**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended May 31, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**CommissionFile Number 0-22183**

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**MEADE INSTRUMENTS CORP.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **95-2988062**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
| **6001 Oak Canyon, Irvine, CA**                                  |   | **92618**                             |
| (Address of  principal executive offices)                        |   | (Zip Code)                            |

 

**(949)451-1450**(Registrant’s telephonenumber, including area code)

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and “largeaccelerated filer” in Rule 12(b)-2 of the Exchange Act.

| Large Accelerated Filer o | Accelerated Filer  o | Non-accelerated  Filer x |
|---------------------------|----------------------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12(b)-2of the Exchange Act). Yes o Nox

As of May 31, 2007, there were 20,126,835outstanding shares of the Registrant’s common stock, par value $0.01 per share.

 

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**MEADE INSTRUMENTSCORP.TABLE OF CONTENTS**
|                                                                                                        | ** ** | **Page No.** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|
| **PART I—FINANCIAL INFORMATION**                                                             |       |              |   |
| Item 1.  Financial Statements                                                                          |       |              |   |
| Consolidated  Balance Sheets (Unaudited)—May 31, 2007 and February 28, 2007             |       | 2                 |   |
| Consolidated  Statements of Operations (Unaudited)—Three Months Ended May 31, 2007 and  2006 |       | 3                 |   |
| Consolidated  Statements of Cash Flows (Unaudited)—Three Months Ended May 31, 2007 and  2006 |       | 4                 |   |
| Notes to  Consolidated Financial Statements (Unaudited)                                                |       | 5                 |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations   |       | 13                |   |
| Item  3. Quantitative and Qualitative Disclosures about Market Risk                                    |       | 19                |   |
| Item 4.  Controls and Procedures                                                                       |       | 20                |   |
| **PART II—OTHER INFORMATION**                                                                |       |              |   |
| Item 1. Legal  Proceedings                                                                             |       | 21                |   |
| Item 1A. Risk  Factors                                                                                 |       | 22                |   |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                   |       | 22                |   |
| Item  3. Defaults Upon Senior Securities                                                               |       | 22                |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                           |       | 22                |   |
| Item 5. Other  Information                                                                             |       | 22                |   |
| Item 6. Exhibits                                                                                       |       | 22                |   |
| Signatures                                                                                             |       | 23                |   |

 

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**ITEM 1.**                FINANCIALSTATEMENTS.

**MEADE INSTRUMENTS CORP.CONSOLIDATED BALANCE SHEETS(Unaudited)**

| ** **                                                                                                                                                                                | ** ** | **May 31,  2007** | ** ** | **February 28,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                    |       |                   |       |                        |       |
| Current assets:                                                                                                                                                                           |       |                   |       |                        |       |
| Cash                                                                                                                                                                                      |       | $                      | 2,146,000  |                        | $          | 4,048,000 |   |
| Accounts receivable, less allowance for doubtful  accounts of $694,000 at May 31, 2007 and $1,048,000 at February 28,  2007                                                     |       | 14,024,000             |       | 12,445,000                  |       |
| Inventories                                                                                                                                                                               |       | 23,646,000             |       | 25,289,000                  |       |
| Prepaid expenses and other current assets                                                                                                                                                 |       | 1,117,000              |       | 443,000                     |       |
| Total current assets                                                                                                                                                                      |       | 40,933,000             |       | 42,225,000                  |       |
| Goodwill                                                                                                                                                                                  |       | 3,141,000              |       | 3,141,000                   |       |
| Acquisition-related intangible assets, net                                                                                                                                                |       | 4,598,000              |       | 4,682,000                   |       |
| Property and equipment, net                                                                                                                                                               |       | 4,723,000              |       | 4,851,000                   |       |
| Other assets, net                                                                                                                                                                         |       | 201,000                |       | 230,000                     |       |
|                                                                                                                                                                                      |       | $                      | 53,596,000 |                        | $          | 55,129,000 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                 |       |                   |       |                        |       |
| Current  liabilities:                                                                                                                                                                     |       |                   |       |                        |       |
| Bank lines of credit                                                                                                                                                                      |       | $                      | 3,531,000  |                        | $          | 860,000 |   |
| Accounts payable                                                                                                                                                                          |       | 8,469,000              |       | 8,551,000                   |       |
| Accrued liabilities                                                                                                                                                                       |       | 6,530,000              |       | 6,810,000                   |       |
| Income taxes payable                                                                                                                                                                      |       | 1,633,000              |       | 1,415,000                   |       |
| Current portion of long-term debt and capital lease  obligations                                                                                                                          |       | 1,158,000              |       | 200,000                     |       |
| Total current liabilities                                                                                                                                                                 |       | 21,321,000             |       | 17,836,000                  |       |
| Long-term debt  and capital lease obligations                                                                                                                                             |       | 16,000                 |       | 1,186,000                   |       |
| Deferred income  taxes                                                                                                                                                                    |       | 1,419,000              |       | 1,436,000                   |       |
| Deferred rent                                                                                                                                                                             |       | 158,000                |       | 195,000                     |       |
| Commitments and  contingencies                                                                                                                                                            |       |                   |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                |       |                   |       |                        |       |
| Common stock; $0.01 par value; 50,000,000 shares  authorized; 20,126,835 and 20,086,000 shares issued and outstanding at  May 31, 2007 and February 28, 2007, respectively |       | 201,000                |       | 201,000                     |       |
| Additional paid-in capital                                                                                                                                                                |       | 45,301,000             |       | 45,104,000                  |       |
| Retained earnings (deficit)                                                                                                                                                               |       | (15,289,000            | )          | (11,096,000                 | )          |
| Deferred stock compensation                                                                                                                                                               |       | (199,000               | )          | (148,000                    | )          |
| Accumulated other comprehensive income                                                                                                                                                    |       | 1,723,000              |       | 1,580,000                   |       |
|                                                                                                                                                                                      |       | 31,737,000             |       | 35,641,000                  |       |
| Unearned ESOP shares                                                                                                                                                                      |       | (1,055,000             | )          | (1,165,000                  | )          |
| Total stockholders’ equity                                                                                                                                                           |       | 30,682,000             |       | 34,476,000                  |       |
|                                                                                                                                                                                      |       | $                      | 53,596,000 |                        | $          | 55,129,000 |   |

 

See accompanying notes to consolidated financial statements

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**MEADE INSTRUMENTSCORP.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

| ** **                                                  | ** ** | **Three Months Ended May 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Net sales                                                   |       | $                                             | 17,621,000 |   | $ | 18,745,000 |   |
| Cost of sales                                               |       | 15,790,000                                    |       | 15,297,000 |   |
| Gross profit                                                |       | 1,831,000                                     |       | 3,448,000 |   |
| Selling expenses                                            |       | 2,251,000                                     |       | 3,359,000 |   |
| General and  administrative expenses                        |       | 2,838,000                                     |       | 3,044,000 |   |
| ESOP expense                                                |       | 69,000                                        |       | 78,000 |   |
| Research and  development expenses                          |       | 448,000                                       |       | 327,000 |   |
| Operating loss                                              |       | (3,775,000                                    | )          | (3,360,000 | ) |
| Interest expense                                            |       | 94,000                                        |       | 99,000 |   |
| Loss before  income taxes                                   |       | (3,869,000                                    | )          | (3,459,000 | ) |
| Provision for  income taxes                                 |       | 335,000                                       |       | 117,000 |   |
| Net loss                                                    |       | $                                             | (4,204,000 | ) | $ | (3,576,000 | ) |
| Basic and diluted  loss per share                           |       | $                                             | (0.21      | ) | $ | (0.18 | ) |
| Weighted average  number of shares outstanding—basic   |       | 19,709,000                                    |       | 19,504,000 |   |
| Weighted average number  of shares outstanding—diluted |       | 19,709,000                                    |       | 19,504,000 |   |

 

See accompanying notes to consolidated financial statements

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**MEADE INSTRUMENTS CORP.**CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

| ** **                                                                   | ** ** | **Three Months Ended May 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                       |       |                                          |       |   |   |
| Net loss                                                                     |       | $                                             | (4,204,000 | ) | $ | (3,576,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                          |       |   |   |
| Depreciation and amortization expense                                        |       | 310,000                                       |       | 620,000 |   |
| Deferred rent amortization                                                   |       | (37,000                                       | )          | (33,000 | ) |
| Deferred income taxes                                                        |       | 12,000                                        |       | — |   |
| ESOP contribution                                                            |       | 69,000                                        |       | 78,000 |   |
| Change in allowance for doubtful accounts                                    |       | (359,000                                      | )          | — |   |
| Stock-based compensation                                                     |       | 149,000                                       |       | — |   |
| Changes in assets  and liabilities:                                          |       |                                          |       |   |   |
| Increase in accounts receivable                                              |       | (1,124,000                                    | )          | (896,000 | ) |
| Decrease in inventories                                                      |       | 1,716,000                                     |       | 1,859,000 |   |
| Increase in prepaid expenses and other assets                                |       | (678,000                                      | )          | (79,000 | ) |
| Decrease in accounts payable                                                 |       | (103,000                                      | )          | (2,000 | ) |
| Increase (decrease) in accrued liabilities                                   |       | (308,000                                      | )          | 543,000 |   |
| Increase in income taxes payable                                             |       | 119,000                                       |       | 1,159,000 |   |
| Net cash used in operating activities                                        |       | (4,438,000                                    | )          | (327,000 | ) |
| Cash flows from  investing activities:                                       |       |                                          |       |   |   |
| Additional consideration paid for Coronado  acquisition                      |       | —                                        |       | (1,026,000 | ) |
| Capital expenditures                                                         |       | (44,000                                       | )          | (77,000 | ) |
| Net cash used in investing activities                                        |       | (44,000                                       | )          | (1,103,000 | ) |
| Cash flows from  financing activities:                                       |       |                                          |       |   |   |
| Net borrowings under bank lines of credit                                    |       | 2,670,000                                     |       | (3,618,000 | ) |
| Payments on long-term bank notes                                             |       | (230,000                                      | )          | (363,000 | ) |
| Payments under capital lease obligations                                     |       | (6,000                                        | )          | (16,000 | ) |
| Net cash provided by (used in) financing activities                          |       | 2,434,000                                     |       | (3,997,000 | ) |
| Effect of  exchange rate changes on cash                                     |       | 146,000                                       |       | 158,000 |   |
| Net decrease in  cash                                                        |       | (1,902,000                                    | )          | (5,269,000 | ) |
| Cash at beginning  of period                                                 |       | 4,048,000                                     |       | 7,589,000 |   |
| Cash at end of  period                                                       |       | $                                             | 2,146,000  |   | $ | 2,320,000 |   |
| Non-cash investing and  financing activities:                                |       |                                          |       |   |   |
| Issuance of restricted stock                                                 |       | $                                             | 150,000    |   | $ | — |   |
| Cash paid for taxes                                                          |       | $                                             | 188,000    |   | $ | 116,000 |   |
| Cash paid for  interest                                                      |       | $                                             | 83,000     |   | $ | 98,000 |   |

 

See accompanying notes to consolidated financial statements

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**MEADE INSTRUMENTS CORP.**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

**A.**                TheConsolidated Financial Statements Have Been Prepared by the Company and areUnaudited.

In management’s opinion, the information and amountsfurnished in this report reflect all adjustments (consisting of normalrecurring adjustments) considered necessary for the fair statement of thefinancial position and results of operations for the interim periods presented.These financial statements should be read in conjunction with the Company’sAnnual Report on Form 10-K for the fiscal year ended February 28,2007.

The Company hasexperienced, and expects to continue to experience, substantial fluctuations inits sales, gross margins and profitability from quarter to quarter. Factorsthat influence these fluctuations include the volume and timing of ordersreceived, changes in the mix of products sold, market acceptance of the Company’sproducts, competitive pricing pressures, the Company’s ability to meet demandand delivery schedules and the timing and extent of research and developmentexpenses, marketing expenses and product development expenses. In addition, asubstantial portion of the Company’s net sales and operating income typicallyoccur in the third quarter of the Company’s fiscal year primarily due todisproportionately higher customer demand for less-expensive products duringthe holiday season. The results of operations for the quarters ended May 31,2007 and 2006, respectively, are not necessarily indicative of the operatingresults for the entire fiscal year.

**B.**               Liquidity

The Company incurred net losses of $19.2 million and$14.0 million in the years ended February 28, 2007 and 2006, respectively,and incurred a net loss of $4.2 million in the quarter ended May 31, 2007.For the fiscal year 2007, sales were negatively affected riflescopes and someof the Company’s foreign-sourced and domestically produced telescopes. Thecombination of significantly reduced sales volume of higher-end products duringthe year not covering fixed, average selling prices dropping or not keepingpace with average cost per unit increases (reflecting the aggressive inventoryrationalization undertaken by management during fiscal 2007), and SKU reductionled to the overall declines in gross margins. Operating margins fellsignificantly during fiscal 2007 as the effects of significant severance costsand increased legal and accounting costs (related to late filing of the prioryears’ required filings) added to the effects of lower gross margins.

With respect to sales recovering from the declinesexperienced during fiscal 2007, management believes that: 1) production of itsriflescope and telescope products (both domestically produced and foreignsourced) are now fully on-line across all product lines and that productionwill be able to fully meet demand; 2) a combination of new products, effectivemarketing and appropriate pricing will stimulate demand for the Company’shigher-end products; and 3) while competition for low-end products willcontinue to be acute the Company may be able to increase demand for theseproducts with enhanced and new product introductions, targeted marketing andcompetitive pricing.

The fiscal 2007 and firstquarter fiscal 2008 operating results led to significantly diminished netassets as compared to the prior periods. Management believes that the Companycan return to profitability as: 1) the supply problems are corrected; 2)new products are introduced; 3) sales are concentrated more on first-line,higher margin products than on significantly discounted older inventory; 4) thecost savings of consolidating the U.S. operations into one facility (from aprevious four facilities) are realized; and 5) reductions in significant “onetime” expenses such as severance are realized.

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**C.**               StockBased Compensation

The Company accounts for stock-based compensation inaccordance with the provisions of Statement of Financial Accounting Standards123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting forequity instruments exchanged for employee services. Under the provisions ofSFAS 123R, share-based compensation cost is measured at the grant date, basedon the calculated fair value of the award, and is recognized as an expense overthe employee’s requisite service period (generally the vesting period of theequity grant). Prior to March 1, 2006, the Company accounted forshare-based compensation to employees in accordance with Accounting PrinciplesBoard Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. The Company also followed the disclosurerequirements of SFAS 123, “Accounting for Stock-Based Compensation”, as amendedby SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.The Company elected to adopt the modified prospective transition method asprovided by SFAS 123R and, accordingly, financial statement amounts for theprior period presented in this Form 10-Q have not been restated toreflect the fair value method of expensing share-based compensation.Share-based compensation expenses, included in general and administrativeexpenses in the Company’s consolidated statement of operations for the threemonths ended May 31, 2007 and 2006, were approximately $0.1 million ineach period. Due to deferred tax valuation allowances provided during thequarter, no net benefit was recorded against the share-based compensationcharged during the period.

The Company estimates the fair value of stock optionsusing the Black-Scholes valuation model. Key input assumptions used to estimatethe fair value of stock options include the expected option term, forfeiturerate, the expected volatility of the Company’s stock over the option’s expectedterm, the risk-free interest rate over the option’s expected term, and the Company’sexpected annual dividend yield. The Company believes that the valuationtechnique and the approach utilized to develop the underlying assumptions areappropriate in calculating the fair values of the Company’s stock optionsgranted in the three months ended May 31, 2007. Estimates of fair valueare not intended to predict actual future events or the value ultimatelyrealized by persons who receive equity awards.

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

**For the three months ended May 31, 2007 and 2006**

| ** **                  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------------|------------|-----------|------------|-----------|------------|
| Expected life(1)            |       | 3.1 years |       | 6.2 years |       |
| Expected  volatility(2)     |       | 58        | %          | 73        | %          |
| Risk-free  interest rate(3) |       | 4.7       | %          | 5.0       | %          |
| Expected dividends          |       | None      |       | None      |       |

 

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(1)          The option term wasdetermined using the simplified method for estimating expected option life.

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

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

As of May 31, 2007there was approximately $1.7 million of unrecognized compensation cost relatedto unvested stock options. This cost is expected to be recognized over aweighted-average period of approximately 4 years. At February 28, 2007,there was approximately $1.1 million of unrecognized compensation costs relatedto unvested stock options.

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**D.**              Compositionof Certain Balance Sheet Accounts

Thecomposition of inventories is as follows:

| ** **      | ** ** | **May 31,  2007** | ** ** | **February 28,  2007** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                      | 6,036,000  |                        | $          | 5,575,000 |   |
| Work-in-process |       | 5,324,000              |       | 5,560,000                   |       |
| Finished goods  |       | 12,286,000             |       | 14,154,000                  |       |
|            |       | $                      | 23,646,000 |                        | $          | 25,289,000 |   |

 

Thecomposition of acquisition-related intangible assets is as follows:

| ** **                                              | ** ** | **May 31,  2007** | ** ** | **February 28,  2007** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Brand  names—non-amortizing                        |       | $                      | 2,041,000  |                        | $          | 2,041,000 |   |
| Trademarks                                              |       | 1,938,000              |       | 1,938,000                   |       |
| Customer  relationships                                 |       | 1,390,000              |       | 1,390,000                   |       |
| Completed  technologies                                 |       | 1,620,000              |       | 1,620,000                   |       |
| Other                                                   |       | 56,000                 |       | 56,000                      |       |
| Accumulated  amortization                               |       | (2,447,000             | )          | (2,363,000                  | )          |
| Total amortizing acquisition-related intangible  assets |       | 2,557,000              |       | 2,641,000                   |       |
| Total  acquisition-related intangible assets            |       | $                      | 4,598,000  |                        | $          | 4,682,000 |   |

 

Amortizationof trademarks and customer relationships over the next five fiscal years isestimated as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2008                 |       | $          | 336,000    |       |
| 2009                 |       | 336,000    |       |
| 2010                 |       | 336,000    |       |
| 2011                 |       | 336,000    |       |
| 2012                 |       | 336,000    |       |
|                      |            |            |            |            |            |  |

 

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

**E.**               Commitmentsand Contingencies

The following purported shareholder derivative actionhas been filed challenging conduct by certain of the Company’s current andformer board members and officers in connection with various stock optiongrants:

*In reMeade Instruments Corp. Derivative Litigation,*   No. 06-CC-205,Superior Court of the State of California for the County of Orange, filed October 6,2006. On November 22, 2006, the court consolidated under the above captiontwo state derivative actions: (i) *Barclayv. Diebel*, et al., No. 06-CC-205, Superior Court ofthe State of California for the County of Orange, filed October 6, 2006and (ii) *Bryant v. Diebel*,et al., No. 06-CC-206, Superior Court of the State of Californiafor the County of Orange, filed October 6, 2006. The plaintiffs filed aconsolidated complaint on December 22, 2006, and the defendants fileddemurrers to the complaint on February 5, 2007. Under 

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the current schedulingorder, the plaintiffs were expected to file their opposition to the demurrersby June 22, 2007. The consolidated complaint asserts causes of action forbreach of fiduciary duty, accounting, abuse of control, gross mismanagement,constructive trust, corporate waste, rescission, unjust enrichment, andviolation of California Corporations Code in connection with the Company’soption granting practices. On May 23, 2007, the parties in both thisaction and the class action discussed below participated in a mediation. As aresult of this mediation, the parties in both actions reached a preliminarysettlement understanding, which includes corporate governance reforms and anamount to cover plaintiffs’ attorneys fees. The Company anticipates that themonetary portion of the proposed settlement will be covered by the Company’sdirector and officer liability insurance. The parties are in the process offinalizing their settlement agreements. These settlements are conditioned uponcourt approval.

The following putative federal securities class actionhas also been filed challenging conduct by the Company and certain of itscurrent and former board members and officers in connection with various stockoption grants:

*Grecianv. Meade Instruments Corp., et al.,*   No. SACV 06-908 AG (JTLx), United states District Court for the CentralDistrict of California, filed September 27, 2006. On January 8, 2007,the court granted the named plaintiffs’ motion to be appointed lead plaintiffs.On February 22, 2007, the plaintiffs filed their second amended complaint,which asserts claims for violations of Section 10(b), 14(a) and 20(a) ofthe Securities Exchange Act in connection with the Company’s option grantingpractices. Under the current scheduling order, the plaintiffs can file a thirdamended complaint by June 1, 2007. The defendants do not believe that thethird amended complaint will differ materially from its predecessor. Thedefendants’ motion to dismiss the third amended complaint will be due on July 16,2007. On May 23, 2007, the parties in both this action and the derivativeaction discussed above participated in a mediation. As a result of thismediation, the parties in both actions reached a preliminary settlementunderstanding, which includes corporate governance reforms and an award to theclass, from which plaintiffs’ attorneys fees and administrative costs would bepaid. The Company anticipates that the monetary portion of the proposedsettlement will be covered by the Company’s director and officer liabilityinsurance. The parties are in the process of finalizing their settlementagreements. These settlements are conditioned upon court approval.

On September 28,2006, Daniel Azari, Paul T. Jones (dba Star Instruments) and RC OpticalSystems, Inc. filed an action against Meade and certain Meade dealers inthe United States District Court for the Southern District of New York,alleging the following claims: (1) violation of the Racketeer InfluencedAnd Corrupt Organization Act (“RICO”); (2) violation of New York GeneralBusiness Law §§ 349 and 350; (3) violation of California Business andProfessions Code § 17200; (4) unfair competition; and (5) productdisparagement. The gravamen of the complaint is that Meade and other defendantsallegedly falsely advertise Meade’s Advanced Ritchey-Chretien products as beingRitchey-Chretien products. On October 31, 2006, Plaintiffs filed anAmended Complaint, adding claims for violation of the Lanham Act. On January 3,2007, the United States District Court for the Southern District of New Yorkgranted a motion filed by Meade and ordered the case transferred to the UnitedStates District Court for the Central District of California. In March 2007,the court dismissed the following claims: (1) violation of the RICO Act; (2) violationof New York General Business Law §§ 349 and 350; and (3) productdisparagement. In June 2007, the court dismissed all claims byPlaintiff Daniel Azari. The complaint seeks injunctive relief, compensatorydamages, and attorneys’ fees and costs.

**F.**                LossPer Share

Basic loss per share amounts exclude the dilutiveeffect of potential shares of common stock. Basic (loss) per share is basedupon the weighted-average number of shares of common stock outstanding, whichexcludes unallocated ESOP shares. Diluted (loss) per share is based upon theweighted-average number of 

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shares of common stock anddilutive potential shares of common stock outstanding for each periodpresented. Potential shares of common stock include outstanding stock optionsand restricted stock, which may be included in the weighted average number ofshares of common stock under the treasury stock method.

Thetotal number of options and restricted shares outstanding were as follows:

| ** **                     | ** ** | **May 31,  2007** | ** ** | **February 28,  2007** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Stock options  outstanding     |       | 2,813,000              |       |                        | 2,741,000  |   |   |
| Restricted shares  outstanding |       | 93,000                 |       |                        | 95,000     |   |   |

 

Areconciliation of the basic weighted average number of shares outstanding andthe diluted weighted average number of shares outstanding follows:

| ** **                                                                                                                                                                                   | ** ** | **Three Months Ended May 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Basic weighted  average number of shares                                                                                                                                                     |       | 19,709,000                                    |       | 19,504,000 |   |
| Dilutive  potential shares of common stock                                                                                                                                                   |       | —                                        |       | — |   |
| Diluted weighted  average number of shares outstanding                                                                                                                                       |       | 19,709,000                                    |       | 19,504,000 |   |
| Number of options  excluded from the calculation of weighted average shares because the  exercise prices were greater than the average market price of the Company’s  common stock |       | 2,743,000                                     |       | 2,630,000 |   |
| Potential shares of  common stock excluded from the calculation of weighted average shares                                                                                                   |       | 162,000                                       |       | 134,000 |   |

 

Weighted average sharesfor the three month period ended May 31, 2007 and 2006, exclude theaggregate dilutive effect of potential shares of common stock related to stockoptions and restricted stock, because the Company incurred a loss and theeffect would be anti-dilutive. Options with exercise prices greater than theaverage market price during the periods presented are excluded from thecalculation of weighted average shares outstanding because the effect would beanti-dilutive.

**G.**              ComprehensiveLoss

Comprehensiveloss is defined as a change in the equity of a business enterprise during aperiod from transactions and other events and circumstances from non-ownersources and, at May 31, 2007 and 2006, includes foreign currencytranslation adjustments and adjustments to the fair value of highly effectivederivative instruments. For the three months ended May 31, 2007 and 2006,the Company had other comprehensive loss as follows:

| ** **                                                                   | ** ** | **Three Months Ended  May 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| Net loss                                                                     |       | $                                              | (4,204,000 | ) | $ | (3,576,000 | ) |
| Currency  translation adjustments                                            |       | 126,000                                        |       | 480,000 |   |
| Change in fair  value of foreign currency forward contracts, net of tax |       | 17,000                                         |       | (824,000 | ) |
| Total other  comprehensive loss                                              |       | $                                              | (4,061,000 | ) | $ | (3,920,000 | ) |

 

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**H.**              ProductWarranties

TheCompany provides reserves for the estimated cost of product warranty-relatedclaims at the time of sale, and periodically adjusts the provision to reflectactual experience related to its standard product warranty programs and itsextended warranty programs. The amount of warranty liability accrued reflectsmanagement’s best estimate of the expected future cost of honoring Companyobligations under its warranty plans. Additionally, from time to time, specificwarranty accruals may be made if unforeseen technical problems arise. Meade andBresser branded products, principally telescopes and binoculars, are generallycovered by a two-year limited warranty. Many of the Simmons products,principally riflescopes and binoculars, have lifetime limited warranties. Mostof the Coronado products have limited five-year warranties. Changes in thewarranty liability, which is included as a component of accrued liabilities onthe accompanying Consolidated Balance Sheets, were as follows:

| ** **                | ** ** | **Three Months Ended  May 31,** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| Beginning balance         |       | $                                              | 1,184,000  |   | $ | 1,053,000 |   |
| Warranty accrual          |       | 595,000                                        |       | 257,000 |   |
| Labor and  material usage |       | (407,000                                       | )          | (200,000 | ) |
| Ending balance            |       | $                                              | 1,372,000  |   | $ | 1,110,000 |   |

 

**I.**                   DerivativeInstruments and Hedging Activities

TheCompany, at times, utilizes derivative financial instruments to manage itscurrency exchange rate and interest rate risks. The Company does not enter intothese arrangements for trading or speculation purposes. The Company’s Germansubsidiary purchases inventory from Asian suppliers in U.S. dollars. A forwardexchange contract is typically entered into when the U.S. dollar amount of theinventory purchase is firm. Given our foreign exchange position, a change inforeign exchange rates upon which these foreign exchange contracts are basedwould result in exchange gains and losses.

| ** **                  | ** ** | **May 31, 2007** | ** ** | **February 28, 2007** | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Notional  amount**       | ** ** | **Fair Value**             | ** ** | **Notional  amount** | ** ** | **Fair Value** | ** ** |
| Forward currency  contracts |       | $                          | 11,200,000 |                            |       | $ | 17,000 |   |   |   | — |   |   |   | — |   |   |
|                             |            |                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

At May 31, 2007, thefair value of forward currency contracts is recorded in accrued liabilities onthe accompanying consolidated balance sheets. Changes in the fair value of thecash flow forward currency contracts have been recorded as a component ofaccumulated other comprehensive loss, net of tax, as these items have beendesignated and qualify as cash flow hedges. Due to continuing taxable losses,the Company has provided an allowance against all tax benefits generated duringthe quarter. Therefore, the change in the fair value of the cash flow forwardcurrency contracts is presented in the accompanying consolidated financialstatements with no net tax benefit. The settlement dates on the forwardcurrency contracts vary based on the underlying instruments through February 2008.

**J.**                  BankBorrowings

The Company was in compliance with all restrictivecovenants under its Credit Agreement for the period ended May 31, 2007. OnMay 31, 2007, the Company executed the Eleventh Amendment to Amended andRestated Credit Agreement (the “Eleventh Amendment”). The Eleventh Amendmentmakes the following key changes to the U.S. credit agreement: (1) extendsthe expiration date to September 30, 2009; (2) reduces the facilityto $30,000,000; (3) adjusts the pricing grid based on the Company’scalculated fixed charge coverage ratio; (4) removes the $4 million reservepreviously established in the Fifth Amendment; (5) sets minimum EBITDA,tangible net worth and capital 

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expenditure requirementsmeasured on a rolling four quarter basis beginning with the quarter endingMay 31, 2007 and minimum fixed charge coverage ratio covenants measured ona rolling four quarter basis beginning with the quarter ending on May 31,2008; (6) requires payment of an intercompany loan to the Company’s Europeansubsidiary in the amount of approximately $2,000,000 by not later than July 31,2007; and (7) establishes prepayment penalties.

Amountsoutstanding under the Company’s various bank and other debt instruments are asfollows:

| ** **                                          | ** ** | **May 31, 2007** | ** ** | **February 28, 2007** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| Domestic bank  revolving line of credit             |       | $                          | 3,531,000  |                            |       | $ | 860,000 |   |   |
| European bank  revolving line of credit             |       | —                     |       |                            | —     |   |   |
| Total bank  revolving lines of credit               |       | $                          | 3,531,000  |                            |       | $ | 860,000 |   |   |
| Domestic term loan                                  |       | $                          | —     |                            |       | $ | — |   |   |
| European term  loans                                |       | 1,155,000                  |       |                            | 1,360,000  |   |   |
| Notes payable and  capital lease obligations        |       | 20,000                     |       |                            | 26,000     |   |   |
| Total debt and  capital lease obligations           |       | 1,175,000                  |       |                            | 1,386,000  |   |   |
| Less current  portion                               |       | (1,158,000                 | )          |                            | (200,000   | ) |   |
| Total long-term debt and  capital lease obligations |       | $                          | 17,000     |                            |       | $ | 1,186,000 |   |   |

 

**K.**              IncomeTaxes

During the year ended February 28,2006, the Company recorded a full valuation allowance against its deferred taxassets. The Company determined, in accordance with SFAS No. 109, “Accountingfor Income Taxes,” that there was sufficient uncertainty surrounding the futurerealization of its deferred tax assets to warrant the recording of a fullvaluation allowance. The valuation allowance was recorded based upon theCompany’s determination that there was insufficient objective evidence, at thetime, to recognize those assets for financial reporting purposes. For theperiods ended May 31, 2007, the Company has not changed its assessmentregarding the reliability of its deferred tax assets. Ultimate realization ofthe benefit of the deferred tax assets is dependent upon the Company generatingsufficient taxable income in future periods, including periods prior to theexpiration of certain underlying tax credits.

**L.**                NewAccounting Pronouncements

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes”,and prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Company adopted the provisions of FIN48 as of March 1, 2007 and recorded on adjustment to its tax liabilitiesof less than $0.1 million.

The Company remains open to audit by major taxingjurisdictions for tax years ending August 31, 2003 to present. The totalamount of unrecognized tax benefits at May 31, 2007 was $0.2 million. The amount of the unrecognized taxbenefit that we anticipate will reverse in the next 12 months is less than $0.1million. The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense as of the adoption date of March 1, 2007,and as of May 31, 2007, accrued interest related to uncertain taxpositions was less than $0.1 million.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting 

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principles, and expandsdisclosures about fair value measurements. This Statement applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, this Statement doesnot require any new fair value measurements. This Statement is effective forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The Company does not expectthe adoption of SFAS No. 157 in fiscal 2009 to have a material impact onits results of operations or financial position.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108regarding the process of quantifying financial statement misstatements. SAB No. 108states that registrants should use both a balance sheet approach and an incomestatement approach when quantifying and evaluating materiality of amisstatement. The interpretations in SAB No. 108 contain guidance oncorrecting errors under the dual approach as well as provide transitionguidance for correcting errors. This interpretation does not change therequirements within SFAS No. 154 for the correction of an error infinancial statements. SAB No. 108 is effective for annual financialstatements covering the first fiscal year ending after November 15, 2006.The Company will be required to adopt this interpretation for its fiscal yearending 2007.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and related notes included in this Form 10-Q.This discussion may contain forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those anticipatedin these forward-looking statements due to known and unknown risks,uncertainties and other factors, including those risks discussed in “RiskFactors” in the Company’s annual report on Form 10-K. Those riskfactors expressly qualify all subsequent oral and written forward-lookingstatements attributable to us or persons acting on our behalf. We do not haveany intention or obligation to update forward-looking statements included inthis Form 10-Q after the date of this Form 10-Q, exceptas required by law.*

**Overview of theCompany**

Meade Instruments Corporation is engaged in thedesign, manufacture, marketing and sales of consumer optics products, primarilytelescopes, binoculars and riflescopes. We design our products in-house or withthe assistance of external consultants. Most of our products are manufacturedoverseas by contract manufacturers in Asia while our high-end telescopes aremanufactured and assembled in our U.S. and Mexico facilities. Sales of ourproducts are driven by an in-house sales force as well as a network of salesrepresentatives throughout the U.S. We currently operate out of three primarylocations: Irvine, California; Tijuana, Mexico; and Rhede, Germany. OurCalifornia facility serves as the Company’s corporate headquarters, U.S.distribution center, and manufacturing operation of certain optics and high-endtelescopes; our Mexico facility primarily performs assembly, repair, andpackaging; while our Germany location is primarily engaged in the distributionof our finished products in Europe. Our business is highly seasonal and ourfinancial results vary significantly on a quarter-by-quarter basis throughouteach year.

We believe that the Company holds valuable brand namesand intellectual property that provides us with a competitive advantage in themarketplace. In the consumer telescope market, the Meade brand name isubiquitous while the Coronado brand name represents a unique niche in the areaof solar astronomy. Our riflescope and binocular brand names include theSimmons, Weaver and Redfield brands and these brands are household names amonghunters and active sportsmen nationwide. Our Bresser brand is primarilyrecognized in Europe.

After two years of financial losses, the Companybrought on a new chief executive officer in May 2006 with extensiveexperience in turnaround situations in an effort to restructure the Company andreturn it to profitability. In the ensuing 12 months, the Company replaced asignificant number of its executives, including its senior officer overoperations and its chief financial officer. The Company embarked on a number ofinitiatives to resolve supply chain constraints, to reduce the Company’s coststructure, to reduce the number of SKUs and required level of inventory, and toincrease investment for new product innovations and introductions.

During the fiscal year ended February 28, 2007,our performance was negatively impacted by the closure and consolidation offour U.S. facilities into one, related headcount reductions and severancecosts, aggressive reductions in inventory, and legal and audit costs associatedwith the Company’s restatement of historical results due to errors inaccounting for stock options and deferred rent. While we believe that we havemade significant progress in restructuring the Company that will be evident inour financial results for the fiscal year ending February 28, 2008compared with the prior year, we also believe that the restructuring is notcomplete and that the turnaround of the Company will be a continuing effort. Assuch, we are continuing to evaluate long-term opportunities to further reduceour cost structure and these opportunities, if executed upon, may result inadditional short-term costs that must be recognized in our current financialstatements.

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In addition, we rely onour credit facilities and other borrowings to fund our losses during theseasonal low quarters and to fund our working capital needs as we build upinventory and receivables in advance of the high season. This requirescontinued mutual cooperation with our lenders. As we continue to make progresstoward returning the Company to profitability, we may incur certain costsassociated with the turnaround, while at the same time anticipating growth inrevenues which may require additional investments in working capital, we cannotguarantee that we will not need to raise additional capital. There can be noassurance that additional sources of capital will be available on reasonableterms, if at all, or that if necessary, such additional sources of capital willbe non-dilutive to stockholders.

**Critical AccountingPolicies and Estimates**

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make certain estimates, judgments andassumptions that it believes are reasonable based upon the informationavailable. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented. Actual resultsmay differ from these estimates under different assumptions or conditions. Thesignificant accounting policies which management believes are the most criticalto assist users in fully understanding and evaluating the Company’s reportedfinancial results include the following:

*Revenue Recognition*

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred, the price to the buyer is fixed or determinable, and collectibilityis reasonably assured. Those criteria are typically met when product is shippedand revenue is not recognized at the time of shipment if these criteria are notmet. Although there are many factors that influence revenue recognition, theprincipal reason the Company may not recognize revenue at the time of shipmentis if the substance of the transaction is a consignment. Consignment typearrangements happen on a limited basis. Under certain circumstances, theCompany may accept product returns that have historically been primarilyrelated to lower-end Meade branded products. Management judgments must be madeand used in connection with establishing the sales return estimates. TheCompany continuously monitors and tracks returns and records revenues net ofprovisions for returns. The Company’s estimate of sales returns is based uponseveral factors including historical experience, current market and economicconditions, customer demand and acceptance of the Company’s products,notification received by the Company of returns and all other availableinformation that would assist the Company is making a determination of itssales return reserves. While sales returns have historically been withinmanagement’s estimates, actual returns may differ significantly from management’sestimates depending on actual market conditions at the time of the return.

*Inventories*

Inventories are stated atthe lower of cost, as determined using the first-in, first-out (“FIFO”) method,or market. Costs include materials, labor and manufacturing overhead. TheCompany evaluates the carrying value of its inventories taking into accountsuch factors as historical and anticipated future sales compared withquantities on hand and the price the Company expects to obtain for its productsin their respective markets. The Company also evaluates the composition of itsinventories to identify any slow-moving or obsolete product. These evaluationsrequire material management judgments, including estimates of future sales,continuing market acceptance of the Company’s products, and current market andeconomic conditions. Inventory may be written down based on such judgments forany inventories that are identified as having a net realizable value less thanits cost.. However, if the Company is not able to meet its sales expectations,or if market conditions deteriorate significantly from management’s estimates, 

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reductionsin the net realizable value of the Company’s inventories could have a materialadverse impact on future operating results.

*Goodwill andIntangible Assets*

Goodwill and intangibleassets are accounted for in accordance with SFAS No. 142, *Goodwill and Intangible Assets*. Under SFASNo. 142, goodwill and intangible assets with indefinite lives are notamortized but are tested for impairment annually and also in the event of animpairment indicator. As required by SFAS No. 142, we evaluate therecoverability of goodwill based on a two-step impairment test. The first stepcompares the fair value of each reporting unit with its carrying amount,including goodwill. If the carrying amount exceeds the fair value, then thesecond step of the impairment test is performed to measure the amount of anyimpairment loss. Fair value is determined based on estimated future cash flows,discounted at a rate that approximates our cost of capital. Such estimates aresubject to change and we may be required to recognize an impairment loss in thefuture. Any impairment losses will be reflected in operating income.

*Income taxes*

A deferred income tax asset or liability isestablished for the expected future consequences of temporary differences inthe financial reporting and tax bases of assets and liabilities. Significantjudgment is necessary in the determination of the recoverability of the Company’sdeferred tax assets. Deferred tax assets are reviewed regularly forrecoverability and the Company establishes a valuation allowance when it ismore likely than not that some portion, or all, of the deferred tax assets willnot be realized. The Company assesses the recoverability of the deferred taxassets on an ongoing basis. In making this assessment, the Company is requiredto consider all available positive and negative evidence to determine whether,based on such evidence, it is more likely than not that some portion, or all,of the net deferred assets will be realized in future periods. If it isdetermined that it is more likely than not that a deferred tax asset will notbe realized, the value of that asset will be reduced to its expected realizablevalue, thereby decreasing net income. If it is determined that a deferred taxasset that had previously been written down will be realized in the future, thevalue of that deferred tax asset will be increased, thereby increasing netincome in the period when the determination is made. Actual results may differsignificantly, either favorably or unfavorably, from the evidence used toassess the recoverability of the Company’s deferred tax assets.

The Company accounts fortax contingencies in accordance with FIN 48.

**Results ofOperations**

The nature of the Company’sbusiness is highly seasonal. Historically, sales in the third quarter ended November 30th each year have been higher than sales achievedin each of the other three fiscal quarters of the year. Thus, expenses and, toa greater extent, operating income may significantly vary by quarter.Therefore, caution is advised when appraising results for a period shorter thana full year, or when comparing any period other than to the same period of theprevious year.

*Three Months Ended May 31,2007 Compared to Three Months Ended May 31, 2006*

Net sales during the first quarter of fiscal year 2008were $17.6 million, down approximately 6% from the prior year’s first quarternet sales of $18.7 million. The decrease was largely driven by the recentlyannounced closure of the Discovery Channel Stores’ retail locations, which hashistorically been a significant customer of the Company. Sales to DiscoveryChannel Stores were $0.2 million during the quarter ended May 31, 2007versus $2.0 million in the same period last year and this reduction primarilyaffected the Company’s sales of low-end telescopes. Overall sales of telescopeswere $8.7 million in the 

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first quarter of fiscal2008 compared with $11.6 million in the same quarter of fiscal 2007. Sales ofriflescopes were $3.8 million, a 41% increase compared with $2.7 million in thesame quarter last year as the Company began shipping riflescope models that hadnot been available in the prior year due to supply chain constraints. TheCompany expects to be essentially fully stocked in riflescopes for the upcomingseason. The U.S. dollar weakened versus the Euro from the prior year quarterwhich positively affected the Company’s reported sales by approximately $0.3million.

Gross profit for the quarter ending May 31, 2007was $1.8 million or 10% of net sales compared with $3.4 million or 18% of netsales in the prior year’s comparable quarter. There were several factors thatcontributed to this decrease in gross profit. First, approximately $1 millionof the decrease in gross profit related to inventory that was either sold atlow margins as part of the Company’s ongoing campaign to reduce inventorylevels or inventory that the Company otherwise determined was excess orobsolete and wrote down accordingly. Second, the Company saw a shift in productmix shifted toward lower margin products. Finally, the Company experienced ahigher-than-anticipated increase in warranty claims and adjusted its reservefor warranties accordingly.

Selling expenses for the quarter ending May 31,2007 were $2.2 million, a 33% decrease from $3.4 million for the samequarter in the prior year. The decrease versus the prior year was due toheadcount reductions related to the restructuring of the Company and theconsolidation of four domestic facilities into one, lower bad debt expenseincluding a bad debt recovery, and a deliberate reduction in advertising andmarketing costs.

General and administrative expenses for the quarterending May 31, 2007 were $2.8 million, a 7% decrease from $3.0 million forthe same quarter in the prior year. The decrease versus the prior year was dueto headcount reductions related to the restructuring of the Company and theconsolidation of four domestic facilities into one, a reduction in legal feesfrom the prior year due, non-recurrence of certain one-time costs and anincreased focus on cost controls.

Research and development expenses for the quarterending May 31, 2007 were $0.4 million compared with $0.3 million for thesame quarter in the prior year. The increase was principally due to an increasein the development of new products slated for market introduction during thefiscal year ending 2008.

Interest expense decreased slightly in the comparableperiods. During the quarter the Company finalized a renewal of it creditfacility with Bank of America, which was filed as an exhibit to its AnnualReport on Form 10-K for the fiscal year ended February 28,2007.

The tax provision was $0.3million on consolidated basis compared with $0.1 million in the same quarter offiscal 2007. The tax provision relates almost exclusively to taxes that theCompany will pay in Germany for its profitable European subsidiary. The Companydid not record any income tax provision or benefit in the U.S. due to its lossfrom operations, level of net operating losses, and valuation allowances placedagainst the deferred tax assets.

**Seasonality**

The Company hasexperienced, and expects to continue to experience, substantial fluctuations inits sales, gross margins and profitability from quarter to quarter. Factorsthat influence these fluctuations include the volume and timing of ordersreceived, changes in the mix of products sold, market acceptance of the Company’sproducts, competitive pricing pressures, the Company’s ability to meetfluctuating demand and delivery schedules, the timing and extent of researchand development expenses, the timing and extent of product development costsand the timing and extent of advertising expenditures. In addition, a substantialportion of the Company’s net sales and operating income typically occurs in thethird quarter of the Company’s fiscal year primarily due to disproportionatelyhigher customer demand for less-expensive telescopes during the holiday season.The Company continues to experience significant sales 

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to massmerchandisers. Mass merchandisers, along with specialty retailers, purchase aconsiderable amount of their inventories to satisfy such seasonal customerdemand. These purchasing patterns have caused the Company to increase its levelof inventory during its second and third quarters in response to such demand oranticipated demand. As a result, the Company’s working capital requirementshave correspondingly increased at such times.

**Liquidity andCapital Resources**

For the three months ended May 31, 2007, theCompany funded its operations principally by borrowing on its bank lines ofcredit and by utilizing its cash on hand. Cash flow from operating activitieswas negatively affected principally by losses for the period and an increase inaccounts receivable which was offset by a decrease in inventories. Managementefforts to reduce inventories resulted in a decrease of nearly $2.0 million ininventories for the current quarter period. Management does not expect thattrend to continue as it expects inventory to build as the Company prepares forthe holiday season. Working capital totaled approximately $20.0 million at May 31,2007, compared to $24.0 million at February 28, 2007. Working capitalrequirements fluctuate during the year due to the seasonal nature of thebusiness. These requirements are typically financed through a combination ofinternally generated cash flow from operating activities and short-term bankborrowings.

The Company was in compliance with its debt covenantsat May 31, 2007. As of February 28, 2007, the Company had $4.0million in cash. The Company funded its operations during the fiscal year withcash and other working capital. Operations generated approximately $2.6 millionin cash, overcoming a $19.2 million net loss with approximately $2 million indepreciation, amortization and ESOP expenses, approximately $0.6 million instock-based compensation expenses, approximately $0.5 million in bad debtallowances and approximately $10 million and $4 million reductions ininventories and accounts receivable, respectively. Also adding to cash flowfrom operations was approximately $4.5 million in increased short-termliabilities. Inventories decreased as management continued to focus on inventoryreduction through aggressive discounts on older inventories and planned SKUcount reductions. Lack of sufficient supply of several of the Company’s primaryproducts also affected inventory levels. Inventories at February 28, 2007were $25.3 million on fiscal year sales of $101.5 million. Inventories at February 28,2007 were at the lowest level at a year end reporting period since February 28,1999 when inventories were $14.2 million on fiscal year sales of $76.3 million.Overall inventory turns increased to 2.8 times during fiscal 2007, up from2.2 times in fiscal 2006. In addition, cash from operations was used topay down the Company’s bank lines of credit by approximately $3 millionbringing the balance owed on its bank lines to $0.9 million at February 28,2007. Accounts receivable decreased on lower sales during the Company’s fourthfiscal quarter as compared to the prior year’s fourth quarter. Accountspayable, accrued liabilities and income taxes payable all increased from theprior year and were influenced by the timing of certain expenses and deliberatecash management. Working capital requirements fluctuate during the year due tothe seasonal nature of the business. These requirements are typically financedthrough a combination of internally generated cash flow from operatingactivities and short-term bank borrowings.

The Company continues to depend on operating cash flowand availability under its bank lines of credit to provide short-termliquidity. Availability under its domestic bank lines of credit at May 31,2007 was over $5.0 million. On July 31, September 29, October 31,and November 30, 2006 the Company executed the Seventh, Eighth, Ninth andTenth amendments to its U.S. bank Credit Agreement, respectively. The Seventh,Eighth and Ninth amendments granted the Company additional time to meet theCredit Agreement requirements regarding reporting deadlines for the Company’saudited year-end financial statements and quarterly financial statements. TheCompany met those reporting deadlines with the filing of its Form 10-Kfor the year ended February 28, 2007. The Tenth amendment granted theCompany until December 15, 2006 to report its quarterly results to thebank for the quarter ended August 31, 2006. The Company met the reportingdeadline for the quarter ended August 31, 2006. The 

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Company was in compliancewith all restrictive covenants under its Credit Agreement for the period ended May 31,2007.

On May 31, 2007, the Company executed theEleventh Amendment to Amended and Restated Credit Agreement (the “EleventhAmendment”). The Eleventh Amendment makes the following key changes to the U.S.credit agreement: (1) extends the expiration date to September 30,2009; (2) reduces the facility to $30,000,000; (3) adjusts thepricing grid based on the Company’s calculated fixed charge coverage ratio; (4) removesthe $4 million reserve previously established in the Fifth Amendment; (5) setsminimum EBITDA, tangible net worth and capital expenditure requirementsmeasured on a rolling four quarter basis beginning with the quarter ending May 31,2007 and minimum fixed charge coverage ratio covenants measured on a rollingfour quarter basis beginning with the quarter ending on May 31, 2008; (6) requirespayment of an intercompany loan to the Company’s European subsidiary in theamount of approximately $2,000,000 by not later than July 31, 2007; and (7) establishesprepayment penalties. The fee for the amendment was $125,000. Upon execution ofthe Eleventh Amendment the Company was in compliance with all of its bankcovenants.

In the event the Company’s plans require more capitalthan is presently anticipated, or in the event the Company requires amendmentsto the covenants or other terms and conditions of the credit agreement that itis unable to secure from its bank, additional sources of liquidity such as debtor equity financings, may be required to meet its capital needs. There can beno assurance that such additional sources of capital will be available onreasonable terms, if at all. However, management believes that operating cashflow and bank borrowing capacity in connection with the Company’s businessshould provide sufficient liquidity for the Company’s obligations for at leastthe next twelve months.

Capital expenditures,including financed purchases of equipment, aggregated $0.1 million and$0.1 million for each of the three month periods ended May 31, 2007and 2006. The Company had no material capital expenditure commitments at May 31,2007. On December 1, 2004, the Company acquired substantially all of theassets and assumed substantially all of the liabilities of Coronado TechnologyGroup, LLC, for approximately $2.5 million in cash plus contingentconsideration. A final payment of approximately $1.0 million was paid in May 2006based upon the financial performance of the acquired operations for the twelvemonths ended December 31, 2006.

**New AccountingPronouncements**

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for IncomeTaxes”, and prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interim periods,disclosure and transition. The Company adopted the provisions of FIN 48 as of March 1,2007. The adoption of FIN 48 did not have a material impact on the Company’sresults of operations or financial position.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This Statement appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements.This Statement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods 

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within those fiscal years.The Company does not expect the adoption of SFAS No. 157 in fiscal 2009 tohave a material impact on its results of operations or financial position.

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin(“SAB”) No. 108 regarding the process of quantifying financial statementmisstatements. SAB No. 108 states that registrants should use both abalance sheet approach and an income statement approach when quantifying andevaluating materiality of a misstatement. The interpretations in SAB No. 108contain guidance on correcting errors under the dual approach as well asprovide transition guidance for correcting errors. This interpretation does notchange the requirements within SFAS No. 154 for the correction of an errorin financial statements. SAB No. 108 is effective for annual financial statementscovering the first fiscal year ending after November 15, 2006. The Companywill be required to adopt this interpretation for its fiscal year ending 2008.

**Forward-LookingInformation**

The preceding “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section contains various “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities and Exchange Act of 1934, as amended, which represent the Company’sreasonable judgment concerning the future and are subject to risks anduncertainties that could cause the Company’s actual operating results andfinancial position to differ materially, including the following: the Companybeing able to see continued progress in its restructuring efforts, the timingof such restructuring efforts, and the fact that the restructuring efforts willresult in positive financial results in the future: the Company’s expectationthat it will solve its riflescope supply chain difficulties, which will resultin the Company being fully stocked in riflescope inventory for the upcomingseason; the Company’s expectation that it will be able to build inventory ofother necessary products in preparation for the holiday season: the Company’sexpectation that it will continue to experience fluctuations in its sales,gross margins and profitability from quarter to quarter consistent with priorperiods; the Company’s expectation that contingent liabilities will not have amaterial effect on the Company’s financial position or results of operations;the Company’s expectation that operating cash flow and bank borrowing capacityin connection with the Company’s business should provide sufficient liquidityfor the Company’s obligations for at least the next twelve months.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

TheCompany has adopted a hedging program to manage its foreign currency exchangerate and, at times, interest rate risks. Upon continuing evaluation and whendeemed appropriate by management, the Company may enter into hedginginstruments to manage its foreign currency exchange and interest rate risks.From time to time, the Company enters into forward exchange contracts toestablish with certainty the U.S. dollar amount of future firm commitmentsdenominated in a foreign currency. The notional 

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amounts of the forward exchange contracts vary,typically with the seasonal inventory requirements of the Company’s Germansubsidiary. The Company’s German subsidiary purchases inventory from Asiansuppliers in U.S. dollars. A forward exchange contract is typically enteredinto when the U.S. dollar amount of the inventory purchase is firm. Given ourforeign exchange position, a change in foreign exchange rates upon which theseforeign exchange contracts are based would result in exchange gains and losses.In all material aspects, these exchange gains and losses would be fully offsetby exchange gains and losses on the underlying net monetary exposures for whichthe contracts are designated as hedges. We do not expect material exchange rategains and losses from unhedged foreign currency exposures. As of May 31,2007, the Company had the following forward exchange contracts outstanding:

| ** **                  | ** ** | **May 31, 2007** | ** ** | **February 28, 2007** | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Notional  amount**       | ** ** | **Fair Value**             | ** ** | **Notional  amount** | ** ** | **Fair Value** | ** ** |
| Forward currency  contracts |       | $                          | 11,200,000 |                            |       | $ | 17,000 |   |   |   | — |   |   |   | — |   |   |
|                             |            |                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

At May 31, 2007, the fair value of forwardcurrency contracts is recorded in accrued liabilities on the accompanyingConsolidated Balance Sheets. Changes in the fair value of the cash flow forwardcurrency contracts have been recorded as a component of accumulated othercomprehensive income (loss), net of tax, as these items have been designatedand qualify as cash flow hedges. Due to continuing taxable losses, the Companyhas provided an allowance against all tax benefits generated during thequarter. Therefore, the change in the fair value of the cash flow forwardcurrency contracts is presented in the accompanying financial statements withno net tax benefit. The settlement dates on the forward currency contracts varybased on the underlying instruments through February 2008.

The Company’s financialinstruments consist of cash, accounts receivable, accounts payable, short-termobligations, and long-term obligations. The Company’s principal exposure tointerest rate fluctuations relates primarily to the U.S. revolving loan. Thedebt under the U.S. revolving loan bears interest at a floating rate tied toeither the LIBOR rate or the bank prime rate of interest. Management believesthat a 1% increase in interest rates on its U.S. revolving loan would haveresulted in an immaterial amount of less than $0.1 million additional interestexpense for the three months ended May 31, 2007.

**ITEM 4.**                CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures.**

The Company’s management (with the participation ofour then Chief Executive Officer and Chief Financial Officer) evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d- 15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)), as of the quarter endedMay 31, 2007. Disclosure controls and procedures are designed to ensurethat information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized andreported on a timely basis and that such information is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. A control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, have been or will bedetected.

The Company’s Chief Executive Officer and ChiefFinancial Officer concluded, based on their evaluation, that the Company’sdisclosure controls and procedures are effective for the Company as of the endof the period covered by this report.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

1.     Thefollowing purported shareholder derivative action has been filed challengingconduct by certain of the Company’s current and former board members andofficers in connection with various stock option grants:

*a.      Inre Meade Instruments Corp. Derivative Litigation,* No. 06-CC-205,Superior Court of the State of California for the County of Orange, filed October 6,2006. On November 22, 2006, the court consolidated under the above captiontwo state derivative actions: (i) *Barclayv. Diebel*, et al., No. 06-CC-205, Superior Court ofthe State of California for the County of Orange, filed October 6, 2006and (ii) *Bryant v. Diebel*,et al., No. 06-CC-206, Superior Court of the State ofCalifornia for the County of Orange, filed October 6, 2006. The plaintiffsfiled a consolidated complaint on December 22, 2006, and the defendantsfiled demurrers to the complaint on February 5, 2007. Under thecurrent scheduling order, the plaintiffs were expected to file their oppositionto the demurrers by June 22, 2007. The consolidated complaint assertscauses of action for breach of fiduciary duty, accounting, abuse of control,gross mismanagement, constructive trust, corporate waste, rescission, unjustenrichment, and violation of California Corporations Code in connection withthe Company’s option granting practices. On May 23, 2007, the parties inboth this action and the class action discussed below participated in amediation. As a result of this mediation, the parties in both actions reached apreliminary settlement understanding, which includes corporate governancereforms and an amount to cover plaintiffs’ attorneys fees. The Companyanticipates that the monetary portion of the proposed settlement will becovered by the Company’s director and officer liability insurance. The partiesare in the process of finalizing their settlement agreements. These settlementsare conditioned upon court approval.

2.     Thefollowing putative federal securities class action has also been filedchallenging conduct by the Company and certain of its current and former boardmembers and officers in connection with various stock option grants:

*a.      Grecianv. Meade Instruments Corp., et al*., No. SA CV 06-908AG (JTLx), United states District Court for the Central District of California,filed September 27, 2006. On January 8, 2007, the court granted thenamed plaintiffs’ motion to be appointed lead plaintiffs. On February 22,2007, the plaintiffs filed their second amended complaint, which asserts claimsfor violations of Section 10(b), 14(a) and 20(a) of theSecurities Exchange Act in connection with the Company’s option grantingpractices. Under the current scheduling order, the plaintiffs can file a thirdamended complaint by June 1, 2007. The defendants do not believe that thethird amended complaint will differ materially from its predecessor. Thedefendants’ motion to dismiss the third amended complaint will be due on July 16,2007. On May 23, 2007, the parties in both this action and the derivativeaction discussed above participated in a mediation. As a result of thismediation, the parties in both actions reached a preliminary settlementunderstanding, which includes corporate governance reforms and an award to theclass, from which plaintiffs’ attorneys fees and administrative costs would bepaid. The Company anticipates that the monetary portion of the proposedsettlement will be covered by the Company’s director and officer liabilityinsurance. The parties are in the process of finalizing their settlementagreements. These settlements are conditioned upon court approval.

3.     On September 28,2006, Daniel Azari, Paul T. Jones (dba Star Instruments) and RC OpticalSystems, Inc. filed an action against Meade and certain Meade dealers inthe United States District Court for the Southern District of New York,alleging the following claims: (1) violation of the Racketeer InfluencedAnd Corrupt Organization Act (“RICO”); (2) violation of New York GeneralBusiness Law §§ 349 and 350; (3) violation of California Business andProfessions Code § 17200; (4) unfair competition; and (5) productdisparagement. The gravamen of the complaint is that Meade and other defendants

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allegedly falselyadvertise Meade’s Advanced Ritchey-Chretien products as being Ritchey-Chretienproducts. On October 31, 2006, Plaintiffs filed an Amended Complaint,adding claims for violation of the Lanham Act. On January 3, 2007, theUnited States District Court for the Southern District of New York granted amotion filed by Meade and ordered the case transferred to the United StatesDistrict Court for the Central District of California. In March 2007, thecourt dismissed the following claims: (1) violation of the RICO Act; (2) violationof New York General Business Law §§ 349 and 350; and (3) productdisparagement. In June 2007, the court dismissed all claims byPlaintiff Daniel Azari. The complaint seeks injunctive relief, compensatorydamages, and attorneys’ fees and costs.

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

Due to the uncertainties of litigation, the Company isunable to provide an evaluation of the likelihood of either a favorable orunfavorable outcome in the above mentioned cases.

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

**ITEM 1.A.**     RISKFACTORS

We do not believe therehave been any material changes from the risk factors discussed in Item 1.A. ofour Annual Report on Form 10-K for our fiscal year ended February 28,2007.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

**ITEM 5.**                OTHERINFORMATION

Not applicable.

**ITEM 6.**                EXHIBITS

Exhibits filed withthis Form 10-Q.

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

2.                 Exhibit 31.2Sarbanes-Oxley Act Section 302 Certification by Paul E. Ross*

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

4.                 Exhibit 32.1Sarbanes-Oxley Act Section 906 Certification by Paul E. Ross*

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*                    Filedherewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                           | ** ** | **MEADE INSTRUMENTS CORP.** |
|---------------------------|------------|-----------------------------|
| Dated: July 16, 2007 |       |                        | By: | /s/ STEVEN L. MUELLNER |
|                      |       |                        | Steven L. Muellner |
| * *                  | * *   | * *                    | *President and Chief Executive Officer* |
|                      |       | By:                         | /s/ PAUL E. ROSS |
|                      |       |                        | Paul E. Ross |
| * *                  | * *   | * *                    | *Senior Vice President, Finance and* |
|                      | * *   | * *                    | *Chief Financial Officer* |
|                           |            |                             |  |  |

 

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**EXHIBITINDEX**
| Exhibit No.  | ** ** | ** **                                                                | ** ** | **Description** |
|-------------------|------------|---------------------------------------------------------------------------|------------|-----------------|
| Exhibit 31.1 |       | Sarbanes-Oxley Act  Section 302 Certification by Steven L. Muellner* |
| Exhibit 31.2 |       | Sarbanes-Oxley  Act Section 302 Certification by Paul E. Ross*       |
| Exhibit 32.1 |       | Sarbanes-Oxley  Act Section 906 Certification by Steven L. Muellner* |
| Exhibit 32.2 |       | Sarbanes-Oxley Act  Section 906 Certification by Paul E. Ross*       |

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*                    Filedherewith.

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