UNITED STATES ~~STATESSECURITIES~~SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~March~~June 3130, ~~2007~~2008


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

For the transition period from to .

Commission file number 000-51664

~~DIRECTED ELECTRONICS~~DEI HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Florida		65-0964171

(State of Incorporation)		(I.R.S. Employer Identification No.)

1 Viper Way
Vista, California		92081

(Address of Principal Executive Offices)		(Zip Code)

(760) 598-6200

(760) 598-6200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be ~~filed~~ filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has ~~been~~ been subject to such filing requirements for the past 90 days. ~~Yes þ No o~~

~~Indicate by check mark whether the registrant is a large accelerated filer, an accelerated~~ ~~filer,~~Yes orþ aNo ~~non-accelerated filer. See definition of “accelerated filer and large accelerated~~o ~~filer” in Rule 12b-2 of the Exchange Act.~~

~~Large~~ Indicate by check mark whether the registrant is a large accelerated filer, ~~o Accelerated~~an accelerated filer, a ~~þ Non~~non-accelerated filer, oor a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark~~o ~~whether~~Accelerated ~~the~~filer ~~registrant~~þ isNon-accelerated afiler ~~shell~~o ~~company~~ (asDo ~~defined~~not incheck ~~Rule 12b-2~~if ~~of the~~a ~~Exchange~~smaller ~~Act~~reporting company). ~~Yes~~Smaller oReporting NoCompany þ o

AsIndicate ofby ~~May 4,~~check ~~2007,~~mark ~~there~~whether ~~were~~the ~~outstanding~~registrant ~~25,220,341~~is ~~shares~~a ofshell ~~the~~company ~~registrant’s~~(as ~~common~~defined ~~stock, par~~in ~~value~~Rule 12b-2 ~~$.01~~of the ~~per~~Exchange ~~share~~Act).

Yes o No þ

As of August 1, 2008, there were outstanding 25,509,813 shares of the registrant’s common stock, par value $.01 per share.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION		1
Item 1. Financial Statements (unaudited)		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		1317
Item 4. Controls and Procedures		1418
PART II — OTHER INFORMATION		1418
Item 1. Legal Proceedings		1418
Item 6. Exhibits		15
Item 4. Submission of Matters to a Vote of Security Holders		18
SIGNATURES		16
Item 5. Other Information		19
EX-10.28
Item 6. Exhibits		19
EX-10.29
SIGNATURES		20
EX-10.35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. ~~CONSOLIDATED~~ CONSOLIDATED BALANCE SHEETS (Unaudited and in thousands, except per share amounts)

	March 31,			December 31,
	June 30,			December 31,
	2007			2006
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	1412,~~137~~790		$	94,~~861~~760
Accounts receivable, net of allowance for doubtful accounts of $1,729 and $1,464 at March 31, 2007 and December 31, 2006, respectively		53,019			157,013
Accounts receivable, net of allowance for doubtful accounts of $1,678 and $1,521 at June 30, 2008 and December 31, 2007, respectively		46,812			77,366
Inventories		7066,~~122~~371			~~122~~64,~~697~~219
Other receivables		36,191			1,942
Income taxes receivable		6,473			9,783
Prepaid expenses and other current assets		164,~~980~~147			157,~~774~~115
Deferred tax assets		136,~~882~~038			146,~~039~~038
Total current assets		~~204~~142,~~331~~631			~~321~~169,~~326~~281
Property and equipment, net		7,~~046~~815			7,~~068~~353
Intangible assets, net		~~184~~153,~~292~~653			~~186~~157,~~112~~265
Goodwill		156,602			156,617
Other assets		7,456			6,535
Other assets		7,306			7,584
Total assets	$	311,555		$	340,434
Total assets	$	559,577		$	678,707
LIABILITIES AND SHAREHOLDERS’ DEFICIT
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3332,~~460~~468		$	~~116~~44,~~690~~814
Accrued liabilities		2321,~~341~~970			3228,~~858~~527
Current portion of senior notes payable		~~3,068~~—			32,~~068~~669
Taxes payable		—			7,772
Total current liabilities		54,438			76,010
Total current liabilities		59,869			160,388
Revolving loan		—			4,000
Revolving loan		20,000			37,000
Senior notes, less current portion		258,591			260,257
Senior notes, less current portion		301,392			302,159
Deferred tax liabilities		9,690			8,864
Deferred tax liabilities		53,473			53,473
Other liabilities		3,796			5,201
Other liabilities		3,352			1,296
Total liabilities		326,515			354,332
Total liabilities		438,086			554,316
Commitments and contingencies (Note 10)
Commitments and contingencies
Shareholders’ deficit:
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized shares — 100,000; issued and outstanding shares — 25,199 and 25,164 at March 31, 2007 and December 31, 2006, respectively		251			251
Authorized shares — 100,000; issued and outstanding shares — 25,489 and 25,420 at June 30, 2008 and December 31, 2007, respectively		254			254
Paid-in capital		~~114~~115,~~427~~215			114,~~571~~674
Notes receivable from shareholders		(3	)		(10	)
Accumulated other comprehensive income		237			1,257
Accumulated other comprehensive income (loss)		(301	)		235
Accumulated deficit		(130,666	)		(130,083	)
Retained earnings		7,117			9,344
Total shareholders’ deficit		(14,960	)		(13,898	)
Total shareholders’ equity		121,491			124,391
Total liabilities and shareholders’deficit	$	311,555		$	340,434
Total liabilities and shareholders’ equity	$	559,577		$	678,707

The accompanying notes are an integral part of the unaudited consolidated financial statements.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited and in thousands, except per share amounts)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006
	2008			2007			2008			2007
Net product sales	$	76,834		$	73,266
Sales:
Royalty and other revenue		1,099			1,035
Security and entertainment product sales, net	$	50,974		$	57,912		$	108,006		$	119,294
Net sales		77,933			74,301
Satellite radio product sales, net of $16,168 and $31,033 of cost for the three and six months ended June 30, 2008, respectively (Note 2)		4,543			27,722			7,258			43,174
Cost of sales		46,299			51,543
Royalty and other revenue		3,356			1,096			4,157			2,195
Gross profit		31,634			22,758
Net sales		58,873			86,730			119,421			164,663
Operating expenses:
Cost of sales:
Selling, general and administrative		22,227			12,986
Cost of security and entertainment sales		27,331			34,052			58,475			67,347
Amortization of intangibles		1,204			660
Cost of satellite radio sales (Note 2)		—			24,299			—			37,303
Provision for litigation		5,494			—
Total cost of sales		27,331			58,351			58,475			104,650
Total operating expenses		28,925			13,646
Gross profit		31,542			28,379			60,946			60,013
Income from operations		2,709			9,112
Operating expenses:
Other income (expense):
Selling, general and administrative		21,855			20,365			45,639			42,592
Interest expense		(7,037	)		(3,489	)
Amortization of intangibles		1,369			1,203			2,739			2,407
Interest income		78			214
Provision for litigation		—			(420	)		—			5,074
Income (loss) before provision for (benefit from) income taxes		(4,250	)		5,837
Total operating expenses		23,224			21,148			48,378			50,073
Provision for (benefit from) income taxes		(1,482	)		1,840
Income from operations		8,318			7,231			12,568			9,940
Net income (loss)	$	(2,768	)	$	3,997
Other income (expense):
Net income (loss) per common share:
Interest expense		(6,033	)		(6,860	)		(12,354	)		(13,897	)
Basic and diluted	$	(0.11	)	$	0.16
Interest income		26			126			115			204
Weighted average number of common shares:
Income (loss) before provision for (benefit from) income taxes		2,311			497			329			(3,753	)
Basic and diluted		25,955			25,753
Provision for (benefit from) income taxes		1,291			486			912			(996	)
Net income (loss)	$	1,020		$	11		$	(583	)	$	(2,757	)
Net income (loss) per common share:
Basic	$	0.04		$	0.00		$	(0.02	)	$	(0.11	)
Diluted	$	0.04		$	0.00		$	(0.02	)	$	(0.11	)
Weighted average number of common shares:
Basic		25,829			25,928			25,844			25,942
Diluted		25,871			25,931			25,844			25,942

The accompanying notes are an integral part of the unaudited consolidated financial statements.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2007			2006
	2008			2007
Operating activities
Net income (loss)	$	(2,768	)	$	3,997
Net loss	$	(583	)	$	(2,757	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		24,~~290~~725			14,~~469~~666
Provision for litigation		5,494			—
Non-cash interest expense		908			591
Non-cash interest expense		280			342
Non-cash stock-based compensation		629			415
Non-cash stock-based compensation		125			59
Deferred taxes		682			547
Deferred taxes		157			(432	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Changes in operating assets and liabilities
Accounts receivable, net		30,436			87,750
Accounts receivable, net		104,104			63,448
Inventories		(2,373	)		64,017
Inventories		52,607			(17,869	)
Prepaid expenses and other current assets		2,957			(12,926	)
Prepaid expenses and other assets		(35,598	)		2,297
Accounts payable		(12,238	)		(92,830	)
Accounts payable		(83,949	)		(15,559	)
Accrued liabilities		(6,594	)		(12,873	)
Accrued liabilities		(14,625	)		(12,926	)
Income taxes receivable		3,290			(7,186	)
Taxes payable		(7,231	)		(735	)
Other		(1,319	)		1,681
Other		1,704			133
Net cash provided by operating activities		20,520			31,095
Net cash provided by operating activities		22,590			24,224
Investing activities
Purchases of property and equipment		(~~592~~1,888	)		(~~479~~1,184	)
Net cash used in investing activities		(592	)		(479	)
Acquisitions of businesses, net of cash acquired		—			(11,057	)
Net cash used in investing activities		(1,888	)		(12,241	)
Financing activities
Proceeds from long-term debt		56,500			7,800
Proceeds from revolving loan		27,500			72,500
Payments on long-term debt		(74,267	)		(13,425	)
Payments on senior notes and revolving loan		(35,835	)		(87,034	)
Debt issuance costs		—			(17	)
Debt amendment fees		(1,822	)		(1,011	)
Payments received on shareholder loan		7—			738
Net cash used in financing activities		(1710,~~760~~157	)		(515,~~569~~537	)
Net effect of exchange rates on cash		38(445	)		(94109	)
Increase in cash and cash equivalents		48,~~276~~030			183,~~082~~208
Cash and cash equivalents at beginning of period		94,~~861~~760			129,~~167~~861
Cash and cash equivalents at end of period	$	1412,~~137~~790		$	3013,~~249~~069

The accompanying notes are an integral part of the unaudited consolidated financial statements.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

1. Basis of Presentation

At the Company’s Annual Meeting of Shareholders held on June 19, 2008, the Company’s shareholders approved the change of the Company’s corporate name from Directed Electronics, Inc. to DEI Holdings, Inc. The accompanying interim unaudited consolidated financial statements include the accounts of DEI Holdings, Inc. (the “Company”) and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary to state fairly the consolidated financial position, results of operations, and cash flows for all periods presented. Because of the seasonal nature of the Company’s business, the results of operations are not necessarily indicative of the results to be expected for the full fiscal year. These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with ~~accounting~~ ~~principles generally accepted in the United States of America~~GAAP. Accordingly, these statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2006~~2007.

2. Summary of Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues, and expenses reported in those financial statements as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates and assumptions. Significant estimates made by the Company include those related to the allowance for ~~doubtful~~ doubtful accounts, sales returns, inventory valuation, recoverability of deferred tax assets, valuation of long-lived assets, warranty reserves, income taxes, and ~~contingencies~~stock-based compensation. A summary of the Company’s significant accounting policies is contained in Note 23 of the Consolidated Financial Statements included in the Company’s ~~fiscal 2006~~ Annual Report on Form 10-K for the year ended December 31, 2007. Other than those listed below, there have been no changes to the Company’s significant accounting policies subsequent to December 31, ~~2006~~2007.

~~Accounting~~Revenue ~~for Income Taxes~~Recognition

Pursuant to the Company’s April 2005 agreement with SIRIUS, as amended in July and November 2007, the Company has exclusive rights to market and sell certain SIRIUS-branded satellite radio receivers and accessories to its existing U.S. retailer customer base. The Company ~~determines~~recognizes these revenues in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” and EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an ~~estimated~~Agent”. ~~annual~~The November 2007 amendment, which was effective ~~income~~as ~~tax~~of ~~rate~~January 1, 2008, provided for or amended existing terms relating to product sourcing and ~~this~~pricing, ~~rate~~product isreturns, ~~updated~~and product atwarranties. The Company further amended its agreement with SIRIUS in April 2008 to extend the ~~end~~term of the agreement through January 2009. Prior to the effective date of ~~each~~the ~~interim~~November 2007 ~~period~~amendment, the Company accounted for the proceeds received for sales of SIRIUS-related hardware products as revenue on a gross basis, as the Company determined that it was the principal in the transaction. The ~~This~~November 2007 ~~rate~~amendment issignificantly ~~used~~reduced the Company’s exposure to ~~calculate~~economic losses resulting from inventory obsolescence, sales returns, and the ~~provision~~fulfillment of warranty obligations related to satellite radio products. In exchange for ~~income~~SIRIUS ~~taxes~~bearing these risks, the Company has agreed to a reduced inventory margin, as defined in the agreement, on sales of satellite radio ~~income~~products. ~~from~~Accordingly, ~~normal~~the Company has determined that it is no longer the principal in the transaction and, ~~recurring~~starting ~~operations~~on January 1, 2008, satellite radio revenues are reported on a ~~year-to-date~~net basis based on the gross amounts billed to customers less (i) amounts paid to suppliers, (ii) rebates and discounts, and (iii) other direct costs. ~~The~~In ~~tax~~accordance ~~effect~~with ofSFAS ~~certain~~No. 154, “Accounting Changes and ~~significant~~Error Corrections”, ~~unusual~~the orCompany ~~extraordinary~~has ~~items~~not recast prior period satellite radio sales to conform with the current period’s presentation as the change in presentation is not ~~taken~~the ~~into~~result ~~account~~of a change in accounting ~~calculating~~principle but the ~~estimated~~application of the same principle to new facts and circumstances that ~~annual~~are ~~effective~~different ~~income~~from ~~tax~~those ~~rate~~prior to January 1, ~~but~~2008. isFor ~~taken~~the ~~into~~three ~~account~~months ~~entirely~~ended inJune 30, 2008, gross billings, net of rebates, and costs for satellite radio products were $20,711 and $16,168, respectively. For the ~~interim~~six ~~period~~months ~~when~~ended June 30, 2008, gross billings, net of rebates, and costs ~~such~~for ~~items~~satellite ~~occur~~radio products were $38,291 and $31,033, respectively.

InFair ~~June 2006,~~Value ~~the FASB issued Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in~~Measurement Income Taxes”. The Company adopted the provisions of FIN 48 on January 1, 2007. Under FIN 48, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. For additional information regarding the adoption of FIN 48, see Note 7, Income Taxes.

Accounting for Derivative Instruments and Hedging Activities

The Company is hedging the cash flows of a portion of its long-term debt using two interest rate swaps combined as one hedging instrument (the “derivative contract” or “interest rate swap”). The Company entered into this derivative contract to manage its exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt and to comply with covenant requirements of its senior credit facility. In the interest rate swap, the Company agreed to exchange the difference between a variable interest rate and a fixed interest rate, multiplied by a notional principal amount. The Company does not use derivative instruments for trading or other speculative purposes.

The Company records the derivative on its consolidated balance sheet at its fair value. As the derivative is designated as a cash flow hedge and the hedging relationship qualifies for cash flow hedge accounting, the effective portion of the change in fair value of the derivative is recorded in other comprehensive income (loss) and reclassified to interest expense when the hedged debt affects interest expense. The ineffective portion of the change in fair value of the derivative, if any, is recognized in interest expense in the period of the change.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

~~At inception~~In September 2006, the ~~Company~~FASB ~~determined~~issued ~~that~~SFAS ~~the~~No. 157, ~~hedge~~“Fair ~~was~~Value ~~highly~~Measurements.” ~~effective~~SFAS No. 157 Indefines ~~addition~~fair value, onestablishes a ~~quarterly~~framework ~~basis~~for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined as an exit price, which is the ~~Company~~price ~~performs~~that would be received to sell an ~~assessment~~asset or paid to ~~determine~~ ~~whether~~transfer ~~the~~a ~~change~~liability in ~~the~~an ~~fair~~orderly transaction ~~value~~between ofmarket participants at the ~~derivative~~measurement date. The statement emphasizes that fair value is ~~deemed~~a ~~highly~~market-based ~~effective~~measurement inand not an entity-specific measurement. It also establishes a ~~offsetting~~fair ~~the~~value ~~change~~hierarchy used in ~~cash~~fair ~~flows~~value ofmeasurements and expands the ~~hedged~~required ~~item.~~disclosures Ifof assets and liabilities measured at ~~any~~fair ~~time~~value. ~~subsequent~~For tofinancial ~~the~~assets ~~inception~~and liabilities, this statement is ofeffective ~~the~~for ~~hedge~~fiscal periods beginning after November 15, ~~the~~2007 ~~assessment~~and ~~indicates~~does ~~that~~not ~~the~~require ~~derivative~~any isnew nofair value ~~longer~~measurements. ~~highly~~In ~~effective~~February 2008, asFASB ~~a hedge~~Staff Position No. 157-2 was issued, which delayed the effective ~~Company~~date ~~will~~of ~~discontinue~~SFAS ~~hedge~~No. 157 ~~accounting~~to ~~and~~fiscal ~~recognize~~years ~~all~~ending ~~subsequent~~after ~~derivative~~November 15, ~~gains~~2008 for nonfinancial assets and ~~losses~~liabilities, inexcept ~~results~~for ofitems ~~operations.~~that ~~For~~are ~~additional~~recognized ~~information~~or ~~regarding~~disclosed ~~the~~at ~~interest~~fair ~~rate~~value ~~swap,~~in the ~~see~~financial ~~Note~~statements 8,on ~~Derivative~~a ~~Instruments~~recurring ~~and~~basis ~~Hedging~~(at ~~Activities~~least annually).

~~Presentation~~ The Company adopted the provisions of ~~Taxes~~SFAS ~~Collected~~No. 157 ~~from~~as ~~Customers~~of January 1, 2008 for financial assets and liabilities. Although the adoption of SFAS No. 157 did not materially impact the Company’s financial condition, results of operation, or cash flows, the Company is now required to provide additional disclosures.

InAs of June ~~2006~~30, ~~the~~2008, ~~FASB ratified~~ the ~~consensus~~Company’s ~~reached~~financial byassets ~~the~~and ~~Emerging~~liabilities ~~Issues~~requiring ~~Task~~measurement at ~~Force~~fair ~~in Issue~~value ~~06-3,~~on ora ~~EITF~~recurring ~~06-3,~~basis ~~“How~~included ~~Taxes~~a ~~Collected~~money ~~from~~market ~~Customers~~fund and ~~Remitted~~a toderivative ~~Governmental~~financial instrument. ~~Authorities~~The ~~Should~~fair Bevalues ~~Presented~~are indetermined based on the application of valuation techniques ~~Income~~contemplated ~~Statement~~within ~~(That~~SFAS IsNo. 157, ~~Gross~~which ~~versus~~specifies ~~Net~~a ~~Presentation)~~hierarchy of inputs to valuation techniques used to measure fair value.” The ~~Company~~levels ~~adopted~~of the ~~provisions~~hierarchy ~~of EITF~~are ~~06-3~~broadly ondefined ~~January~~ as follows: Level 1, ~~2007.~~— quoted ~~The~~prices ~~adoption~~for ofidentical ~~EITF~~assets ~~06-3~~or ~~did~~liabilities, ~~not~~Level ~~change~~2 ~~the~~— ~~Company’s~~quoted ~~method~~prices for similar assets or ~~reporting~~liabilities ~~taxes~~in ~~collected~~active ~~from~~markets, ~~customers~~quoted onprices afor ~~net~~identical ~~presentation~~or ~~basis~~similar assets or liabilities in markets ~~the~~that ~~consolidated~~are ~~statement~~not active, and model-based valuations in which significant inputs are ofcorroborated ~~operations~~by observable market data, and Level 3 — valuation techniques in which significant inputs are unobservable.

~~Reclassifications~~ The fair value of the Company’s money market fund, which is included in cash and cash equivalents on the consolidated balance sheet, is derived from quoted prices available in an active market. The Company has determined such input to be a Level 1 measurement as defined previously. The fair value of the Company’s derivative financial instrument discussed in Note 5 is derived from quotes from observable market data. The Company has determined such input to be a Level 2 measurement as defined previously.

~~Certain~~The ~~prior~~Company’s ~~period~~financial ~~amounts~~assets ~~have~~and ~~been~~liabilities ~~reclassified~~measured toat ~~conform~~fair tovalue ~~the~~on ~~current~~a ~~period presentation.~~recurring ~~Specifically, $1,942 was previously included in prepaid expenses and other current~~basis ~~assets~~subject into the ~~December 31,~~disclosure ~~2006~~requirements ~~consolidated~~of ~~balance~~SFAS ~~sheet, which has been reclassified to other receivables~~No. 157 ~~For~~at ~~additional information regarding other receivables~~June 30, ~~see~~2008 ~~Note~~were 9,as ~~Other~~follows: ~~Receivables.~~

3. Accounting for Stock-Based Compensation Expense


	Fair Value Measurements at June 30, 2008 Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Money market fund	$	8,100	$	—	$	—	$	8,100

Liabilities
Derivative	$	—	$	4,302	$	—	$	4,302

InRecent ~~2005,~~Accounting ~~the Company adopted the 2005 Incentive Compensation Plan (the “2005 Plan”). The 2005~~Pronouncements Plan provides for the issuance of incentive stock options, stock appreciation rights, restricted stock, stock units, stock granted as a bonus or in lieu of another award, dividend equivalents or other stock-based awards or performance awards to executives, employees, officers, directors, consultants and other persons who provide services to the Company. The total number of shares which remained available for grant under the 2005 Plan was 1,163 at March 31, 2007.

~~The~~In ~~Company~~December 2007, ~~reported~~the ~~stock-based~~FASB ~~compensation~~issued ~~expense~~SFAS ofNo. 141R, ~~$125~~“Business ~~and~~Combinations.” ~~$59~~SFAS ~~as a component of~~No. 141R ~~selling,~~establishes ~~general~~principles and ~~administrative~~requirements ~~expense~~for inhow the ~~Statement~~acquirer of ~~Operations~~a ~~for~~business ~~the~~recognizes ~~three~~and ~~months~~measures ~~ended~~in ~~March 31,~~its ~~2007~~financial ~~and~~statements ~~2006,~~the ~~respectively.~~identifiable Asassets ~~of March 31~~acquired, ~~2007,~~the ~~there~~liabilities ~~was~~assumed, ~~approximately~~and ~~$3,373~~any ofnoncontrolling ~~total~~interest ~~unrecognized~~in ~~compensation~~the ~~cost related to unvested share-based awards granted~~acquiree. The ~~unrecognized~~ ~~compensation~~statement ~~cost~~also isprovides ~~expected~~guidance tofor berecognizing ~~recognized over a weighted-average period of~~and ~~approximately 3 years.~~

In March 2007, the Company granted restricted stock unit awards for an aggregate of 76 shares of common stock. Half of the awards provide for delivery of all of the underlying common stock on the third anniversary of their grant date, contingent upon continued employment of the holders of the restricted stock units. The remaining 38 are performance-based awards, all of which will vest upon the achievement of certain financial performance goals. If the performance goals are met, the awards provide for delivery on the third anniversary of the grant date. Delivery is contingent upon the Company’s continued employment of the holders of the restricted stock units. As the performance condition was determined to be probable of achievement, the Company began recognizing compensation expense on the date of grant.

Stock options issued under the 2005 Plan are exercisable at various dates and will expire no more than ten years from their date of grant. The exercise price of each option is equal to the fair market value of the Company’s stock on the date of grant. In March 2007, the Company granted an aggregate of 368 options. As of March 31, 2007, there were options for an aggregate of 473 shares outstanding under the 2005 Plan. No options have been exercised or forfeited during 2007. The outstanding options have a weighted-average exercise price of $10.42, have a weighted-average remaining contractual term of 7.57 years, and had an aggregate intrinsic value of $0 at March 31, 2007.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

4measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ~~Net~~SFAS ~~Income~~No. 141R ~~(Loss)~~is ~~Per~~effective ~~Common~~for ~~Share~~financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. The Company does not expect that SFAS No. 141R will have a material impact on its previous acquisitions. The impact on the Company’s consolidated financial statements will depend upon the nature, terms, and size of acquisitions consummated after the effective date.

~~Basic~~In ~~net income (loss)~~March ~~per~~2008, ~~common~~the ~~share~~FASB ~~(“EPS”)~~issued isSFAS ~~calculated~~No. 161, by“Disclosures ~~dividing~~about ~~net~~Derivative ~~income~~Instruments ~~(loss)~~and ~~available~~Hedging toActivities,” ~~common~~an ~~shareholders~~amendment ~~by the weighted-average number~~ of ~~common~~SFAS ~~shares~~No. 133. ~~outstanding~~SFAS ~~for the~~No. 161 ~~period,~~requires ~~without~~disclosures ~~consideration~~ of ~~potential~~how ~~common~~and why ~~stock.~~an ~~Vested~~entity ~~restricted~~uses ~~stock~~derivative ~~units~~instruments, ~~have been~~how ~~treated~~derivative asinstruments ~~outstanding~~and ~~shares~~related ofhedged ~~common~~items ~~stock~~are accounted for, ~~purposes of basic~~ and ~~diluted~~how ~~earnings~~derivative ~~per share.~~instruments ~~Unvested~~and ~~restricted~~related ~~stock~~hedged ~~units~~items ~~that~~affect ~~are~~an ~~not~~entity’s ~~subject~~financial position, tofinancial performance, ~~conditions~~and ~~are~~cash ~~included in~~flows. ~~diluted~~SFAS ~~EPS using the treasury stock method~~No. 161 ~~Unvested~~is ~~restricted~~effective ~~stock~~for ~~units~~fiscal ~~that are subject to~~years ~~performance~~beginning ~~conditions~~after ~~are~~November 15, ~~included~~2008, inwith ~~diluted~~early ~~EPS~~adoption ~~using~~permitted. ~~the~~The ~~treasury~~Company ~~stock~~is ~~method~~currently evaluating ~~when~~the itimpact ~~is probable~~of ~~that~~SFAS ~~the~~No. 161 ~~performance~~on ~~conditions~~its ~~will~~consolidated befinancial ~~achieved~~statements.

~~The~~In ~~Company~~April 2008, ~~has~~the ~~excluded~~FASB ~~options~~issued ~~and~~FSP ~~restricted~~No. FAS ~~stock~~142-3, ~~units~~“Determination ~~for~~of anthe ~~aggregate~~Useful Life of Intangible ~~203~~Assets.” ~~and~~FSP 50No. FAS 142-3 amends the factors that should be considered in developing ~~shares~~renewal ~~from~~or extension assumptions used to determine the ~~calculation~~useful life of ~~diluted~~a ~~net~~recognized ~~income~~intangible ~~(loss)~~asset under SFAS No. ~~per~~142, ~~common~~“Goodwill ~~share~~and ~~for~~Other Intangible Assets,” in order to improve the ~~three~~consistency between ~~months~~the useful life of a recognized intangible asset under SFAS ~~ended~~No. 142 ~~March~~and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 31141R and other GAAP. FSP No. FAS 142-3 applies to all intangible assets, ~~2007~~whether ~~and~~acquired ~~2006~~in a business combination or otherwise, and ~~respectively~~will be effective for financial statements issued for fiscal years beginning after December 15, 2008, ~~because~~and interim periods within those fiscal years. The guidance for determining the ~~effect~~useful life of ~~their~~intangible ~~inclusion~~assets ~~would~~will be applied prospectively to intangible assets acquired after the ~~antidilutive~~effective date. The disclosure requirements apply prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is prohibited. The Company is currently evaluating this guidance but does not expect it to have a significant impact on the Company’s consolidated financial statements.

53. ~~Other~~Warranty ~~Comprehensive Income (Loss)~~Liability

~~Comprehensive~~The ~~income~~Company ~~(loss)~~records a reserve for product warranties at the time revenue is recognized. The Company offers warranties of various lengths depending upon the specific product. Where applicable, the Company returns to the manufacturer or receives credit from the manufacturer for defective security and entertainment products to the extent that it cannot repair or resell the refurbished product. Pursuant to the Company’s amended agreement with SIRIUS, the Company has the right to return defective satellite radio products to SIRIUS. The Company records an estimate for warranty related costs based upon historical product warranty return rates, materials usage, and service delivery costs incurred in correcting the product where applicable. During the three and six months ended June ~~consisted~~30, 2007, for both security and entertainment and satellite radio products, and during the three and six months ended June 30, 2008 for security and entertainment products, the estimate for warranty related costs was recorded in cost of sales. Should actual product warranty return rates, materials usage, or service delivery costs differ from the ~~following:~~historical rates, revisions to the estimated warranty reserve would be required. The warranty reserve is included in accrued liabilities on the consolidated balance sheet.

	Three Months
	Ended March 31,
	2007			2006
Net income (loss)	$	(2,768	)	$	3,997
Other comprehensive income (loss):
Foreign currency translation effects, net of tax		(36	)		(94	)
Unrealized losses on interest rate swap, net of tax		(500	)		—
Comprehensive income (loss)	$	(3,304	)	$	3,903

The following is a summary of the changes to the balance of the warranty reserve:

Components of accumulated other comprehensive income (loss) consisted of the following:


	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
Beginning balance	$	4,711		$	4,854		$	4,248		$	8,631
Increases in reserve		901			1,970			2,590			3,872
Decrease charged against reserve		(1,058	)		(2,471	)		(2,284	)		(8,150	)

Ending balance	$	4,554		$	4,353		$	4,554		$	4,353

	March 31,			December 31,
	2007			2006
Foreign currency translation effects, net of tax	$	199		$	235
Unrealized gains (losses) on interest rate swap, net of tax		(500	)		—
Accumulated other comprehensive income (loss)	$	(301	)	$	235

4. Other Comprehensive Income (Loss)

6. Warranty Liability

The Company records a reserve for product warranties at the time revenue is recognized. The Company estimates warranty obligations by reference to historical product warranty return rates, materials usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, materials usage or service delivery costs differ from the historical rates, revisions to the estimated warranty reserve would be required.

Changes in the warranty reserve during the three months ended March 31, 2007 and 2006 were as follows:

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

	Three Months
	Ended March 31,
	2007			2006
Beginning balance	$	8,631		$	7,412
Charged to cost of sales		1,902			3,485
Warranty claims		(5,679	)		(5,838	)
Ending balance	$	4,854		$	5,059

Comprehensive income (loss) consisted of the following:

The warranty reserve is included in accrued liabilities.


	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2008		2007		2008			2007
Net income (loss)	$	1,020	$	11	$	(583	)	$	(2,757	)
Other comprehensive income (loss):
Foreign currency translation effects		201		1,164		(951	)		1,128
Unrealized gain (loss) on interest rate swap, net of tax		1,900		947		(69	)		447

Comprehensive income (loss)	$	3,121	$	2,122	$	(1,603	)	$	(1,182	)

7. Components ~~Income~~of ~~Taxes~~accumulated other comprehensive income consisted of the following:

The Company’s current estimated annual effective income tax rate that has been applied to normal, recurring operations for the three-months ended March 31, 2007 is 38.6%. After consideration of discrete items, the Company’s effective income tax benefit rate was 35.0% for the three months ended March 31, 2007.


	June 30,			December 31,
	2008			2007
Foreign currency translation effects	$	2,837		$	3,788
Unrealized loss on interest rate swap, net of tax		(2,600	)		(2,531	)

Accumulated other comprehensive income	$	237		$	1,257

~~On January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes~~5.~~” As~~ aDerivative ~~result~~Instruments ofand ~~the~~Hedging ~~implementation of FIN 48, the Company recognized a $541 decrease to reserves for~~Activities uncertain tax positions. This decrease was accounted for as an adjustment to the beginning balance of retained earnings. At the adoption date of January 1, 2007, the Company had $876 of unrecognized tax benefits, all of which would impact its effective income tax rate if recognized. The Company does not expect material changes in its unrecognized tax benefits over the next 12 months.

~~The~~In 2007, the Company isentered ~~subject~~into totwo ~~U.S.~~interest ~~federal~~rate ~~income~~swap ~~tax~~agreements aswith ~~well~~three-year terms, combined as ~~income~~one ~~tax~~hedging ofinstrument ~~Canada,~~ (the ~~United~~“derivative contract” or “interest rate swap”). Under the ~~Kingdom~~agreements, ~~Hong~~floating ~~Kong~~rate interest payments on $153,000 ~~and~~of ~~multiple~~the ~~state~~Company’s ~~jurisdictions~~senior credit facility were swapped for a fixed rate interest payment at a rate of 5.04%. The ~~tax~~Company ~~years~~entered ~~2002~~into ~~through~~this derivative ~~2006~~contract ~~remain~~to ~~open~~ manage its exposure to ~~examination~~interest rate changes by ~~some~~achieving ora ~~all~~desired proportion of ~~the~~fixed ~~major~~rate ~~taxing~~versus ~~jurisdictions~~variable rate debt and to ~~which~~ ~~the~~comply with covenant requirements of the Company’s issenior ~~subject~~credit facility.

~~The~~For ~~Company’s~~the ~~continuing~~three ~~practice~~and issix tomonths ~~recognize~~ended June 30, 2008 and 2007, the interest rate swap was highly effective, as defined by SFAS No. 133, “Accounting for Derivative Instruments and ~~penalties~~Hedging Activities”, in offsetting cash flows of the hedged item and, thus, there is no impact on earnings due to hedge ineffectiveness. The fair value of the derivative contract at inception was zero. The Company records the derivative contract on its consolidated balance sheet at its fair value. The Company classifies the portion of the fair value that is related to ~~income~~cash ~~tax~~flows that are expected to ~~matters~~occur inwithin ~~income~~the ~~tax~~next ~~expense~~12 months as current with the remaining amount classified as non-current. The fair ~~Company~~value ~~had~~of ~~$499~~the ~~accrued~~derivative ~~for~~contract ~~interest~~as ~~and~~of June 30, 2008 was a liability of $~~184~~4,302, ~~accrued~~of ~~for~~which ~~penalties~~$3,236 was recorded as ~~January~~a current liability. The fair value of the derivative contract as of December 131, 2007 was a liability of $4,189, of which $1,848 was recorded as a current liability.

8. The ~~Derivative~~amount ~~Instruments~~recorded ~~and~~in ~~Hedging~~accumulated ~~Activities~~other comprehensive income related to cash flow hedging instruments was as follows:

Effective January 4, 2007, the Company entered into two interest rate swap agreements with three-year terms, combined as one hedging instrument (the “derivative contract” or “interest rate swap”). Under the agreements, floating rate interest payments on $153,000 of the Company’s senior credit facility were swapped for a fixed rate interest payment at a rate of 5.04% plus a 2.50% margin. The Company entered into this derivative contract to manage its exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt and to comply with covenant requirements of the Company’s senior credit facility.


	June 30,			December 31,
	2008			2007
Beginning balance	$	(2,531	)	$	—
Changes in fair value of derivatives		(114	)		(4,189	)
Deferred income tax provision		45			1,658

Ending balance	$	(2,600	)	$	(2,531	)

~~For the three months ended March 31, 2007, the swap was 100% effective in offsetting cash flows of the hedged item and, thus, there is no impact on earnings due to hedge ineffectiveness~~6. ~~The~~ fair value of the swap at inception was zero. The Company records the derivative on its consolidated balance sheet at its fair value. The Company classifies the portion of the fair value that is related to cash flows that are expected to occur within the next 12 months as current with the remaining amount classified as nonStock-~~current.~~Based ~~The fair value of the swap agreement as of March~~Compensation ~~31, 2007 was a net liability of $813, of which $143 was recorded in other current assets and $956 was recorded in other liabilities on the consolidated balance sheet.~~

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

The ~~amount~~Company’s ~~recorded~~2005 Incentive Compensation Plan (“the 2005 Plan”) provides for the issuance of incentive stock options, stock appreciation rights, restricted stock, stock units, stock granted as a bonus or in ~~accumulated~~lieu of another award, dividend equivalents or other ~~comprehensive~~stock-based ~~income~~awards ~~(loss) related~~or performance awards to ~~cash~~executives, ~~flow~~employees, officers, directors, consultants, and other persons ~~hedging~~who ~~instruments~~provide ~~was~~services asto ~~follows:~~the Company. As of June 30, 2008, 2,140 shares remained available for grant under the 2005 Plan. At the Company’s Annual Meeting of Shareholders held on June 19, 2008, the Company’s shareholders approved an increase in the maximum number of shares of common stock available for issuance in connection with awards by 2,000 shares from 2,750 to 4,750.

	Three Months
	Ended
	March 31, 2007
Beginning balance	$	—
Changes in fair value of derivatives		(813	)
Deferred income tax benefit		313
Ending balance	$	(500	)

The Company reported stock-based compensation expense of $326 and $290 as a component of selling, general, and administrative expense in the consolidated statements of operations for the three months ended June 30, 2008 and 2007, respectively. The Company reported stock-based compensation expense of $629 and $415 as a component of selling, general, and administrative expense in the consolidated statements of operations for the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, there was approximately $2,633 of total unrecognized compensation cost related to unvested share-based awards granted. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately two years.

9 Stock options issued under the 2005 Plan are exercisable at various dates and will expire no more than ten years from their date of grant. ~~Other~~The ~~Receivables~~exercise price of each option is equal to the price of the Company’s stock on the date of grant. In the second quarter of 2008, the Company granted an aggregate of 65 options which have a weighted average grant date fair value of $0.76 per share. As of June 30, 2008, there were options for an aggregate of 1,865 shares outstanding under the 2005 Plan. No options were exercised or forfeited during the three months ended June 30, 2008. Outstanding options as of June 30, 2008 had a weighted-average exercise price of $3.61 per share, had a weighted-average remaining contractual term of approximately 7 years, and had an aggregate intrinsic value of $388. An aggregate of 150 of the outstanding options were exercisable at June 30, 2008. The exercisable options had a weighted-average exercise price of $11.44 and had an aggregate intrinsic value of $0.

~~A portion of the Company’s SIRIUS product inventory is subject to an agreement that permits the Company to sell qualifying product at its carrying cost to SIRUIS~~7. ~~Under~~Net ~~this~~Income ~~inventory protection~~(Loss) ~~arrangement,~~Per ~~the~~Common ~~Company had an aggregate receivable of $27,215 and $0 as of March 31,~~Share ~~2007 and December 31, 2006, respectively.~~

~~From~~Basic ~~time~~net toincome ~~time,~~(loss) per ~~SIRIUS~~common ~~will~~share ~~provide~~(“EPS”) ~~price~~is ~~protection~~calculated toby dividing net income (loss) by the ~~Company~~weighted-average number of common shares outstanding for ~~inventory~~the period, without consideration ~~purchased.~~of ~~Under~~potential ~~these~~common ~~price~~stock. ~~protection~~Vested ~~arrangements,~~restricted ~~the~~stock ~~Company~~units ~~had~~have anbeen ~~aggregate~~treated ~~receivable~~as ~~from SIRIUS~~outstanding shares of ~~$8,976~~common ~~and~~stock ~~$1,942~~for aspurposes of ~~March 31,~~calculating ~~2007~~basic and ~~December 31,~~diluted ~~2006,~~EPS. ~~respectively~~Unvested restricted stock units that are not subject to performance conditions are included in diluted EPS using the treasury stock method. Unvested restricted stock units that are subject to performance conditions are included in diluted EPS using the treasury stock method when it is probable that the performance conditions will be achieved.

10 The Company has excluded options and restricted stock units for an aggregate of 651 and 542 shares from the calculation of diluted net income (loss) per common share for the three months ended June 30, 2008 and 2007, respectively, because the effect of their inclusion would be antidilutive. ~~Related~~The ~~Parties~~Company has excluded options and restricted stock units for an aggregate of 697 and 375 shares from the calculation of diluted net income (loss) per common share for the six months ended June 30, 2008 and 2007, respectively, because the effect of their inclusion would be antidilutive.

~~Under~~8. anIncome ~~operating lease agreement for its primary distribution facility and corporate~~Taxes ~~headquarters, the Company paid a company owned by a Board member and shareholder $576 and $400 during the three months ended March 31, 2007 and 2006, respectively.~~

~~Polk,~~The aCompany’s ~~wholly~~current ~~owned~~estimated ~~subsidiary~~annual ofeffective income tax rate that has been applied to normal, recurring operations for the ~~Company~~six months ended June 30, 2008 is ~~obligated~~37.7%. ~~under~~The Company’s ~~two~~effective ~~operating~~income ~~leases~~tax expense rate was 55.9% and 277.2% for the three and six months ended ~~its~~June 30, ~~primary~~2008, ~~distribution~~respectively. ~~facility~~The effective tax rate for both the three and ~~office~~six ~~facility~~months ~~with~~ended ~~two~~June 30, ~~separate~~2008 ~~partnerships~~differed ~~comprised~~from the Company’s estimated annual effective tax rate due to the impact of ~~shareholders~~discrete ofitems on the Company’s income before the provision for income taxes. ~~The~~These ~~Company~~discrete ~~paid~~items ~~rentals~~primarily related to shortfalls on restricted stock units delivered during the ~~partnerships~~first and second quarters of ~~$433~~2008. ~~and~~The $0shortfalls occur ~~during~~when the ~~three~~ ~~months~~actual ~~ended~~tax ~~March 31,~~deduction ~~2007~~realized ~~and~~is ~~2006,~~less ~~respectively~~than the previously recognized compensation expense related to the restricted stock units.

11 On January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes.” As ~~Litigation~~a result of the implementation of FIN 48, the Company recognized a $541 decrease to reserves for uncertain tax positions. This decrease was

The Company has been named as a defendant in a lawsuit asserting patent infringement. Specifically, the plaintiff alleged that certain of the Company’s products infringe certain of the plaintiff’s patents. The plaintiff sought both an injunction and unspecified monetary damages, as well as exemplary damages, attorneys’ fees, and costs. A jury trial began January 26, 2007 and concluded February 12, 2007. A jury verdict was handed down finding the asserted patents were infringed and damages to the plaintiff were found to be $615, which was accrued as of December 31, 2006. On April 4, 2007, the trial court enhanced the damages for a total award of $1.8 million. The trial court also awarded attorney’s fees to the plaintiff and granted a permanent injunction that prohibits the Company from making, using, or selling any products that infringe on the plaintiff’s patents and requires the Company to recall and destroy any of its infringing products that are in the inventory of its retailer customers. The Company is currently examining its options with respect to this litigation, including various avenues of appeal from the trial court’s decision, and does not believe that its obligations to pay damages and attorneys fees will have a material adverse effect on its business or financial condition. The Company has increased the accrual related to the judgment on this case by $4,385 during the current quarter, bringing the aggregate amount accrued to $5,000 as of March 31, 2007. Additionally, the Company incurred legal fees of approximately $1,109 in defending the case during the three months ended March 31, 2007.

~~DIRECTED~~DEI ~~ELECTRONICS~~HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~MARCH~~JUNE 3130, ~~2007~~2008 (Unaudited and in thousands, except per share amounts)

~~The~~accounted ~~Company~~for ~~has been named~~ as aan ~~defendant~~adjustment into athe ~~lawsuit~~beginning ~~alleging restraint~~ balance of ~~trade, monopolization,~~retained ~~tortious interference with contracts, anticompetitive practices and unfair competition~~earnings. ~~The~~At ~~plaintiff is seeking unspecified damages, including punitive damages, as well as attorneys’ fees, and costs. The Company filed a motion to dismiss~~ the ~~case~~adoption ~~and~~date onof ~~April~~January 101, 2007 ~~the~~, ~~Court handed down a ruling dismissing all claims except~~ the ~~claim~~Company ~~for~~had ~~tortious~~$876 ~~interference with contracts. Although the ultimate outcome~~ of ~~this matter is not currently determinable, the~~ ~~Company~~unrecognized ~~believes~~tax ~~that it has meritorious defense to this allegation~~benefits, ~~intends~~all toof ~~vigorously~~which ~~defend the~~would ~~case, and does not expect this litigation to materially~~ impact its ~~business,~~effective ~~results~~income ~~of operations,~~tax orrate ~~financial~~if ~~condition~~recognized. At ~~However~~December 31, ~~there~~2007 ~~can~~and beJune 30, no2008, ~~assurance that~~ the Company ~~will prevail~~had in$2,057 ~~this~~of ~~litigation~~unrecognized ortax ~~that~~benefits, ~~the ultimate resolution~~ most of ~~this~~which ~~matter~~would ~~will~~impact ~~not~~its ~~have~~effective aincome ~~material adverse~~tax ~~effect~~rate onif ~~the Company’s results of operations~~recognized.

InThe ~~2006,~~Company aexpects ~~manufacturer~~the ofchange in the ~~Company’s~~FIN ~~products~~48 ~~was~~liability ~~named~~for asunrecognized atax ~~defendant~~benefits into ~~a lawsuit~~be ~~alleging~~less ~~patent~~than ~~infringement. Specifically~~$1,000 ~~the~~in ~~plaintiff alleged that certain of~~ the ~~Company’s products~~next ~~infringed~~12 months onand ~~certain~~does ofnot expect the ~~plaintiff’s~~changes ~~patents.~~to ~~The~~materially ~~plaintiff~~affect ~~sought an injunction,~~its ~~payment~~operating ~~for~~results ~~past~~or ~~damages,~~financial ~~and~~position. ~~destruction~~The ofCompany ~~all~~is ~~tooling~~subject ~~and means~~ to ~~manufacture the product~~U.S. ~~The Company’s~~federal ~~manufacturer~~income ~~sought~~tax ~~full~~as ~~indemnification~~well as ofincome ~~all~~tax ~~legal~~in ~~expenses~~Canada, ~~and~~the ~~any~~United ~~damages~~Kingdom, ~~that~~Hong ~~may be~~Kong, ~~awarded~~and tomultiple ~~the~~state ~~plaintiff~~jurisdictions. The ~~Company~~2004 through ~~assumed~~2006 ~~the~~tax ~~defense~~years inremain ~~this~~open ~~matter.~~to Onexamination ~~April 10,~~by ~~2007,~~major ~~the plaintiff~~taxing ~~withdrew~~jurisdictions ~~the~~to ~~case.~~which Itthe Company is ~~uncertain whether the case will be re-filed~~subject.

~~From~~The ~~time~~Company’s tocontinuing ~~time,~~practice ~~the Company~~ is ~~involved~~to inrecognize ~~other~~interest ~~litigation~~ and ~~proceedings~~penalties inrelated ~~the~~to ~~ordinary~~uncertain ~~course~~tax ofpositions ~~its~~in ~~business.~~income ~~Except~~tax asexpense. ~~described~~Accrued ~~above,~~interest ~~the~~and ~~Company~~penalties isrelated ~~not~~to ~~currently~~uncertain ~~involved in any~~tax ~~legal~~positions ~~proceedings~~as ~~that~~of itJune 30, ~~believes~~2008 ~~would~~and ~~have~~December 31, a2007 ~~material~~was ~~adverse~~$808 ~~effect~~and on$718, ~~its business or financial condition~~respectively.

9. Related Parties

Under an operating lease agreement for one of its distribution facilities and corporate headquarters, the Company made cash payments to a company owned by a Board member and shareholder of $633 and $496 during the three months ended June 30, 2008 and 2007, respectively. Under the operating lease agreement, the Company paid $1,112 and $1,073 during the six months ended June 30, 2008 and 2007, respectively.

10. Commitments and Contingencies

From time to time, the Company is involved in litigation and proceedings in the ordinary course of its business. The Company is not currently involved in any legal proceedings that it believes would have a material adverse effect on its business or financial condition.

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

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions,. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006, and elsewhere in this report~~2007.

Overview

Headquartered in Southern California, we are the parent company of some of the most respected brands in the consumer electronics industry. We are the largest designer and marketer in North America of premium home theater loudspeakers (sold under the Polk Audio® and Definitive Technology® brand names), ~~consumer~~and consumer-branded vehicle security, and ~~vehicle~~ remote start ~~and convenience~~ systems, ~~and~~(sold under the ~~largest~~Viper®, ~~supplier~~Clifford®, ofPython®, ~~aftermarket satellite radio receivers~~Autostart®, ~~based~~and ~~upon~~other ~~sales~~brand names). We are also athe ~~major~~largest aftermarket supplier of ~~mobile~~SIRIUS ~~audio~~satellite radios and ~~video~~accessories, ~~systems~~ and ~~have~~a ~~exclusive~~supplier ~~rights~~of tomobile audio ~~market~~sold ~~and~~principally ~~sell certain~~under ~~SIRIUS-branded~~both ~~satellite~~the ~~radio~~Polk ~~receivers~~Audio and ~~accessories~~Orion tobrand ~~our existing U~~names.S. ~~retailer customer base.~~ We ~~sell~~market our broad portfolio of products through ~~numerous~~many channels, including ~~independent~~leading national retailers and specialty ~~retailers,~~chains ~~national~~throughout ~~and~~North ~~regional~~America ~~electronics~~and ~~chains,~~around ~~mass~~the ~~merchants,~~world. ~~automotive~~Founded ~~parts~~in ~~retailers~~1982, ~~and~~ ~~car~~we ~~dealers.~~have Weapproximately ~~also~~470 employees ~~sell~~and ~~our~~operations ~~products~~in ~~internationally~~California, ~~primarily~~Maryland, ~~through~~Canada, ~~independent distributors~~Europe, and ~~our foreign subsidiaries~~Asia.

We ~~have~~outsource ~~grown~~all of our ~~business~~manufacturing ~~both~~activities ~~organically~~to ~~and~~third ~~through~~parties ~~acquisitions.~~located ~~Our~~primarily ~~expansion has resulted~~ in ~~diversifying our product offerings, distribution channels, and base of contract manufacturers~~Asia. Our Wecosts ~~expanded~~are ~~our~~largely ~~business~~driven by ~~entering~~the ~~into~~prices annegotiated ~~arrangement~~ with ~~SIRIUS~~our ~~Satellite~~suppliers. ~~Radio in~~Our ~~2004~~expenses toare ~~sell~~also impacted ~~and~~by ~~market~~such ~~SIRIUS-branded~~items ~~satellite~~as ~~radio products~~personnel, ~~thus~~sales ~~increasing our penetration of national electronics retailers~~ and ~~further~~marketing, ~~diversifying our product mix. During 2006~~distribution, ~~we expanded our security~~ and ~~entertainment~~occupancy ~~product sales through acquisitions~~costs.

WeCritical ~~outsource~~Accounting ~~all~~Policies of our manufacturing activities to third parties located primarily in Asia. Our costs are largely driven by the prices we negotiate with our suppliers. Our expenses are also impacted by such items as personnel, sales and ~~marketing, distribution, and occupancy costs.~~Estimates

~~Results~~ Our discussion and analysis of ~~Operations~~our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States. During preparation of these consolidated financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, inventories, long-lived assets, goodwill and other intangible assets, warranties, income taxes, and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

~~The~~In ~~following~~addition ~~table~~to ~~sets~~those ~~forth,~~described in Item 7 of our Annual Report on Form 10-K for the ~~periods~~year ~~indicated~~ended December 31, 2007, we believe the ~~percentage~~following ofcritical ~~net~~accounting ~~sales~~policies ofaffect ~~certain~~our more ~~items~~significant judgments and estimates used in the preparation of our ~~financial~~consolidated financial statements: as of and for the three and six months ended June 30, 2008.

	Three Months Ended
	March 31,
	2007			2006
Net sales		100.0	%		100.0	%
Cost of sales		59.4	%		69.4	%
Gross profit		40.6	%		30.6	%
Total operating expenses		37.1	%		18.4	%
Income from operations		3.5	%		12.2	%
Interest expense, net		8.9	%		4.4	%
Income (loss) before provision for (benefit from) income taxes		(5.4	)%		7.8	%
Provision for (benefit from) income taxes		(1.9	)%		2.5	%
Net income (loss)		(3.5	)%		5.3	%

Revenue Recognition

~~Net~~Pursuant ~~sales~~to ~~that~~our ~~represent~~April 2005 ~~gross~~agreement ~~product~~with ~~sales~~SIRIUS, as amended in July and November 2007, we have exclusive rights to ~~customers~~market ~~less~~and ~~rebates~~sell certain SIRIUS-branded satellite radio receivers and accessories ~~payment~~to our existing U.S. retailer customer base. We recognize these revenues in accordance ~~discounts~~with SEC Staff Accounting Bulletin No. 104, ~~plus~~“Revenue ~~royalty~~Recognition in Financial Statements” and ~~other~~EITF Issue ~~revenue~~No. 99-19, We“Reporting doRevenue ~~not~~Gross ~~allocate~~as ~~these~~a ~~rebate~~Principal versus Net as an Agent”. The November 2007 amendment, which was effective as of January 1, 2008, provides for or ~~payment~~amends ~~discounts~~existing toterms ~~specific~~relating to product ~~categories.~~sourcing Asand apricing, ~~result~~product returns, and product warranties. We further amended our agreement with SIRIUS in April 2008 to extend the ~~discussion~~term ~~below~~of the agreement through January 2009. Prior to the effective date of the November 2007 amendment, we ~~discuss~~accounted ~~gross~~for the proceeds received for sales byof SIRIUS-related hardware products as revenue on a gross basis, as we ~~product~~determined ~~category~~that we were the principal in the transaction. The ~~following~~November 2007 ~~table~~amendment significantly ~~sets~~reduced ~~forth~~ our ~~gross~~exposure to economic losses resulting from inventory obsolescence, sales returns, and the fulfillment of warranty obligations related to satellite radio products. In exchange for SIRIUS bearing these risks, we have agreed to a reduced inventory margin, as defined in the agreement, on sales of satellite radio products. Accordingly, we have determined that we are no longer the principal in the transaction and, starting on January 1, 2008, satellite radio revenues are reported on a net basis based on the gross amounts billed to customers less (i) amounts paid to suppliers, (ii) rebates and discounts, and (iii) other direct costs. In accordance with SFAS No. 154, “Accounting Changes and Error Corrections”, we have not recast prior period satellite radio sales ~~information:~~to conform with the current period’s presentation as the change in presentation is not the result of a change in

	Three Months Ended
	March 31,
	2007			2006
Gross security and entertainment sales	$	64,732		$	39,234
Gross satellite radio sales		15,431			36,277
Rebate/payment discount		(3,329	)		(2,245	)
Net product sales		76,834			73,266
Royalty and other revenues		1,099			1,035
Net sales	$	77,933		$	74,301

accounting principle but the application of the same principle to new facts and circumstances that are different from those prior to January 1, 2008. For the three months ended June 30, 2008, gross billings, net of rebates, and costs for satellite radio products were $20.7 million and $16.2 million, respectively. For the six months ended June 30, 2008, gross billings, net of rebates, and costs for satellite radio products were $38.3 million and $31.0 million, respectively.

~~Three~~Restructuring ~~Months~~Activities ~~Ended~~and ~~March 31,~~Other ~~2007~~Business ~~Compared to Three Months Ended March 31, 2006~~Developments

During 2008, we initiated a number of restructuring activities in order to achieve our goal of identifying and reducing costs on a company-wide basis. As previously announced, we retained an operations efficiency improvement consultant to assist us in developing a plan that we expect to result in cost savings of approximately $2 million in 2008 and $5 million on an annualized basis consisting of improvements in operating efficiency and staff reductions. Also included in this plan, we have integrated our four 2006 and 2007 Canadian acquisitions into one company in order to gain efficiencies and cost savings and have decided to change our distribution strategy in the European market by ceasing operations at our branch in the United Kingdom and entering into an international distribution agreement with a leading European distributor of consumer electronics. We incurred approximately $0.4 million and $0.8 million of restructuring and restructuring-related costs during the three and six months ended June 30, 2008, respectively, consisting primarily of severance pay and consulting fees. As of June 30, 2008, $0.1 million of these expenses remained unpaid and are included in accrued liabilities on our consolidated balance sheet. We expect to incur approximately $0.9 million of additional restructuring and restructuring-related costs during the second half of 2008.

We have also decided to exit the mobile video product category. The decision was based on the continued weakness in this lower margin category, increased OEM competition, and the desire to focus attention on higher margin product categories. We are currently in the process of selling through our existing inventory and expect to be fully exited from the category by the end of 2008. Although we expect that sales in this category will continue to decline, due to the relatively lower margins than our other security and entertainment products, we do not expect to incur a material impact on our operating results, cash flows, or financial position.

Results of Operations

As discussed in “Critical Accounting Policies and Estimates” above, beginning in the first quarter of 2008, we reported satellite radio sales on a net basis in accordance with EITF 99-19. In accordance with SFAS No. 154, “Accounting Changes and Error Corrections”, we have not recast prior period satellite radio sales as the change in presentation is not considered a change in accounting principle but is the application of the same principle to facts and circumstances that are different from those prior to January 1, 2008. For comparison and discussion purposes, we provide sales and cost information on a gross basis for the three and six months ended June 30, 2008 in the tables below. Although not in accordance with generally accepted accounting principles in the United States (GAAP), we believe this information is informative as to the level of our satellite radio business, provides increased transparency, and presents our satellite radio sales on a basis comparable to prior periods and to our security and entertainment sales. The tables below present reconciliations of non-GAAP gross sales to net sales for the three and six months ended June 30, 2008.

Three Months Ended June 30, 2008 Compared with the Three Months Ended June 30, 2007


	As Reported			Reclassification		Non-GAAP			As Reported
	Three Months Ended			Three Months Ended		Three Months Ended
	June 30,			June 30,		June 30,
	2008			2008		2008			2007
Sales:
Security and entertainment product sales, net	$	50,974		$	—	$	50,974		$	57,912
Satellite radio product sales, net		4,543			16,168		20,711			27,722

Net product sales		55,517			16,168		71,685			85,634

Royalty and other revenues related to security and entertainment products		3,335			—		3,335			984
Other revenues related to satellite radio products		21			—		21			112

Royalty and other revenues		3,356			—		3,356			1,096

Net sales	$	58,873		$	16,168	$	75,041		$	86,730

Cost of sales:
Cost of security and entertainment sales		27,331			—		27,331			34,052
Cost of satellite radio sales		—			16,168		16,168			24,299

Total cost of sales	$	27,331		$	16,168	$	43,499		$	58,351


Security and entertainment gross profit, including royalty and other revenue	$	26,978			—	$	26,978		$	24,844
Satellite radio gross profit, including other revenue		4,564			—		4,564			3,535

Consolidated gross profit	$	31,542		$	—	$	31,542		$	28,379


Security and entertainment gross profit margin		49.7	%		—		49.7	%		42.2	%
Satellite radio gross profit margin		—			—		22.0	%		12.7	%
Consolidated gross profit margin		53.6	%		—		42.0	%		32.7	%

Net Sales

~~Our~~Prior ~~net~~to ~~sales~~the ~~increased approximately~~second ~~$3.6 million,~~quarter orof ~~4.8%~~2007, ~~to $77.9 million~~ for ~~the~~customers ~~three months~~that ~~ended~~did ~~March 31,~~not ~~2007~~arrange ~~compared with $74.3 million~~ for ~~the~~their ~~three~~own shipping, ~~months~~we ~~ended~~recognized ~~March 31,~~revenue ~~2006. The~~upon ~~increase~~delivery ~~was~~to ~~driven~~the bycustomer aas ~~65.1%~~we ~~increase~~held inoutbound ~~security~~shipping insurance and ~~entertainment~~it ~~product~~was ~~sales~~determined ~~resulting primarily~~that ~~from~~the ~~our~~risk ~~acquisition~~ of ~~Polk~~ownership inhad ~~September 2006.~~not ~~Within~~transferred to the ~~security and entertainment~~customer ~~category,~~until the ~~Polk~~product ~~impact on sales~~ was ~~partially offset by lower mobile audio and mobile video product sales due to industry-wide softness in these two categories~~delivered. ~~Satellite~~As ~~radio~~of ~~product sales decreased by approximately $20.9~~June ~~million~~30, ~~or 57.6%~~2007, towe ~~$15.4 million~~no ~~for~~longer ~~the~~insured ~~three~~our ~~months~~shipments. ~~ended March 31~~Rather, all ~~2007~~products ~~compared~~shipped ~~with~~were ~~$36.3 million~~insured ~~for~~by the ~~three~~customer. ~~months ended March 31~~Accordingly, ~~2006. The decrease was primarily due to reduced demand~~ during the ~~first~~second quarter of 2007, for ~~from~~customers ~~the~~with ~~residual~~FOB ~~effect~~shipping ~~of the~~point ~~slower~~terms, ~~than~~we ~~expected~~began ~~sell-through~~to ofrecognize ~~SIRIUS~~revenue ~~products~~at ~~during~~ the ~~2006~~time ~~holiday~~of ~~season and to~~shipment. ~~possible~~Due ~~consumer uncertainty related~~ to ~~the~~this ~~proposed~~change, ~~business~~net ~~combination~~revenues ~~between~~during ~~SIRIUS~~the ~~and~~second ~~XM Radio.~~quarter ~~Additionally,~~of ~~reported~~2007 ~~sales~~included ~~were~~a ~~decreased~~one-time ~~during~~increase ~~the quarter by~~ of approximately $43.02 million ~~to reflect the amounts that we will reimburse our customers related to voluntary price reductions on certain SIRIUS products~~. ~~In turn, have received price reductions from SIRIUS related to these~~ ~~products.~~

Effective January 1, 2008, as a result of our amended distribution agreement with SIRIUS, which significantly lowered our risks, principally those associated with product returns, we began reporting our sales of satellite radio products on a net basis as described in “Critical Accounting Policies and Estimates” above. This change in presentation resulted in reported satellite radio sales, net of $16.2 million in direct costs, of $4.5 million for the second quarter of 2008. The change in the application of our accounting policy did not affect our reported gross profit, operating income, or net income. On a non-GAAP basis, our satellite radio product sales, net of rebates, for the second quarter of 2008 were $20.7 million, a 25.3% decrease compared with net sales of $27.7 million for the second quarter of 2007. Of the $7.0 million decrease, $0.2 million is attributable to the change in timing of revenue recognition in 2007 as discussed above. The remainder of the decrease was partially attributable to a company-initiated plan and a new arrangement with SIRIUS to reduce sales to Sirius.com as these sales carried lower than average margins and required high working capital. Additionally, consumer demand for satellite radio was lower in the second quarter of 2008 compared with the second quarter of 2007, particularly related to Father’s Day gift giving, which has historically been a demand driver for the purchase of satellite radio receivers.

Our net security and entertainment product sales totaled $51.0 million for the three months ended June 30, 2008 compared with

$57.9 million for the three months ended June 30, 2007. Of the $6.9 million decrease, $3.0 million is attributable to the change in timing of revenue recognition in 2007 as discussed above. Excluding the decrease attributable to the change in timing of revenue recognition, security and entertainment product sales decreased by $3.9 million, or 7.1%. Strong sales of Polk Audio products, as well as security products to Best Buy and Circuit City, were more than offset by overall consumer weakness in our industry in many regions of the United States.

Our royalty and other revenues totaled $3.4 million for the three months ended June 30, 2008 compared with $1.1 million for the three months ended June 30, 2007. The increase is due to incremental royalty payments totaling $2.7 million related to two patent licensing agreements that we entered into during the quarter ended June 30, 2008.

With the change in our satellite radio sales reporting method, our total GAAP net sales decreased to $58.9 million for the three months ended June 30, 2008 compared with $86.7 million for the three months ended June 30, 2007.

Gross Profit and Income from Operations

Our consolidated gross profit ~~increased~~ bytotaled ~~approximately~~ $~~8.8 million, or 38.6%, to $~~31.65 million for the three months ended ~~March~~June 3130, ~~2007~~ 2008 compared with $2228.84 million for the three months ended ~~March~~June 3130, 2007, a $3.1 million increase, or ~~2006~~10.9%. The increase was primarily due to anthe ~~increase~~$2.7 million inof ~~our~~one-time ~~net~~royalty ~~sales~~revenue ~~and~~earned during ~~change~~the insecond ~~product~~quarter ~~sales~~of ~~mix~~2008. Our consolidated GAAP gross profit margin increased from 3032.67% for the three months ended ~~March~~June 3130, ~~2006~~ 2007 to 4053.6% for the three months ended ~~March~~ June 3130, ~~2007~~2008. This increase is primarily due to the ~~sales~~change ~~mix shift~~ in ~~selling~~presentation ~~significantly~~of ~~less~~our satellite radio products ~~during~~to a net basis in the ~~period~~current year, ~~which~~an ~~have~~increase ~~lower~~in ~~gross~~royalty ~~margins~~revenue, ~~than~~and a reduction in our ~~security~~warranty and ~~entertainment business.~~returns ~~Our~~expense ~~security~~primarily ~~and~~associated ~~entertainment~~with ~~margins~~our improved ~~remained~~satellite atradio ~~historical~~distribution ~~levels~~agreement.

~~Operating~~Our ~~expenses~~gross ~~increased~~profit bymargin ~~approximately~~on ~~$15.3 million,~~security orand ~~112.5%,~~entertainment toproduct ~~$28~~sales increased from 42.~~9 million~~2% for the three months ended ~~March~~June 3130, 2007 ~~compared~~to ~~with $13~~49.~~6 million~~7% for the three months ended ~~March 31~~June 30, ~~2006 primarily due to $8~~2008.~~8 million~~ ~~of costs associated with the~~ The increase inis ~~our sales base~~ due to ~~2006 acquisitions and $5.5 million of legal expenses related~~ to ~~patent~~one-time ~~litigation.~~royalty ~~As a result~~revenue, ~~income~~ ~~from~~lower ~~operations~~warranty ~~decreased~~and ~~approximately~~returns ~~$6.4 million~~costs, ~~or 70.3%,~~and tostrategic ~~$2.7 million for the~~price ~~three~~increases ~~months~~during ~~ended March 31, 2007 compared with $9.1 million for~~ the ~~three~~quarter ~~months~~ ended ~~March~~June 3130, ~~2006.~~ ~~As more fully described in Part II, Item 1~~2008. ~~Legal Proceedings below, we are involved in~~ ~~certain litigation related to patent infringement.~~

On a non-GAAP basis, our gross profit margin on satellite radio sales increased from 12.7% for the three months ended June 30, 2007 to 22.0% for the three months ended June 30, 2008. The increase was primarily attributable to a $1.4 million reduction of our warranty accrual and allowance for sales returns related to the reduction in our risk associated with satellite radio product returns as a result of our amended distribution agreement with SIRIUS. Excluding these reductions, our non-GAAP gross profit margins increased from 12.7% for the three months ended June 30, 2007 to 15.8% for the three months ended June 30, 2008 due to an improved customer mix.

Our consolidated gross profit margin on a non-GAAP basis increased from 32.7% for the three months ended June 30, 2007 to 42.0% for the three months ended June 30, 2008. In addition to the reasons above, the increase was due to a change in product sales mix of increased sales of higher margin security and entertainment products.

Operating expenses increased by approximately $2.1 million, or 10.0%, to $23.2 million for the three months ended June 30, 2008 compared with $21.1 million for the three months ended June 30, 2007. The increase was due to $0.7 million in outbound shipping principally related to higher fuel prices, $0.5 million related to our May 2007 acquisition of Trilogix, and $0.4 million in restructuring charges related to workforce right-sizing initiatives and the closure of our UK office. The increase was also partially attributable to the reduction of our bonus expense during the second quarter of 2007 as it became clear that company performance criteria would not be met.

Interest Expense

Net interest expense ~~increased~~decreased approximately $30.7 million, or ~~112~~10.18%, to $76.0 million for the three months ended ~~March~~June 3130, ~~2007~~2008 compared with $36.37 million for the three months ended ~~March~~June 3130, ~~2006~~2007. ~~Our~~The decrease is primarily due to lower levels of outstanding debt on our senior credit facility ~~was~~in ~~amended~~the incurrent ~~connection~~quarter. Outstanding debt as of June 30, 2008 totaled $258.6 million, a $69.1 million decrease compared with ~~our~~outstanding ~~acquisition~~debt of ~~Polk~~$327.7 million inas of June 30, 2007. As of ~~September~~June ~~2006~~30, ~~which~~2008, ~~resulted~~we inhad ~~additional~~no ~~borrowings~~amounts ofdrawn on our revolving loan compared with $~~141~~24.0 million ~~and~~as of June 30, 2007. This decrease was partially offset by a 25non-cash ~~basis~~write-off ~~point~~of $0.1 million of ~~increase~~unamortized indebt issuance costs related a $3.0 million prepayment on the outstanding principal of our ~~interest~~senior ~~rates~~notes during the second quarter of 2008.

Provision for (benefit from) Income Taxes

~~Our effective tax rate~~13 increased from 31.5% for the three months ended March 31, 2006 to 35.0% for the three months ended March 31, 2007. This increase resulted from a discrete income tax benefit of $0.4 million in the first quarter of 2006 related to the revaluation of deferred tax assets and liabilities, as well as the amount of income subject to various taxing authorities with varying income tax rates. The Company’s current estimated annual effective income tax rate that has been applied to normal, recurring operations for the three-months ended March 31, 2007 was 38.6%. Our expected annual effective income tax rate is approximately 38.5% for the year ended December 31, 2007. The difference between our effective tax rate of 35.0% for the three-months ended March 31, 2007 and the annual effective rate is primarily the result of a discrete income tax benefit related to litigation expenses during the quarter.

Our effective tax rate was 55.9% for the three months ended June 30, 2008 compared with 97.8% for the three months ended June 30, 2007. The rate reduction compared with the prior year is due to the fixed tax impact of certain discrete items in relation to our income before taxes. Our $1.3 million provision for income taxes for the three months ended June 30, 2008 is the result of the application of a 37.7% tax rate to our year-to-date normal, recurring operations, which resulted in a $0.1 million tax benefit offset by a $1.4 million expense related to discrete items. These discrete items primarily related to recognition of one-time royalty revenues and to shortfalls on delivered restricted stock units during the three months ended June 30, 2008. The shortfalls on restricted stock units occur when the actual tax deduction realized based on the delivery of restricted stock units is less than the previously recognized compensation expense related to the granting of restricted stock units. Because the tax expense associated with the shortfalls is a fixed component of our tax expense with no corresponding income recognized in earnings before taxes, our effective tax rate for the three months ended June 30, 2008 is significantly higher than the 37.7% applied to normal, recurring operations.

Six Months Ended June 30, 2008 Compared with the Six Months Ended June 30, 2007


	As Reported			Reclassification		Non-GAAP			As Reported
	Six Months Ended			Six Months Ended		Six Months Ended
	June 30,			June 30,		June 30,
	2008			2008		2008			2007
Sales:
Security and entertainment product sales, net	$	108,006		$	—	$	108,006		$	119,294
Satellite radio product sales, net		7,258			31,033		38,291			43,174

Net product sales		115,264			31,033		146,297			162,468

Royalty and other revenues related to security and entertainment products		4,040			—		4,040			2,044
Other revenues related to satellite radio products		117			—		117			151

Royalty and other revenues		4,157			—		4,157			2,195

Net sales	$	119,421		$	31,033	$	150,454		$	164,663

Cost of sales:
Cost of security and entertainment sales		58,475			—		58,475			67,347
Cost of satellite radio sales		—			31,033		31,033			37,303

Total cost of sales	$	58,475		$	31,033	$	89,508		$	104,650


Security and entertainment gross profit, including royalty and other revenue	$	53,571			—	$	53,571		$	53,991
Satellite radio gross profit, including other revenue		7,375			—		7,375			6,022

Consolidated gross profit	$	60,946		$	—	$	60,946		$	60,013


Security and entertainment gross profit margin		47.8	%		—		47.8	%		44.5	%
Satellite radio gross profit margin		—			—		19.2	%		13.9	%
Consolidated gross profit margin		51.0	%		—		40.5	%		36.4	%

Net Sales

Effective January 1, 2008, as a result of our amended distribution agreement with SIRIUS, which significantly lowered our risks, principally those associated with product returns, we began reporting our sales of satellite radio products on a net basis as described in “Critical Accounting Policies and Estimates” above. This change in presentation, which was required by GAAP, resulted in reported satellite radio sales, net of $31.0 million in direct costs, of $7.3 million for the six months ended June 30, 2008. The change in the application of our accounting policy did not affect our reported gross profit, operating income, or net loss. On a non-GAAP basis, our net satellite radio product sales for the first half of 2008 would have been $38.3 million, an 11.3% decrease compared with net sales of $43.2 million for the first half of 2007. Of the $4.9 million decrease, $0.2 million is attributable to the change in timing of revenue recognition in 2007 as discussed above. The remainder of the decrease is attributable to reduced sales to Sirius.com and lower consumer demand in the current year.

Our net security and entertainment product sales totaled $108.0 million for the six months ended June 30, 2008 compared with $119.3 million for the six months ended June 30, 2007. Of the $11.3 million decrease, $3.0 million is attributable to the change in

timing of revenue recognition in 2007 as discussed above. Excluding the decrease attributable to the change in timing of revenue recognition, security and entertainment product sales decreased by $8.3 million, or 7.1%. Strong first quarter growth of our Definitive Technology product sales and second quarter sales related to the initial shipments of our Polk Audio products to Best Buy were more than offset by slower sales across our security and entertainment product categories due to overall consumer weakness in many regions of the United States.

Our royalty and other revenues totaled $4.2 million for the six months ended June 30, 2008 compared with $2.2 million for the six months ended June 30, 2007. The increase is due to incremental royalty payments totaling $2.7 million related to two patent licensing agreements that we entered into during the quarter ended June 30, 2008.

With the change in our satellite radio sales reporting method, our total GAAP net sales decreased to $119.4 million for the six months ended June 30, 2008 compared with $164.7 million for the six months ended June 30, 2007.

Gross Profit and Income from Operations

Our consolidated gross profit totaled $61.0 million for the six months ended June 30, 2008 compared with $60.0 million for the six months ended June 30, 2007, a $1.0 million increase. The increase was primarily due to the $2.7 million of one-time royalty revenue earned during the quarter ended June 30, 2008 partially offset by lower net sales. Our consolidated GAAP gross profit margin increased from 36.4% for the six months ended June 30, 2007 to 51.0% for the six months ended June 30, 2008. This increase is primarily due to the change in presentation of our satellite radio products to a net basis in the current year, an increase in royalty revenue, and a reduction in our warranty and returns expense.

Our gross profit margin on security and entertainment product sales increased from 44.5% for the six months ended June 30, 2007 to 47.8% for the six months ended June 30, 2008. The increase is due to one-time royalty revenue, lower warranty costs, strategic price increases, and a decrease in our allowance for sales returns during the six months ended June 30, 2008.

On a non-GAAP basis, our gross profit margin on satellite radio sales increased from 13.9% for the six months ended June 30, 2007 to 19.2% for the six months ended June 30, 2008. The increase was primarily attributable to a one-time reduction of $1.4 million in our warranty and sales returns reserves related to the reduction in our risk associated with satellite radio product returns as a result of our amended distribution agreement with SIRIUS. Excluding the reduction in these reserves, our non-GAAP gross profit margins increased from 13.9% for the six months ended June 30, 2007 to 15.3% for the six months ended June 30, 2008 due to an improved customer mix.

As a result of the increases in both our security and entertainment and satellite radio gross profit margins, our consolidated gross profit margin on a non-GAAP basis increased from 36.4% for the six months ended June 30, 2007 to 40.5% for the six months ended June 30, 2008.

Operating expenses decreased by approximately $1.7 million, or 3.4%, to $48.4 million for the six months ended June 30, 2008 compared with $50.1 million for the six months ended June 30, 2007. The decrease was primarily due to the reduction in our provision for litigation. During the first half of 2007, we had accrued $5.1 million for legal fees and settlement expense related to patent litigation. This reduction was partially offset by increases in our comparative bonus accrual, operating expenses related to our May 2007 acquisition of Trilogix, restructuring charges associated with the right-sizing of our workforce and the closure of our UK office, and increases in distribution costs related to increased fuel prices.

Interest Expense

Net interest expense decreased approximately $1.5 million, or 10.9%, to $12.2 million for the six months ended June 30, 2008 compared with $13.7 million for the six months ended June 30, 2007. The decrease is primarily due to lower levels of outstanding debt on our senior credit facility in the current year. Outstanding debt as of June 30, 2008 totaled $258.6 million, a $69.1 million decrease compared with outstanding debt of $327.7 million as of June 30, 2007. As of June 30, 2008, we had no amounts drawn on our revolving loan compared with $24.0 million as of June 30, 2007. This decrease in interest expense was partially offset by non-cash write-offs totaling $0.2 million of unamortized debt issuance costs related a second quarter $3.0 million prepayment on the outstanding principal of our senior notes and the first quarter amendment to our senior credit facility.

Provision for (benefit from) Income Taxes

Our effective tax rate was 277.2% for the six months ended June 30, 2008 compared with a tax benefit rate of 26.5% for the six months ended June 30, 2007. The rate change compared with the prior year is due to the fixed tax impact of certain discrete items in relation to our income (loss) before taxes. Our $0.9 million provision for income taxes for the six months ended June 30, 2008 is the result of the application of a 37.7% tax rate to normal, recurring operations, which resulted in a $0.9 million tax benefit offset by a $1.8 million expense related to discrete items. These discrete items primarily related to recognition of one-time royalty revenues and to shortfalls on delivered restricted stock units. The shortfalls on restricted stock units occur when the actual tax deduction realized based on the delivery of restricted stock units is less than the previously recognized compensation expense related to the granting of restricted stock units. Because the tax expense associated with the shortfalls is a fixed component of our tax expense with no corresponding income recognized in earnings before taxes, our effective tax rate for the six months ended June 30, 2008 is significantly higher than the 37.7% applied to normal, recurring operations. Our 2008 annual effective tax rate is expected to be approximately 50%.

Liquidity and Capital Resources

Our principal uses of cash are for operating expenses, working capital, servicing long-term debt, capital expenditures, acquisitions, and payment of income taxes. ~~Our~~Historically, we have financed these requirements from internally generated cash flow and borrowings from our credit facility. Due to our business model, our capital expenditures are generally low. As a result of seasonal demand, our receivables and payables typically peak near the end of the year due to high fourth quarter volume and ~~will~~are typically be reduced in the first ~~quarter~~ half of the year. ~~Historically~~We believe, webased ~~have~~on our ~~financed~~current ~~these~~revenue ~~requirements~~levels, that our existing and future cash flows from ~~internally~~operations, ~~generated~~together with ~~cash~~borrowings ~~flow~~available under our revolving credit facility, will be sufficient to fund our working capital needs, capital expenditures, and ~~borrowings~~interest ~~from~~and principal payments as they become due under the terms of our senior credit facility for the foreseeable future.

Net cash provided by operating activities was approximately $2220.65 million for the ~~three~~six months ended ~~March~~June 3130, ~~2007~~2008, compared towith approximately $2431.21 million for the ~~three~~six months ended ~~March~~June 3130, ~~2006~~2007, a decrease of $110.6 million. This decrease is primarily due to ~~slower~~lower ~~moving~~working ~~SIRIUS~~capital ~~inventory~~ in December 2007 ~~the~~compared ~~current~~with ~~quarter~~December 2006 ~~and~~that ~~the~~converted ~~increase~~into cash in ~~receivables~~the asfirst half of ~~March 31, 2007 related to an inventory~~the ~~protection~~following ~~arrangement we have with SIRIUS~~year. The difference between our year-to-date ~~2007~~2008 operating cash flow and our $20.8 6 million net loss was primarily attributable to ~~decreases~~a decrease of $~~104~~30.14 million~~, $52.6 million,~~ ~~and $83.9 million~~ in our accounts receivable, ~~inventories,~~partially ~~and~~offset ~~accounts~~by ~~payable, respectively.~~a ~~The~~ decrease ~~in accounts receivable was due to the seasonality~~ of ~~our business~~$18.8 million ~~The decrease~~ in ~~inventory~~our ~~was~~accounts ~~due~~payable toand ~~selling~~accrued liabilities, ~~products~~and onan ~~hand~~increase as of ~~December 31, 2006, along with a~~ $332.94 million ~~reduction~~in ~~related to inventory that was sold at~~ our ~~carrying~~inventories. ~~cost~~The todecreases ~~SIRIUS~~in ~~pursuant~~accounts toreceivable, ~~our~~accounts ~~inventory protection arrangement~~payable, and aaccrued ~~$4.9 million~~liabilities ~~decrease~~were related to ~~price~~the ~~protection arrangements~~seasonality ~~with~~of ~~SIRIUS. The reductions in inventory for inventory protection arrangements and~~our ~~price~~business ~~protection~~as ~~are~~well ~~reflected~~as inimproved ~~the~~working ~~$34~~capital management.~~2 million~~ The increase in ~~other~~inventory ~~receivables~~levels aswas primarily ~~the~~due ~~majority of~~to the ~~cash~~introduction ~~was~~of ~~not~~new ~~yet~~home ~~collected~~audio atproducts ~~March 31,~~as ~~2007.~~well ~~The~~as ~~decrease~~slower inthan ~~accounts~~expected ~~payable is also~~sales ~~related~~due to ~~the~~overall ~~seasonality~~consumer ofweakness in our ~~business~~industry.

Net cash used in ~~financing~~investing activities was approximately $171.89 million for the ~~three~~six months ~~ended~~ ~~March~~ended June 3130, ~~2007~~2008 compared with $512.62 million for the ~~three~~six months ended ~~March~~June 3130, ~~2006~~2007. The ~~increase~~ decrease occurred primarily due to ~~payments~~our ~~made~~acquisition ~~toward~~of ~~our~~a ~~revolving~~security ~~credit~~and ~~facility~~remote ~~during~~start ~~the three~~company ~~months~~in ~~ended March~~May ~~31,~~ 2007.

~~Cash~~Net ~~and~~ cash ~~equivalents~~used ~~were~~in financing activities was approximately $1410.12 million for the six months ended June 30, 2008 as we paid down our revolving loan, prepaid $3.0 million of ~~March~~our outstanding term debt, and paid fees in connection with the amendment of our senior credit facility. As of June 3130, 2008, ~~2007~~we had no amounts drawn on our revolving loan compared with $94.90 million as and $24.0 million as of December 31, ~~2006~~2007 and June 30, 2007, respectively.

Our principal sources of liquidity are cash from operations and funds available for borrowing under our senior credit facility. ~~Our~~In ~~senior~~connection ~~credit~~with ~~agreement~~the ~~provides~~acquisition ~~for~~of ~~senior~~Polk, ~~notes~~on ~~in an aggregate principal amount equal to $306.8~~September ~~million~~22, 2006, ~~plus~~we aentered ~~revolving~~into ~~loan in~~ a ~~maximum~~new ~~principal amount~~senior ofcredit ~~$100.0 million~~facility, of which ~~only~~increased our term loan by $50141.0 million. isIn ~~available from~~ March 2008, ~~through~~we ~~September. The~~amended ~~revolving~~certain ~~loan~~terms, ~~will mature on September 22~~conditions, ~~2012~~ and ~~the~~covenants ~~senior~~contained ~~notes~~in our ~~will~~senior ~~mature~~credit onfacility ~~September 22,~~(“Amendment ~~2013~~No. 2”). AnAmendment ~~incremental~~No. 2 ~~loan~~increased ~~facility~~our isallowable ~~available~~leverage ratio to us5.25x inthrough anMarch 31, ~~aggregate~~2009, ~~amount~~stepping updown to ~~$75~~4.~~0 million,~~95x ~~provided~~through ~~that (i)~~December no31, ~~default or event of default shall have occurred and be continuing~~2009, with ~~and~~step-downs ~~(ii) we~~thereafter ~~are~~consistent ~~in compliance~~ with ~~all~~the ~~covenants~~previous ~~contained~~terms inof the ~~amended~~agreement. ~~credit~~Amendment ~~agreement~~No. 2 ~~Our~~also ~~senior~~increased ~~credit~~our ~~facility~~interest ~~contains~~rate ~~certain~~by ~~affirmative~~100 ~~and~~to ~~negative~~150 ~~covenants~~basis ~~related to indebtedness~~points, ~~leverage~~ ~~and~~depending ~~fixed~~upon ~~charges~~leverage ~~coverage~~ratios, ~~and~~from ~~restrictions~~our previous ~~against~~rate ~~paying~~of ~~cash~~LIBOR ~~dividends~~plus ~~without~~250 ~~the lenders’~~basis ~~consent~~points. ~~Principal~~In isaddition, ~~payable~~Amendment ~~in quarterly installments of $0~~No.8 ~~million~~2 ~~through~~permits ~~June 2013~~additional ~~with~~add-backs ato ~~final~~adjusted ~~installment~~EBITDA ofin the ~~total~~calculation ~~principal~~of ~~due~~our onleverage ~~September 22~~ratio, ~~2013.~~modifies ~~The~~principal ~~revolving~~payment terms ~~loan~~ and ~~incremental~~ revolving loan ~~facility may be used for working capital requirements~~availability, ~~general corporate purposes,~~ and ~~certain~~permits ~~permitted~~the ~~acquisitions.~~right Asto ofexecute ~~March 31, 2007,~~ the ~~balance~~sale of ~~the senior notes was~~certain ~~$304.5 million~~accounts ~~and~~receivable weso ~~had~~long ~~$20.0 million~~as ~~drawn~~the onproceeds ~~our~~are ~~revolving~~used ~~credit facility~~ to ~~fund~~reduce ~~working capital requirements~~indebtedness. In ~~April~~connection ~~2007~~with Amendment No. 2, we ~~were~~paid ~~granted~~fees anof ~~amendment~~$1.8 million ~~to our~~and ~~senior~~wrote ~~credit~~off ~~facility~~unamortized ~~that~~debt ~~allows~~issuance acosts ~~higher~~of ~~leverage~~$0.1 million ~~ratio~~during ~~for~~ the ~~next~~ three ~~years~~months ended March 31, 2008.

~~Capital~~Our ~~expenditures~~credit ~~are~~agreement ~~expected~~provides tofor besenior ~~approximately~~notes ~~$5.0 million~~ in ~~2007,~~ an ~~increase~~aggregate ~~of approximately~~principal amount equal to $3306.08 million, ~~from~~plus ~~2006~~a torevolving ~~support~~loan ~~infrastructure~~in ~~needs and~~ a ~~full~~maximum ~~year~~principal amount of ~~the Polk business~~$60. ~~We believe~~0 million, ~~based~~of ~~on our current revenue levels, that our existing and future cash flows~~which ~~from~~$50.0 million ~~operations,~~is ~~together with borrowings~~ available ~~under~~all ~~our~~year ~~revolving~~with ~~credit~~an ~~facility,~~additional ~~will~~$10.0 million ~~be sufficient~~available tofrom ~~fund~~October ~~our working capital needs, capital expenditures, and to make interest and~~through ~~principal~~February ~~payments as they become~~ due ~~under~~to the ~~terms~~seasonality of our ~~senior credit facility for the foreseeable future~~business. WeThe ~~have~~revolving ~~minimal~~loan ~~required~~will ~~principal~~mature ~~payments~~on ~~until~~ September ~~2013. We expect to refinance or extend our senior credit facility before that time~~22, ~~but we may not be able to obtain~~ ~~such~~2012 ~~refinancing~~and ~~on acceptable terms or at all.~~the

~~In the future, the growth of our business may require us to seek additional sources of~~16 liquidity such as a larger revolving credit facility. In addition, if we pursue significant acquisitions in the future, this will likely necessitate additional borrowings and, potentially, additional equity. Our ability to use operating cash flow to increase our growth is limited by requirements in our credit agreement to repay debt with excess cash flow as defined therein.

~~Contractual~~senior ~~Obligations~~notes will mature on September 22, 2013. An incremental loan facility is available to us in an aggregate amount up to $75.0 million, provided that (i) no default or event of default shall have occurred and be continuing, and (ii) we are in compliance with all covenants contained in the amended credit agreement. Our senior credit facility contains certain affirmative and negative covenants related to indebtedness, leverage and fixed charges coverage, and restrictions against paying cash dividends without the lenders’ consent. In the second quarter of 2008, we prepaid $3.0 million of our outstanding debt. As a result, we do not have required principal payments until September 2009, at which time principal is payable in quarterly installments of $0.7 million, with balloon payments of $5.9 million on December 31, 2009 and $11.1 million on December 31, 2010, 2011, and 2012, with the final installment of the total principal due on September 22, 2013. We expect to refinance or extend our senior credit facility prior to September 22, 2013, but we may not be able to obtain such refinancing on acceptable terms or at all. The revolving loan and incremental loan facility may be used for working capital requirements, general corporate purposes, and certain permitted acquisitions. As of June 30, 2008, the balance of the senior notes was $258.6 million and we had no amounts drawn on our revolving credit facility.

OnWe ~~January 1,~~were ~~2007,~~in wecompliance ~~adopted~~with all the ~~provisions~~covenants ofrelated ~~FIN~~to ~~48,~~our ~~“Accounting~~indebtedness ~~for~~as ~~Uncertainty~~of ~~in Income~~June 30, ~~Taxes”~~2008. Based Asupon acurrent ~~result~~earnings ofand ~~the~~working ~~implementation~~capital offorecasts ~~FIN~~for 482008, we ~~have~~believe awe ~~liability~~will ofcontinue ~~unrecognized tax~~to ~~benefits~~remain ofin ~~approximately~~compliance ~~$0.9 million.~~with Wesuch ~~are~~covenants. ~~unable~~In tothe ~~reasonably~~event ~~estimate~~that ~~the~~our ~~amount~~earnings or ~~timing~~working capital fall short of ~~payments~~our ~~for~~forecasts, ~~the~~it ~~liability.~~is ~~Other~~possible ~~than~~that ~~the~~we ~~obligations~~would ~~related~~fail to ~~the~~comply ~~adoption~~with ofcertain ~~FIN~~leverage ~~48, there~~ratio ~~have~~requirements ~~been~~of noour ~~other~~senior ~~material~~credit ~~changes~~facility. ~~outside~~Under the ~~ordinary~~terms ~~course~~ of ~~business~~our tosenior ~~our~~credit ~~total~~facility, such ~~contractual~~failure ~~obligations~~would ~~which~~constitute ~~are~~an ~~set~~event ~~forth~~of indefault. Upon the ~~table~~occurrence ~~included~~of inan event of default, our lenders ~~Annual~~could ~~Report~~prohibit onadditional ~~Form~~borrowings ~~10-K for~~under ~~the~~our ~~year~~revolving ~~ended~~line ~~December 31,~~of ~~2006~~credit ~~filed~~and ~~with~~could ~~the~~call ~~SEC~~due all onamounts ~~March 16,~~then ~~2007~~outstanding.

~~Critical~~ In ~~Accounting~~the ~~Policies~~future, ~~and~~we ~~Estimates~~may be required to seek additional sources of liquidity such as a larger revolving credit facility or by entering into a permitted receivables financing arrangement as defined by our lending agreement. Our ability to use operating cash flow to increase our growth is limited by requirements in our credit agreement to repay debt with excess cash flow as defined therein.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States. During preparation of these consolidated financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In addition to those described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006, we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements as of and for the three-month period ended March 31, 2007.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with SFAS No. 123R. Under the provisions of SFAS No. l23R, stock-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by a Black-Scholes option-pricing model and is recognized as expense evenly over the requisite service period. The Black-Scholes model requires various judgmental assumptions including dividend yield, expected volatility, risk-free interest rate, and expected option life. If any of the assumptions used in the model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Recent Accounting Pronouncements

In ~~September~~December ~~2006~~2007, the FASB issued SFAS No. ~~157~~141R, “~~Fair~~Business ~~Value Measurements”~~Combinations.” SFAS ~~157 defines~~No. 141R ~~fair value,~~ establishes aprinciples ~~framework~~and requirements for ~~measuring~~how ~~fair~~the ~~value~~acquirer inof ~~accordance~~a ~~with~~business ~~U.S.~~recognizes ~~GAAP,~~ and measures ~~expands~~in ~~disclosures~~its ~~about~~financial ~~fair~~statements ~~value~~the ~~measurements.~~identifiable ~~The~~assets ~~statement~~acquired, ~~clarifies~~the ~~that~~liabilities ~~the~~assumed, ~~exchange~~and ~~price~~any isnoncontrolling ~~the~~interest ~~price~~ in anthe ~~orderly~~acquiree. ~~transaction~~The ~~between~~statement ~~market~~also ~~participants~~provides toguidance ~~sell~~for anrecognizing ~~asset or transfer a~~and ~~liability~~measuring at the ~~measurement~~goodwill ~~date.~~acquired ~~The~~in ~~statement~~the ~~emphasizes~~business ~~that~~combination ~~fair~~and ~~value~~determines iswhat ainformation ~~market-based~~to ~~measurement~~disclose ~~and~~to ~~not~~enable anusers ~~entity-specific~~of ~~measurement.~~the Itfinancial ~~also~~statements ~~establishes~~to aevaluate ~~fair~~the ~~value~~nature ~~hierarchy~~and ~~used~~financial effects inof ~~fair~~the ~~value~~business ~~measurements~~combination. ~~and~~SFAS ~~expands~~No. 141R ~~the~~is ~~required~~effective ~~disclosures~~for offinancial ~~assets~~statements ~~and~~issued ~~liabilities~~for ~~measured~~fiscal atyears ~~fair~~beginning ~~value~~after December 15, 2008. ~~The~~Accordingly, ~~accounting~~any ~~provisions~~business ofcombinations ~~SFAS~~we ~~157~~engage ~~will~~in will be ~~effective~~recorded ~~for~~and usdisclosed onfollowing existing GAAP until January 1, ~~2008~~2009. ~~Adoption~~ ofWe ~~this~~do ~~statement~~not isexpect ~~not~~that ~~anticipated~~SFAS No. 141R towill have a material impact on our ~~financial~~previous acquisitions. The impact on our consolidated financial statements will depend upon the nature, ~~although~~terms, ~~additional~~and ~~disclosures~~size ~~may~~of beacquisitions ~~required~~we consummate after the effective date.

In ~~February~~March ~~2007~~2008, the FASB issued SFAS No. ~~159~~161, “~~The~~Disclosures ~~Fair~~about ~~Value~~Derivative ~~Option~~Instruments ~~for Financial Assets~~ and Hedging ~~Liabilities~~Activities,”. an amendment of SFAS No. ~~159~~133. ~~provides~~SFAS aNo. 161 ~~fair~~requires ~~value~~disclosures ~~option~~of ~~election~~how ~~that~~and why ~~allows~~an ~~companies~~entity ~~to irrevocably~~uses ~~elect~~derivative ~~fair~~instruments, ~~value~~how asderivative ~~the~~instruments ~~initial~~ and ~~subsequent~~related ~~measurement~~hedged ~~attribute~~items ~~for certain~~are ~~financial~~accounted ~~assets~~for, and ~~liabilities,~~how ~~with~~derivative ~~changes~~instruments inand ~~fair~~related ~~value~~hedged ~~recognized~~items inaffect ~~earnings as they occur. SFAS No. 159 permits the fair value option election on~~ an ~~instrument~~entity’s ~~by instrument basis at initial~~financial ~~recognition~~position, offinancial anperformance, ~~asset~~and orcash ~~liability or upon an event that gives rise to a new basis of accounting for that instrument~~flows. SFAS No. ~~159~~161 is effective asfor ~~of the beginning of an entity’s first~~ fiscal ~~year~~years ~~that~~beginning ~~begins~~ after November 15, ~~2007~~2008, with early adoption permitted. We doare ~~not~~currently ~~believe~~evaluating ~~that~~ the ~~adoption~~impact of SFAS No. ~~159~~161 ~~will have a material impact~~ on our consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets,” in order to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other GAAP. FSP No. FAS 142-3 applies to all intangible assets, whether acquired in a business combination or otherwise, and will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance for determining the useful life of intangible assets will be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements apply prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is prohibited. We are currently evaluating this guidance but do not expect it to have a significant impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

~~Our exposure to interest rate risk is primarily the result of borrowings under our existing~~17 senior credit facility. At March 31, 2007, $324.5 million was outstanding under our senior credit facility, including $20.0 million that we had drawn on our revolving credit facility. Borrowings under our senior credit facility are secured by first priority security interests in substantially all of our tangible and intangible assets. Our results of operations are affected by changes in market interest rates on these borrowings. As required by

Our exposure to interest rate risk is primarily the result of borrowings under our existing senior credit facility. At June 30, 2008, $258.6 million was outstanding under our senior credit facility. Borrowings under our senior credit facility are secured by first priority security interests in substantially all of our tangible and intangible assets. Our results of operations are affected by changes in market interest rates on these borrowings. As required by our credit agreement, we entered into aan ~~hedge~~interest rate swap agreement in January 2007 to fix the interest rate on ~~approximately~~a ~~half~~portion of our term loans. Pursuant to that agreement, the interest rate on an aggregate of $153.0 million of our senior debt ~~may~~is ~~not~~fixed ~~exceed~~at 5.04% ~~plus~~until ~~2.5% margin before~~ January 4, 2010. The interest rate swap is inrecorded ~~place~~at ~~for~~its ~~three~~fair value ~~years,~~on ~~ending~~our inbalance ~~January 2010~~sheet. Changes in the fair value of the swap are recorded in accumulated other comprehensive income (loss) on our consolidated balance sheet. ASee 1%Notes ~~increase~~2 inand ~~the~~5 ~~interest~~to ~~rate~~our Consolidated ~~would~~Financial ~~result~~Statements infor ~~additional~~further ~~annual~~details ~~interest~~regarding ~~expense~~the ~~of $1.5 million~~accounting onand disclosure of our ~~senior~~derivative ~~credit~~instruments ~~facility,~~and ~~assuming~~hedging ~~no revolving credit borrowings~~activities.

WeA ~~will~~1% ~~continue~~increase toin ~~monitor~~interest ~~changing~~rates ~~economic~~would ~~conditions.~~result ~~Based~~in onadditional ~~current~~annual ~~circumstances,~~interest weexpense of do$1.1 million ~~not~~on ~~expect~~our tosenior ~~incur~~credit afacility, ~~substantial~~assuming ~~increase~~no inrevolving ~~costs~~credit orborrowings aand ~~material~~considering the ~~adverse~~fixed ~~effect~~rate on ~~cash~~$153.0 million ~~flows as~~of aour ~~result~~debt ofrelated ~~changing~~to our interest ~~rates~~rate swap.

Foreign Currency Exchange Risk

Our revenues and purchases are predominantly in U.S. Dollars. ~~However,~~We weaccount ~~collect~~for a portion of our costs ~~revenue~~ in ~~non-U.S.~~our ~~currencies, such as British Pounds Sterling and~~ Canadian ~~Dollars.~~subsidiaries ~~In the future,~~ and ~~especially as we expand~~ our ~~sales~~UK ~~in international markets, our customers may increasingly make payments in non-U.S. currencies. In addition, we account for a portion of our costs in our U.K.~~ and ~~Canadian~~Hong Kong offices, such as payroll, rent, and indirect operating costs, in foreign ~~currency~~currencies. Fluctuations in foreign currency exchange rates could affect our sales, cost of sales, and operating margins. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency and could cause losses to our contract manufacturers, which could ultimately increase our product costs from these suppliers. ~~Although~~We wedo not ~~plan~~currently use derivative instruments to ~~expand~~hedge ~~internationally~~against this risk. We also collect a portion of our revenue in non-U.S. currencies, primarily Canadian Dollars. On a limited basis, we douse forward contracts that are not ~~expect~~designated toas behedging ~~materially~~instruments ~~affected~~under bySFAS ~~foreign~~No. 133, ~~currency~~“Accounting for ~~exchange~~Derivative ~~rate~~Instruments ~~fluctuations~~and inHedging ~~the~~Activities”, ~~near~~to ~~future,~~hedge asthe impact of the ~~transactions~~variability in exchange rates on a portion of accounts receivable and collections denominated in ~~non-U~~Canadian Dollars.S. As of ~~currencies~~June 30, ~~are~~2008 we did not ~~material~~have any derivative instruments to ~~our~~hedge ~~consolidated~~against ~~financial~~this ~~statements~~risk. ~~Therefore,~~As we doplan ~~not~~to ~~currently~~expand ~~use~~internationally, we may enter into additional derivative financial instruments asin ~~hedges~~the future. ~~against~~We ~~foreign~~generally ~~currency~~do ~~fluctuations~~not hedge the net assets of our international subsidiaries. We do not enter into derivative contracts for trading or speculative purposes.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-~~15e under~~15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, ~~the~~our principal executive officer and principal financial officer have concluded that, as of ~~March~~June 3130, ~~2007~~2008, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting during the quarter ended ~~March~~June 3130, ~~2007~~2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

OnFrom ~~March 31,~~time 2004, Omega Patents, L.L.C., or Omega, filed a claim in the United States District Court for the Middle District of Florida, OMEGA PATENTS, L.L.C. vs. FORTIN AUTO RADIO, Inc., alleging breach of a license agreement. On November 11, 2005, Omega amended its complaint to ~~add~~ ~~us as a defendant in the suit~~time, ~~alleging~~we ~~patent~~are ~~infringement.~~involved Specifically, Omega alleged that certain of our products infringe certain Omega patents. Omega sought both an injunction and unspecified monetary damages, as well as exemplary damages, attorneys’ fees, and costs. A jury trial commenced on January 26, 2007 in ~~which~~litigation ~~we pursued various defenses including licensing, non-infringement,~~ and ~~invalidity~~proceedings ~~defenses. On February 12, 2007, the jury returned a verdict~~ in ~~favor~~ ~~of Omega, awarding Omega $0.6 million in damages. On April 4, 2007,~~ the ~~trial~~ordinary ~~court~~course ~~enhanced the damages for a total award~~ of $1.8 million. The trial court also awarded attorney’s fees to Omega and granted a permanent injunction that prohibits us from making, using, or selling any products that infringe on the Omega patents and requires us to recall and destroy any of our ~~infringing products that are in the inventory of our retailer customers~~business. We ~~have accrued $5.0 million as of March 31, 2007 related to the judgment on this case. We~~ are not currently ~~examining~~involved ~~our options~~in ~~with~~any ~~respect~~legal toproceeding ~~this~~that ~~litigation,~~we ~~including various avenues of appeal from the trial court’s decision, and do not~~ believe ~~that~~would ~~our obligations to pay damages and attorneys fees will~~ have a material adverse effect on our business or financial condition.

~~On October~~Item ~~5, 2006, U~~4.S. ~~Electronics,~~Submission ~~Inc.~~of ~~(“USE”)~~Matters ~~filed~~to a ~~claim~~Vote ~~in the United States District Court for the Southern District~~ of ~~New~~Security ~~York, U.S. ELECTRONICS, INC. vs. DIRECTED ELECTRONICS, INC.~~Holders ~~The claim alleges restraint of trade, monopolization, tortious interference with contracts, anticompetitive practices, and unfair competition. More specifically, USE alleges that we have~~

14 Our 2008 Annual Meeting of Shareholders was held on June 19, 2008 for the purpose of electing four directors to serve for three-year terms expiring in 2011, to approve an amendment to our 2005 Incentive Compensation Plan in order to increase the number of shares available for issuance under the plan to 4,750,000, and to approve an amendment to our Articles of Incorporation to change our corporate name from Directed Electronics, Inc. to DEI Holdings, Inc.

The following nominees were elected to our Board of Directors to serve for a three-year term expiring 2011:

entered into contracts, induced others, or conspired with third parties to restrict USE from the satellite radio market. USE further alleges that we have interfered with their relationships with certain of their retail customers. USE is seeking unspecified damages, including treble and punitive damages, as well as attorneys’ fees, and costs. On November 21, 2006, we filed a motion to dismiss the case. On April 10, 2007, the Court handed down a ruling dismissing all claims except the claim for tortious interference with contracts. Although the ultimate outcome of this matter is not currently determinable, we believe we have meritorious defenses to these allegations, intend to vigorously defend the case, and do not expect this litigation to materially impact our business, results of operations, or financial condition. However, there can be no assurance that we will prevail in this litigation or that the ultimate resolution of this matter will not have a material adverse effect on our results of operations.


Nominee	Votes in Favor		Withheld
Troy D. Templeton		16,317,878		3,569,552
James E. Minarik		19,471,182		416,248
Edmond S. Thomas		19,443,705		443,725
Andrew D. Robertson		19,412,575		474,855

InThe ~~late~~following ~~August 2006,~~directors’ aterms ~~legal~~of ~~action~~office ~~for~~continued ~~patent~~after ~~infringement~~the ~~was~~2008 ~~brought~~Annual byMeeting ~~Mrs. LV Shu Zhen~~of ~~against~~Shareholders: ~~Portman~~Jon ~~Electronics (Shenzhen) Co~~E. ~~Ltd.~~Elias, orDarrell ~~Portman,~~E. ~~a manufacturer of our products~~Issa, ~~before the~~Seth ~~Shenzhen Intermediate People’s Court in The People’s Republic of China (PRC) in connection with its production of our Automate branded transmitter relay product~~R. ~~Mrs. LV Shu Zhen sought an injunction to stop Portman from making the product~~Johnson, ~~payment~~Kevin ~~for~~B. ~~past damages~~McColgan, ~~and~~Victor ~~destruction of all tooling and means to manufacture the product~~J. ~~We were obligated to fully indemnify Portman for~~Orler, ~~all legal expenses~~ and ~~any damage award to which Portman may be subject based on contractual provisions in a written agreement between us and Portman~~S. WeJames ~~assumed the defense in this matter~~Spierer. On ~~April 10, 2007, the plaintiff withdrew the case. It is uncertain whether the case will be re-filed.~~

~~From~~An ~~time~~amendment to ~~time,~~our we2005 ~~are~~Incentive ~~involved~~Compensation inPlan ~~other~~that ~~litigation~~increases ~~and proceedings in~~ the ~~ordinary~~number ~~course~~ of ~~our~~shares available ~~business.~~for ~~Except~~issuance asunder ~~described~~the ~~above,~~plan weto ~~are~~4,750,000 ~~not~~was ~~currently~~voted ~~involved~~upon inand ~~any~~approved ~~legal~~by ~~proceeding that we believe would have a material adverse effect on~~ our ~~business~~shareholders as ~~or financial condition.~~follows:


Votes in Favor	Votes Against		Abstained		Broker Non-Votes
10,613,556		3,874,670		112,566		5,286,638

An amendment to our Articles of Incorporation to change our corporate name from Directed Electronics, Inc. to DEI Holdings, Inc. was voted upon and approved by our shareholders as follows:


Votes in Favor	Votes Against		Abstained		Broker Non-Votes
19,617,710		106,235		129,431		34,054

Item 5. Other Information

On August 4, 2008, we entered into an employment agreement with Kevin P. Duffy, our executive vice president and chief financial officer.

The employment agreement provides for Mr. Duffy to receive an annual base salary of $325,000. Mr. Duffy’s base salary will be reviewed annually for additional merit increases and may, at the discretion of our board of directors, be increased at any time. Mr. Duffy is also eligible to earn an annual bonus under our executive bonus plan based upon the achievement of certain performance objectives established by the compensation committee of our board of directors, and to receive equity compensation as determined by our board of directors or compensation committee.

As part of Mr. Duffy’s compensation package, we will provide Mr. Duffy (i) the right to participate in all medical and hospitalization, group life insurance, retirement, and other fringe benefit plans as may from time to time be provided to our executives, (ii) up to four weeks paid vacation per year, (iii) reimbursement for reasonable business expenses and expenses incurred in attending trade association meetings and shows, and (iv) an annual year-end payment of $5,000 pursuant to a deferred compensation plan previously established for Mr. Duffy’s benefit.

Pursuant to the employment agreement, Mr. Duffy’s employment will continue until the first to occur of (i) August 4, 2011, (ii) Mr. Duffy’s voluntary resignation other than for “good reason” (as defined in the employment agreement), (iii) our board of directors determines to terminate Mr. Duffy’s employment for “cause” (as defined in the employment agreement), (iv) our board of directors determines that Mr. Duffy’s employment is no longer in the best interest of our company, (v) Mr. Duffy resigns for “good reason,” (vi) the date of Mr. Duffy’s death, or (vii) Mr. Duffy’s employment is terminated due to his “disability” (as defined in the employment agreement).

If, as a result of or following a “change of control” (as defined in employment agreement), Mr. Duffy’s employment is terminated without cause or Mr. Duffy resigns for good reason, Mr. Duffy is entitled to receive his base salary for a period of 18 months from the date of termination or resignation. If Mr. Duffy’s employment is terminated without cause or Mr. Duffy resigns for good reason, in each case other than as a result of or following a change of control, Mr. Duffy is entitled to receive his base salary for a period of 12 months. If, as of August 4, 2011, we and Mr. Duffy have not either extended his employment period or entered into a new employment agreement, we have agreed to pay Mr. Duffy his base salary for a period of 12 months (provided that Mr. Duffy has given notice to the board of directors of the expiration of the employment agreement at least 90 days but not more than 180 days prior to its expiation and the company has failed to negotiate in good faith with Mr. Duffy for such extension or new employment agreement.) Additionally, during the period in which Mr. Duffy receives any severance payments under the employment agreement, we will arrange to provide Mr. Duffy with benefits substantially similar to the life, disability, accident and group health insurance plans or other similar plans in which he was participating immediately prior to his termination.

The foregoing description of the employment agreement is only a summary and is qualified in its entirety by reference to the full text of the employment agreement, which is attached hereto as Exhibit 10.35 and is hereby incorporated by reference into this Item 5.

Item 6. Exhibits.

10.28		Second Amendment to Industrial/Commercial Lease Agreement Multi-Tenant — Net by and between the Registrant and Greene Properties, Inc., dated as of March 31, 2006
10.35		Employment Agreement by and between the Registrant and Kevin P. Duffy, dated as of August 4, 2008
10.29		Amendment and Waiver No. 1 to Credit Agreement by and among DEI Sales, Inc., the Guarantors listed on the signature pages thereto, the Lenders (as defined therein), and Canadian Imperial Bank of Commerce, acting through its New York Agency as Administrative Agent, dated as of April 20, 2007
31.1		Rule 13a-l4(a)/15d-l4(a) Certification of Chief Executive Officer
31.2		Rule 13a-l4(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer

1519

SIGNATURES

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

	DIRECTED ELECTRONICS, INC. (Registrant)
	DEI HOLDINGS, INC.
Date: May 10, 2007	By:	/s/ James E. Minarik
	(Registrant)
Date: August 5, 2008	By:	/s/ James E. Minarik
	Name:	James E. Minarik
	Title:	President and Chief Executive Officer
Date: May 10, 2007	By:	/s/ Ronald F. Dutt
Date: August 5, 2008	By:	/s/ Kevin P. Duffy
	Name:	~~Ronald~~Kevin FP. ~~Dutt~~Duffy
	Title:	Executive Vice President and Chief Financial Officer

1620

EXHIBIT INDEX

10.28		Second Amendment to Industrial/Commercial Lease Agreement Multi-Tenant — Net by and between the Registrant and Greene Properties, Inc., dated as of March 31, 2006
10.35		Employment Agreement by and between the Registrant and Kevin P. Duffy, dated as of August 4, 2008
10.29		Amendment and Waiver No. 1 to Credit Agreement by and among DEI Sales, Inc., the Guarantors listed on the signature pages thereto, the Lenders (as defined therein), and Canadian Imperial Bank of Commerce, acting through its New York Agency as Administrative Agent, dated as of April 20, 2007
31.1		Rule 13a-l4(a)/15d-l4(a) Certification of Chief Executive Officer
31.2		Rule 13a-l4(a)/15d-l4(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer

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