LETTER TO THE SHAREHOLDERS

AUGUST, 2006

Fellow Shareholders:

     Fiscal 2006 was a challenging year for us as we began to feel the impact of negative industry dynamics, the continued erosion of the market share for our traditional products and rising material costs. Net sales declined to $181,197,000 from last year’s level of $190,314,000. Net income declined to $12,477,000 from the previous year’s level of $15,038,000. Despite these declines, we were still able to generate positive EVA of $8,200,000.

     While our results reflect the negative trends in our industry, there were also positive developments in our business. Here is a brief recap of the highlights and lowlights for the year.

     In July, we signed a successor Agreement for our Alliance with WITTE-Velbert of Germany. This successor to the original five-year Agreement signed in 2000 provides a more efficient framework for our mutual efforts, and adds flexibility for future initiatives that may be considered by the partners. One of those initiatives came to fruition later in the fiscal year with the addition of ADAC Plastics of Grand Rapids, Michigan in January as a third member to the Alliance. ADAC brings depth to the Alliance’s global capability in exterior and interior door handles, which are an important part of the Alliance’s access control product line. With this expansion, we and our partners also established a brand identity for Alliance activities, creating the name VAST Alliance, and renaming our former WITTE-STRATTEC LLC joint venture Vehicle Access Systems Technology LLC. ADAC also became a part of this LLC. We announced these developments in the Alliance through coordinated press releases and customer visits in February. Please see the Company Description portion of this report for further information about the VAST Alliance and LLC.

     In late August, Hurricane Katrina hit New Orleans and other Gulf-coast areas, triggering a dramatic and rapid rise in oil prices. Subsequent global political and production issues continued to drive oil prices up throughout our fiscal year and continue doing so as I write this letter. Rising oil prices have had a correspondingly dramatic effect on us as sales of mid-size and large SUVs and trucks produced by our principal customers have declined significantly. Production cuts followed, and are likely to continue over the next several quarters.

     In October, Delphi Corporation filed for protection under Chapter 11 bankruptcy laws, affecting $3.4 million of our accounts receivable. This was our first encounter with the bankruptcy of a major customer. Subsequently, we were able to sell our rights to these receivables to a third party for $1.8 million, resulting in a write-off for uncollectible accounts receivable of $1.6 million. We were also able to negotiate revised payment terms with Delphi, reducing our risk exposure going forward. We continue to monitor Delphi’s situation closely.

     During November and December, we began to feel the effects of rising raw material costs for zinc and brass, the primary materials used in our lock and key products. These raw material costs continued to escalate during the remainder of the fiscal year such that they nearly doubled on a year-over-year basis. Material costs continue their upward trend, and we do not anticipate a return to the stable prices we enjoyed over the past several years. As a consequence of these factors, we began a concerted effort to request pricing adjustments from our customers to offset these extraordinary increased material costs. This effort continues in the new fiscal year. As I am sure you are aware, this will be a difficult thing to accomplish with customers who are in financial distress and continue to demand year-over-year price decreases. Nevertheless, we are firm in our resolve to cover these

LETTER TO THE SHAREHOLDERS

material increases with price adjustments.

     During the last quarter, General Motors awarded the VAST Alliance partners a significant amount of business supplying their new global Epsilon vehicles, which will go into production in our fiscal 2009 and 2010. These business awards are for locksets, door handles, ignition lock housings and rear seat-back latches. STRATTEC’s direct benefit will be with the rear seat-back latches for North America. We were also anticipating producing the global requirements for ignition lock housings in North America, but our Tier 1 customer for this product has decided to produce only in China. We will therefore likely be producing this at our VAST China joint venture. Although the portion of Epsilon products STRATTEC will directly produce is a relatively small portion of the total awarded to the VAST Alliance by GM, we are very pleased with the outcome as it clearly substantiates our global strategy. Further, under the terms of the Alliance Agreement, STRATTEC will have an indirect benefit from the lockset and lock housing products produced outside North America.

     Throughout this fiscal year, we have taken steps to align our resources and implement plans to fulfill our drive to expand both our product portfolio and customer base. We are making progress, but those of you who understand the automotive market place know that the benefits of making that progress take three to four years to realize due to lead times in the industry. To speed this process along we have also been actively seeking opportunities to make an acquisition that would support our corporate strategy. These activities will continue into the new fiscal year.

     Given the current turmoil in the North American automotive industry, one could legitimately ask why we are pursuing this strategy. We ask ourselves that question on a regular basis. The answer is based on the following beliefs. We have believed for some time that the basic business models pursued by our major customers have lost their effectiveness. We believed this would lead to some sort of crisis which in turn would drive a restructuring. We are experiencing that crisis now, and it will be painful for the entire industry and overall economy. But a restructuring will occur, and the industry will be stronger when it concludes. We believe we are in a good position to weather this period of turmoil. With the transition we have been going through and continue to pursue, we intend to not only survive the restructuring, but benefit from it. We have already received opportunities to quote business currently placed with suppliers who are at risk financially. In one such case, a major customer has tentatively awarded a major latch program to us. We believe there will be other opportunities like this for us resulting from our capabilities and financial stability.

     We believe the challenges of fiscal 2006 will continue in 2007. We will not be immune to the turmoil affecting our industry. But our company’s capital structure continues to be robust. With that robustness, we are investing in our future through internal resources, and are ready to invest in an appropriate strategic acquisition. We believe the restructuring facing the domestic automotive industry will give us good opportunities to do exactly what we have targeted for our transition: Expand our product and customer bases. We believe we are in the right position to take advantage of the changes coming in the industry, and look for a positive outcome.

Sincerely,

Harold M. Stratton II
Chairman, President and Chief Executive Officer

FINANCIAL HIGHLIGHTS
(IN MILLIONS)

		2006				2005				2004
Net Sales		$	181.2			$	190.3			$	195.6
Gross Profit			37.0				42.7				47.5
Income from Operations			13.4				22.0				26.9
Net Income			12.5				15.0				17.3
Total Assets			148.6				138.1				137.2
Total Debt			—				—				—
Shareholders’ Equity			110.3				91.8				89.9

ECONOMIC VALUE ADDED (EVA^®)

     All U.S. associates and many of our Mexico-based salaried associates participate in incentive plans that are based upon our ability to add economic value to the enterprise. During 2006, $8.2 million of positive economic value was generated, a decrease of $3.0 million compared to the economic value the business generated in 2005. We continue to believe that EVA^® represents STRATTEC’s ultimate measure of success and shareholder value.

Net Operating Profit After Cash-Basis Taxes						$	12.9
Average Net Capital Employed		$	42.5
Capital Cost			11	%
							4.7
Economic Value Added						$	8.2

     EVA^® is not a traditional financial measurement under U.S. GAAP and may not be similar to EVA^® calculations used by other companies. However, STRATTEC believes the reporting of EVA^® provides investors with greater visibility of economic profit. The following is a reconciliation of the relevant GAAP financial measures to the non-GAAP measures used in the calculation of STRATTEC’s EVA^®.

Net Operating Profit After Cash-Basis Taxes:

2006 Net Income as Reported		$	12.5
Deferred Tax Provision			.3
Other			.1
Net Operating Profit After Cash-Basis Taxes		$	12.9

Average Monthly Net Capital Employed:

Total Shareholders’ Equity as Reported at July 2, 2006		$	110.3
Current Interest Bearing Assets			(69.3	)
Long-Term Liabilities			4.6
Other			(2.6	)
Net Capital Employed at July 2, 2006			43.0
Impact of 12 Month Average			(.5	)
Average Monthly Net Capital Employed		$	42.5

EVA^® is a registered trademark of Stern, Stewart & Co.

COMPANY DESCRIPTION

BASIC BUSINESS

     STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches and related access control products for North American automotive customers, and for global automotive manufacturers through the VAST Alliance in which we participate with WITTE Automotive of Velbert, Germany and ADAC Plastics, Inc. of Grand Rapids, Michigan. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe, South America and China, and we provide full service and aftermarket support.

HISTORY

     STRATTEC formerly was a division of Briggs & Stratton Corporation. In 1995, STRATTEC was spun off from Briggs & Stratton through a tax-free distribution to the then-existing Briggs & Stratton shareholders and has since been an independent public company for eleven years.

     Our history in the automotive security business spans nearly 100 years. STRATTEC has been the world’s largest producer of automotive locks and keys since the late 1920s, and we currently maintain a dominant share of the North American markets for these products.

PRODUCTS

     Our traditional products are locks and keys for cars and light trucks. A typical new car uses a set of two to three locks. A typical 3-way lockset contains a steering column/ignition lock, a driver’s door lock and a rear compartment (trunk, hatch or liftgate) lock. Pickup trucks also use two to three locks, while sport utility vehicles and vans use three to five locks. Some vehicles have additional locks for consoles, storage compartments or folding rear seats. Pick-up truck tailgate locks, spare tire locks and burglar alarm locks are offered as options. Usually, two keys are provided with each vehicle lockset. Most of the vehicles we currently supply are using keys with sophisticated radio frequency identification technology for theft prevention. However, keys with remote entry devices integrated into a single unit have been added to our product line.

     A relatively new and growing product line for us is ignition lock housings. These housings are the mating part for our ignition locks and typically are part of the steering column structure, although there are instrument panel-mounted versions for certain vehicle applications. These housings are typically zinc or magnesium die castings and can include electronic components for theft deterrent systems.

     We are also developing business for additional access control products, including trunk latches, liftgate latches, tailgate latches, hood latches, side door latches and related hardware for this product category.

MARKETS

     We are a direct supplier to OEM auto and light truck manufacturers as well as other transportation-related manufacturers. For the 2006 model year, our lock and key products

COMPANY DESCRIPTION

enjoyed a 46% market share in the North American automotive industry, supplying over 52% of General Motors’ production, 66% of Ford’s, 93% of DaimlerChrysler’s and 100% of Mitsubishi’s production. Our growing ignition lock housing business captured an estimated 24% share in 2006. Our housings and OEM components are also sold to other “Tier 1” automotive suppliers and industrial manufacturers.

     Direct sales to various OEMs represented approximately 80% of our total sales for fiscal 2006. The remainder of the company’s revenue is received primarily through sales to the OEM service channels, and the aftermarket.

     Sales to our major automotive customers, both OEM and Tier 1, are coordinated through direct sales personnel located in our Detroit-area office. Sales are also facilitated through daily interaction between our customer Program Managers and Application Engineers located in Detroit and product engineering departments. Sales to other OEM customers are accomplished through a combination of our own sales personnel and manufacturer representative agencies. STRATTEC’s products are supported by an extensive staff of experienced lock, housing and latch engineers. This staff, which includes product design, quality and manufacturing engineers, is capable of providing complete design, development and testing services of new products for our customers. This staff also is available for customer problem solving, warranty analysis, and other activities that arise during a product’s life cycle. Our customers receive after-sales support in the form of special field service kits, service manuals, and specific in-plant production repair programs.

     The majority of our OEM products are sold in North America. While a modest amount of exporting is done to automotive assembly plants in Europe and South America, we are in the process of expanding our presence in these markets and elsewhere through our Vehicle Access Systems Technology (VAST) Alliance with WITTE Automotive and ADAC Plastics, Inc., which is described in more detail on page 8.

     OEM service and replacement parts are sold to the OEM’s own service operations. In addition, we distribute our components and security products to the automotive aftermarket through approximately 50 authorized wholesale distributors, as well as other marketers and users of component parts, including export customers. Increasingly, our products find their way into the retail channel, specifically the hardware store channel. Our ability to provide a full line of keys to that channel has been accomplished through the introduction of the STRATTEC “XL” key line. This extension to our line includes keys that we currently do not supply on an OE basis, including keys for Toyota, Honda and other popular domestic and import vehicles. This extended line of keys is augmented by a variety of diagnostic programming tools. Together, the diagnostic tools and our full line of keys enable automotive repair specialists to satisfy consumer needs for repair or replacement parts. These aftermarket activities are serviced through a warehousing operation integral to our Milwaukee headquarters and manufacturing facility.

COMPANY DESCRIPTION

CUSTOMER FOCUS

     To bring the proper focus to the relationships with our major customers, we have seven customer-focused teams, each with a Director of Sales, a Product Business Manager, one or two Engineering Program Managers and Customer Application Engineers. In addition to customer teams for General Motors, Ford and DaimlerChrysler/Mitsubishi, we have teams for New Domestic Vehicle Manufacturers, Driver Control/Ignition Lock Housing customers, Tiered Products, and for Service and Aftermarket customers.

     Each Sales Director is responsible for the overall relationship between STRATTEC and a specific customer group. Engineering Program Managers report to their respective team and are responsible for coordinating engineering resources and managing new product programs for their customers.

     To serve our customers’ product needs, STRATTEC’s engineering resources are organized by product type. We have four product groups: Locks and Keys, Latches, Driver Control/Ignition Lock Housings and Electrical. Each group has an Engineering Manager and a complement of skilled engineers who design and develop products for specific applications. In doing this, each engineering group works closely with the Product Business Managers, team Engineering Program Managers, sales personnel, and application engineers.

     Underlying this organization is a formalized product development process to identify and meet customer needs in the shortest possible time. By following this streamlined development system, we shorten product lead times, tighten our response to market changes and provide our customers with the optimum value solution to their security/access control requirements. STRATTEC is also QS9000, ISO/TS 16949 and ISO 14001 certified. This means we embrace the philosophy that quality should exist not only in the finished product, but in every step of our processes as well.

OPERATIONS

     A significant number of the components that go into our products are manufactured at our main facility and headquarters in Milwaukee, Wisconsin. This facility produces zinc die cast components, stampings, and key blanks. Key finishing takes place at STRATTEC Componentes Automotrices in Juarez, Mexico, along with some limited

COMPANY DESCRIPTION

assembly activities. The majority of our assembly operations take place at STRATTEC de Mexico, also located in Juarez. Warehousing and distribution of service and aftermarket product is accomplished at the Milwaukee facility.

ADVANCED DEVELOPMENT

     Research and development activities are centered around a dedicated research engineering staff we call our Advanced Development Group. This group has the responsibility for developing future products and processes that will keep us in the forefront of the markets we serve. Projects we are pursuing focus on electronic and mechanical access control products, modularization of related access/security control components and new manufacturing processes to reduce costs for ourselves and our customers.

VAST ALLIANCE

     In fiscal 2001, we entered into a formal Alliance with WITTE-Velbert GmbH, an automotive supplier based in Germany, designing, developing, manufacturing and marketing automotive access control products for European-based customers. This Alliance consisted of two initiatives. The first was a cross licensing agreement which allowed STRATTEC to manufacture and market WITTE’s core products in North America, and WITTE to manufacture and market STRATTEC’s core products in Europe. The second initiative was a 50-50 joint venture to invest in operations with local partners in strategic markets outside of Europe and North America.

     In February of 2006, we announced the expansion of the Alliance and related joint venture with the addition of ADAC Plastics, Inc. ADAC, of Grand Rapids, Michigan adds North American expertise in door handles, a part of WITTE’s core product line that STRATTEC could not support, and an expertise in color-matched painting of these components which we believe is unique in the world.

     With the expansion of the Alliance, we now have a full range of access control related products available on a global basis to support customer programs. To identify this powerful combination of independent companies focused on working together, we renamed the joint venture Vehicle Access Systems Technology LLC, and the Alliance is now called the VAST Alliance. WITTE is now called WITTE Automotive, and ADAC is now doing business as

COMPANY DESCRIPTION

ADAC Automotive. We have adopted a common graphic image in which we share a logo mark and colors, and a specific logo for the Alliance itself to be used on the partners’ printed and electronic presentation materials (see Page 37 of this Report for an example). Our VAST LLC partners in China and Brazil are also adopting the name and image so that VAST now truly has global brand awareness.

CYCLICAL NATURE OF THE BUSINESS

     The manufacturing of components used in automobiles is driven by the normal peaks and valleys associated with the automotive industry. Typically, the months of July and August are relatively slow as summer vacation shutdowns and model year changeover occur at the automotive assembly plants. September volumes increase rapidly as the new model year begins. This volume strength continues through October and into early November. As the holiday and winter seasons approach, the demand for automobiles slows as does production. March usually brings a major sales and production increase, which then continues through most of June. This results in our first fiscal quarter (ending in September) sales and operating results typically being our weakest, with the remaining quarters being more consistent.

GLOBAL PARTNERS

1. STRATTEC – Milwaukee,Wisconsin		6. WITTE Automotive – Velbert, Germany
2. STRATTEC de Mexico – Juarez, Mexico		7. WITTE Automotive – Nejdek, Czech Republic
3. STRATTEC Componentes Automotrices – Juarez, Mexico		8. VAST do Brasil – Sao Paulo, Brazil
4. ADAC Plastics, Inc. – Grand Rapids and Muskegan, Michigan		9. VAST Fuzhou – Fuzhou, China
5. ADAC Paintbox, Limited – United Kingdom		10. VAST Great Shanghai Co. – Shanghai, China

ECONOMIC VALUE COMMITMENT

     The underlying philosophy of our business, and the means by which we measure our performance, is Economic Value Added (EVA^®). Simply stated, economic value is created when our business enterprise yields a return greater than the cost of capital we and our shareholders have invested in STRATTEC. The amount by which our return exceeds the cost of our capital is EVA^®. In line with this philosophy, EVA^® bonus plans are in effect for all our U.S. associates, outside directors and many of our Mexico-based salaried associates as an incentive to help positively drive the business.

     STRATTEC’s significant market presence is the result of a nine-decade-long commitment to creating quality products and systems that are responsive to changing needs. As technologies advance and markets grow, STRATTEC retains that commitment to meeting and exceeding the expectations of our customers, and providing economic value to our shareholders.

MANAGEMENT’S DISCUSSION AND ANALYSIS

     The following Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s Financial Statements and Notes thereto. Unless otherwise indicated, all references to years refer to fiscal years.

RESULTS OF OPERATIONS
2006 Compared to 2005

     Net sales were $181.2 million in 2006 compared to $190.3 million in 2005. The prior year included one additional shipping week, which increased sales by approximately $2.9 million. Sales to our largest customers overall declined in the current year as compared to the prior year. Sales to DaimlerChrysler Corporation increased significantly to $58.6 million in 2006 compared to $51.5 million in 2005 due to additional product content and higher production volumes. Sales to Mitsubishi Motor Manufacturing of America, Inc. were $5.4 million in 2006 compared to $4.5 million in 2005 due to higher vehicle production volumes and increased product content. Sales to Ford Motor Company were $27.3 million in 2006 compared to $32.0 million in 2005 due to pre-programmed price reductions, discontinued models and lower Ford vehicle production volumes on certain vehicles. Sales to General Motors Corporation were $32.9 million in 2006 compared to $43.2 million in 2005 due to a combination of price reductions, discontinued models and lower production volumes on certain General Motors vehicles. Sales to Delphi Corporation were $26.7 million in 2006 compared to $29.6 million in 2005 due primarily to pre-programmed price reductions, lower levels of production and lower component content.

     As discussed in our 2004 and 2005 Annual Reports, Mitsubishi informed STRATTEC of their intent to consolidate the purchase of their lockset requirements with their Japanese supplier beginning with the 2007 model year due primarily to economic pressures impacting Mitsubishi. As a result, in 2007 supply of production requirements to Mitsubishi will continue only on a limited basis. It is anticipated that our supply of parts to Mitsubishi will be fully completed by December 2006. Mitsubishi represented approximately 3 percent of STRATTEC’s fiscal 2006 sales.

     Gross profit as a percentage of net sales was 20.4 percent in 2006 compared to 22.5 percent in 2005. The lower gross margins are primarily attributed to lower production volumes, higher purchased material costs for brass and zinc and a less favorable Mexican peso to U.S. dollar exchange rate affecting our Mexican operations. The gross margin reduction resulting from these items was partially offset by a $580,000 customer reimbursement received and recorded in 2006 relating to production capacity constraint issues expensed during 2005. The 2005 gross margin was also reduced by a $217,000 lump sum bonus for our Milwaukee represented hourly workers related to the June 27, 2005 ratification of a new three-year labor contract. The average zinc price per pound increased to $1.01 in 2006 compared to $0.54 in 2005. During 2006 approximately 9.1 million pounds of zinc were used. This resulted in increased zinc costs of approximately $4.3 million in the current year over the prior year. The average brass price per pound increased to $2.81 in 2006 from $1.94 in 2005. During 2006 approximately 1.5 million pounds of brass were used. This resulted in increased brass costs of approximately $1.3 million in the current year over the prior year. The inflation rate in Mexico for the 12 months ended June 2006 was approximately 3 percent and increased operating costs by approximately $530,000 in the current year over the prior year. The U.S. dollar/Mexican peso exchange rate decreased to approximately 10.80 pesos to the dollar in 2006 from approximately 11.20 pesos to the dollar in 2005. This resulted in increased costs related to our Mexican operations of approximately $770,000 in the current year over the prior year.

     At the beginning of the current fiscal year, we adopted Statement of Financial Accounting Standards (‘SFAS’), No. 123(R), “Share Based Payments,” to recognize stock-based compensation expense in our financial statements. In accordance with SFAS No. 123(R), we used the modified prospective method of adoption, which requires compensation cost to be recognized for all stock awards issued subsequent to adoption, as well as the unvested portion of awards outstanding on the date of adoption. No cumulative effect of change in accounting principle was required under this method. Prior to 2006, we elected to follow APB Opinion No. 25 in accounting for our stock option plan. Under APB Opinion No. 25, no stock-based compensation expense was reflected in our consolidated statements of income. The adoption of SFAS No. 123(R) resulted in the recognition of $1.0 million of compensation cost related to stock options during 2006. The modified prospective method of application does not impact the financial results of our previously reported periods. We also recognized $113,000 of compensation cost related to restricted stock issued during 2006, which also would have been recognized under the provisions of APB No. 25. As of July 2, 2006, we had $737,000 of total unrecognized compensation cost related to stock options granted, which we expect to recognize over a weighted average period of .8 years. As of July 2,

MANAGEMENT’S DISCUSSION AND ANALYSIS

2006, we also had $343,000 of total unrecognized compensation cost related to restricted stock grants, which we expect to recognize over a weighted average period of 1.2 years. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. We made no modifications to outstanding share-based payment arrangements in conjunction with the adoption of SFAS No. 123(R).

     Engineering, selling and administrative expenses were $22.1 million in 2006, compared to $20.7 million in 2005. The increase over the prior year was primarily attributed to higher spending in new product development and recognizing stock-based compensation expense.

     The provision for bad debts of $1.6 million in the current year reflects a write-off of uncollectible pre-petition Chapter 11 accounts receivable due from Delphi Corporation. During the current year, approximately $3.4 million of pre-petition Chapter 11 accounts receivable due from Delphi Corporation were sold to a third party for $1.8 million.

     Income from operations decreased to $13.4 million in 2006 from $22.0 million in 2005. This decrease is primarily the result of the increase in the provision for bad debts, the decline in net sales and gross margin and the increase in operating expenses as discussed above.

     The effective income tax rate for 2006 was 26.1 percent compared to 36.0 percent in 2005. The 2006 income tax provision includes a state refund claim recovery and a favorable state income tax adjustment. The 2006 claim recovery and tax adjustment, net of the Federal income tax impact, was approximately $1.2 million. The 2006 income tax provision also includes a favorable foreign tax adjustment related to the operation of our Mexican subsidiaries of $664,000. The 2005 income tax provision included a state refund claim recovery. The 2005 claim recovery, net of the Federal income tax impact, was $162,000.

RESULTS OF OPERATIONS
2005 Compared to 2004

     Net sales were $190.3 million in 2005 compared to $195.6 million in 2004. The 2005 year included one additional shipping week, which increased sales by approximately $2.9 million. Sales to our largest customers overall declined in 2005 as compared to 2004. Sales to DaimlerChrysler Corporation increased to $51.5 million in 2005 from $42.0 million in 2004. The sales increase was primarily the result of content changes on existing products STRATTEC supplied. Sales to General Motors Corporation, Delphi Corporation, Ford Motor Company and Mitsubishi Motor Manufacturing of America, Inc. decreased in 2005 compared to 2004. Sales to General Motors decreased to $43.2 million from $52.2 million, Delphi sales decreased to $29.6 million from $30.2 million, Ford sales decreased to $32.0 million from $34.7 million and Mitsubishi sales decreased to $4.5 million from $7.0 million. The decrease in sales to these customers was primarily the result of lower customer vehicle production on vehicles STRATTEC supplied, and to a lesser degree, discontinued models and pre-programmed price decreases. As discussed in the 2004 Annual Report, Mitsubishi informed STRATTEC that due primarily to economic pressures impacting Mitsubishi they intend to consolidate the purchase of their lockset requirements with their Japanese supplier for the 2007 model year. This will effectively end our supply of production requirements to Mitsubishi by the start of our 2007 fiscal year. Mitsubishi represented approximately 2.4 percent of STRATTEC’s fiscal 2005 sales. Sales to Auto Alliance International, Ford Motor Company’s joint venture assembly plant with Mazda, were $2.2 million in 2005 and represented new lockset content related to the Ford Mustang. Decreased aftermarket sales of approximately $2.2 million also contributed to the overall reduction in sales.

     Gross profit as a percentage of net sales was 22.5 percent in 2005 compared to 24.3 percent in 2004. The lower gross margin in 2005 was primarily the result of lower production volumes, which resulted from lower customer vehicle production on vehicles STRATTEC supplied as discussed above, changes in customer product content with lower margins and higher purchased material costs for brass, zinc and magnesium. A lump sum bonus of approximately $217,000 paid to our Milwaukee represented hourly workers resulting from a new three year labor contract ratified June 27, 2005 and $580,000 of premium freight and overtime charges related to capacity issues with two customer directed component suppliers also reduced the 2005 margin. The average per pound price of brass increased to $1.94 in 2005 from $1.63 in 2004. The average per pound price of zinc increased to $.54 in 2005 from $.46 in 2004. We used an average of approximately 170,000 pounds per month of brass and approximately 770,000 pounds per month of zinc. Increased magnesium costs resulted in increased purchased component costs of approximately $420,000 in 2005.

     STRATTEC is required under SFAS No. 123(R) to recognize stock-based compensation expense in its financial statements beginning in fiscal 2006. The adoption of SFAS No. 123(R)’s fair value method will have an impact on our results of operations, although it will not have an impact on the overall financial position. The impact of the adoption of

MANAGEMENT’S DISCUSSION AND ANALYSIS

SFAS No. 123(R) will depend on levels of share-based payments granted in the future and is expected to reduce pre-tax earnings by approximately $1.1 million in fiscal 2006.

     Engineering, selling and administrative expenses were $20.7 million in 2005, compared to $20.6 million in 2004. Increases in payroll related costs resulting from the August 2004 human resources realignment, which shifted resources to the engineering and sales areas to support new product development and aftermarket sales, were mostly offset by reduced costs for bonuses to be paid to eligible associates.

     Income from operations was $22.0 million in 2005, compared to $26.9 million in 2004, reflecting the decreased sales and profitability as discussed above.

     The effective income tax rate was 36.0 percent in 2005 compared to 37.5 percent in 2004. The 2005 income tax provision includes a state refund claim recovery. This claim recovery, net of the Federal income tax impact, was $162,000. The overall effective tax rate differs from the Federal statutory tax rate primarily due to the effects of state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow generated from operating activities was $19.3 million in 2006 compared to $15.8 million in 2005. Cash flow generated from operating activities was impacted by pension contributions, tax payments and recoveries, bonus payments made to all eligible associates and the timing of scheduled payments received from two major customers. We made pension contributions to our qualified plan of $6.0 million in 2006 compared to $8.0 million in 2005. Tax payments, net of recoveries and adjustments received, totaled $3.1 million in 2006 compared to $6.4 million in 2005. Bonus payments to eligible associates, which are based on financial results, totaled $2.0 million in 2006 and $5.1 million in 2005. The bonus payments made in 2006 were based on 2005 financial results. The bonus payments made in 2005 were based on 2004 financial results. The normally scheduled July 2005 payments from two major customers totaling approximately $4.8 million were received prior to the end of our 2005 fiscal year increasing 2005 cash balances. The normally scheduled July 2006 payments were not received prior to the end of our 2006 fiscal year. In addition, during 2006, we wrote-off $1.6 million of uncollectible pre-petition Chapter 11 accounts receivable due from Delphi Corporation. Payment terms with Delphi Corporation have been accelerated for all shipments subsequent to the bankruptcy filing.

     Our LIFO inventory balance decreased $2.3 million in 2006 and increased $3.3 million in 2005. The increased inventory at July 3, 2005 was primarily due to the build-up of inventory banks in preparation of a potential strike by our unionized associates at the Milwaukee facility. The contract with the unionized associates expired June 26, 2005. A new contract was ratified and is effective through June 29, 2008.

     At July 2, 2006, the pension obligations are reflected as a prepaid balance due to the removal of the additional minimum pension liability related to the qualified plan. The $6.0 million pension contribution made to the qualified plan during 2006 is included in the increase in other assets in the consolidated statement of cash flows. The $8.0 million contribution to the qualified plan during 2005 is included in the decrease in accounts payable and accrued liabilities in the consolidated statement of cash flows. The reduction in the accrued payroll and benefits balance from July 3, 2005 to July 2, 2006 is primarily due to a reduction in the bonus accrual, which is based on financial results and paid to all eligible associates.

     Capital expenditures were $5.8 million in 2006 compared to $5.5 million in 2005. Expenditures were primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment. We anticipate that capital expenditures will be approximately $6 million in fiscal 2007, primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment.

     Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized under the program totaled 3,639,395 at July 2, 2006. Over the life of the repurchase program through July 2, 2006, a total of 3,258,487 shares have been repurchased at a cost of approximately $122.0 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations.

     We have a $50.0 million unsecured line of credit (the “Line of Credit”), which expires October 31, 2006. There were no outstanding borrowings under the Line of Credit at July 2, 2006 or at July 3, 2005. Interest on borrowings under the Line of Credit are at varying rates based on the London Interbank Offering Rate or the bank’s prime rate. We believe the Line of Credit is adequate, along with cash flow from operations, to meet our anticipated capital expenditure, working capital and operating expenditure requirements.

     We have not been significantly impacted by inflationary pressures over the last several years, except for rising health care costs which have increased our cost of employee medical coverage, fluctuations in the market price of zinc, brass, aluminum and magnesium, and inflation in Mexico, which impacts the U.S. dollar costs of our Mexican operations. We do not hedge against our Mexican peso exposure.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONTRACTUAL OBLIGATIONS

Contractual obligations are as follows as of July 2, 2006 (thousands of dollars):

		Payments Due By Period
						Less Than												More Than
Contractual Obligation		Total				1 Year				1-3 Years				3-5 Years				5 Years
Operating Leases		$	1,397			$	591			$	779			$	27			$	—
Purchase Obligations			575				575				—				—				—
Pension and Postretirement Obligations (a)			4,084				4,084				—				—				—
Total		$	6,056			$	5,250			$	779			$	27			$	—

JOINT VENTURES

     On November 28, 2000, we signed certain Alliance Agreements with E. WITTE Verwaltungsgesellschaft GmbH, and its operating unit, WITTE-Velbert GmbH & Co. KG (“WITTE”). WITTE, of Velbert, Germany, is a privately held, automotive supplier. WITTE designs, manufactures and markets components including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE’s primary market for these products has been Europe. The WITTE-STRATTEC Alliance provided a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC in North America, and the manufacture, distribution and sale of our products by WITTE in Europe. Additionally, a joint venture company (“WITTE-STRATTEC LLC”) — in which each company originally held a 50 percent interest — was established to seek opportunities to manufacture and sell both companies’ products in areas of the world outside of North America and Europe. The November 28, 2000 Alliance Agreements were replaced with new agreements as of July 12, 2005 which extended the term of the original agreements, and included certain modifications to their provisions.

     In November 2001, WITTE-STRATTEC do Brasil, a joint venture formed between WITTE-STRATTEC LLC and Ifer Estamparia e Ferramentaria Ltda. was formed to service customers in South America. On March 1, 2002, WITTE-STRATTEC China was formed and in April 2004, WITTE-STRATTEC Great Shanghai Co. was formed. WITTE-STRATTEC China and WITTE-STRATTEC Great Shanghai Co. are joint ventures between WITTE-STRATTEC LLC and a unit of Elitech Technology Co. Ltd. of Taiwan and are the base of operations to service our automotive customers in the Asian market.

     Effective January 1, 2006, agreements were signed among WITTE, STRATTEC and ADAC Plastics, Inc. (“ADAC”) making ADAC a member of the various Alliance agreements described above and of WITTE-STRATTEC LLC. ADAC manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes. Moreover, the name of WITTE-STRATTEC LLC was subsequently changed to Vehicle Access Systems Technology LLC (“VAST LLC”). WITTE and STRATTEC each hold a 40 percent interest and ADAC holds a 20 percent interest in VAST LLC.

     The investments are accounted for using the equity method of accounting. The activities related to the joint ventures resulted in a gain of approximately $188,000 in 2006 and a loss of approximately $70,000 in 2005. A capital contribution of $569,000 was made in 2006 in support of general operating expenses and the anticipated purchase of an additional 16 percent of VAST Fuzhou (formerly WITTE-STRATTEC China) and VAST Great Shanghai (formerly WITTE-STRATTEC Great Shanghai) by VAST LLC. A capital contribution of $125,000 was made to the joint ventures in 2005 primarily in support of general operating expenses.

CRITICAL ACCOUNTING POLICIES

We believe the following represents our critical accounting policies:

     Pension and Postretirement Health Benefits – We account for our defined benefit pension and postretirement health benefits in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106 “Employer’s Accounting for Postretirement Benefits Other than Pensions,” which require that the amounts recognized in the financial

MANAGEMENT’S DISCUSSION AND ANALYSIS

statements be determined on an actuarial basis. The determination of the obligation and expense for pension and postretirement health benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the Notes to Financial Statements and include, among others, the discount rate, expected long-term rate of return on plan assets, retirement age and rates of increase in compensation and health care costs. In accordance with SFAS No. 87 and SFAS No. 106, actual results that differ from these assumptions are deferred and, under certain circumstances, amortized over future periods. Refer to Notes to Financial Statements for the impact of the pension and postretirement plans on the financial statements.

     We determine the discount rate used to measure plan liabilities as of the June 30 measurement date. The assumed discount rate reflects the prevailing market rates of a large population of high-quality, non-callable, corporate bonds currently available that, if the obligation was settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. Using this methodology, we determined a discount rate of 6.62 percent to be appropriate as of June 30, 2006, which is an increase of 1.19 percentage points from the rate used at June 30, 2005.

     As of June 30, 2005, we converted to the RP (Retirement Plans) 2000 Mortality Table for calculating the year end 2005 pension and postretirement obligations and 2006 expense. The impact of this change increased the year-end 2005 projected pension benefit obligations by $1.3 million, the year-end 2005 accumulated pension benefit obligations by $943,000 and the year-end 2005 accumulated postretirement obligation by $112,000. This change also increased the 2006 pension expense by $250,000 and postretirement expense by $17,000.

     A significant element in determining the pension expense in accordance with SFAS No. 87 is the expected return on plan assets. Our assumption for the expected return on plan assets is based on historical results for similar allocations among asset classes and was 8.5 percent for 2006 and will remain at 8.5 percent for 2007. Refer to Notes to Financial Statements for additional information on how this rate was determined.

     The difference between the expected return and actual return on plan assets is deferred and, under certain circumstances, amortized over future years of service. Therefore, the deferral of past asset gains and losses ultimately affects future pension expense. This is also the case with changes to actuarial assumptions. As of June 30, 2006, we had net unrecognized pension actuarial losses of $12.1 million and unrecognized postretirement actuarial losses of $10.9 million. These amounts represent potential future pension and postretirement expenses that would be amortized over average future service periods. The average remaining service period is 12 years for the pension plans and 15 years for the postretirement plan.

     A significant element in determining the postretirement health expense in accordance with SFAS No. 106 is the health care cost trend rates. We develop these rates based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Changes in the health care cost trend rate assumption will have a significant effect on the postretirement benefit amounts reported. Refer to Notes to Financial Statements for an analysis of the impact of a one percent change in the trend rate.

     While we believe that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect our pension and postretirement health obligations and future expense.

     Other Reserves – We have reserves such as an environmental reserve, an incurred but not reported claim reserve for self-insured health plans, a workers’ compensation reserve, an allowance for doubtful accounts related to trade accounts receivable and a repair and maintenance supply parts reserve. These reserves require the use of estimates and judgment with regard to risk exposure, ultimate liability and net realizable value. We believe such reserves are estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserves.

     Stock Based Compensation – We account for stock-based compensation in accordance with SFAS No. 123(R), “Share Based Payments.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating future volatility of our stock, the amount of share-based awards that are expected to be forfeited and the expected term of awards granted. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the vesting periods. The expected term of awards granted represents the period of time they are expected to be outstanding. We determine the expected term based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. We estimate the expected volatility of our common stock at the date of grant based on the historical volatility of our common stock.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The volatility factor we use in the Black-Scholes option valuation model is based on our historical stock prices over the most recent period commensurate with the estimated expected term of the award. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

RISK FACTORS

     We understand we are subject to the following risk factors based on our operations and the nature of the automotive industry in which we operate:

     Loss of Significant Customers, Vehicle Content, Vehicle Models and Market Share – Sales to General Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation and Delphi Corporation represent approximately 80 percent of our annual sales. The contracts with these customers provide for supplying the customer’s requirements for a particular model. The contracts do not specify a specific quantity of parts. The contracts typically cover the life of a model, which averages approximately four to five years. Components for certain customer models may also be market tested annually. Therefore, the loss of any one of these customers, the loss of a contract for a specific vehicle model, reduction in vehicle content, early cancellation of a specific vehicle model, technological changes or a significant reduction in demand for certain key models could have a material adverse effect on our existing and future revenues and net income.

     Our major customers also have significant underfunded legacy liabilities related to pension and postretirement health care obligations. The future impact of these items along with a continuing loss in their North American automotive market share to the “New Domestic” automotive manufacturers (primarily the Japanese automotive manufacturers) may have a significant impact on our future sales and collectibility risks. For example, on October 8, 2005, Delphi Corporation filed for Chapter 11 bankruptcy protection. As a result, we wrote-off $1.6 million of uncollectible pre-petition Chapter 11 accounts receivable due from Delphi Corporation. This directly reduced our pre-tax net income during fiscal 2006.

     Cost Reduction – There is continuing pressure from our major customers to reduce the prices we charge for our products. This requires us to generate cost reductions, including reductions in the cost of components purchased from outside suppliers. If we are unable to generate sufficient production cost savings in the future to offset pre-programmed price reductions, our gross margin and profitability will be adversely affected.

     Cyclicality and Seasonality in the Automotive Market – The automotive market is highly cyclical and is dependent on consumer spending and to a certain extent on customer sales incentives. Economic factors adversely affecting consumer demand for automobiles and automotive production could adversely impact our revenues and net income. We typically experience decreased revenue and operating income during the first fiscal quarter of each year due to the impact of scheduled customer plant shut-downs in July and new model changeovers.

     Foreign Operations – As discussed under Joint Ventures, we have joint venture investments in both Brazil and China. These operations are currently not material. However, as these operations expand, their success will depend, in part, on our and our partners’ ability to anticipate and effectively manage certain risks inherent in international operations including: enforcing agreements and collecting receivables through certain foreign legal systems, payment cycles of foreign customers, compliance with foreign tax laws, general economic and political conditions in these countries and compliance with foreign laws and regulations.

     Currency Exchange Rate Fluctuations – We incur a portion of our expenses in Mexican pesos. Exchange rate fluctuations between the U.S. dollar and the Mexican peso could have an adverse effect on our financial results.

     Sources of and Fluctuations in Market Prices of Raw Materials – Our primary raw materials are high-grade zinc, brass, magnesium, aluminum, steel and plastic resins. These materials are generally available from a number of suppliers, but we have chosen to concentrate our sourcing with one primary vendor for each commodity or purchased component. We believe our sources of raw materials are reliable and adequate for our needs. However, the development of future sourcing issues related to the availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse affect on our financial results if the increased raw material costs can’t be recovered from our customers.

     Disruptions Due to Work Stoppages and Other Labor Matters – Our major customers and many of their suppliers have unionized work forces. Work stoppages or slow-downs experienced by our customers or their suppliers could result in slow-downs or

MANAGEMENT’S DISCUSSION AND ANALYSIS

closures of assembly plants where our products are included in assembled vehicles. For example, strikes by the United Auto Workers led to a shut-down of most of General Motors Corporation’s North American assembly plants in June and July of 1998. A material work stoppage experienced by one or more of our customers could have an adverse effect on our business and our financial results. In addition, all production associates at our Milwaukee facility are unionized. A sixteen-day strike by these associates in June 2001 resulted in increased costs as all salaried associates worked with additional outside resources to produce the components necessary to meet customer requirements. The current contract with the unionized associates is effective through June 29, 2008. We may encounter further labor disruption after the expiration date of this contract and may also encounter unionization efforts in our other plants or other types of labor conflicts, any of which could have an adverse effect on our business and our financial results.

     Environmental and Safety Regulations – We are subject to federal, state, local and foreign laws and other legal requirements related to the generation, storage, transport, treatment and disposal of materials as a result of our manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). We have an environmental management system that is ISO-14001 certified. We believe that our existing environmental management system is adequate and we have no current plans for substantial capital expenditures in the environmental area. An environmental reserve was established in 1995 for estimated costs to remediate a site at our Milwaukee facility. The site was contaminated by a former above-ground solvent storage tank, located on the east side of the facility. The contamination occurred in 1985. This is being monitored in accordance with federal, state and local requirements. We do not currently anticipate any material adverse impact on our results of operations, financial condition or competitive position as a result of compliance with federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and changes associated with maintaining compliance with environmental laws is inherent in the nature of our business and there is no assurance that material liabilities or changes could not arise.

     Highly Competitive Automotive Supply Industry – The automotive component supply industry is highly competitive. Some of our competitors are companies, or divisions or subsidiaries of companies, that are larger than STRATTEC and have greater financial and technology capabilities. Our products may not be able to compete successfully with the products of these other companies, which could result in loss of customers and, as a result, decreased revenues and profitability. Some of our major customers have also announced that they will be reducing their supply base. This could potentially result in the loss of these customers and consolidation within the supply base. The loss of any of our major customers could have a material adverse effect on our existing and future revenues and net income.

     In addition, our competitive position in the North American automotive component supply industry could be adversely affected in the event that we are unsuccessful in making strategic acquisitions, alliances or establishing joint ventures that would enable us to expand globally. We principally compete for new business at the beginning of the development of new models and upon the redesign of existing models by our major customers. New model development generally begins two to five years prior to the marketing of such new models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results. In addition, as a result of relatively long lead times for many of our components, it may be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the sale of existing products. Finally, we may incur significant product development expense in preparing to meet anticipated customer requirements which may not be recovered.

     Program Volume and Pricing Fluctuations – We incur costs and make capital expenditures for new program awards based upon certain estimates of production volumes over the anticipated program life for certain vehicles. While we attempt to establish the price of our products for variances in production volumes, if the actual production of certain vehicle models is significantly less than planned, our revenues and net income may be adversely affected. We cannot predict our customers’ demands for the products we supply either in the aggregate or for particular reporting periods.

     Investments in Customer Program Specific Assets – We make investments in machinery and equipment used exclusively to manufacture products for specific customer programs. This machinery and equipment is capitalized and depreciated over the expected useful life of each respective asset. Therefore, the loss of any one of our major customers, the loss of specific vehicle models or the early cancellation of a vehicle model could result in impairment in the value of these assets and may have a material adverse effect on our financial results.

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		Years Ended
		July 2, 2006				July 3, 2005				June 27, 2004
NET SALES		$	181,197			$	190,314			$	195,646
Cost of goods sold			144,151				147,538				148,133
GROSS PROFIT			37,046				42,776				47,513
Engineering, selling, and administrative expenses			22,067				20,688				20,624
Provision for doubtful accounts, net			1,622				80				26
INCOME FROM OPERATIONS			13,357				22,008				26,863
Interest income			2,563				1,169				426
Interest expense			—				—				—
Other income, net			960				320				362
INCOME BEFORE PROVISION FOR INCOME TAXES			16,880				23,497				27,651
Provision for income taxes			4,403				8,459				10,369
NET INCOME		$	12,477			$	15,038			$	17,282
EARNINGS PER SHARE:
BASIC		$	3.36			$	3.97			$	4.56
DILUTED		$	3.35			$	3.94			$	4.49
AVERAGE SHARES OUTSTANDING:
BASIC			3,716				3,790				3,788
DILUTED			3,720				3,816				3,849

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

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)

		July 2, 2006				July 3, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	65,712			$	56,950
Receivables, less allowance for doubtful accounts of $250 at July 2, 2006 and July 3, 2005			25,357				26,053
Inventories			9,337				11,654
Customer tooling in progress			1,422				1,295
Deferred income taxes			1,541				1,594
Income taxes refundable			—				214
Other current assets			7,505				6,927
Total current assets			110,874				104,687
DEFERRED INCOME TAXES			—				1,796
INVESTMENT IN JOINT VENTURES			2,202				1,412
PREPAID PENSION OBLIGATIONS			7,602				—
OTHER LONG-TERM ASSETS			197				603
PROPERTY, PLANT, AND EQUIPMENT, NET			27,764				29,592
		$	148,639			$	138,090
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	17,701			$	17,218
Accrued liabilities:
Payroll and benefits			5,475				7,679
Environmental			2,683				2,701
Commitments and Contingencies–see note
Income taxes			1,340				—
Other			2,327				2,470
Total current liabilities			29,526				30,068
BORROWINGS UNDER LINE OF CREDIT			—				—
DEFERRED INCOME TAXES			4,266				—
ACCRUED PENSION OBLIGATIONS			—				11,191
ACCRUED POSTRETIREMENT OBLIGATIONS			4,572				5,080
SHAREHOLDERS’ EQUITY:
Common stock, authorized 12,000,000 shares $.01 par value, issued 6,880,457 shares at July 2, 2006 and 6,856,237 shares at July 3, 2005			69				69
Capital in excess of par value			77,175				74,924
Retained earnings			157,745				145,268
Accumulated other comprehensive loss			(2,958	)			(12,047	)
Less: Treasury stock at cost (3,243,177 shares at July 2, 2006 and 3,113,004 shares at July 3, 2005)			(121,756	)			(116,463	)
Total shareholders’ equity			110,275				91,751
		$	148,639			$	138,090

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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (IN THOUSANDS)

														Accumulated
						Capital in								Other
		Common				Excess of				Retained				Comprehensive				Treasury				Comprehensive
		Stock				Par Value				Earnings				Loss				Stock				Income
BALANCE JUNE 29, 2003		$	66			$	63,830			$	112,948			$	(6,891	)		$	(100,858	)
Net Income			—				—				17,282				—				—			$	17,282
Translation adjustments			—				—				—				(270	)			—				(270	)
Minimum pension liability, net of tax of $1,088			—				—				—				1,776				—				1,776
Comprehensive income																						$	18,788
Purchase of common stock			—				—				—				—				(4,633	)
Exercise of stock options and employee stock purchases, including tax benefit of $1,368			2				6,585				—				—				15
BALANCE JUNE 27, 2004			68				70,415				130,230				(5,385	)			(105,476	)
Net Income			—				—				15,038				—				—			$	15,038
Translation adjustments			—				—				—				283				—				283
Minimum pension liability, net of tax of $4,257			—				—				—				(6,945	)			—				(6,945	)
Comprehensive income																						$	8,376
Purchase of common stock			—				—				—				—				(10,999	)
Exercise of stock options and employee stock purchases, including tax benefit of $956			1				4,509				—				—				12
BALANCE JULY 3, 2005			69				74,924				145,268				(12,047	)			(116,463	)
Net Income			—				—				12,477				—				—			$	12,477
Translation adjustments			—				—				—				(317	)			—				(317	)
Minimum pension liability, net of tax of $5,765			—				—				—				9,406				—				9,406
Comprehensive income																						$	21,566
Purchase of common stock			—				—				—				—				(5,306	)
Stock-Based Compensation			—				1,118				—				—				—
Exercise of stock options and employee stock purchases, including tax benefit of $61			—				1,133				—				—				13
BALANCE JULY 2, 2006		$	69			$	77,175			$	157,745			$	(2,958	)		$	(121,756	)

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

		Years Ended
		July 2, 2006				July 3, 2005				June 27, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	12,477			$	15,038			$	17,282
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			7,155				7,225				7,704
Loss on disposition of property, plant and equipment			320				190				116
Deferred income taxes			350				2,282				1,393
Tax benefit from options exercised			61				956				1,368
Stock-based compensation expense			1,118				—				—
Provision for doubtful accounts			1,622				80				26
Change in operating assets and liabilities:
Receivables			(973	)			4,863				96
Inventories			2,317				(3,293	)			(477	)
Other assets			(3,803	)			748				1,047
Accounts payable and accrued liabilities			(863	)			(12,621	)			954
Other, net			(485	)			285				(144	)
Net cash provided by operating activities			19,296				15,753				29,365
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint ventures			(569	)			(125	)			(125	)
Additions to property, plant, and equipment			(5,766	)			(5,498	)			(5,523	)
Proceeds received on sale of property, plant, and equipment			22				22				12
Net cash used in investing activities			(6,313	)			(5,601	)			(5,636	)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock			(5,306	)			(10,999	)			(4,633	)
Exercise of stock options			1,085				3,566				5,233
Net cash (used in) provided by financing activities			(4,221	)			(7,433	)			600
NET INCREASE IN CASH AND CASH EQUIVALENTS			8,762				2,719				24,329
CASH AND CASH EQUIVALENTS
Beginning of year			56,950				54,231				29,902
End of year		$	65,712			$	56,950			$	54,231
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid		$	3,120			$	6,446			$	5,950
Interest paid			—				—				—

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

NOTES TO FINANCIAL STATEMENTS

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     STRATTEC SECURITY CORPORATION designs, develops, manufacturers and markets mechanical locks and keys, electronically enhanced locks and keys, steering column and instrument panel ignition lock housings, latches and related access control products for North American automotive customers, and for global automotive manufacturers through the VAST Alliance in which we participate with WITTE Automotive of Velbert, Germany and ADAC Plastics, Inc. of Grand Rapids, Michigan. STRATTEC’s history in the automotive business spans nearly 100 years.

     The accompanying consolidated financial statements reflect the consolidated results of STRATTEC SECURITY CORPORATION, located in Milwaukee, Wisconsin, and its wholly owned Mexican subsidiaries, STRATTEC de Mexico and STRATTEC Componentes Automotrices, both located in Juarez, Mexico. STRATTEC has only one reporting segment.

     The significant accounting policies followed in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

     Principles of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of STRATTEC SECURITY CORPORATION and its wholly owned Mexican subsidiaries. Equity investments for which we exercise significant influence but do not control and are not the primary beneficiary are accounted for using the equity method. All intercompany transactions and balances have been eliminated.

     Reclassifications: Certain reclassifications have been made to the 2004 and 2005 financial statements to conform to the 2006 presentation.

     Fiscal Year: Our fiscal year ends on the Sunday nearest June 30. The years ended July 2, 2006, July 3, 2005, and June 27, 2004 are comprised of 52, 53 and 52 weeks, respectively.

     Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the periods presented. These estimates and assumptions could also affect the disclosure of contingencies. Actual results and outcomes may differ from management’s estimates and assumptions.

     Cash and Cash Equivalents: Cash and cash equivalents include all short-term investments with an original maturity of three months or less due to the short-term nature of the instruments. Excess cash balances are placed in a money market account at a high quality financial institution and in short-term commercial paper.

     Fair Value of Financial Instruments: The fair value of our cash and cash equivalents, accounts receivable and accounts payable approximated book value as of July 2, 2006 and July 3, 2005.

     Receivables: Receivables consist primarily of trade receivables due from Original Equipment Manufacturers in the automotive industry and locksmith distributors relating to our service and aftermarket business. We evaluate the collectibility of receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, general economic conditions and the industry as a whole. In connection with the filing for Chapter 11 bankruptcy protection by Delphi Corporation on October 8, 2005, $3.4 million of pre-petition Chapter 11 accounts receivable was sold to a third party for $1.78 million. This resulted in a write-off of $1.62 million of accounts receivable during fiscal 2006. Changes in the allowance for doubtful accounts are as follows (thousands of dollars):

		Balance,				Provision								Balance,
		Beginning				Charged to				Accounts				End of
		of Year				Expense				Written Off				Year
Year ended July 2, 2006		$	250			$	1,622			$	1,622			$	250
Year ended July 3, 2005		$	250			$	80			$	80			$	250
Year ended June 27, 2004		$	250			$	26			$	26			$	250

     Inventories: Inventories are comprised of material, direct labor and manufacturing overhead, and stated at the lower of cost or market. The last-in, first-out (LIFO) method is used for determining the cost of the inventories at the end of each period. Inventories consist of the following (thousands of dollars):

		July 2, 2006				July 3, 2005
Finished products		$	2,937			$	3,691
Work in process			5,401				5,171
Purchased materials			5,802				6,287
LIFO reserve			(4,803	)			(3,495	)
		$	9,337			$	11,654