UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934 for the quarterly period ended ~~March 31,~~September 30, 2007.

Commission file number: 0-20206

PERCEPTRON, INC. ~~(Exact~~

(Exact Name of Registrant as Specified in Its Charter)


Michigan ~~38-2381442 (State~~ (State or Other Jurisdiction of ~~(I.R.S. Employer~~ Incorporation or Organization)		38-2381442 (I.R.S. Employer Identification No.)


47827 Halyard Drive, Plymouth, Michigan ~~48170-2461 (Address~~ (Address of Principal Executive Offices) ~~(Zip~~		48170-2461 (Zip Code)

(734) 414-6100 ~~(Registrant's~~
(Registrant’s Telephone Number, Including Area Code)

Not Applicable ~~(Former~~
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

~~Yes ~~[X]~~þ No ~~[ ]~~ o~~

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ~~"accelerated~~“accelerated filer and large accelerated ~~filer"~~filer” in Rule 12b-2 of the Exchange Act. (Check one):

~~Large accelerated filer ~~[ ]~~o Accelerated filer ~~[ ]~~o Non-accelerated filer ~~[X]~~ þ~~

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).~~

~~Yes ~~[ ]~~o No ~~[X]~~ þ~~

~~The number of shares outstanding of each of the ~~issuer's~~issuer’s classes of common stock as of ~~May 8,~~November 7, 2007, was:~~


Common Stock, $0.01 par value ~~8,002,587~~		8,404,385

Class		Number of shares

PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q ~~FOR THE QUARTER ENDED MARCH 31,~~
For the Quarter Ended September 30, 2007

~~PAGE NUMBER ------~~

		Page
		Number
COVER			1

INDEX			2

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
Item 2. ~~Management's~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations 12		14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk 24		22
Item 4.	Controls and Procedures 24		22

PART II. OTHER INFORMATION
Item 1A.	Risk Factors 24		23
Item ~~2. Unregistered Sales of Equity Securities and Use of Proceeds 24~~ 5.	Other Information		23
Item 6.	Exhibits 25		23

SIGNATURES 26			24
Amended and Restated Bylaws, as amended to date
Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
Certification by the Chief Executive Officer Pursuant to Section 906
Certification by the Chief Financial Officer Pursuant to Section 906

PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 2007 2006 ----------- -------- (In Thousands, Except Per Share Amount) (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 15,880 $ 25,188 Receivables: Billed receivables, net of allowance for doubtful accounts of $408 and $352, respectively 15,607 15,623 Unbilled receivables 1,375 994 Other receivables 996 577 Inventories, net of reserves of $891 and $554, respectively 10,858 6,433 Deferred taxes 1,481 1,481 Other current assets 612 521 -------- -------- Total current assets 46,809 50,817 PROPERTY AND EQUIPMENT Building and land 6,013 6,013 Machinery and equipment 12,301 11,566 Furniture and fixtures 1,098 1,093 -------- -------- 19,412 18,672 Less - Accumulated depreciation and amortization (12,141) (11,264) -------- -------- Net property and equipment 7,271 7,408 DEFERRED TAX ASSET 4,720 4,170 -------- -------- TOTAL ASSETS $ 58,800 $ 62,395 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,132 $ 1,667 Accrued liabilities and expenses 2,598 2,277 Accrued compensation 1,051 1,740 Income taxes payable 227 145 Deferred revenue 1,888 2,336 -------- -------- Total current liabilities 7,896 8,165 SHAREHOLDERS' EQUITY Preferred stock - no par value, authorized 1,000 shares, issued none -- -- Common stock, $0.01 par value, authorized 19,000 shares, issued and outstanding 7,993 and 8,352, respectively 80 84 Accumulated other comprehensive income (loss) 745 (15) Additional paid-in capital 35,843 39,111 Retained earnings 14,236 15,050 -------- -------- Total shareholders' equity 50,904 54,230 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,800 $ 62,395 ======== ========

September 30, June 30,
(In Thousands, Except Per Share Amount) 2007 2007
(Unaudited) As Restated
(Note 13)
ASSETS

Current Assets

Cash and cash equivalents $ 18,334 $ 10,878
Short term investments 6,300 6,300
Receivables:
Billed receivables, net of allowance for doubtful accounts of $601 and $673, respectively 15,853 21,287
Unbilled receivables 3,360 2,858
Other receivables 649 799
Inventories, net of reserves of $1,021 and $911, respectively 8,719 7,625
Deferred taxes 1,243 1,243
Other current assets 2,753 3,025

Total current assets 57,211 54,015

Property and Equipment

Building and land 6,013 5,984
Machinery and equipment 12,311 11,952
Furniture and fixtures 1,074 1,133

19,398 19,069
Less — Accumulated depreciation and amortization (12,420 ) (12,012 )

Net property and equipment 6,978 7,057

Deferred Tax Asset
4,103 4,384

Total Assets
$ 68,292 $ 65,456

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable $ 2,898 $ 3,446
Accrued liabilities and expenses 2,910 2,764
Accrued compensation 1,343 1,075
Income taxes payable 663 883
Deferred revenue 4,359 3,483

Total current liabilities 12,173 11,651

Shareholders’ Equity

Preferred stock — no par value, authorized 1,000 shares, issued none — —
Common stock, $0.01 par value, authorized 19,000 shares, issued and outstanding 8,358 and 8,142, respectively 84 81
Accumulated other comprehensive income 1,545 869
Additional paid-in capital 37,534 36,346
Retained earnings 16,956 16,509

Total shareholders’ equity 56,119 53,805

Total Liabilities and Shareholders’ Equity
$ 68,292 $ 65,456

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

PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME ~~(UNAUDITED)~~
THREE MONTHS NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, ----------------- ------------------ (In Thousands, Except Per Share Amounts) 2007 2006 2007 2006 ------- ------- -------- ------- NET SALES $15,954 $13,447 $38,898 $43,395 COST OF SALES 8,697 6,298 22,608 22,365 ------- ------- ------- ------- GROSS PROFIT 7,257 7,149 16,290 21,030 OPERATING EXPENSES Selling, general and administrative 4,219 3,850 12,284 10,794 Engineering, research and development 2,043 1,984 5,687 5,742 ------- ------- ------- ------- Total operating expenses 6,262 5,834 17,971 16,536 ------- ------- ------- ------- OPERATING INCOME (LOSS) 995 1,315 (1,681) 4,494 OTHER INCOME AND (EXPENSES) Interest income, net 188 206 767 457 Foreign currency gain (loss) (2) 32 (23) (45) Other -- 8 5 169 ------- ------- ------- ------- Total other income (expenses) 186 246 749 581 ------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES 1,181 1,561 (932) 5,075 INCOME TAX EXPENSE (BENEFIT) (NOTE 9) 490 513 (118) 1,564 ------- ------- ------- ------- NET INCOME (LOSS) $ 691 $ 1,048 $ (814) $ 3,511 ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE Basic $ 0.09 $ 0.12 ($ 0.10) $ 0.41 Diluted $ 0.08 $ 0.12 ($ 0.10) $ 0.38 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 7,950 8,453 8,143 8,650 Dilutive effect of stock options 683 639 -- 608 ------- ------- ------- ------- Diluted 8,633 9,092 8,143 9,258 ======= ======= ======= =======

(UNAUDITED)

Three Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2007 2006

Net Sales
$ 17,666 $ 10,710

Cost of Sales
10,565 6,223

Gross Profit
7,101 4,487

Operating Expenses

Selling, general and administrative 4,403 3,887
Engineering, research and development 2,195 1,732

Total operating expenses 6,598 5,619

Operating Income (Loss)
503 (1,132 )

Other Income and (Expenses)

Interest income, net 215 314
Foreign currency gain (loss) 131 (5 )
Other 1 5

Total other income 347 314

Income (Loss) Before Income Taxes
850 (818 )

Income Tax Expense (Benefit)
403 (177 )

Net Income (Loss)
$ 447 $ (641 )

Earnings (Loss) Per Common Share

Basic $ 0.05 ($0.08 )
Diluted $ 0.05 ($0.08 )

Weighted Average Common Shares Outstanding

Basic 8,205 8,343
Dilutive effect of stock options 599 —

Diluted 8,804 8,343

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

PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED MARCH 31, ----------------- (In Thousands) 2007 2006 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (814) $ 3,511 Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: Depreciation and amortization 960 919 Stock compensation expense 645 523 Deferred income taxes (550) 973 Other 177 (9) Changes in assets and liabilities, exclusive of changes shown separately (5,194) 593 ------- ------- Net cash provided from (used for) operating activities (4,776) 6,510 CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit borrowings 1,028 641 Revolving credit repayments (1,028) (641) Proceeds from stock plans 1,267 304 Repurchase of company stock (5,184) (3,990) ------- ------- Net cash used for financing activities (3,917) (3,686) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (945) (1,008) ------- ------- Net cash used for investing activities (945) (1,008) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 330 6 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,308) 1,822 CASH AND CASH EQUIVALENTS, JULY 1 25,188 20,374 ------- ------- CASH AND CASH EQUIVALENTS, MARCH 31 $15,880 $22,196 ======= ======= CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Receivables, net $ (361) $ 2,174 Inventories (4,424) (1,430) Accounts payable 465 9 Other current assets and liabilities (874) (160) ------- ------- $(5,194) $ 593 ======= =======

Three Months Ended
September 30,
(In Thousands) 2007 2006
As Restated
(Note 13)
Cash Flows from Operating Activities

Net income (loss) $ 447 $ (641 )
Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities:
Depreciation and amortization 317 333
Stock compensation expense 168 275
Deferred income tax benefit 302 (286 )
Other (93 ) 125
Changes in assets and liabilities, exclusive of changes shown separately 5,004 692

Net cash provided from operating activities 6,145 498

Cash Flows from Financing Activities

Revolving credit borrowings 10 33
Revolving credit repayments (10 ) (33 )
Proceeds from stock plans 1,022 266
Repurchase of company stock — (932 )

Net cash provided from (used for) financing activities 1,022 (666 )

Cash Flows from Investing Activities

Capital expenditures (201 ) (448 )
Purchases of investments — —
Sales of investments — 25

Net cash used for investing activities (201 ) (423 )

Effect of Exchange Rate Changes on Cash and Cash Equivalents
490 55

Net Increase (Decrease) in Cash and Cash Equivalents
7,456 (536 )
Cash and Cash Equivalents, July 1
10,878 17,963

Cash and Cash Equivalents, September 30
$ 18,334 $ 17,427

Changes in Assets and Liabilities, Exclusive of Changes Shown Separately

Receivables, net $ 5,637 $ 2,614
Inventories (885 ) (1,463 )
Accounts payable (638 ) 71
Other current assets and liabilities 890 (530 )

$ 5,004 $ 692

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

PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~1. ~~BASIS OF PRESENTATION~~ Basis of Presentation~~

The accompanying consolidated financial statements should be read in conjunction with the ~~Company's 2006~~Company’s 2007 Annual Report on Form ~~10-K.~~10-K/A-1. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary, ~~consisting~~including the Company’s reclassification of ~~normal recurring adjustments,~~investments from cash and cash equivalents to short term investments, see Note 2, for a fair presentation of the financial statements for the periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for a full year.

~~2. ~~INVENTORY~~ Short-term Investments~~

The Company’s investments with a maturity of greater than three months to one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term if the Company reasonably expects the investment to be realized in cash or sold or consumed during the normal operating cycle of the business. Investments available for sale are recorded at market value using the specific identification method. Investments held to maturity are measured at amortized cost in the statement of financial position if it is the Company’s intent and ability to hold those securities to maturity. Any unrealized gains and losses on available for sale securities are reported as other comprehensive income as a separate component of shareholders’ equity until realized or until a decline in fair value is determined to be other than temporary.

The Company has short-term investments in investment grade auction rate securities. The auction rate securities are classified as available for sale and are recorded at market value using the specific identification method. An auction is held every 28 days to provide holders of these auction rate securities the opportunity to increase (buy), decrease (sell) or hold their investment. As a result of negative conditions in the global credit markets, auctions for the $6.3 million of the Company’s investments in auction rate securities have failed beginning in August 2007. The failed auctions have resulted in the interest rate on these securities resetting at a premium interest rate (in the range of 6.7% to 9.1%). In the event the Company needs to access funds invested in these auction rate securities, the Company would not be able to liquidate those securities until a future auction of these securities is successful or a buyer is found outside of the auction process. In October 2007 we identified a temporary impairment of approximately $370,000 pre-tax related to these auction rate securities that would be charged to Accumulated Other Comprehensive Income on the Balance Sheet in the second quarter of our fiscal year 2008 if current market conditions persist. These securities are being analyzed each reporting period for temporary and other-than-temporary impairment factors.

Based on the Company’s current business plan, cash and cash equivalents of $18.3 million at September 30, 2007 and its existing unused credit facilities, the Company does not currently anticipate that the lack of liquidity on these short term investments will affect the Company’s ability to operate or fund its currently anticipated fiscal 2008 cash flow requirements.

~~3. Inventory~~

Inventory is stated at the lower of cost or market. The cost of inventory is determined by the first-in, first-out ~~("FIFO"~~(“FIFO”) method. The Company provides a reserve for obsolescence to recognize the effects of engineering change orders, age and use of inventory that affect the value of the inventory. When the related inventory is disposed of, the obsolescence reserve is reduced. A detailed review of the inventory

is performed yearly with quarterly updates for known changes that have occurred since the annual review. Inventory, net of reserves of ~~$891,000~~$1,021,000 and ~~$554,000~~$911,000 at ~~March 31,~~September 30, 2007 and June 30, ~~2006,~~2007, respectively, is comprised of the following (in thousands):
~~MARCH 31, JUNE 30, 2007 2006 --------- --------~~ Component Parts $ 3,013 $3,038 Work In Process 2,986 309 Finished Goods 4,859 3,086 ------- ------ Total $10,858 $6,433 ======= ======
~~3. EARNINGS PER SHARE~~

September 30, June 30,
2007 2007
Component parts $ 3,020 $ 2,900
Work in process 522 355
Finished goods 5,177 4,370

Total $ 8,719 $ 7,625

~~4. Earnings Per Share~~

Basic earnings per share ~~("EPS"~~(“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Other obligations, such as stock options, are considered to be potentially dilutive common shares. Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive. Effective with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, ("(“SFAS ~~123R"~~123R”), the calculation of diluted shares also takes into effect the average unrecognized non-cash stock-based compensation expense and additional adjustments for tax benefits related to non-cash stock-based compensation expense.

Options to purchase ~~326,000~~390,000 and ~~491,000~~258,000 shares of common stock outstanding in the three months ended ~~March 31,~~September 30, 2007 and 2006, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive. Options to purchase 338,000 and 610,000 shares of common stock outstanding in the nine months ended March 31, 2007 and 2006, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive. 6 ~~4. FOREIGN EXCHANGE CONTRACTS~~

~~5. Foreign Exchange Contracts~~

The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. These transactions involve the use of forward contracts, typically mature within one year and are designed to hedge anticipated foreign currency transactions. The Company may use forward exchange contracts to hedge the net assets of certain of its foreign subsidiaries to offset the translation and economic exposures related to the ~~Company's~~Company’s investment in these subsidiaries.

At ~~March 31,~~September 30, 2007, the Company had forward exchange contracts to sell ~~3.0~~5.0 million Euros ($~~4.0~~6.9 million equivalent) at a weighted average settlement rate of ~~1.32~~1.38 Euros to the United States Dollar. The contracts outstanding at ~~March 31,~~September 30, 2007, mature through ~~September 28, 2007.~~March 31, 2008. The objective of the hedge transactions is to protect designated portions of the ~~Company's~~Company’s net investment in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The Company assesses hedge effectiveness based on overall changes in fair value of the forward contract. Since the critical risks of the forward contract and the net investment coincide, there was no ineffectiveness. The accounting for the hedges is consistent with translation adjustments where any gains and losses are recorded to other comprehensive income. The Company recognized a ~~charge~~loss of approximately ~~$23,000 and $47,000~~$236,000 in other comprehensive income (loss) for the unrealized and realized change in value of the forward exchange contracts during the ~~three and nine months~~quarter ended ~~March 31, 2007, respectively.~~September 30, 2007. Offsetting ~~these amounts~~this amount in other comprehensive income (loss) was the translation effect of the ~~Company's~~Company’s foreign subsidiary. Because the forward contracts were effective, there was no gain or loss recognized in earnings. The ~~Company's~~Company’s forward exchange contracts do not subject it to material risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged.

At ~~March 31,~~September 30, 2006, the Company had ~~$4.8~~approximately $2.6 million of forward exchange contracts between the United States Dollar and the Euro with a weighted average settlement price of ~~1.21~~1.28 Euros to the United States Dollar. The Company recognized ~~a charge of $33,000 and~~ income of ~~$99,000~~$73,000 in other comprehensive income (loss) for the unrealized ~~and realized~~ change in value of forward exchange contracts during the ~~three and nine months~~quarter ended ~~March 31, 2006, respectively. 5. COMPREHENSIVE INCOME~~ September 30, 2006.

~~6. Comprehensive Income~~

Comprehensive income is defined as the change in common ~~shareholder's~~shareholder’s equity during a period from transactions and events from non-owner sources, including net income. Other items of comprehensive income include revenues, expenses, gains and losses that are excluded from net income. Total comprehensive income for the applicable periods is as follows (in thousands):
~~THREE MONTHS ENDED MARCH 31, 2007 2006 ----- ------~~ Net Income $ 691 $1,048 Other Comprehensive Income (Loss): Foreign currency translation adjustments 151 183 Forward contracts (23) (33) ----- ------ Total Comprehensive Income $ 819 $1,198 ===== ======
~~NINE MONTHS ENDED MARCH 31, 2007 2006 ----- ------~~ Net Income (Loss) $(814) $3,511 Other Comprehensive Income (Loss): Foreign currency translation adjustments 807 (74) Forward contracts (47) 99 ----- ------ Total Comprehensive Income (Loss) $ (54) $3,536 ===== ======
7 ~~6. CREDIT FACILITIES~~

Three Months Ended September 30, 2007 2006
Net Income (Loss) $ 447 $ (641 )
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 912 150
Forward contracts (236 ) 73

Total Comprehensive Income (Loss) $ 1,123 $ (418 )

~~7. Credit Facilities~~

~~The Company had no debt outstanding at ~~March 31,~~September 30, 2007.~~

The Company has a $7.5 million secured Credit Agreement with Comerica Bank, which expires on November 1, 2008. Proceeds under the Credit Agreement may be used for working capital and capital expenditures. The security for the loan is substantially all non real estate assets of the Company held in the United States. Borrowings are designated as a Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based Advances is payable on the last day of each month and is calculated daily at a rate that ranges from a ~~1/2%~~¹/2% below to a ~~1/4%~~¹/4% above the ~~bank's~~bank’s prime rate ~~(8.25%~~(7.75% as of ~~March 31,~~September 30, 2007) dependent upon the ~~Company's~~Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization ~~("EBITDA"~~(“EBITDA”). Interest on Eurodollar-based Advances is calculated at a specific margin above the Eurodollar Rate offered at the time and for the period chosen (approximately ~~7.23%~~7.11% as of ~~March 31,~~September 30, 2007) dependent upon the ~~Company's~~Company’s ratio of funded debt to EBITDA and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee on the daily unused portion of the Credit Agreement based on a percentage dependent upon the ~~Company's~~Company’s ratio of funded debt to EBITDA. The Credit Agreement prohibits the Company from paying dividends. In addition, the Credit Agreement requires the Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of not less than ~~$39.8~~$41.2 million as of ~~March 31,~~September 30, 2007 and to have no advances outstanding for 30 consecutive days each calendar year. At ~~March 31,~~September 30, 2007, the ~~Company's~~Company had no borrowings outstanding.

At September 30, 2007, the Company’s German subsidiary (GmbH) had an unsecured credit facility totaling 500,000 Euros (equivalent to approximately ~~$667,000~~$713,600 at ~~March 31,~~September 30, 2007). The facility may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings for working capital needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable. At ~~March 31,~~September 30, 2007, GmbH had no borrowings outstanding. ~~At March 31, 2007, the facility supported outstanding letters of credit totaling 54,300 Euros (equivalent to approximately $72,000). 7. STOCK-BASED COMPENSATION~~

~~8. Stock-Based Compensation~~

The Company adopted SFAS 123R, effective July 1, 2005. SFAS 123R requires the recognition of the fair value of stock-based compensation in the ~~Company's~~Company’s financial statements. Prior to July 1, 2005, the Company applied the requirements of APB Opinion No. 25 ("(“APB ~~25"~~25”), ~~"Accounting~~“Accounting for Stock Issued to Employees," ”and related interpretations in accounting for its stock-based plans. Under APB 25, generally no compensation expense was recognized for the ~~Company's~~Company’s stock-based plans since the exercise price of granted employee stock options was greater than or equal to the market value of the underlying common stock on the date of grant.

The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. The Company continues to use the Black Scholes model for determining stock option valuations. The provisions of SFAS 123R also apply to awards granted prior to July 1, 2005 that did not vest before July 1, 2005 (transition awards). The compensation cost for the portion of the transition awards that had not vested by July 1, 2005 is based on the grant-date fair value of these transition awards as calculated for pro forma disclosures under the provisions of SFAS 123. Compensation cost for these transition awards are attributed to periods beginning July 1, 2005 and use the Black Scholes method used under SFAS 123, except that an estimate of expected forfeitures is used rather than actual forfeitures. 8

The Company recognized ~~as an~~ operating expense for non-cash stock-based compensation ~~cost~~costs in the amount of ~~$194,000~~$168,000 and ~~$645,000~~$275,000 in the three ~~and nine~~ months ended ~~March 31,~~September 30, 2007 ~~respectively. This had the effect of decreasing net income by $163,000, or $0.02 per diluted share,~~ and $519,000, or $0.06 per diluted share, for the three and nine months ended March 31, 2007, respectively. The Company recognized as an operating expense non-cash stock-based compensation cost in the amount of $140,000 and $523,000 in the three and nine months ended March 31, 2006, respectively. This had the effect of decreasing net income by ~~$112,000,~~$137,000, or ~~$0.01~~$0.02 per diluted share, and ~~$423,000,~~$219,000, or ~~$0.05~~$0.03 per diluted share, for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2007 and 2006 respectively. As of ~~March 31,~~September 30, 2007, the total remaining unrecognized compensation cost related to non-vested stock options amounted to ~~$834,000.~~$1.3 million. The Company expects to recognize this cost over a weighted average vesting period of ~~1.58~~2.76 years.

The Company maintains a 1992 Stock Option Plan ("(“1992 ~~Plan"~~Plan”) and a 1998 Global Team Member Stock Option Plan ("(“1998 ~~Plan"~~Plan”) covering substantially all company employees and certain other key persons and a Directors Stock Option Plan ("(“Directors ~~Plan"~~Plan”) covering all non-employee directors. During fiscal 2005, shareholders approved a new 2004 Stock Incentive Plan that replaced the 1992 and Directors Stock Option Plans as to future grants. Options previously granted under the 1992 and Directors Stock Option Plans will continue to be maintained until all options are executed, cancelled or expire. The 2004, 1992 and Directors Plans are administered by a committee of the Board of Directors, the Management Development ~~Compensation~~compensation and Stock Option Committee (the ~~"Management~~“Management Development ~~Committee"~~Committee”). The 1998 Plan is administered by the President of the Company.

Awards under the 2004 Stock Incentive Plan may be in the form of stock options, stock appreciation rights, restricted stock or restricted stock units, performance share awards, director stock purchase rights and deferred stock units; or any combination thereof. The terms of the awards will be determined by the Management Development Committee, unless specified in the 2004 Stock Incentive Plan. As of ~~March 31,~~September 30, 2007, the Company has only issued awards in the form of stock options. Options outstanding under the 2004 Stock Incentive Plan and the 1992 and 1998 ~~Stock Option~~ Plans generally become exercisable at 25% per year beginning one year after the date of grant and expire ten years after the date of grant. Options outstanding under the Directors Stock Option Plan are either an initial option or an annual option. Prior to December 7, 2004, initial options of 15,000 shares were granted as of the date the non-employee director was first elected to the Board of Directors and became exercisable in full on the first anniversary of the date of grant. Prior to December 7, 2004, annual options of 3,000 shares were granted as of the date of the respective annual meeting to each non-employee director serving at least six months prior to the annual meeting and become exercisable in three annual increments of 33 1/3% after the date of grant. Options under the Directors Stock Option Plan expire ten years from the date of grant. Option prices for options granted under these plans must not be less than fair market value of the ~~Company's~~Company’s stock on the date of grant.

The estimated fair value as of the date options were granted during the periods presented, using the ~~Black-Scholes~~Black Scholes option-pricing model, was as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED 3/31/2007 3/31/2006 3/31/2007 3/31/2006 ------------ ------------ ----------- ----------- Weighted Average Estimated Fair Value Per Share of Options Granted During the Period $ 3.05 $ 2.37 $ 3.04 $ 2.28 Assumptions: Amortized Dividend Yield -- -- -- -- Common Stock Price Volatility 31.10% 29.49% 31.56% 30.16% Risk Free Rate of Return 4.63% 4.25% 4.76% 4.02% Expected Option Term (in years) 5 5 5 5
9

Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
Weighted average estimated fair value per share of options granted during the period $ 4.03 $ 3.03
Assumptions:
Amortized dividend yield — —
Common stock price volatility 30.77 % 32.78 %
Risk free rate of return 4.88 % 5.13 %
Expected option term (in years) 5 5

The Company received ~~$726,000 and $1,056,000~~$974,000 in cash from option exercises under all share-based payment arrangements ~~during~~for the three ~~and nine~~ months ended ~~March~~September 30, 2007.

~~9. Income Taxes~~

On July 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (‘FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, “Accounting for Contingencies”. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement reporting of tax positions taken in tax returns. For financial reporting purposes, the Company can recognize only tax benefits from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions and income tax disclosures.

Adopting FIN 48 did not result in any material adjustment in the liability for unrecognized income tax benefits. On July 1, 2007, the Company had $1.6 million of unrecognized tax benefits, of which $844,000 would affect the effective tax rate if recognized. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within the next twelve months. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively. As of July 1, 2007 there was no accrued interest or penalties related to uncertain tax positions recorded on the Company’s financial statements. For U.S. Federal income tax purposes, the tax years 1999 — 2006 remain open to examination as a result of the Company’s net operating loss carryforward. For German income tax purposes, the tax years 2004 — 2006 remain open to examination.

In July 2007, the State of Michigan signed into law the Michigan Business Tax Act, replacing the Michigan single business tax with a business income tax and modified gross receipts tax. These new taxes take effect on January 1, 2008, and, because they are based on or derived from income-based measures, the provisions of SFAS No. 109, “Accounting for Income Taxes,” apply as of the enactment date. In September 2007, an amendment to the Michigan Business Tax Act was also signed into law establishing a deduction to the business income tax base if temporary differences associated with certain assets result in a net deferred tax liability as of December 31, ~~2007, respectively. 8. COMMITMENTS AND CONTINGENCIES~~ 2007. The Company has a small net deferred tax asset. Therefore, this deduction does not apply.

~~10. Commitments and Contingencies~~

~~Management is currently unaware of any significant pending litigation affecting the Company, other than the matters set forth below.~~

The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS Inc., and Centre de Preparation GDS, Inc. (collectively, ~~"GDS"~~“GDS”) on or about November 21, 2002 in the Superior Court of the Judicial District of Quebec, Canada against the Company, Carbotech, Inc. ~~("Carbotech"~~(“Carbotech”), and U.S. Natural Resources, Inc. ~~("USNR"~~(“USNR”), among others. The suit alleges that the Company breached its contractual and warranty obligations as a manufacturer in connection with the sale and installation of three systems for trimming and edging wood products. The suit also alleges that Carbotech breached its contractual obligations in connection with the sale of equipment and the installation of two trimmer lines, of which the ~~Company's~~Company’s systems were a part, and that USNR, which acquired substantially all of the assets of the Forest Products business unit from the Company, was liable for ~~GDS'~~GDS’ damages. USNR has sought indemnification from the Company under the terms of existing contracts between the Company and USNR. GDS seeks compensatory damages against the Company, Carbotech and USNR of approximately ~~$5.8~~$6.7 million using a ~~March 31,~~September 30, 2007 exchange rate. GDS and Carbotech have filed for bankruptcy protection in Canada. The Company intends to vigorously defend ~~GDS'~~GDS’ claims.

The Company has been informed that certain of its customers have received allegations of possible patent infringement involving processes and methods used in the ~~Company's~~Company’s products. Certain of these customers, including one customer who was a party to a patent infringement suit relating to this matter, have settled such claims. Management believes that the processes used in the ~~Company's~~Company’s products were independently developed without utilizing any previously patented process or technology. Because of the uncertainty surrounding the nature of any possible infringement and the validity of any such claim or any possible customer claim for indemnity relating to claims against the ~~Company's~~Company’s customers, it is not possible to estimate the ultimate effect, if any, of this matter on the ~~Company's~~Company’s financial statements. Based upon a recent review by the Company of a third party licensing agreement under which the Company licenses certain software included in its products, the Company has begun discussions with the third party licensor to resolve potential instances of non-compliance by the Company with the terms of the licensing agreement. The Company anticipates that it will incur additional royalty costs for prior periods and has recorded a reserve for the amount it believes will be required to resolve the matter. The final resolution of this issue may be different from the estimate recorded.

~~The Company may, from time to time, be subject to other claims and suits in the ordinary course of its business.~~

To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. Since the outcome of claims and litigation is subject to significant uncertainty, changes in these factors could materially impact the ~~Company's~~Company’s financial position or results of operations. 9. INCOME TAXES During the third quarter of fiscal 2007, the Company's German subsidiary recorded a one-time tax benefit of approximately $98,000 related to new corporate tax legislation. The tax benefit related to 10 corporate tax credits derived under previous tax regulations that under the new legislation will be paid to the German subsidiary over a 10 year period. During the second quarter of fiscal 2006, the Company recognized a $725,000 tax benefit associated with reversing the valuation allowance related to net operating losses in the United States. The Company continues to have a valuation allowance for tax credit carryforwards that it still expects will more likely than not expire prior to the tax benefit being realized. During the second quarter of fiscal 2006, the Company recorded a $290,000 tax expense related to the repatriation of $6.3 million of unremitted earnings of certain of the Company's European subsidiaries under the provisions of The American Jobs Creation Act of 2004. 10. NEW ACCOUNTING PRONOUNCEMENTS

~~11. New Accounting Pronouncements~~

In February 2007, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued Statement of Financial Accounting Standards ~~("SFAS"~~(“SFAS”) No. 159, ~~"The~~“The Fair Value ~~Options~~Option for Financial Assets and Financial ~~Liabilities - Including an amendment of FASB Statement No. 115"~~Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This statement is effective for fiscal years beginning after November 15, 2007. The impact of adopting this statement on the ~~Company's~~Company’s financial statements has ~~net~~not yet been evaluated.

In September 2006, the ~~Securities and Exchange Commission~~FASB issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatement". This bulletin requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. This bulletin is effective for the Company's 2007 fiscal year annual financial statements. The Company is currently assessing the potential impact that the adoption of this bulletin will have on the Company's financial statements although the impact is not expected to be material. In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")SFAS No. 157, ~~"Fair~~“Fair Value ~~Measurements"~~Measurements”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but does provide guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007. The impact of adopting this statement on the ~~Company's~~Company’s financial statements has not yet been evaluated. ~~In June 2006,~~

~~12. Segment and Geographic Information~~

Effective April 1, 2007, the Company organized its business into two operating segments, Automated Systems and Technology Products. The Company’s reportable segments are strategic business units that have separate management teams focused on different marketing strategies. The Automated Systems segment primarily sells its products to automotive companies either directly or through manufacturing line builders, system integrators or original equipment manufacturers (“OEMs”). The Company’s Automated Systems products are primarily custom-designed systems typically purchased for installation in connection with new model retooling programs. The Automated Systems segment includes value added services that are primarily related to Automated Systems products. The Technology Products segment sells its product to a variety of markets through OEMs, system integrators, value-added resellers and distributors. The Company’s Technology Products target the digitizing, reverse engineering and inspection markets and include products that are sold as whole components ready for use.

The accounting policies of the segments are the same as those described in the summary of significant policies. The Company evaluates performance based on operating income, excluding unusual items. Company-wide costs are allocated between segments based on revenues and/or labor as deemed appropriate.

Reportable Segments ($000) Automated Systems Technology Products Consolidated

Three months ended September 30, 2007

Net sales $ 8,114 $ 9,552 $ 17,666
Operating income (loss) (1,182 ) 1,685 503
Assets 52,973 15,294 68,267
Depreciation and amortization 9,945 2,475 12,420

Three months ended September 30, 2006

Net sales $ 7,821 $ 2,889 $ 10,710
Operating income (loss) (565 ) (567 ) (1,132 )
Assets 47,171 14,304 61,475
Depreciation and amortization 9,150 2,438 11,588

13. Restatement of Previously Issued Consolidated Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". This interpretation prescribes a recognition threshold and a measurement attributeStatements

Subsequent to filing the Company’s Form 10-K for the ~~financial statement reporting~~fiscal year ended June 30, 2007, the Company determined that its previously issued Consolidated Balance Sheets had short-term investments incorrectly identified and reported with cash and cash equivalents. As a result, the Consolidated Statements of ~~tax positions taken in tax returns.~~Cash Flow did not reflect the purchases and sales activity of the short-term investments. The ~~interpretation is effective for fiscal years beginning after December 15, 2006. The impact of adopting this statement~~restatement did not have any effect on the ~~Company's financial statements is currently being evaluated. 11~~ Income Statement in any year. The effects of the restatement on the Consolidated Balance Sheet at June 30, 2007, and the Consolidated Statement of Cash Flow for the three months ended September 30, 2006 are reflected in the following tables:

June 30, 2007
As Reported Adjustment As Restated
Cash and cash equivalents
$ 17,178 $ (6,300 ) $ 10,878
Short-term investments
— 6,300 6,300

For the Three Months Ended
September 30, 2006
As Reported Adjustment As Restated
Cash Flows from Operating Activities

Net cash provided from operating activities $ 498 $ — $ 498

Cash Flows from Financing Activities

Net cash used for financing activities (666 ) — (666 )

Cash Flows from Investing Activities

Purchases of investments — — —
Sales of investments — 25 25

Net cash used for investing activities (448 ) 25 (423 )
Effect of Exchange Rate changes on Cash and Cash Equivalents
55 — 55

Net Increase (Decrease) in Cash and Cash Equivalents
(561 ) 25 (536 )
Cash and Cash Equivalents, July 1
25,188 (7,225 ) 17,963

Cash and Cash Equivalents, September 30
$ 24,627 $ (7,200 ) $ 17,427

ITEM 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Perceptron, Inc. ("Perceptron" or the "Company") develops, produces and markets non-contact metrology solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement and inspection applications. Perceptron's product offerings are designed to improve quality, increase productivity and decrease costs in manufacturing and product development. Perceptron also produces innovative technology solutions for scanning and inspection, serving industrial, trade and consumer applications. The solutions offered by the Company are divided into three groups: 1) The Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R), AutoSpect(R) and AutoGuide(R) products; 2) The Technology Products Group made up of ScanWorks(R), Non-Contact Wheel Alignment ("WheelWorks(R)"), TriCam(R) sensors for the forest products industry and commercial products; and 3) The Value Added Services Group offering consulting, training and non-warranty support services. The Company services multiple markets, with the largest being the automotive industry. The Company's primary operations are in North America, Europe and Asia. The Company's financial base remained strong, with no debt and approximately $15.9 million of cash at March 31, 2007 available to support its growth plans. Near-term the Company's focus is on the production of its recently announced new line of electronic inspection products and its previously announced growth strategy in untapped geographic markets, principally in Asia. The Company's growth strategies in Asia are generating customer interest in this region. This region represents approximately one-third of global light vehicle production and sales and with the development of China's light vehicle market will become of increasing importance to the Company. As a result, the Company will continue to hire sales and technical personnel during fiscal 2007 to support its long term growth opportunities in Asia. The Company's sales are principally derived from the sale of products for use in the automotive industry. New vehicle tooling programs are the most important selling opportunity for the Company's Automated Systems Group. The number and timing of new vehicle tooling programs can be influenced by economic conditions. Therefore, the Company continues to assess the global economy and its likely effect on the Company's automotive customers and markets served to determine if actions are required. The Company views the automotive industry's focus on introducing new vehicles more frequently to satisfy their customers' changing requirements, as well as their continuing focus on improved quality, as positive indicators for its automotive Automated Systems Group business. The Company is continuing its efforts to identify opportunities outside the automotive industry, principally through its Technology Products Group. The foregoing

~~SAFE HARBOR STATEMENT~~

We make statements in this ~~"Overview" section are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. See Item 2 "Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of a number of uncertainties which could cause actual results to differ materially from those set forth in the forward-looking statements. 12 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006 For the third quarter of fiscal 2007, the Company reported net income of $691,000, or $0.08 per diluted share, compared to net income of $1.0 million, or $0.12 per diluted share, for the third quarter of fiscal 2006. Specific line item results are described below. SALES - Net sales of $16.0 million for the third quarter of fiscal 2007 were up $2.6 million, compared with the same period one year ago. The following tables set forth comparison data for the Company's net sales by product groups and ~~geographic location.~~
SALES (BY GROUP) THIRD QUARTER THIRD QUARTER INCREASE/ (in millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- Automated Systems $10.5 65.6% $10.7 79.9% $(0.2) (1.9)% Technology Products 4.3 26.9% 2.0 14.9% 2.3 115.0% Value Added Services 1.2 7.5% 0.7 5.2% 0.5 71.4% ----- ----- ----- ----- ----- Totals $16.0 100.0% $13.4 100.0% $ 2.6 19.4% ===== ===== ===== ===== =====
SALES (BY LOCATION) THIRD QUARTER THIRD QUARTER INCREASE/ (in millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- North America $ 7.4 46.3% $10.8 80.6% $(3.4) (31.5)% Europe 8.0 50.0% 2.3 17.2% 5.7 247.8% Asia 0.6 3.7% 0.3 2.2% 0.3 100.0% ----- ----- ----- ----- ----- Totals $16.0 100.0% $13.4 100.0% $ 2.6 19.4% ===== ===== ===== ===== =====
Automated Systems sales in the third quarter of fiscal 2007 were comparable to those of the third quarter of fiscal 2006. The sales increase in the Technology Products Group was primarily due to higher sales of the Company's commercial products. The first deliveries of the Company's new commercial products occurred in the third quarter of fiscal 2007, which is the first quarter that the Company recognized revenues from commercial products sales. Sales of WheelWorks(R) and Forest Products also contributed to the increase in Technology Products Group revenues. Sales of Value Added Services were up $500,000 compared with the same period one year ago. This increase was due to higher support and training services for the third quarter. North American sales of $7.4 million were $3.4 million lower compared to the third quarter of fiscal 2006 primarily as a result of lower Automated Systems sales, offset by increased Technology Products sales including the Company's new commercial products. The changes in both North America and Europe primarily reflected the timing of new vehicle programs. The sales increase in Europe reflected the high level of new order bookings for Automated Systems in the second quarter of fiscal 2007 with several of those orders shipping in the third quarter of fiscal 2007 as well as the shipment of customer orders for Automated Systems that were delayed from the second quarter and shipped in the third quarter. The increase in Europe was also due to the strengthening Euro that, based on conversion rates in effect this quarter, resulted in $730,000 more in sales than the comparable rates in the third quarter of fiscal 2006 would have yielded. Asian sales were up $300,000 from the same quarter in fiscal 2006. BOOKINGS - The Company had new order bookings during the quarter of $20.0 million compared with new order bookings of $17.2 million in the quarter ended December 31, 2006 and $8.5 million for the quarter ended March 31, 2006. The amount of new order bookings during any particular period is not 13 ~~necessarily indicative of the future operating performance of the Company. The following tables set forth comparison data for the Company's bookings by product groups and geographic location.~~
BOOKINGS (BY GROUP) THIRD QUARTER THIRD QUARTER INCREASE/ (in millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- Automated Systems $ 9.4 47.0% $4.9 57.7% $ 4.5 91.8% Technology Products 9.7 48.5% 2.8 32.9% 6.9 246.4% Value Added Services 0.9 4.5% 0.8 9.4 0.1 12.5% ----- ----- ---- ----- ----- TOTALS $20.0 100.0% $8.5 100.0% $11.5 135.3% ===== ===== ==== ===== =====
BOOKINGS (BY LOCATION) (in THIRD QUARTER THIRD QUARTER INCREASE/ millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- North America $14.1 70.5% $5.7 67.0% $ 8.4 147.4% Europe 5.6 28.0% 2.3 27.1% 3.3 143.5% Asia 0.3 1.5% 0.5 5.9% (0.2) (40.0)% ----- ----- ---- ----- ----- TOTALS $20.0 100.0% $8.5 100.0% $11.5 135.3% ===== ===== ==== ===== =====
New orders in North America were $8.4 million higher than in the third quarter of fiscal 2006 primarily as a result of higher orders for Technology Products, in particular, the Company's new commercial products. European new order bookings primarily represented increased Automated Systems orders. Additionally, European bookings during the third quarter of fiscal 2006 reflected the generally weak state of many European economies. Historically, the Company's rate of new orders has varied from quarter to quarter. Based on the timing of current customer programs that the Company is quoting, the Company expects new order bookings for the fourth quarter of fiscal 2007 to be comparable to the level of new orders received in the third quarter of fiscal 2007. The foregoing statements are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. See ItemNote 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of a number of uncertainties which could cause actual results to differ materially from those set forth in the forward-looking statements. BACKLOG - The Company's backlog was $26.6 million as of March 31, 2007 compared with $22.6 million as of December 31, 2006 and $17.0 million as of March 31, 2006. The following tables set forth comparison data for the Company's backlog by product groups and geographic location.
BACKLOG (BY GROUP) THIRD QUARTER THIRD QUARTER INCREASE/ (in millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- Automated Systems $15.5 58.3% $13.2 77.6% $ 2.3 17.4% Technology Products 9.1 34.2% 2.0 11.8% 7.1 355.0% Value Added Services 2.0 7.5% 1.8 10.6% 0.2 11.1% ----- ----- ----- ----- ----- TOTALS $26.6 100.0% $17.0 100.0% $ 9.6 56.5% ===== ===== ===== ===== =====
BACKLOG (BY LOCATION) THIRD QUARTER THIRD QUARTER INCREASE/ (in millions) 2007 2006 (DECREASE) - -------------------- ------------- ------------- ------------- North America $16.8 63.1% $10.3 60.6% $ 6.5 63.1% Europe 9.5 35.7% 6.2 36.5% 3.3 53.2% Asia 0.3 1.2% 0.5 2.9% (0.2) (40.0)% ----- ----- ----- ----- ----- TOTALS $26.6 100.0% $17.0 100.0% $ 9.6 56.5% ===== ===== ===== ===== =====
14 The $26.6 million backlog at March 31, 2007, is the highest backlog the Company has had since 1999. The increase in backlog was primarily due to increased orders for Technology Products, principally for the new commercial products. The Company expects to be able to fill substantially all of the orders in backlog during the next twelve months. The level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company. Most of the backlog is subject to cancellation by the customer. GROSS PROFIT - Gross profit was $7.3 million, or 45.5% of sales, in the third quarter of fiscal year 2007, as compared to $7.1 million, or 53.2% of sales, in the third quarter of fiscal year 2006. The gross profit margin reduction was primarily due to the mix of product sales that included the higher volume commercial products this quarter and, to a lesser extent, Forest Products sales, both of which are sold at a lower gross margin than the Company's other products. The stronger Euro in the quarter mitigated the impact. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $4.2 million in the quarter ended March 31, 2007 compared to $3.9 million in the third quarter a year ago. SG&A expenses were higher primarily due to personnel additions to support growth opportunities in the Far East, to support the new commercial products business initiatives, and salary and benefit increases. The increase was also due to the effect of the strengthening Euro on costs. These SG&A costs were partially offset by lower Michigan Single Business Taxes and commission expense. ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D expenses were $2.0 million in both quarters ended March 31, 2007 and 2006 as salary and benefit increases in the current quarter were offset by decreased spending on engineering materials. INTEREST INCOME, NET - Net interest income was $188,000 in the third quarter of fiscal 2007 compared with net interest income of $206,000 in the third quarter of fiscal 2006. The decrease was primarily due to a lower cash balance compared to one year ago. FOREIGN CURRENCY - There was a net foreign currency transaction loss of $2,000 this quarter compared to a net foreign currency gain of $32,000 last year due to foreign currency changes, particularly the Euro. INCOME TAXES - The effective tax rate this quarter of 41.5% included a one time tax benefit of approximately $98,000 recorded by the Company's German subsidiary that related to new corporate tax legislation. The tax benefit related to corporate tax credits derived under previous tax regulations that under the new legislation will be paid to the German subsidiary over a 10 year period. The benefit had the effect of reducing the effective tax rate for the third quarter by 8.3%. Excluding this benefit, the effective tax rate this quarter would have been 49.8% compared to 32.9% in the third quarter of fiscal 2006 and primarily reflected the effect of pretax losses in North America being offset by pretax income in the Company's European subsidiaries which are taxed at higher rates. OUTLOOK - The Company expects total revenues for fiscal year 2007, including anticipated sales of the Company's new commercial product, to be comparable to fiscal year 2006. Based on business currently being quoted, the Company expects new order bookings for the fourth quarter of fiscal 2007 to be comparable to the level of new orders received in the third quarter of fiscal 2007. The Company continually reviews its cost structures in each geographic region, particularly as they relate to system installation and support, to ensure that the Company's resources allow for future growth and are consistent with the requirements of each business and geographic region. As a result, the Company took steps during the fourth quarter of fiscal 2007 to reduce expenses in its North American and European Automotive businesses by over $1.4 million annually. To fuel long-term growth, the Company intends to continue to make investments in Asia and to support its new commercial products initiatives. See Item 2 15 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of the uncertainties regarding the expansion into new markets and the development and introduction of new products. The Company's new order bookings and sales forecast for its products sold to the automotive industry is based on a thorough assessment of the probable size, system content, and timing of each of the programs being considered by its automotive customers. These factors are difficult to quantify accurately because over time the Company's customers weigh changes in the economy and the probable effect of these changes on their business, and on occasion adjust the number and timing of their new vehicle programs to reflect changing business conditions. The Company continues to view the automotive industry's focus on introducing new vehicles more frequently to satisfy their customers' changing requirements, as well as their continuing focus on improved quality, as positive indicators for new business. The Company's new order bookings and sales forecast relating to its new electronic inspection products is based upon preliminary customer and internal forecasts. The actual level of orders will depend on the market demand. The foregoing statements in this "Outlook" section are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of a number of uncertainties which could cause actual results to differ materially from those set forth in the forward-looking statements. NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO NINE MONTHS ENDED MARCH 31, 2006 The Company reported a net loss of $814,000, or $0.10 per diluted share, for the nine months ended March 31, 2007, compared with net income of $3.5 million, or $0.38 per diluted share for the nine months ended March 31, 2006. SALES - Net sales in the nine months ended March 31, 2007 were $38.9 million, compared to $43.4 million for the nine months ended March 31, 2006. The following tables set forth comparison data for the Company's net sales by product groups and geographic location.
SALES (BY GROUP) NINE MONTHS NINE MONTHS INCREASE/ (in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE) - ---------------- ------------- ------------- ------------- Automated Systems $25.3 65.0% $33.0 76.0% $(7.7) (23.3)% Technology Products 10.2 26.2% 7.9 18.2% 2.3 29.1% Value Added Services 3.4 8.8% 2.5 5.8% 0.9 36.0% ----- ----- ----- ----- ----- Totals $38.9 100.0% $43.4 100.0% $(4.5) (10.4)% ===== ===== ===== ===== =====
SALES (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/ (in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE) - ------------------- ------------- ------------- -------------- North America $18.7 48.1% $29.2 67.3% $(10.5) (36.0)% Europe 18.4 47.3% 13.1 30.2% 5.3 40.1% Asia 1.8 4.6% 1.1 2.5% 0.7 63.6% ----- ----- ----- ----- ------ Totals $38.9 100.0% $43.4 100.0% $ (4.5) (10.4)% ===== ===== ===== ===== ======
Sales of Automated Systems products during the nine-months ended March 31, 2007 reflected changes in original delivery schedules made by the Company's customers that accelerated delivery of several orders into the fourth quarter of fiscal 2006. The sales increase in the Technology Products Group was 16 primarily due to higher sales of the Company's commercial products and ScanWorks(R). The Company has focused resources on the sale of Value Added Services and believes that the sales improvement for this group is beginning to reflect the results from this effort. The sales decline in the nine-month period ended March 31, 2007 reflected customer delays primarily in North America, as customers delayed some of their tooling programs as a result of restructuring efforts and as programs were reassessed in response to demand for more fuel efficient models. The sales increase in Europe was due to increased sales for Automated Systems in fiscal 2007. The increase in Europe was also due in part to a favorable strengthening of the Euro during the first nine months of fiscal 2007 that based on conversion rates in effect during the nine-month period, resulted in approximately $1.4 million of higher sales than rates in effect in the corresponding period of fiscal 2006 would have yielded. BOOKINGS - New order bookings for the nine months ended March 31, 2007 were $46.7 million compared to $42.4 million for the same period one year ago. The amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company. The following tables set forth comparison data for the Company's bookings by product groups and geographic location.
BOOKINGS (BY GROUP) NINE MONTHS NINE MONTHS INCREASE/ (in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE) - ------------------- ------------- ------------- ------------- Automated Systems $25.7 55.0% $31.9 75.2% $(6.2) (19.4)% Technology Products 17.5 37.5% 7.3 17.2% 10.2 139.7% Value Added Services 3.5 7.5% 3.2 7.6% 0.3 9.4% ----- ----- ----- ----- ----- TOTALS $46.7 100.0% $42.4 100.0% $ 4.3 10.1% ===== ===== ===== ===== =====
BOOKINGS (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/ (in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE) - ---------------------- ------------- ------------- ------------- North America $27.4 58.7% $30.5 71.9% $(3.1) (10.2)% Europe 17.6 37.7% 10.7 25.3% 6.9 64.5% Asia 1.7 3.6% 1.2 2.8% 0.5 41.7% ----- ----- ----- ----- ----- TOTALS $46.7 100.0% $42.4 100.0% $ 4.3 10.1% ===== ===== ===== ===== =====
The decrease in new order bookings for both the Automated Systems Group and North America for the nine-months ended March 31, 2007 was primarily due to the significantly high level of AutoGauge(R) systems booked in the first half of fiscal 2006, principally as a result of several large orders to support a customer's new vehicle platform at several assembly plants in North America. Increased new order bookings in the Technology Products Group for the nine-months ended March 31, 2007 primarily represented increased bookings of commercial products. Bookings for WheelWorks(R) and ScanWorks(R), also increased on a comparable basis. North American new order bookings were also negatively impacted by customer delays as a result of customer restructuring efforts and as programs were reassessed by customers in response to demand for more fuel efficient models. Increased new order bookings in Europe in the nine-month period ended March 31, 2007, reflected strong orders received in the second and third quarters of fiscal 2007 and the generally weak state of many European economies in the 2006 period. Historically, the Company's rate of new orders has varied from quarter to quarter. Based on the timing of current customer programs that the Company is quoting, the Company expects new order bookings for the fourth quarter of fiscal 2007 to be comparable to the level of new orders received in the third quarter of fiscal 2007. The foregoing statements are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of a number of uncertainties which could cause actual results to differ materially from those set forth in the forward-looking statements. 17 GROSS PROFIT - Gross profit was $16.3 million, or 41.9% of sales, for the nine months ended March 31, 2007, as compared to $21.0 million, or 48.5% of sales, for the nine months ended March 31, 2006. The gross profit margin reduction was primarily due to higher installation labor and manufacturing costs as a percent of sales at the lower level of sales for the first nine months of fiscal 2007 and included a reserve for royalty costs, see note 8 to the Consolidated Financial Statements "Commitments and Contingencies". The reduction was mitigated by the benefit from the strengthening Euro exchange rate in fiscal 2007. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $12.3 million for the nine months ended March 31, 2007 compared to $10.8 million in the period one year ago. SG&A expenses were higher primarily due to salary and benefit increases, recruiting and relocation costs and travel of approximately $550,000. These increases primarily related to the Company's new sales growth opportunities in Asia and to support the new commercial products initiatives. The increase was also due to higher costs for various expenses including the unfavorable effect of the strengthening Euro on expenses and legal and auditing fees that were partially offset by lower commission expense and Michigan Single Business taxes. ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D expenses were $5.7 million in both nine-month periods ended March 31, 2007 and 2006 as salary and benefit increases in the current period were offset by decreased spending on engineering materials. INTEREST INCOME, NET - Net interest income was $767,000 in the nine months ended March 31, 2007 compared with net interest income of $457,000 in the nine months ended March 31, 2006. The increase was due to higher interest rates compared to one year ago and also reflected in the nine-month period of fiscal 2006 interest expense of approximately $53,000 on additional taxes related to a tax audit in Germany covering fiscal years 2001 through 2003. FOREIGN CURRENCY - There was a net foreign currency loss of $23,000 in the fiscal 2007 nine-month period compared with a net foreign currency loss of $45,000 a year ago and represents foreign currency changes, particularly the Euro and Yen, within the respective periods. OTHER - Other income in the fiscal 2006 nine-month period of $169,000 primarily reflected the value of stock received by the Company when a mutual life insurance company was demutualized. INCOME TAXES - The income tax benefit for the nine months ended March 31, 2007 included a one time tax benefit of approximately $98,000 recorded by the Company's German subsidiary that related to new corporate tax legislation. The tax benefit related to corporate tax credits derived under previous tax regulations that under the new legislation will be paid to the German subsidiary over a 10 year period. The benefit had the effect of reducing the effective tax rate for the nine-month period by 10.5%. Excluding this benefit, the effective tax rate for the fiscal 2007 nine-month period would have been 2.2% and primarily reflected the effect of pretax losses in North America being offset by pretax income in the Company's European subsidiaries which are taxed at higher rates. Income tax expense for the nine-month period ended March 31, 2006 included the recognition of a $725,000 tax benefit associated with reversing a valuation allowance related to net operating losses in North America that the Company believed would be utilized, and a $290,000 tax expense related to the repatriation of $6.3 million of unremitted earnings of certain of the Company's European subsidiaries under the provisions of the American Jobs Creation Act of 2004. The effective tax rate excluding these two items was 39.4% for the fiscal 2006 nine-month period and primarily reflected the effect of the mix of operating profit and loss among the Company's various operating entities and their countries' respective tax rates. 18 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $15.9 million at March 31, 2007, compared to $25.2 million at June 30, 2006. The cash decrease of $9.3 million for the nine months ended March 31, 2007 resulted primarily from $5.2 million used to repurchase shares of the Company's common stock and $4.8 million used for operations. The Company also used $945,000 for capital expenditures and received $1.3 million from the Company's stock plans. Depreciation and amortization was $960,000 during the nine months ended March 31, 2007. The $4.8 million used for operations was primarily related to $4.4 million of increased inventory purchases. The increase in inventory of $4.4 million was related to an increase of $2.7 million in work in process primarily to support the initial production of the new commercial products and an increase of $1.7 million in finished goods inventory to fulfill existing and anticipated orders primarily in Europe. The Company provides a reserve for obsolescence to recognize the effects of engineering change orders, age and use of inventory that affect the value of the inventory. A detailed review of the inventory is performed yearly with quarterly updates for known changes that have occurred since the annual review. When inventory is deemed to have no further use or value, the Company disposes of the inventory and the reserve for obsolescence is reduced. During fiscal 2007, the Company's German subsidiary made a change to separate its reserve for obsolescence from its inventory value to reflect the methodology used by the rest of the Company. As a result, the inventory of the German subsidiary is reported at a gross value and the reserve for obsolescence increased by $332,000, which had no effect on net income. During the nine months ended March 31, 2007, the Company disposed of $5,000 of inventory that had previously been reserved for at June 30, 2006. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company increased its allowance for doubtful accounts by $101,000 and wrote off $45,000 of receivables during the nine months ended March 31, 2007. The Company had no debt outstanding at March 31, 2007. The Company has a $7.5 million secured Credit Agreement with Comerica Bank, which expires on November 1, 2008. Proceeds under the Credit Agreement may be used for working capital and capital expenditures. The security for the loan is substantially all non real estate assets of the Company held in the United States. Borrowings are designated as a Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based Advances is payable on the last day of each month and is calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the bank's prime rate (8.25% as of March 31, 2007) dependent upon the Company's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at a specific margin above the Eurodollar Rate offered at the time and for the period chosen (approximately 7.23% as of March 31, 2007) dependent upon the Company's ratio of funded debt to EBITDA and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee on the daily unused portion of the Credit Agreement based on a percentage dependent upon the Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the Company from paying dividends. In addition, the Credit Agreement requires the Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of not less than $39.8 million as of March 31, 2007 and to have no advances outstanding for 30 consecutive days each calendar year. 19 At March 31, 2007, the Company's German subsidiary (GmbH) had an unsecured credit facility totaling 500,000 Euros (equivalent to approximately $667,000 at March 31, 2007). The facility may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings for working capital needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable. At March 31, 2007, GmbH had no borrowings outstanding. At March 31, 2007, the facility supported outstanding letters of credit totaling 54,300 Euros (equivalent to approximately $72,000). On August 7, 2006, the Company's Board of Directors ("Board") approved a stock repurchase program authorizing the Company to repurchase up to $3.0 million of the Company's Common Stock through August 2007. On November 13, 2006, the Board approved a $2.0 million increase to the stock repurchase program bringing the total repurchase authority to $5.0 million through August 2007. The Company may buy shares of its Common Stock on the open market or in privately negotiated transactions from time to time, based on market prices. The program may be discontinued at any time. The Company also announced that it had entered into a Rule 10b5-1 trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to purchase up to $5.0 million of the Company's Common Stock through August 2007 (less the dollar amount of purchases by the Company outside the Repurchase Plan), in open market or privately negotiated transactions, in accordance with the requirements of Rule 10b-18. See Part II Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds" for a discussion of the Repurchase Plan. The Company completed its repurchase plan during the third quarter of fiscal 2007. See Note 8 to the Consolidated Financial Statements, "Commitments and Contingencies", contained in this Quarterly Report on Form 10-Q, Item 3, "Legal Proceedings" and Note 6 to the Consolidated Financial Statements, "Contingencies", of the Company's Annual Report on Form 10-K for fiscal year 2006, for a discussion of certain contingencies relating to the Company's liquidity, financial position and results of operations. See also, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Litigation and Other Contingencies" of the Company's Annual Report on Form 10-K for fiscal year 2006. The Company expects to spend approximately $1.4 million during fiscal year 2007 for capital equipment, although there is no binding commitment to do so. Based upon the Company's current business plan, the Company believes that available cash on hand and existing credit facilities will be sufficient to fund its currently anticipated fiscal 2007 cash flow requirements and its cash flow requirements for at least the next few years, except to the extent that the Company implements new business development opportunities, which would be financed as discussed below. The Company does not believe that inflation has significantly impacted historical operations and does not expect any significant near-term inflationary impact. The foregoing statements are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement" for a discussion of a number of uncertainties which could cause actual results to differ materially from those set forth in the forward-looking statements. The Company will consider evaluating business opportunities that fit its strategic plans. There can be no assurance that the Company will identify any opportunities that fit its strategic plans or will be able to enter into agreements with identified business opportunities on terms acceptable to the Company. The Company intends to finance any such business opportunities from available cash on hand, existing credit facilities, issuance of additional shares of its stock or additional sources of financing, as circumstances warrant. 20 CRITICAL ACCOUNTING POLICIES A summary of critical accounting policies is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of the Company's Annual Report on Form 10-K for fiscal year 2006. MARKET RISK INFORMATION The Company's primary market risk is related to foreign exchange rates. The foreign exchange risk is derived from the operations of its international subsidiaries, which are primarily located in Germany and for which products are produced in the United States. The Company may from time to time have interest rate risk in connection with its investment of its cash. FOREIGN CURRENCY RISK The Company has foreign currency exchange risk in its international operations arising from the time period between sales commitment and delivery for contracts in non-United States currencies. For sales commitments entered into in the non-United States currencies, the currency rate risk exposure is predominantly less than one year with the majority in the 120 to 150 day range. At March 31, 2007, the Company's percentage of sales commitments in non-United States currencies was approximately 39.5% or $10.5 million, compared to 41.5% or $7.1 million at March 31, 2006. The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. These transactions involve the use of forward contracts, typically mature within one year and are designed to hedge anticipated foreign currency transactions. The Company may use forward exchange contracts to hedge the net assets of certain of its foreign subsidiaries to offset the translation and economic exposures related to the Company's investment in these subsidiaries. At March 31, 2007, the Company had forward exchange contracts to sell 3.0 million Euros ($4.0 million equivalent) at a weighted average settlement rate of 1.32 Euros to the United States Dollar. The contracts outstanding at March 31, 2007, mature through September 28, 2007. The objective of the hedge transactions is to protect designated portions of the Company's net investment in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The Company assesses hedge effectiveness based on overall changes in fair value of the forward contract. Since the critical risks of the forward contract and the net investment coincide, there was no ineffectiveness. The accounting for the hedges is consistent with translation adjustments where any gains and losses are recorded to other comprehensive income. The Company recognized a charge of approximately $23,000 and $47,000 in other comprehensive income (loss) for the unrealized change in value of the forward exchange contracts during the three and nine months ended March 31, 2007, respectively. Offsetting this amount was an increase in other comprehensive income (loss) for the translation effect of the Company's foreign subsidiary. Because the forward contracts were effective, there was no gain or loss recognized in earnings. The Company's forward exchange contracts do not subject it to material risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged. At March 31, 2006, the Company had $4.8 million of forward exchange contracts between the United States Dollar and the Euro with a weighted average settlement price of 1.21 Euros to the United States Dollar. The Company recognized a charge of $33,000 and income of $99,000 in other comprehensive income (loss) for the unrealized and realized change in value of forward exchange contracts during the three and nine months ended March 31, 2006, respectively. 21 The Company's potential loss in earnings that would have resulted from a hypothetical 10% adverse change in quoted foreign currency exchange rates related to the translation of foreign denominated revenues and expenses into U.S. dollars for the three and nine months ended March 31, 2007 would have been approximately $99,000 and $48,000, respectively. The potential loss in earnings for the comparable periods in fiscal 2006 would have been approximately $71,000 and $2,000, respectively. INTEREST RATE RISK The Company invests its cash and cash equivalents in high quality, short-term investments with primarily a term of three months or less. Given the short maturities and investment grade quality of the Company's investment holdings at March 31, 2007, a 100 basis point rise in interest rates would not be expected to have a material adverse impact on the fair value of the Company's cash and cash equivalents. As a result, the Company does not currently hedge these interest rate exposures. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 10 to the Consolidated Financial Statements, "New Accounting Pronouncements". SAFE HARBOR STATEMENT We make statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations that may be ~~"forward-looking statements"~~“forward-looking statements” within the meaning of the Securities Exchange Act of 1934, including the ~~Company's~~Company’s expectation as to ~~fiscal 2007 and~~ fiscal 2008 and future new order bookings, revenue, expenses, net income and backlog levels, trends affecting its future revenue levels, the rate of new orders, the timing of revenue and net income increases from new products which we have recently released or have not yet released and from our plans to make important new investments, largely for personnel, for newly introduced products and geographic growth opportunities in the U.S., Europe, Eastern Europe, Asia, the timing of the introduction of new products, our ability to fund our fiscal year ~~2007~~2008 cash flow requirements and ~~customers'~~customers’ current and future interest in our Value Added Services. We may also make forward-looking statements in our press releases or other public or shareholder communications. When we use words such as ~~"will," "should," "believes," "expects," "anticipates," "estimates"~~“will,” “should,” “believes,” “expects,” “anticipates,” “estimates” or similar expressions, we are making forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in our reports filed with the Securities and Exchange Commission, including those listed in ~~"Item~~“Item 1A -— Risk ~~Factors"~~Factors” of the ~~Company's~~Company’s Annual Report on Form ~~10-K~~10-K/A-1 for fiscal year ~~2006.~~2007. Other factors not currently anticipated by management may also materially and adversely affect our financial condition, liquidity or results of operations, as well as the following: the dependence of the Company's revenue on a number of sizable orders from a small number of customers concentrated in the Automotive industry, particularly in the United States and Europe, the dependence of the Company's net income levels on increasing revenues, continued pricing pressures from the Company's customers, the timing of orders and shipments which can cause the Company to experience significant fluctuations in its quarterly and annual revenue, order bookings, backlog and operating results, timely receipt of required supplies and components which could result in delays in anticipated shipments, continued access to third party components for our ScanWorks(R) systems, the ability of the Company to successfully compete with alternative and similar 22 technologies, the timing, number and continuation of the Automotive industry's retooling programs, including the risk that the Company's customers postpone new tooling programs as a result of economic conditions or otherwise, the ability of the Company to develop and introduce new products, the ability of the Company to expand into new markets in Eastern Europe and Asia, the ability of the Company to attract and retain key personnel, especially technical personnel, the quality and cost of competitive products already in existence or developed in the future, rapid or unexpected technological changes, the ability of the Company to identify and satisfy demand for the Company's Value Added Services, the ability of the Company to identify business opportunities that fit the Company's strategic plans, the ability to implement identified business opportunities on terms acceptable to the Company and the effect of economic conditions, particularly economic conditions in the domestic and worldwide Automotive industry, which has from time to time been subject to cyclical downturns due to the level of demand for, or supply of, the products produced by companies in this industry. The ability of the Company to develop and introduce new products, especially in markets outside of automotive, is subject to a number of uncertainties, including general product demand and market acceptance risks, the ability of the Company to resolve technical issues inherent in the development of new products and technologies, the ability of the Company to identify and satisfy market needs, the ability of the Company to identify satisfactory distribution networks, the ability of the Company to develop internally or identify externally high quality cost effective manufacturing capabilities for the products, general product development and commercialization difficulties, and the level of interest existing and potential new customers may have in new products and technologies generally. The ability of the Company to expand into new geographic markets is subject to a number of uncertainties, including the timing of customer acceptance of the Company's products and technologies, the impact of changes in local economic conditions, the ability of the Company to attract the appropriate personnel to effectively represent, install and service the Company's products in the market and uncertainties inherent in doing business in foreign markets, especially those that are less well developed than the Company's traditional markets, such as the impact of fluctuations in foreign currency exchange rates, foreign government controls, policies and laws affecting foreign trade and investment, differences in the level of protection available for the Company's intellectual property and differences in language and local business and social customs. The ability of the Company to identify and satisfy demand for the Company's Value Added Services is subject to a number of uncertainties including that these services represent discretionary spending by customers and so tend to decline during economic downturns even if product sales do not decline.operations. Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. The ~~Company's~~Company’s expectations regarding future bookings and revenues are projections developed by the Company based upon information from a number of sources, including, but not limited to, customer data and discussions. These projections are subject to change based upon a wide variety of factors, a number of which are discussed above. Certain of these new orders have been delayed in the past and could be delayed in the future. Because the ~~Company's~~Company’s products are typically integrated into larger systems or lines, the timing of new orders is dependent on the timing of completion of the overall system or line. In addition, because the ~~Company's~~Company’s products have shorter lead times than other components and are required later in the process, orders for the ~~Company's~~Company’s products tend to be given later in the integration process. A significant portion of the ~~Company's~~Company’s projected revenues and net income depends upon the ~~Company's~~Company’s ability to successfully develop and introduce new products and expand into new geographic markets. Because a significant portion of the ~~Company's~~Company’s revenues are denominated in foreign currencies and are translated for financial reporting purposes into U.S. Dollars, the level of the ~~Company's~~Company’s reported net sales, operating profits and net income are affected by changes in currency exchange rates, principally between U.S. Dollars and Euros. Currency exchange rates are subject to significant fluctuations, due to a number of factors beyond the control of the Company, including general economic conditions in the United States and other countries. Because the ~~Company's~~Company’s expectations regarding future revenues, order bookings, backlog and operating results are based upon assumptions as to the levels of such currency exchange rates, actual results could differ materially from the ~~Company's~~Company’s expectations. 23

~~OVERVIEW~~

Perceptron, Inc. (“Perceptron” or the “Company”) develops, produces and markets non-contact metrology solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement and inspection applications. Perceptron’s product offerings are designed to improve quality, increase productivity and decrease costs in manufacturing and product development. Perceptron also produces innovative technology solutions for scanning and inspection, serving industrial, trade and consumer applications. The solutions offered by the Company are divided into two segments: 1) The Automated Systems segment made up of AutoGaugeâ, AutoFitâ, AutoScanâ, and AutoGuideâ products and Value Added Services for consulting, training and non-warranty support services; and 2) The Technology Products segment made up of ScanWorksâ, Non-Contact Wheel Alignment (“WheelWorksâ”), TriCamâ sensors for the forest products industry and commercial products. The Company services multiple markets, with the largest being the automotive industry. The Company’s primary operations are in the Americas, Europe and Asia.

In the fiscal quarter ended March 31, 2007 the Company launched its first commercial product, the SeeSnakeâ micro™, designed to be used by professional tradespersons as well as individual homeowners. The SeeSnakeâ micro™ is an optical technology tool that allows its user to see in unreachable places, via a liquid crystal display screen on a hand held unit. It is used to detect and diagnose problems a tradesperson or homeowner may have beneath, behind, or in-between places that cannot otherwise be seen — such as around machinery, inside pipes, behind walls, inside ductwork, etc. Attachments also allow the user to retrieve loose objects via a hook or magnet. The product is sold to Ridge Tool pursuant to a long-term supply agreement, which requires Ridge Tool to purchase certain minimum levels of product to maintain exclusivity. The Company expects to introduce additional electronic inspection products in fiscal 2008 and future years.

New vehicle tooling programs represent the most important selling opportunity for the Company’s automotive related sales. The number and timing of new vehicle tooling programs varies in accordance with individual automotive manufacturers’ plans and is also influenced by the state of the economy.

The Company is continuing its efforts to expand its opportunities outside the automotive industry, through both the new commercial product development efforts in its Technology Products segment and with non-automotive prospects for its Automated Systems. The Company expects sales from its Technology Products segment, in large part due to anticipated growth in commercial products, to become a greater percentage of overall revenue in fiscal 2008.

The Company’s financial base remained strong, and strengthened during the quarter, with no debt and approximately $24.6 million of cash and short-term investments at September 30, 2007 available to support its growth plans. Near-term the Company will focus on the successful production and release of its recently announced new line of electronic inspection products and its previously announced growth strategy in new geographic markets, principally in Asia.

As detailed in Note 13 to the Consolidated Financial Statements, “Restatement of Previously Issued Consolidated Financial Statements”, subsequent to filing the Company’s Form 10-K for the fiscal year ended June 30, 2007, then Company determined that its previously issued Consolidated Balance Sheets had short-term investments incorrectly identified and reported with cash and cash equivalents. As a result, we restated our financial statements for the fiscal years 2007, 2006 and 2005.

~~RESULTS OF OPERATIONS~~

Overview— For the first quarter of fiscal 2008, the Company reported net income of $447,000, or $0.05 per diluted share, compared to net loss of $641,000 or $0.08 per diluted share, for the first quarter of fiscal 2007. Specific line item results are described below.

Sales— Net sales were $17.7 million for the first quarter of fiscal 2008 compared to net sales of $10.7 million for the same period one year ago. The following tables set forth comparison data for the Company’s net sales by segment and geographic location.

First First
Sales (by segment) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Automated Systems $ 8.1 45.8 % $ 7.8 72.9 % $ 0.3 3.8 %
Technology Products 9.6 54.2 % 2.9 27.1 % 6.7 231.0 %

Totals
$ 17.7 100.0 % $ 10.7 100.0 % $ 7.0 65.4 %

First First
Sales (by location) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Americas $ 13.0 73.4 % $ 4.5 42.1 % $ 8.5 188.9 %
Europe 4.0 22.6 % 5.6 52.3 % (1.6 ) (28.6 )%
Asia 0.7 4.0 % 0.6 5.6 % 0.1 16.7 %

Totals
$ 17.7 100.0 % $ 10.7 100.0 % $ 7.0 65.4 %

Sales of the Company’s Technology Products increased $6.7 million primarily due to the new commercial product that was not available in the first quarter of fiscal 2007. This was also the primary cause of the increase in sales in the Americas in fiscal 2008 compared to fiscal 2007. The Company also experienced growth in our North American Automated Systems business that was partially offset by lower Automated Systems sales in Europe. The sales decrease in Europe was mitigated by a favorable strengthening of the Euro during the first quarter of fiscal 2008 that based on conversion rates in effect during the quarter, resulted in approximately $286,000 of higher sales than rates in effect in the corresponding quarter of fiscal 2007 would have yielded.

Bookings— Bookings represent new orders received from customers. The Company had new order bookings during the quarter of $17.5 million compared with new order bookings of $19.7 million in the fourth quarter of fiscal 2007 and $9.6 million for the quarter ended September 30, 2006. The amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company. The following tables set forth comparison data for the Company’s bookings by segments and geographic location.

First First
Bookings (by segment) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Automated Systems $ 11.8 67.4 % $ 6.6 68.8 % $ 5.2 78.8 %
Technology Products 5.7 32.6 % 3.0 31.2 % 2.7 90.0 %

Totals
$ 17.5 100.0 % $ 9.6 100.0 % $ 7.9 82.3 %

First First
Bookings (by location) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Americas $ 9.8 56.0 % $ 6.3 65.6 % $ 3.5 55.6 %
Europe 6.4 36.6 % 2.8 29.2 % 3.6 128.6 %
Asia 1.3 7.4 % 0.5 5.2 % 0.8 160.0 %

Totals
$ 17.5 100.0 % $ 9.6 100.0 % $ 7.9 82.3 %

The Company’s level of new orders, particularly as they relate to the Automated Systems segment, fluctuates from quarter to quarter. Automated Systems bookings increased $5.2 million in the first quarter of fiscal 2008 over the same quarter in fiscal 2007. The orders received during the first quarter of fiscal 2007 were unusually low in both the Americas and Europe as a result of the timing of orders on customer programs. Technology Products bookings during the first quarter of fiscal 2008 increased $2.7 million over the previous year primarily as a result of orders received for the Company’s new commercial product that was not available in the first quarter of fiscal 2007. This was also the primary cause of the increase in bookings in the Americas in fiscal 2008 compared to fiscal 2007.

Backlog—Backlog represents orders or bookings received by the Company that have not yet been filled. The Company’s backlog was $22.8 million as of September 30, 2007 compared with $23.0 million as of June 30, 2007 and $17.7 million as of September 30, 2006. The following tables set forth comparison data for the Company’s backlog by segments and geographic location.

First First
Backlog (by segment) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Automated Systems $ 16.8 73.7 % $ 15.9 89.8 % $ 0.9 5.7 %
Technology Products 6.0 26.3 % 1.8 10.2 % 4.2 233.3 %

Totals
$ 22.8 100.0 % $ 17.7 100.0 % $ 5.1 28.8 %

First First
Backlog (by location) Quarter Quarter
(in millions) 2008 2007 Increase/(Decrease)
Americas $ 13.2 57.9 % $ 9.9 55.9 % $ 3.3 33.3 %
Europe 8.7 38.2 % 7.5 42.4 % 1.2 16.0 %
Asia 0.9 3.9 % 0.3 1.7 % 0.6 200.0 %

Totals
$ 22.8 100.0 % $ 17.7 100.0 % $ 5.1 28.8 %

The Company expects to be able to fill substantially all of the orders in backlog at September 30, 2007 during the following twelve months. The level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company.

Gross Profit— Gross profit was $7.1 million, or 40.2% of sales, in the first quarter of fiscal year 2008, as compared to $4.5 million, or 41.9% of sales, in the first quarter of fiscal year 2007. The gross profit margin reduction was primarily due to higher Technology Products sales which have lower margins than Automated Systems sales and the impact of fixed labor related costs on lower European automotive sales compared to the first quarter of fiscal 2007. The reduction was mitigated by the benefit from the strengthening Euro exchange rate this quarter compared with the first quarter of fiscal 2007.

Selling, General and Administrative (SG&A) Expenses— SG&A expenses were $4.4 million in the quarter ended September 30, 2007 compared to $3.9 million in the first quarter a year ago. The $516,000 increase in SG&A expenses in fiscal 2008 were primarily due to increases for personnel additions, recruiting and relocation, and travel of approximately $211,000 to support growth opportunities in Asia and $174,000 for personnel and marketing expenses related to the new commercial products initiatives. The balance of the increase totaling $131,000 was primarily due to a charge related to the departure of a company executive, the unfavorable effect of the strengthening Euro on expenses and higher medical benefit costs in the U.S. which were mitigated by lower legal and bad debt expenses.

Engineering, Research and Development (R&D) Expenses— Engineering and R&D expenses were $2.2 million in the quarter ended September 30, 2007 compared to $1.7 million in the first quarter a year ago.

The increase was due to higher labor and benefit expenses of approximately $220,000 and engineering materials and contract services of approximately $235,000 primarily to support new development in the Technology Products segment for commercial products.

Interest Income, net— Net interest income was $215,000 in the first quarter of fiscal 2008 compared with net interest income of $314,000 in the first quarter of fiscal 2007. The decrease was primarily due to lower average cash and investment balances in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.

Foreign Currency— There was net foreign currency income of $131,000 in the first quarter of fiscal 2008 compared with a net foreign currency loss of $5,000 in the first quarter of fiscal 2007 as a result of foreign currency changes, particularly in the Yen, within the respective quarters.

Income Taxes—The effective tax rates for the first quarter of fiscal 2008 and 2007 of 47.4% and 21.6% respectively, primarily reflected the effect of the mix of operating profit and loss among the Company’s various operating entities and their countries’ respective tax rates. On a comparison basis, the first quarter of fiscal 2008 had increased income in the United States and a loss in Europe compared to the fiscal 2007 quarter which had a loss in the United States and income in Europe.

Outlook— The Company expects both revenue and earnings growth for the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. Additionally, the Company expects both new orders and sales will show significant growth in fiscal 2008 compared to fiscal 2007 based on anticipated sales opportunities within the Technology Products segment for the new commercial product offering and the number and value of projects currently being considered by customers of our Automated Systems products. The Company anticipates operating income as a percentage of sales will increase during fiscal 2008 because the incremental sales growth in Technology Products is expected to be accompanied by relatively small increases in SG&A costs.

~~LIQUIDITY AND CAPITAL RESOURCES~~

The Company’s cash and cash equivalents were $18.3 million at September 30, 2007, compared to $10.9 million at June 30, 2007. The cash increase of $7.4 million for the quarter ended September 30, 2007 resulted primarily from $6.1 million of cash generated from operations and $1.0 million received from the Company’s stock plans, which were offset by $201,000 used for capital expenditures.

The $6.1 million in cash provided from operations was primarily generated from changes in net working capital of $5.0 million. Net working capital is defined as changes in assets and liabilities, exclusive of changes shown separately on the Consolidated Statements of Cash Flow. The net working capital change resulted primarily from reductions of receivables of $5.6 million and a favorable change of $890,000 in other current assets and liabilities that were offset by an increase in inventory of $885,000 and a reduction in accounts payable of $638,000. The $5.6 million reduction in receivables primarily related to cash collections during the quarter exceeding new sales in the quarter. Inventory increased $885,000 due to purchases of long lead time items required to fill anticipated orders.

The Company provides a reserve for obsolescence to recognize the effects of engineering change orders, age and use of inventory that affect the value of the inventory. A detailed review of the inventory is performed yearly with quarterly updates for known changes that have occurred since the annual review. When inventory is deemed to have no further use or value, the Company disposes of the inventory and the reserve for obsolescence is reduced. During the first quarter of fiscal 2008, the Company increased the reserve for obsolescence by $122,000 and disposed of $12,000 of inventory that had previously been reserved for at June 30, 2007.

The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company decreased its allowance for doubtful accounts by $67,000 and wrote off $5,000 of receivables during the first quarter of fiscal 2008.

The Company had no debt outstanding at September 30, 2007. The Company has a $7.5 million secured Credit Agreement with Comerica Bank, which expires on November 1, 2008. Proceeds under the Credit Agreement may be used for working capital and capital expenditures. The security for the loan is substantially all non real estate assets of the Company held in the United States. Borrowings are designated as a Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based Advances is payable on the last day of each month and is calculated daily at a rate that ranges from a¹/2% below to a¹/4% above the bank’s prime rate (7.75% as of September 30, 2007) dependent upon the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). Interest on Eurodollar-based Advances is calculated at a specific margin above the Eurodollar Rate offered at the time and for the period chosen (approximately 7.11% as of September 30, 2007) dependent upon the Company’s ratio of funded debt to EBITDA and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee on the daily unused portion of the Credit Agreement based on a percentage dependent upon the Company’s ratio of funded debt to EBITDA. The Credit Agreement prohibits the Company from paying dividends. In addition, the Credit Agreement requires the Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of not less than $41.2 million as of September 30, 2007 and to have no advances outstanding for 30 consecutive days each calendar year. At September 30, 2007, the Company had no borrowings outstanding.

At September 30, 2007, the Company’s German subsidiary (GmbH) had an unsecured credit facility totaling 500,000 Euros (equivalent to approximately $713,600 at September 30, 2007). The facility may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings for working capital needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable. At September 30, 2007, GmbH had no borrowings outstanding.

See Note 10 to the Consolidated Financial Statements, “Commitments and Contingencies”, contained in this Quarterly Report on Form 10-Q, Item 3, “Legal Proceedings” and Note 6 to the Consolidated Financial Statements, “Contingencies”, of the Company’s Annual Report on Form 10-K/A-1 for fiscal year 2007, for a discussion of certain contingencies relating to the Company’s liquidity, financial position and results of operations. See also, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Litigation and Other Contingencies” of the Company’s Annual Report on Form 10-K/A-1 for fiscal year 2007.

~~The Company expects to spend approximately $1.5 million during fiscal year 2008 for capital expenditures, although there is no binding commitment to do so.~~

resulted in the interest rate on these investments resetting at a premium interest rate (in the range of 6.7% to 9.1%). In the event the Company needs to access the funds invested in these auction rate securities, the Company would not able to liquidate these securities until a future auction of these securities is successful or a buyer is found outside of the auction process. Under applicable accounting rules, the Company will evaluate the securities each reporting period for temporary and other than temporary impairments, and to determine whether the securities remain properly classified as short-term. If there are any unrealized losses on these securities, they would be reported as other comprehensive income as a separate component of shareholders’ equity until the security is sold and the loss realized or until a decline in fair value is determined to be other than temporary, at which time the losses would be reflected in the Company’s Consolidated Statement of Income. In October 2007 we identified a temporary impairment of approximately $370,000 pre-tax related to these auction rate securities that would be charged to Accumulated Other Comprehensive Income on the Balance Sheet in the second quarter of our fiscal year 2008 if current market conditions persist. See Note 2 to the Consolidated Financial Statements, “Short-term Investments” for further information on the Company’s short-term investments.

Based on the Company’s current business plan, cash and cash equivalents of $18.3 million at September 30, 2007 and its existing unused credit facilities, the Company does not currently anticipate that the lack of liquidity on these short-term investments will affect the Company’s ability to operate or fund its currently anticipated fiscal 2008 cash flow requirements.

Also based upon the Company’s current business plan, the Company believes that available cash on hand and existing credit facilities will be sufficient to fund its cash flow requirements for at least the next few years, except to the extent that the Company implements new business development opportunities, which would be financed as discussed below. The Company does not believe that inflation has significantly impacted historical operations and does not expect any significant near-term inflationary impact.

The Company will consider evaluating business opportunities that fit its strategic plans. There can be no assurance that the Company will identify any opportunities that fit its strategic plans or will be able to enter into agreements with identified business opportunities on terms acceptable to the Company. The Company intends to finance any such business opportunities from available cash on hand, existing credit facilities, issuance of additional shares of its stock or additional sources of financing, as circumstances warrant.

~~CRITICAL ACCOUNTING POLICIES~~

A summary of critical accounting policies is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” of the Company’s Annual Report on Form 10-K/A-1 for fiscal year 2007.

~~MARKET RISK INFORMATION~~

The Company’s primary market risk is related to foreign exchange rates. The foreign exchange risk is derived from the operations of its international subsidiaries, which are primarily located in Germany and for which products are produced in the United States. The Company may from time to time have interest rate risk in connection with its investment of its cash.

~~Foreign Currency Risk~~

The Company has foreign currency exchange risk in its international operations arising from the time period between sales commitment and delivery for contracts in non-United States currencies. For sales commitments entered into in the non-United States currencies, the currency rate risk exposure is

predominantly less than one year with the majority in the 120 to 150 day range. At September 30, 2007, the Company’s percentage of sales commitments in non-United States currencies was approximately 39.0% or $8.9 million, compared to 48.8% or $8.6 million at September 30, 2006.

At September 30, 2007, the Company had forward exchange contracts to sell 5.0 million Euros ($6.9 million equivalent) at a weighted average settlement rate of 1.38 Euros to the United States Dollar. The contracts outstanding at September 30, 2007, mature through March 31, 2008. The objective of the hedge transactions is to protect designated portions of the Company’s net investment in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The Company assesses hedge effectiveness based on overall changes in fair value of the forward contract. Since the critical risks of the forward contract and the net investment coincide, there was no ineffectiveness. The accounting for the hedges is consistent with translation adjustments where any gains and losses are recorded to other comprehensive income. The Company recognized a loss of approximately $236,000 in other comprehensive income (loss) for the unrealized and realized change in value of the forward exchange contracts during the quarter ended September 30, 2007. Offsetting this amount in other comprehensive income (loss) was the translation effect of the Company’s foreign subsidiary. Because the forward contracts were effective, there was no gain or loss recognized in earnings. The Company’s forward exchange contracts do not subject it to material risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged.

At September 30, 2006, the Company had approximately $2.6 million of forward exchange contracts between the United States Dollar and the Euro with a weighted average settlement price of 1.28 Euros to the United States Dollar. The Company recognized income of $73,000 in other comprehensive income (loss) for the unrealized change in value of forward exchange contracts during the quarter ended September 30, 2006.

The Company’s potential loss in earnings that would have resulted from a hypothetical 10% adverse change in quoted foreign currency exchange rates related to the translation of foreign denominated revenues and expenses into U.S. dollars for the three months ended September 30, 2007 and 2006 would have been approximately $40,000 and $18,000, respectively.

~~Interest Rate Risk~~

The Company invests its cash and cash equivalents in high quality, short-term investments with primarily a term of three months or less. The Company’s short-term investments at September 30, 2007 consist of investment grade auction rate securities for which an auction is held every 28 days to provide holders of these auction rate securities the opportunity to increase (buy), decrease (sell) or hold their investment and to reset the yield on the investments. Given the short maturities, 28 day auction cycles, and investment grade quality of the Company’s investment holdings at September 30 2007, a 100 basis point rise in interest rates would not be expected to have a material adverse impact on the fair value of the Company’s cash and cash equivalents and short-term investments. As a result, the Company does not currently hedge these interest rate exposures.

The Company’s short-term investments are also subject to risk due to a decline in value of the investment. As a result of negative conditions in the global credit markets, auctions for the $6.3 million of investments the Company held as of September 30, 2007 in auction rate securities have failed beginning

in August 2007. In the event the Company needs to access the funds invested in these auction rate securities, the Company would not be able to liquidate these securities until a future auction of these securities is successful or a buyer is found outside of the auction process. The Company could experience losses on any such sales outside of the auction process. In addition, in the event that the auctions for these securities continue to fail, the Company is likely to have to record an impairment charge relating to a decline in the value of these securities. See Note 2 to the Consolidated Financial Statements,“Short-term Investments”.

~~New Accounting Pronouncements~~

~~For a discussion of new accounting pronouncements, see Note 11 to the Consolidated Financial Statements, “New Accounting Pronouncements”.~~

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

Information required pursuant to this item is incorporated by reference herein from Item 2 ~~"Management's~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations -— Market Risk ~~Information"~~Information”.

~~ITEM 4. CONTROLS AND PROCEDURES~~

The Company carried out an evaluation, under the supervision and with the participation of the ~~Company's~~Company’s management, including its Chief Executive Officer and ~~Acting~~ Chief Financial Officer, of the effectiveness of the design and operation of the ~~Company's~~Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the ~~Company's~~Company’s Chief Executive Officer and ~~Acting~~ Chief Financial Officer concluded that, as of ~~March 31,~~September 30, 2007, solely as a result of the ~~Company's~~material weakness in our internal control over financial reporting discussed below, the Company’s disclosure controls and procedures were not effective in causing the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported, to the extent applicable, within the time periods required for the Company to meet the Securities and Exchange ~~Commission's ("SEC"~~Commission’s (“SEC”) filing deadlines for these reports specified in the ~~SEC's~~SEC’s rules and forms. ~~There~~

During the quarter ended June 30, 2007, in connection with the audit of the Company’s consolidated financial statements as of June 30, 2007, the Company and its outside auditor, Grant Thornton LLP, identified a material weakness in the Company’s internal control over financial reporting related to the calculation and review of income taxes. This deficiency resulted from an ineffective review process. As a result of this deficiency, there were errors in the accounting for the provision for income taxes, deferred income taxes, and current income taxes payable, primarily related to the Company’s foreign operations, which were detected and remedied in connection with the preparation of the Company’s consolidated financial statements as of June 30, 2007. The Company believes it has remediated the material weakness during the first quarter of fiscal year 2008 by implementing additional monitoring and oversight controls, principally engaging external tax advisors to assist in the review of the Company’s income tax calculations to ensure compliance with generally accepted accounting principles.

During the first quarter of fiscal year 2008, the Company identified a material weakness in the Company’s internal control over financial reporting related to the identification and reporting of certain short-term investments as cash and cash equivalents. This deficiency resulted from the misclassification of these investments as cash equivalents and an error in applying generally accepted accounting principals in the classification of certain of the Company’s investments. The investments were primarily in investment grade auction rate securities. An auction is held every 28 days to provide holders of the investment the opportunity to increase (buy), decrease (sell) or hold their investment. In the past the

Company identified and reported its auction rate securities as cash equivalents. Further review by the Company of these investments together with applicable accounting and SEC literature has determined that the Company made an error in classifying these short-term investments as a cash equivalent. As a result, the Company restated its Balance Sheet, Cash Flow Statements and related disclosures on Form 10-K/A-1 dated November 16, 2007 to reflect the short-term investments separately from cash and cash equivalents. See Item 1, Note 13 to the Consolidated Financial Statements, “Restatement of Previously Issued Consolidated Financial Statements” of this Form 10-Q for details of the restatements. The Company is in the process of remediating the material weakness by revising its investment policy and implementing additional review and oversight processes to ensure compliance with generally accepted accounting principles.

Except as discussed above, there have been no ~~significant~~ changes in the ~~Company's~~Company’s internal controls over financial reporting during the quarter ended ~~March 31,~~September 30, 2007 identified in connection with the ~~Company's~~Company’s evaluation that has materially affected, or is reasonably likely to materially affect, the ~~Company's~~Company’s internal controls over financial reporting.

~~PART II. OTHER INFORMATION~~

~~ITEM 1A. RISK FACTORS~~

No material changes were made to the risk factors listed in ~~"Item~~“Item 1A -— Risk ~~Factors"~~Factors” of the ~~Company's~~Company’s Annual Report on Form ~~10-K~~10-K/A-1 for fiscal year ~~2006.~~ 2007.

~~ITEM ~~2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth information concerning~~5. OTHER INFORMATION~~

On November 12, 2007, the ~~Company's repurchases of its common stock during the quarter ended March 31, 2007. All shares were purchased pursuant to the Company's stock repurchase program described below.~~
(C) TOTAL NUMBER (A) TOTAL OF SHARES (D) APPROXIMATE DOLLAR NUMBER OF (B) AVERAGE PURCHASED AS PART VALUE OF SHARES THAT SHARES PRICE PAID OF PUBLICLY MAY YET BE PURCHASED PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM - ------ --------- ----------- ----------------- ---------------------- January 1-31, 2007 104,200 $8.84 104,200 $561,415 February 1-28, 2007 61,600 $8.99 61,600 $ 7,365 ------- ------- Total 165,800 $8.90 165,800 $ 7,365 ======= =======
~~On August 7, 2006, the Company's~~ Board of Directors ~~("Board") approved a stock repurchase program authorizing~~adopted Amended and Restated Bylaws. The amendment allows for the Company to repurchase up to $3.0 million of the Company's Common Stock through August 2007. On November 13, 2006, the Board approved a $2.0 million increase to the stock repurchase program bringing the total repurchase authority to $5.0 million through August 2007. The Company may buyissue shares of its Common Stock on the open market or in privately negotiated transactions from time to time, based on market prices. The program may be discontinued at any time. The Company 24 also announced that it had entered into a Rule 10b5-1 trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to purchase up to $5.0 million of the Company's Common Stock through August 2007 (less the dollar amount of purchases by the Company outside the Repurchase Plan), in open market or privately negotiated transactions, in accordance with the requirements of Rule 10b-18. The Company completed the stock repurchase program during the third quarter of fiscal 2007. without certificates.

ITEM 6. EXHIBITS 31.1 Certification by the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a). 31.2 Certification by the Acting Chief Financial Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a). 32.1 Certification by the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by the Acting Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 25

3.1.		Amended and Restated Bylaws, as amended to date.

10.46		First Amendment to Severance Agreement dated October 2, 2007 between Perceptron, Inc. and Wilfred J. Corriveau is incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on October 11, 2007.

31.1		Certification by the Chief Executive Officer of the Company pursuant to Rule 13a — 14(a) and Rule 15d — 14(a).

31.2		Certification by the Chief Financial Officer of the Company pursuant to Rule 13a — 14(a) and Rule 15d — 14(a).

32.1		Certification by the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PERCEPTRON, INC. (Registrant) Date: May 14, 2007 By: /S/ Alfred A. Pease ------------------------------------ Alfred A. Pease Chairman of the Board, President and Chief Executive Officer Date: May 14, 2007 By: /S/ Sylvia M. Smith ------------------------------------ Sylvia M. Smith Acting Chief Financial Officer, Controller and Chief Accounting Officer (Principal Financial Officer) (Principal Accounting Officer) 26


	September 30,			June 30,
(In Thousands, Except Per Share Amount)	2007			2007
	(Unaudited)			As Restated
				(Note 13)
ASSETS

Current Assets
Cash and cash equivalents	$	18,334		$	10,878
Short term investments		6,300			6,300
Receivables:
Billed receivables, net of allowance for doubtful accounts of $601 and $673, respectively		15,853			21,287
Unbilled receivables		3,360			2,858
Other receivables		649			799
Inventories, net of reserves of $1,021 and $911, respectively		8,719			7,625
Deferred taxes		1,243			1,243
Other current assets		2,753			3,025

Total current assets		57,211			54,015

Property and Equipment
Building and land		6,013			5,984
Machinery and equipment		12,311			11,952
Furniture and fixtures		1,074			1,133

		19,398			19,069
Less — Accumulated depreciation and amortization		(12,420	)		(12,012	)

Net property and equipment		6,978			7,057

Deferred Tax Asset		4,103			4,384


Total Assets	$	68,292		$	65,456


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	2,898		$	3,446
Accrued liabilities and expenses		2,910			2,764
Accrued compensation		1,343			1,075
Income taxes payable		663			883
Deferred revenue		4,359			3,483

Total current liabilities		12,173			11,651

Shareholders’ Equity
Preferred stock — no par value, authorized 1,000 shares, issued none		—			—
Common stock, $0.01 par value, authorized 19,000 shares, issued and outstanding 8,358 and 8,142, respectively		84			81
Accumulated other comprehensive income		1,545			869
Additional paid-in capital		37,534			36,346
Retained earnings		16,956			16,509

Total shareholders’ equity		56,119			53,805


Total Liabilities and Shareholders’ Equity	$	68,292		$	65,456


	Three Months Ended
	September 30,
(In Thousands, Except Per Share Amounts)	2007		2006

Net Sales	$	17,666	$	10,710

Cost of Sales		10,565		6,223

Gross Profit		7,101		4,487

Operating Expenses
Selling, general and administrative		4,403		3,887
Engineering, research and development		2,195		1,732

Total operating expenses		6,598		5,619


Operating Income (Loss)		503		(1,132	)

Other Income and (Expenses)
Interest income, net		215		314
Foreign currency gain (loss)		131		(5	)
Other		1		5

Total other income		347		314


Income (Loss) Before Income Taxes		850		(818	)

Income Tax Expense (Benefit)		403		(177	)


Net Income (Loss)	$	447	$	(641	)


Earnings (Loss) Per Common Share
Basic	$	0.05		($0.08	)
Diluted	$	0.05		($0.08	)

Weighted Average Common Shares Outstanding
Basic		8,205		8,343
Dilutive effect of stock options		599		—

Diluted		8,804		8,343


	Three Months Ended
	September 30,
(In Thousands)	2007			2006
				As Restated
				(Note 13)
Cash Flows from Operating Activities
Net income (loss)	$	447		$	(641	)
Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities:
Depreciation and amortization		317			333
Stock compensation expense		168			275
Deferred income tax benefit		302			(286	)
Other		(93	)		125
Changes in assets and liabilities, exclusive of changes shown separately		5,004			692

Net cash provided from operating activities		6,145			498

Cash Flows from Financing Activities
Revolving credit borrowings		10			33
Revolving credit repayments		(10	)		(33	)
Proceeds from stock plans		1,022			266
Repurchase of company stock		—			(932	)

Net cash provided from (used for) financing activities		1,022			(666	)

Cash Flows from Investing Activities
Capital expenditures		(201	)		(448	)
Purchases of investments		—			—
Sales of investments		—			25

Net cash used for investing activities		(201	)		(423	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		490			55


Net Increase (Decrease) in Cash and Cash Equivalents		7,456			(536	)
Cash and Cash Equivalents, July 1		10,878			17,963

Cash and Cash Equivalents, September 30	$	18,334		$	17,427


Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Receivables, net	$	5,637		$	2,614
Inventories		(885	)		(1,463	)
Accounts payable		(638	)		71
Other current assets and liabilities		890			(530	)

	$	5,004		$	692


Three Months Ended September 30,	2007			2006
Net Income (Loss)	$	447		$	(641	)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments		912			150
Forward contracts		(236	)		73

Total Comprehensive Income (Loss)	$	1,123		$	(418	)


	Three Months Ended			Three Months Ended
	September 30, 2007			September 30, 2006
Weighted average estimated fair value per share of options granted during the period	$	4.03		$	3.03
Assumptions:
Amortized dividend yield		—			—
Common stock price volatility		30.77	%		32.78	%
Risk free rate of return		4.88	%		5.13	%
Expected option term (in years)		5			5


Reportable Segments ($000)	Automated Systems			Technology Products			Consolidated

Three months ended September 30, 2007
Net sales	$	8,114		$	9,552		$	17,666
Operating income (loss)		(1,182	)		1,685			503
Assets		52,973			15,294			68,267
Depreciation and amortization		9,945			2,475			12,420

Three months ended September 30, 2006
Net sales	$	7,821		$	2,889		$	10,710
Operating income (loss)		(565	)		(567	)		(1,132	)
Assets		47,171			14,304			61,475
Depreciation and amortization		9,150			2,438			11,588


	June 30, 2007
	As Reported		Adjustment			As Restated
Cash and cash equivalents	$	17,178	$	(6,300	)	$	10,878
Short-term investments		—		6,300			6,300


	For the Three Months Ended
	September 30, 2006
	As Reported			Adjustment			As Restated
Cash Flows from Operating Activities
Net cash provided from operating activities	$	498		$	—		$	498

Cash Flows from Financing Activities
Net cash used for financing activities		(666	)		—			(666	)

Cash Flows from Investing Activities
Purchases of investments		—			—			—
Sales of investments		—			25			25

Net cash used for investing activities		(448	)		25			(423	)
Effect of Exchange Rate changes on Cash and Cash Equivalents		55			—			55


Net Increase (Decrease) in Cash and Cash Equivalents		(561	)		25			(536	)
Cash and Cash Equivalents, July 1		25,188			(7,225	)		17,963

Cash and Cash Equivalents, September 30	$	24,627		$	(7,200	)	$	17,427


	First				First
Sales (by segment)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Automated Systems	$	8.1	45.8	%	$	7.8	72.9	%	$	0.3	3.8	%
Technology Products		9.6	54.2	%		2.9	27.1	%		6.7	231.0	%

Totals	$	17.7	100.0	%	$	10.7	100.0	%	$	7.0	65.4	%


	First				First
Sales (by location)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Americas	$	13.0	73.4	%	$	4.5	42.1	%	$	8.5		188.9	%
Europe		4.0	22.6	%		5.6	52.3	%		(1.6	)	(28.6	)%
Asia		0.7	4.0	%		0.6	5.6	%		0.1		16.7	%

Totals	$	17.7	100.0	%	$	10.7	100.0	%	$	7.0		65.4	%


	First				First
Bookings (by segment)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Automated Systems	$	11.8	67.4	%	$	6.6	68.8	%	$	5.2	78.8	%
Technology Products		5.7	32.6	%		3.0	31.2	%		2.7	90.0	%

Totals	$	17.5	100.0	%	$	9.6	100.0	%	$	7.9	82.3	%


	First				First
Bookings (by location)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Americas	$	9.8	56.0	%	$	6.3	65.6	%	$	3.5	55.6	%
Europe		6.4	36.6	%		2.8	29.2	%		3.6	128.6	%
Asia		1.3	7.4	%		0.5	5.2	%		0.8	160.0	%

Totals	$	17.5	100.0	%	$	9.6	100.0	%	$	7.9	82.3	%


	First				First
Backlog (by segment)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Automated Systems	$	16.8	73.7	%	$	15.9	89.8	%	$	0.9	5.7	%
Technology Products		6.0	26.3	%		1.8	10.2	%		4.2	233.3	%

Totals	$	22.8	100.0	%	$	17.7	100.0	%	$	5.1	28.8	%


	First				First
Backlog (by location)	Quarter				Quarter
(in millions)	2008				2007				Increase/(Decrease)
Americas	$	13.2	57.9	%	$	9.9	55.9	%	$	3.3	33.3	%
Europe		8.7	38.2	%		7.5	42.4	%		1.2	16.0	%
Asia		0.9	3.9	%		0.3	1.7	%		0.6	200.0	%

Totals	$	22.8	100.0	%	$	17.7	100.0	%	$	5.1	28.8	%


	Perceptron, Inc. (Registrant)
Date: November 15, 2007	By:	/S/ Alfred A. Pease
		Alfred A. Pease
		President and Chief Executive Officer


Date: November 15, 2007	By:	/S/ John H. Lowry III
		John H. Lowry III
		Vice President and Chief Financial Officer (Principal Financial Officer)


Date: November 15, 2007	By:	/S/ Sylvia M. Smith
		Sylvia M. Smith
		Controller and Chief Accounting Officer (Principal Accounting Officer)