Summary of STRATTEC SECURITY CORP

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION's accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2008 Annual Report which was filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on August 29, 2008. Unless otherwise indicated, all references to years refer to fiscal years.

Purchase of Delphi Power Products Business

Effective November 30, 2008, STRATTEC SECURITY CORPORATION in combination with WITTE Automotive of Velbert, Germany, and Vehicle Access Systems Technology LLC (VAST), a joint venture between STRATTEC, WITTE and ADAC Automotive of Grand Rapids, Michigan, completed the acquisition of certain assets, primarily equipment and inventory, and assumption of certain employee liabilities of Delphi Corporation's global Power Products business for approximately $6.7 million, subject to post-closing working capital adjustments. For the purposes of owning and operating the North American portion of this acquired business, STRATTEC established a new subsidiary, STRATTEC POWER ACCESS LLC (SPA), which is 80 percent owned by STRATTEC and 20 percent owned by WITTE. The purchase price of the North American portion of the acquired business, which is subject to further post-closing working capital adjustments, totaled approximately $3.8 million, of which STRATTEC paid approximately $3.1 million. WITTE acquired the European portion of the business for approximately $2.4 million, and VAST LLC is in the process of acquiring the Asian portion for approximately $500,000.

The acquisition of the North American portion of this business by SPA was not material to STRATTEC's consolidated financial statements. Amortizable intangible assets acquired in the acquisition of $920,000 were preliminarily recorded and are subject to amortization over a period of nine years. In addition, goodwill of approximately $87,000 was preliminarily recorded as part of the transaction. All goodwill resulting from the purchase for tax purposes is expected to be deductible. The purchase accounting will be completed by the end of fiscal 2009 when final costs are determined.

The operating results of SPA for the period December 1, 2008 through December 28, 2008 are consolidated with the financial results of STRATTEC and resulted in decreased net income to STRATTEC of approximately $640,000 during the three and six month periods ended December 28, 2008.

SPA designs, develops, tests, manufactures, markets and sells power systems to operate vehicle sliding side doors and rear compartment access points such as liftgates and trunk lids. In addition, the product line includes power cinching latches and cinching strikers used in these systems. Current customers for these products supplied from North America are Chrysler LLC, Hyundai Motor Company, General Motors and Ford.

Analysis of Results of Operations

Our financial results for the three and six months ended December 28, 2008 reflect the overall weakness in the U.S. economy, and in particular the sharp decline in vehicle sales and production during the period. We are reacting to the unprecedented decline in the North American auto industry in several ways. In the second quarter, we reduced our productive work force at both our Milwaukee, Wisconsin and Juarez, Mexico facilities through a combination of temporary and permanent layoffs. We will continue to adjust our productive workforce in this way until the business improves or stabilizes at a predictable level. Since the beginning of our current fiscal year, we have not been replacing salaried associates who retired or left through normal attrition, saving nearly $1 million on an annualized basis. On January 15, 2009, we reduced the U.S. salaried workforce by approximately 10 percent. Effective January 1, 2009, we also froze executive officer salaries at their 2008 levels, and reduced our 401K match for salaried associates. We expect these changes will save approximately $2 million on an annual basis, but will be offset during our third quarter with a charge to earnings of $350,000 for severance and outplacement costs. Other cost reduction activities aimed at reducing general overhead costs are in place. In addition, with the November 2008 completion of our new manufacturing facility in Juarez, Mexico we are vacating two leased facilities, one in Juarez and one in Matamoros, Mexico. During the current quarter, we incurred approximately $132,000 of relocation costs to vacate a majority of the leased facility in

Juarez. We expect additional relocation costs to be incurred in the third quarter to complete the moves out of both facilities. After the consolidation of the two facilities is completed, we anticipate annual savings of approximately $500,000.

A large volume ignition lock housing program originally planned for our VAST Fuzhou joint venture plant in China will soon be sourced from our North American operations, providing additional sales and increased production of this product line at both our Milwaukee and Juarez facilities. Production for this program should begin late in the current fiscal year, and if current forecasts are correct, it should enhance sales by more than $12 million over the next two years.

Three months ended December 28, 2008 compared to the three months ended December 30, 2007

Net sales for the three months ended December 28, 2008 were $33.8 million compared to net sales of $39.9 million for the three months ended December 30, 2007. Sales to our largest customers overall were significantly lower in the current quarter compared to the prior year quarter. Sales to General Motors Corporation in the current quarter were $11.6 million compared to $11.9 million in the prior year quarter due to the takeover of certain passenger car lockset production from another supplier, offset by lower vehicle production volumes, primarily for trucks and SUV's. Sales to Chrysler Corporation were $7.7 million in the current quarter compared to $10.0 million in the prior year quarter due to a combination of lower vehicle production and reduced component content in the products we supply, offset somewhat by $1.3 million of sales generated by SPA in December 2008. Sales to Ford Motor Company were $3.0 million in the current quarter compared to $4.4 million in the prior year quarter and sales to Delphi Corporation were $2.0 million in the current quarter compared to $3.8 million in the prior year quarter. The lower sales to Ford and Delphi were due to lower vehicle production volumes. Sales during the current quarter were weaker than initially anticipated for the above four customers due to their additional production cut backs announced after the Thanksgiving holiday. Subsequently, these customers extended their Christmas holiday shutdown downtime and further reduced their production schedules. This will affect both our sales and profitability for the third fiscal quarter ending March 28, 2009.

Gross profit as a percentage of net sales was 8.5 percent in the current quarter compared to 17.3 percent in the prior year quarter. The reduction in the gross profit margin was primarily attributed to reduced customer production volumes. The current quarter also included approximately $132,000 of relocation costs related to the move from our leased facility in Juarez, Mexico to our new manufacturing facility in Juarez and a non-recurring inventory adjustment of $114,000. Construction of the new facility was completed in November 2008. The non-recurring inventory adjustment related to finished goods inventory acquired in the Delphi Power Products business acquisition. The value of the finished goods inventory acquired was adjusted to its selling price less costs to sell, and gross profit was impacted by the inventory that was sold during the quarter. The impact of the reduced customer production volumes was partially offset by lower purchased material costs for zinc and brass along with a favorable Mexico peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our operations in Mexico. The average zinc price paid per pound decreased to $1.22 in the current quarter from $1.52 in the prior year quarter. During the current quarter, we used approximately 1.5 million pounds of zinc. This resulted in decreased zinc costs of approximately $450,000 in the current quarter compared to the prior year quarter. The average brass price paid per pound decreased to $2.82 in the current quarter from $3.71 in the prior year quarter. During the current quarter, we used approximately 235,000 pounds of brass. This resulted in decreased brass costs of approximately $210,000 in the current quarter compared to the prior year quarter. The inflation rate in Mexico for the twelve months ended December 28, 2008 was approximately 6.5 percent and increased operating costs by approximately $260,000 in the current quarter over the prior year quarter. The average U.S. dollar/Mexican peso exchange rate increased to approximately 12.75 pesos to the dollar in the current quarter from approximately 10.85 pesos to the dollar in the prior year quarter. This resulted in decreased costs related to our Mexican operations of approximately $820,000 in the current quarter over the prior year quarter.

Engineering, selling and administrative expenses were $6.7 million in the current quarter, compared to $5.8 million in the prior year quarter. The increase was attributed to hiring SPA engineering personnel, contracting with Delphi for temporary transition services related to the acquisition, and outside legal costs incurred to defend a STRATTEC patent.

The loss from operations in the current quarter was $3.8 million compared to income from operations of $1.1 million in the prior year quarter. This reduction was the result of the decrease in sales and gross profit margin as discussed above.

Net other income was $557,000 in the current quarter compared to $158,000 in the prior year quarter. The increase was primarily due to increased transaction gains resulting from foreign currency transactions entered into by our Mexican subsidiaries and was partially offset by losses on the Rabbi trust which funds our supplemental executive retirement plan. Transaction gains were $910,000 in the current quarter compared to losses of $5,000 in the prior year quarter. Losses related to the Rabbi trust totaled $470,000 in the current quarter compared to $30,000 in the prior year quarter. The investments held in the trust are considered trading securities.

Our U.S. effective tax rate was approximately 37 percent. Our effective tax rate in Mexico was approximately 15 percent. The current quarter income tax benefit was the result of the higher U.S. effective tax rate applied to pre-tax U.S. losses and a lower Mexican tax rate being applied to pre-tax income in Mexico. The overall U.S. effective tax rate differed from the Federal statutory tax rate primarily due to the effects of state income taxes.

Six months ended December 28, 2008 compared to the six months ended December 30, 2007

Net sales for the six months ended December 28, 2008 were $68.5 million compared to net sales of $82.6 million for the six months ended December 30, 2007. Sales to our largest customers overall were significantly lower in the current period compared to the prior year period. Sales to General Motors Corporation in the current period were $23.9 million compared to $24.4 million in the prior year period due to the takeover of certain passenger car lockset production from another supplier, offset by lower vehicle production volumes, primarily for trucks and SUV's. Sales to Chrysler Corporation were $14.8 million in the current period compared to $20.6 million in the prior year period. This sales reduction was due to a combination of lower vehicle production and reduced component content in the products we supply, offset somewhat by $1.3 million of sales generated by SPA in December 2008. Sales to Ford Motor Company were $5.3 million in the current period compared to $9.9 million in the prior year period and sales to Delphi Corporation were $4.0 million in the current period compared to $7.7 million in the prior year period. The lower sales to Ford and Delphi were due to lower vehicle production volumes. Sales during the current quarter were weaker than initially anticipated for the above four customers due to their additional production cut backs announced after the Thanksgiving holiday. Subsequently, these customers extended their Christmas holiday shutdown downtime and further reduced their production schedules. This will also affect our sales and profitability for the third fiscal quarter ending March 28, 2009.

Gross profit as a percentage of net sales was 12.1 percent in the current period compared to 18.5 percent in the prior year period. The reduction in the gross profit margin was primarily attributed to reduced customer production volumes. The current period also included approximately $132,000 of relocation costs related to the move from our leased facility in Juarez, Mexico to our new manufacturing facility in Juarez and a non-recurring inventory adjustment of $114,000. Construction of the new facility was completed in November 2008. The non-recurring inventory adjustment related to finished goods inventory acquired in the Delphi Power Products business acquisition. The value of the finished goods inventory acquired was adjusted to its selling price less costs to sell, and gross profit was impacted by the inventory that was sold during the period. The impact of the reduced customer production volumes was partially offset by lower purchased material costs for zinc and brass. The favorable Mexico peso to U.S. dollar exchange rate affecting the U.S. dollar cost of our operations in Mexico experienced during the period was mostly offset by cost increases resulting from inflation. The average zinc price paid per pound decreased to $1.22 in the current period from $1.59 in the prior year period. During the current period, we used approximately 3.2 million pounds of zinc. This resulted in decreased zinc costs of approximately $1.2 million in the current period compared to the prior year period. The average brass price paid per pound decreased to $3.26 in the current period from $3.81 in the prior year period. During the current period, we used approximately 495,000 pounds of brass. This resulted in decreased brass costs of approximately $270,000 in the current period compared to the prior year period.

Engineering, selling and administrative expenses were $12.6 million in the current period, compared to $11.6 million in the prior year period. The increase was attributed to hiring SPA engineering personnel, contracting with Delphi for temporary transition services related to the acquisition, and outside legal costs incurred to defend a STRATTEC patent.

The loss from operations in the current period was $4.3 million compared to income from operations of $3.7 million in the prior year period. This reduction was the result of the decrease in sales and gross profit margin as discussed above.

Net other income was $780,000 in the current period compared to $466,000 in the prior year period. The increase was primarily due to increased transaction gains resulting from foreign currency transactions entered into by our Mexican subsidiaries and was partially offset by losses on the Rabbi trust which funds our supplemental executive retirement plan. Transactions gains were $1.1 million in the current period compared to $45,000 in the prior year period. Losses related to the Rabbi trust totaled $530,000 in the current period compared to gains of $15,000 in the prior year period. The investments held in the trust are considered trading securities.

Our U.S. effective tax rate was approximately 37 percent. Our effective tax rate in Mexico was approximately 15 percent. The current period income tax benefit was the result of the higher U.S. effective tax rate applied to pre-tax U.S. losses and a lower Mexican tax rate being applied to pre-tax income in Mexico. The overall U.S. effective tax rate differed from the Federal statutory tax rate primarily due to the effects of state income taxes.

Liquidity and Capital Resources

Cash flow used in operating activities was $2.4 million during the six months ended December 28, 2008 compared to $3.9 million of cash generated from operations during the six months ended December 30, 2007. Current period operating cash flow was negatively impacted by overall financial results. Pension contributions to our qualified plan totaled $3 million during both the current year and prior year periods.

Accounts receivable balances at December 28, 2008 decreased $5.7 million from the June 29, 2008 balances. This decrease was primarily the result of decreased sales during the current quarter as compared to the quarter ended June 29, 2008. Inventory balances, accounted for on a LIFO and FIFO basis, at December 28, 2008 increased $4.5 million from the June 29, 2008 balances. The increase was primarily the result of the acquisition of certain assets, including inventory, of Delphi Corporation's global Power Products business. Inventory balances at December 28, 2008 related to the acquired business totaled $4.1 million. Other current liability balances at December 28, 2008 increased $2.9 million from the June 29, 2008 balances. The increase was primarily due to liabilities established to relocate operations of the acquired business from Delphi leased facilities to STRATTEC owned facilities and other leased facilities.

Capital expenditures during the six months ended December 28, 2008, were $8.5 million, which included approximately $5.2 million for the construction of a new facility in Juarez, Mexico to replace our existing leased facility. Capital expenditures during the six months ended December 30, 2007, were $4.5 million. We anticipate that capital expenditures will be approximately $11 million in fiscal 2009, primarily relating to expenditures in support of requirements for new product programs, the upgrade and replacement of existing equipment and the construction of our new facility in Juarez, Mexico.

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at December 28, 2008. A total of 3,655,322 shares have been repurchased as of December 28, 2008, at a cost of approximately $136.4 million. During the three months ended December 28, 2008, 20,951 shares were repurchased at a cost of approximately $500,000. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances.

We have a $50.0 million unsecured line of credit (the "Line of Credit") with M&I Marshall & Ilsley Bank, which expires October 31, 2009. There were no outstanding borrowings under the Line of Credit at December 28, 2008 or June 29, 2008. Interest on borrowings under the Line of Credit is at varying rates based on the London Interbank Offering Rate or the bank's prime rate. We believe that the Line of Credit is adequate, along with existing cash balances and cash flow from operations, to meet our anticipated capital expenditure, working capital and operating expenditure requirements.

Over the past two years, we have been impacted by rising health care costs, which have increased our cost of employee medical coverage. We have also been impacted by fluctuations in the market price of zinc, brass and magnesium and inflation in Mexico, which impacts the U.S. dollar costs of our Mexican operations. We do not hedge against our Mexican peso exposure.

Joint Ventures

We participate in certain Alliance Agreements with WITTE Automotive ("WITTE") and ADAC Automotive ("ADAC"). WITTE, of Velbert, Germany, is a privately held automotive supplier. WITTE designs, manufactures and markets components including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WITTE's primary market for these products has been Europe. ADAC, of Grand Rapids, Michigan, is a privately held automotive supplier and manufactures engineered products, including door handles and other automotive trim parts, utilizing plastic injection molding, automated painting and various assembly processes.

The Alliance provides a set of cross-licensing agreements for the manufacture, distribution and sale of WITTE products by STRATTEC and ADAC in North America, and the manufacture, distribution and sale of STRATTEC and ADAC products by WITTE in Europe. Additionally, a joint venture company, Vehicle Access Systems Technology LLC ("VAST LLC"), in which WITTE, STRATTEC and ADAC each hold a one-third interest, exists to seek opportunities to manufacture and sell the companies' products in areas of the world outside of North America and Europe.

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

The VAST investments are accounted for using the equity method of accounting. The activities related to the VAST joint ventures resulted in a gain of approximately $126,000 during the six months ended December 28, 2008 and $301,000 during the six months ended December 30, 2007. Capital contributions totaling $388,000 were made in the current period in support of general operating expenses and the purchase of the Asian portion of Delphi Corporation's global Power Products business.

In fiscal year 2007, we entered into a joint venture with ADAC, in which STRATTEC holds a 50.1 percent interest and ADAC holds a 49.9 percent interest. The joint venture was created to establish injection molding and door handle assembly operations in Mexico. ADAC-STRATTEC LLC, a Delaware limited liability company, was formed on October 27, 2006. An additional Mexican entity, ADAC-STRATTEC de Mexico, which is wholly owned by ADAC-STRATTEC LLC, was formed on February 21, 2007. ADAC-STRATTEC de Mexico production activities began in July 2007. ADAC-STRATTEC LLC's financial results are consolidated with the financial results of STRATTEC and resulted in increased net income to STRATTEC of $59,000 during the six months ended December 28, 2008 and decreased net income to STRATTEC of $149,000 during the six months ended December 30, 2007.

Recently Issued Accounting Standards

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment to ARB No. 51." SFAS No. 160 establishes accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent's equity, the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statements of income, and changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning after December 15, 2008 and will be effective for us beginning in fiscal 2010. We do not expect the new standard to have a material impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations." SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changed the method of applying the acquisition method in a number of aspects. SFAS No. 141(R) will require that (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain contingent assets and liabilities acquired be recognized at their fair value on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings when settled; (4) acquisition related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interests in an acquiree held prior to obtaining control be remeasured to their acquisition date fair values, with any gain or loss recognized in earnings; and
(6) when making adjustments to finalize initial accounting, companies revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that the adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). This standard will be applied to all future business combinations in accordance with the effective dates as early adoption is prohibited.

Critical Accounting Policies
The Company believes the following represents its critical accounting policies:

Pension and Postretirement Health Benefits- Pension and postretirement health obligations and costs are developed from actuarial valuations. The determination of the obligation and expense for pension and postretirement health benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the Notes to Financial Statements in our 2008 Annual Report and include, among others, the discount rate, expected long-term rate of return on plan assets, retirement age and rates of increase in compensation and health care costs. Actual results that differ from these assumptions are deferred and, under certain circumstances, amortized over future periods. While we believe that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect our pension and postretirement health obligations and future expense.

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

Stock-Based Compensation- We account for stock-based compensation in accordance with SFAS No. 123(R), "Share-based Payments." Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the . . .