LETTER TO THE SHAREHOLDERS

AUGUST, 2007

Fellow Shareholders:

     Fiscal 2007 continued the challenges affecting the last half of fiscal 2006. Operationally, we faced the two-part challenge of significantly declining volume from our four largest customers and dramatically escalating raw material costs. Our operations team did an admirable job of adjusting our production base to the lower volumes while continuing our ongoing cost reduction programs. The most dramatic action taken in this regard was the movement of service assembly and packaging from our Milwaukee facility to our assembly facility in Juarez, Mexico which we estimate is saving us approximately $1.5 million per year.

     At the same time, our sales team focused a considerable amount of their attention on negotiating pricing adjustments with our customers to mitigate the effect of our escalating raw material costs. These negotiations were in most cases difficult and time consuming, but we estimate that we have recovered about 50% of the cost increases through these activities, the majority of that coming into effect in the second half of the year. This effort is being continued as we move into fiscal 2008.

     Fiscal 2007 net sales were $167.7 million. As a result of the sales and production decline, and the timing of our partial material cost increase recovery, net income declined to $8.2 million from the previous year’s $12.5 million. While this result is disappointing, I am proud that our team was able to respond to the negative industry dynamics and sustain at least modest profitability in each quarter of the fiscal year. Further, the actions we took during the year helped move us to a stronger second half and allowed us to generate a slight amount of positive EVA.

     Dealing with the negative industry dynamics was our primary focus during the year, and although we had some success in mitigating those negative dynamics, it came at the expense of some of our strategic initiatives. I therefore cannot report significant progress in either closing on a viable acquisition in support of our strategic goals, or securing future business from new domestic customers. Although our progress on these important initiatives was slowed, they remain high priority objectives.

     Other initiatives showed better progress. Based on a contract from one of our major customers for a tailgate latch program, our capital expenditures this year included a large new stamping press and equipment for an expansion of our plating capability at our Milwaukee facility. We expect this program to enhance our presence in the latch marketplace, in line with our strategic intent to both expand our product offerings and support our VAST Alliance partners.

     In October 2006 we began a joint venture with ADAC Automotive to produce door handles and related assemblies in Mexico. ADAC is the newest member of the VAST Alliance. (See the VAST Alliance portion of the “Company Description” section of this report.) However, this new joint venture, ADAC-STRATTEC de MEXICO (ASdM), is not directly related to the Alliance. STRATTEC owns 50.1% of ASdM, and we have initially set up operations in a

LETTER TO THE SHAREHOLDERS

dedicated portion of the STRATTEC Componentes Automotrices facility in Juarez. This year, the financial impact of this start up is a net loss of $75,000. However, we expect several product programs coming on stream in the months ahead will enhance our sales and revenue in fiscal 2008.

     In last year’s letter to shareholders, I indicated that our reputation and strong balance sheet put us in a good position to weather the current turmoil in the auto industry. Further, it might give us opportunities to capture business from suppliers less able to weather the turmoil. The tailgate program I mentioned in this letter is an example of that situation. I am pleased to report that it has also allowed us to regain some lockset business previously awarded to a foreign-based competitor. This “take-over” business began shipping late in our fourth quarter, and we expect the trend to escalate during fiscal year 2008. We are enthusiastic about taking over this business as it should have a near-term positive impact on our financial performance, while strengthening the base upon which we will continue to pursue our strategic initiatives.

     The industry restructuring I wrote about in last year’s letter is still going on as I write this and will likely continue for at least a year or two. Despite the continued turbulence, we believe there are signs of progress, both for your company and the industry it serves. We are therefore optimistic that we will experience improved results in the new fiscal year.

     With the positive signs and our continued strong balance sheet, your management recommended to the Company’s Board of Directors at our August meeting that we establish a regular quarterly dividend. The Board agreed with management’s belief that a regular dividend can be established without adversely impacting the retention of cash reserves or debt capacity that can be utilized for strategic initiatives. The Board therefore declared a regular quarterly dividend of $0.15 per share. Further, given the magnitude of our cash reserves and the current relatively favorable tax treatment of qualified dividends, the Board believes this is an opportune time to declare a special, one-time dividend of $1.00 per share. Both our initial quarterly dividend and the special dividend are payable on October 1st, 2007 to shareholders of record as of September 14, 2007. Henceforth, we anticipate that the $0.15 quarterly dividend will be paid on or about January 2nd, April 1st, July 1st and October 1st of each year, subject to the approval of the Board of Directors, who will also set the appropriate record date each quarter.

     The establishment of this regular dividend is another milestone in the development of our business that has progressed since we began as an independent Company twelve-and-a-half years ago. We are very pleased that we can share the value we create in this tangible way. My fellow STRATTEC associates and I thank you for your support of our business as we continue to move ahead.

Sincerely,

Harold M. Stratton II

Chairman, President and Chief Executive Officer

FINANCIAL HIGHLIGHTS

(IN MILLIONS)

		2007				2006				2005
Net Sales		$	167.7			$	181.2			$	190.3
Gross Profit			26.5				37.0				42.8
Income from Operations			6.3				13.4				22.0
Net Income			8.2				12.5				15.0
Total Assets			148.4				154.3				138.1
Total Debt			—				—				—
Shareholders’ Equity			103.0				110.3				91.8

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 2007, $1.3 million of positive economic value was generated, a decrease of $6.9 million compared to the economic value the business generated in 2006. We continue to believe that EVA^® represents STRATTEC’s ultimate measure of success and shareholder value.

Net Operating Profit After Cash-Basis Taxes						$	5.5
Average Net Capital Employed		$	38.5
Capital Cost			11	%
							4.2
Economic Value Added						$	1.3

     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:

2007 Net Income as Reported		$	8.2
Investment Income			(3.1	)
Deferred Tax Provision			(.4	)
Other			.8
Net Operating Profit After Cash-Basis Taxes		$	5.5

Average Monthly Net Capital Employed:

Total Shareholders’ Equity as Reported at July 1, 2007		$	103.0
Current Interest Bearing Assets			(69.6	)
Long-Term Liabilities			13.4
Prepaid Pension Obligations			(4.4	)
Long-Term Deferred Tax Asset			(2.1	)
Other			.5
Net Capital Employed at July 1, 2007		$	40.8
Impact of 12 Month Average			(2.3	)
Average Monthly Net Capital Employed		$	38.5

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, door handles 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 (which does business as ADAC Automotive). 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 twelve 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. Pickup 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. Through a joint venture formed with ADAC Automotive during fiscal 2007, we are also pursuing door handles and related vehicle access hardware.

MARKETS

     We are a direct supplier to OEM auto and light truck manufacturers as well as other transportation-related manufacturers. For the 2007 model year, our lock and key products enjoyed a 43% market share in the North American automotive industry, supplying over

COMPANY DESCRIPTION

53% of General Motors’ production, 55% of Ford’s production and 93% of DaimlerChrysler’s production. Our growing ignition lock housing business captured an estimated 24% share in 2007. Our housings and OEM components are also sold to other “Tier 1” automotive suppliers and industrial manufacturers.

     Direct sales to various OEMs represented approximately 75% of our total sales for fiscal 2007. The remainder of our 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 located in Detroit and personnel in our Milwaukee headquarters office. 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 GmbH 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 additional, 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.

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, we have teams for New

     

COMPANY DESCRIPTION

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 teams 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 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.

O P E R A T I O N S

     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 assembly activities. The majority of our assembly operations take place at STRATTEC de Mexico, also located in Juarez. Warehousing and distribution of 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. Once our Advance Development Group establishes a proof-of-concept product utilizing new technology, further product development shifts to our engineering groups for commercialization and product applications.

COMPANY DESCRIPTION

VAST ALLIANCE

     In fiscal 2001, we entered into a formal Alliance with WITTE-Velbert GmbH, an automotive supplier based in Germany, which designs, develops, manufactures and markets 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 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. Our VAST LLC partners in China and Brazil adopted the name and image change so that VAST now truly has a global brand awareness.

ADAC - - STRATTEC de MEXICO

     During fiscal 2007, we formed a joint venture with ADAC Automotive called ADAC-STRATTEC de MEXICO (ASdM). The purpose of this joint venture is to produce certain ADAC and STRATTEC products utilizing ADAC’s plastic molding expertise and STRATTEC’s assembly capability. ASdM currently operates out of defined space in our STRATTEC Componentes Automotrices facility in Juarez, Mexico. Initial products from this joint venture

COMPANY DESCRIPTION

include door handle components and exterior trim components for customers producing in Mexico. As a start-up operaton, ASdM had a minimal financial impact on STRATTEC’s fiscal 2007. However, beginning in our fiscal 2008, there will be growing activity in this joint venture which will be consolidated into STRATTEC’s financial statements.

SEASONAL 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 changeovers 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

2. STRATTEC de Mexico – Juarez, Mexico

3. STRATTEC Componentes Automotrices – Juarez, Mexico

4. ADAC-STRATTEC de Mexico – Juarez, Mexico

5. ADAC Plastics, Inc. – Grand Rapids and Muskegan, Michigan

6. ADAC Paintbox, Limited – United Kingdom

7. WITTE Automotive – Velbert, Germany

8. WITTE Automotive – Nejdek, Czech Republic

9. VAST do Brasil – Sao Paulo, Brazil

10. VAST Fuzhou – Fuzhou, China

11. VAST Great Shanghai Co. – Shanghai, China

12. VAST Japan – Tokyo, Japan

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 ten-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
2007 Compared to 2006

     Net sales were $167.7 million in 2007 compared to $181.2 million in 2006. Sales to our largest customers overall declined in 2007 as compared to 2006. Sales to DaimlerChrysler Corporation were essentially flat between years at $58.1 million in 2007 compared to $58.6 million in 2006. Sales to General Motors Corporation were $35.7 million in 2007 compared to $32.9 million in 2006 due to a combination of higher product content on certain General Motors vehicles, takeover of certain passenger car lockset production from another supplier and price adjustments received to partially recover raw material cost increases. Sales to Ford Motor Company were $21.0 million in 2007 compared to $27.3 million in 2006 due to pre-programmed price reductions and lower Ford vehicle production volumes. Sales to Delphi Corporation were $18.4 million in 2007 compared to $26.7 million in 2006 due primarily to lower levels of production and lower component content. This was partially offset by price adjustments received to partially recover raw material cost increases. Sales to Mitsubishi Motor Manufacturing of America, Inc. were $1.9 million in 2007 compared to $5.4 million in 2006 due to the previously announced phase-out of this customer relationship. The impact of the reduction in sales to our largest customers was partially offset by increased sales to our industrial and aftermarket customers. The sales increase to our industrial and aftermarket customers was primarily due to increased volumes and price adjustments received from some of these customers to partially recover raw material cost increases.

     Gross profit as a percentage of net sales was 15.8 percent in 2007 compared to 20.4 percent in 2006. The lower profitability in the current year is primarily the result of higher purchased raw material costs for zinc and brass, the primary raw materials used in our business. The prior year gross margin also included a $580,000 customer reimbursement received and recorded in 2006 relating to production capacity constraint issues expensed during 2005. The current year gross profit impact of the increased zinc and brass costs was partially offset by price adjustments received from some of our customers to recover a portion of the material cost increases as discussed above in connection with our net sales. In addition, cost reduction activities, including the move of our service products assembly operation from our Milwaukee, Wisconsin facility to our Juarez, Mexico facilities, further reduced the impact of the current year increased raw material costs. The increased raw material costs and the related price adjustments from our customers reduced gross margins by approximately 3.3 percent in the current year as compared to the prior year. The average zinc price paid per pound increased to $1.77 in the current year from $1.01 in the prior year. During the current year, we used approximately 8.3 million pounds of zinc. This resulted in increased zinc costs of approximately $6.3 million in the current year over the prior year. The average brass price paid per pound increased to $3.74 in the current year from $2.81 in the prior year. During the current year, we used approximately 1.3 million pounds of brass. This resulted in increased brass costs of approximately $1.2 million in the current year over the prior year. Total price adjustments received from some of our customers to partially cover these cost increases, which are reflected in our net sales, totaled approximately $2.5 million in the current year.

     Engineering, selling and administrative expenses were $20.2 million in 2007, compared to $22.1 million in 2006. This reduction is primarily the result of reduced spending in new product development, reduced benefit costs primarily related to the actuarially calculated pension expense and reduced bonus expense, and reduced stock-based compensation expense resulting from previously issued stock options becoming fully vested. No additional stock options were issued during fiscal 2007.

     The provision for bad debts of $1.6 million in 2006 reflects a write-off of uncollectible pre-petition Chapter 11 accounts receivable due from Delphi Corporation. During 2006, 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 $6.3 million in 2007 from $13.4 million in 2006. This decrease is primarily the result of reductions in our net sales and gross profit margins as discussed above.

     Other income, net, decreased to $715,000 in 2007 from $960,000 in 2006. The decrease is primarily due to a decrease in transaction gains related to foreign currency transactions entered into by our Mexican subsidiaries.

     Our effective income tax rate for 2007 was 23.6 percent compared to 26.1 percent in

MANAGEMENT’S DISCUSSION AND ANALYSIS

2006. The 2007 provision includes a state refund claim recovery and a favorable tax adjustment primarily related to foreign tax adjustments. The claim recovery, net of the Federal income tax impact, was $329,000. The favorable tax adjustment totaled $1.1 million. 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.

RESULTS OF OPERATIONS
2006 Compared to 2005

     Net sales were $181.2 million in 2006 compared to $190.3 million in 2005. The 2005 year included one additional shipping week, which increased sales by approximately $2.9 million. Sales to our largest customers overall declined in 2006 as compared to 2005. 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, 2005 and 2006 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 continued only on a limited basis. 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 were 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 2006 over 2005. 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 2006 over 2005. 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 2006 over 2005. 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 2006 over 2005.

     At the beginning of the 2006 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 awards under 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

MANAGEMENT’S DISCUSSION AND ANALYSIS

of adoption did 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 was expected to be recognized over a weighted average period of .8 years. As of July 2, 2006, we also had $343,000 of total unrecognized compensation cost related to restricted stock grants, which was expected to be recognized 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 2005 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 2006 reflects a write-off of uncollectible pre-petition Chapter 11 accounts receivable due from Delphi Corporation. During 2006, 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 was 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.

     Other income, net, increased $640,000 to $960,000 in 2006 from $320,000 in 2005. The increase was primarily due to a gain on our investment in VAST LLC of $188,000 in 2006 compared to a loss of $70,000 in 2005 and an increase in transaction gains related to foreign currency transactions entered into by our Mexican subsidiaries.

     Our 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.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow generated from operating activities was $9.8 million in 2007 compared to $19.3 million in 2006. Cash flow generated from operating activities was mostly impacted by overall financial results and increased pension contributions. Net income, adjusted for non-cash items such as depreciation, stock-based compensation expense and provision for doubtful accounts, decreased $7.5 million between 2006 and 2007, primarily due to reduced sales and higher purchased material costs for zinc and brass. Pension contributions to our qualified plan totaled $7.0 million in 2007 compared to $6.0 million in 2006.

     Our accounts receivable balance decreased $1.4 million in 2007 and increased $3.9 million in 2006. The 2007 decrease is primarily due to a reduction in outstanding customer tooling billings. The 2006 increase is primarily due to the normally scheduled July 2005 payments from two major customers totaling approximately $4.8 million being received prior to the end of our 2005 fiscal year. The normally scheduled July 2006 payments from these customers were not received until fiscal 2007.

     Our LIFO inventory balance decreased $2.2 million during 2007 and decreased $2.3 million during 2006. The 2007 decrease was the result of a concentrated effort to manage inventories at lower levels. The 2006 decrease was primarily due to the July 3, 2005 buildup 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.

     Our prepaid pension obligations relate to our qualified pension plan and decreased $6.0 million during 2007. The decrease is the net impact of $7.0 million of pension contributions during 2007, the actuarially calculated pension expense and an $11.7 million pre-tax reduction in the asset balance as a result of recognizing the funded status of the plan in accordance with Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 123(R).”

     Capital expenditures were $5.7 million in 2007 compared to $5.8 million in 2006. 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

MANAGEMENT’S DISCUSSION AND ANALYSIS

be approximately $6 million in fiscal 2008, 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 for repurchase under the program totaled 3,639,395 at July 1, 2007. Over the life of the repurchase program through July 1, 2007, a total of 3,384,700 shares have been repurchased at a cost of approximately $127.1 million. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations.

     We have a $50.0 million unsecured line of credit (the “Line of Credit”), which expires October 31, 2007. There were no outstanding borrowings under the Line of Credit at July 1, 2007 or at July 2, 2006. 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.

     Up until the past 21 months, we have not been significantly impacted by general inflationary pressures over the last several years. However, in addition to rising health care costs, which have increased our cost of employee medical coverage, we have been impacted by increases in the market price of zinc, brass and magnesium over the past 21 months and inflation in Mexico, which impacts the U.S. dollar costs of our Mexican operations. We do not hedge against our Mexican peso exposure.

CONTRACTUAL OBLIGATIONS

Contractual obligations are as follows as of July 1, 2007 (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		$	1,358			$	560			$	544			$	254			$	—
Purchase Obligations			644				644				—				—				—
Pension and Postretirement Obligations (a)			4,173				4,173				—				—				—
Total		$	6,175			$	5,377			$	544			$	254			$	—

JOINT VENTURES

     We participate in certain alliance agreements with E. WITTE Verwaltungsgesellschaft GmbH, and its operating unit, WITTE-Velbert GmbH & Co. KG (“WITTE”) and ADAC Plastics, Inc. (“ADAC”). 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. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

     The Alliance provides a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC (“VAST LLC”), in which WITTE and STRATTEC originally held a 40 percent interest and ADAC originally held a 20 percent interest, exists to seek opportunities to manufacture and sell the companies’ products in areas of the world outside of North America and Europe. Effective July 1, 2007, WITTE, STRATTEC and ADAC each hold a one-third interest in VAST LLC.

     VAST LLC participates in joint ventures in Brazil and China. VAST do Brasil, a joint venture between VAST LLC and Ifer do Brasil Ltda., was formed to service customers in South America. VAST Fuzhou and VAST Great Shanghai, joint ventures between VAST LLC and Fortitude Corporation and a unit of Elitech Technology Co. Ltd., of Taiwan, are the base of operations to service our automotive customers in the Asian market.

MANAGEMENT’S DISCUSSION AND ANALYSIS

     The VAST investments are accounted for using the equity method of accounting. The activities related to the VAST joint ventures resulted in a gain of approximately $394,000 in 2007 and $188,000 in 2006. A capital contribution of $100,000 was made to the VAST LLC joint venture in 2007 primarily in support of general operating expenses. A capital contribution of $569,000 was made in 2006 in support of general operating expenses and the purchase of an additional 16 percent of VAST Fuzhou and VAST Great Shanghai by VAST LLC.

     In 2007, we entered into a joint venture with ADAC, in which STRATTEC holds a 50.1 percent interest and ADAC holds a 49.9 percent interest. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC de MEXICO, LLC (“ASdM”), a Delaware limited liability company, was formed on October 27, 2006. An additional Mexican entity, which is wholly owned by ASdM, was formed on February 21, 2007. It is anticipated that ASdM production activities will begin in July 2007. Start-up costs for ASdM were incurred in fiscal 2007 resulting in a net loss of $75,000 to STRATTEC. ASdM’s financial results are consolidated with the financial results of STRATTEC.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation will be effective for STRATTEC beginning in our 2008 fiscal year. The impact on our consolidated financial statements is not expected to be material.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 123(R).” SFAS No. 158 requires employers that sponsor defined benefit pension and postretirement benefit plans to recognize previously unrecognized actuarial losses and prior service costs in the statement of financial position and to recognize future changes in these amounts in the year in which changes occur through comprehensive income. As a result, the statement of financial position will reflect the funded status of those plans as an asset or liability. Additionally, employers are required to measure the funded status of a plan as of the date of its year end statement of financial position. STRATTEC adopted SFAS No. 158 as of July 1, 2007. We use a June 30 measurement date for our defined pension and postretirement plans. The measurement date will not change as a result of the adoption of SFAS No. 158. Pension and Postretirement benefits are further discussed under Retirement Plans and Postretirement Costs under Notes to Financial Statements.

CRITICAL ACCOUNTING POLICIES

We believe the following represents our critical accounting policies:

     Pension and Postretirement Health Benefits – Pension and postretirement health obligations and costs are developed from actuarial valuations. 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. We evaluate and update all of the assumptions annually on June 30, the measurement date. 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 using 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 6.41 percent to be appropriate as of June 30, 2007, which is a decrease of .21 percentage points from the rate used at June 30, 2006.

     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 our 2006 pension expense by $250,000 and postretirement expense by $17,000. As of June 30, 2007, we converted to the RP 2000 Mortality Table projected to 2014 for annuitants and 2022 for non-annuitants for calculating the year-end 2007 pension and postretirement obligations. The impact of this change increased our year-end

MANAGEMENT’S DISCUSSION AND ANALYSIS

2007 projected pension benefit obligations by $2.4 million, the year-end 2007 accumulated pension benefit obligations by $2.1 million and the year-end 2007 accumulated postretirement obligation by $85,000. This change is also expected to increase our 2008 pension expense by $462,000 and postretirement expense by $10,000.

     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 2007 and will remain at 8.5 percent for 2008. 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, 2007, we had $11.3 million of net unrecognized pension actuarial losses, which is net of deferred asset gains of $3.6 million. As of June 30, 2007, we had unrecognized postretirement actuarial losses of $11.4 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 11.9 years for the pension plans and 14.6 years for the postretirement plan.

     During fiscal years 2007, 2006 and 2005, we contributed $7 million, $6 million and $8 million, respectively, to our qualified pension plan. Future pension contributions are expected to be $2 to $3 million annually depending on market conditions. We have evaluated the potential impact of the Pension Protection Act (the “Act”), which was passed into law on August 17, 2006, on future pension plan funding requirements based on current market conditions. The Act is not anticipated to have a material effect on our level of future funding requirements or on our liquidity and capital resources.

     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. The volatility factor used 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 net sales and net income. We typically experience decreased sales 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 Mexico, 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 using alternative raw materials and 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 cannot 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 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

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 for current and anticipated operations 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 sales 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 net sales 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 net sales 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 1, 2007				July 2, 2006				July 3, 2005
NET SALES		$	167,707			$	181,197			$	190,314
Cost of goods sold			141,213				144,151				147,538
GROSS PROFIT			26,494				37,046				42,776
Engineering, selling, and administrative expenses			20,189				22,067				20,688
Provision for doubtful accounts, net			—				1,622				80
INCOME FROM OPERATIONS			6,305				13,357				22,008
Interest income			3,611				2,563				1,169
Interest expense			—				—				—
Other income, net			715				960				320
Minority interest			75				—				—
INCOME BEFORE PROVISION FOR INCOME TAXES			10,706				16,880				23,497
Provision for income taxes			2,523				4,403				8,459
NET INCOME		$	8,183			$	12,477			$	15,038
EARNINGS PER SHARE:
BASIC		$	2.30			$	3.36			$	3.97
DILUTED		$	2.30			$	3.35			$	3.94
AVERAGE SHARES OUTSTANDING:
BASIC			3,552				3,716				3,790
DILUTED			3,555				3,720				3,816

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 1, 2007				July 2, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	65,491			$	65,712
Receivables, less allowance for doubtful accounts of $250 at July 1, 2007 and July 2, 2006			26,890				28,254
Inventories			7,166				9,337
Customer tooling in progress			1,824				1,422
Deferred income taxes			2,729				1,541
Other current assets			8,464				7,505
Total current assets			112,564				113,771
DEFERRED INCOME TAXES			2,117				—
INVESTMENT IN JOINT VENTURES			2,813				2,202
PREPAID PENSION OBLIGATIONS			4,385				10,358
OTHER LONG-TERM ASSETS			41				197
PROPERTY, PLANT AND EQUIPMENT, NET			26,526				27,764
		$	148,446			$	154,292
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	16,575			$	17,701
Accrued liabilities:
Payroll and benefits			6,280				6,559
Environmental			2,655				2,683
Commitments and Contingencies – see note on page 28
Income taxes			664				1,340
Other			5,307				5,224
Total current liabilities			31,481				33,507
BORROWINGS UNDER LINE OF CREDIT			—				—
DEFERRED INCOME TAXES			—				4,266
ACCRUED PENSION OBLIGATIONS			2,855				2,608
ACCRUED POSTRETIREMENT OBLIGATIONS			10,576				3,636
MINORITY INTEREST			574				—
SHAREHOLDERS’ EQUITY:
Common stock, authorized 12,000,000 shares, $.01 par value, issued 6,887,757 shares at July 1, 2007 and 6,880,457 shares at July 2, 2006			69				69
Capital in excess of par value			78,122				77,175
Retained earnings			165,928				157,745
Accumulated other comprehensive loss			(14,341	)			(2,958	)
Less: Treasury stock at cost (3,368,619 shares at July 1, 2007 and 3,243,177 shares at July 2, 2006)			(126,818	)			(121,756	)
Total shareholders’ equity			102,960				110,275
		$	148,446			$	154,292

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 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 $62			—				1,133				—				—				13
BALANCE JULY 2, 2006		$	69			$	77,175			$	157,745			$	(2,958	)		$	(121,756	)
Net Income			—				—				8,183				—				—			$	8,183
Translation adjustments			—				—				—				449				—				449
Minimum pension liability, net of tax of $14			—				—				—				24				—				24
Net gains in other comprehensive income															473								473
Comprehensive income																						$	8,656
Purchase of common stock			—				—				—				—				(5,075	)
Stock-Based Compensation			—				698				—				—				—
Exercise of stock options and employee stock purchases, including tax benefit of $69			—				249				—				—				13
Adjustments to initially adopt SFAS No.158:
Prior service costs, net of tax of $1,363			—				—				—				2,224				—
Net losses, net of tax of $8,629			—				—				—				(14,080	)			—
BALANCE JULY 1, 2007		$	69			$	78,122			$	165,928			$	(14,341	)		$	(126,818	)

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

     

		Years Ended
		July 1, 2007				July 2, 2006				July 3, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	8,183			$	12,477			$	15,038
Adjustments to reconcile net income to net cash provided by operating activities:
Minority Interest			(75	)			—				—
Depreciation			6,988				7,155				7,225
Loss on disposition of property, plant and equipment			58				320				190
Deferred income taxes			(359	)			350				2,282
Tax benefit from options exercised			23				61				956
Stock-based compensation expense			738				1,118				—
Provision for doubtful accounts			—				1,622				80
Change in operating assets and liabilities:
Receivables			1,434				(3,870	)			4,863
Inventories			2,171				2,317				(3,293	)
Other assets			(7,277	)			(3,953	)			748
Accounts payable and accrued liabilities			(1,937	)			2,184				(12,621	)
Other, net			(153	)			(485	)			285
Net cash provided by operating activities			9,794				19,296				15,753
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint ventures			(100	)			(569	)			(125	)
Additions to property, plant and equipment			(5,748	)			(5,766	)			(5,498	)
Proceeds received on sale of property, plant and equipment			21				22				22
Net cash used in investing activities			(5,827	)			(6,313	)			(5,601	)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock			(5,075	)			(5,306	)			(10,999	)
Exercise of stock options			238				1,085				3,566
Contribution from minority interest			649				—				—
Net cash used in financing activities			(4,188	)			(4,221	)			(7,433	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(221	)			8,762				2,719
CASH AND CASH EQUIVALENTS
Beginning of year			65,712				56,950				54,231
End of year		$	65,491			$	65,712			$	56,950
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid		$	3,231			$	3,120			$	6,446
Interest paid			—				—				—