e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended May 31, 2006


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

Commission File Number 0-22183

MEADE INSTRUMENTS CORP.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		95-2988062 (I.R.S. Employer Identification No.)

6001 Oak Canyon, Irvine, CA (Address of principal executive offices)		92618 (Zip Code)

(949) 451-1450
(Registrant’s telephone number, including area code)

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 o No þ

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

Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer þ

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

Yes o No þ

Number of shares of common stock outstanding as of October 31, 2006 is 20,086,355, $0.01 par value per share.

Explanatory Note
Restatement of Consolidated Financial Statements

On May 24, 2006, Meade Instruments Corp. (the “Company”) initiated an independent evaluation of the Company’s stock option grant practices following an article appearing in the Wall Street Journal on May 22, 2006. A Special Committee of the Audit Committee of the Board of Directors, with the assistance of independent outside counsel, evaluated all stock option awards since the Company’s initial public offering and concluded that the accounting measurement dates for certain stock option awards during the fiscal years 1998 through 2005 were determined in error. As such, on August 25, 2006, the Company’s management and the Audit Committee of the Board of Directors concluded that (i) the Company’s consolidated balance sheet as of February 28, 2005, and (ii) the Company’s consolidated statements of operations, the consolidated statements of stockholders’ equity and consolidated statements of cash flows for the fiscal years ended February 29, 2004 and February 28, 2005, should be restated to reflect the effects of additional stock-based compensation expense resulting from certain stock options granted during fiscal years ending February 28/29, 1998 to 2005 that were accounted for in error under generally accepted accounting principles. The Company also determined that it had made an error in its historical accounting for operating leases that had scheduled rent increases during the lease term. With respect to several of the Company’s leased properties, the Company recognized escalations in rent expense in the period when the escalation became effective rather than amortizing the escalating rent over the lease term. Accordingly, the Company concluded that in connection with the restatement described above, it should also correct this error.

In this Form 10-Q, the Company is presenting the consolidated statement of operations and consolidated statement of cash flows for the quarter ended May 31, 2005 as restated.

Except as expressly provided herein, all the information in this Form 10-Q is as of May 31, 2006 and does not reflect any subsequent information or events other than the restatement and error correction described above. For the convenience of the reader, the following item has been amended solely as a result of, and to reflect, the restatement and error correction described above.

Part I — Financial Information

ITEM 1. FINANCIAL STATEMENTS.

MEADE INSTRUMENTS CORP.

CONSOLIDATED BALANCE SHEETS
(Unaudited)


	May 31,			February 28,
	2006			2006
ASSETS
Current assets:
Cash	$	2,320,000		$	7,589,000
Accounts receivable, less allowance for doubtful accounts of $575,000 at May 31, 2006 and $483,000 at February 28, 2006		18,016,000			16,822,000
Inventories, net		32,839,000			34,359,000
Prepaid expenses and other current assets		716,000			395,000

Total current assets		53,891,000			59,165,000
Goodwill		3,141,000			2,115,000
Acquisition-related intangible assets, net		4,934,000			5,018,000
Property and equipment, net		5,273,000			5,371,000
Other assets, net		343,000			571,000

	$	67,582,000		$	72,240,000


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank lines of credit	$	611,000		$	4,229,000
Accounts payable		5,947,000			5,899,000
Accrued liabilities		7,251,000			5,773,000
Income taxes payable		1,455,000			133,000
Current portion of long-term debt and capital lease obligations		1,235,000			1,306,000

Total current liabilities		16,499,000			17,340,000

Long-term debt and capital lease obligations		1,285,000			1,410,000
Deferred income taxes		1,540,000			1,540,000
Deferred rent		189,000			222,000
Commitments and contingencies
Stockholders’ equity:
Common stock; $0.01 par value; 50,000,000 shares authorized; 20,090,000 and 20,004,000 shares issued and outstanding at May 31, 2006 and February 28, 2006, respectively		201,000			200,000
Additional paid-in capital		44,873,000			44,890,000
Retained earnings		4,510,000			8,086,000
Deferred stock compensation		(340,000	)		(507,000	)
Accumulated other comprehensive income		338,000			682,000

		49,582,000			53,351,000
Unearned ESOP shares		(1,513,000	)		(1,623,000	)

Total stockholders’ equity		48,069,000			51,728,000

	$	67,582,000		$	72,240,000

See accompanying notes to consolidated financial statements.

MEADE INSTRUMENTS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months Ended
	May 31,
	2006			2005
				as restated
Cash flows from operating activities:
Net loss	$	(3,576,000	)	$	(782,000	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		620,000			504,000
ESOP contribution		78,000			92,000
Deferred rent amortization		(33,000	)		(31,000	)
Changes in assets and liabilities:
Increase in accounts receivable		(896,000	)		(2,898,000	)
Decrease in inventories		1,859,000			4,374,000
(Increase) decrease in prepaid expenses and other assets		(79,000	)		106,000
(Decrease) increase in accounts payable		(2,000	)		469,000
Increase in accrued liabilities		543,000			94,000
Increase (decrease) in income taxes payable		1,159,000			(453,000	)

Net cash (used in) provided by operating activities		(327,000	)		1,475,000

Cash flows from investing activities:
Capital expenditures		(77,000	)		(324,000	)
Additional consideration paid for Coronado acquisition		(1,026,000	)		—

Net cash used in investing activities		(1,103,000	)		(324,000	)

Cash flows from financing activities:
Net payments on bank lines of credit		(3,618,000	)		(1,883,000	)
Payments on long-term debt		(363,000	)		(272,000	)
Payments under capital lease obligations		(16,000	)		(3,000	)

Net cash used in financing activities		(3,997,000	)		(2,158,000	)

Effect of exchange rate changes on cash		158,000			(118,000	)

Net decrease increase in cash		(5,269,000	)		(1,125,000	)
Cash at beginning of period		7,589,000			3,929,000

Cash at end of period	$	2,320,000		$	2,804,000

See accompanying notes to consolidated financial statements.

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Consolidated Financial Statements Have Been Prepared by the Company and are Unaudited.

In management’s opinion, the information and amounts furnished in this report reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the financial position and results of operations for the interim periods presented. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2006.

The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins and profitability from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company’s products, competitive pricing pressures, the Company’s ability to meet demand and delivery schedules and the timing and extent of research and development expenses, marketing expenses and product development expenses. In addition, a substantial portion of the Company’s net sales and operating income typically occur in the third quarter of the Company’s fiscal year primarily due to disproportionately higher customer demand for less-expensive products during the holiday season. The results of operations for the quarters ended May 31, 2006 and 2005, respectively, are not necessarily indicative of the operating results for the entire fiscal year.

B. Restatement of Previously Issued Financial Statements

The Company also determined that it had made an error in its historical accounting for operating leases that had scheduled rent increases during the lease term. With respect to several of the Company’s leased properties, the Company recognized escalations in rent expense in the period when the escalation became effective rather than amortizing the escalating rent over the lease term. Accordingly, the Company concluded that in connection with the restatement described above, it should also correct this error.

In the Company’s Form 10-K for the fiscal year ended February 28, 2006, the Company restated the financial statements described above. The Company’s Form 10-K for the fiscal year ended February 28, 2006 presents the effects of the error corrections back to the fiscal year ended February 28, 1998, the year in which the first error occurred. In this Form 10-Q, the consolidated statement of operations and statement of cash flows for the quarter ended May 31, 2005, are restated.

The restatement adjustments for the additional stock-based compensation and rent expenses described above had no material effect on the quarter ended May 31, 2005 — net loss increased by $11,000 with no material effect on any single line item in the body of the restated financial statements. The restatement adjustments had no effect on the previously reported net loss per share.

C. Stock Based Compensation

Effective March 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to March 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to

Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation. Share-based compensation expenses, included in general and administrative expenses in the Company’s consolidated statement of operations for the quarter ended May 31, 2006, was approximately $0.1 million. Due to deferred tax valuation allowances provided during the quarter, no net benefit was recorded against the share-based compensation charged during the quarter.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the three months ended May 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair value of the Company’s stock options was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:


	Three months ended
	May 31, 2006
Expected life (1)	6.2 years
Expected volatility (2)		73	%
Risk-free interest rate (3)		5.0	%
Expected dividends	None


(1)		The option term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options.

(2)		The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

(3)		The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S.Treasury yield curve in effect at the time of grant.

The Company did not recognize compensation expense for employee share-based awards for the three months ended May 31, 2005, when the exercise price of the stock awards equaled the market price of the underlying stock on the date of grant. The Company recognized compensation expense under APB 25 for certain stock options with exercise prices below fair market value on the date of grant, and for the fair value of restricted stock.

The Company had previously adopted the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” for disclosure only. The following table illustrates pro forma net income and net loss per share for the three months ended May 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee awards.


	Three months			Three months
	ended May 31,			ended May 31,
	2005			2005
	as reported			as restated
Reported net loss	$	(793,000	)	$	(782,000	)
Compensation cost, net of taxes under APB25		—			9,000
Compensation cost, net of taxes under SFAS No. 123		(91,000	)		(266,000	)

Pro forma net loss	$	(884,000	)	$	(1,039,000	)

Reported net loss per share — basic and diluted	$	(0.04	)	$	(0.04	)

Pro forma net loss per share — basic and diluted	$	(0.05	)	$	(0.05	)

The fair value of the Company’s stock options used to compute pro forma net loss and loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following assumptions:


	Three months
	ended May 31,
	2005
Expected life	6.0 years
Expected volatility		33	%
Risk-free interest rate		4.0	%
Expected dividends	None

As of May 31, 2006 there was approximately $1.3 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over the weighted-average period of approximately 4 years.

D. Composition of Certain Balance Sheet Accounts

The composition of inventories is as follows:


	May 31,		February 28,
	2006		2006
Raw materials	$	4,971,000	$	6,895,000
Work-in-process		2,857,000		4,871,000
Finished goods		25,011,000		22,593,000

	$	32,839,000	$	34,359,000

The composition of acquisition-related intangible assets is as follows:


	May 31,			February 28,
	2006			2006
Brand names — non-amortizing	$	2,041,000		$	2,041,000

Trademarks		1,938,000			1,938,000
Customer relationships		1,390,000			1,390,000
Completed technologies		1,620,000			1,620,000
Other		56,000			56,000
Accumulated amortization		(2,111,000	)		(2,027,000	)

Total amortizing acquisition-related intangible assets		2,893,000			2,977,000

Total acquisition-related intangible assets	$	4,934,000		$	5,018,000

Amortization of trademarks and customer relationships over the next five fiscal years is estimated as follows:


Fiscal Year	Amount
2007	$	336,000
2008		336,000
2009		336,000
2010		336,000
2011		336,000

The Company accounts for goodwill and acquisition-related intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which requires that goodwill and identifiable assets determined to have an indefinite life no longer be amortized, but instead be tested for impairment at least annually.

On December 1, 2004, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Coronado Technology Group, LLC, for approximately $2.5 million in cash plus contingent consideration. A final payment of approximately $1 million was paid in May 2006, based upon the financial performance of the acquired operations for the twelve months ended December 31, 2005. The additional consideration was added to the cost of the acquired assets as additional goodwill.

E. Commitments and Contingencies

On September 27, 2006 a complaint was filed against the Company and certain of its current and former officers and directors in the United States District Court for the Central District of California asserting claims for violations of certain sections of the Securities Exchange Act in connection with the Company’s option granting practices. This case is in its early

stages. Due to the preliminary status of this case and the uncertainties of litigation, the Company is unable to evaluate the likelihood of either a favorable or unfavorable outcome in this case and therefore, is unable to estimate the effect of this litigation on the financial position, results of operations or cash flows of the Company.

On September 28, 2006 a complaint was filed against the Company and certain of the Company’s dealers in the United States District Court for the Southern District of New York. The essence of the complaint is that Meade and other defendants allegedly falsely advertise Meade’s Advanced Ritchey-Chretien products as being Ritchey-Chretien products. The complaint seeks injunctive relief, compensatory and treble damages, and attorneys’ fees and costs. Meade has not yet been required to file an answer to the complaint. This case is in its early stages. Due to the preliminary status of this case and the uncertainties of litigation, the Company is unable to evaluate the likelihood of either a favorable or unfavorable outcome in this case and therefore, is unable to estimate the effect of this litigation on the financial position, results of operations or cash flows of the Company.

On October 6, 2006 two complaints were filed against the Company’s Board of Directors and certain of its current and former officers, in the California Superior Court. Each claim asserts causes of action for breach of fiduciary duty, accounting, abuse of control, gross mismanagement, constructive trust, corporate waste, rescission, unjust enrichment and violation of California Corporations Code in connection with the Company’s option granting practices. This case is in its early stages. Due to the preliminary status of this case and the uncertainties of litigation, the Company is unable to evaluate the likelihood of either a favorable or unfavorable outcome in these cases and therefore, is unable to estimate the effect of this litigation on the financial position, results of operations or cash flows of the Company.

The Company is involved from time to time in other litigation incidental to its business. Management believes that the outcome of such litigation will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

F. Earnings (Loss) Per Share

Basic earnings (loss) per share amounts exclude the dilutive effect of potential shares of common stock. Basic earnings (loss) per share is based upon the weighted-average number of shares of common stock outstanding, which excludes unallocated ESOP shares. Diluted earnings (loss) per share is based upon the weighted-average number of shares of common stock and dilutive potential shares of common stock outstanding for each period presented. Potential shares of common stock include outstanding stock options and restricted stock, which may be included in the weighted average number of shares of common stock under the treasury stock method.

The total number of options and restricted shares outstanding were as follows:


	May 31,		February 28,
	2006		2006
Stock options outstanding		3,599,000		3,844,000
Restricted shares outstanding		125,000		247,500

A reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding follows:


	Three months ended
	May 31,
	2006		2005
Basic weighted average number of shares		19,504,000		19,252,000
Dilutive potential shares of common stock		—		—

Diluted weighted average number of shares outstanding		19,504,000		19,252,000
Number of options excluded from the calculation of weighted average shares because the exercise prices were greater than the average market price of the Company’s common stock		2,630,000		3,346,000

Weighted average shares for the three month period ended May 31, 2006 and 2005, exclude the aggregate dilutive effect of approximately 134,000 and 72,000 shares, respectively, subject to stock options and restricted stock, because the Company incurred a loss and the effect would have been anti-dilutive. Options with exercise prices greater than the average market price during the periods presented are excluded from the calculation of weighted average shares outstanding because the effect would be anti-dilutive.

G. Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in the equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and, at May 31, 2006, includes foreign currency translation adjustments and adjustments to the fair value of highly effective derivative instruments. For the three months ended May 31, 2006 and 2005, respectively, the Company had other comprehensive income (loss) as follows:


	Three months ended
	May 31,
	2006			2005
				as restated
Net loss	$	(3,576,000	)	$	(782,000	)
Currency translation adjustment		480,000			(392,000	)
Change in fair value of foreign currency forward contracts, net of tax		(824,000	)		(1,897,000	)

Total other comprehensive loss	$	(3,920,000	)	$	(3,071,000	)

H. Product Warranties

The Company provides reserves for the estimated cost of product warranty-related claims at the time of sale, and periodically adjusts the provision to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under its warranty plans. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Meade and Bresser branded products, principally telescopes and binoculars, are generally covered by a two-year limited warranty. Many of the Simmons products, principally riflescopes and binoculars, have lifetime limited warranties. Most of the Coronado products have limited five-year warranties. Changes in the warranty liability, which is included as a component of accrued liabilities on the accompanying consolidated balance sheets, were as follows.


	Three months ended
	May 31,
	2006			2005
Beginning balance	$	1,053,000		$	1,173,000
Warranty accrual		257,000			162,000
Labor and material usage		(200,000	)		(152,000	)

Ending balance	$	1,110,000		$	1,183,000

I. Derivative Instruments and Hedging Activities

The Company, at times, utilizes derivative financial instruments to manage its currency exchange rate and interest rate risks. The Company does not enter into these arrangements for trading or speculation purposes. The Company’s German subsidiary purchases inventory from Far Eastern suppliers in U.S. dollars. A forward exchange contract is typically entered into when the U.S. dollar amount of the inventory purchase is firm. Given our foreign exchange position, a change in foreign exchange rates upon which these foreign exchange contracts are based would result in exchange gains and losses.


	May 31, 2006					February 28, 2006
	Notional					Notional
	amount		Fair Value			amount		Fair Value
Forward currency contracts	$	15,258,000	$	(824,000	)		—		—

At May 31, 2006, the fair value of forward currency contracts is recorded in accrued liabilities on the accompanying consolidated balance sheets. Changes in the fair value of the cash flow forward currency contracts have been recorded as a component of accumulated other comprehensive income (loss), net of tax, as these items have been designated and qualify as cash flow hedges. Due to continuing taxable losses, the Company has provided an allowance against all tax benefits generated during the quarter. Therefore, the change in the fair value of the cash flow forward currency contracts is presented in the accompanying financial statements with no net tax benefit. The settlement dates on the forward currency contracts vary based on the underlying instruments through January 2007.

J. Bank Borrowings

On July 31, 2006, September 29, 2006 and October 31, 2006 the Company executed the Seventh, Eighth and Ninth amendments to its bank Credit Agreement, respectively. Each amendment granted the Company additional time to meet the Credit Agreement requirements regarding the reporting deadlines for the Company’s audited year-end financial statements and quarterly financial statements. The Ninth amendment granted the Company until November 30, 2006 to report its audited results to the bank for the year ended February 28, 2006 and until the earlier of November 30, 2006 or five days after the delivery of the Company’s Form 10-K for the year ended February 28, 2006 to report its results for the quarters ended May 31 and August 31, 2006, respectively. The Company met the reporting deadline for the quarter ended May 31, 2006 and was in compliance with all restrictive covenants under its Credit Agreement at the time the results for the quarter ended May 31, 2006 were reported to the bank. The Company is currently in discussions with its bank to extend the deadline for reporting its results for the quarter ended August 31, 2006. Although the Company expects to receive an extension from its bank, it cannot give assurance that it will receive such extension.

Amounts outstanding under the Company’s various bank and other debt instruments are as follows:


	May 31, 2006			February 28, 2006
U.S. bank revolving line of credit	$	602,000		$	4,229,000
European bank revolving line of credit		9,000			—

Total bank lines of credit	$	611,000		$	4,229,000


U.S. term loan	$	140,000		$	245,000
European term loans		2,342,000			2,416,000
Notes payable and capital lease obligations		38,000			55,000

Total debt and capital lease obligations		2,520,000			2,716,000
Less current portion		(1,235,000	)		(1,306,000	)

Total long-term debt and capital lease obligations	$	1,285,000		$	1,410,000

K. New Accounting Pronouncement

In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 as of March 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’s results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to adopt the provisions of FIN 48 beginning its fiscal year 2008. The Company is currently in the process of assessing what impact FIN 48 may have on its consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 in fiscal 2009 to have a material impact on its results of operations or financial position.

postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The Company does not expect the adoption of SFAS No. 158 in fiscal 2008 to have a material impact on its results of operations or financial position.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108 regarding the process of quantifying financial statement misstatements. SAB No. 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating materiality of a misstatement. The interpretations in SAB No. 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS No. 154 for the correction of an error in financial statements. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company will be required to adopt this interpretation for its fiscal year ending 2008.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in “Risk Factors” and elsewhere in this Form 10-Q. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. We do not have any intention or obligation to update forward-looking statements included in this Form 10-Q after the date of this Form 10-Q, except as required by law.

Restatement of Consolidated Financial Statements

Critical Accounting Policies and Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results include the following:

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. Those criteria are typically met when product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met. Although there are many factors that influence revenue recognition, the principal reason the Company may not recognize revenue at the time of shipment is if the substance of the transaction is a consignment. Consignment type arrangements happen on a limited basis. Under certain circumstances, the Company accepts product returns. Product returns are principally related to lower-end Meade branded products. Management judgments must be made and used in connection with establishing the sales return estimates. The Company continuously monitors and tracks returns and records revenues net of provisions for returns. The Company’s estimate of sales returns is based upon several factors including historical experience, current market and economic conditions, customer demand and acceptance of the Company’s products and/or any notification received by the Company of such a return. Historically, sales returns have been within management’s estimates and, for the lower-end Meade branded products, were approximately 18% of gross sales of such products for the year ended February 28, 2006, and approximately 20% of gross sales of such products for the years ended February 28, 2005 and, February 29, 2004, respectively. However, actual returns may differ significantly, either favorably or unfavorably, from management’s estimates depending on actual market conditions at the time of the return. The Company has not identified any trends, events or uncertainties that would require a change in management’s methodologies or assumptions related to sales return estimates.

Inventories

Inventories are stated at the lower of cost, as determined using the first-in, first-out (“FIFO”) method, or market. Costs include materials, labor and manufacturing overhead. The Company evaluates the carrying value of its inventories taking into account such factors as historical and anticipated future sales compared with quantities on hand and the price the Company expects to obtain for its products in their respective markets. The Company also evaluates the composition of its inventories to identify any slow-moving or obsolete product. These evaluations require material management judgments, including estimates of future sales, continuing market acceptance of the Company’s products, and current market and economic conditions. Inventory reserves are established, based on such judgments, for any inventories that are identified as having a net realizable value less than its cost. Inventory reserves represented 17%, 16% and 17% of gross inventory value at February 28, 2006 and 2005 and February 29, 2004, respectively. Historically, the net realizable value of the Company’s inventories has generally been within management’s estimates. However, if the Company is not able to meet its sales expectations, or if market conditions deteriorate significantly from management’s estimates, reductions in the net realizable value of the Company’s inventories could have a material adverse impact on future operating results. The Company has not identified any trends, events or uncertainties that would require a change in management’s methodologies or assumptions related to determining the net realizable value of its inventories.

Goodwill and Intangible Assets

Goodwill and intangible assets are accounted for in accordance with SFAS No. 142, Goodwill and Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually and also in the event of an impairment indicator. As required by SFAS No. 142, we evaluate the recoverability of goodwill based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates our cost of capital. Such estimates are subject to change and we may be required to recognize an impairment loss in the future. Any impairment losses will be reflected in operating income.

Income taxes

A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. Significant judgment is necessary in the determination of the recoverability of the Company’s deferred tax assets. Deferred tax assets are reviewed regularly for recoverability and the Company establishes a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion, or all, of the net deferred assets will be realized in future periods. If it is determined that it is more likely than not that a deferred tax asset will not be realized, the value of that asset will be reduced to its expected realizable value, thereby decreasing net income. If it is determined that a deferred tax asset that had previously been written down will be realized in the future, the value of that deferred tax asset will be increased, thereby increasing net income in the period when the determination is made. Actual results may differ significantly, either favorably or unfavorably, from the evidence used to assess the recoverability of the Company’s deferred tax assets. The Company has not identified any trends, events or uncertainties that would require a change in management’s methodologies or assumptions related to the valuation of its deferred tax assets.

Results of Operations

The nature of the Company’s business is seasonal. Historically, sales in the third quarter have been higher than sales achieved in each of the other three fiscal quarters of the year. Thus, expenses and, to a greater extent, operating income vary by quarter. Caution, therefore, is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year.

Overview

Net sales during the first quarter of fiscal year 2007 were down slightly less than thirteen percent from the prior year’s first quarter. Sales of the Company’s various lines were mixed. Sales of the Company’s higher-end and mid-level Meade and Coronado branded telescope products were lower than the prior year due to softness in demand and some production delays as the Company continued its strategy to move to lower cost producers. Sales of digital camera binoculars were also lower than in the prior year quarter as the Company moved aggressively to work through its remaining inventories of those products. Management expects to continue to aggressively move inventories across many of its lines as it focuses on significant SKU reductions. Management expects demand for its higher-end and mid-level products to remain relatively

steady through the remainder of the fiscal year. Sales of Bresser branded binoculars in Europe were lower as an uncharacteristically large order in the prior year was not repeated in the current year quarter. Management expects European revenues for the current fiscal year to be relatively consistent with the prior year. Sales of riflescopes were generally flat compared to the prior year quarter. Management does not expect sales of riflescopes to improve much over the prior year due to continuing supply problems. The Company is aggressively pursuing supply chain management improvements that include new internal management and an outsourced solution that it expects to be functioning in the latter part of the current fiscal year. Management believes demand for the Company’s innovative riflescopes is firm and that as the supply chain issues are resolved shipments of those products will increase. Partially offsetting the sales reductions during the quarter were improved sales of lower-end Meade brand telescopes.

Three Months Ended May 31, 2006 Compared to Three Months Ended May 31, 2005

Net sales for the first quarter of fiscal 2006 were $18.7 million compared to $21.5 million for the first quarter of fiscal 2006, a decrease of 12.9%. The decrease in net sales from the prior year was principally due to a decrease of nearly $2 million in the Company’s mid to higher-end telescopes and related products and an over $2 million decrease in binocular sales. Partially offsetting those decreases was an approximately $1 million increase in sales of lower-end telescopes.

Gross profit decreased from $6.0 million (27.8% of net sales) for the first quarter of fiscal 2006 to $3.4 million (18.3% of net sales) for the first quarter of fiscal 2007, a decrease of 42.4%. The dollar decrease followed the decrease in net sales for the quarter as well as the decreased gross margin for the quarter. The Company is aggressively reducing its SKU count, leading to lower gross margins on the SKU’s that are identified for elimination from the mix. Gross margins on riflescopes were lower in the current year period as the sales mix continued to be concentrated on lower-end, lower margin scopes. Costs related to inventory disposition also increased, particularly related to the disposition of product returns which negatively affected the current year margin as compared to the prior year.

Selling, general and administrative expenses decreased from $6.6 million (30.6% of net sales) for the first quarter of fiscal 2006 to $6.4 million (34.2% of net sales) for the first quarter of fiscal 2007, a decrease of 2.6%. Selling expenses decreased approximately $0.3 million or 9.0% principally on lower outgoing freight on decreased sales volume and lower marketing and advertising costs. General and administrative expenses increased approximately $0.2 million or 5.5% on a slightly different mix of general and administrative expenses compared to the prior year quarter.

ESOP contribution expense remained flat at approximately $0.1 million for each quarter presented (0.4% of net sales for the prior and current year quarter). The non-cash ESOP contribution expense may fluctuate as the number of shares allocated and the market value of the Company’s common stock changes.

Research and development expenses decreased from $0.4 million (1.7% of net sales) for the first quarter of fiscal 2006 to $0.3 million (1.7% of net sales) for the first quarter of fiscal 2007, a decrease of 11.4%. The decrease was principally due to a decrease in outside research and development consulting costs. Research and development expenses continue to be focused on new product development and product improvement in the Company’s core consumer product categories.

Interest expense decreased from $0.2 million (1.0% of net sales) for the first quarter of fiscal 2006 to $0.1 million (0.5% of net sales) for the first quarter of fiscal 2007, a decrease of 51.5%. Although borrowing rates are higher in the current year than last year, interest expense decreased on lower borrowings.

The effective tax rate for the quarter ended May 31, 2006 was significantly affected by recording a full valuation allowance to recognize the uncertainty of realizing any tax benefits generated during the quarter. The valuation allowance was recorded because there is insufficient objective evidence at this time to recognize those benefits for financial reporting purposes. Ultimate realization of any tax benefits is dependent upon the Company generating sufficient taxable income in future periods including periods prior to the expiration of certain underlying tax credits.

Seasonality

The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins and profitability from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company’s products, competitive pricing pressures, the Company’s ability to meet fluctuating demand and delivery schedules, the timing and extent of research and development expenses, the timing and extent of product development costs and the timing and extent of advertising expenditures. In addition, a substantial portion of the Company’s net sales and operating income typically occurs in the third quarter of the Company’s fiscal year primarily due to disproportionately higher customer demand for less-expensive

telescopes during the holiday season. The Company continues to experience significant sales to mass merchandisers. Mass merchandisers, along with specialty retailers, purchase a considerable amount of their inventories to satisfy such seasonal customer demand. These purchasing patterns have caused the Company to increase its level of inventory during its second and third quarters in response to such demand or anticipated demand. As a result, the Company’s working capital requirements have correspondingly increased at such times.

Liquidity and Capital Resources

For the three months ended May 31, 2006 the Company funded its operations principally by utilizing its cash on hand. Cash flow from operating activities was augmented by a decrease in inventories and an increase in accrued payables and taxes payable, partially offset by an increase in accounts receivable. The decrease in inventories was influenced by management focus on SKU reduction. Increases in accrued payables and taxes payable reflects timing of expenses incurred. The increase in accounts receivable reflects the timing of sales in the quarter as compared to the timing of sales in the fourth quarter of fiscal 2006 (fourth quarter 2006 sales were concentrated in the beginning of the quarter compared to first quarter 2007 sales that were not concentrated in any single month of the quarter). Working capital totaled approximately $37.4 million at May 31, 2006, compared to $41.8 million at February 28, 2006. Working capital requirements fluctuate during the year due to the seasonal nature of the business. These requirements are typically financed through a combination of internally generated cash flow from operating activities and short-term bank borrowings.

The Company continues to depend on operating cash flow and availability under its bank lines of credit to provide short-term liquidity. Availability under its bank lines of credit at May 31, 2006 was approximately $9.0 million. Availability under the Company’s bank lines of credit as of mid November 2006 was approximately $10.0 million. On July 31, 2006, September 29, 2006 and October 31, 2006, the Company executed the Seventh, Eighth and Ninth amendments to its bank Credit Agreement, respectively. Each amendment granted the Company additional time to meet the Credit Agreement requirements regarding the reporting deadlines for the Company’s audited year-end financial statements and quarterly financial statements. The Ninth amendment granted the Company until November 30, 2006 to report its audited results to the bank for the year ended February 28, 2006 and until the earlier of November 30, 2006 or five days after the delivery of the Company’s Form 10-K for the year ended February 28, 2006 to report its results for the quarters ended May 31 and August 31, 2006, respectively. The Company met the reporting deadline for the quarter ended May 31, 2006 and was in compliance with all restrictive covenants under its Credit Agreement at the time the results for the quarter ended May 31, 2006 were reported to the bank. The Company is currently in discussions with its bank to extend the deadline for reporting its results for the quarter ended August 31, 2006. Although the Company expects to receive an extension from its bank, it cannot give assurance that it will receive such extension. In the event the Company’s plans require more capital than is presently anticipated, additional sources of liquidity such as debt or equity financings, may be required to meet its capital needs. There can be no assurance that such additional sources of capital will be available on reasonable terms, if at all. However, management believes that operating cash flow and bank borrowing capacity in connection with the Company’s business should provide sufficient liquidity for the Company’s obligations for at least the next twelve months.

Capital expenditures, including financed purchases of equipment, aggregated $0.1 million and $0.3 million for the three month periods ended May 31, 2006 and 2005, respectively. The Company had no material capital expenditure commitments at May 31, 2006. On December 1, 2004, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Coronado Technology Group, LLC, for approximately $2.5 million in cash plus contingent consideration. A final payment of approximately $1 million was paid in May 2006 based upon the financial performance of the acquired operations for the twelve months ended December 31, 2005.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 in fiscal 2009 to have a material impact on its results of operations or financial position.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The Company does not expect the adoption of SFAS No. 158 in fiscal 2008 to have a material impact on its results of operations or financial position.

Forward-Looking Information

The preceding “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which represent the Company’s reasonable judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results and financial position to differ materially, including the following: the Company’s ability to expand the markets for telescopes, binoculars, riflescopes, microscopes, night vision and other optical products; the Company’s ability to continue to develop and bring to market new and innovative products that will be accepted by consumers and end the downward trend in telescope sales; the Company’s ability to develop and grow the Simmons business; the Company’s ability to integrate and grow the Coronado business: the Company’s ability to further develop its wholly owned manufacturing facility in Mexico in combination with its existing manufacturing capabilities; the Company expanding its distribution network; the Company’s ability to further develop the business of its European subsidiary; the Company experiencing fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company’s expectation that contingent liabilities will not have a material effect on the Company’s financial position or results of operations; the extent to which the Company will be able to leverage its design and manufacturing expertise in certain industrial applications such as digital imaging; and the Company’s expectation that it will have sufficient funds to meet any working capital requirements during the foreseeable future with internally generated cash flow and borrowing ability.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain levels of market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company conducts business in a number of foreign countries and is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in the Euro. Business activities in various currencies expose the Company to the risk that the eventual net United States dollar cash inflows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. In prior years, foreign currency fluctuations have not had a material impact on Meade’s revenues or results of operations. There can be no assurance that European or other currencies will remain stable relative to the U.S. dollar or that future fluctuations in the value of foreign currencies will not have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

The Company has adopted a hedging program to manage its foreign currency exchange rate and, at times, interest rate risks. Upon continuing evaluation and when deemed appropriate by management, the Company may enter into hedging instruments to manage its foreign currency exchange and interest rate risks. From time to time, the Company enters into forward exchange contracts to establish with certainty the U.S. dollar amount of future firm commitments denominated in a foreign currency. The notional amounts of the forward exchange contracts vary, typically with the seasonal inventory requirements of the Company’s German subsidiary. The Company’s German subsidiary purchases inventory from Far Eastern suppliers in U.S. dollars. A forward exchange contract is typically entered into when the U.S. dollar amount of the inventory purchase is firm. Given our foreign exchange position, a change in foreign exchange rates upon which these foreign exchange contracts are based would result in exchange gains and losses. In all material aspects, these exchange gains and losses would be fully offset by exchange gains and losses on the underlying net monetary exposures for which the contracts are designated as hedges. We do not expect material exchange rate gains and losses from unhedged foreign currency exposures. As of May 31, 2006, the Company had the following forward exchange contracts outstanding.


	May 31, 2006					February 28, 2006
	Notional					Notional
	amount		Fair Value			amount		Fair Value
Forward currency contracts	$	15,258,000	$	(824,000	)		—		—

At May 31, 2006, the fair value of forward currency contracts is recorded in accrued liabilities on the accompanying Consolidated Balance Sheets. Changes in the fair value of the cash flow forward currency contracts have been recorded as a component of accumulated other comprehensive income (loss), net of tax, as these items have been designated and qualify as cash flow hedges. Due to continuing taxable losses, the Company has provided an allowance against all tax benefits generated during the quarter. Therefore, the change in the fair value of the cash flow forward currency contracts is presented in the accompanying financial statements with no net tax benefit. The settlement dates on the forward currency contracts vary based on the underlying instruments through January 2007.

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, short-term obligations, and long-term obligations. The Company’s principal exposure to interest rate fluctuations relates primarily to the U.S. revolving and term loans. The debt under the U.S. revolving and term loans bears interest at a floating rate tied to either the LIBOR rate or the bank prime rate of interest.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company’s management (with the participation of our then Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the quarter ended November 30, 2005. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been or will be detected.

At the time of the filing of the Company’s Form 10-Q for the period ended November 30, 2005, the then Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls were effective as of that date, which conclusion they believed was accurate at that time. On August 25, 2006, subsequent to this evaluation, the Company determined that certain stock option grants were accounted for and disclosed erroneously as described below.

On May 24, 2006, the Company initiated an independent evaluation of the Company’s stock option grant practices following an article appearing in the Wall Street Journal on May 22, 2006. A Special Committee of the Audit Committee of the Board of Directors, with the assistance of independent outside counsel, evaluated all stock option awards since the Company’s initial public offering. The Special Committee determined that there existed certain flaws in the Company’s option approval and pricing processes, particularly relating to the use of “unanimous written consents” executed by members of the Company’s Board of Directors in connection with otherwise undocumented verbal approvals by the Company’s compensation committee. In addition, it determined that in certain instances management exercised discretion in setting the grant date for options on dates subsequent to obtaining verbal authorization from the Company’s Board of Directors, which was inconsistent with the terms of the Company’s stock option plan. While the Special Committee concluded that incorrect measurement dates were used in several instances, the Special Committee did not find evidence demonstrating that stock options were “back-dated” to coincide with low stock prices. Rather, most of the measurement dates that require adjustment, require such adjustment because there is a lack of contemporaneous evidence confirming approval on those original measurement dates which were originally evidenced by unanimous written consents of the Board, and to ensure that the new measurement dates coincide with the date of formal and final Board action to grant the options. The Special Committee’s independent investigation, therefore, identified certain stock options granted during fiscal years 1998 through 2005 that were accounted for in error. The options identified consisted of: (i) options to purchase an aggregate of 720,000, 600,000, 3,000, 859,000 and 20,000 shares of Company common stock granted, in the aggregate, to fifty-eight employees, during the fiscal years ended February 28/29, 1998, 2001, 2002, 2003 and 2005, respectively, where from a review of supporting records, including unanimous written consents of the Company’s Board of Directors (the “Board”) and minutes of Board and committee meetings, as well as other documentation such as SEC filings and other contemporaneous material, the option grants were not ultimately determined and approved with finality until dates subsequent to the original grant date, (ii) options to purchase an aggregate of 815,000 and 555,000 shares of Company common stock granted, in the aggregate, to thirty-six employees, during the fiscal years ended February 28/29, 2000 and 2001, respectively, where from a review of supporting records, including unanimous written consents of the Board and minutes of Board and committee meetings, as well as other documentation such as SEC filings and other contemporaneous material, the option grants were determined and approved with finality on dates prior to the original grant date, and (iii) options to purchase an aggregate of 236,500 shares of Company common stock granted to fourteen new employees covering a period beginning in fiscal 1998 through fiscal 2005, in which the actual employment date was not used to price the options, which was inconsistent with certain provisions of the Company’s governing stock award plan.

Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) defines the measurement date for determining compensation cost in stock option, purchase, and award plans as the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price, if any. The Special Committee concluded that incorrect measurement dates were used for various stock option grants during the periods described above.

APB 25 requires compensation cost be measured as the difference between the quoted market price of the award at the measurement date, less the amount, if any, that the employee is required to pay. The Company has calculated compensation expense for all option awards whose quoted market price at the new measurement date was greater than the exercise price for the award. APB 25 also requires that compensation cost be recognized over the periods in which an employee performs services for the consideration received.

In accordance with the above guidance and other applicable guidance in APB 25, the Company calculated the amount of compensation expense by multiplying the number of options awarded by the difference between the exercise price on the original grant date and the fair value of the Company’s common stock on the new measurement date. The calculated expense was then amortized over the grantee’s service period which was assumed to be equal to the vesting schedule period. The expense was amortized over the full vesting period beginning on the new measurement date and was adjusted for forfeitures and/or cancellations, if any. The original grant date was disregarded with respect to the period over which the expense was amortized.

As a result of the findings described above, on August 25, 2006, Company management and the Company’s Board of Directors, concluded that certain of the Company’s financial statements required restatement, and in the Company’s Form 10-K for the year ended February 28, 2006 the following financial statements were restated, specifically: (i) the consolidated

balance sheet as of February 28, 2005, and (ii) the consolidated statements of operations, the consolidated statements of stockholders’ equity and consolidated statements of cash flows for the fiscal years ended February 29, 2004 and February 28, 2005. The Company also restated the selected financial data as of and for the years ended February 28/29, 2005, 2004, 2003, and 2002, as well as the selected quarterly financial data for the quarters ended May 31, August 31, and November 30, 2004 and 2005, respectively, and the quarter ended February 28, 2005.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The Company determined that two material weaknesses in its internal control over financial reporting existed as of February 28, 2006. Specifically, as a result of the independent investigation into the Company’s stock option accounting practices, management determined that the Company did not maintain effective controls over the completeness and accuracy of its accounting for and monitoring of its non-cash stock-based accounting and related financial statement disclosures, including the validity of its recording of various stock option transactions. This control deficiency resulted in management’s failure to detect errors with regard to the accounting for certain stock option grants and resulted in the restatement of the Company’s consolidated financial statements and related disclosures, as described above. Additionally, this control deficiency could result in a misstatement of non-cash stock-based compensation expense, additional paid-in capital, accumulated deficit and deferred compensation and financial statement disclosures related to stock options that could result in a material misstatement of the interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, the Company has determined that this control deficiency constitutes a material weakness. The Company also determined that, as of February 28, 2006, it did not maintain adequate controls over the preparation, analysis, documentation, and review of the income tax provision calculation and related financial statement disclosures.

These material weaknesses had not been remediated as of May 31, 2006 and therefore, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of May 31, 2006, the Company’s disclosure controls and procedures were not effective for the reasons described in the preceding paragraphs.

Remediation of Material Weakness in Internal Control over Financial Reporting of Stock-Based Compensation Expense

To address the findings of the independent investigation and the Company’s subsequent analysis which led to the determination of the existence of a material weakness in the Company’s internal control over financial reporting related to non-cash stock-based accounting, the Company agreed to implement a series of remedial actions during the third and fourth quarters of fiscal year 2007, including: (i) the institution of policies and procedures regarding the pricing and dating of option grants to new hires; (ii) the use of fixed, pre-determined dates for the issuance of options to employees and directors other than new hires; (iii) required documentation of approval of all option grants in Compensation Committee and/or Board minutes, not via the use of unanimous written consents; (iv) a prohibition against the exercise of discretionary authority by any employee over any aspect of the Company’s stock option plan; (v) the contemporaneous preparation and dating of Compensation Committee minutes and related documentation; and (vi) the utilization of nationally recognized stock option accounting software. Management believes that these corrective actions, taken as a whole, will mitigate the material weakness described above.

Remediation of Controls over the Preparation, Analysis, documentation, and Review of the Income Tax Provision Calculation

Management is currently reviewing its control policies and procedures with respect to preparation, analysis, documentation, and review of its income tax provision calculation. As part of its remediation plan over the calculation, management is actively pursuing an outsourcing solution combined with the utilization of nationally recognized tax provision preparation software. Management believes that outsourced qualified tax professionals combined with the utilization of a nationally recognized tax provision preparation software will afford the Company the appropriate knowledge, experience and tools to maintain effective controls over the preparation, documentation and analysis of the Company’s income tax provision calculation.

Changes in Internal Control over Financial Reporting.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

1. The following purported shareholder derivative actions have been filed challenging conduct by certain of the Company’s current and former board members and officers in connection with various stock option grants:

a. Barclay v. Diebel, et al., 06-CC-00205, Superior Court of the State of California for the County of Orange, filed October 6, 2006. The complaint asserts causes of action for breach of fiduciary duty, accounting, abuse of control, gross mismanagement, constructive trust, corporate waste, rescission, unjust enrichment, and violation of California Corporations Code in connection with the Company’s option granting practices.

b. Bryant v. Diebel, et al., 06-CC-00206, Superior Court of the State of California for the County of Orange, filed October 6, 2006. The complaint asserts causes of action for breach of fiduciary duty, accounting, abuse of control, gross mismanagement, constructive trust, corporate waste, rescission, unjust enrichment, and violation of California Corporations Code in connection with the Company’s option granting practices.

2. The following putative federal securities class action has also been filed challenging conduct by the Company and certain of its current and former board members and officers in connection with various stock option grants:

(a) Grecian v. Meade Instruments Corp., et al., SA CV 06-908 AG (JTLx), United States District Court for the Central District of California, filed September 27, 2006. The complaint asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act in connection with the Company’s option granting practices. The Company has been advised by plaintiffs’ counsel that plaintiffs intend to file an amended complaint that will also allege violations of Section 14(a) of the Securities Exchange Act.

3. On September 28, 2006, Daniel Azari and Paul T. Jones, dba Star Instruments and RC Optical Systems, Inc., filed an action against Meade and certain Meade dealers in the United States District Court for the Southern District of New York. The complaint alleges the following claims: (1) violation of the Racketeer Influenced And Corrupt Organization Act (“RICO”); (2) violation of New York General Business Law §§ 349 and 350; (3) violation of California Business and Professions Code § 17200; (4) unfair competition; and (5) product disparagement. The gravamen of the complaint is that Meade and other defendants allegedly falsely advertise Meade’s Advanced Ritchey-Chretien products as being Ritchey-Chretien products. The complaint seeks injunctive relief, compensatory and treble damages, and attorneys’ fees and costs. Meade has not yet been required to file an answer to the complaint.

4. On June 13, 2006, the Company issued a press release announcing that it had received notification from the Securities and Exchange Commission (the “SEC”) of an informal inquiry into the Company’s past stock option grant practices. The Company is cooperating with the SEC in this inquiry.

Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in the above mentioned cases.

In addition to the above, the Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of such litigation will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

ITEM 1.A. RISK FACTORS

We do not believe there have been any material changes from the risk factors discussed in Item 1.A. of our Annual Report on Form 10-K for our fiscal year ended February 28, 2006.

We rely on independent contract manufacturers and, as a result, we are exposed to potential disruptions in product supply.

All of our consumer optics products with retail prices under $500 are currently manufactured by independent contract manufacturers, principally located in China. We do not have long-term contracts with our Asian manufacturers, and we compete with other consumer optics companies for production facilities. We have experienced, and continue to experience, difficulties with these manufacturers, including reductions in the availability of production capacity, failure to meet our quality control standards, failure to meet production deadlines and increased manufacturing costs. Some manufacturers in China are facing labor shortages as migrant workers seek better wages and working conditions. If this trend continues, our current manufacturers’ operations could be adversely affected.

If our current manufacturers cease doing business with us, we could experience an interruption in the manufacture of our products. Although we believe that we could find alternative manufacturers, we may be unable to establish relationships with alternative manufacturers that will be as favorable as the relationships we have now. For example, new manufacturers may have higher prices, less favorable payment terms, lower manufacturing capacity, lower quality standards or higher lead times for delivery. If we are unable to provide products to our customers that are consistent with our standards or the manufacture of our products is delayed or becomes more expensive, this could result in our customers canceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.

Our future success depends upon our ability to respond to changing consumer demands and successfully market new products.

The consumer optics industry is subject to changing consumer demands and technology trends. Accordingly, we must identify those trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving market acceptance for new products generally requires substantial product development and marketing efforts and expenditures. If we do not continue to meet changing consumer demands and develop successful products in the future, our growth and profitability will be negatively impacted. We frequently make decisions about product designs and marketing expenditures several months to years in advance of the time when consumer acceptance can be determined. If we fail to anticipate, identify or react appropriately to changes in trends or are not successful in marketing new products, we could experience excess inventories, higher than normal markdowns or an inability to profitably sell our products. Because of these risks, the consumer optics industry has experienced periods of growth in revenues and earnings and thereafter periods of declining sales and losses. Similarly, these risks could have a material adverse effect on our results of operations, financial condition or cash flows.

Our business and the success of our products could be harmed if we are unable to maintain our brand image.

Our principal brands include Meade^®, Bresser^®, Simmons^®, Weaver^®, Redfield^® and Coronado^®. If we are unable to timely and appropriately respond to changing consumer demand, our brand names and brand images may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider these brands to be outdated or undesirable. If we fail to maintain and develop our principal brands, our sales and profitability will be adversely affected.

Our business could be harmed if we fail to maintain appropriate inventory levels.

We place orders with suppliers for many of our products prior to the time we receive all of our customers’ orders. We do this to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We, at times, also maintain an inventory of certain products that we anticipate will be in greater demand. However, we may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our suppliers fail to supply the products that we require with the quality and at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to our customers, negatively impact our retailer and distributor relationships, and diminish brand loyalty.

We face intense competition, including competition from companies with significantly greater resources, and, if we are unable to compete effectively with these competitors, our market share may decline and our business could be harmed.

We face intense competition from other established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the consumer optics market, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition in the consumer optics industry.

We believes that our ability to compete successfully depends on a number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of operations and financial condition.

We depend upon a relatively small group of customers for a large portion of our sales.

Sales to our ten largest customers accounted for between approximately 30% and 35% of total net sales for each of the three fiscal years ending February 28, 2006. We have also had significant single customers that have represented over 10% of our net sales. Although we have long-term relationships with many of our customers, those customers do not have contractual obligations to purchase our products and we cannot be certain that we will be able to retain our existing major customers. Furthermore, the retail industry regularly experiences consolidation, contractions and closings which may result in a loss of customers or the loss of our ability to collect accounts receivable from major customers in excess of amounts that we have insured. If we lose a major customer, experiences a significant decrease in sales to a major customer or are unable to collect the accounts receivable of a major customer in excess of amounts insured, our business could be harmed.

Our international sales and third-party manufacturing operations are subject to the risks of doing business abroad, particularly in China, which could affect our ability to sell or manufacture our products in international markets, obtain products from foreign suppliers or control product costs.

A significant potion of our net sales during the year ended February 28, 2006 were derived from sales of products manufactured in foreign countries, with most manufactured in China. We also sell our products in several foreign countries and plan to increase our international sales efforts as part of our growth strategy. Foreign manufacturing and sales are subject to a number of risks, including the following risks: political and social unrest, including that related to the U.S. military presence in Iraq; changing economic conditions; currency exchange rate fluctuations; international political tension and terrorism; labor shortages and work stoppages; electrical shortages,

transportation delays; loss or damage to products in transit; expropriation; nationalization; the imposition of domestic and international tariffs and trade duties, import and export controls and other non-tariff barriers, exposure to different legal standards (particularly with respect to intellectual property), compliance with foreign laws, and changes in domestic and foreign governmental policies. We have not, to date, been materially affected by any such risks, but we cannot predict the likelihood of such developments occurring or the resulting long-term adverse impact on our business, results of operations or financial condition.

In particular, because most of our products are manufactured in China, adverse changes in trade or political relations with China, political instability in China, the occurrence of a natural disaster such as an earthquake or hurricane in China or the outbreak of a pandemic disease such as Severe Acute Respiratory Syndrome (SARS) or the Avian Flu in China would severely interfere with the manufacture of our products and would have a material adverse effect on our operations. In addition, electrical shortages, labor shortages or work stoppages may extend the production time necessary to produce our orders, and there may be circumstances in the future where we may have to incur premium freight charges to expedite the delivery of product to our customers. If we incur a significant amount of premium charges to airfreight product for our customers, gross profit will be negatively affected if we are unable to pass those charges on to our customers.

Also, the manufacturers of our products that are located in China may be subject to the effects of exchange rate fluctuations should the Chinese currency not remain stable with the U.S. dollar. The value of the Chinese currency depends to a large extent on the Chinese government’s policies and China’s domestic and international economic and political developments. The valuation of the Yuan may increase incrementally over time should the Chinese central bank allow it to do so, which could significantly increase labor and other costs incurred in the production of our products in China.

Our business could be harmed if our contract manufacturers or suppliers violate labor, trade or other laws.

We require our independent contract manufacturers to operate in compliance with applicable United States and foreign laws and regulations. Manufacturers may not use convicted, forced or indentured labor (as defined under United States law) nor child labor (as defined by the manufacturer’s country) in the production process. Compensation must be paid in accordance with local law and factories must be in compliance with local safety regulations. Although we promote ethical business practices and send sourcing personnel periodically to visit and monitor the operations of our independent contract manufacturers, we do not control them or their labor practices. If one of our independent contract manufacturers violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result in the loss of certain of our major customers, adverse publicity for us, damage our reputation in the United States or render our conduct of business in a particular foreign country undesirable or impractical, any of which could harm our business.

In addition, if we, or our foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate record keeping of imported products, misstatements or errors as to the origin, quota category, classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.

We may be unable to successfully execute our growth and profitability strategies.

Our net sales and operating results have fluctuated significantly over the past five fiscal years and we may experience similar fluctuations in the future. Our ability to grow in the future depends upon, among other things, the maintenance and enhancement of our brand image and expansion of our product offerings and distribution channels. Furthermore, if our business becomes larger, we may not be able to effectively manage our growth. We anticipate that as the business grows, we will have to improve and enhance our overall financial and managerial controls, reporting systems and procedures. We may be unable to successfully implement our current growth and profitability

strategies or other growth strategies or effectively manage our growth, any of which would negatively impact our business, results of operations and financial condition.

The disruption, expense and potential liability associated with existing and unanticipated future litigation against us could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We are subject to various legal proceedings and threatened legal proceedings from time to time. We are not currently a party to any legal proceedings or aware of any threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe, would have a material adverse effect on our business, results of operations, financial condition or cash flows. However, any unanticipated litigation in the future, regardless of its merits, could significantly divert management’s attention from our operations and result in substantial legal fees being borne by us. Further, there can be no assurance that any actions that have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against us, that we will have the ability to pay such judgments. Such disruptions, legal fees and any losses resulting from these claims could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our failure to comply with any of the financial covenants in our U.S. line of credit facility or other debt agreements could have a material adverse impact on our business.

A significant decrease in our operating results could adversely affect our ability to maintain required financial covenants under our various debt agreements. Due to operating losses over the past two years, we have, several times, renegotiated the financial covenants contained in our U.S. credit agreement, which is our primary debt agreement. If financial covenants are not maintained, the creditors will have the option to require immediate repayment of all outstanding debt under the related debt agreements. In such event, we may be required to renegotiate certain terms of these agreements, obtain waivers from the creditors or obtain new debt agreements with other creditors, which may contain less favorable terms. If we are unable to renegotiate acceptable terms, obtain necessary waivers or obtain new debt agreements, this could have a material adverse effect on our business, results of operations and financial condition.

Our business may be negatively impacted as a result of changes in the economy.

Our business depends on the general economic environment and levels of consumer spending that affect not only the ultimate consumer, but also retailers, our primary direct customers. Purchases of consumer optics tend to decline in periods of recession or uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, declines. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, maintain or increase our international operations on a profitable basis, or maintain or improve our earnings from operations as a percentage of net sales. As a result, our operating results may be materially adversely affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general.

Our quarterly revenues and operating results fluctuate as a result of a variety of factors, including seasonal fluctuations in the demand for consumer optics, delivery date delays and potential fluctuations in our annualized tax rate, which may result in volatility of our stock price.

Our quarterly revenues and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a number of factors, many of which are beyond our control. Our major customers generally have no obligation to purchase forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice and without penalty. As a result, we may not be able to accurately predict our quarterly sales or operating results. In addition, sales of consumer optics have historically been seasonal in nature and tied to the holiday shopping season, with the strongest sales generally occurring in our third fiscal quarter. Holiday shopping sales typically begin to ship in August, and delays in the timing, cancellation, or rescheduling of the related orders by our wholesale customers could negatively impact our net sales and results of operations. More specifically, the timing of when products are shipped is determined by the delivery schedules set

by our wholesale customers, which could cause sales to shift between our second, third and fourth quarters. Because our expense levels are partially based on our expectations of future net sales, expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shifts or shortfalls, which could have a material adverse effect on our operating results. Also, our annualized tax rate is based on projections of our domestic and international operating results for the year, which are reviewed and revised by management as necessary at the end of each quarter, and it is highly sensitive to fluctuations in the projected mix of international and domestic earnings. Any quarterly fluctuations in our annualized tax rate that may occur could have a material impact on our quarterly operating results. As a result of these specific and other general factors, our operating results vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year which may lead to volatility in the our stock price.

Changes in currency exchange rates could affect our revenues and operating results.

A significant portion of our production and approximately 30% of our sales for the year ended February 28, 2006 were denominated in foreign currencies and are subject to exchange rate fluctuation risk. Although we engage in some hedging activities to reduce foreign exchange transaction risk, changes in the exchange rates between the U.S. dollar and the currencies of Europe and Asia could make our products less competitive in foreign markets, and could reduce the sales and operating results represented by foreign currencies. Additionally, such fluctuation could result in an increase in cost of products sold in foreign markets reducing margins and earnings.

Our trademarks, design patents, utility patents and other intellectual property rights may not be adequately protected outside the United States.

We believe that our trademarks, design patents, utility patents and other proprietary rights are important to our business and our competitive position. We devote substantial resources to the establishment and protection of our trademarks, design patents and utility patents on a worldwide basis. Nevertheless, we cannot assure that the actions we have taken to establish and protect our trademarks and other proprietary rights outside the United States will be adequate to prevent infringement of our technologies or trade names by others or to prevent others from seeking to block sales of our products as a violation of the trademarks and proprietary rights of others. Also, we cannot assure that others will not assert rights in, or ownership of, our trademarks, patents, designs and other proprietary rights or that we will be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights or if we are sued for intellectual property infringement.

We use trademarks on all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, in identifying the Company and in distinguishing our goods from the goods of others. We consider our Meade^®, Bresser^®, Simmons^®, Weaver^®, Redfield^® and Coronado^® trademarks and brand names to be among our most valuable assets and we have registered these trademarks in many countries. In addition, we own many other trademarks and trade names, which we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. We also have a number of utility patents and design patents covering components and features used in many of our telescope, riflescope, binocular and other products. We believe our success depends more upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on designs and technologies that we deem valuable as critical contributors to our business.

We are exposed to potential risks from recent legislation requiring public companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like all other public companies, are incurring expenses and diverting management’s time in an effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. We are a non-accelerated filer and we are in the early stages of process documentation and evaluation of our systems of internal control. If, in the future, management identifies one or more material weaknesses, or our external auditors are unable to attest that our management’s report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibits filed with this Form 10-Q.

	1.		Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification by Steven L. Muellner

	2.		Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification by Brent W. Christensen

	3.		Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification by Steven L. Muellner

	4.		Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen


		Page No.
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited) — May 31, 2006 and February 28, 2006		1

	Consolidated Statements of Operations (Unaudited) — Three Months Ended May 31, 2006 and 2005		2

	Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended May 31, 2006 and 2005		3

	Notes to Consolidated Financial Statements (Unaudited)		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		16

Item 4.	Controls and Procedures		16

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		19

Item 1A.	Risk Factors		19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25

Item 3.	Defaults Upon Senior Securities		25

Item 4.	Submission of Matters to a Vote of Security Holders		25

Item 5.	Other Information		25

Item 6.	Exhibits		25

	Signatures		26
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	Three Months Ended
	May 31,
	2006			2005
				as restated
Net sales	$	18,745,000		$	21,525,000
Cost of sales		15,297,000			15,533,000

Gross profit		3,448,000			5,992,000
Selling expenses		3,359,000			3,693,000
General and administrative expenses		3,044,000			2,880,000
ESOP contribution expense		78,000			92,000
Research and development expenses		327,000			369,000

Operating loss		(3,360,000	)		(1,042,000	)
Interest expense		99,000			204,000

Loss before income taxes		(3,459,000	)		(1,246,000	)
Provision (benefit) for income taxes		117,000			(464,000	)

Net loss	$	(3,576,000	)	$	(782,000	)

Basic and diluted loss per share	$	(0.18	)	$	(0.04	)

Weighted average number of shares outstanding — basic and diluted		19,504,000			19,252,000


	MEADE INSTRUMENTS CORP.
	By:	/s/ STEVEN L. MUELLNER
		Steven L. Muellner
		President and Chief Executive Officer



	By:	/s/ BRENT W. CHRISTENSEN
		Brent W. Christensen
		Senior Vice President, Finance and Chief Financial Officer

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Exhibit		Description
31.1		Sarbanes-Oxley Act Section 302 Certification by Steven L. Muellner

31.2		Sarbanes-Oxley Act Section 302 Certification by Brent W. Christensen

32.1		Sarbanes-Oxley Act Section 906 Certification by Steven L. Muellner

32.2		Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen