##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K


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

For the fiscal year ended December 31, 2005







Directed Electronics, 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





(Registrants Telephone Number, Including Area Code)




|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | Not Applicable                           



Common Stock, par value $0.01 per share


(Title of Class)


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o o þ


12b-2 o þ






Documents Incorporated by Reference












---



##### 










DIRECTED ELECTRONICS, INC.


ANNUAL REPORT ON
FORM 10-K


Fiscal Year Ended December 31, 2005


TABLE OF CONTENTS


|                                               |  |                                                                                                                      |     |      |    | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                               |  |                                                                                                                      |     | Page |   
|                                               |  |                                                                                                                      |     |      |   
|PART I                                        
|ITEM 1.                                        |  | BUSINESS                                                                                                             |     |      | 3  | 
|ITEM 1A.                                       |  | RISK FACTORS                                                                                                         |     |      | 21 | 
|ITEM 1B.                                       |  | UNRESOLVED STAFF COMMENTS                                                                                            |     |      | 33 | 
|ITEM 2.                                        |  | PROPERTIES                                                                                                           |     |      | 33 | 
|ITEM 3.                                        |  | LEGAL PROCEEDINGS                                                                                                    |     |      | 33 | 
|ITEM 4.                                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                                              |     |      | 33 | 
|                                              
|PART II                                       
|ITEM 5.                                        |  | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES |     |      | 34 | 
|ITEM 6.                                        |  | SELECTED FINANCIAL DATA                                                                                              |     |      | 36 | 
|ITEM 7.                                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |     |      | 38 | 
|ITEM 7A.                                       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                                                       |     |      | 53 | 
|ITEM 8.                                        |  | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                                         |     |      | 53 | 
|ITEM 9.                                        |  | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |     |      | 54 | 
|ITEM 9A.                                       |  | CONTROLS AND PROCEDURES                                                                                              |     |      | 54 | 
|ITEM 9B.                                       |  | OTHER INFORMATION                                                                                                    |     |      | 55 | 
|                                              
|PART III                                      
|ITEM 10.                                       |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT                                                               |     |      | 56 | 
|ITEM 11.                                       |  | EXECUTIVE COMPENSATION                                                                                               |     |      | 56 | 
|ITEM 12.                                       |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                   |     |      | 56 | 
|ITEM 13.                                       |  | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS                                                                   |     |      | 56 | 
|ITEM 14.                                       |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                               |     |      | 56 | 
|                                              
|PART IV                                       
|ITEM 15.                                       |  | EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES                                                                       |     |      | 56 | 
|SIGNATURES                                     |  |                                                                                                                      | 59  |     
|INDEX TO CONSOLIDATED FINANCIAL
    STATEMENTS |  |                                                                                                                      | F-1 |     
|Exhibit 31.1                                  
|Exhibit 31.2                                  
|Exhibit 32.1                                  
|Exhibit 32.2                                  



Directed®,
Viper®,
Clifford®,
Python®,
Orion®,
Precision
Power®,
a/d/s/®,
Xtreme®,
Definitive
Technology®,
Mythos®,
ProCinema®,
SuperCube®,
Avital®,
Valet®,
Hornet®,
Boa®,
Automate®,
No One Dares Come
Close®,
Responder®,
and
DesignTech®
are registered United States trademarks of Directed Electronics,
Inc. or one of its wholly owned subsidiaries; and The Science of
SecurityTM,
Direct
FlexTM,
and Directed
VideoTM
are unregistered trademarks of Directed Electronics, Inc. or one
of its wholly owned subsidiaries. Other trademarks, service
marks, and trade names appearing in this report are the property
of their respective holders.


Statement Regarding Forward-Looking Statements


The statements contained in this report on
Form 10-K that are
not purely historical are forward-looking statements within the
meaning of applicable securities laws. Forward-looking
statements include statements regarding our
expectations, anticipation,
intentions, beliefs, or
strategies regarding the future. Forward-looking
statements relating to our future economic performance, plans
and objectives for future operations, and projections of revenue
and other financial items are based on our beliefs as well as
assumptions made by us and information currently available to
us. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including those
discussed in Item 1A, Risk Factors.




---



##### Table of Contents






PART I







|        |          
|------- | ---------
|Item 1. | Business.

Introduction




Viper, Clifford,
Python Orion, Precision Power, Directed Audio, a/d/s/ Xtreme Directed Video Automate a/d/s/






www.directed.com. 10-K, 10-Q, 8-K,


3



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##### Table of Contents



Industry






Security and Convenience.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued Focus on Security. Drivers are
    installing an increasing amount of aftermarket accessories in
    their vehicles. According to the Specialty Equipment Market
    Association, over the last decade annual retail spending on
    aftermarket car parts and accessories has doubled to
    $28.9 billion a year. We believe this has increased demand
    for security products needed to protect those valuable contents.
    According to the 2004 FBI Uniform Crime Report:



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2004, content theft from vehicles amounted to approximately
    $1.8 billion in the United States. Aftermarket security
    systems address this type of theft with sophisticated sensor
    technology.
|
| |  | In 2004, an estimated 1.2 million vehicles were stolen in
    the United States, amounting to an estimated $7.6 billion
    in value.                                                                      



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Product Features. The vehicle security
    aftermarket increasingly features sophisticated products that
    incorporate security, convenience, and other advanced features.
    Examples of these features include two-way capabilities, which
    provide information back to the user such as confirmation of
    alarm activation or vehicle ignition; GPS applications, which
    allow for stolen vehicle recovery and monitoring a
    vehicles location; and remote operation of windows,
    sunroofs, and audio systems.                                                                                                                                                                                                                                                                                                                                    
|
| |  | Low OEM Penetration. Vehicle manufacturers have
    historically focused primarily on basic security and keyless
    entry devices, while aftermarket participants generally offer
    more complex products and systems. We estimate that OEMs have
    installation rates of only approximately 8% with sensor alarms,
    no installation of two-way capabilities, and limited
    availability of remote start features. We believe the automobile
    industrys cost-driven manufacturing environment and
    emphasis on standardization are not conducive to increased OEM
    adoption of sophisticated aftermarket features. However, if OEMs
    decide to offer features such as remote start on their new
    vehicles more broadly, we believe the aftermarket industry could
    be influenced by the attendant advertising and increase in
    product awareness.
|
| |  | Broadening Distribution Channels. Vehicle security
    and convenience products have migrated from primarily a
    specialty, niche item sold primarily by local mobile electronics
    specialists to a standard product category for a diverse set of
    retailers, including national and regional electronics chains,
    mass merchants, and national automotive parts retailers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

4



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##### Table of Contents



Home Audio.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Home Theater. The emergence of home
    theater  the integration of audio and video systems
    to recreate the movie theater experience  has been an
    important driver of home speaker sales in recent years. Advances
    such as Dolby Digital technology and 5.1 Audio have led to
    important changes in the home speaker category, most notably the
    use of surround sound technology. These developments in home
    entertainment are driving growth in premium speaker sales, as
    many consumers upgrade their home loudspeaker systems.                                                                                                                                                                                                                                                                                 
|
| |  | Flat Panel Displays. Flat panel televisions have
    experienced extraordinary sales growth due to superior picture
    quality, high-definition capabilities, and the continuing
    decline in retail prices. Flat panel television sales grew to an
    estimated 2.7 million units in 2004, an increase of
    approximately 70% compared to 2003. We expect strong continued
    sales of flat panel televisions in 2006. Consumer spending on
    flat panel televisions is driving growth in premium speaker
    systems, as many consumers upgrade their home loudspeaker
    systems to match the sophistication of their video displays. In
    addition, with the continued decline in the prices of flat panel
    televisions, we believe consumers are more likely to allocate
    spending to other components such as speakers.
|
| |  | Architectural Loudspeakers. Architectural
    loudspeakers (in-wall/in-ceiling speakers) appeal to consumers
    seeking to integrate their entertainment systems into their
    homes. These speakers are typically used in distributed audio
    applications or home theater systems. The desire for appealing
    aesthetics, the space efficiency of in-wall and in-ceiling
    speakers, and the increasing penetration of structured wiring
    have all resulted in an increasing consumer demand for
    architectural loudspeakers. Additionally, the recent increases
    in new home construction and home remodeling, coupled with the
    low existing market penetration of architectural loudspeakers,
    have led to increased demand in this market.                                                                        

Mobile audio.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sound Quality and Format. Sound quality has
    increased greatly in recent years due to the development of
    digital transmission, storage, and playback, including satellite
    radio. In addition, new music formats have been developed, such
    as MP3. We believe the increases in both sound quality and
    storage should drive additional mobile audio purchases, as
    consumers seek to upgrade sound quality in their vehicles.
|
| |  | Increased Customization. We believe the growing
    popularity of vehicle customization should help increase mobile
    audio sales. Television programs, hit movies, and other media
    formats have brought increased visibility to custom mobile audio
    systems, which we believe support demand in our core mobile
    audio demographic.                                                                                                

Mobile Video.


5



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Larger Vehicles. Minivan and sport utility vehicle
    owners have more room for video screens and more passengers to
    entertain. As a result, mobile video systems are especially
    prevalent in these vehicle categories.                                                                                    
|
| |  | Childrens Entertainment. The adoption of
    mobile video has been especially prevalent among families with
    small children. The ability to occupy and entertain children
    while on longer drives has led to strong demand from consumers
    in that demographic.                                           
|
| |  | Gaming. The ability to connect videogame players
    to mobile video screens has also led to the popularity of mobile
    video. Videogame players enjoy the ability to play while
    traveling, and mobile video offers those players a superior
    gaming experience from what they receive with handheld units.

Satellite Radio.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Programming Content. Satellite radio programming
    consists of nearly commercial free music, talk shows, sports,
    and other entertainment content. In much the same way that cable
    television offers expanded viewing choices over traditional
    broadcast television, satellite radio offers greatly enhanced
    listening options over traditional broadcast radio. Satellite
    radio offers listeners a much broader selection of programming
    formats and even allows listeners to customize their own content.
|
| |  | Consumer Awareness. Satellite radio service has
    only recently become available to consumers, and both SIRIUS and
    XM Radio are rapidly adding new subscribers to their customer
    base. This growth in subscribers is driving the attendant growth
    in hardware sales.                                                                                                                                                                                                                                                  
|
| |  | Availability of Attractive Receivers. Satellite
    radio receiver suppliers are introducing new products with
    greater features and more attractive styling.                                                                                                                                                                                                                                                                                                                                                                    



Our Competitive Strengths






| |                        
| | -----------------------
| | Strong Market Positions



6



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| |                                      
| | -------------------------------------
| | Broad Portfolio of Established Brands

Viper Python Clifford Definitive Technology, Orion,
a/d/s/ Precision Power Directed Video Automate


Viper




| |                             
| | ----------------------------
| | Highly Diverse Customer Base







| |                                
| | -------------------------------
| | Attractive Retailer Proposition



7



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|                                     |  |                                                                                                                             
|------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------
|Element                              |  | Benefit                                                                                                                     
|                                     |  |                                                                                                                             
|Efficient Inventory Execution        |  | Approximately 93% average fill rate on our mobile products, with
    approximately 92% of all orders shipped on time in 2005
|Installer-Friendly Design Philosophy |  | Easy installation with minimal return rates                                                                                 
|Commitment to Training               |  | More than 4,500 installers trained                                                                                          





| |                                                   
| | --------------------------------------------------
| | Strong Track Record of Growth and Operating Profit





| |                                         
| | ----------------------------------------
| | Scalable, Outsourced Manufacturing Model





| |                                                      
| | -----------------------------------------------------
| | Strong Executive Team with Experience Managing Growth



Our Strategy


easy-to






| |                                         
| | ----------------------------------------
| | Leverage Successful Multi-Brand Strategy

Viper Python Clifford


8



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Automate Directed
Video Orion Precision Power Directed Audio a/d/s/ Xtreme




| |                             
| | ----------------------------
| | Increase Product Penetration





| |                                  
| | ---------------------------------
| | Develop New and Enhanced Products





a/d/s/ Mythos


Expand Distribution Channels






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Domestic. We intend to continue adding some of the
    largest and fastest growing retailers in the United States to
    our distribution network. In 2004, we entered the mass merchant
    channel for the first time with our line of do-it-yourself
    remote start and convenience products. We also intend to
    increase our presence in the car dealer channel. There are more
    than 21,500 car dealers in the United States, and we have
    designed our Automateline of products specifically for
    that market. We have recently begun targeting this market and
    believe that it represents a significant growth opportunity. In
    the mobile video category, we intend to expand our relationship
    with Best Buy as well as continue our penetration of our dealer
    base. We intend to capitalize on both our well-recognized brand
    names and strong distribution network to continue to expand our
    dealer base.

9



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | International. We believe there is a significant
    opportunity to expand our international distribution. We believe
    that many of the same factors  increased awareness of
    the value of security and convenience products, the need for
    additional security due to the increased value of accessories
    installed in cars, and widening consumer interest in premium
    home theater systems  that have driven the growth of
    our business in the United States could also benefit our
    international business. We plan to use our current U.K. office
    as a base for expansion into additional European markets. We
    also opened an office in the first quarter of 2006 in Hong Kong
    as a base for expansion into the Asian market, as well as to
    better oversee the product manufacturing of our Asian suppliers.
    Our international growth plan includes appointing new
    distributors and working with our security and convenience
    customers to sell additional product categories. We are also
    considering establishing a direct sales force in selected
    foreign countries. Additionally, we believe that the emerging
    Chinese automotive market represents a promising long-term
    consumer market opportunity for our products.



| |                                           
| | ------------------------------------------
| | Pursue Selective Acquisition Opportunities



Product Lines




|                                                      |  |      |      | 
|----------------------------------------------------- |  | ---- | ---- | 
|Product                                               |  | Year |     
|                                                      |  |      |     
|Anti-Theft, Digital Keypads, Motion Sensors           |  |      | 1983 | 
|Radio Frequency Remote Control and Shock Sensors      |  |      | 1987 | 
|Remote Start                                          |  |      | 1990 | 
|Hybrid                                                |  |      | 1995 | 
|Mobile Audio                                          |  |      | 1996 | 
|Home Audio                                            |  |      | 2001 | 
|Mobile Video/ Two-Way Security and Convenience        |  |      | 2002 | 
|Do-It-Yourself Security and Remote Start/GPS Tracking |  |      | 2003 | 
|Satellite Radio                                       |  |      | 2004 | 
|Mobile Video Dockable Hardrives                       |  |      | 2005 | 



| |                           
| | --------------------------
| | Security and Entertainment



10



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Security and Convenience.


|                 |  |                                                                                                 |  |                     |             | 
|---------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------- | ----------- | 
|                 |  |                                                                                                 |  | Representative      |            
|Product          |  | Description                                                                                     |  | Retail Price Points |            
|                 |  |                                                                                                 |  |                     |            
|Security         |  | Designed to deter theft of vehicles and vehicle contents.                                       |  | $                   | 99 - $399   | 
|Remote Start     |  | Permits users to start a vehicles ignition from up to
    one-half mile away from the vehicle. |  | $                   | 159 - $399  | 
|DIY Remote Start |  | Remote start systems designed for do-it-yourself installation.                                  |  | $                   | 59 - $199   | 
|Hybrid           |  | Contains security, remote start, and other convenience
    capabilities.                        |  | $                   | 349 - $499  | 
|GPS Tracking     |  | Remote locating and tracking to recover a stolen vehicle and for
    fleet management.          |  | $                   | 499 - $799  | 
|Accessories      |  | Selection of components to facilitate vehicle installation.                                     |  |                     | Broad Range | 

Responder




|           |  |          |  |             
|---------- |  | -------- |  | ------------
| Viper    |  |  Avital |  |  Boa       
| Clifford |  |  Valet  |  |  Automate  
| Python   |  |  Hornet |  |  DesignTech

Home Audio. Definitive Technology a/d/s/ Mythos a/d/s


11



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|                                                     |  |                                                                                                                                                                             |  |                     |                       | 
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | --------------------- | 
|                                                     |  |                                                                                                                                                                             |  | Representative      |                      
|Product                                              |  | Description                                                                                                                                                                 |  | Retail Price Points |                      
|                                                     |  |                                                                                                                                                                             |  |                     |                      
|ProCinema                                            |  | Packaged speaker systems that include surround speakers, a
    center channel speaker and a powered subwoofer designed for
    music and movie surround sound applications. |  |                     | $199 - $699 (package) | 
|Tower Speakers                                       |  | Patented bipolar speakers designed for three
    dimensional sound with built-in subwoofers marketed under the
    SuperTowertrade name.                                  |  |                     | $299 - $2,499 (each)  | 
|Mythos                                               |  | On-wall and stand-alone speakers designed to complement flat
    panel televisions.                                                                                         |  |                     | $499 - $799 (each)    | 
|Powered Subwoofers                                   |  | Ultra-compact subwoofers marketed primarily under the
    SuperCubetrade name.                                                                                              |  |                     | $699 - $1,699 (each)  | 
|Architectural & Outdoor Loudspeakers                 |  | A wide range of in-wall, in-ceiling, and outdoor speakers
    engineered to achieve superior sound quality.                                                                 |  |                     | $259 - $649 (each)    | 
|Center Channel, Surround,
    and Bookshelf Speakers |  | Smaller speakers designed for specific applications.                                                                                                                        |  |                     | $175 - $799 (each)    | 

Mobile audio. Orion Precision Power Directed Audio a/d/s/ Xtreme


|            |  |                                                                                                                                                     |  |                     |                     | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------------------- | 
|            |  |                                                                                                                                                     |  | Representative      |                    
|Product     |  | Description                                                                                                                                         |  | Retail Price Points |                    
|            |  |                                                                                                                                                     |  |                     |                    
|Amplifiers  |  | Power amplifiers increase the voltage and current coming from
    the source unit, providing more power than possible from a
    source unit alone. |  |                     | $99 - $1,499 (each) | 
|Speakers    |  | Aftermarket speakers provide improved sound quality compared to
    most factory-installed mobile audio systems.                                    |  |                     | $39 - $499 (each)   | 
|Subwoofers  |  | Speakers that are eight inches or greater in diameter, which are
    designed to play lower (bass) frequencies.                                     |  |                     | $49 - $699 (each)   | 
|Accessories |  | Power capacitors, distribution blocks, audio interconnects, and
    amplifier wiring kits for a variety of installation applications.               |  |                     | Broad Range         | 

Mobile Video. all-in


12



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Directed Video Automate


|                               |  |                                                                                                                                                                |  |                        
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------
|                               |  |                                                                                                                                                                |  | Representative         
|Product                        |  | Description                                                                                                                                                    |  | Retail Price Points    
|                               |  |                                                                                                                                                                |  |                        
|Overhead Entertainment Systems |  | Flip-down video displays combined with DVD players and wireless
    headphones that are installed inside the roof of SUVs and
    minivans.                    |  | $399 - $1,349 (package)
|Replacement Headrest Packages  |  | Aftermarket headrests that contain video screens and are
    designed to easily replace existing OEM headrests, packaged with
    a DVD player and headphones. |  | $699
    (package)     
|Stand-Alone Video Monitors     |  | Active matrix LCD screens designed for vehicle installation.                                                                                                   |  | $189 - $1,199 (each)   
|Media Players                  |  | DVD players designed for vehicle installation.                                                                                                                 |  | $129 - $179 (each)     
|Accessories                    |  | Wireless headphones, control modules, trim rings, and antennas
    designed for installation convenience.                                                      |  | Broad Range            



| |                
| | ---------------
| | Satellite Radio





|                                 |  |                                                                                                                        |  |                     |            | 
|-------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ---------- | 
|                                 |  |                                                                                                                        |  | Representative      |           
|Product                          |  | Description                                                                                                            |  | Retail Price Points |           
|                                 |  |                                                                                                                        |  |                     |           
|Portable Plug-and-Play Receivers |  | Portable units that can be attached in a vehicle, boombox, or at
    home.                                             |  |                     | $49 - $329 | 
|Docking Kits                     |  | Docking stations to allow users to utilize receivers in
    vehicles, at home, or at work.                             |  |                     | $39 - $249 | 
|Home Receivers                   |  | Satellite radio reception units for use with home audio equipment                                                      |  |                     | $269       | 
|Down Link Processors             |  | Receivers designed to add to any existing car stereo.                                                                  |  |                     | $99 - $299 | 
|Accessories                      |  | Signal combiners, distribution systems, antennas, and related
    items to assist with vehicle and home installations. |  |                     | $10 - $70  | 

13



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Distribution




Specialty Retailers


Viper,
Python Clifford Valet, Hornet Avital Boa


Definitive Technology a/d/s/


National and Regional Electronics Chains






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Best Buy. We have supplied Best Buy with security
    and convenience products since 1994 and have helped them sell
    more premium, higher-priced products in this category. In 2004,
    we increased our product offerings with Best Buy through the
    addition of mobile video and SIRIUS Satellite Radio products. We
    believe that the significant sales of these products at Best Buy
    should strengthen our relationship and provide additional
    cross-selling opportunities.
|
| |  | Circuit City. We have served as a vendor to
    Circuit City since 1986. We became Circuit Citys exclusive
    provider for vehicle security, remote start, convenience
    systems, and related accessories in 2005. The products we sell
    to Circuit City consist of the latest technologies available in
    our Python, Valet,Hornet,Boa, and
    Directed Installation Accessorieslines. Circuit City is
    also one of our largest customers of SIRIUS Satellite Radio
    products.  

Mass Merchants and Automotive Parts Retailers


Boa


Car Dealers




14



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International Distribution




Customers




Sales and Marketing


point-of Definitive Technology Home Theater Sound
and Vision.








15



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##### Table of Contents







word-of


www.directed.com www.clifford.com www.orioncaraudio.com www.definitivetech.com


Outsourced Manufacturing and Assembly


on-site








Product Development and Engineering








16



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Technical Support and Warranty






Training


state-of


Intellectual Property








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|                          |  |                           |  |                  
|------------------------- |  | ------------------------- |  | -----------------
| Viper                   |  |  Definitive Technology   |  |  Automate       
| Clifford                |  |  a/d/s/                  |  |  Orion          
| Python                  |  |  Directed Video          |  |  Precision Power
| No One Dares Come Close |  |  The Science of Security |  |  DesignTech     

Competition






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Specialty Audio Suppliers. These companies
    generally compete in specific market niches on the basis of
    brand image, quality, and technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Large Consumer Electronics Companies. These
    companies offer a wide range of products as part of their broad
    consumer electronics offerings. These companies tend to focus on
    large, high-volume product categories and generally have not
    focused on the smaller product segments, such as component
    speakers, security and convenience products, car amplifiers, and
    mobile video units, in which we compete. Although consumers may
    purchase complete audio systems or
    theater-in-a-box
    made by these consumer electronics companies instead of systems
    with premium component speakers, we do not compete directly with
    these products at most of the retailers carrying our speakers.
    We do, however, compete with a few of these companies. We plan
    to continue our focus on product categories that do not compete
    directly with these consumer electronics companies at the
    wholesale level. To the extent that these companies choose to
    focus on our product categories, they would be formidable
    competitors.

















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Government Regulation






truth-in




Employees




Executive Officers




|                     |  |     |    |  |          |                                                                                   
|-------------------- |  | --- | -- |  | -------- | ----------------------------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|James E. Minarik     |  |     | 53 |  |          | President and Chief Executive Officer                                             
|Glenn R. Busse       |  |     | 43 |  |          | Senior Vice President  Sales and Marketing                                       
|Kevin P. Duffy       |  |     | 30 |  |          | Senior Vice President  Strategy, Corporate
    Development and Investor Relations
|Mark E. Rutledge     |  |     | 35 |  |          | Senior Vice President  Engineering and Product
    Development                   
|KC Bean              |  |     | 42 |  |          | Vice President, General Counsel, and Secretary                                    
|Richard J. Hirshberg |  |     | 51 |  |          | Vice President  Internal Audit and Compliance                                    
|John D. Morberg      |  |     | 42 |  |          | Vice President  Finance, Chief Financial Officer, and
    Treasurer              
|Michael N. Smith     |  |     | 39 |  |          | Vice President  Operations, Human Resources and
    Information Technology       

James E. Minarik


19



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Glenn R. Busse


Kevin P. Duffy


Mark E. Rutledge


KC Bean


Richard J. Hirshberg start-up


John D. Morberg


Michael N. Smith


20



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##### Table of Contents








Item 1A.     Risk Factors.




Risks Related to Our Business


We operate in the highly competitive branded consumer
electronics industry.








| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | our success in designing and developing new or enhanced products;                                                         
|
| |  | our ability to address the needs of our retailers and consumers;                                                          
|
| |  | the pricing, quality, performance, reliability, features, ease
    of installation and use, and diversity of our products;
|
| |  | the quality of our customer service; and                                                                                  
|
| |  | product or technology introductions by our competitors.                                                                   



If we do not continue to improve our core products or develop
new products that meet the constantly changing demands of our
customers, our sales may decline.






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##### Table of Contents







| |   |                                                              
| | - | -------------------------------------------------------------
| |  | unfavorable comparisons with products introduced by others;  
|
| |  | superior technologies developed by our competitors;          
|
| |  | price considerations; and                                    
|
| |  | lack of anticipated or actual market demand for our products.



We depend upon certain key customers for a large portion of
our sales, and the loss of any of those customers could harm our
business.






Adverse developments affecting SIRIUS Satellite Radio could
cause our sales to decline and harm our business.










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##### Table of Contents



Our pricing and promotional practices could be challenged.




We rely on contract manufacturers, and their failure to
maintain satisfactory delivery schedules could increase our
costs, disrupt our supply chain, and result in our inability to
deliver our products, all of which would adversely affect our
operating results.




Shortages of components and materials may delay or reduce our
sales and increase our costs.




A disruption in our ability to import our products could
increase our costs, cause our sales to decline, and harm our
business.






23



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If we do not successfully maintain the quality of the
installation of our automotive products by our retailer
partners, our reputation could suffer and our sales could
decline.




If we become subject to product returns or product liability
claims resulting from defects in our products, we may face an
increase in our costs, a loss of customers, or a delay in the
market acceptance of our products.






We have identified certain material weaknesses in our
internal control over financial reporting. Our efforts to remedy
these issues may not be successful or may not be sufficient to
prevent similar issues from arising in the future.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inadequate Resources in our Accounting and Financial
    Reporting Functions. We did not maintain a sufficient
    complement of personnel with an appropriate level of accounting
    knowledge, experience, and training in the application of
    U.S. generally accepted accounting principles commensurate
    with our existing financial reporting requirements and the
    requirements we face as a public company. Accordingly,
    management has concluded that this control deficiency
    constitutes a material weakness, and that it contributed to the
    following material weakness.
|
| |  | Inability to Appropriately Analyze Certain Accounts. We
    did not maintain effective controls with respect to the analysis
    of our other assets and various accrual accounts. Specifically,
    we did not perform a complete and timely analysis of our other
    assets account, which resulted in an audit adjustment                                                                                                                                                                                                                                                                           

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##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | related to the inappropriate capitalization of costs during the
    three-month period ended June 30, 2005 and the three-month
    period ended September 30, 2005. In addition, we did not perform
    a complete analysis of various accrual accounts, including
    accrued expenses and accrued rebates, resulting in audit
    adjustments in the 2005 consolidated financial statements.
    Additionally, this control deficiency could result in a
    misstatement in the aforementioned accounts that would result in
    a material misstatement to the annual or interim consolidated
    financial statements that would not be prevented or detected.
    Accordingly, management has concluded that this control
    deficiency constitutes a material weakness.









| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | faulty human judgment and simple errors, omissions, or mistakes;                                                                                       
|
| |  | fraudulent action of an individual or collusion of two or more
    people;                                                                             
|
| |  | inappropriate management override of policies and
    procedures; and                                                                                  
|
| |  | the possibility that any enhancements to controls and procedures
    may still not be adequate to assure timely and accurate
    financial information.



If we do not successfully address the risks associated with
our international operations, our business could be harmed.




25



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| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | management of a multinational organization;                                                                                               
|
| |  | the burdens and costs of compliance with local laws and
    regulatory requirements as well as changes in those laws and
    requirements;
|
| |  | transportation delays or interruptions and other consequences of
    less developed infrastructures;                                      
|
| |  | overlap of tax issues;                                                                                                                    
|
| |  | tariffs and duties;                                                                                                                       
|
| |  | political or economic instability in certain parts of the
    world; and                                                                  
|
| |  | protectionist trade legislation in either the United States or
    foreign countries.                                                     

non-U.S. non-U.S.


Any acquisitions that we undertake could be difficult to
integrate, disrupt our business, dilute shareholder value, and
adversely affect our operating results.






| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | challenges integrating the purchased operations, technologies,
    products, systems, or services with our own;
|
| |  | potential compliance issues with regard to acquired companies
    that do not have adequate internal controls; 
|
| |  | misjudgment by us of revenue and profit potential of acquisition
    candidates;                               
|
| |  | unanticipated costs or hidden liabilities associated with the
    acquisition;                                 
|
| |  | diversion of managements attention from our existing
    businesses;                                          
|
| |  | adverse effects on existing business relationships with
    suppliers and customers;                           
|
| |  | risks associated with entering markets in which we have little
    or no prior experience; and                 
|
| |  | potential loss of key employees and customers of purchased
    organizations.                                  

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##### Table of Contents









If we are unable to protect our intellectual property, our
ability to compete effectively in our markets could be
harmed.






| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | intellectual property laws may not protect our intellectual
    property rights;                                                                                  
|
| |  | third parties may challenge, invalidate, or circumvent any
    patents issued to us;                                                                              
|
| |  | unauthorized parties may attempt to copy or otherwise use
    information that we regard as proprietary despite our efforts to
    protect our proprietary rights;
|
| |  | others may independently develop similar or superior technology,
    duplicate our technologies, or design around any patents issued
    to us; and               
|
| |  | effective protection of intellectual property rights may be
    limited or unavailable in some foreign countries in which we
    operate.                         

a/d/s/ a/d/s/


We may be required to incur substantial expenses and divert
management attention and resources in defending intellectual
property litigation against us or prosecuting others for their
unauthorized use of our intellectual property.




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Our substantial indebtedness could adversely affect our
business and limit our ability to plan for or respond to changes
in our business, and we may be unable to generate sufficient
cash flow to satisfy significant debt service obligations.








| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                                                                                                        
|
| |  | reducing the availability of our cash flow for other purposes;                                                                                                                                                                                                                                                               
|
| |  | limiting our flexibility in planning for, or reacting to,
    changes in our business and the industry in which we operate,
    which would place us at a competitive disadvantage compared to
    our competitors that may have less debt;                                                                                  
|
| |  | limiting, by the financial and other restrictive covenants in
    our debt agreements, our ability to borrow additional
    funds; and                                                                                                                                                                                       
|
| |  | having a material adverse effect on our business if we fail to
    comply with the covenants in our debt agreements, because such
    failure could result in an event of default that, if not cured
    or waived, could result in all or a substantial amount of our
    indebtedness becoming immediately due and payable.



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##### Table of Contents





Our senior secured credit facility contains restrictive terms
and our failure to comply with these terms could put us in
default, which would have an adverse effect on our business and
operations.






| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness;                                                                    
|
| |  | make capital expenditures and other investments;                                                  
|
| |  | merge, consolidate, or dispose of our assets or the capital
    stock or assets of any subsidiary;
|
| |  | pay dividends, make distributions, or redeem capital stock;                                       
|
| |  | change our line of business;                                                                      
|
| |  | enter into transactions with our affiliates; and                                                  
|
| |  | grant liens on our assets or the assets of our subsidiaries.                                      



Our debt obligations have variable rates, which makes us
vulnerable to increases in interest rates.




Disruption in our main distribution centers may prevent us
from meeting customer demand, and our sales and profitability
may suffer as a result.




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A decline in discretionary spending would likely cause our
sales to decline.




Our operating results may experience significant periodic and
seasonal fluctuations, which could cause our results to fall
short of expectations and cause our stock price to decline.


period-to






| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and volume of orders relative to the capacity of our
    contract manufacturers;                                         
|
| |  | product introductions or enhancements and market acceptance of
    product introductions and enhancements by us and our competitors;
|
| |  | evolution in the life cycles of our products;                                                                                       
|
| |  | timing of expenditures in anticipation of future orders;                                                                            
|
| |  | product mix; and                                                                                                                    
|
| |  | pricing and availability of competitive products.                                                                                   









We may seek to raise additional capital in the future to
finance our operations in the consumer electronics industry, and
our inability to raise such capital could restrict our growth
and harm our operating results.




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Our executive officers and key personnel are critical to our
business, and these officers and personnel may not remain with
us in the future.




We are subject to various governmental regulations that could
adversely affect our business.








Risks Related to Ownership of Our Common Stock


The market price for our common stock may be volatile.






| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | the gain or loss of significant customers or orders;                                  
|
| |  | introductions of new products or new pricing policies by us or
    by our competitors;
|
| |  | variations in our quarterly results;                                                  
|
| |  | announcements of technological innovations by us or by our
    competitors;           
|
| |  | acquisitions or strategic alliances by us or by our competitors;                      

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | recruitment or departure of key personnel;                                                                                                     
|
| |  | the level and quality of research analyst coverage for our
    common stock;                                                                   
|
| |  | changes in the estimates of our operating performance or changes
    in recommendations by any research analysts that follow our
    stock; and
|
| |  | market conditions in our industry, the industries of our
    customers, and the economy as a whole.                                            



Our current principal shareholders have significant influence
over us, and they could delay, deter, or prevent a change of
control or other business combination or otherwise cause us to
take action with which you might not agree.




The large number of shares eligible for public sale or
subject to rights requiring us to register them for public sale
could depress the market price of our common stock.


180-day lock-up






Provisions in our articles of incorporation, our bylaws, and
Florida law could make it more difficult for a third party to
acquire us, discourage a takeover, and adversely affect existing
shareholders.




32



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|         |                           
|-------- | --------------------------
|Item 1B. | Unresolved Staff Comments.








|        |            
|------- | -----------
|Item 2. | Properties.





|                       |  |         |                               |  |      |  |                | 
|---------------------- |  | ------- | ----------------------------- |  | ---- |  | -------------- | 
|Location               |  | Purpose |                               |  | Size | 
|                       |  |         |                               |  |      | 
|Owings Mills, Maryland |  |         | Sales and Marketing Office    |  |      |  | 4,500 sq. ft.  | 
|Epsom, England         |  |         | Sales and Distribution Center |  |      |  | 10,000 sq. ft. | 






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.










|        |                                                     
|------- | ----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders.



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PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.

Market Information for Common Stock




|     |                                        |      |   |       |     |  |   |       | 
|---- | -------------------------------------- | ---- | - | ----- | --- |  | - | ----- | 
|     |                                        | High |   |       | Low | 
|     |                                        |      |   |       |     | 
|2005 |                                        |      |   |       |     |  |   |      
|     | Fourth quarter                         |      | $ | 17.00 |     |  | $ | 13.76 | 
|2006 |                                        |      |   |       |     |  |   |      
|     | First quarter (through March 30, 2006) |      | $ | 16.25 |     |  | $ | 12.75 | 



Use of Proceeds


S-1 333-127823)






Dividend Policy






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##### Table of Contents



Equity Compensation Plan Information




|                                                       |       |                    |           |           |                    |            |                     |                      |  |  |           |           | 
|------------------------------------------------------ | ----- | ------------------ | --------- | --------- | ------------------ | ---------- | ------------------- | -------------------- |  |  | --------- | --------- | 
|                                                       |       |                    |           |           |                    | (c)        |                    
|                                                       |       |                    |           |           |                    | Number of  |                    
|                                                       |       |                    |           |           |                    | Securities |                    
|                                                       |       | (a)                |           |           |                    |            | Remaining Available |                     
|                                                       |       | Number of          |           |           |                    |            | for Future Issuance |                     
|                                                       |       | Securities to be   |           |           | (b)                |            |                     | Under Equity         | 
|                                                       |       | Issued Upon        |           |           | Weighted Average   |            |                     | Compensation Plans   | 
|                                                       |       | Exercise of        |           |           | Exercise Price of  |            |                     | (Excluding           | 
|                                                       |       | Outstanding        |           |           | Outstanding        |            |                     | Securities Reflected | 
|                                                       |       | Options, Warrants, |           |           | Options, Warrants, |            |                     | in Column            | 
|Plan Category                                          |       | and Rights         |           |           | and Rights         |            |                     | (a))                 | 
|                                                       |       |                    |           |           |                    |            |                     |                      | 
|Equity Compensation Plans Approved by Stockholders     |       |                    | 1,055,686 |           |                    | $          | 16.00               |                      |  |  | 1,694,314 |          
|Equity Compensation Plans Not Approved by Stockholders |       |                    |          |           |                    |            |                    |                      |  |  |          |          
|                                                       |       |                    |           |           |                    |            |                     |                      | 
|                                                       | Total |                    |           | 1,055,686 |                    |            |                     |                      |  |  |           | 1,694,314 | 
|                                                       |       |                    |           |           |                    |            |                     |                      | 

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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.



|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |     |  |   |         |    
|---------------------------------------------------------------- |  | ------------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- | --- |  | - | ------- | ---
|                                                                 |  | Year Ended December 31,               |        
|                                                                 |  |                                       |        
|                                                                 |  | 2001                                  |         |  | 2002 |   |         | 2003 |  |   | 2004    |  |  | 2005 |        
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                                                 |  | (Unaudited)                           |         |  |      |   |         |      |  |   |        
|                                                                 |  | (In thousands, except per share data) |        
|Consolidated Statement of Operations Data:                       |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |     |  |   |         |    
|Net sales                                                        |  | $                                     | 105,591 |  |      | $ | 123,709 |      |  | $ | 131,765 |  |  | $    | 189,869 | (a) |  | $ | 304,558 |    
|Cost of sales                                                    |  |                                       | 53,143  |  |      |   | 61,960  |      |  |   | 69,907  |  |  |      | 108,525 |     |  |   | 204,171 | (c)
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Gross profit                                                     |  |                                       | 52,448  |  |      |   | 61,749  |      |  |   | 61,858  |  |  |      | 81,344  |     |  |   | 100,387 |    
|Total operating expenses                                         |  |                                       | 28,092  |  |      |   | 30,470  |      |  |   | 31,782  |  |  |      | 41,105  |     |  |   | 81,065  | (c)
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Income from operations                                           |  |                                       | 24,356  |  |      |   | 31,279  |      |  |   | 30,076  |  |  |      | 40,239  | (a) |  |   | 19,322  |    
|Interest expense, net(b)                                         |  |                                       | 12,486  |  |      |   | 9,723   |      |  |   | 9,091   |  |  |      | 16,523  |     |  |   | 24,857  |    
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Income (loss) before provision for (benefit from) income taxes   |  |                                       | 11,870  |  |      |   | 21,556  |      |  |   | 20,985  |  |  |      | 23,716  |     |  |   | (5,535  | )  
|Provision for (benefit from) income taxes                        |  |                                       | 4,695   |  |      |   | 8,793   |      |  |   | 8,514   |  |  |      | 9,754   |     |  |   | (398    | )  
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Net income (loss)                                                |  |                                       | 7,175   |  |      |   | 12,763  |      |  |   | 12,471  |  |  |      | 13,962  |     |  |   | (5,137  | )  
|Net income (loss) attributable to participating security holders |  |                                       | 3       |  |      |   | 19      |      |  |   | 63      |  |  |      | 138     |     |  |   | (61     | )  
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Net income (loss) available to common shareholders               |  | $                                     | 7,172   |  |      | $ | 12,744  |      |  | $ | 12,408  |  |  | $    | 13,824  |     |  | $ | (5,076  | )  
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Net income (loss) per common share:                              |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |     |  |   |         |    
|Basic                                                            |  | $                                     | 0.56    |  |      | $ | 1.00    |      |  | $ | 0.97    |  |  | $    | 0.88    |     |  | $ | (0.27   | )  
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|Diluted                                                          |  | $                                     | 0.47    |  |      | $ | 0.79    |      |  | $ | 0.76    |  |  | $    | 0.80    |     |  | $ | (0.27   | )  
|                                                                 |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        

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|                            |  |                         |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|--------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                            |  | Year Ended December 31, |       
|                            |  |                         |       
|                            |  | 2001                    |        |  | 2002 |   |        | 2003 |  |   | 2004   |  |  | 2005 |       
|                            |  |                         |        |  |      |   |        |      |  |   |        |  |  |      |       
|                            |  | (Unaudited)             |        |  |      |   |        |      |  |   |       
|                            |  | (In thousands)          |       
|Other Data:                 |  |                         |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|Adjusted EBITDA(d)          |  | $                       | 31,546 |  |      | $ | 35,611 |      |  | $ | 34,491 |  |  | $    | 40,689 |  |  | $ | 55,777 | 
|Capital expenditures        |  |                         | 828    |  |      |   | 1,269  |      |  |   | 1,520  |  |  |      | 1,317  |  |  |   | 1,690  | 
|Depreciation                |  |                         | 262    |  |      |   | 475    |      |  |   | 723    |  |  |      | 943    |  |  |   | 1,409  | 
|Amortization of intangibles |  |                         | 6,502  |  |      |   | 3,286  |      |  |   | 3,287  |  |  |      | 3,505  |  |  |   | 4,050  | 
|Cash taxes paid             |  |                         | 3,800  |  |      |   | 2,482  |      |  |   | 6,254  |  |  |      | 3,937  |  |  |   | 6,669  | 
|Cash interest paid          |  |                         | 11,482 |  |      |   | 9,556  |      |  |   | 7,210  |  |  |      | 10,141 |  |  |   | 21,903 | 

|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |     |  |   |         | 
|-------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- | --- |  | - | ------- | 
|                                 |  | As of December 31, |        
|                                 |  |                    |        
|                                 |  | 2001               |         |  | 2002 |   |         | 2003 |  |   | 2004    |  |  | 2005 |        
|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                 |  | (Unaudited)        |         |  |      |   |         |      |  |   |        
|                                 |  | (In thousands)     |        
|Consolidated Balance Sheet Data: |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |     |  |   |         | 
|Cash and cash equivalents        |  | $                  | 6,862   |  |      | $ | 14,971  |      |  | $ | 16,284  |  |  | $    | 3,784   |     |  | $ | 12,167  | 
|Total assets                     |  |                    | 192,516 |  |      |   | 206,628 |      |  |   | 213,815 |  |  |      | 294,347 |     |  |   | 370,620 | 
|Total debt                       |  |                    | 113,590 |  |      |   | 112,716 |      |  |   | 95,092  |  |  |      | 225,610 | (b) |  |   | 171,810 | 
|Total shareholders equity       |  |                    | 49,779  |  |      |   | 62,527  |      |  |   | 75,548  |  |  |      | 458     | (b) |  |   | 99,523  | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes $6.5 million of royalty revenue from a one-time
    payment from a major automobile manufacturer for a non-exclusive
    license to use certain of our patented technology. The only
    expense associated with this payment was a $0.7 million
    one-time bonus recorded as operating expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(b) |  | In connection with our June 2004 recapitalization, we incurred
    approximately $185.0 million of new indebtedness and paid
    off a total of $76.6 million of existing debt. In addition,
    we paid a special dividend to shareholders and warrant holders
    of approximately $109.4 million. Due to the repayment of
    the existing debt, we wrote off $1.1 million of deferred
    financing costs and we wrote off $1.7 million of
    unamortized discount related to the warrants that were issued
    with the existing debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(c) |  | In connection with our initial public offering of our common
    stock, we incurred $24.5 million of stock-based
    compensation, costs related to the termination of certain sale
    bonus and equity gain program arrangements, and other IPO costs,
    of which $0.8 million of which is included in cost of sales
    and $23.7 million of which is included in operating
    expenses; paid $2.2 million to our chief executive officer
    pursuant to an equity participation agreement; and paid $3.5
    million to terminate a management agreement with a related party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(d) |  | In evaluating our business, we consider and use Adjusted EBITDA
    as a supplemental measure of our operating performance. We
    define Adjusted EBITDA as EBITDA plus expenses (minus gains)
    that we do not consider reflective of our ongoing operations. We
    use Adjusted EBITDA to measure our performance when determining
    management bonuses, we use Adjusted EBITDA per employee to
    measure our efficiency, and we use Adjusted EBITDA to measure
    the performance of potential acquisition candidates. For
    example, we used EBITDA, as adjusted for certain compensation
    expenses, rebates, and receivables insurance, to evaluate our
    acquisition of Definitive Technology in 2004. In addition, we
    adjust for these expenses in measuring our performance under our
    senior credit facility. EBITDA and Adjusted EBITDA have
    limitations as analytical tools, and you should not consider
    them in isolation, or as a substitute for analysis of our
    results as reported under GAAP. See Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Non-GAAP Discussion for a
    discussion of our use of EBITDA and Adjusted EBITDA and certain
    limitations of EBITDA and Adjusted EBITDA as financial measures.
    Because of these limitations, Adjusted EBITDA should not be
    considered as a measure of discretionary cash available to us to
    invest in the growth of our business. We compensate for these
    limitations by relying primarily on our GAAP results and using
    EBITDA and Adjusted EBITDA only supplementally.

37



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|                                               |  |                         |        |                |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        |  
|---------------------------------------------- |  | ----------------------- | ------ | -------------- | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | -
|                                               |  | Year Ended December 31, |       
|                                               |  |                         |       
|                                               |  | 2001                    |        |                | 2002 |   |        | 2003 |  |   | 2004   |  |  | 2005 |       
|                                               |  |                         |        |                |      |   |        |      |  |   |        |  |  |      |       
|                                               |  | (Unaudited)             |        |                |      |   |        |      |  |   |       
|                                               |  |                         |        | (In thousands) |     
|Net income (loss)                              |  | $                       | 7,175  |                |      | $ | 12,763 |      |  | $ | 12,471 |  |  | $    | 13,962 |  |  | $ | (5,137 | )
|Plus: interest expense, net                    |  |                         | 12,486 |                |      |   | 9,723  |      |  |   | 9,091  |  |  |      | 16,523 |  |  |   | 24,857 |  
|Plus: income tax expense (benefit)             |  |                         | 4,695  |                |      |   | 8,793  |      |  |   | 8,514  |  |  |      | 9,754  |  |  |   | (398   | )
|Plus: depreciation and amortization            |  |                         | 6,764  |                |      |   | 3,761  |      |  |   | 4,010  |  |  |      | 4,448  |  |  |   | 5,459  |  
|                                               |  |                         |        |                |      |   |        |      |  |   |        |  |  |      |       
|EBITDA                                         |  |                         | 31,120 |                |      |   | 35,040 |      |  |   | 34,086 |  |  |      | 44,687 |  |  |   | 24,781 |  
|Plus: equity participation payments(1)         |  |                         |       |                |      |   |       |      |  |   |       |  |  |      | 1,280  |  |  |   | 2,236  |  
|Plus: management fees(2)                       |  |                         | 426    |                |      |   | 571    |      |  |   | 405    |  |  |      | 552    |  |  |   | 4,220  |  
|Less: one-time license fee, net of expenses(3) |  |                         |       |                |      |   |       |      |  |   |       |  |  |      | 5,830  |  |  |   |       |  
|Plus: one-time IPO related expenses(4)         |  |                         |       |                |      |   |       |      |  |   |       |  |  |      |       |  |  |   | 24,540 |  
|                                               |  |                         |        |                |      |   |        |      |  |   |        |  |  |      |       
|Adjusted EBITDA                                |  | $                       | 31,546 |                |      | $ | 35,611 |      |  | $ | 34,491 |  |  | $    | 40,689 |  |  | $ | 55,777 |  
|                                               |  |                         |        |                |      |   |        |      |  |   |        |  |  |      |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We made these payments under an equity participation agreement
    with our chief executive officer in connection with our June
    2004 recapitalization and our December 2005 IPO. These payments
    reduced 2004 and 2005 net income and pro forma net income,
    but we do not consider these payments reflective of our ongoing
    operations. See Managements Discussion and Analysis
    of Financial Condition and Results of Operations 
    Outlook.
|   
|(2) | In connection with our initial public offering, our management
    agreement with Trivest Partners, L.P. was terminated. For more
    information, see Certain Relationships and Related
    Transactions.                                                                                                                                                                                                                                                         
|   
|(3) | Reflects a $6.5 million non-refundable, up-front payment
    received from a major vehicle manufacturer for a non-exclusive
    license to use certain of our patented technology, net of a
    special $0.7 million one-time bonus paid to all employees.                                                                                                                                                                                                           
|   
|(4) | In connection with our IPO, we incurred costs of
    $24.5 million of stock-based compensation, costs related to
    the termination of certain sale bonus and associate equity gain
    program arrangements, and other IPO costs.                                                                                                                                                                                                                                  






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | 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 and elsewhere in this
report.


Overview




38



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##### Table of Contents







Significant Transactions


Clifford Avital a/d/s/ Precision Power, Orion


period-to


period-to


Outlook








| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Satellite Radio. In August 2004, we entered into a
    strategic supply relationship with SIRIUS Satellite Radio under
    which we exclusively market and sell certain SIRIUS-branded
    receivers and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | other hardware devices to our United States dealer network. For
    the year ended December 31, 2005, we generated
    $120.9 million of satellite radio related sales. Our 2005
    total sales benefited from a full year of selling satellite
    radio products, which resulted in a comparatively lower gross
    margin percentage for 2005 compared with 2004. Our gross profit
    margin on these products is substantially lower than on our
    other products. Strong satellite radio sales are continuing in
    the first quarter of 2006, and we expect that the increasing
    proportion of satellite radio sales in our product mix will
    continue to lower our total gross profit margin for the balance
    of 2006. We expect that this increase in satellite radio product
    sales will have less of an impact on our operating margins since
    we generally have lower operating expenses associated with the
    sale of these products. In 2005, a significant proportion of our
    satellite radio sales were to national consumer electronics
    retailers. Because we expect this trend to continue during 2006,
    we expect the proportion of our total sales accounted for by
    Best Buy and Circuit City to continue to increase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Definitive Technology. In September 2004, we acquired
    Definitive Technology, a leading supplier of premium
    loudspeakers, which enhanced our position in the home audio
    market. We believe continued growth from this acquisition will
    depend on continued expansion of Definitive Technology product
    sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Exclusive Circuit City Supply Relationship. Circuit City
    selected us as their exclusive supplier of security and
    convenience products under the Python, Valet, and
    Hornetbrands for 2005. Due to selling through of a
    competitors existing inventory, Circuit Citys
    initial orders of our products began in late March 2005. As a
    result, we also expect the proportion of our total sales
    accounted for by Circuit City to increase during 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Interest Expense. As of December 31, 2005, the
    outstanding principal balance of our senior credit facility was
    $166.6 million. In February 2005, we negotiated a reduction
    in the interest rate on this debt by 1.0%, from LIBOR plus 4.25%
    to LIBOR plus 3.25%. In connection with our initial public
    offering and the repayment of our subordinated notes with a
    portion of the proceeds from that offering, we negotiated a
    further 1.0% reduction in the interest rate on this debt to
    LIBOR plus 2.25%, which became effective in February 2006. Our
    2005 results reflect the full year impact of interest expense
    from our current senior credit facility, which we entered into
    in June 2004 and increased in September 2004 and again in
    September 2005. In connection with our initial public offering,
    we repaid $74.0 million of our outstanding subordinated
    notes. The subordinated notes that were repaid consisted of
    $37.0 million of senior subordinated notes that bore
    interest at LIBOR plus 8.0% and $37.0 million of junior
    subordinated notes that bore interest at 12.0%. We incurred
    $8.9 million of interest related to this debt in 2005. The
    repayment of this debt slightly reduced our 2005 interest
    expense, which reduction was offset by higher term loan and
    revolving credit balances to support our growth. In connection
    with repaying the subordinated notes, we incurred a pre-tax
    charge of approximately $3.2 million related to a debt
    prepayment premium and the write-off of deferred financing fees.
    The repayment of the subordinated notes should significantly
    reduce our 2006 interest expense. As of December 31, 2005,
    our effective interest rate on our debt was 8.5%.
|
| |  | Termination of Sale Bonus, Management, and Associate Equity
    Gain Program Arrangements. In the fourth quarter of 2005, we
    recorded a non-recurring, pre-tax charge of $24.5 million of
    stock-based compensation costs related to the termination of
    certain sale bonus and associate equity gain program
    arrangements, and other IPO costs. We also paid $2.2 million to
    our chief executive officer pursuant to an equity participation
    agreement, and paid $3.5 million to terminate a management
    agreement with a related party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Stock-Based Compensation. From July 19, 2001 through
    July 20, 2005, we issued 161,695 shares of our common
    stock and $18.7 million aggregate principal amount of
    convertible promissory notes to certain of our employees for
    gross proceeds of $0.7 million. Upon the consummation of
    our initial public offering, we recognized as stock-based
    compensation expense the difference between the purchase price
    of the stock (or conversion price of the notes) and the fair
    value of the stock. As a result, we recorded a non-cash, pre-tax
    charge for stock-based compensation expense of approximately                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

40



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | $2.5 million upon the closing of our initial public
    offering. We do not expect to recognize any additional expense
    in any future periods with respect to these issuances. We also
    recorded aggregate expense of $21.3 million related to the
    termination of certain sale bonus and associate equity gain
    program arrangements (of which $4.9 million was paid in cash),
    and we granted of 1.0 million restricted stock units, of
    which all but 22,000 are fully vested. We do not expect to
    record any additional expense in any future periods with respect
    to these restricted stock units, with the exception of the
    vesting of the restricted stock units. We are required to adopt
    SFAS 123R in 2006, which will result in stock-based
    compensation, and based on current outstanding options, we do
    not expect the impact of the adoption of SFAS 123R to have
    a material impact on our consolidated financial statements.
|
| |  | Public Company Expenses. We expect an increase in our
    general and administrative expenses related to the costs of
    operating as a public company, such as increased legal and
    accounting expenses, insurance premiums, and investor relations
    costs of approximately $2.5 million to $3.0 million in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Working Capital Requirements. Historically, we have
    required minimal working capital investment in order to operate
    our business. However, with the initiation of our satellite
    radio sales and the addition of Definitive Technology in late
    2004, our inventory and accounts receivable increased over
    historical levels. As these products and sales to national
    retailers represent a higher portion of our overall sales, we
    will be required to maintain an appropriate level of working
    capital to support these sales, which will likely include higher
    revolving credit borrowings. In anticipation of these sales, in
    September 2005 we increased our term loan by a total of
    $15.0 million and increased the amount available under our
    revolving credit facility from $25.0 million to
    $50.0 million. As of December 31, 2005, we had drawn
    $5.2 million on our revolving credit facility.                          
|
| |  | Effective Tax Rate. Our effective tax rate for 2005 was a
    benefit of 7.7% as a result of the non-deductibility of
    stock-based compensation and certain costs incurred as a result
    of our IPO. For 2006, we expect our effective tax rate to be
    approximately 39.0%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Results of Operations




|                                                               |  |                         |       |   |      |  |       |      |  |  |       |     
|-------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | ----
|                                                               |  | Year Ended December 31, |      
|                                                               |  |                         |      
|                                                               |  | 2003                    |       |   | 2004 |  |       | 2005 | 
|                                                               |  |                         |       |   |      |  |       |      | 
|Net sales                                                      |  |                         | 100.0 | % |      |  | 100.0 | %    |  |  | 100.0 | %   
|Cost of sales                                                  |  |                         | 53.1  | % |      |  | 57.2  | %    |  |  | 67.0  | %   
|                                                               |  |                         |       |   |      |  |       |      | 
|Gross profit                                                   |  |                         | 46.9  | % |      |  | 42.8  | %(a) |  |  | 33.0  | %(b)
|Total operating expenses                                       |  |                         | 24.1  | % |      |  | 21.6  | %(a) |  |  | 26.6  | %(b)
|                                                               |  |                         |       |   |      |  |       |      | 
|Income from operations                                         |  |                         | 22.8  | % |      |  | 21.2  | %(a) |  |  | 6.3   | %(b)
|Interest expense, net                                          |  |                         | 6.9   | % |      |  | 8.7   | %    |  |  | 8.2   | %   
|Income (loss) before provision for (benefit from) income taxes |  |                         | 15.9  | % |      |  | 12.5  | %    |  |  | (1.8  | %)  
|Provision for (benefit from) income taxes                      |  |                         | 6.4   | % |      |  | 5.1   | %    |  |  | (0.1  | %)  
|                                                               |  |                         |       |   |      |  |       |      | 
|Net income (loss)                                              |  |                         | 9.5   | % |      |  | 7.4   | %    |  |  | (1.7  | %)  
|                                                               |  |                         |       |   |      |  |       |      | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Our 2004 performance was affected by $6.5 million of
    royalty revenue received from a one-time payment from a major
    automobile manufacturer for a non-exclusive license to use
    certain of our patented technology and a related
    $0.7 million one-time bonus.                                                                                                                                                    
|   
|(b) |  | In connection with the IPO, we incurred costs of
    $24.5 million of stock-based compensation, costs related to
    the termination of certain sale bonus and associate equity gain
    program arrangements, and other IPO costs; paid
    $2.2 million to our chief executive officer pursuant to an
    equity participation agreement; and paid $3.5 million to
    terminate a management agreement with a related party.

41



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|                          |                   |                         |         |         |      |   |         |         |  |   |         |         | 
|------------------------- | ----------------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                          |                   | Year Ended December 31, |        
|                          |                   |                         |        
|                          |                   | 2003                    |         |         | 2004 |   |         | 2005    | 
|                          |                   |                         |         |         |      |   |         |         | 
|                          |                   | (In thousands)          |        
|Gross product sales       |                   | $                       | 136,927 |         |      | $ | 189,318 |         |  | $ | 311,403 |        
|Rebate/payment discount   |                   |                         | 7,895   |         |      |   | 8,647   |         |  |   | 9,997   |        
|                          |                   |                         |         |         |      |   |         |         | 
|                          | Net product sales |                         |         | 129,032 |      |   |         | 180,671 |  |   |         | 301,406 | 
|Royalty and other revenue |                   |                         | 2,733   |         |      |   | 9,198   |         |  |   | 3,152   |        
|                          |                   |                         |         |         |      |   |         |         | 
|                          | Net sales         |                         | $       | 131,765 |      |   | $       | 189,869 |  |   | $       | 304,558 | 
|                          |                   |                         |         |         |      |   |         |         | 



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2005 Compared to Year Ended
    December 31, 2004



| |          
| | ---------
| | Net Sales











| |                                        
| | ---------------------------------------
| | Gross Profit and Income from Operations





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| |                 
| | ----------------
| | Interest Expense





| |                                          
| | -----------------------------------------
| | Provision for (benefit from) Income Taxes





| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003



| |          
| | ---------
| | Net Sales











| |                                        
| | ---------------------------------------
| | Gross Profit and Income from Operations



43



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| |                 
| | ----------------
| | Interest Expense





| |                           
| | --------------------------
| | Provision for Income Taxes



Liquidity and Capital Resources








44



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Quarterly Results of Operations




45



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|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            |  |  |   |        |  |  |   |         |    
|--------------------------------------------------------------- |  | ------------------------------------------------ | ------ |  | ------- | - | ------ | -------- |  | - | ---------- |  |  | ---------- | ------ |  | ------------- | - | ------ | ------------- |  | -------- | ---------- |  |  | - | ------ |  |  | - | ------- | ---
|                                                                |  | Quarter Ended                                    |       
|                                                                |  |                                                  |       
|                                                                |  | 2004                                             |        |  | 2005    |  
|                                                                |  |                                                  |        |  |         |  
|                                                                |  | Mar. 31                                          |        |  | June 30 |   |        | Sept. 30 |  |   | Dec. 31(a) |  |  | Mar. 31(a) |        |  | June 30(a)(e) |   |        | Sep. 30(a)(e) |  |          | Dec. 31(a) | 
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|                                                                |  | (Unaudited, in thousands, except per share data) |       
|Consolidated Statement of Operations Data:                      |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  | Restated |            |  |  |  
|Net Sales                                                       |  | $                                                | 33,914 |  |         | $ | 37,534 | (b)      |  | $ | 38,343     |  |  | $          | 80,078 |  |               | $ | 52,065 |               |  | $        | 55,656     |  |  | $ | 61,316 |  |  | $ | 135,521 |    
|Cost of sales                                                   |  |                                                  | 18,754 |  |         |   | 17,862 |          |  |   | 22,187     |  |  |            | 49,722 |  |               |   | 33,106 |               |  |          | 35,891     |  |  |   | 39,308 |  |  |   | 95,866  | (c)
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Gross profit                                                    |  |                                                  | 15,160 |  |         |   | 19,672 |          |  |   | 16,156     |  |  |            | 30,356 |  |               |   | 18,959 |               |  |          | 19,765     |  |  |   | 22,008 |  |  |   | 39,655  |    
|Total operating expenses                                        |  |                                                  | 8,594  |  |         |   | 10,207 |          |  |   | 9,312      |  |  |            | 12,992 |  |               |   | 11,535 |               |  |          | 12,399     |  |  |   | 12,505 |  |  |   | 44,626  | (c)
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Income from operations                                          |  |                                                  | 6,566  |  |         |   | 9,465  | (b)      |  |   | 6,844      |  |  |            | 17,364 |  |               |   | 7,424  |               |  |          | 7,366      |  |  |   | 9,503  |  |  |   | (4,971  | )  
|Interest expense, net(d)                                        |  |                                                  | 2,094  |  |         |   | 5,037  |          |  |   | 4,144      |  |  |            | 5,248  |  |               |   | 5,010  |               |  |          | 5,052      |  |  |   | 5,585  |  |  |   | 9,210   |    
|Income (loss) before provision for (benefit from) income taxes  |  |                                                  | 4,472  |  |         |   | 4,428  |          |  |   | 2,700      |  |  |            | 12,116 |  |               |   | 2,414  |               |  |          | 2,314      |  |  |   | 3,918  |  |  |   | (14,181 | )  
|Provision for (benefit from) income taxes                       |  |                                                  | 1,841  |  |         |   | 1,822  |          |  |   | 1,110      |  |  |            | 4,981  |  |               |   | 983    |               |  |          | 1,182      |  |  |   | 1,944  |  |  |   | (4,507  | )  
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Net income (loss)                                               |  |                                                  | 2,631  |  |         |   | 2,606  |          |  |   | 1,590      |  |  |            | 7,135  |  |               |   | 1,431  |               |  |          | 1,132      |  |  |   | 1,974  |  |  |   | (9,674  | )  
|Net income (loss) attributable to participating securityholders |  |                                                  | 21     |  |         |   | 24     |          |  |   | 18         |  |  |            | 76     |  |               |   | 16     |               |  |          | 14         |  |  |   | 26     |  |  |   | (100    | )  
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Net income (loss) available to common shareholders              |  | $                                                | 2,610  |  |         | $ | 2,582  |          |  | $ | 1,572      |  |  | $          | 7,059  |  |               | $ | 1,415  |               |  | $        | 1,118      |  |  | $ | 1,948  |  |  | $ | (9,574  | )  
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Net income (loss) per common share:                             |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            |  |  |   |        |  |  |   |         |    
|Basic                                                           |  | $                                                | 0.20   |  |         | $ | 0.19   |          |  | $ | 0.09       |  |  | $          | 0.38   |  |               | $ | 0.08   |               |  | $        | 0.06       |  |  | $ | 010    |  |  | $ | (0.48   | )  
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 
|Diluted                                                         |  | $                                                | 0.16   |  |         | $ | 0.16   |          |  | $ | 0.09       |  |  | $          | 0.38   |  |               | $ | 0.08   |               |  | $        | 0.06       |  |  | $ | 0.10   |  |  | $ | (0.48   | )  
|                                                                |  |                                                  |        |  |         |   |        |          |  |   |            |  |  |            |        |  |               |   |        |               |  |          |            | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes sales attributable to the Definitive Technology
    acquisition and sales of SIRIUS Satellite Radio products. The
    fourth quarter of 2004 was our first full quarter that included
    sales of Definitive Technology products and SIRIUS products.                                                                                                                                                                
|   
|(b) |  | Includes $6.5 million of royalty revenue from a one-time
    payment received from a major automobile manufacturer for a
    non-exclusive license to use certain of our patented technology.
    The only expense associated with this payment was a
    $0.7 million special bonus recorded as operating expense.                                                                                                            
|   
|(c) |  | In connection with the IPO, we incurred costs of
    $24.5 million of stock-based compensation, costs related to
    the termination of certain sale bonus and associate equity gain
    program arrangements, and other IPO costs; paid
    $2.2 million to our chief executive officer pursuant to an
    equity participation agreement; and paid $3.5 million to
    terminate a management agreement with a related party.
|   
|(d) |  | In connection with our June 2004 recapitalization, we incurred
    approximately $185.0 million of new indebtedness and paid
    off a total of $76.6 million of existing debt. Due to the
    repayment of the existing debt, we wrote off $1.1 million
    of deferred financing costs and we wrote off $1.7 million
    of unamortized                                                                                      

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | discount related to the warrants that were issued with the
    existing debt. In December 2005, we repaid $74.0 million of
    subordinated notes and recorded $3.2 million of debt
    retirement costs associated with the debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(e) |  | In the process of completing the IPO, we capitalized certain
    costs that we expected to record as a reduction of the gross
    proceeds from the IPO. Subsequent to completing our IPO, we
    concluded that certain costs incurred in the quarters ended
    June 30, 2005 and September 30, 2005 should be
    expensed as incurred. Accordingly, we have recorded
    $0.6 million and $0.9 million related to these costs
    in operating expenses in the quarters ended June 30, 2005
    and September 30, 2005, respectively. The following table
    reconciles the quarterly results previously disclosed in the
    Form S-1 with our
    restated results for these interim periods:

|                                                         |  |                                       |        |  |          |   |        |         |  |   |          |  |  |   |        | 
|-------------------------------------------------------- |  | ------------------------------------- | ------ |  | -------- | - | ------ | ------- |  | - | -------- |  |  | - | ------ | 
|                                                         |  | Quarter Ended 2005                    |       
|                                                         |  |                                       |       
|                                                         |  | Previously Disclosed                  |        |  | Restated |  
|                                                         |  |                                       |        |  |          |  
|                                                         |  | June 30                               |        |  | Sept. 30 |   |        | June 30 |  |   | Sept. 30 | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|                                                         |  | (In thousands, except per share data) |       
|Consolidated Statement of Operations Data:               |  |                                       |        |  |          |   |        |         |  |   |          |  |  |   |        | 
|Net Sales                                                |  | $                                     | 55,656 |  |          | $ | 61,316 |         |  | $ | 55,656   |  |  | $ | 61,316 | 
|Cost of sales                                            |  |                                       | 35,891 |  |          |   | 39,308 |         |  |   | 35,891   |  |  |   | 39,308 | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Gross profit                                             |  |                                       | 19,765 |  |          |   | 22,008 |         |  |   | 19,765   |  |  |   | 22,008 | 
|Total operating expenses                                 |  |                                       | 11,809 |  |          |   | 11,647 |         |  |   | 12,399   |  |  |   | 12,505 | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Income from operations                                   |  |                                       | 7,956  |  |          |   | 10,361 |         |  |   | 7,366    |  |  |   | 9,503  | 
|Interest expense, net                                    |  |                                       | 5,052  |  |          |   | 5,585  |         |  |   | 5,052    |  |  |   | 5,585  | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Income before provision for income taxes                 |  |                                       | 2,904  |  |          |   | 4,776  |         |  |   | 2,314    |  |  |   | 3,918  | 
|Provision for income taxes                               |  |                                       | 1,182  |  |          |   | 1,944  |         |  |   | 1,182    |  |  |   | 1,944  | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Net income                                               |  |                                       | 1,722  |  |          |   | 2,832  |         |  |   | 1,132    |  |  |   | 1,974  | 
|Net income attributable to participating securityholders |  |                                       | 22     |  |          |   | 37     |         |  |   | 14       |  |  |   | 26     | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Net income available to common shareholders              |  | $                                     | 1,700  |  |          | $ | 2,795  |         |  | $ | 1,118    |  |  | $ | 1,948  | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Net income per common share:                             |  |                                       |        |  |          |   |        |         |  |   |          |  |  |   |        | 
|Basic                                                    |  | $                                     | 0.09   |  |          | $ | 0.15   |         |  | $ | 0.06     |  |  | $ | 0.10   | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 
|Diluted                                                  |  | $                                     | 0.09   |  |          | $ | 0.15   |         |  | $ | 0.06     |  |  | $ | 0.10   | 
|                                                         |  |                                       |        |  |          |   |        |         |  |   |          | 

Contractual Obligations




|                                                       |  |                |         |                        |           |   |        |           |  |         |           |  |  |          |         |  |  |   |       | 
|------------------------------------------------------ |  | -------------- | ------- | ---------------------- | --------- | - | ------ | --------- |  | ------- | --------- |  |  | -------- | ------- |  |  | - | ----- | 
|                                                       |  |                |         | Payments Due by Period |          
|                                                       |  |                |         |                        |          
|                                                       |  | Total          |         |                        | Less than |   |        |           |  | 6 Years |          
|Commercial Commitments                                 |  | Amounts Due    |         |                        | 1 Year    |   |        | 1-3 Years |  |         | 4-5 Years |  |  | and Over |        
|                                                       |  |                |         |                        |           |   |        |           |  |         |           |  |  |          |        
|                                                       |  | (In thousands) |        
|Long-term debt, including current portion and interest |  | $              | 230,631 |                        |           | $ | 16,249 |           |  | $       | 32,064    |  |  | $        | 182,317 |  |  | $ |      | 
|Operating leases                                       |  | $              | 13,913  |                        |           | $ | 1,632  |           |  | $       | 3,309     |  |  | $        | 3,492   |  |  | $ | 5,480 | 
|Other long-term liabilities                            |  | $              | 1,040   |                        |           | $ |       |           |  | $       | 1,040     |  |  | $        |        |  |  | $ |      | 



47



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Off Balance Sheet Arrangements




Non-GAAP Discussion












| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | they do not reflect our cash expenditures for capital
    expenditures or contractual commitments;                                                             
|
| |  | they do not reflect changes in, or cash requirements for, our
    working capital requirements;                                                                
|
| |  | they do not reflect our significant interest expense, or the
    cash requirements necessary to service interest or principal
    payments on our indebtedness;

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| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and EBITDA and Adjusted EBITDA do not
    reflect the cost or cash requirements for such replacements;
|
| |  | Adjusted EBITDA does not reflect the impact on our reported
    results of earnings or charges resulting from equity
    participation payments, management fees, and one-time licensing
    revenue; and                                                           
|
| |  | other companies, including other companies in our industry, may
    calculate these measures differently than we do, limiting their
    usefulness as a comparative measure.                                                                                        





|                                               |  |                         |        |  |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | Year Ended December 31, |       
|                                               |  |                         |       
|                                               |  | 2003                    |        |  | 2004 |   |        | 2005 | 
|                                               |  |                         |        |  |      |   |        |      | 
|                                               |  | (In thousands)          |       
|Net income (loss)                              |  | $                       | 12,471 |  |      | $ | 13,962 |      |  | $ | (5,137 | )
|Plus: interest expense, net                    |  |                         | 9,091  |  |      |   | 16,523 |      |  |   | 24,857 |  
|Plus: income tax expense (benefit)             |  |                         | 8,514  |  |      |   | 9,754  |      |  |   | (398   | )
|Plus: depreciation and amortization            |  |                         | 4,010  |  |      |   | 4,448  |      |  |   | 5,459  |  
|                                               |  |                         |        |  |      |   |        |      | 
|EBITDA                                         |  |                         | 34,086 |  |      |   | 44,687 |      |  |   | 24,781 |  
|Plus: equity participation payment(1)          |  |                         |       |  |      |   | 1,280  |      |  |   | 2,236  |  
|Plus: management fees(2)                       |  |                         | 405    |  |      |   | 552    |      |  |   | 4,220  |  
|Less: one-time license fee, net of expenses(3) |  |                         |       |  |      |   | 5,830  |      |  |   |       |  
|Plus: one-time IPO related expenses(4)         |  |                         |       |  |      |   |       |      |  |   | 24,540 |  
|                                               |  |                         |        |  |      |   |        |      | 
|Adjusted EBITDA                                |  | $                       | 34,491 |  |      | $ | 40,689 |      |  | $ | 55,777 |  
|                                               |  |                         |        |  |      |   |        |      | 






|    |                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We made these payments under an equity participation agreement
    with our chief executive officer in connection with our June
    2004 recapitalization and December 2005 IPO. These payments
    reduced 2004 and 2005 net income, but we do not consider
    these payments reflective of our ongoing operations.
|   
|(2) | In connection with our initial public offering, our management
    agreement with Trivest Partners, L.P. was terminated. For more
    information, see Certain Relationships and Related
    Transactions.                                                                                                         
|   
|(3) | Reflects a non-refundable, up-front payment from a major vehicle
    manufacturer for a non-exclusive license to use certain of our
    patented technology, net of a $0.7 million one-time bonus
    paid to all employees.                                                                                         
|   
|(4) | In connection with our IPO, we incurred costs of
    $24.5 million of stock based compensation and other IPO
    costs related to the termination of a management agreement with
    a related party and termination of certain sale bonus,
    management, and associate equity gain program arrangements.          

Recently Issued Accounting Pronouncements




49



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Critical Accounting Policies and Estimates




50



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| |                    
| | -------------------
| | Revenue Recognition











| |                    
| | -------------------
| | Accounts Receivable



51



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| |            
| | -----------
| | Inventories

first-in,




| |                                                
| | -----------------------------------------------
| | Goodwill and Indefinite-Lived Intangible Assets





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets





| |           
| | ----------
| | Warranties



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|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk.

Interest Rate Risk






Foreign Currency Exchange Risk


non-U.S. non-U.S. non-U.S.


Impact of Inflation









|        |                                                          
|------- | ---------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary Data.








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on Accounting
    and Financial Disclosure.








|         |                        
|-------- | -----------------------
|Item 9A. | Controls And Procedures

Evaluation of Disclosure Controls and Procedures


13a-15(e) 15d-15(e)


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13a-15(b) 15d-15(b).






Material Weaknesses in Internal Control Over Financial
Reporting






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inadequate Resources in our Accounting and Financial
    Reporting Functions. We did not maintain a sufficient
    complement of personnel with an appropriate level of accounting
    knowledge, experience, and training in the application of
    U.S. generally accepted accounting principles commensurate
    with our existing financial reporting requirements and the
    requirements we face as a public company. Accordingly,
    management has concluded that this control deficiency
    constitutes a material weakness, and that it contributed to the
    following material weakness.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Inability to Appropriately Analyze Certain Accounts. We
    did not maintain effective controls with respect to the analysis
    of our other assets and various accrual accounts. Specifically,
    we did not perform a complete and timely analysis of our other
    assets account, which resulted in an audit adjustment related to
    the inappropriate capitalization of costs during the three-month
    period ended June 30, 2005 and the three-month period ended
    September 30, 2005. In addition, we did not perform a
    complete analysis of various accrual accounts, including accrued
    expenses and accrued rebates, resulting in audit adjustments in
    the 2005 consolidated financial statements. Additionally, this
    control deficiency could result in a misstatement in the
    aforementioned accounts that would result in a material
    misstatement to the annual or interim consolidated financial
    statements that would not be prevented or detected. Accordingly,
    management has concluded that this control deficiency
    constitutes a material weakness.

Managements Remediation Initiatives


S-1




| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We implemented compensating controls to ensure that material
    expenses and inventory purchases are recorded in the proper
    period and to ensure that such accounts are not materially
    misstated.                                                                
|
| |  | We implemented procedures to ensure that we have properly
    recorded our tax obligations for each state in which we are
    required to file returns and have established compensating
    controls to ensure that our tax disclosures are not materially
    misstated.

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S-1






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We assessed the organization of our accounting personnel and the
    technical expertise within the accounting function. We have
    added a general accounting manager. However, we also intend to
    increase the number and skills of our personnel in order to
    increase our depth of experience in generally accepted
    accounting principles and guidelines required by the Securities
    and Exchange Commission.
|
| |  | We subscribed to an on-line research tool to assist our
    accounting personnel with staying abreast of new accounting
    pronouncements, proper accounting disclosure and technical
    accounting issues.                                                                                                                                                                                                                  






|         |                   
|-------- | ------------------
|Item 9B. | Other Information.



55



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PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.








|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters.








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accounting Fees and Services.






PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules.

(a) Financial Statements and Financial Statement
Schedules








| |     |         
| | --- | --------
| | (b) | Exhibits

|        |    |         |  |                                                                               
|------- | -- | ------- |  | ------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|        | 3  | .1      |  | Second Amended and Restated Articles of Incorporation of the
    Registrant(1)
|        | 3  | .2      |  | Amended and Restated Bylaws of the Registrant(1)                              
|       
|        | 4  | .1      |  | Form of Common Stock Certificate(1)                                           
|       
|        | 4  | .2      |  | Amended and Restated Registration Rights Agreement(1)                         
|       
|        | 10 | .1     |  | Form of Deferred Compensation/ Salary Continuation Agreement(1)               
|       
|        | 10 | .2     |  | Form of Change In Control Severance Agreements(1)                             

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|        |    |         |  |                                                                                                                                                                                                                                                                                                      
|------- | -- | ------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 10 | .3     |  | Amended and Restated Employment Agreement by and between the
    Registrant and James E. Minarik, dated as of January 1,
    2004(1)                                                                                                                                                                 
|       
|        | 10 | .4     |  | Sales Bonus Agreement by and between the Registrant and James E.
    Minarik, dated as of December 7, 2004(1)                                                                                                                                                                                        
|       
|        | 10 | .5     |  | Form of Key Employee Sale Bonus Agreement(1)                                                                                                                                                                                                                                                         
|       
|        | 10 | .6     |  | Associate Equity Gain Program(1)                                                                                                                                                                                                                                                                     
|       
|        | 10 | .7      |  | Credit Agreement by and among the Registrant; the Lenders (as
    defined therein); and Wachovia Bank, National Association, as
    Administrative Agent, dated as of June 17, 2004(1)                                                                                                               
|       
|        | 10 | .8      |  | First Amendment to Credit Agreement by and among the Registrant;
    the Lenders (as defined therein); and Wachovia Bank, National
    Association, as Administrative Agent, dated as of
    September 17, 2004(1)                                                                                   
|       
|        | 10 | .9      |  | Second Amendment to Credit Agreement by and among the
    Registrant; the Lenders (as defined therein); and Wachovia Bank,
    National Association, as Administrative Agent, dated as of
    February 4, 2005(1)                                                                                    
|       
|        | 10 | .10     |  | Note Purchase Agreement by and among the Registrant; DEI
    Headquarters, Inc.; DEI Sales Inc. (formerly Directed
    Electronics, Inc.); the Purchasers (as defined therein); and
    American Capital Financial Services, Inc., as Agent, dated as of
    June 17, 2004(1)                        
|       
|        | 10 | .11     |  | First Amendment to Note Purchase Agreement by and among the
    Registrant; DEI Headquarters, Inc., DEI Sales Inc. (formerly
    Directed Electronics, Inc.); the Purchasers (as defined
    therein); and American Capital Financial Services, Inc., as
    Agent, dated as of September 17, 2004(1)
|       
|        | 10 | .12     |  | Industrial/ Commercial Lease Agreement Multi Tenant 
    Net by and between the Registrant and Greene Properties, Inc.,
    dated as of July 14, 2003(1)                                                                                                                                            
|       
|        | 10 | .13     |  | First Amendment to Industrial/ Commercial Lease Agreement Multi
    Tenant  Net by and between the Registrant and Greene
    Properties, Inc., dated as of September 8, 2004(1)                                                                                                                     
|       
|        | 10 | .14   |  | Purchase Agreement by and between the Registrant and Nutek
    Corporation, dated as of December 26, 2001(1)                                                                                                                                                                                         
|       
|        | 10 | .15   |  | Manufacturing and Distribution Agreement by and between the
    Registrant and SIRIUS Satellite Radio, Inc., dated as of
    April 1, 2005(1)                                                                                                                                                        
|       
|        | 10 | .16   |  | Vendor Agreement by and between the Registrant and Best Buy Co.,
    Inc., dated as of April 11, 2001(1)                                                                                                                                                                                             
|       
|        | 10 | .17   |  | Letter Agreement by and between the Registrant and Circuit City
    Stores, Inc., dated as of January 27, 2005(1)                                                                                                                                                                                    
|       
|        | 10 | .18     |  | Third Amendment to Credit Agreement by and among the Registrant;
    the Lenders (as defined therein); and Wachovia Bank, National
    Association, as Administrative Agent, dated as of
    September 21, 2005(1)                                                                                   
|       
|        | 10 | .19    |  | 2005 Incentive Compensation Plan (1)                                                                                                                                                                                                                                                                 
|       
|        | 10 | .20    |  | Form of Key Employee Sale Bonus Cancellation Agreement(1)                                                                                                                                                                                                                                            
|       
|        | 10 | .21    |  | Sale Bonus Cancellation Agreement by and between the Registrant
    and James E. Minarik dated as of December 1, 2005(1)                                                                                                                                                                             
|       
|        | 10 | .22    |  | Form of Indemnification Agreement(1)                                                                                                                                                                                                                                                                 
|       
|        | 10 | .23     |  | Advisory Agreement by and between the Registrant and Trivest
    Partners, L.P., dated as of December 1, 2005(1)                                                                                                                                                                                     
|       
|        | 10 | .24     |  | Fourth Amendment to Credit Agreement by and among DEI Sales,
    Inc. (formerly Directed Electronics, Inc.); the Guarantors
    listed on the signature pages thereto; the Lenders (as defined
    therein); and Wachovia Bank, National Association, as
    Administrative Agent for the Lenders(2) 
|       
|        | 21 |         |  | List of Subsidiaries(1)                                                                                                                                                                                                                                                                              
|       
|        | 31 | .1      |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer                                                                                                                                                                                                                                

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|        |    |         |  |                                                                      
|------- | -- | ------- |  | ---------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 31 | .2      |  | Rule 13a-14(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                






|  |                                                 
|- | ------------------------------------------------
| | Management contract or compensatory arrangement.



|   |                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------
| | Confidential treatment has previously been granted by the SEC
    for certain portions of the referenced exhibit



|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registrants Registration
    Statement on
    Form S-1
    (Registration
    No. 333-127823),
    as filed with the Securities and Exchange Commission.
|   
|(2) | Incorporated by reference to the Registrants Current
    Report on Form 8-K
    dated December 15, 2005, as filed with the Securities and
    Exchange Commission on December 21, 2005. 

58



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SIGNATURES






| |                                      
| | -------------------------------------
| | DIRECTED ELECTRONICS,
    INC.       
|
| | /s/ James E. Minarik                 
| |                                      
| | James E. Minarik                     
| | President and Chief Executive Officer





|                                           |  |                                                                                                                   |  |                |  | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                  |  | Capacity                                                                                                          |  | Date          
|                                           |  |                                                                                                                   |  |               
|                                          
|/s/ James E. MinarikJames E. Minarik       |  | President, Chief Executive
    Officer, and Director (Principal
    Executive Officer)                            |  | March 31, 2006
|                                          
|/s/ John D. MorbergJohn D. Morberg         |  | Vice President  Finance, Chief Financial Officer, and
    Treasurer (Principal Accounting and Financial Officer) |  | March 31, 2006
|                                          
|/s/ Troy D. TempletonTroy D. Templeton     |  | Chairman of the Board                                                                                             |  | March 31, 2006
|                                          
|/s/ Earl W. PowellEarl W. Powell           |  | Director                                                                                                          |  | March 31, 2006
|                                          
|/s/ Jon E. EliasJon E. Elias               |  | Director                                                                                                          |  | March 31, 2006
|                                          
|/s/ Darrell E. IssaDarrell E. Issa         |  | Director                                                                                                          |  | March 31, 2006
|                                          
|/s/ Andrew D. RobertsonAndrew D. Robertson |  | Director                                                                                                          |  | March 31, 2006
|                                          
|Victor J. Orler                            |  | Director                                                                                                          |  |               
|                                          
|/s/ S. James SpiererS. James Spierer       |  | Director                                                                                                          |  | March 31, 2006
|                                          
|/s/ Kevin B. McColganKevin B. McColgan     |  | Director                                                                                                          |  | March 31, 2006
|                                          
|/s/ Edmond S. ThomasEdmond S. Thomas       |  | Director                                                                                                          |  | March 31, 2006

59



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|                                                                                                               |  |      |     | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                               |  | Page |    
|                                                                                                               |  |      |    
|Directed Electronics, Inc.                                                                                     |  |      |     | 
|Report of Independent Registered Public
    Accounting Firm                                                    |  |      | F-2 | 
|Consolidated Balance Sheets  As
    of December 31, 2004 and 2005                                             |  |      | F-3 | 
|Consolidated Statements of
    Operations  For the years ended December 31,
    2003, 2004 and 2005           |  |      | F-4 | 
|Consolidated Statements of
    Shareholders Equity  For the years ended
    December 31, 2003, 2004 and 2005 |  |      | F-5 | 
|Consolidated Statements of Cash
    Flows  For the years ended December 31, 2003,
    2004 and 2005           |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                                 |  |      | F-7 | 

F-1



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##### Table of Contents


















F-2



---



##### Table of Contents



DIRECTED ELECTRONICS, INC.





CONSOLIDATED BALANCE SHEETS


(In thousands, except per share amounts)


|                                           |                                                                                                                       |              |         |         |      |   |         |         |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | -
|                                           |                                                                                                                       | December 31, |        
|                                           |                                                                                                                       |              |        
|                                           |                                                                                                                       | 2004         |         |         | 2005 |  
|                                           |                                                                                                                       |              |         |         |      |  
|ASSETS                                    
|Current Assets:                            |                                                                                                                       |              |         |         |      |   |         |        
|                                           | Cash and cash equivalents                                                                                             |              | $       | 3,784   |      |   | $       | 12,167  |  
|                                           | Accounts receivable, net                                                                                              |              |         | 48,442  |      |   |         | 100,140 |  
|                                           | Inventories                                                                                                           |              |         | 30,768  |      |   |         | 43,324  |  
|                                           | Prepaid expenses and other assets                                                                                     |              |         | 4,037   |      |   |         | 8,578   |  
|                                           | Deferred tax assets                                                                                                   |              |         | 2,974   |      |   |         | 8,019   |  
|                                           |                                                                                                                       |              |         |         |      |  
|Total current assets                       |                                                                                                                       |              | 90,005  |         |      |   | 172,228 |        
|                                          
|                                           | Property and equipment, net                                                                                           |              |         | 4,368   |      |   |         | 4,649   |  
|                                           | Intangible assets, net                                                                                                |              |         | 93,750  |      |   |         | 90,246  |  
|                                           | Goodwill                                                                                                              |              |         | 97,441  |      |   |         | 97,807  |  
|                                           | Other assets                                                                                                          |              |         | 8,783   |      |   |         | 5,690   |  
|                                           |                                                                                                                       |              |         |         |      |  
|Total assets                               |                                                                                                                       | $            | 294,347 |         |      | $ | 370,620 |        
|                                           |                                                                                                                       |              |         |         |      |  
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                       |              |         |         |      |   |         |        
|                                           | Accounts payable                                                                                                      |              | $       | 36,810  |      |   | $       | 54,520  |  
|                                           | Accrued liabilities                                                                                                   |              |         | 11,216  |      |   |         | 26,023  |  
|                                           | Current portion of notes payable                                                                                      |              |         |        |      |   |         | 1,699   |  
|                                           | Income taxes payable                                                                                                  |              |         | 5,741   |      |   |         | 5,014   |  
|                                           |                                                                                                                       |              |         |         |      |  
|Total current liabilities                  |                                                                                                                       |              | 53,767  |         |      |   | 87,256  |        
|                                          
|                                           | Revolving loan                                                                                                        |              |         |        |      |   |         | 5,200   |  
|                                           | Senior notes, less current portion                                                                                    |              |         | 151,610 |      |   |         | 164,911 |  
|                                           | Subordinated notes                                                                                                    |              |         | 74,000  |      |   |         |        |  
|                                           | Deferred tax liabilities                                                                                              |              |         | 13,968  |      |   |         | 12,690  |  
|                                           | Other                                                                                                                 |              |         | 544     |      |   |         | 1,040   |  
|                                           |                                                                                                                       |              |         |         |      |  
|Total liabilities                          |                                                                                                                       |              | 293,889 |         |      |   | 271,097 |        
|                                           |                                                                                                                       |              |         |         |      |  
|                                          
|Commitments and contingencies (Note 15)    |                                                                                                                       |              |         |         |      |   |         |        
|                                          
|Shareholders equity:                      |                                                                                                                       |              |         |         |      |   |         |        
|                                           | Common Stock, $0.01 par value:                                                                                        |              |         |         |      |   |         |         |  
|                                           | Authorized shares  100,000; issued and outstanding
    shares  17,361 and 24,769 in 2004 and 2005,
    respectively |              |         | 174     |      |   |         | 248     |  
|                                           | Paid-in capital                                                                                                       |              |         | 6,527   |      |   |         | 111,110 |  
|                                           | Notes receivable from shareholders                                                                                    |              |         |        |      |   |         | (126    | )
|                                           | Deferred compensation                                                                                                 |              |         |        |      |   |         | (350    | )
|                                           | Accumulated other comprehensive income                                                                                |              |         | 285     |      |   |         | 306     |  
|                                           | Retained earnings (deficit)                                                                                           |              |         | (6,528  | )    |   |         | (11,665 | )
|                                           |                                                                                                                       |              |         |         |      |  
|Total shareholders equity                 |                                                                                                                       |              | 458     |         |      |   | 99,523  |        
|                                           |                                                                                                                       |              |         |         |      |  
|Total liabilities and shareholders equity |                                                                                                                       | $            | 294,347 |         |      | $ | 370,620 |        
|                                           |                                                                                                                       |              |         |         |      |  



F-3



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##### Table of Contents



DIRECTED ELECTRONICS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)


|                                                                |                                     |                          |         |        |        |   |         |         |        |   |         |         |        |  
|--------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------ | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                |                                     | Years Ended December 31, |        
|                                                                |                                     |                          |        
|                                                                |                                     | 2003                     |         |        | 2004   |   |         | 2005    |       
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Net product sales                                               |                                     | $                        | 129,032 |        |        | $ | 180,671 |         |        | $ | 301,406 |        
|Royalty and other revenue                                       |                                     |                          | 2,733   |        |        |   | 9,198   |         |        |   | 3,152   |        
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Net sales                                                       |                                     |                          | 131,765 |        |        |   | 189,869 |         |        |   | 304,558 |        
|Cost of sales                                                   |                                     |                          | 69,907  |        |        |   | 108,525 |         |        |   | 204,171 |        
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Gross profit                                                    |                                     |                          | 61,858  |        |        |   | 81,344  |         |        |   | 100,387 |        
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Operating expenses:                                             |                                     |                          |         |        |        |   |         |         |        |   |         |        
|                                                                | Selling, general and administrative |                          |         | 28,090 |        |   |         | 37,048  |        |   |         | 72,795  |       
|                                                                | Management fee to related party     |                          |         | 405    |        |   |         | 552     |        |   |         | 4,220   |       
|                                                                | Amortization of intangibles         |                          |         | 3,287  |        |   |         | 3,505   |        |   |         | 4,050   |       
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Total operating expenses                                        |                                     |                          | 31,782  |        |        |   | 41,105  |         |        |   | 81,065  |        
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Income from operations                                          |                                     |                          | 30,076  |        |        |   | 40,239  |         |        |   | 19,322  |        
|Other income (expense):                                         |                                     |                          |         |        |        |   |         |         |        |   |         |        
|                                                                | Interest expense                    |                          |         | (9,211 | )      |   |         | (16,542 | )      |   |         | (24,964 | )     
|                                                                | Interest income                     |                          |         | 120    |        |   |         | 19      |        |   |         | 107     |       
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Income (loss) before provision for (benefit from) income taxes  |                                     |                          | 20,985  |        |        |   | 23,716  |         |        |   | (5,535  | )      
|Provision for (benefit from) income taxes                       |                                     |                          | 8,514   |        |        |   | 9,754   |         |        |   | (398    | )      
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Net income (loss)                                               |                                     |                          | 12,471  |        |        |   | 13,962  |         |        |   | (5,137  | )      
|Net income (loss) attributable to participating securityholders |                                     |                          | 63      |        |        |   | 138     |         |        |   | (61     | )      
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Net income (loss) available to common shareholders              |                                     | $                        | 12,408  |        |        | $ | 13,824  |         |        | $ | (5,076  | )      
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Net income (loss) per common share:                             |                                     |                          |         |        |        |   |         |         |        |   |         |        
|                                                                |                                     | Basic                    |         | $      | 0.97   |   |         | $       | 0.88   |   |         | $       | (0.27  | )
|                                                                |                                     |                          |         |        |        |   |         |         |       
|                                                                |                                     | Diluted                  |         | $      | 0.76   |   |         | $       | 0.80   |   |         | $       | (0.27  | )
|                                                                |                                     |                          |         |        |        |   |         |         |       
|Weighted average number of common shares:                       |                                     |                          |         |        |        |   |         |         |        |   |         |        
|                                                                |                                     | Basic                    |         |        | 12,783 |   |         |         | 15,637 |   |         |         | 18,897 |  
|                                                                |                                     |                          |         |        |        |   |         |         |       
|                                                                |                                     | Diluted                  |         |        | 17,050 |   |         |         | 17,710 |   |         |         | 18,897 |  
|                                                                |                                     |                          |         |        |        |   |         |         |       



F-4



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##### Table of Contents



DIRECTED ELECTRONICS, INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


(In thousands, except per share amounts)


|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   |          |        |  
|-------------------------------------------------------------------------------------------------- | ---------------------------- | ------------ | ------ | - | ------- | ----- | ---------- | ------- |  | - | ------------ | ----- |  | ------------- | -------- | - | ------------- | - | ---- | --------- |  | - | ----- | --- | - | - | ------- | ------ | - | - | -------- | ------ | -
|                                                                                                   |                              |              |        |   |         | Notes |            |         |  |   | Accumulated  |       |  |               |          |  
|                                                                                                   |                              | Common Stock |        |   |         |       | Receivable |         |  |   |              | Other |  |               | Retained |   |               |  
|                                                                                                   |                              |              |        |   | Paid-in |       |            | From    |  |   | Deferred     |       |  | Comprehensive |          |   | Earnings      |   |      |          
|                                                                                                   |                              | Shares       |        |   | Amount  |       |            | Capital |  |   | Shareholders |       |  | Compensation  |          |   | Income (Loss) |   |      | (Deficit) |  |   | Total |    
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Balance at December 31, 2002                                                                       |                              |              | 11,481 |   |         | $     | 115        |         |  | $ | 39,348       |       |  | $             | (650     | ) |               | $ |     |           |  | $ | (24   | )   |   | $ | 23,738  |        |   | $ | 62,527   |       
|Comprehensive income                                                                               |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   |          |       
|                                                                                                   | Foreign currency translation |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       | 327 |   |   |         |       |   |   |          | 327    |  
|                                                                                                   | Net income                   |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       |    |   |   |         | 12,471 |   |   |          | 12,471 |  
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Comprehensive income                                                                               |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   | 12,798   |       
|Issuance of common stock for cash, non-cash charge and notes
    receivable                        |                              |              | 75     |   |         |       | 1          |         |  |   | 345          |       |  |               | (180     | ) |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 166      |       
|Note forgiveness                                                                                   |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | 110      |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 110      |       
|Accrued interest on shareholder notes                                                              |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | (53      | ) |               |   |     |           |  |   |      |     |   |   |        |        |   |   | (53      | )     
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Balance at December 31, 2003                                                                       |                              |              | 11,556 |   |         |       | 116        |         |  |   | 39,693       |       |  |               | (773     | ) |               |   |     |           |  |   | 303   |     |   |   | 36,209  |        |   |   | 75,548   |       
|Issuance of common stock for cash, non-cash charge and notes
    receivable                        |                              |              | 13     |   |         |       |           |         |  |   | 64           |       |  |               | (32      | ) |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 32       |       
|Conversion of convertible notes                                                                    |                              |              | 4,631  |   |         |       | 46         |         |  |   | 14,114       |       |  |               |         |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 14,160   |       
|Accrued interest on shareholder notes                                                              |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | 24       |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 24       |       
|Cash dividend of $6.24 per share of common stock                                                   |                              |              |       |   |         |       |           |         |  |   | (53,332      | )     |  |               | 671      |   |               |   |     |           |  |   |      |     |   |   | (56,699 | )      |   |   | (109,360 | )     
|Issuance of common stock for cash                                                                  |                              |              | 1,161  |   |         |       | 12         |         |  |   | 5,988        |       |  |               |         |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 6,000    |       
|Comprehensive income                                                                               |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   |          |       
|                                                                                                   | Foreign currency translation |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       | (18 | ) |   |         |       |   |   |          | (18    | )
|                                                                                                   | Net income                   |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       |    |   |   |         | 13,962 |   |   |          | 13,962 |  
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Comprehensive income                                                                               |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   | 13,944   |       
|Note forgiveness                                                                                   |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | 110      |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 110      |       
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Balance at December 31, 2004                                                                       |                              |              | 17,361 |   |         |       | 174        |         |  |   | 6,527        |       |  |               |         |   |               |   |     |           |  |   | 285   |     |   |   | (6,528  | )      |   |   | 458      |       
|Issuance of common stock for cash and notes receivable                                             |                              |              | 50     |   |         |       | 1          |         |  |   | 259          |       |  |               | (155     | ) |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 105      |       
|Accrued interest on shareholder notes                                                              |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | (6       | ) |               |   |     |           |  |   |      |     |   |   |        |        |   |   | (6       | )     
|Issuance of common stock upon initial public offering, net of
    $9,240 million in offering costs |                              |              | 5,938  |   |         |       | 59         |         |  |   | 85,701       |       |  |               |         |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 85,760   |       
|Exercise of warrants                                                                               |                              |              | 1,420  |   |         |       | 14         |         |  |   |             |       |  |               |         |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 14       |       
|Grant of restricted stock units                                                                    |                              |              |       |   |         |       |           |         |  |   | 16,096       |       |  |               |         |   |               |   | (350 | )         |  |   |      |     |   |   |        |        |   |   | 15,746   |       
|Stock-based compensation                                                                           |                              |              |       |   |         |       |           |         |  |   | 2,527        |       |  |               |         |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 2,527    |       
|Forgiveness of note receivable                                                                     |                              |              |       |   |         |       |           |         |  |   |             |       |  |               | 35       |   |               |   |     |           |  |   |      |     |   |   |        |        |   |   | 35       |       
|Comprehensive income (loss)                                                                        |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   |          |       
|                                                                                                   | Foreign currency translation |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       | 21  |   |   |         |       |   |   |          | 21     |  
|                                                                                                   | Net income (loss)            |              |        |  |         |       |            |        |  |   |              |      |  |               |          |  |               |   |      |          |  |   |       |    |   |   |         | (5,137 | ) |   |          | (5,137 | )
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Comprehensive income (loss)                                                                        |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |     |   |   |         |        |   |   | (5,116   | )     
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    
|Balance at December 31, 2005                                                                       |                              |              | 24,769 |   |         | $     | 248        |         |  | $ | 111,110      |       |  | $             | (126     | ) |               | $ | (350 | )         |  | $ | 306   |     |   | $ | (11,665 | )      |   | $ | 99,523   |       
|                                                                                                   |                              |              |        |   |         |       |            |         |  |   |              |       |  |               |          |   |               |   |      |           |  |   |       |    



F-5



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##### Table of Contents



DIRECTED ELECTRONICS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |         |   |         |         |         |  
|------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------- | - | -------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                                       |                                                 | Years Ended December 31,                            |        
|                                                                                                       |                                                 |                                                     |        
|                                                                                                       |                                                 | 2003                                                |         |        | 2004    |   |          | 2005    |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Operating activities                                                                                   |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|Net income (loss)                                                                                      |                                                 | $                                                   | 12,471  |        |         | $ | 13,962   |         |         | $ | (5,137  | )      
|Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|                                                                                                       | Depreciation                                    |                                                     |         | 723    |         |   |          | 943     |         |   |         | 1,409   |        
|                                                                                                       | Amortization                                    |                                                     |         | 3,287  |         |   |          | 3,505   |         |   |         | 4,050   |        
|                                                                                                       | Non-cash interest expense                       |                                                     |         | 2,088  |         |   |          | 4,449   |         |   |         | 4,449   |        
|                                                                                                       | Stock-based compensation                        |                                                     |         |       |         |   |          |        |         |   |         | 18,273  |        
|                                                                                                       | Forgiveness of note receivable from shareholder |                                                     |         | 110    |         |   |          | 110     |         |   |         | 35      |        
|                                                                                                       | Deferred taxes                                  |                                                     |         | 2,210  |         |   |          | 2,785   |         |   |         | (6,323  | )      
|Changes in operating assets and liabilities:                                                           |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|                                                                                                       | Accounts receivable, net                        |                                                     |         | (2,980 | )       |   |          | (27,250 | )       |   |         | (51,556 | )      
|                                                                                                       | Inventories                                     |                                                     |         | (4,864 | )       |   |          | (4,215  | )       |   |         | (12,556 | )      
|                                                                                                       | Prepaid expenses and other assets               |                                                     |         | (169   | )       |   |          | (2,519  | )       |   |         | (4,545  | )      
|                                                                                                       | Other assets                                    |                                                     |         | (1,122 | )       |   |          | 296     |         |   |         | 26      |        
|                                                                                                       | Accounts payable                                |                                                     |         | 7,236  |         |   |          | 9,818   |         |   |         | 17,710  |        
|                                                                                                       | Accrued liabilities                             |                                                     |         | 2,194  |         |   |          | 3,856   |         |   |         | 14,801  |        
|                                                                                                       | Income taxes payable                            |                                                     |         | (385   | )       |   |          | 3,050   |         |   |         | (727    | )      
|                                                                                                       | Other liabilities                               |                                                     |         | 451    |         |   |          | 134     |         |   |         | 498     |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|                                                                                                       |                                                 | Net cash provided by (used in) operating activities |         |        | 21,250  |   |          |         | 8,924   |   |         |         | (19,593 | )
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Investing activities                                                                                   |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|Purchases of property and equipment                                                                    |                                                 |                                                     | (1,520  | )      |         |   | (1,317   | )       |         |   | (1,690  | )      
|Acquisition of business, net of cash acquired                                                          |                                                 |                                                     |        |        |         |   | (49,823  | )       |         |   | (1,050  | )      
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|                                                                                                       |                                                 | Net cash used in investing activities               |         |        | (1,520  | ) |          |         | (51,140 | ) |         |         | (2,740  | )
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Financing activities                                                                                   |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|Proceeds from revolving loan                                                                           |                                                 |                                                     |        |        |         |   |         |         |         |   | 28,800  |        
|Payments on revolving loan                                                                             |                                                 |                                                     |        |        |         |   |         |         |         |   | (23,600 | )      
|Proceeds from senior notes                                                                             |                                                 |                                                     |        |        |         |   | 156,000  |         |         |   | 15,000  |        
|Payments on senior notes                                                                               |                                                 |                                                     | (19,090 | )      |         |   | (87,780  | )       |         |   |        |        
|Proceeds from subordinated notes                                                                       |                                                 |                                                     |        |        |         |   | 74,000   |         |         |   |        |        
|Payments on subordinated notes                                                                         |                                                 |                                                     |        |        |         |   |         |         |         |   | (74,000 | )      
|Payment of dividend                                                                                    |                                                 |                                                     |        |        |         |   | (109,360 | )       |         |   |        |        
|Debt issuance costs                                                                                    |                                                 |                                                     |        |        |         |   | (9,189   | )       |         |   | (1,384  | )      
|Issuance of common shares                                                                              |                                                 |                                                     | 346     |        |         |   | 6,063    |         |         |   | 85,879  |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|                                                                                                       |                                                 | Net cash (used in) provided by financing activities |         |        | (18,744 | ) |          |         | 29,734  |   |         |         | 30,695  |  
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Net effect of exchange rates on cash                                                                   |                                                 |                                                     | 327     |        |         |   | (18      | )       |         |   | 21      |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Increase (decrease) in cash and cash equivalents                                                       |                                                 |                                                     | 1,313   |        |         |   | (12,500  | )       |         |   | 8,383   |        
|Cash and cash equivalents at beginning of year                                                         |                                                 |                                                     | 14,971  |        |         |   | 16,284   |         |         |   | 3,784   |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Cash and cash equivalents at end of year                                                               |                                                 | $                                                   | 16,284  |        |         | $ | 3,784    |         |         | $ | 12,167  |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Supplemental disclosure of cash flow information                                                       |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|                                                                                                       | Interest paid                                   |                                                     | $       | 7,210  |         |   | $        | 10,141  |         |   | $       | 21,903  |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|                                                                                                       | Taxes paid                                      |                                                     | $       | 6,254  |         |   | $        | 3,937   |         |   | $       | 6,669   |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Supplemental disclosure of non-cash financing activities                                               |                                                 |                                                     |         |        |         |   |          |         |         |   |         |        
|Issuance of common stock for promissory note                                                           |                                                 | $                                                   | 180     |        |         | $ | 32       |         |         | $ | 155     |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Conversion of notes payable to common stock                                                            |                                                 | $                                                   |        |        |         | $ | 14,160   |         |         | $ |        |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        
|Accrued interest on shareholder notes payable                                                          |                                                 | $                                                   |        |        |         | $ |         |         |         | $ | 6       |        
|                                                                                                       |                                                 |                                                     |         |        |         |   |          |         |        



F-6



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##### Table of Contents



DIRECTED ELECTRONICS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2003, 2004, and 2005


(In thousands, except per share data)




|   |                                    
|-- | -----------------------------------
|1. | The Company and Business Activities









| |                 
| | ----------------
| | Use of Estimates





|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                    
| | -------------------
| | Revenue Recognition



F-7



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)














| |                         
| | ------------------------
| | Research and Development





| |                                     
| | ------------------------------------
| | Shipping and Handling Fees and Costs

00-10,




| |                  
| | -----------------
| | Advertising Costs





| |                          
| | -------------------------
| | Cash and cash equivalents



F-8



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




| |                      
| | ---------------------
| | Concentration of Risk







| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts



|                                             |  |                     |      |   |      |   |       |      |  |   |        |  
|-------------------------------------------- |  | ------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                             |  | For the Years Ended |     
|                                             |  | December 31,        |     
|                                             |  |                     |     
|                                             |  | 2003                |      |   | 2004 |   |       | 2005 | 
|                                             |  |                     |      |   |      |   |       |      | 
|Beginning balance                            |  | $                   | 819  |   |      | $ | 732   |      |  | $ | 1,684  |  
|Increases in reserves, charged to operations |  |                     | 444  |   |      |   | 1,507 |      |  |   | 2,276  |  
|Decrease charged against reserve             |  |                     | (531 | ) |      |   | (555  | )    |  |   | (2,158 | )
|                                             |  |                     |      |   |      |   |       |      | 
|Ending balance                               |  | $                   | 732  |   |      | $ | 1,684 |      |  | $ | 1,802  |  
|                                             |  |                     |      |   |      |   |       |      | 



| |            
| | -----------
| | Inventories

first-in,


F-9



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




| |           
| | ----------
| | Warranties



|                                             |  |                                  |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                             |  | For the Years Ended December 31, |       
|                                             |  |                                  |       
|                                             |  | 2003                             |        |   | 2004 |   |        | 2005 | 
|                                             |  |                                  |        |   |      |   |        |      | 
|Beginning balance                            |  | $                                | 1,399  |   |      | $ | 1,254  |      |  | $ | 3,216   |  
|Increases in reserves, charged to operations |  |                                  | 5,164  |   |      |   | 8,393  |      |  |   | 16,270  |  
|Decrease charged against reserve             |  |                                  | (5,309 | ) |      |   | (6,431 | )    |  |   | (12,074 | )
|                                             |  |                                  |        |   |      |   |        |      | 
|Ending balance                               |  | $                                | 1,254  |   |      | $ | 3,216  |      |  | $ | 7,412   |  
|                                             |  |                                  |        |   |      |   |        |      | 



| |                       
| | ----------------------
| | Property and Equipment





| |                                                
| | -----------------------------------------------
| | Goodwill and Indefinite-Lived Intangible Assets





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



F-10



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)






| |                         
| | ------------------------
| | Deferred Financing Costs





| |                              
| | -----------------------------
| | Foreign Currency Transactions





| |                             
| | ----------------------------
| | Business Segment Disclosures











| |             
| | ------------
| | Income Taxes



F-11



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




| |                     
| | --------------------
| | Comprehensive Income





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









F-12



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




3. Net Income (Loss) per Common Share




00-23,






|                                                                                     |  |                          |        |  |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                     |  | Years Ended December 31, |       
|                                                                                     |  |                          |       
|                                                                                     |  | 2003                     |        |  | 2004 |   |        | 2005 | 
|                                                                                     |  |                          |        |  |      |   |        |      | 
|Determination of diluted number of shares:                                           |  |                          |        |  |      |   |        |      |  |   |        |  
|Weighted average shares used to compute basic EPS                                    |  |                          | 12,783 |  |      |   | 15,637 |      |  |   | 18,897 |  
|Shares issuable on conversion of notes                                               |  |                          | 4,267  |  |      |   | 2,073  |      |  |   |       |  
|                                                                                     |  |                          |        |  |      |   |        |      | 
|Diluted weighted average shares outstanding                                          |  |                          | 17,050 |  |      |   | 17,710 |      |  |   | 18,897 |  
|Calculation of diluted net income (loss) per common share:                           |  |                          |        |  |      |   |        |      |  |   |        |  
|Net income (loss) available to common shareholders                                   |  | $                        | 12,408 |  |      | $ | 13,824 |      |  | $ | (5,076 | )
|Add: Interest component on assumed conversion of convertible
    notes, net of taxes |  |                          | 595    |  |      |   | 361    |      |  |   |       |  
|                                                                                     |  |                          |        |  |      |   |        |      | 
|Net income (loss), adjusted                                                          |  | $                        | 13,003 |  |      | $ | 14,185 |      |  | $ | (5,076 | )
|                                                                                     |  |                          |        |  |      |   |        |      | 

F-13



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




4. Acquisitions






|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Cash                                          |  | $ | 177    |  
|Accounts receivable                           |  |   | 3,633  |  
|Inventory                                     |  |   | 5,045  |  
|Other assets                                  |  |   | 863    |  
|Liabilities assumed, net                      |  |   | (4,393 | )
|Intangible assets acquired:                   |  |   |        |  
|Trademarks and trade names (indefinite lived) |  |   | 14,360 |  
|Customer lists (15 years)                     |  |   | 8,000  |  
|Patents (11 years)                            |  |   | 930    |  
|Covenants not to compete (4 years)            |  |   | 550    |  
|Goodwill (indefinite lived)                   |  |   | 20,835 |  
|                                              |  |   |       
|Total purchase price                          |  | $ | 50,000 |  
|                                              |  |   |       





|                                    |  |                             |         | 
|----------------------------------- |  | --------------------------- | ------- | 
|                                    |  | For the Twelve Months Ended |        
|                                    |  | December 31, 2004           |        
|                                    |  |                             |        
|Pro Forma Information:              |  |                             |         | 
|Net sales                           |  | $                           | 205,940 | 
|Operating income                    |  |                             | 44,308  | 
|Net income                          |  |                             | 14,994  | 
|Basic net income per common share   |  |                             | 0.95    | 
|Diluted net income per common share |  |                             | 0.86    | 

F-14



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




5. Licensing Agreements




6. SIRIUS Satellite Radio Agreement




F-15



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)


7. Balance Sheet Details




|                                                |  |              |        |   |      |   |         |  
|----------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------- | -
|                                                |  | December 31, |       
|                                                |  |              |       
|                                                |  | 2004         |        |   | 2005 |  
|                                                |  |              |        |   |      |  
|Accounts receivable:                            |  |              |        |   |      |   |         |  
|Accounts receivable                             |  | $            | 51,389 |   |      | $ | 104,198 |  
|Less accounts receivable allowances             |  |              | (2,947 | ) |      |   | (4,058  | )
|                                                |  |              |        |   |      |  
|                                                |  | $            | 48,442 |   |      | $ | 100,140 |  
|                                                |  |              |        |   |      |  
|Inventories:                                    |  |              |        |   |      |   |         |  
|Raw materials                                   |  | $            | 702    |   |      | $ | 732     |  
|Finished goods                                  |  |              | 30,066 |   |      |   | 42,592  |  
|                                                |  |              |        |   |      |  
|                                                |  | $            | 30,768 |   |      | $ | 43,324  |  
|                                                |  |              |        |   |      |  
|Property and equipment:                         |  |              |        |   |      |   |         |  
|Machinery and equipment                         |  | $            | 3,660  |   |      | $ | 3,645   |  
|Molds and tooling                               |  |              | 2,460  |   |      |   | 3,802   |  
|Furniture and fixtures                          |  |              | 531    |   |      |   | 568     |  
|Leasehold improvements                          |  |              | 562    |   |      |   | 602     |  
|                                                |  |              |        |   |      |  
|                                                |  |              | 7,213  |   |      |   | 8,617   |  
|Less accumulated depreciation and amortization  |  |              | (2,845 | ) |      |   | (3,968  | )
|                                                |  |              |        |   |      |  
|                                                |  | $            | 4,368  |   |      | $ | 4,649   |  
|                                                |  |              |        |   |      |  
|Accrued liabilities:                            |  |              |        |   |      |   |         |  
|Accrued warranty                                |  | $            | 3,216  |   |      | $ | 7,412   |  
|Accrued salaries, bonuses and employee benefits |  |              | 2,565  |   |      |   | 11,239  |  
|Accrued interest                                |  |              | 2,549  |   |      |   | 389     |  
|Accrued sales incentives                        |  |              | 2,373  |   |      |   | 5,295   |  
|Other                                           |  |              | 513    |   |      |   | 1,688   |  
|                                                |  |              |        |   |      |  
|                                                |  | $            | 11,216 |   |      | $ | 26,023  |  
|                                                |  |              |        |   |      |  

F-16



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)


8. Intangible Assets




|                                                             |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|------------------------------------------------------------ |  | ----------------- | ---- |  | ------ | - | ------- | ------------ |  | - | -------- |  |  | - | ------ | 
|                                                             |  | December 31, 2004 |     
|                                                             |  |                   |     
|                                                             |  | Useful            |      |  |       
|                                                             |  | Life              |      |  | Gross  |   |         | Accumulated  |  |   | Net Book | 
|                                                             |  | (Years)           |      |  | Amount |   |         | Amortization |  |   | Value    | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|Intangibles subject to amortization:                         |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|Patents                                                      |  |                   | 8-11 |  |        | $ | 11,230  |              |  | $ | 5,972    |  |  | $ | 5,258  | 
|Customer relationships                                       |  |                   | 15   |  |        |   | 37,300  |              |  |   | 9,922    |  |  |   | 27,378 | 
|Licensing agreements                                         |  |                   | 12   |  |        |   | 1,430   |              |  |   | 536      |  |  |   | 894    | 
|Non-compete agreements                                       |  |                   | 4    |  |        |   | 550     |              |  |   | 40       |  |  |   | 510    | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|                                                             |  |                   |      |  |        |   | 50,510  |              |  |   | 16,470   |  |  |   | 34,040 | 
|Intangibles not subject to amortization, excluding goodwill: |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|Trademarks                                                   |  |                   |      |  |        |   | 59,710  |              |  |   |         |  |  |   | 59,710 | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|Total intangibles                                            |  |                   |      |  |        | $ | 110,220 |              |  | $ | 16,470   |  |  | $ | 93,750 | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 

|                                                             |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|------------------------------------------------------------ |  | ----------------- | ---- |  | ------ | - | ------- | ------------ |  | - | -------- |  |  | - | ------ | 
|                                                             |  | December 31, 2005 |     
|                                                             |  |                   |     
|                                                             |  | Useful Life       |      |  | Gross  |   |         | Accumulated  |  |   | Net Book | 
|                                                             |  | (Years)           |      |  | Amount |   |         | Amortization |  |   | Value    | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|Intangibles subject to amortization:                         |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|Patents                                                      |  |                   | 8-11 |  |        | $ | 11,230  |              |  | $ | 7,268    |  |  | $ | 3,962  | 
|Customer relationships                                       |  |                   | 15   |  |        |   | 37,494  |              |  |   | 12,416   |  |  |   | 25,078 | 
|Licensing agreements                                         |  |                   | 12   |  |        |   | 1,430   |              |  |   | 655      |  |  |   | 775    | 
|Non-compete agreements                                       |  |                   | 4    |  |        |   | 550     |              |  |   | 178      |  |  |   | 372    | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|                                                             |  |                   |      |  |        |   | 50,704  |              |  |   | 20,517   |  |  |   | 30,187 | 
|Intangibles not subject to amortization, excluding goodwill: |  |                   |      |  |        |   |         |              |  |   |          |  |  |   |        | 
|Trademarks                                                   |  |                   |      |  |        |   | 60,059  |              |  |   |         |  |  |   | 60,059 | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 
|Total intangibles                                            |  |                   |      |  |        | $ | 110,763 |              |  | $ | 20,517   |  |  | $ | 90,246 | 
|                                                             |  |                   |      |  |        |   |         |              |  |   |          | 



9. Senior Credit Facility




F-17



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)








|                     |  |              |         |  |      |   |         | 
|-------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                     |  | December 31, |        
|                     |  |              |        
|                     |  | 2004         |         |  | 2005 |  
|                     |  |              |         |  |      |  
|Revolving loans      |  | $            |        |  |      | $ | 5,200   | 
|Senior notes         |  |              | 151,610 |  |      |   | 166,610 | 
|                     |  |              |         |  |      |  
|                     |  |              | 151,610 |  |      |   | 171,810 | 
|Less current portion |  |              |        |  |      |   | 1,699   | 
|                     |  |              |         |  |      |  
|                     |  | $            | 151,610 |  |      | $ | 170,111 | 
|                     |  |              |         |  |      |  





10. Subordinated Notes




F-18



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)


11. Shareholders Equity


(a) Common Stock












(b) Warrants




(c) Stock Options




(d) Restricted Stock Units






F-19



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




(e) Stock Based Compensation




(f) Dividends




12. Income Taxes




|          |         |              |       |       |      |   |       |       |  |   |        |        |  
|--------- | ------- | ------------ | ----- | ----- | ---- | - | ----- | ----- |  | - | ------ | ------ | -
|          |         | December 31, |      
|          |         |              |      
|          |         | 2003         |       |       | 2004 |   |       | 2005  | 
|          |         |              |       |       |      |   |       |       | 
|Current:  |         |              |       |       |      |   |       |       |  |   |        |       
|          | Federal |              | $     | 4,768 |      |   | $     | 5,233 |  |   | $      | 4,914  |  
|          | State   |              |       | 1,272 |      |   |       | 1,442 |  |   |        | 1,036  |  
|          | Foreign |              |       | 264   |      |   |       | 294   |  |   |        | (25    | )
|          |         |              |       |       |      |   |       |       | 
|          |         |              | 6,304 |       |      |   | 6,969 |       |  |   | 5,925  |       
|          |         |              |       |       |      |   |       |       | 
|Deferred: |         |              |       |       |      |   |       |       |  |   |        |       
|          | Federal |              |       | 1,743 |      |   |       | 2,194 |  |   |        | (4,987 | )
|          | State   |              |       | 467   |      |   |       | 591   |  |   |        | (1,336 | )
|          |         |              |       |       |      |   |       |       | 
|          |         |              | 2,210 |       |      |   | 2,785 |       |  |   | (6,323 | )     
|          |         |              |       |       |      |   |       |       | 
|          |         | $            | 8,514 |       |      | $ | 9,754 |       |  | $ | (398   | )     
|          |         |              |       |       |      |   |       |       | 

F-20



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)




|                                                  |  |              |       |   |      |   |       |      |  |   |        |  
|------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                  |  | December 31, |      
|                                                  |  |              |      
|                                                  |  | 2003         |       |   | 2004 |   |       | 2005 | 
|                                                  |  |              |       |   |      |   |       |      | 
|Expected provision at federal statutory rate      |  | $            | 7,346 |   |      | $ | 8,301 |      |  | $ | (1,937 | )
|State tax, net of federal tax benefit             |  |              | 1,141 |   |      |   | 1,349 |      |  |   | 17     |  
|Tax credits                                       |  |              | (264  | ) |      |   | (294  | )    |  |   | 25     |  
|Foreign tax                                       |  |              | 264   |   |      |   | 294   |      |  |   | (25    | )
|Other permanent items                             |  |              | 27    |   |      |   | 104   |      |  |   | 9      |  
|Stock based compensation                          |  |              |      |   |      |   |      |      |  |   | 885    |  
|Initial public offering costs capitalized for tax |  |              |      |   |      |   |      |      |  |   | 628    |  
|                                                  |  |              |       |   |      |   |       |      | 
|                                                  |  | $            | 8,514 |   |      | $ | 9,754 |      |  | $ | (398   | )
|                                                  |  |              |       |   |      |   |       |      | 



|                               |                            |              |         |        |      |   |         |        |  
|------------------------------ | -------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | -
|                               |                            | December 31, |        
|                               |                            |              |        
|                               |                            | 2004         |         |        | 2005 |  
|                               |                            |              |         |        |      |  
|Deferred tax assets:           |                            |              |         |        |      |   |         |       
|                               | Allowances and accruals    |              | $       | 1,563  |      |   | $       | 3,813  |  
|                               | Revenue deferred for books |              |         | 1,642  |      |   |         | 3,387  |  
|                               | State taxes                |              |         | 677    |      |   |         | 792    |  
|                               | Stock based compensation   |              |         |       |      |   |         | 6,462  |  
|                               |                            |              |         |        |      |  
|Total deferred tax assets      |                            |              | 3,882   |        |      |   | 14,454  |       
|                               |                            |              |         |        |      |  
|Deferred tax liabilities:      |                            |              |         |        |      |   |         |       
|                               | Goodwill                   |              |         | (8,457 | )    |   |         | (9,817 | )
|                               | Intangible assets          |              |         | (5,072 | )    |   |         | (6,754 | )
|                               | Depreciation               |              |         | (439   | )    |   |         | (428   | )
|                               | Inventory sold for tax     |              |         | (908   | )    |   |         | (2,126 | )
|                               |                            |              |         |        |      |  
|Total deferred tax liabilities |                            |              | (14,876 | )      |      |   | (19,125 | )     
|                               |                            |              |         |        |      |  
|Net deferred tax liabilities   |                            | $            | (10,994 | )      |      | $ | (4,671  | )     
|                               |                            |              |         |        |      |  







F-21



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)


13. Benefit Plans




Employee Savings Plan




Key Employee Equity Purchase Plan




Equity Participation Rights Agreement




14. Related Party Transactions








F-22



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##### Table of Contents



DIRECTED ELECTRONICS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share data)


15. Commitment and Contingencies








|           |  |   |        | 
|---------- |  | - | ------ | 
|2006       |  | $ | 1,632  | 
|2007       |  |   | 1,632  | 
|2008       |  |   | 1,677  | 
|2009       |  |   | 1,722  | 
|2010       |  |   | 1,770  | 
|Thereafter |  |   | 5,480  | 
|           |  |   |       
|           |  | $ | 13,913 | 
|           |  |   |       







F-23



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##### Table of Contents



Exhibit Index


|        |    |         |  |                                                                                                                                                                                                                                                                                                      
|------- | -- | ------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|        | 3  | .1      |  | Second Amended and Restated Articles of Incorporation of the
    Registrant(1)                                                                                                                                                                                                                       
|        | 3  | .2      |  | Amended and Restated Bylaws of the Registrant(1)                                                                                                                                                                                                                                                     
|       
|        | 4  | .1      |  | Form of Common Stock Certificate(1)                                                                                                                                                                                                                                                                  
|       
|        | 4  | .2      |  | Amended and Restated Registration Rights Agreement(1)                                                                                                                                                                                                                                                
|       
|        | 10 | .1     |  | Form of Deferred Compensation/ Salary Continuation Agreement(1)                                                                                                                                                                                                                                      
|       
|        | 10 | .2     |  | Form of Change In Control Severance Agreements(1)                                                                                                                                                                                                                                                    
|       
|        | 10 | .3     |  | Amended and Restated Employment Agreement by and between the
    Registrant and James E. Minarik, dated as of January 1,
    2004(1)                                                                                                                                                                 
|       
|        | 10 | .4     |  | Sales Bonus Agreement by and between the Registrant and James E.
    Minarik, dated as of December 7, 2004(1)                                                                                                                                                                                        
|       
|        | 10 | .5     |  | Form of Key Employee Sale Bonus Agreement(1)                                                                                                                                                                                                                                                         
|       
|        | 10 | .6     |  | Associate Equity Gain Program(1)                                                                                                                                                                                                                                                                     
|       
|        | 10 | .7      |  | Credit Agreement by and among the Registrant; the Lenders (as
    defined therein); and Wachovia Bank, National Association, as
    Administrative Agent, dated as of June 17, 2004(1)                                                                                                               
|       
|        | 10 | .8      |  | First Amendment to Credit Agreement by and among the Registrant;
    the Lenders (as defined therein); and Wachovia Bank, National
    Association, as Administrative Agent, dated as of
    September 17, 2004(1)                                                                                   
|       
|        | 10 | .9      |  | Second Amendment to Credit Agreement by and among the
    Registrant; the Lenders (as defined therein); and Wachovia Bank,
    National Association, as Administrative Agent, dated as of
    February 4, 2005(1)                                                                                    
|       
|        | 10 | .10     |  | Note Purchase Agreement by and among the Registrant; DEI
    Headquarters, Inc.; DEI Sales Inc. (formerly Directed
    Electronics, Inc.); the Purchasers (as defined therein); and
    American Capital Financial Services, Inc., as Agent, dated as of
    June 17, 2004(1)                        
|       
|        | 10 | .11     |  | First Amendment to Note Purchase Agreement by and among the
    Registrant; DEI Headquarters, Inc., DEI Sales Inc. (formerly
    Directed Electronics, Inc.); the Purchasers (as defined
    therein); and American Capital Financial Services, Inc., as
    Agent, dated as of September 17, 2004(1)
|       
|        | 10 | .12     |  | Industrial/ Commercial Lease Agreement Multi Tenant 
    Net by and between the Registrant and Greene Properties, Inc.,
    dated as of July 14, 2003(1)                                                                                                                                            
|       
|        | 10 | .13     |  | First Amendment to Industrial/ Commercial Lease Agreement Multi
    Tenant  Net by and between the Registrant and Greene
    Properties, Inc., dated as of September 8, 2004(1)                                                                                                                     
|       
|        | 10 | .14   |  | Purchase Agreement by and between the Registrant and Nutek
    Corporation, dated as of December 26, 2001(1)                                                                                                                                                                                         
|       
|        | 10 | .15   |  | Manufacturing and Distribution Agreement by and between the
    Registrant and SIRIUS Satellite Radio, Inc., dated as of
    April 1, 2005(1)                                                                                                                                                        
|       
|        | 10 | .16   |  | Vendor Agreement by and between the Registrant and Best Buy Co.,
    Inc., dated as of April 11, 2001(1)                                                                                                                                                                                             
|       
|        | 10 | .17   |  | Letter Agreement by and between the Registrant and Circuit City
    Stores, Inc., dated as of January 27, 2005(1)                                                                                                                                                                                    
|       
|        | 10 | .18     |  | Third Amendment to Credit Agreement by and among the Registrant;
    the Lenders (as defined therein); and Wachovia Bank, National
    Association, as Administrative Agent, dated as of
    September 21, 2005(1)                                                                                   
|       
|        | 10 | .19    |  | 2005 Incentive Compensation Plan (1)                                                                                                                                                                                                                                                                 
|       
|        | 10 | .20    |  | Form of Key Employee Sale Bonus Cancellation Agreement(1)                                                                                                                                                                                                                                            
|       
|        | 10 | .21    |  | Sale Bonus Cancellation Agreement by and between the Registrant
    and James E. Minarik dated as of December 1, 2005(1)                                                                                                                                                                             
|       
|        | 10 | .22    |  | Form of Indemnification Agreement(1)                                                                                                                                                                                                                                                                 
|       
|        | 10 | .23     |  | Advisory Agreement by and between the Registrant and Trivest
    Partners, L.P., dated as of December 1, 2005(1)                                                                                                                                                                                     



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##### Table of Contents



|        |    |         |  |                                                                                                                                                                                                                                                                                                     
|------- | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 10 | .24     |  | Fourth Amendment to Credit Agreement by and among DEI Sales,
    Inc. (formerly Directed Electronics, Inc.); the Guarantors
    listed on the signature pages thereto; the Lenders (as defined
    therein); and Wachovia Bank, National Association, as
    Administrative Agent for the Lenders(2)
|       
|        | 21 |         |  | List of Subsidiaries(1)                                                                                                                                                                                                                                                                             
|       
|        | 31 | .1      |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer                                                                                                                                                                                                                               
|       
|        | 31 | .2      |  | Rule 13a-14(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                                                                                                                                                                                                                                               






|  |                                                 
|- | ------------------------------------------------
| | Management contract or compensatory arrangement.



|   |                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------
| | Confidential treatment has previously been granted by the SEC
    for certain portions of the referenced exhibit



|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registrants Registration
    Statement on
    Form S-1
    (Registration
    No. 333-127823),
    as filed with the Securities and Exchange Commission.
|   
|(2) | Incorporated by reference to the Registrants Current
    Report on Form 8-K
    dated December 15, 2005, as filed with the Securities and
    Exchange Commission on December 21, 2005.