use of its credit facility. The Company may decide to convert all or a portion of the credit facility balance to a term note or pay down on the credit facility as excess cash becomes available. The impact of this credit facility balance on cash needs in 2006 will depend on the repayment terms selected.

     The Company’s ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. The Company has successfully negotiated new credit terms with its lender in order to provide more operating flexibility than it previously had. However, failure to achieve expected operating results could have a material adverse effect on our liquidity and our operations in the future.

     The Company’s cash needs for working capital, capital equipment and debt service during 2006 and the foreseeable future, are expected to be met by cash flows from operations, its current cash balance and if necessary utilization of its revolving credit facility.

DISCONTINUED OPERATIONS

     On September 26, 2002, the Company announced the spin-off of its wholly owned subsidiary MOD-PAC CORP., which operated the Printing and Packaging business segment. That transaction was effective March 14, 2003 and was accomplished by a tax free distribution of the stock of MOD-PAC CORP. to the shareholders of Astronics Corporation. As such, the net assets and equity of MOD-PAC CORP. were removed from the balance sheet of Astronics resulting in a reduction of the Company’s retained earnings and related net assets of $21.0 million. In December of 2002, the Company announced the discontinuance of its Electroluminescent Lamp Business Group, whose business had involved sales of micro-encapsulated electroluminescent lamps to customers in the consumer electronics industry. The operations of MOD-PAC CORP., through the spin-off date, and the operations of the Electroluminescent Lamp Business Group have been reported as discontinued operations in the financial statements of the Company. During 2005 and 2004, there was no income or loss from discontinued operations. During 2003, income from discontinued operations attributable to MOD-PAC CORP. was $0.4 million, and the Electroluminescent Lamp Business Group had a loss of $0.04 million. The business activity for the Electroluminescent Lamp Business Group was concluded during 2003.

DIVIDENDS

     Management believes that it should retain the capital generated from operating activities for investment in advancing technologies, acquisitions and debt retirement. Accordingly, there are no plans to institute a cash dividend program.

BACKLOG

     At December 31, 2005, the Company’s backlog was $96.1 million compared with $27.2 million at December 31, 2004. The Company acquired $45.9 million of backlog with the acquisition of Astronics AES.

RELATED-PARTY TRANSACTIONS

     See the discussion in Item 8, Financial Statements and Supplementary Data, Note 12, Discontinued Operations and Note 11 Related-Party Transactions in this report.

RECENT ACCOUNTING PRONOUNCEMENTS

     On December 16, 2004 the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R) (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006, which is when the Company will adopt it.

     As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) in 2006 is estimated to be approximately $0.4 million in additional expense after income taxes; however this will vary depending on levels of share-based payments granted in the future. Had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

     In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 2004. The Company believes the adoption of this standard will not have a material impact on its results of operations or financial position.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Astronics Corporation

We have audited the accompanying consolidated balance sheets of Astronics Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Astronics Corporation at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 13 of the consolidated financial statements, the Company restated its 2005 consolidated financial statements.

/s/ Ernst & Young LLP

Buffalo, New York
February 3, 2006,
except for Note 13, as to which the date is
March 14, 2007

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)

ASTRONICS CORPORATION

		Year ended December 31,
		2005
(in thousands, except per share data)		(restated)				2004				2003
Sales		$	74,354			$	34,696			$	33,182
Cost and Expenses
Cost of products sold			59,484				30,087				26,439
Selling, general and administrative expenses			10,246				5,477				5,494
Interest expense, net of interest income of $29, $127 and $190			735				282				200
Other (income) expense			(278	)			32				—
Total Costs and Expenses			70,187				35,878				32,133
Income (Loss) from Continuing Operations Before Income Taxes			4,167				(1,182	)			1,049
Provision (Benefit) for Income Taxes			1,930				(448	)			267
Income (Loss) from Continuing Operations			2,237				(734	)			782
Income from Discontinued Operations			—				—				331
Net Income (Loss)		$	2,237			$	(734	)		$	1,113
Basic Earnings (Loss) per Share
Continuing Operations		$	.28			$	(.09	)		$	.10
Discontinued Operations			—				—				.04
Net Income (Loss)		$	.28			$	(.09	)		$	.14
Diluted Earnings (Loss) per Share
Continuing Operations		$	.28			$	(.09	)		$	.10
Discontinued Operations			—				—				.04
Net Income (Loss)		$	.28			$	(.09	)		$	.14

See notes to financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)

ASTRONICS CORPORATION

		December 31,
		2005
(in thousands, except per share data)		(Restated)				2004
ASSETS
Current Assets:
Cash and Cash Equivalents		$	4,473			$	8,476
Short-term Investments			—				1,000
Accounts Receivable, Net of Allowance for Doubtful Accounts of $365 in 2005 and $259 in 2004			12,635				5,880
Inventories			19,381				7,110
Prepaid Expenses			626				560
Prepaid Income Taxes			—				796
Deferred Income Taxes			989				660
Total Current Assets			38,104				24,482
Property, Plant and Equipment, at Cost:
Land			1,143				1,143
Buildings and Improvements			12,007				12,007
Machinery and Equipment			18,515				12,102
			31,665				25,252
Less Accumulated Depreciation and Amortization			11,204				10,031
Net Property, Plant and Equipment			20,461				15,221
Deferred Income Taxes			—				488
Intangibles net of accumulated amortization of $329 in 2005 and $- in 2004			3,400				951
Other Assets			1,788				1,479
Goodwill			2,686				2,615
Total Assets		$	66,439			$	45,236
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current Maturities of Long-term Debt		$	914			$	908
Note Payable			7,000				—
Current Liabilities of Discontinued Operations			—				533
Accounts Payable			5,421				2,551
Accrued Payroll and Employee Benefits			3,861				1,309
Income Taxes Payable			171				—
Customer Advanced Payments and Deferred Revenue			5,402				—
Contract Loss Reserves			830				—
Other Accrued Expenses			1,156				1,077
Total Current Liabilities			24,755				6,378
Long-term Debt			10,304				11,154
Supplemental Retirement Plan and Other Benefits			4,494				4,543
Other Liabilities			1,317				501
Deferred Income Taxes			151				—
Shareholders’ Equity
Common Stock, $.01 par value — Authorized 20,000,000 Shares, issued 7,082,100 in 2005; 6,633,805 in 2004			71				66
Class B Stock, $.01 par value — Authorized 5,000,000 Shares, Issued 1,603,323 in 2005; 1,950,517 in 2004			16				19
Additional Paid-in Capital			3,808				3,432
Accumulated Other Comprehensive Income			799				656
Retained Earnings			24,443				22,206
			29,137				26,379
Less Treasury Stock: 784,250 Shares in 2005 and 2004			3,719				3,719
Total Shareholders’ Equity			25,418				22,660
Total Liabilities and Shareholders’ Equity		$	66,439			$	45,236

See notes to financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)

ASTRONICS CORPORATION

		Year ended December 31,
		2005
(in thousands)		(Restated)				2004				2003
Cash Flows from Operating Activities
Income (Loss) from Continuing Operations		$	2,237			$	(734	)		$	782
Adjustments to Reconcile Income (Loss) from Continuing Operations to Cash provided by Operating Activities:
Depreciation and Amortization			2,373				1,273				1,212
Provision for Doubtful Accounts			124				397				(78	)
Deferred Taxes Provision (Benefit)			93				(40	)			175
(Gain) Loss on Disposal of Assets			(41	)			32				—
Cash Flows from Changes in Operating Assets and Liabilities, Excluding the Effects of Acquisitions:
Accounts Receivable			(828	)			(1,287	)			696
Inventories			(4,874	)			(1,138	)			671
Prepaid Expenses and Other Assets			(67	)			149				(427	)
Accounts Payable			677				885				(400	)
Accrued Expenses			2,079				328				(383	)
Customer Advanced Payments and Deferred Revenue			4,722				—				—
Contract Loss Reserves			(2,909	)			—				—
Income Taxes			1,182				(65	)			(429	)
Supplemental Retirement Plan and Other Liabilities			282				343				307
Cash provided by Operating Activities			5,050				143				2,126
Cash Flows from Investing Activities
Purchases of Short-term Investments			—				(4,000	)			—
Proceeds from Sale of Short-term Investments			1,000				3,000				—
Business Acquisition			(13,366	)			—				—
Capital Expenditures			(2,498	)			(1,136	)			(420	)
Other			(233	)			(322	)			(284	)
Proceeds from the Sale of Assets			56				34				—
Cash used for Investing Activities			(15,041	)			(2,424	)			(704	)
Cash Flows from Financing Activities
Proceeds from Spin-off of MOD-PAC CORP.			—				—				4,751
Principal Payments on Long-term Debt			(897	)			(1,452	)			(879	)
Proceeds from Note Payable			7,000				—				—
Unexpended Industrial Revenue Bond Proceeds			—				555				—
Proceeds from Issuance of Stock			343				133				35
Purchase and Retirement of Stock			—				—				(606	)
Purchase of Stock for Treasury			—				—				(497	)
Cash provided by (used for) Financing Activities			6,446				(764	)			2,804
Effect of Exchange Rates on Cash			(11	)			(133	)			64
Cash (used for) provided by Continuing Operations			(3,556	)			(3,178	)			4,290
Cash used for Discontinued Operations – Operating Activities			(447	)			(154	)			(204	)
Cash and Cash Equivalents at Beginning of Year			8,476				11,808				7,722
Cash and Cash Equivalents at End of Year		$	4,473			$	8,476			$	11,808
Disclosure of Cash Payments (Refunds) for:
Interest — Continuing Operations		$	764			$	396			$	404
Income taxes — Continuing Operations			651				(421	)			840
Interest — Discontinued Operations			—				—				9
Income taxes — Discontinued Operations			—				—				185

See notes to financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

																														Accumulated
		Common Stock								Class B Stock																				Other
		Shares				Par				Shares				Par				Treasury Stock								Paid-In				Comprehensive				Retained				Comprehensive
(dollars and shares in thousands)		Issued				Value				Issued				Value				Shares				Cost				Capital				Income (Loss)				Earnings				Income
Balance at December 31, 2002			6,441			$	64				2,132			$	21				703			$	3,222			$	3,790			$	(545	)		$	42,831
Net Income for 2003																																			1,113				1,113
Minimum Pension Liability Adjustment (net of income taxes of $127)																															207								207
Currency Translation Adjustments																															573								573
Mark to Market Adjustments for Derivatives (net of income taxes of $44)																															66								66
Total Comprehensive Income																																						$	1,959
Common Stock Purchased and Retired			(98	)			(1	)																			(606	)
Treasury Stock Purchased																			81				497
Exercise of Stock Options (including income tax benefit of $50)			38				1				13																85
Class B Stock converted to Common Stock			102				1				(102	)			(1	)
Spin-off of MOD-PAC CORP																															64				(21,004	)
Balance at December 31, 2003			6,483			$	65				2,043			$	20				784			$	3,719			$	3,269			$	365			$	22,940
Net Loss for 2004																																			(734	)		$	(734	)
Currency Translation Adjustments																															197								197
Mark to Market Adjustments for Derivatives (net of income taxes of $57)																															94								94
Total Comprehensive Income																																						$	(443	)
Exercise of Stock Options (including income tax benefit of $30)			52								6																163
Class B Stock converted to Common Stock			99				1				(99	)			(1	)
Balance at December 31, 2004			6,634			$	66				1,950			$	19				784			$	3,719			$	3,432			$	656			$	22,206
Net Income for 2005 (Restated)																																			2,237			$	2,237
Currency Translation Adjustments																															83								83
Mark to Market Adjustments for Derivatives (net of income taxes of $33)																															60								60
Total Comprehensive Income (Restated)																																						$	2,380
Exercise of Stock Options (including income tax benefit of $35)			84				1				17				1												376
Class B Stock converted to Common Stock			364				4				(364	)			(4	)
Balance at December 31, 2005 (Restated)			7,082			$	71				1,603			$	16				784			$	3,719			$	3,808			$	799			$	24,443

See notes to financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES

Description of the Business

     Astronics Corporation, through its subsidiaries Luminescent Systems, Inc., Luminescent Systems-Canada Inc. and Astronics Advanced Electronic Systems Corp. (AES) designs and manufactures lighting components and subsystems, electrical power generation, in-flight control and power distribution systems for aircraft. Astronics (AES) was acquired On February 3, 2005 (See Note 10). The Company serves the three primary markets for aircraft which are the military, commercial transport and the business jet markets.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, except for MOD-PAC CORP., which is presented with discontinued operations through its spin-off date of March 14, 2003. All intercompany transactions and balances have been eliminated.

     Acquisitions are accounted for under the purchase method and, accordingly, the operating results for the acquired companies are included in the consolidated statements of earnings from the respective dates of acquisition.

Revenue and Expense Recognition

     Revenue is recognized on the accrual basis, generally at the time of shipment of goods. There are no significant contracts allowing for right of return. The Company does evaluate and record an allowance for any potential returns based on experience and any known circumstances. For the years ended December 31, 2005, 2004 and 2003 no allowances were recorded for contracts allowing for right of return. A trade receivable is recorded at the value of the sale. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company records a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on Management’s knowledge of the business and specific customers and review and analysis of accounts receivable agings. After collection efforts have been exhausted, uncollected balances are charged off to the allowance. At December 31, 2005, the Company’s allowance for doubtful accounts for accounts receivable was $0.4 million, or 3% of gross accounts receivable. At December 31, 2004, the Company’s allowance for doubtful accounts was $0.3 million, or 4% of gross accounts receivable. In addition, at December 31, 2005 and 2004, the Company fully reserved the balance of a non-current note receivable in the amount of $0.6 million

     Cost of products sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead as well as all engineering and developmental costs. Selling, general and administrative expenses include costs primarily related to our sales and marketing departments and administrative departments. Shipping and handling costs are expensed as incurred and are included in costs of products sold.

     The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. These costs are expensed when incurred and included in cost of sales. Research and development and related engineering amounted to $8.9 million in 2005, $5.8 million in 2004 and $3.6 million in 2003.

Stock-Based Compensation

     The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations.

     The measurement prescribed by APB Opinion No. 25 does not recognize compensation expense if the exercise price of the stock option equals the market price of the underlying stock on the date of grant and the number of stock options granted is fixed. Accordingly, no compensation expense related to stock options has been recorded in the financial statements.

     The following table provides pro forma earnings information as if the Company recorded compensation expense based on the fair value of stock options:

		2005
(in thousands, except per share data)		(Restated)				2004				2003
Income (Loss) from Continuing Operations, as reported		$	2,237			$	(734	)		$	782
Stock-based compensation included in net income (loss) as reported			—				—				—
Adjustment to record compensation expense for Stock Option awards under the Fair Value Method of Accounting			(302	)			(273	)			(446	)
Pro Forma Income (Loss) from Continuing Operations		$	1,935			$	(1,007	)		$	336
Net Income (Loss), as reported		$	2,237			$	(734	)		$	1,113
Stock-based compensation included in net income (loss) as reported			—				—				—
Adjustment to record compensation expense for Stock Option Awards under the Fair Value Method of Accounting			(302	)			(273	)			(225	)
Pro Forma Net Income (Loss)		$	1,935			$	(1,007	)		$	888
Pro Forma Basic Earnings (Loss) Per Share:
Continuing Operations		$	.25			$	(.13)			$	.04
Net Income (Loss)		$	.25			$	(.13)			$	.11
Pro Forma Diluted Earnings (Loss) Per Share:
Continuing Operations		$	.24			$	(.13	)		$	.04
Net Income (Loss)		$	.24			$	(.13	)		$	.11

Cash and Cash Equivalents

     All highly liquid instruments with a maturity of three months or less at the time of purchase are considered cash equivalents.

Short-Term Investments

     The Company’s short-term investments consist of marketable securities that are categorized as available for sale securities as defined by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The investment portfolio at December 31, 2004 consisted of Government Agency securities totaling $1.0 million. There was no unrealized gain or loss at December 31, 2004. There was no realized gain or loss for the years ended December 31, 2005, 2004 and 2003.

Inventories

     Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. Inventories at December 31 are as follows:

		2005
(in thousands)		(Restated)				2004
Finished Goods		$	3,026			$	644
Work in Progress			7,805				1,068
Raw Material			8,550				5,398
		$	19,381			$	7,110

     The Company records valuation reserves to provide for slow moving or obsolete inventory or to reduce inventory to the lower of cost or market value. In determining the appropriate reserve, Management considers overall inventory levels in relation to forecasted demands. At December 31, 2005, the Company’s reserve for inventory valuation was $4.8 million, or 19.8% of gross inventory. This is an increase of $4.1 million from $0.7 million at December 31, 2004 which represented 9% of gross inventories. Approximately $4.0 million of the increase was added as result of the AES acquisition on February 3, 2005.

Property, Plant and Equipment

     Depreciation of property, plant and equipment is computed on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 40 years; machinery and equipment, 4-10 years. Leasehold improvements are amortized over the terms of the lease or the lives of the assets, whichever is shorter.

     The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts, and the resulting gain or loss, as well as maintenance and repair expenses, are reflected in income. Replacements and improvements are capitalized.

     Depreciation expense was $1.9 million, $1.0 million and $1.1 million in 2005, 2004 and 2003, respectively.

Goodwill

     The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has one reporting unit for purposes of the goodwill impairment test. The impairment test consists of comparing the fair value of the reporting unit, determined using discounted cash flows, with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be recognized for the carrying amount of goodwill in excess of its implied fair value.

     The Company recognized no goodwill as a result of the acquisition of Astronics AES in February 2005. The changes in the carrying amount of goodwill are as follows:

(in thousands)		2005				2004
Balance at January 1,		$	2,615			$	2,444
Foreign currency translations			71				171
Balance at December 31,		$	2,686			$	2,615

Income Taxes

     The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not expected to be realized. Investment tax credits are recognized on the flow through method.

Earnings per Share

     Earnings per share computations are based upon the following table:

		2005
(in thousands, except per share data)		(Restated)				2004				2003
Income (Loss) from continuing operations		$	2,237			$	(734	)		$	782
Income from discontinued operations			—				—				331
Net Income (Loss)		$	2,237			$	(734	)		$	1,113
Basic earnings weighted average shares			7,855				7,766				7,761
Net effect of dilutive stock options			183				—				54
Diluted earnings weighted average shares			8,038				7,766				7,815
Basic earnings (loss) per share continuing operations		$	.28			$	(.09	)		$	.10
Discontinued operations			—				—				.04
Net Income (loss)		$	.28			$	(.09	)		$	.14
Diluted earnings (loss) per share continuing operations		$	.28			$	(.09	)		$	.10
Discontinued operations			—				—				.04
Net Income (loss)		$	.28			$	(.09	)		$	.14

The effect of stock options has not been included for 2004 since this would be anti-dilutive as a result of the Company’s net loss.

Class B Stock

     Class B Stock is identical to Common Stock, except Class B Stock has ten votes per share, is automatically converted to Common Stock on a one for one basis when sold or transferred, and cannot receive dividends unless an equal or greater amount is declared on Common Stock. At December 31, 2005, approximately 3.2 million shares of common stock were reserved for issuance upon conversion of the Class B stock, exercise of stock options and purchases under the Employee Stock Purchase Plan.

Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and the reported amounts of revenues and expenses during the reporting periods in the financial statements and accompanying notes. Actual results could differ from those estimates.

Long-Lived Assets

     Long-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if future undiscounted cash flows and earnings from operations are not expected to be sufficient to recover long-lived assets. The carrying amounts are then reduced by the estimated shortfall of the discounted cash flows.

Financial Instruments

     The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, notes payable, long-term debt and an interest rate swap. The carrying value of the Company’s financial instruments approximate fair value. The Company does not hold or issue financial instruments for trading purposes.

Derivatives

     The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use and resulting designation. At December 31, 2005 and 2004, the Company’s use of derivative instruments is limited to a cash flow hedge of interest rate risk. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portions of all derivatives are recognized immediately into earnings as other income or expense. Ineffectiveness was not material in 2005, 2004, and 2003. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items. The Company reclassified $0.1 million from accumulated other comprehensive income to interest expense and $0.2 million during each of the years 2004 and 2003. The Company entered into an interest rate swap in February 2006, on its New York Industrial Revenue Bond which effectively fixes the rate at 3.99% on this $4.3 million obligation through January 2016.

Comprehensive Income

     Comprehensive income (loss) consists primarily of net earnings and the after-tax impact of currency translation adjustments, mark to market adjustment for derivatives and minimum pension liability adjustments. Income taxes related to derivatives and minimum pension liability adjustments within other comprehensive income are generally recorded based on an effective tax rate of approximately 36%. No income taxes are recorded for currency translation adjustments.

     The accumulated balances of the components of other comprehensive income net of tax, at December 31, 2005 and 2004 are as follows: accumulated foreign currency translation $0.8 million and $0.7 million, respectively; and accumulated mark to market adjustment for derivatives $0.0 million and $(0.1) million, respectively.

Recent Accounting Pronouncements

     On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted as of the first quarter of 2006, which is when the Company will adopt it.

     As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will impact on the results of operations, although it will have no impact on overall financial position. The impact of adoption of Statement 123(R) in 2006 is estimated to be approximately $0.4 million in additional expense after income taxes; however this will vary depending on levels of share-based payments granted in the future and variations in the factors impacting the expense calculation such as; stock price volatility, risk free interest rates, dividend yields and expected life. Had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net (loss) income and (loss) earnings per share previously in Note 1 under Stock-Based Compensation.

     In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 2005. The Company believes the adoption of this standard will not have a material impact on its results of operations or financial position.

NOTE 2 LONG-TERM DEBT AND NOTE PAYABLE

Long-term debt consists of the following:

(in thousands)		2005				2004
Note Payable at Canadian Prime payable $12 monthly through 2016 with interest (Canadian prime was 5.00% at December 31, 2005)		$	1,538			$	1,618
Industrial Revenue Bonds issued through the Erie County, New York Industrial Development Agency payable $350 annually through 2019 with interest reset weekly (3.6% at December 31, 2005)			4,345				4,695
Industrial Revenue Bonds issued through the Business Finance Authority of the State of New Hampshire payable $400 annually through 2018 with interest reset weekly (3.6% at December 31, 2005)			5,250				5,650
Other			85				99
			11,218				12,062
Less current maturities			914				908
		$	10,304			$	11,154

     Principal maturities of long-term debt for each of the next five years are $0.9 million.

     No interest costs were capitalized in 2005, 2004, and 2003.

     The Company is in compliance with all its debt and credit facility covenants at December 31, 2005 and believes it will continue to be compliant in the future.

     The Industrial Revenue Bonds are held by institutional investors and are guaranteed by a bank letter of credit, which is collateralized by certain property, plant and equipment assets, the carrying value of which approximates the principal balance on the bonds.

     The Company has a standby unsecured bank letter of credit guaranteeing the note payable in Canada, the carrying value of which approximates the principal balance on the note.

     To offset risks due to fluctuation in interest rates, the Company entered into an interest rate swap on the New York Industrial Revenue Bond through December 2005 which effectively fixed the interest rate at 4.09%. In February 2006, the Company entered into a new interest rate swap, on its New York Industrial Revenue Bond which effectively fixes the rate at 3.99% on this $4.3 million obligation through January 2016.

     In February, 2005 the Company borrowed $7.0 million on its unsecured revolving credit facility for its acquisition of Astronics AES. On March 18, 2005 the Company received an amended agreement from HSBC Bank USA to increase the revolving credit facility to $15 million. At December 31, 2005 the Company had $7.0 million outstanding on its revolving credit facility; with interest at bank prime or LIBOR plus 175 basis points. At December 31, 2005, the Company had $8 million available on the facility. It may be converted into a four-year term loan at any time. The credit facility is renewed annually.

NOTE 3 STOCK OPTION AND PURCHASE PLANS

     A summary of the Company’s stock option activity, excluding MOD-PAC employees, and related information for the years ended December 31 follows:

		2005								2004								2003
						Weighted								Weighted								Weighted
						Average								Average								Average
						Exercise								Exercise								Exercise
		Options				Price				Options				Price				Options				Price
Outstanding at the Beginning of the Year			724,080			$	5.83				538,931			$	5.88				392,703			$	6.79
Options Granted			165,100				8.10				254,100				5.30				98,700				6.60
Adjustments to Maintain Intrinsic Value as a result of MOD-PAC’ s Spin-off			—				—				—				—				105,177				(1.43	)
Options Exercised			(61,459	)			2.96				(23,490	)			1.07				(50,899	)			1.30
Options Forfeited			(26,138	)			6.76				(45,461	)			5.88				(6,750	)			8.79
Outstanding at the End of the Year			801,583				6.49				724,080				5.83				538,931				5.88
Exercisable at December 31			468,967			$	6.28				483,135			$	5.90				292,982			$	4.85

     In 2003, 433,754 options at a weighted average exercise price of $7.36 per share were adjusted to maintain their intrinsic value as a result of the MOD-PAC CORP. spin-off. The adjustment had the affect of increasing the number of options outstanding to 538,931 at a weighted average exercise price of $5.93 per share. The adjustment was determined by reference to the fair value of the Company’s common stock at the time of the Distribution; so as to equalize the intrinsic value of the stock options before and after the Distribution. Under SEC regulations, fair value for this purpose is defined as the last trade before and the first trade immediately following the Distribution.

     The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 2005:

		Outstanding												Exercisable
						Weighted Average				Weighted								Weighted
						Remaining Life				Average								Average
Exercise Price Range		Shares				in Years				Exercise Price				Shares				Exercise Price
$2.18-$4.60			77,987				1.2			$	3.49				77,987			$	3.49
$5.09- $7.65			554,639				7.5			$	5.63				310,310			$	5.61
$9.83 - $13.49			168,957				6.7			$	10.67				80,670			$	11.48
			801,583				6.7			$	6.49				468,967			$	6.28

     The Company established Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key employees, and to align management’s interest with those of the shareholders. Generally, the options must be exercised within ten years from the grant date and vest ratably over a five-year period. The exercise price for the options is equal to the fair market value at the date of grant. The Company had options outstanding for 610,834 shares under the plans. At December 31, 2005, 514,761 options were available for future grant under the plan established in 2001.

     The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with those of the shareholders. The options must be exercised within ten years from the grant date. The exercise price for the option is equal to the fair market value at the date of grant. The Company had options outstanding for 190,749 shares under the plans at December 31, 2005. At December 31, 2005, 205,602 options were available for future grant under the plans established in 1997 and 2005.

     The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

		2005				2004				2003
Risk-free interest rate			4.40	%			4.25	%			5.5	%
Dividend yield			0.0	%			0.0	%			0.0	%
Volatility factor			0.33				0.30				0.35
Expected life		8.1 years				7.0 years				7.0 years

     The weighted average fair value of options granted during 2005, 2004, and 2003 was $3.97, $2.30 and $3.16, respectively.

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

     Astronics established the Employee Stock Purchase Plan to encourage employees to invest in Astronics. The plan provides employees that have been with the company for at least a year the opportunity to invest up to 20% of their cash compensation (up to an annual maximum of $20,000) in Astronics common stock at a price equal to 85% of the fair market value of the Astronics common stock, determined each October 1. Employees are allowed to enroll annually. Employees indicate the number of shares they wish to obtain through the program and their intention to pay for the shares through payroll deductions over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annual cycle, and all money withheld from the employees pay is returned with interest. If an employee remains enrolled in the program, enough money will have been withheld from the employees’ pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2005, employees had subscribed to purchase 75,380 shares at $8.16 per share on September 30, 2006.

NOTE 4 INCOME TAXES

     Pretax losses from the Company’s foreign subsidiary amounted to $(0.5) million, $(1.0) million and $(0.2) million for 2005, 2004 and 2003 respectively. The balances of pretax earnings for each of those years were domestic.

     The provision (benefit) for income taxes for continuing operations consists of the following:

		2005
(in thousands)		(Restated)				2004				2003
Current
US Federal		$	1,817			$	(56	)		$	81
Foreign			(109	)			(399	)			(28	)
State			129				47				39
Deferred			93				(40	)			175
		$	1,930			$	(448	)		$	267

     The effective tax rates differ from the statutory federal income tax as follows:

		2005
		(Restated)				2004				2003
Statutory Federal Income Tax Rate			34.0	%			(34.0	%)			34.0	%
Permanent Items, Net			(0.9	%)			0.6	%			1.4	%
Foreign Taxes (benefits)			2.8	%			(7.1	%)			3.4	%
State Income Tax, Net of Federal Income Tax Benefit			9.4	%			0.1	%			2.5	%
Research and Development Credits			—				—				(13.0	%)
Other			1.0	%			2.5	%			(2.8	%)
			46.3	%			(37.9	%)			25.5	%

     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 as of December 31, 2005 and 2004 are as follows:

		2005
(in thousands)		(Restated)				2004
Deferred tax assets:
Deferred compensation		$	2,009			$	1,654
State investment tax credit carryforwards, net of federal benefit			325				325
Reserves and obligations related to discontinued operation			106				298
Deferred Revenue			214				—
Asset reserves and other			483				505
Deferred tax assets			3,137				2,782
Valuation allowance for deferred tax assets related to state investment tax credit carryforwards, net of federal benefit			(297	)			—
			2,840				2,782
Deferred tax liabilities:
Depreciation			1,434				1,634
Intangibles			568				—
Deferred tax liabilities			2,002				1,634
Net deferred tax asset		$	838			$	1,148

     The net deferred tax assets and liabilities are presented in the consolidated balance sheet as follows at December 31, 2005 and 2004:

		2005
(in thousands)		(Restated)				2004
Deferred tax asset – current		$	989			$	660
Deferred tax asset – long-term			—				488
			989				1,148
Deferred tax liability – long-term			151				—
Net deferred tax asset		$	838			$	1,148

     In the second quarter of 2005, the Company recorded a valuation allowance reducing the Company’s deferred tax asset relating to state investment tax credit carryforward to $0.0 million. As a result of this valuation allowance, the Company recorded a non-cash charge to income tax expense of $0.3 million net of the federal tax benefit.

NOTE 5 PROFIT SHARING/401(k) PLAN

     The Company has a qualified Profit Sharing/401(k) Plan for the benefit of its eligible full-time employees. The Profit Sharing/401(k) Plan provides for annual contributions based on percentages of pretax income. In addition, employees may contribute a portion of their salary to the 401(k) plan which is partially matched by the Company. The plan may be amended or terminated at any time. Total charges to income from continuing operations for the plan were $1.0 million, $0.5 million and $0.5 million in 2005, 2004 and 2003, respectively.

NOTE 6 SUPPLEMENTAL RETIREMENT PLAN AND RELATED POST RETIREMENT BENEFITS

     The Company has a nonqualified supplemental retirement defined benefit plan (the “Plan”) for certain current and retired executives. The Plan provides for benefits based upon average annual compensation and years of service, less offsets for Social Security and Profit Sharing benefits. It is the Company’s intent to fund the benefits as they become payable. The following table sets forth the benefit obligation and amounts recognized in the balance sheet as of December 31, 2005 and 2004 along with the net periodic cost for the years ended 2005, 2004 and 2003. The measurement date for determining the Plan obligation and cost is December 31.

(in thousands)		2005				2004
Change in Benefit Obligation
Benefit Obligation at Beginning of Year		$	5,508			$	5,396
Service Cost			25				23
Interest Cost			307				313
Actuarial Loss (Gain)			301				(113	)
Benefits Paid			(347	)			(111	)
Benefit Obligation at Year-End		$	5,794			$	5,508
Benefit Obligation at Year-End
Unfunded Benefit Obligation		$	5,794			$	5,508
Unrecognized Prior Service Costs			(1,116	)			(1,225	)
Unrecognized Actuarial Losses			(685	)			(383	)
Net Amount Recognized		$	3,993			$	3,900
Amounts Recognized in Balance Sheet
Accrued Expenses – Current		$	347			$	361
Supplemental Retirement Plan			4,403				4,490
Intangible Asset			(757	)			(951	)
Net Amount Recognized		$	3,993			$	3,900

     The assumptions used to calculate the benefit obligation as of December 31, 2005 and 2004 are as follows:

		2005				2004
Discount Rate			5.50	%			5.75	%
Future Average Compensation Increases			5.00	%			5.00	%

     The following table summarizes the components of the net periodic cost for the years ended December 31, 2005, 2004 and 2003:

(in thousands)		2005				2004				2003
Net Periodic Cost
Service Cost – Benefits Earned During Period		$	25			$	23			$	28
Interest Cost			307				313				351
Amortization of Prior Service Cost			109				109				109
Amortization of Net Actuarial Losses			—				—				32
Net Periodic Cost		$	441			$	445			$	520

     The assumptions used to determine the net periodic cost are as follows:

		2005				2004				2003
Discount Rate			5.75	%			6.00	%			6.50	%
Future Average Compensation Increases			5.00	%			5.00	%			5.00	%