<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended December 31, 2005.

Commission file number: 0-20206

                                PERCEPTRON, INC.
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                                          <C>
                Michigan                                          38-2381442
    (State or Other Jurisdiction of                            (I.R.S. Employer
     Incorporation or Organization)                          Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
 47827 Halyard Drive, Plymouth, Michigan                          48170-2461
(Address of Principal Executive Offices)                          (Zip Code)
</TABLE>

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

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

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

                                Yes  X    No
                                    ---      ---

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       Accelerated filer       Non-accelerated filer X
                        ---                      ---                        ---

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

                                Yes       No  X
                                    ---      ---

The number of shares outstanding of each of the issuer's classes of common stock
as of February 8, 2006, was:

<TABLE>
<S>                                                    <C>
Common Stock, $0.01 par value                               8,501,437
-----------------------------                           ----------------
          Class                                         Number of shares
</TABLE>

<PAGE>

                        PERCEPTRON, INC. AND SUBSIDIARIES
                               INDEX TO FORM 10-Q
                     FOR THE QUARTER ENDED DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                       NUMBER
                                                                       ------
<S>                                                                    <C>
COVER                                                                     1

INDEX                                                                     2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements                                              3
Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations                                        14
Item 3. Quantitative and Qualitative Disclosures about Market Risk       27
Item 4. Controls and Procedures                                          27

PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      27
Item 4. Submission of Matters to a Vote of Security Holders              28
Item 6. Exhibits                                                         28

SIGNATURES                                                               29
</TABLE>


                                       2

<PAGE>

                        PERCEPTRON, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,   JUNE 30,
(In Thousands, Except Per Share Amount)                                          2005         2005
                                                                             ------------   --------
                                                                              (Unaudited)
<S>                                                                          <C>            <C>
ASSETS

   CURRENT ASSETS
      Cash and cash equivalents                                                $ 18,785     $ 20,374
      Receivables:
         Billed receivables, net of allowance for doubtful accounts
            of $358 and $391, respectively                                       20,993       19,413
         Unbilled receivables                                                     2,671        1,888
         Other receivables                                                          534        1,004
      Inventories, net of reserves of $518 and $520, respectively                 6,528        5,884
      Deferred taxes                                                              1,199        1,199
      Other current assets                                                          845          736
                                                                               --------     --------
         Total current assets                                                    51,555       50,498

   PROPERTY AND EQUIPMENT
      Building and land                                                           6,013        6,013
      Machinery and equipment                                                    11,196       10,653
      Furniture and fixtures                                                      1,073        1,059
                                                                               --------     --------
                                                                                 18,282       17,725
      Less - Accumulated depreciation and amortization                          (10,662)     (10,038)
                                                                               --------     --------
         Net property and equipment                                               7,620        7,687

   DEFERRED TAX ASSET                                                             5,172        5,205
                                                                               --------     --------
   TOTAL ASSETS                                                                $ 64,347     $ 63,390
                                                                               ========     ========

LIABILITIES AND SHAREHOLDERS' EQUITY

   CURRENT LIABILITIES
      Accounts payable                                                         $  2,827     $  1,854
      Accrued liabilities and expenses                                            2,289        2,807
      Accrued compensation                                                          762        1,359
      Income taxes payable                                                          634          130
      Deferred revenue                                                            3,853        3,248
                                                                               --------     --------
         Total current liabilities                                               10,365        9,398

   SHAREHOLDERS' EQUITY
      Preferred stock - no par value, authorized 1,000 shares, issued none           --           --
      Common stock, $0.01 par value, authorized 19,000 shares, issued
         and outstanding 8,477 and 8,822, respectively                               85           88
      Accumulated other comprehensive (loss)                                       (802)        (677)
      Additional paid-in capital                                                 40,425       42,770
      Retained earnings                                                          14,274       11,811
                                                                               --------     --------
         Total shareholders' equity                                              53,982       53,992
                                                                               --------     --------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $ 64,347     $ 63,390
                                                                               ========     ========
</TABLE>

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


                                       3

<PAGE>

                        PERCEPTRON, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED    SIX MONTHS ENDED
                                                DECEMBER 31,         DECEMBER 31,
                                             ------------------   -----------------
(In Thousands, Except Per Share Amounts)       2005      2004       2005      2004
                                             -------   -------    -------   -------
<S>                                          <C>       <C>        <C>       <C>
NET SALES                                    $17,188   $14,812    $29,948   $27,056
COST OF SALES                                  8,890     7,394     16,067    13,610
                                             -------   -------    -------   -------
   GROSS PROFIT                                8,298     7,418     13,881    13,446

OPERATING EXPENSES
   Selling, general and administrative         3,652     3,355      6,944     6,152
   Engineering, research and development       1,886     1,917      3,758     3,620
                                             -------   -------    -------   -------
      Total operating expenses                 5,538     5,272     10,702     9,772
                                             -------   -------    -------   -------

   OPERATING INCOME                            2,760     2,146      3,179     3,674

OTHER INCOME AND (EXPENSES)
   Interest income, net                          104       127        251       218
   Foreign currency gain (loss)                 (126)       89        (77)      120
   Other                                         162       (49)       161       (12)
                                             -------   -------    -------   -------
      Total other income (expenses)              140       167        335       326
                                             -------   -------    -------   -------

INCOME BEFORE INCOME TAXES                     2,900     2,313      3,514     4,000

INCOME TAX EXPENSE (NOTE 9)                      706       846      1,051     1,568
                                             -------   -------    -------   -------
NET INCOME                                   $ 2,194   $ 1,467    $ 2,463   $ 2,432
                                             =======   =======    =======   =======

EARNINGS PER COMMON SHARE
   Basic                                     $  0.25   $  0.17    $  0.28   $  0.28
   Diluted                                   $  0.24   $  0.16    $  0.27   $  0.26

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
   Basic                                       8,668     8,749      8,749     8,738
   Dilutive effect of stock options              502       664        474       665
                                             -------   -------    -------   -------
   Diluted                                     9,170     9,413      9,223     9,403
                                             =======   =======    =======   =======
</TABLE>

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


                                       4

<PAGE>

                        PERCEPTRON, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                              DECEMBER 31,
                                                                           -----------------
(In Thousands)                                                               2005      2004
                                                                           -------   -------
<S>                                                                        <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                              $ 2,463   $ 2,432
   Adjustments to reconcile net income to net cash provided from
      (used for) operating activities:
      Depreciation and amortization                                            654       665
      Stock compensation expense                                               383        --
      Deferred income taxes                                                     33     1,074
      Stock option income tax benefit                                           53        22
      Other                                                                    (28)       84
      Changes in assets and liabilities, exclusive of changes shown
         separately                                                         (1,639)     (935)
                                                                           -------   -------
         Net cash provided from operating activities                         1,919     3,342

CASH FLOWS FROM FINANCING ACTIVITIES
   Revolving credit borrowings                                                 468       441
   Revolving credit repayments                                                (468)     (441)
   Proceeds from stock plans                                                   162       167
   Repurchase of company stock                                              (2,947)      (38)
                                                                           -------   -------
         Net cash provided from (used for) financing activities             (2,785)      129

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures                                                       (591)     (763)
                                                                           -------   -------
         Net cash used for investing activities                               (591)     (763)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                  (132)    1,122
                                                                           -------   -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        (1,589)    3,830
CASH AND CASH EQUIVALENTS, JULY 1                                           20,374    19,679
                                                                           -------   -------
CASH AND CASH EQUIVALENTS, DECEMBER 31                                     $18,785   $23,509
                                                                           =======   =======

CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
   Receivables, net                                                        $(1,985)  $ 3,322
   Inventories                                                                (644)     (763)
   Accounts payable                                                            972       483
   Other current assets and liabilities                                         18    (3,977)
                                                                           -------   -------
                                                                           $(1,639)  $  (935)
                                                                           =======   =======
</TABLE>

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


                                       5

<PAGE>

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

1.   BASIS OF PRESENTATION

The accompanying consolidated financial statements should be read in conjunction
with the Company's 2005 Annual Report on Form 10-K. In the opinion of
management, the unaudited information furnished herein reflects all adjustments
necessary, consisting of normal recurring adjustments, for a fair presentation
of the financial statements for the periods presented. The results of operations
for any interim period are not necessarily indicative of the results of
operations for a full year.

2.   INVENTORY

Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders,
age and use of inventory that affect the value of the inventory. When the
related inventory is disposed of, the obsolescence reserve is reduced. A
detailed review of the inventory is performed yearly with quarterly updates for
known changes that have occurred since the annual review. Inventory, net of
reserves of $518,000 and $520,000 at December 31, 2005 and June 30, 2005,
respectively, is comprised of the following (in thousands):

<TABLE>
<CAPTION>
                  DECEMBER 31,   JUNE 30,
                      2005         2005
                  ------------   --------
<S>               <C>            <C>
Component Parts      $3,234       $2,799
Work In Process         396          407
Finished Goods        2,898        2,678
                     ------       ------
Total                $6,528       $5,884
                     ======       ======
</TABLE>

3.   EARNINGS PER SHARE

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

Options to purchase 955,000 and 624,000 shares of common stock outstanding in
the three months ended December 31, 2005 and 2004, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 1,031,000 and 623,000 shares of common stock
outstanding in the six months ended December 31, 2005 and 2004, respectively,
were not included in the computation of diluted EPS because the effect would
have been anti-dilutive.


                                       6

<PAGE>

4.   FOREIGN EXCHANGE CONTRACTS

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

At December 31, 2005, the Company had forward exchange contracts to sell 3.0
million Euros ($3.6 million equivalent) at a weighted average settlement rate of
1.20 Euros to the United States Dollar. The contracts outstanding at December
31, 2005, mature through September 29, 2006. The objective of the hedge
transactions is to protect designated portions of the Company's net investment
in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar
exchange rate. The Company assesses hedge effectiveness based on overall changes
in fair value of the forward contract. Since the critical risks of the forward
contract and the net investment coincide, there was no ineffectiveness. The
accounting for the hedges is consistent with translation adjustments where any
gains and losses are recorded to other comprehensive income. The Company
recognized income of approximately $92,000 and $132,000 in other comprehensive
income (loss) for the unrealized change in value of the forward exchange
contracts during the three and six months ended December 31, 2005, respectively.
Offsetting this amount was an increase in other comprehensive income (loss) for
the translation effect of the Company's foreign subsidiary. Because the forward
contracts were effective, there was no gain or loss recognized in earnings. The
Company's forward exchange contracts do not subject it to material risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.

At December 31, 2004, the Company had $8.0 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.28 Euros to the United States Dollar. The Company recognized a charge
of approximately $988,000 and $1.1 million in other comprehensive income (loss)
for the unrealized change in value of forward exchange contracts during the
three and six months ended December 31, 2004, respectively.

5.   COMPREHENSIVE INCOME

Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):

<TABLE>
<CAPTION>
                                               2005     2004
                                              ------   ------
<S>                                           <C>      <C>
THREE MONTHS ENDED DECEMBER 31,
Net Income                                    $2,194   $1,467
Other Comprehensive Income (Loss):
   Foreign currency translation adjustments     (186)   1,863
   Forward Contracts                              92     (988)
                                              ------   ------
Total Comprehensive Income                    $2,100   $2,342
                                              ======   ======
</TABLE>

<TABLE>
<CAPTION>
                                               2005      2004
                                              ------   -------
<S>                                           <C>      <C>
SIX MONTHS ENDED DECEMBER 31,
Net Income                                    $2,463   $ 2,432
Other Comprehensive Income (Loss):
   Foreign currency translation adjustments     (257)    2,205
   Forward Contracts                             132    (1,131)
                                              ------   -------
Total Comprehensive Income                    $2,338   $ 3,506
                                              ======   =======
</TABLE>


                                       7

<PAGE>

6.   CREDIT FACILITIES

The Company had no debt outstanding at December 31, 2005.

The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2007. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (7.25% as of December 31, 2005) dependent upon the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at
a specific margin above the Eurodollar Rate offered at the time and for the
period chosen (approximately 6.41% as of December 31, 2005) dependent upon the
Company's ratio of funded debt to EBITDA and is payable on the last day of the
applicable period. Quarterly, the Company pays a commitment fee on the daily
unused portion of the Credit Agreement based on a percentage dependent upon the
Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the
Company from paying dividends. In addition, the Credit Agreement requires the
Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of
not less than $35.5 million as of December 31, 2005 and to have no advances
outstanding for 30 consecutive days each calendar year.

At December 31, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $592,000 at
December 31, 2005). The facility may be used to finance working capital needs
and equipment purchases or capital leases. Any borrowings for working capital
needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and
2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable
at any time by either GmbH or the bank and any amounts then outstanding would
become immediately due and payable. At December 31, 2005, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
103,000 Euros (equivalent to approximately $122,000 at December 31, 2005).

7.   STOCK-BASED COMPENSATION

The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment ("SFAS 123R"), effective July 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based compensation in the
Company's financial statements. Prior to July 1, 2005, the Company applied the
requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based plans.
Under APB 25, generally no compensation expense was recognized for the Company's
stock-based plans since the exercise price of granted employee stock options was
greater than or equal to the market value of the underlying common stock on the
date of grant.

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


                                       8

<PAGE>

The Company recognized as an operating expense non-cash stock-based compensation
cost in the amount of $198,000 and $383,000 in the three and six months ended
December 31, 2005. This had the effect of decreasing net income by $161,000, or
$0.02 per diluted share, and $311,000, or $0.03 per diluted share, for the
quarter and six months ended December 31, 2005, respectively. As of December 31,
2005, the total remaining unrecognized compensation cost related to non-vested
stock options amounted to $1.5 million.

SFAS 123R requires the Company to present pro forma information for periods
prior to the adoption as if the Company had accounted for all employee
stock-based awards under the fair value method of that statement. For purposes
of pro forma disclosure, the estimated fair value of the stock-based awards at
the date of the grant is amortized to expense over the requisite service period,
which generally equals the vesting period. The following table illustrates the
effect on net income and earnings per share for the periods indicated as if the
Company had applied the fair value recognition provisions of SFAS 123R to its
stock-based employee compensation plans. (in thousands except per share
amounts):

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED    SIX MONTHS ENDED
                                                              DECEMBER 31, 2004   DECEMBER 31, 2004
                                                             ------------------   -----------------
<S>                                                          <C>                  <C>
NET INCOME
   AS REPORTED                                                     $1,467               $ 2,432
   EFFECT OF STOCK-BASED COMPENSATION EXPENSE - NET OF TAX           (136)                 (272)
                                                                   ------               -------
   PRO FORMA                                                       $1,331               $ 2,160
                                                                   ======               =======

EARNINGS PER SHARE
   BASIC - AS REPORTED                                             $ 0.17               $  0.28
   BASIC - PRO FORMA                                               $ 0.15               $  0.25
   DILUTED - AS REPORTED                                           $ 0.16               $  0.26
   DILUTED - PRO FORMA                                             $ 0.14               $  0.23
</TABLE>

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

Awards under the 2004 Stock Incentive Plan may be in the form of stock options,
stock appreciation rights, restricted stock or restricted stock units,
performance share awards, director stock purchase rights and deferred stock
units; or any combination thereof. The terms of the awards will be determined by
the Management Development, Compensation and Stock Option Committee, unless
specified in the 2004 Stock Incentive Plan. As of December 31, 2005, the Company
has only issued awards in the form of stock options. Options outstanding under
the 2004 Stock Incentive Plan and the 1992 and 1998 Plans generally become
exercisable at 25% per year beginning one year after the date of grant and
expire ten years after the date of grant. Options outstanding under the
Directors Plan are either an initial option or an annual option. Prior to
December 7, 2004, initial options of 15,000 shares were granted as of the date
the non-employee director was first elected to the Board of Directors and became
exercisable in full on the first anniversary of the date of grant. Prior to
December 7, 2004, annual options of 3,000 shares were granted as of the date of
the respective annual meeting to each non-employee director serving at least six
months prior to the annual meeting and become exercisable in three annual
increments of 33 1/3% after the date of grant. Options under the Directors Plan
expire ten years from the date of grant. Option prices


                                       9

<PAGE>

for options granted under these plans must not be less than fair market value of
the Company's stock on the date of grant.

Activity under these Plans is shown in the following tables:

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                     SIX MONTHS ENDED
                                               DECEMBER 31, 2005                     DECEMBER 31, 2005
                                     -------------------------------------   ---------------------------------
                                                                                                     Aggregate
                                                 Weighted      Aggregate                 Weighted   Instrinsic
                                                  Average   Instrinsic (1)                Average    (1) Value
                                                 Exercise      Value (in                 Exercise       (in
Shares subject to option               Shares      Price       millions)       Shares      Price     millions)
------------------------             ---------   --------   --------------   ---------   --------   ----------
<S>                                  <C>         <C>        <C>              <C>         <C>        <C>
Outstanding at beginning of period   2,134,021    $ 7.60                     2,204,007    $ 7.56
New Grants (based on fair value of
   common stock at dates of grant)     151,675    $ 6.56                       151,675    $ 6.56
Exercised                              (62,928)   $ 1.76                       (76,292)   $ 1.78
Expired                                (20,512)   $21.03                       (21,512)   $20.78
Forfeited                               (3,537)   $ 5.71                       (59,159)   $ 7.23
Outstanding at end of period         2,198,719    $ 7.57         $5.19       2,198,719    $ 7.57       $5.19
Exercisable at end of period         1,501,318    $ 8.57         $4.03       1,501,318    $ 8.57       $4.03
</TABLE>

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                     SIX MONTHS ENDED
                                               DECEMBER 31, 2004                     DECEMBER 31, 2004
                                     -------------------------------------   ---------------------------------
                                                                                                     Aggregate
                                                 Weighted      Aggregate                 Weighted   Instrinsic
                                                  Average   Instrinsic (1)                Average    (1) Value
                                                 Exercise      Value (in                 Exercise       (in
Shares subject to option               Shares      Price       millions)       Shares      Price     millions)
------------------------             ---------   --------   --------------   ---------   --------   ----------
<S>                                  <C>         <C>        <C>              <C>         <C>        <C>
Outstanding at beginning of period   2,156,396    $ 8.14                     2,182,882    $ 8.06
New Grants (based on fair value of
   common stock at dates of grant)     388,550    $ 6.74                       389,050    $ 6.74
Exercised                               (6,289)   $ 2.57                       (31,101)   $ 1.81
Expired                                      0    $ 0.00                             0    $ 0.00
Forfeited                             (223,375)   $13.55                      (225,549)   $13.45
Outstanding at end of period         2,315,282    $ 7.39         $6.40       2,315,282    $ 7.39       $6.40
Exercisable at end of period         1,307,152    $ 9.65         $3.55       1,307,152    $ 9.65       $3.55
</TABLE>

(1)  The intrinsic value of a stock option is the amount by which the current
     market value of the underlying stock exceeds the exercise price of the
     option.

The total intrinsic value of stock options exercised during the three months
ended December 31, 2005 and 2004 was $77,898 and $26,805, respectively. The
total intrinsic value of stock options exercised during the six months ended
December 31, 2005 and 2004 was $141,293 and $70,833, respectively.

The total fair value of shares vested during the three months ended December 31,
2005 and 2004 was $163,000 and $270,000, respectively. The total fair value of
shares vested during the six months ended December 31, 2005 and 2004 was
$339,000 and $557,000, respectively.


                                       10

<PAGE>

Activity regarding non-vested shares is shown in the following table:

<TABLE>
<CAPTION>
                                              WEIGHTED AVERAGE
                                                 GRANT DATE
        NON-VESTED SHARES           SHARES       FAIR VALUE
        -----------------          --------   ----------------
<S>                                <C>        <C>
Non-vested at July 1, 2005          768,133        $ 6.85
   Granted                               --            --
   Vested                          (103,675)       $ 8.13
   Cancelled                        (52,346)       $ 6.75
                                   --------
Non-vested at September 30, 2005    612,112        $ 6.89
   Granted                          151,675        $ 6.56
   Vested                           (57,463)       $ 5.90
   Cancelled                        (47,245)       $16.78
                                   --------
Non-vested at December 31, 2005     659,079        $ 5.33
                                   ========
</TABLE>

The estimated fair value as of the date options were granted during the periods
presented using the Black Scholes option-pricing model, was as follows:

<TABLE>
<CAPTION>
                                        THREE MONTHS   THREE MONTHS   SIX MONTHS   SIX MONTHS
                                            ENDED          ENDED         ENDED       ENDED
                                         12/31/2005     12/31/2004    12/31/2005   12/31/2004
                                        ------------   ------------   ----------   ----------
<S>                                     <C>            <C>            <C>          <C>
Weighted Average Estimated Fair Value
   Per Share Of Options Granted
   During The Period                       $ 2.23         $ 2.12        $ 2.23       $ 2.12
Assumptions:
   Amortized Dividend Yield                    --             --            --           --
   Common Stock Price Volatility            30.57%         28.39%        30.57%       28.39%
   Risk Free Rate Of Return                  3.88%          3.38%         3.88%        3.38%
   Expected Option Term (in years)              5              5             5            5
</TABLE>

The following table summarizes information about stock options at December 31,
2005:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                           ---------------------------------------   --------------------
                                           WEIGHTED       WEIGHTED               WEIGHTED
                                            AVERAGE        AVERAGE                AVERAGE
                                           REMAINING      EXERCISE               EXERCISE
RANGE OF EXERCISE PRICES     SHARES    CONTRACTUAL LIFE     PRICE      SHARES      PRICE
------------------------   ---------   ----------------   --------   ---------   --------
<S>                        <C>         <C>                <C>        <C>         <C>
$1.21 to $ 1.53              588,219         5.76          $ 1.39      475,972    $ 1.41
 1.72 to   6.45              567,251         5.96          $ 4.28      379,323    $ 3.86
 6.47 to   6.97              618,553         7.64          $ 6.68      261,650    $ 6.65
 6.98 to  33.96              424,696         1.83          $21.84      384,373    $23.37
                           ---------                                 ---------
$1.21 to $33.96            2,198,719         5.58          $ 7.57    1,501,318    $ 8.57
                           =========                                 =========
</TABLE>

At December 31, 2005, options covering 668,589 shares were available for future
grants under the 2004 and 1998 Plans.


                                       11

<PAGE>

8.   COMMITMENTS AND CONTINGENCIES

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

The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $5.7 million using a December 31,
2005 exchange rate. Carbotech has filed for bankruptcy protection in Canada. The
Company intends to vigorously defend GDS' claims.

The Company has been informed that certain of its customers have received
allegations of possible patent infringement involving processes and methods used
in the Company's products. Certain of these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. Management believes that the processes used in the
Company's products were independently developed without utilizing any previously
patented process or technology. Because of the uncertainty surrounding the
nature of any possible infringement and the validity of any such claim or any
possible customer claim for indemnity relating to claims against the Company's
customers, it is not possible to estimate the ultimate effect, if any, of this
matter on the Company's financial statements.

The Company may, from time to time, be subject to other claims and suits in the
ordinary course of its business. To estimate whether a loss contingency should
be accrued by a charge to income, the Company evaluates, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of the loss. Since the outcome of litigation
is subject to significant uncertainty, changes in these factors could materially
impact the Company's financial position or results of operations.

9.   INCOME TAXES

The Company had established in fiscal 2002, a valuation allowance for a portion
of the Company's net operating loss carryforwards and tax credit carryforwards
where it was more likely than not that these tax benefits would expire prior to
the Company being able to realize the benefit. Based on the past few years of
taxable income in the United States and expected taxable income in the United
States in the future, the Company believes there is positive evidence that it is
more likely than not that the tax benefits associated with the valuation
allowance on the net operating loss carryforwards will now be utilized. As a
result, in the second quarter of fiscal 2006, the Company recognized a $725,000
tax benefit associated with reversing the valuation allowance related to net
operating losses in the United States. The Company continues to have a valuation
allowance for tax credit carryforwards that it still expects will more likely
than not expire prior to the tax benefit being realized.

During the second quarter of fiscal 2006, the Company recorded a $290,000 tax
expense related to the repatriation of $6.3 million of unremitted earnings of
certain of the Company's European subsidiaries under the provisions of the
American Jobs Creation Act of 2004.


                                       12

<PAGE>

10.  NEW ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2005, the Company adopted Statement of Financial Accounting
Standards ("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). The
adoption of this Statement did not have a material impact on the Company's
financial statements.

Effective July 1, 2005, the Company adopted SFAS 123R, "Share-Based Payment".
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. Effective July 1, 2005, the Company also adopted the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 107, "Share-Based
Payment". This SAB provides guidance regarding the interaction between SFAS No.
123R and certain SEC rules and regulations. Under SFAS 123R and SAB 107, the
Company recorded in the second quarter and first half of fiscal 2006 $198,000
and $383,000, respectively, of non-cash stock-based compensation expense related
to the amortization of the fair value of stock options and, to a smaller extent,
the amortization of the fair value of the Company's Employee Stock Purchase
Plan. The non-cash stock-based compensation expense had the effect of reducing
net income $161,000, or $0.02 per diluted share, and $311,000, or $0.03 per
diluted share, during the quarter and first half of fiscal 2006, respectively.
See Note 7 for further information regarding the Company's stock plans.


                                       13

<PAGE>

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

OVERVIEW

Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection solutions for process
improvement. Perceptron's product offerings are designed to improve quality,
increase productivity and decrease costs in manufacturing and product
development. The solutions offered by the Company are divided into three groups:
1) The Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R),
AutoSpect(R) and AutoGuide(R) products; 2) The Technology Components Group made
up of ScanWorks(R), Non-Contact Wheel Alignment and TriCam(R) sensors for the
forest products industry; and 3) The Value Added Services Group providing
consulting, training and non-warranty support services. The Company services
multiple markets, with the largest being the automotive industry. The Company's
primary operations are in North America, Europe and Asia.

The Company's financial base remained strong, with no debt and approximately
$18.8 million of cash at December 31, 2005 available to support its growth
plans. The Company's near-term focus for growth has been on the successful
introduction of two Automated Systems products, AutoFit(R) and AutoScan(R),
which are designed to expand the Company's product offerings in its worldwide
automotive markets, the continued development of enhanced versions of its
ScanWorks(R) product line and its other new product development efforts relating
to products outside the automotive industry. The latest version of the Company's
ScanWorks(R) product line which the Company believes offers features and a level
of precision that are superior to similar competitive products was demonstrated
at a show in Europe during the second quarter. The Company continues to believe
that these products have the potential to yield significant sales growth.

The Company has initiated its plans to achieve sales growth in largely untapped
geographic areas, including Asia and Eastern Europe, related to the emerging
automotive markets in those areas and the expansion of the Company's business
with current customers in Japan. Toward this end, the Company has established an
office in Singapore and hired and trained most of the new personnel necessary to
support the new business opportunities in these regions. The Company believes
that the long term sales growth potential in these geographic regions will
provide a significant return on the investment in personnel.

The Company's revenues are principally derived from the sale of products for use
in the automotive industry. New vehicle tooling programs are the most important
selling opportunity for the Company's automotive related sales. The number and
timing of new vehicle tooling programs can be influenced by a number of economic
factors. Therefore, from a macro perspective, the Company continues to assess
the global economy and its likely effect on the Company's automotive customers
and markets served. The Company continues to view the automotive industry's
focus on introducing new vehicles more frequently to satisfy their customers'
changing requirements, as well as their continuing focus on improved quality, as
positive indicators for new business. The Company is continuing its efforts to
increase revenue outside the automotive industry, principally through its
Technology Components Group and other new product development efforts.

Effective July 1, 2005, the Company was required to adopt a new accounting
pronouncement, SFAS 123R, that required the Company to record non-cash
stock-based compensation expense for its stock compensation plans. Previously,
the Company generally did not record non-cash stock-based


                                       14

<PAGE>
compensation as an expense following the requirements of Accounting Principles
Board Opinion 25. Under SFAS 123R, the Company recorded $198,000 of non-cash
stock-based compensation expense in the second quarter and $383,000 for the six
months ended December 31, 2005 related to the amortization of the fair value of
stock options and, to a smaller extent, the amortization of the fair value of
the Company's Employee Stock Purchase Plan. The non-cash stock-based
compensation expense had the effect of reducing net income by $161,000, or $0.02
per diluted share, and $311,000, or $0.03 per diluted share, for the quarter and
six months ended December 31, 2005, respectively. Based upon outstanding stock
option grants, the Company expects quarterly non-cash stock-based compensation
expense for the balance of fiscal 2006 to be at comparable levels. Additional
stock-based awards granted under these plans during fiscal 2006 could increase
the amount of non-cash stock-based compensation expense.

The foregoing statements in this "Overview" section are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.

RESULTS OF OPERATIONS

       THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED
                                DECEMBER 31, 2004

For the second quarter of fiscal 2006, the Company reported net income of $2.2
million, or $0.24 per diluted share, compared to net income of $1.5 million or
$0.16 per diluted share, for the second quarter of fiscal 2005. Specific line
item results are described below.

SALES - Net sales of $17.2 million for the second quarter of fiscal 2006 were up
$2.4 million, compared with the same period one year ago. The following tables
set forth comparison data for the Company's net sales by product groups and
geographic location.

<TABLE>
<CAPTION>
SALES (BY GROUP)        SECOND QUARTER   SECOND QUARTER
(in millions)                2006             2005        INCREASE/(DECREASE)
----------------        --------------   --------------   -------------------
<S>                     <C>     <C>      <C>     <C>      <C>       <C>
Automated Systems       $13.2    76.7%   $11.1    75.0%      $2.1    18.9%
Technology Components     3.0    17.5%     2.2    14.9%       0.8    36.4%
Value Added Services      1.0     5.8%     1.5    10.1%      (0.5)  (33.3)%
                        -----   -----    -----   -----       ----
Totals                  $17.2   100.0%   $14.8   100.0%      $2.4    16.2%
                        =====   =====    =====   =====       ====
</TABLE>

<TABLE>
<CAPTION>
SALES (BY LOCATION)     SECOND QUARTER   SECOND QUARTER
(in millions)                2006             2005        INCREASE/(DECREASE)
-------------------     --------------   --------------   -------------------
<S>                     <C>     <C>      <C>     <C>      <C>        <C>
North America           $12.0    69.8%   $ 9.2    62.2%      $ 2.8   30.4%
Europe                    4.9    28.5%     5.3    35.8%       (0.4)  (7.5)%
Asia                      0.3     1.7%     0.3     2.0%        0.0    0.0%
                        -----   -----    -----   -----       -----
Totals                  $17.2   100.0%   $14.8   100.0%      $ 2.4   16.2%
                        =====   =====    =====   =====       =====
</TABLE>

Sales of the Company's Automated Systems products increased primarily due to the
early delivery of a large AutoGauge(R) order to support a revised customer
delivery schedule. Within the Technology Components Group, the sales increase
primarily represented higher ScanWorks(R) sales as a result of the resolution of
certain component part supply issues. The sales decrease in the sale of Value
Added Services was primarily due to the timing of customer requirements. The
Company does not believe that


                                       15

<PAGE>
it reflected a trend of lower demand. The Company is focusing sales efforts in
both North America and Europe on the sale of Value Added Services. The foregoing
statements are "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward-looking
statements. The sales increase in North America was primarily due to the early
delivery of a large AutoGauge(R) order. The sales decrease in Europe was
primarily due to the decline in the Euro that based on conversion rates in
effect this quarter resulted in $520,000 less in sales than the comparable rates
in the second quarter of fiscal 2005 would have yielded.

BOOKINGS - The Company had new order bookings during the quarter of $18.9
million compared with new order bookings of $15.0 million in the first quarter
of fiscal 2006 and $16.9 million for the quarter ended December 31, 2004. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.

<TABLE>
<CAPTION>
BOOKINGS (BY GROUP)     SECOND QUARTER   SECOND QUARTER
(in millions)                2006             2005        INCREASE/(DECREASE)
-------------------     --------------   --------------   -------------------
<S>                     <C>     <C>      <C>     <C>      <C>        <C>
Automated Systems       $15.5    82.0%   $13.6    80.4%       $1.9   14.0%
Technology Components     1.9    10.1%     1.8    10.7%        0.1    5.6%
Value Added Services      1.5     7.9%     1.5     8.9%        0.0    0.0%
                        -----   -----    -----   -----        ----
TOTALS                  $18.9   100.0%   $16.9   100.0%       $2.0   11.8%
                        =====   =====    =====   =====        ====
</TABLE>

<TABLE>
<CAPTION>
BOOKINGS (BY LOCATION)   SECOND QUARTER   SECOND QUARTER
(in millions)                 2006             2005        INCREASE/(DECREASE)
----------------------   --------------   --------------   -------------------
<S>                      <C>     <C>      <C>     <C>      <C>       <C>
North America            $14.9    78.8%   $12.1    71.6%     $ 2.8    23.1%
Europe                     3.8    20.1%     4.8    28.4%      (1.0)  (20.8)%
Asia                       0.2     1.1%     0.0     0.0%       0.2   100.0%
                         -----   -----    -----   -----      -----
TOTALS                   $18.9   100.0%   $16.9   100.0%     $ 2.0    11.8%
                         =====   =====    =====   =====      =====
</TABLE>

The high level of new orders this quarter primarily reflected a large order for
AutoGauge(R) systems to support a customer's new vehicle platform that will be
assembled at several assembly plants in North America. The lower level of new
orders in Europe reflected the generally weak state of many European economies.
Historically, the Company's rate of new orders has varied from quarter to
quarter. Based on the timing of current customer programs and associated
Automated Systems new order opportunities, the Company expects new order
bookings for the second half of fiscal 2006 to be lower than the very high level
achieved in the first half of fiscal 2006. The foregoing statements are
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended. See Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement" for a
discussion of a number of uncertainties which could cause actual results to
differ materially from those set forth in the forward-looking statements.

BACKLOG - The Company's backlog was $22.0 million as of December 31, 2005
compared with $20.2 million as of September 30, 2005 and $15.6 million as of
December 31, 2004. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.


                                       16

<PAGE>

<TABLE>
<CAPTION>
BACKLOG (BY GROUP)       SECOND QUARTER   SECOND QUARTER
(in millions)                 2006             2005        INCREASE/(DECREASE)
------------------       --------------   --------------   -------------------
<S>                      <C>     <C>      <C>     <C>      <C>       <C>
Automated Systems        $19.1    86.8%   $12.2    78.2%     $ 6.9    56.6%
Technology Components      1.2     5.5%     1.9    12.2%      (0.7)  (36.8)%
Value Added Services       1.7     7.7%     1.5     9.6%       0.2   (13.3)%
                         -----   -----    -----   -----      -----
TOTALS                   $22.0   100.0%   $15.6   100.0%     $ 6.4    41.0%
                         =====   =====    =====   =====      =====
</TABLE>

<TABLE>
<CAPTION>
BACKLOG (BY LOCATION)    SECOND QUARTER   SECOND QUARTER
(in millions)                 2006             2005        INCREASE/(DECREASE)
---------------------    --------------   --------------   -------------------
<S>                      <C>     <C>      <C>     <C>      <C>       <C>
North America            $15.6    70.9%   $10.2    65.4%     $ 5.4    52.9%
Europe                     6.2    28.1%     5.1    32.7%       1.1    21.6%
Asia                       0.2     1.0%     0.3     1.9%      (0.1)  (33.3)%
                         -----   -----    -----   -----      -----
TOTALS                   $22.0   100.0%   $15.6   100.0%     $ 6.4    41.0%
                         =====   =====    =====   =====      =====
</TABLE>

The Company expects to be able to fill substantially all of the orders in
backlog during the next twelve months. The level of backlog during any
particular period is not necessarily indicative of the future operating
performance of the Company. Most of the backlog is subject to cancellation by
the customer.

GROSS PROFIT - Gross profit was $8.3 million, or 48.3% of sales, in the second
quarter of fiscal year 2006, as compared to $7.4 million, or 50.1% of sales, in
the second quarter of fiscal year 2005. The margin decrease primarily reflected
the decline in the Euro to the U.S. dollar that based on conversion rates this
quarter had the effect of lowering margins by approximately 2.0% compared with
the second quarter of fiscal 2005. Favorable installation and manufacturing
fixed overhead absorption at the higher level of operation this quarter was
offset by lower sales related to customer buy-offs on completed system
installations with nominal associated costs in fiscal 2006 compared to fiscal
2005, and a product mix in fiscal 2006 with lower average gross profit compared
with the second quarter of fiscal 2005.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $3.7
million in the quarter ended December 31, 2005 compared to $3.4 million in the
second quarter a year ago. The increase was primarily due to salary and benefit
increases and personnel additions of approximately $280,000, higher travel
expenses of $140,000, recruiting and relocation expenses of approximately
$100,000, and non-cash stock-based compensation expense of $72,000. These
increases were partially offset by lower employee profit sharing of $206,000, a
net decrease in the allowance for doubtful accounts of $140,000, and a net
benefit of approximately $140,000 resulting from converting selling, general,
and administrative expenses in Europe at the lower Euro rate. Various other
expense increases including sales promotion, audit fees, and the Singapore
office start-up made up the balance of the increase.

ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $1.9 million in the quarter ended December 31, 2005 down slightly
from the second quarter a year ago. Lower spending on engineering contract
services and material for new product development of $177,000 and employee
profit sharing of $100,000 offset salary and benefit increases of approximately
$150,000 and non-cash stock-based compensation expense of $68,000 compared with
the second quarter of fiscal 2005.

INTEREST INCOME, NET - Net interest income was $104,000 in the second quarter of
fiscal 2006 compared with net interest income of $127,000 in the second quarter
of fiscal 2005. The decrease was due to interest expense of approximately
$53,000 on additional taxes related to a tax audit in Germany for fiscal


                                       17

<PAGE>

years 2001 through 2003 that offset higher interest income resulting from higher
interest rates on cash invested in short term securities compared to one year
ago.

FOREIGN CURRENCY - There was a net foreign currency transaction loss of $126,000
this quarter primarily due to the declining Euro compared with a net foreign
currency gain of $89,000 last year when the Euro was strengthening.

OTHER - Other income of $162,000 this quarter primarily reflected the value of
stock received by the Company when a mutual life insurance company was
demutualized. Other expense in the second quarter of fiscal 2005 of $49,000 was
primarily due to the loss on a Euro foreign exchange contract.

     INCOME TAXES - Income tax expense this quarter included the recognition of
a $725,000 tax benefit associated with reversing a valuation allowance related
to net operating losses in North America that the Company now believes will be
utilized, and a $290,000 tax expense related to the repatriation of $6.3 million
of unremitted earnings of certain of the Company's European subsidiaries under
the provisions of the American Jobs Creation Act of 2004. The effective tax rate
excluding these two items was 39.3% for the second quarter of fiscal 2006
compared to 36.6% in fiscal 2005 and principally reflected the effect of the mix
of operating profit and loss among the Company's various operating entities and
their countries' respective tax rates. In addition, the Company is not able to
record a tax benefit for non-cash stock-based compensation expense related to
incentive stock options and the Company's Employee Stock Purchase Plan, which
had the effect of increasing the effective tax rate in fiscal 2006 by 1.0%.

     OUTLOOK - Because the Company received orders in the second quarter that it
had expected to receive in the third quarter, the Company does not expect its
rate of new orders to continue at the very high level achieved in the first half
of fiscal 2006. The Company expects sales in the third quarter of fiscal 2006 to
be comparable to the third quarter of fiscal 2005 and operating results at or
slightly below break-even. Factors affecting operating results are the decline
in the Euro this year compared to last year, increased investment in new
resources in Asia and Europe to implement the Company's sales growth strategy
and stock compensation expense in fiscal 2006 related to the adoption of SFAS
123R. The Company continues to expect revenues for fiscal 2006 to be
approximately 10% higher than those of fiscal 2005 although this sales growth is
dependent on incremental sales from the Company's recently introduced Automated
Systems products as well as sales from new products which the Company has not
yet released. See Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement" for a discussion of
the uncertainties regarding the development and introduction of new products.

As previously announced, the Company has made important new investments in
fiscal 2006, largely in personnel, for recently introduced products, new product
development and potential geographic growth opportunities in the United States,
Europe, Eastern Europe and Asia, particularly where the Company had not
aggressively pursued business previously and where we see potential for sales
growth. Most of the planned personnel additions and training have been
completed. The Company expects selling expenses and, to a lesser degree,
research and development expenses to be higher than those of fiscal 2005. The
Company also expects to generate revenue from these investments beginning with
the second half of fiscal 2006, and net income growth from these investments
beginning in fiscal 2007. As a result of these investments, the uncertainty of
when new sales will actually be reported, the decline in the Euro this year
compared to last year and the adoption of SFAS 123R, the Company expects net
income levels for fiscal 2006 to be lower than fiscal 2005.

The Company's new order bookings and sales forecast for its products sold to the
automotive industry is based on a thorough assessment of the probable size,
system content, and timing of each of the programs being considered by our
automotive customers. These factors are difficult to quantify accurately because


                                       18

<PAGE>

over time the Company's customers assess changes in the economy and the probable
effect of these changes on their business, and on occasion adjust the number and
timing of their new vehicle programs to reflect changing business conditions.
The Company continues to view as positive indicators for new business, the
automotive industry's focus on introducing new vehicles more frequently to
satisfy their customers' changing requirements, as well as their continuing
focus on improved quality. The Company's new order bookings and sales forecast
for products sold outside the automotive industry, including unreleased
products, is based upon management's assessment of potential orders based upon
its prior experience with these products or, in the case of unreleased products,
its experience in the industry into which the products are to be sold.

The foregoing statements in this "Outlook" section are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.

         SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED
                                DECEMBER 31, 2004

The Company reported net income of $2.5 million, or $0.27 per diluted share, for
the first half of fiscal 2006, compared with net income of $2.4 million, or
$0.26 per diluted share for the six months ended December 31, 2004.

SALES - Net sales in the first six months of fiscal 2006 were $29.9 million,
compared to $27.1 million for the six months ended December 31, 2004. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.

<TABLE>
<CAPTION>
SALES (BY GROUP)          SIX MONTHS       SIX MONTHS
(in millions)           ENDED 12/31/05   ENDED 12/31/04   INCREASE/(DECREASE)
----------------        --------------   --------------   -------------------
<S>                     <C>     <C>      <C>     <C>      <C>        <C>
Automated Systems       $22.3    74.6%   $19.0    70.1%      $3.3    17.4%
Technology Components     5.9    19.7%     5.2    19.2%       0.7    13.5%
Value Added Services      1.7     5.7%     2.9    10.7%      (1.2)  (41.4)%
                        -----   -----    -----   -----       ----
Totals                  $29.9   100.0%   $27.1   100.0%      $2.8    10.3%
                        =====   =====    =====   =====       ====
</TABLE>

<TABLE>
<CAPTION>
SALES (BY LOCATION)     SIX MONTHS       SIX MONTHS
(in millions)         ENDED 12/31/05   ENDED 12/31/04   INCREASE/(DECREASE)
-------------------   --------------   --------------   -------------------
<S>                   <C>     <C>      <C>     <C>      <C>        <C>
North America         $18.3    61.2%   $17.1    63.1%       $1.2    7.0%
Europe                 10.8    36.1%     9.2    33.9%        1.6   17.4%
Asia                    0.8     2.7%     0.8     3.0%        0.0    0.0%
                      -----   -----    -----   -----        ----
Totals                $29.9   100.0%   $27.1   100.0%       $2.8   10.3%
                      =====   =====    =====   =====        ====
</TABLE>

Sales by product line and geographic region for both six month periods generally
reflected the timing of orders scheduled for delivery. The sales increase in the
Automated Systems Group was primarily due to higher sales of AutoGauge(R)
systems. Higher sales of AutoGuide(R) and AutoScan(R) systems also contributed
to the increase. The sales increase in the Technology Components Group was
primarily due to higher sales of ScanWorks(R). The Company does not believe that
the decrease in sales of Value Added Services reflected a trend in reduced
customer demand. The Company is focusing sales efforts in both North America and
Europe on the sale of Value Added Services. The sales increase in North America
was primarily due to higher sales of AutoGuide(R) systems within the Automated
Systems Group and ScanWorks(R) products within the Technology Components Group.
The increased sales in Europe

                                       19

<PAGE>
was primarily due to higher sales of AutoGauge(R) systems within the Automated
Systems Group. Sales in Europe were higher despite the declining Euro that based
on conversion rates in effect for fiscal year 2006 resulted in $500,000 less
sales than the comparable rates for the same period of fiscal 2005 would have
yielded.

BOOKINGS - New order bookings for the six months ended December 31, 2005 were
$33.9 million compared to $23.6 million for the same period one year ago. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.

<TABLE>
<CAPTION>
BOOKINGS (BY GROUP)       SIX MONTHS       SIX MONTHS
(in millions)           ENDED 12/31/05   ENDED 12/31/04   INCREASE/(DECREASE)
-------------------     --------------   --------------   -------------------
<S>                     <C>     <C>      <C>     <C>      <C>        <C>
Automated Systems       $27.1    80.0%   $16.0    67.8%      $11.1    69.4%
Technology Components     4.5    13.3%     4.4    18.6%        0.1     2.3%
Value Added Services      2.3     6.7%     3.2    13.6%       (0.9)  (28.1)%
                        -----   -----    -----   -----       -----
TOTALS                  $33.9   100.0%   $23.6   100.0%      $10.3    43.6%
                        =====   =====    =====   =====       =====
</TABLE>

<TABLE>
<CAPTION>
BOOKINGS (BY LOCATION)     SIX MONTHS       SIX MONTHS
(in millions)            ENDED 12/31/05   ENDED 12/31/04   INCREASE/(DECREASE)
----------------------   --------------   --------------   ------------------
<S>                      <C>     <C>      <C>     <C>      <C>        <C>
North America            $24.9    73.4%   $15.8    67.0%      $ 9.1   57.6%
Europe                     8.4    24.8%     7.3    30.9%        1.1   15.1%
Asia                       0.6     1.8%     0.5     2.1%        0.1   20.0%
                         -----   -----    -----   -----       -----
TOTALS                   $33.9   100.0%   $23.6   100.0%      $10.3   43.6%
                         =====   =====    =====   =====       =====
</TABLE>

The increase in orders for the Automated Systems Group and North America was
primarily due to a significant increase for AutoGauge(R) systems principally as
a result of a large order to support a customer's new vehicle platform that will
be assembled at several plants in North America. New orders for AutoGuide(R)
systems were also higher in fiscal 2006 compared to last year reflecting
increased customer demand for this product following the redesign of the
software used in the AutoGuide(R) systems. Historically, the Company's rate of
new orders has varied from quarter to quarter. Based on the timing of current
customer programs and associated Automated Systems new order opportunities, the
Company expects new order bookings for the second half of fiscal 2006 to be
lower than the very high level achieved in the first half of fiscal 2006. The
foregoing statements are "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, as amended. See Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward-looking
statements.

GROSS PROFIT - Gross profit was $13.9 million, or 46.4% of sales, in the first
half of fiscal year 2006, as compared to $13.4 million, or 49.7% of sales, in
the first half of fiscal year 2005: the margin decrease primarily reflected the
following two factors that favorably effected margins in the first half of
fiscal 2005; the benefit from higher than normal sales reported last year in
North America related to customer buy-offs on completed system installations
with nominal associated cost and the decline in the Euro to the U.S. dollar this
year compared to the first half of fiscal 2005.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $6.9
million for the six months ended December 31, 2005 compared to $6.2 million in
the six-month period a year ago. The increase was primarily due to salary and
benefit increases and personnel additions of approximately


                                       20

<PAGE>

$445,000, higher travel expenses of $185,000, non-cash stock-based compensation
expense of $140,000, recruiting and relocation expenses of approximately
$120,000, and a $75,000 increase in audit fees mainly due to costs incurred to
prepare for the increased reporting requirements regarding the Company's
internal controls under Section 404 of the Sarbanes Oxley Act and comply with
new accounting requirements under SFAS 123R regarding stock-based compensation
expense. These increases were partially offset by lower employee profit sharing
of $206,000, a net benefit of approximately $140,000 resulting from converting
selling, general, and administrative expenses in Europe at a lower Euro rate
compared to last year and a net decrease in the allowance for doubtful accounts
of $59,000. Various other expense increases including sales promotion and
Singapore office start-up expenses made up the balance of the increase.

ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $3.8 million for the six months ended December 31, 2005 compared
to $3.6 million for the six-month period a year ago. The increase was due
principally to increased spending of approximately $160,000 for salary and
benefit increases and non-cash stock-based compensation expense of $131,000 that
was partially offset by lower spending on engineering contract services and
material for new product development of $110,000 and lower employee profit
sharing of $109,000.

INTEREST INCOME, NET - Net interest income was $251,000 in the first half of
fiscal 2006 compared with net interest income of $218,000 in the first half of
fiscal 2005. The increase was due to higher interest rates compared to one year
ago that was partially offset by interest expense of approximately $53,000 on
additional taxes related to a tax audit in Germany for fiscal years 2001-2003.

FOREIGN CURRENCY - There was a net foreign currency loss of $77,000 in the first
half of fiscal 2006 primarily due to the declining Euro compared with a net
foreign currency gain of $120,000 last year when the Euro was appreciating
compared to the U.S. dollar.

OTHER - Other income in the first half of fiscal 2006 of $161,000 primarily
reflected the value of stock received by the Company when a mutual life
insurance company was demutualized compared to other expense of $12,000 in the
second half of fiscal 2005 that was primarily due to the loss on a Euro foreign
exchange contract.

INCOME TAXES - Income tax expense in the first half of fiscal 2006 included the
recognition of a $725,000 tax benefit associated with reversing a valuation
allowance related to net operating losses in North America that the Company now
believes will be utilized, and a $290,000 tax expense related to the
repatriation of $6.3 million of unremitted earnings of certain of the Company's
European subsidiaries under the provisions of the American Jobs Creation Act of
2004. The effective tax rate excluding these two items was 42.3% for the second
quarter of fiscal 2006 compared to 39.2% in fiscal 2005 and reflected the effect
of the mix of operating profit and loss among the Company's various operating
entities and their countries' respective tax rates. In addition, the Company is
not able to record a tax benefit for non-cash stock-based compensation expense
related to incentive stock options and the Company's Employee Stock Purchase
Plan, which had the effect of increasing the effective tax rate in fiscal 2006
by 1.7%.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents were $18.8 million at December 31, 2005,
compared to $20.4 million at June 30, 2005. The cash decrease of $1.6 million
for the six months ended December 31, 2005 resulted primarily from $2.9 million
of cash used to repurchase shares of the Company's common stock, offset by cash
provided from operations of $1.9 million. The Company also used $591,000 of cash
for capital expenditures and received $162,000 of cash from the purchase of
common stock under its


                                       21

<PAGE>

employee stock plans. Depreciation and amortization was $654,000 during the six
months ended December 31, 2005.

The $1.9 million in cash provided from operations was primarily generated from
net income of $2.5 million and the add back of non-cash items such as
depreciation and non-cash stock based compensation expense that totaled $1.1
million. Cash provided from operations also reflected a decrease due to the
change in net working capital of $1.6 million. Net working capital is defined as
changes in assets and liabilities, exclusive of changes shown separately on the
Consolidated Statements of Cash Flow. The net working capital increase resulted
primarily from increased receivables of $2.0 million and increased inventories
of $644,000 that were partially offset by an increase in accounts payable of
$972,000. The $2.0 million increase in receivables reflected the higher level of
sales achieved in the second quarter of fiscal 2006. Inventory increased due to
purchases of items required to fill anticipated orders.

The Company provides a reserve for obsolescence to recognize the effects of
engineering change orders, age and use of inventory that affect the value of the
inventory. A detailed review of the inventory is performed yearly with quarterly
updates for known changes that have occurred since the annual review. When
inventory is deemed to have no further use or value, the Company disposes of the
inventory and the reserve for obsolescence is reduced. During the six months
ended December 31, 2005, the Company disposed of $2,000 of inventory that had
previously been reserved for at June 30, 2005.

The Company determines its allowance for doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The Company did not have any
write-offs of receivables during the first half of fiscal 2006. To date, the
Company has not experienced any significant losses related to the collection of
accounts receivable except for a customer bankruptcy during fiscal 2005 that
resulted in a write-off of approximately $500,000.

The Company had no debt outstanding at December 31, 2005.

The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2007. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (7.25% as of December 31, 2005) dependent upon the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at
a specific margin above the Eurodollar Rate offered at the time and for the
period chosen (approximately 6.41% as of December 31, 2005) dependent upon the
Company's ratio of funded debt to EBITDA and is payable on the last day of the
applicable period. Quarterly, the Company pays a commitment fee on the daily
unused portion of the Credit Agreement based on a percentage dependent upon the
Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the
Company from paying dividends. In addition, the Credit Agreement requires the
Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of
not less than $35.5 million as of December 31, 2005 and to have no advances
outstanding for 30 consecutive days each calendar year.

At December 31, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $592,000 at
December 31, 2005). The facility may


                                       22

<PAGE>

be used to finance working capital needs and equipment purchases or capital
leases. Any borrowings for working capital needs will bear interest at 9.0% on
the first 100,000 Euros of borrowings and 2.0% for borrowings over 100,000
Euros. The German credit facility is cancelable at any time by either GmbH or
the bank and any amounts then outstanding would become immediately due and
payable. At December 31, 2005, GmbH had no borrowings outstanding. The facility
supported outstanding letters of credit totaling 103,000 Euros (equivalent to
approximately $122,000 at December 31, 2005).

On September 9, 2005, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to $5.0 million of
the Company's common stock during fiscal year 2006. The Company may buy shares
of its common stock on the open market or in privately negotiated transactions
from time to time, based on market prices. The program may be discontinued at
any time. The Company also announced that it has entered into a Rule 10b5-1
trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to
purchase up to $5.0 million of the Company's common stock during fiscal year
2006 (less the dollar amount of purchases by the Company outside the Repurchase
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18. Pursuant to the authorization, the Company
repurchased 425,500 shares of common stock for $2.9 million during the period
from September 12, 2005 to December 31, 2005.

See Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies", contained in this Quarterly Report on Form 10-Q, Item 3, "Legal
Proceedings" and Note 6 to the Consolidated Financial Statements,
"Contingencies", of the Company's Annual Report on Form 10-K for fiscal year
2005, for a discussion of certain contingencies relating to the Company's
liquidity, financial position and results of operations. See also, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Litigation and Other Contingencies"
of the Company's Annual Report on Form 10-K for fiscal year 2005.

The Company expects to spend approximately $1.5 million during fiscal year 2006
for capital equipment, although there is no binding commitment to do so.

Based upon the Company's current business plan, the Company believes that
available cash on hand and existing credit facilities will be sufficient to fund
its currently anticipated fiscal 2006 cash flow requirements and its cash flow
requirements for at least the next few years, except to the extent that the
Company implements new business development opportunities, which would be
financed as discussed below. The Company does not believe that inflation has
significantly impacted historical operations and does not expect any significant
near-term inflationary impact. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.

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

CRITICAL ACCOUNTING POLICIES

A summary of critical accounting policies is presented in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies" of the


                                       23

<PAGE>

Company's Annual Report on Form 10-K for fiscal year 2005. Effective July 1,
2005, the Company adopted SFAS 123R that required the Company to record non-cash
stock-based compensation expense for its stock compensation plans. Previously,
the Company generally did not record non-cash stock-based compensation as an
expense following the requirements of Accounting Principles Board Opinion 25.
SFAS 123R was adopted using the modified prospective method of application,
which requires the Company to recognize compensation expense on a prospective
basis. As a result, prior period financial statements have not been restated.
Under SFAS 123R, the Company recorded $198,000 and $383,000 for the second
quarter and six months ended December 31, 2005, respectively, of non-cash
stock-based compensation expense related to the amortization of the fair value
of granted stock options and, to a smaller extent, the amortization of the fair
value of the Company's Employee Stock Purchase Plan. The non-cash stock-based
compensation expense had the effect of reducing net income $161,000, or $0.02
per diluted share, and $311,000, or $0.03 per diluted share, for the quarter and
six months ended December 31, 2005, respectively.

MARKET RISK INFORMATION

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

FOREIGN CURRENCY RISK

The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-United States currencies. For sales commitments entered into in the
non-United States currencies, the currency rate risk exposure is predominantly
less than one year with the majority in the 120 to 150 day range. At December
31, 2005, the Company's percentage of sales commitments in non-United States
currencies was approximately 31.1% or $6.8 million, compared to 41.2% or $6.4
million at December 31, 2004.

The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts. These forward contracts, which typically mature within one
year, are designed to hedge anticipated foreign currency transactions. The
Company's forward exchange contracts do not subject it to material risk due to
exchange rate movements, because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged. The
Company may use forward exchange contracts to hedge the net assets of certain of
its foreign subsidiaries to offset the translation and economic exposures
related to the Company's investment in these subsidiaries.

At December 31, 2005, the Company had forward exchange contracts to sell 3.0
million Euros ($3.6 million equivalent) at a weighted average settlement rate of
1.20 Euros to the United States Dollar. The contracts outstanding at December
31, 2005, mature through September 29, 2006. The objective of the hedge
transactions is to protect designated portions of the Company's net investment
in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar
exchange rate. The Company assesses hedge effectiveness based on overall changes
in fair value of the forward contract. Since the critical risks of the forward
contract and the net investment coincide, there was no ineffectiveness. The
accounting for the hedges is consistent with translation adjustments where any
gains and losses are recorded to other comprehensive income. The Company
recognized income of approximately $92,000 and $132,000 in other comprehensive
income (loss) for the unrealized change in value of the forward exchange
contracts during the three and six months ended December 31, 2005, respectively.
Offsetting this amount was an increase in other comprehensive income (loss) for
the translation effect of the Company's foreign


                                       24

<PAGE>

subsidiary. Because the forward contracts were effective, there was no gain or
loss recognized in earnings. The Company's forward exchange contracts do not
subject it to material risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.

At December 31, 2004, the Company had $8.0 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.28 Euros to the United States Dollar. The Company recognized a charge
of $988,000 and $1.1 million in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the three and
six months ended December 31, 2004, respectively.

The Company's potential loss in earnings that would have resulted from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
related to the translation of foreign denominated revenues and expenses into
U.S. dollars for the three and six months ended December 31, 2005 would have
been approximately $12,000 and $73,000, respectively. The potential loss in
earnings for the comparable periods in fiscal 2005 would have been approximately
$52,000 and $69,000, respectively.

INTEREST RATE RISK

The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
December 30, 2005, a 100 basis point rise in interest rates would not be
expected to have a material adverse impact on the fair value of the Company's
cash and cash equivalents. As a result, the Company does not currently hedge
these interest rate exposures.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion of new accounting pronouncements, see Note 10 to the
Consolidated Financial Statements, "New Accounting Pronouncements".

SAFE HARBOR STATEMENT

Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may be "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, including the Company's
expectation as to fiscal 2006 and future new order bookings, revenue, expenses
and net income levels, the rate of new orders, the timing of revenue and net
income increases from new products which the Company has recently released or
has not yet released and from the Company's plans to make important new
investments, largely for personnel, for newly introduced products and geographic
growth opportunities in the U.S., Europe, Eastern Europe, Asia, the ability of
the Company to fund its fiscal year 2006 cash flow requirements and customers'
current and future interest in the Company's Value Added Services. The Company
assumes no obligation for updating any such forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements. Actual results could differ
materially from those in the forward-looking statements due to a number of
uncertainties, including, but not limited to, the dependence of the Company's
revenue on a number of sizable orders from a small number of customers
concentrated in the automotive industry, particularly in the United States and
Western Europe, the dependence of the Company's net income levels on increasing
revenues, continued pricing pressures from the Company's customers, the timing
of orders and shipments which can cause the Company to experience significant
fluctuations in its quarterly and annual revenue, order bookings, backlog and
operating results, timely receipt of required supplies and components which
could result in delays in anticipated shipments, continued access to third party
components for our ScanWorks(R) systems, the ability of the Company to


                                       25

<PAGE>
successfully compete with alternative and similar technologies, the timing,
number and continuation of the Automotive industry's retooling programs,
including the risk that the Company's customers postpone new tooling programs as
a result of economic conditions or otherwise, the ability of the Company to
develop and introduce new products, the ability of the Company to expand into
new markets in Eastern Europe and Asia, the ability of the Company to attract
and retain key personnel, especially technical personnel, the quality and cost
of competitive products already in existence or developed in the future, rapid
or unexpected technological changes, the ability of the Company to identify and
satisfy demand for the Company's Value Added Services, the ability of the
Company to identify business opportunities that fit the Company's strategic
plans, the ability to implement identified business opportunities on terms
acceptable to the Company and the effect of economic conditions, particularly
economic conditions in the domestic and worldwide Automotive industry, which has
from time to time been subject to cyclical downturns due to the level of demand
for, or supply of, the products produced by companies in this industry. The
ability of the Company to develop and introduce new products, especially in
markets outside of automotive, is subject to a number of uncertainties,
including general product demand and market acceptance risks, the ability of the
Company to resolve technical issues inherent in the development of new products
and technologies, the ability of the Company to identify and satisfy market
needs, the ability of the Company to identify satisfactory distribution
networks, the ability of the Company to develop internally or identify
externally high quality cost effective manufacturing capabilities for the
products, general product development and commercialization difficulties, and
the level of interest existing and potential new customers may have in new
products and technologies generally. The ability of the Company to expand into
new geographic markets is subject to a number of uncertainties, including the
timing of customer acceptance of the Company's products and technologies, the
impact of changes in local economic conditions, the ability of the Company to
attract the appropriate personnel to effectively represent, install and service
the Company's products in the market and uncertainties inherent in doing
business in foreign markets, especially those that are less well developed than
the Company's traditional markets, such as the impact of fluctuations in foreign
currency exchange rates, foreign government controls, policies and laws
affecting foreign trade and investment, differences in the level of protection
available for the Company's intellectual property and differences in language
and local business and social customs. The ability of the Company to identify
and satisfy demand for the Company's Value Added Services is subject to a number
of uncertainties including that these services represent discretionary spending
by customers and so tend to decline during economic downturns even if product
sales do not decline. The Company's expectations regarding future bookings and
revenues are projections developed by the Company based upon information from a
number of sources, including, but not limited to, customer data and discussions.
These projections are subject to change based upon a wide variety of factors, a
number of which are discussed above. Certain of these new orders have been
delayed in the past and could be delayed in the future. Because the Company's
products are typically integrated into larger systems or lines, the timing of
new orders is dependent on the timing of completion of the overall system or
line. In addition, because the Company's products have shorter lead times than
other components and are required later in the process, orders for the Company's
products tend to be given later in the integration process. A significant
portion of the Company's projected revenues and net income depends upon the
Company's ability to successfully develop and introduce new products and expand
into new geographic markets. Because a significant portion of the Company's
revenues are denominated in foreign currencies and are translated for financial
reporting purposes into U.S. Dollars, the level of the Company's reported net
sales, operating profits and net income are affected by changes in currency
exchange rates, principally between U.S. Dollars and Euros. Currency exchange
rates are subject to significant fluctuations, due to a number of factors beyond
the control of the Company, including general economic conditions in the United
States and other countries. Because the Company's expectations regarding future
revenues, order bookings, backlog and operating results are based upon
assumptions as to the levels of such currency exchange rates, actual results
could differ materially from the Company's expectations.


                                       26

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2005, the Company's disclosure controls and procedures were effective in causing
the material information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported, to the extent applicable, within
the time periods required for the Company to meet the Securities and Exchange
Commission's ("SEC") filing deadlines for these reports specified in the SEC's
rules and forms. There have been no changes in the Company's internal controls
over financial reporting during the quarter ended December 31, 2005 identified
in connection with the Company's evaluation that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.

PART II. OTHER INFORMATION

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

The following table sets forth information concerning the Company's repurchases
of its common stock during the quarter ended December 31, 2005. All shares were
purchased pursuant to the Company's stock repurchase program described below.

<TABLE>
<CAPTION>
                                                (C) TOTAL NUMBER
                                                    OF SHARES          (D) APPROXIMATE
                      (A) TOTAL                   PURCHASED AS     DOLLAR VALUE OF SHARES
                      NUMBER OF   (B) AVERAGE   PART OF PUBLICLY       THAT MAY YET BE
                        SHARES     PRICE PAID       ANNOUNCED        PURCHASED UNDER THE
       PERIOD         PURCHASED    PER SHARE         PROGRAM               PROGRAM
-------------------   ---------   -----------   ----------------   ----------------------
<S>                   <C>         <C>           <C>                <C>
October 1-31, 2005      19,500       $6.42            19,500             $4,743,995
November 1-30, 2005    356,800       $6.90           356,800             $2,283,575
December 1-31, 2005     28,900       $7.24            28,900             $2,074,467
                       -------                       -------
Total                  405,200       $6.90           405,200             $2,074,467
                       =======                       =======
</TABLE>

On September 9, 2005, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to $5.0 million of
the Company's common stock during fiscal year 2006. The Company may buy shares
of its common stock on the open market or in privately negotiated transactions
from time to time, based on market prices. The program may be discontinued at
any time. The Company also announced that it has entered into a Rule 10b5-1
trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to
purchase up to $5.0 million of the Company's common stock during fiscal year
2006 (less the dollar amount of purchases by the Company outside the Repurchase
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18. This stock repurchase program replaces the
Company's stock repurchase program for fiscal year 2005, which terminated on
June 30, 2005.


                                       27

<PAGE>

On December 1, 2005, four members of the Company's Board of Directors became
entitled to receive a total of 2,748 shares of Common Stock at $7.27 per share
pursuant to the Directors Stock Purchase Rights Option under the 2004 Stock
Incentive Plan which was approved by shareholders in December 2004. The 2004
Stock Incentive Plan permits non-employee directors to purchase shares of Common
Stock through the 2004 Stock Incentive Plan in exchange for all or a portion of
the cash fees payable to them for serving as directors of the Company. The
transactions by the Company with the four directors did not involve a public
offering and are exempt under Section 4(2) of the Securities Act of 1933 and
Rules 505 and 506 promulgated thereunder.

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

The Company held its Annual Meeting of Shareholders on December 5, 2005 at which
the following action was taken:

1. The Shareholders elected the following persons as the Company's Board of
Directors, and the results of the vote on this matter were as follows:

<TABLE>
<CAPTION>
Name                      For       Withheld   Broker Non-Votes
----                   ---------   ---------   ----------------
<S>                    <C>         <C>         <C>
David J. Beattie       6,527,787   1,163,834          --
Kenneth R. Dabrowski   7,487,604     204,017          --
Philip J. DeCocco      7,451,878     239,743          --
W. Richard Marz        7,487,504     204,117          --
Robert S. Oswald       7,479,804     211,817          --
Alfred A. Pease        7,463,136     228,485          --
James A. Ratigan       7,437,594     254,027          --
Terryll R. Smith       7,464,868     226,753          --
</TABLE>

ITEM 6. EXHIBITS

     10.44      Written Description of 2006 Team Member Profit Sharing Plan is
                incorporated by reference to Exhibit 10.1 of the Company's
                Report on Form 8-K filed December 27, 2005.

     10.45      Form of Nonqualified Stock Option Agreement Terms for Officers
                under the Perceptron, Inc. 2004 Stock Incentive Plan is
                incorporated by reference to Exhibit 10.2 of the Company's
                Report on Form 8-K filed December 27, 2005.

     10.46      Form of Incentive Stock Option Agreement Terms for Officers
                under the Perceptron, Inc. 2004 Stock Incentive Plan is
                incorporated by reference to Exhibit 10.3 of the Company's
                Report on Form 8-K filed December 27, 2005.

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

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

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

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


                                       28

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                  PERCEPTRON, INC.
                                  (Registrant)


Date: February 13, 2006           By: /S/ Alfred A. Pease
                                      ------------------------------------------
                                      Alfred A. Pease
                                      Chairman of the Board, President and
                                      Chief Executive Officer


Date: February 13, 2006           By: /S/ John J. Garber
                                      ------------------------------------------
                                      John J. Garber
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)


Date: February 13, 2006           By: /S/ Sylvia M. Smith
                                      ------------------------------------------
                                      Sylvia M. Smith
                                      Controller and Chief Accounting Officer
                                      (Principal Accounting Officer)


                                       29
<PAGE>
                                 Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.   Description
-----------   -----------
<S>           <C>
10.44         Written Description of 2006 Team Member Profit Sharing Plan is
              incorporated by reference to Exhibit 10.1 of the Company's Report
              on Form 8-K filed December 27, 2005.

10.45         Form of Nonqualified Stock Option Agreement Terms for Officers
              under the Perceptron, Inc. 2004 Stock Incentive Plan is
              incorporated by reference to Exhibit 10.2 of the Company's Report
              on Form 8-K filed December 27, 2005.

10.46         Form of Incentive Stock Option Agreement Terms for Officers under
              the Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
              reference to Exhibit 10.3 of the Company's Report on Form 8-K
              filed December 27, 2005.

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

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

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

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