##### 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, 2006
 000-51664
    Directed Electronics,
    Inc.
  (Exact Name of Registrant as
    Specified in Its Charter)
  Florida(State
    of Incorporation)

65-0964171(I.R.S.
    Employer Identification No.)1 Viper Way
    Vista, California(Address
    of Principal Executive Offices)

92081(Zip
    Code)   (760) 598-6200
  (Registrants Telephone
    Number, Including Area Code)
    Title of Each ClassCommon
    Stock, par value $0.01 per share

Name of Each Exchange on Which
    RegisteredThe
    Nasdaq Stock Market     None
   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer o     Accelerated
    filer þ     Non-accelerated
    filer o
  Rule 12b-2 o þ
      Documents
    Incorporated by Reference




---



##### 



DIRECTED
    ELECTRONICS, INC.
    ANNUAL REPORT ON
    FORM 10-K
    Fiscal Year Ended December 31, 2006
    TABLE OF CONTENTS
  PagePART IITEM 1.


BUSINESS


3ITEM 1A.


RISK
    FACTORS


20ITEM 1B.


UNRESOLVED STAFF
    COMMENTS


31ITEM 2.


PROPERTIES


31ITEM 3.


LEGAL
    PROCEEDINGS


31ITEM 4.


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


32PART IIITEM 5.


MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


33ITEM 6.


SELECTED FINANCIAL
    DATA


35ITEM 7.


MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


36ITEM 7A.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


47ITEM 8.


CONSOLIDATED
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


47ITEM 9.


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


47ITEM 9A.


CONTROLS AND
    PROCEDURES


47ITEM 9B.


OTHER
    INFORMATION


49PART IIIITEM 10.


DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


50ITEM 11.


EXECUTIVE
    COMPENSATION


50ITEM 12.


SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
    STOCKHOLDER MATTERS


50ITEM 13.


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE


50ITEM 14.


PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


50PART IVITEM 15.


EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


51SIGNATURES


53INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS


F-1Exhibit 21Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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®,
    DesignTech®,
    Polk
    Audio®,
    Astroflex®,
    Autostart®,
    Polk
    MOMO®,
    Directed
    Audio®,
    and
    Automate®
    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
  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.




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##### Table of Contents



PART I
  Item 1.
    Business.  Introduction
    ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
      (760) 598-6200. www.directed.com Form 10-K, Form 10-Q, Form 8-K,
 3




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##### Table of Contents



Industry
    Security and Convenience.
    
    Continued Focus on Security.  Vehicle
    values are increasing and drivers are installing a greater
    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 nearly doubled to $34.3 billion a year. We
    believe this has increased demand for security products needed
    to help protect vehicles and their valuable contents. According
    to the 2005 FBI Uniform Crime Report:  
    In 2005, content theft from vehicles amounted to approximately
    $1.1 billion in the United States. Aftermarket security
    systems address this type of theft with sophisticated sensor
    technologies designed to detect various types of vehicle
    intrusion.
    In 2005, an estimated 1.2 million vehicles were stolen in
    the United States, amounting to an estimated $7.6 billion
    in value.  
    Increased Product Functions and
    Features.  The vehicle security aftermarket
    increasingly features sophisticated products that incorporate a
    variety of 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 that the vehicle was started with a remote
    control; 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 convenience such as anti-theft kill
    switches and keyless entry devices, while aftermarket
    participants generally offer more complex products and feature
    rich systems. We estimate that OEMs have factory installation
    rates of only approximately 10% 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 positively 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 mainly by local mobile electronics specialists to a
    customary product category for a diverse set of retailers,
    including national and regional electronics chains, mass
    merchants, national automotive parts retailers, and
    international retailers.  Home Audio.
 4




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##### Table of Contents




    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 5.1 Audio and advanced digital
    media 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 14 million units in 2006, an increase
    of approximately 133% compared to 2005. We expect strong
    continued sales of flat panel televisions in 2007 as television
    broadcasters transition from analog to digital broadcasting.
    Consumer spending on flat panel televisions is driving growth in
    attachment sales of premium speaker systems, as many consumers
    upgrade their home loudspeaker systems to match the
    sophistication and quality 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, premium
    sound quality, and the increasing penetration of structured
    wiring have all resulted in an increasing consumer demand for
    architectural loudspeakers. Additionally, the low existing
    market penetration of architectural loudspeakers has 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 use these devises in their vehicles and desire
    upgraded sound quality.
    Audio Accessories.  New digital device
    content players like MP3 players and satellite radio receivers
    are generally portable. Demand for speaker docking systems for
    these players has created increased opportunity for boombox,
    executive docking stations, and other cradle or interface
    systems that allow consumers to use their players in multiple
    environments.  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.
    Portable Navigation.  Handheld and
    in-vehicle GPS navigation technology provides users with
    location and turn by turn direction mapping information.
    Consumer adoption of this technology has grown rapidly.
    Substantial marketing efforts and increased consumer awareness
    have increased demand. Improved GPS receiver technology and
    mapping software have also enhanced consumer product experience.
    Recently this market has been characterized by increased unit
    volume sales and decreasing retail price points. Additionally, a
    number of new competitors have entered this market.  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 is a relatively new technology, and both SIRIUS and XM
    Radio are rapidly adding new subscribers to their customer base.
    Both providers continue to aggressively market their services,
    focusing on listeners from large market groups like NASCAR, NBA,
    NFL, MLB, Oprah, and Howard Stern. Consumers also recognize the
    value of a national footprint for the services. 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. Receivers capable of satellite signal
    content storage, Wi-Fi and MP3 functions are currently available
    from both XM and SIRIUS.  plug-and-play and/or
 6




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##### Table of Contents



Our
    Competitive Strengths
    Strong
    Market Positions
  Orion Precision
    Power Directed Audio.
    Broad
    Portfolio of Established Brands
  Viper Python Clifford Polk Audio Definitive
    Technology Orion Precision Power Directed Automate Astroflex Command
    Start Autostart
  Highly
    Diverse Customer Base
   7




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##### Table of Contents



Attractive
    Retailer Proposition
      Strong
    Track Record of Growth and Operating Profit
    Scalable,
    Outsourced Manufacturing Model
    Strong
    Executive Team with Experience Managing Growth
    Our
    Strategy
  easy-to-understand
 8




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##### Table of Contents



Leverage
    Successful Multi-Brand Strategy
  Viper Python Clifford Automate Directed Orion Precision Power Directed Audio Xtreme Polk Audio
  Increase
    Product Penetration
    Develop
    New and Enhanced Products
      a/d/s/ Mythos® SurroundBar tm
  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. 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 expanded our mass merchant sales to
    customers such as Wal-Mart, Sams Club, COSTCO, Target,
    BJs Wholesale, and Staples. We also were successful in
    getting out products placed in to the automotive 9




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##### Table of Contents



parts channel with Balkamp, AutoZone, and Advance Auto Parts. We
    intend to capitalize on both our well-recognized brand names and
    strong distribution network to continue to expand our dealer
    base.  
    International.  We believe there is a
    significant opportunity to expand our international
    distribution. As an example, 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. In 2006, we
    contributed to our international sales growth with our
    significant growth in the Canadian market through acquisitions.
    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 aftermarket and Best Buys entry into
    China represent promising long-term consumer market
    opportunities for many of our products.  Pursue
    Selective Acquisition Opportunities
    Product
    Lines
    Product

YearAnti-Theft, Digital Keypads,
    Motion Sensors


1983Radio Frequency
    Remote Control and Shock Sensors


1987Remote Start


1990Hybrid Security Systems (Security
    and Remote Start)


1995Mobile Audio


1996Home Audio


2001Mobile Video/Two-Way Security and
    Convenience


2002Do-It-Yourself Security and Remote
    Start/GPS Tracking


2003Satellite Radio


2004Mobile Video Dockable Hardrives


2005One-mile
    range two-way security and convenience products


2006   Security
    and Entertainment
   10




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##### Table of Contents



Security and Convenience.
  
    Security products designed to deter theft of vehicles and
    vehicle contents.
    Remote start products that permit users to start a
    vehicles ignition from up to one mile away from the
    vehicle.
    DIY remote start systems designed for do-it-yourself
    installation.
    Hybrid products that contain security, remote start, and other
    convenience capabilities with a range of up to one mile from the
    vehicle.
    GPS tracking products that enable remote locating and tracking
    to recover a stolen vehicle.  Responder
     Viper

 Python

 AutoCommand

 Avital

 Ready
    Remote

 Astroflex Clifford

 Design
    Tech

 Hornet

 Valet

 Automate

 Autostart   Home Audio. Definitive Technology Polk Audio
    
    Packaged speaker systems that include surround speakers, a
    center channel speaker, and a powered subwoofer designed for
    music and movie surround sound applications marketed under the
    ProCinemaname.
    Tower speakers with patented bipolar speakers
    designed for three dimensional sound including models with
    built-in subwoofers marketed under the SuperTowertrade
    name.
    Highly styled on-wall and stand-alone extruded aluminum speakers
    designed to complement flat panel televisions including the new
    Mythos STwith built-in high performance powered
    subwoofer.
    Ultra-compact powered subwoofers marketed primarily under the
    SuperCubename.
    A wide range of in-wall, in-ceiling, and outdoor speakers
    engineered to achieve superior sound quality.
    Smaller speakers designed for specific applications, such as
    center channel, surround, and bookshelf speakers.   11




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##### Table of Contents




    Tower Speakers with patented PowerPort& ARC
    Porttechnologies used in a good, better and best series of
    award winning designs.
    Powered subwoofers with patented PowerPorttechnologies
    used in a complete range of products for traditional stereo and
    home theater applications.
    Patented PowerPort& ARC Porttechnologies used in smaller designs for specific home
    theater applications as well as stereo applications.
    Packaged home theater speaker systems for easy attachment to
    TVs that combine strong industrial design with high
    performance. Many models include patented PowerPorttechnology and sleek extruded aluminum cabinets.
    A broad range of entry level, step up and premium powered
    in-wall and in-ceiling speakers, built-in subwoofers and digital
    amplifiers that fulfill all the applications required by the
    retail channel and the custom installation specialist.
    All digital format entertainment systems using patented
    PowerPort technologies. These systems include the I-Sonic
    ES DVD, HD Radio & XM Entertainment system, MiDock
    Portfolio iPod Dock, MiDock Studio iPod Dock, MiDock 10 iPod
    Dock and HX-3 CD/HD Radio Executive System.
    The award winning XRT-12 XM tuner, a component satellite tuner.  Mobile Audio. Orion Precision Power Directed Audio Xtreme Polk Audio
  
    Power amplifiers that increase the voltage and current coming
    from the source unit, providing more power than is possible from
    a source unit alone, which are used in aftermarket automobile
    and OEM marine applications.
    Aftermarket speakers that provide improved sound quality
    compared to most factory-installed mobile audio systems which
    are used in aftermarket automobile and OEM marine applications.
    Subwoofers, or speakers that are eight inches or greater in
    diameter, which are designed to play lower (bass) frequencies
    and are used in aftermarket automobile and OEM marine
    applications.
    A variety of accessories including power capacitors,
    distribution blocks, audio interconnects, and amplifier wiring
    kits for a variety of installation applications.
    SIRIUS accessories, including portable, boomboxes, desktop,
    sound system, and installation kits to support SIRIUS receivers.  Mobile Video. all-in-one Directed Automate
  
    Flip-down video displays combined with DVD players and wireless
    headphones that are installed inside the roof of SUVs and
    minivans.
    Aftermarket headrests that contain video screens designed to
    easily replace existing OEM headrests that are packaged with a
    DVD player and headphones. 12




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##### Table of Contents




    Active matrix LCD screens designed for vehicle installation.
    DVD players designed for vehicle installation.
    A variety of accessories including wireless headphones, control
    modules, trim rings, and antennas designed for installation
    convenience.  Satellite
    Radio
      
    Portable receivers that can be attached in a vehicle, to a
    boombox, at home, or which are wearable/live receivers.
    Docking stations that allow users to utilize receivers in
    vehicles, at home, or at work.
    Satellite radio reception units for use with home audio
    equipment.
    Down link processors, which are receivers designed to add to any
    existing car stereo.
    A variety of accessories including signal combiners,
    distribution systems, antennas, and related items to assist with
    vehicle and home installations.  Distribution
    Specialty
    Retailers
  Viper Python Clifford Valet Hornet Avital
  Definitive Technology Polk Audio
  National
    and Regional Electronics Chains
   13




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##### Table of Contents




    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. Since 2004, we have increased our product offerings
    with Best Buy (and Magnolia Audio Video, a subsidiary of Best
    Buy) through the addition of Directed video products, Definitive
    Technology speakers, 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, Directed, and Directed Installation
    Accessorieslines. Circuit City is also one of our largest
    customers of SIRIUS Satellite Radio products.  Mass
    Merchants and Automotive Parts Retailers
  Ready Remote
  Car
    Dealers
  Automate
  International
    Distribution
    Customers
   14




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##### Table of Contents



Sales and
    Marketing
  point-of-purchase Definitive Technology Home Theater Sound
    and Vision.
          word-of-mouth
  www.directed.com
  www.viper.com

www.clifford.com

www.orioncaraudio.comwww.definitvetech.com

www.polkaudio.com

www.pythonsecurity.comwww.avital.com

www.designtech-intl.com

www.precisionpower.comwww.directedxtreme.com

www.cliffordscout.com

www.directedsirius.comwww.astroflex.com

www.automatecarsecurity.com

www.autostart.ca   Outsourced
    Manufacturing and Assembly
  on-site
 15




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##### Table of Contents



Product
    Development and Engineering
        Technical
    Support and Warranty
      Training
   16




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##### Table of Contents



state-of-the-art
  Intellectual
    Property
         Viper

 Definitive
    Technology

 Automate Clifford

 Autostart

 Orion Python

 Directed
    Video

 Precision
    Power No One Dares Come
    Close

 The Science
    of Security

 DesignTech Polk Audio

 Astroflex   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 17




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##### Table of Contents



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.    
    Security and convenience: Audiovox, Crimestopper, Compustar and
    Autopage
    Premium loudspeakers: Klipsch, Paradigm, B&W, Harman (JBL
    and Infinity), and Bose
    Satellite radio: Delphi (XM Radio), Audiovox, and Clarion
    Mobile video: Audiovox and Rosen
    Mobile audio: Rockford Fosgate, Kicker, Alpine, MTX, JL Audio,
    and Audiobahn      Government
    Regulation
      truth-in-advertising
    Employees
   18




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##### Table of Contents



Executive
    Officers
    Name

Age

PositionJames E. Minarik


53


President and Chief Executive
    OfficerRonald F. Dutt


59


Executive Vice President, Chief
    Financial Officer, and TreasurerGlenn R. Busse


44


Senior Vice President 
    SalesKevin P. Duffy


31


Senior Vice President 
    Corporate Development and MarketingMark E. Rutledge


36


Senior Vice President 
    Engineering and Product DevelopmentMichael N. Smith


40


Vice President 
    Operations and ITKC Bean


43


Vice President, General Counsel,
    and SecretaryRichard J. Hirshberg


52


Vice President 
    Internal Audit and Compliance   James E. Minarik
  Ronald F. Dutt 20-year
  Glenn R. Busse
  Kevin P. Duffy
  Mark E. Rutledge
 19




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##### Table of Contents



Michael N. Smith
  KC Bean
  Richard J. Hirshberg start-up
  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; 20




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##### Table of Contents




    the quality of our customer service;
    product or technology introductions by our competitors;
    ability of our contract manufacturers to deliver on time, on
    price, and with acceptable quality; and
    restricted access to component parts such as micro processors
    and LCD screens.    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.
      
    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.
   21




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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.
   22




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##### Table of Contents



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.
        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.
     23




---



##### Table of Contents



If we do not successfully address the risks associated with
    our international operations, our business could be harmed.
    
    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. currencies, non-U.S. currencies.
  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; 24




---



##### Table of Contents




    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.        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.   25




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##### Table of Contents



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.
          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 26




---



##### Table of Contents




    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.    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.
   27




---



##### Table of Contents



A decline
    in discretionary spending would likely cause our sales to
    decline.
    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.
     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.
     28




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##### Table of Contents



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;
    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
    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-period
 29




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##### Table of Contents




    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.          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.
     30




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##### Table of Contents



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.
      Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.      Location

Purpose

Square FeetOwings Mills, Maryland

Sales and Marketing Office


5,700Epsom, England

Sales and Distribution Center


10,000Baltimore, Maryland

Office and Distribution Center


100,000San Diego, California

Distribution Center


147,000Quebec, Canada

Sales and Marketing Office


6,000Quebec, Canada

Warehouse and Distribution Center


12,000Quebec, Canada

Sales and Marketing Office


21,000Hong Kong

Vendor Relations Office


1,500   Item 3.
    Legal
    Proceedings.   31




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##### Table of Contents



Automate
    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   32




---



##### Table of Contents



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


Low2006Fourth quarter

$
16.14


$
10.80Third quarter

$
16.30


$
10.54Second quarter

$
17.79


$
12.04First quarter

$
18.00


$
12.752005Fourth quarter

$
17.00


$
13.76     Dividend
    Policy
    Equity
    Compensation Plan Information
    (c)(a)

(b)

Number of securities remainingNumber of securities to

Weighted-average

available for future issuancebe issued upon exercise

exercise price of

under equity compensationof outstanding options,

outstanding options,

plans (excluding securitiesPlan Category

warrants and rights

warrants and rights

reflected in column (a))Equity Compensation Plans Approved
    by Shareholders


1,145,387


$
14.96



1,604,613Equity Compensation Plans Not
    Approved by Shareholders










Total


1,145,387







1,604,613   Performance
    Graph
  This performance graph shall not be deemed filed
    for purposes of Section 18 of the Securities Act of 1934,
    as amended (the Exchange Act), and shall not be
    deemed incorporated by reference into any filing of our Company
    under the Exchange Act or the Securities Act of 1933, as
    amended.
   33




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##### Table of Contents



12/16/05


12/31/05


03/31/06


06/30/06


09/30/06


12/31/06DIRECTED ELECTRONICS, INC.


$100.00


$102.79


$119.64


$
93.71


$107.86


$
81.79PEER GROUP INDEX


$100.00


$105.38


$121.82


$
129.64


$122.58


$
141.88NASDAQ COMPOSITE INDEX


$100.00


$100.00


$106.46


$
99.67


$103.83


$
112.05  34




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##### Table of Contents



Item 6.
    Selected
    Financial Data.    Years Ended December 31,2006


2005


2004


2003


2002(In thousands, expect per share data)Consolidated Statement of
    Operations Data:Net sales

$
437,778


$
304,558


$
189,869


$
131,765


$
123,709Cost of sales


315,155



205,587



108,525



69,907



61,960Gross profit


122,623



98,971



81,344



61,858



61,749Total operating expenses


70,972



79,649



41,105



31,782



30,470Income from operations


51,651



19,322



40,239



30,076



31,279Interest expense, net


17,516



24,857



16,523



9,091



9,723Income (loss) before provision for
    (benefit from) income taxes


34,135



(5,535
)


23,716



20,985



21,556Provision for (benefit from)
    income taxes


13,126



(398
)


9,754



8,514



8,793Net income (loss)


21,009



(5,137
)


13,962



12,471



12,763Net income (loss) attributable to
    participating security holders






(61
)


138



63



19Net income (loss) available to
    common shareholders

$
21,009


$
(5,076
)

$
13,824


$
12,408


$
12,744Net income (loss) per common share:Basic

$
0.81


$
(0.27
)

$
0.88


$
0.97


$
1.00Diluted

$
0.81


$
(0.27
)

$
0.80


$
0.76


$
0.79   As of December 31,2006


2005


2004


2003


2002(In thousands)Consolidated Balance Sheet
    Data:Cash and cash equivalents

$
9,861


$
12,167


$
3,784


$
16,284


$
14,971Total assets


678,707



370,620



294,347



213,815



206,628Total debt


342,227



171,810



225,610



95,092



112,716Total shareholders equity


124,391



99,523



458



75,548



62,527  35




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##### Table of Contents



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
        Significant
    Transactions
  period-to-period
      Outlook
   36




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##### Table of Contents




    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 other hardware devices to our
    United States dealer network. For the year ended
    December 31, 2006, we generated $220.1 million of
    satellite radio related sales. Our gross profit margin on these
    products is substantially lower than on our other products. We
    do not expect the significant growth we have experienced during
    2006 of our satellite radio sales to continue in 2007. The
    slower than anticipated sell-through of SIRIUS products during
    the 2006 holiday season is expected to have an impact on our
    2007 sales. In February 2007 SIRIUS and XM Radio announced
    a definitive agreement pursuant to which SIRIUS and
    XM Radio will combine their businesses. It is unclear
    whether the transaction will gain governmental approval and
    whether SIRIUS and XM Radio shareholders will approve the
    transaction. While we believe that during the review of the
    transaction by governmental regulators our relationship with
    SIRIUS will remain unchanged, the impact of the proposed
    business combination on our future relationship with SIRIUS is
    uncertain. Although our business relationship remains strong,
    the uncertainty of the proposed business combination is a risk
    to our sales in 2007.
    Polk Holding Corp.  In September 2006, we
    acquired Polk, a leading provider of high performance home and
    mobile audio equipment, which enhanced our position in the home
    and mobile audio market including allowing us to gain the number
    one market share in premium home theater loudspeakers. We
    believe our home and mobile audio sales in 2007 will increase
    due to a full year inclusion of Polk product sales.
    Mass Merchants.  During the second half of
    2006, we began SIRIUS product sales to mass merchants such as
    Wal-Mart,
    Target, COSTCO, Amazon.com, Sams Club, and Staples. We
    anticipate that placement of SIRIUS products in these stores
    will provide us with opportunities to place our other products.
    Interest Expense.  In September 2006, we
    amended our senior credit facility to increase our term loan by
    $141.0 million. The amendment resulted in a 25 basis
    point increase in our interest rate to LIBOR plus 2.50%. Our
    2006 results do not reflect the full year impact of interest
    expense from our current amended senior credit facility. We
    incurred $18.3 million of interest in 2006 and we expect to
    incur $26.3 million in 2007. As of December 31, 2006,
    the effective interest rate on our debt was 8.4%. In January
    2007, we entered into an interest rate swap for approximately
    $150.0 million of our outstanding debt at a fixed rate of
    5.04% plus 2.5% margin for three years. We expect an increase of
    annual interest expense of approximately $8.0 million
    during 2007.
    Working Capital Requirements.  Historically, we
    have required minimal working capital investment in order to
    operate our business. However, with the acquisition of Polk in
    September 2006 and increased sales, our inventory and accounts
    receivable increased substantially over historical levels. As we
    expect growth in sales in 2007, we will be required to maintain
    a higher level of working capital to support these sales, which
    will likely include higher revolving credit borrowings. As of
    December 31, 2006, we had drawn $37.0 million on our
    revolving credit facility which related to funding of working
    capital requirements.
    Effective Tax Rate.  Our effective tax rate for
    2006 was 38.5%, which is slightly higher than the combined
    statutory rate of 37.8%. For 2007, we expect our effective tax
    rate to continue to be approximately 38.5%. 37




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##### Table of Contents



Results
    of Operations
    Years Ended December 31,2006


2005


2004Net sales


100.0
%


100.0
%


100.0
%Cost of sales


72.0
%


67.5
%


57.2
%Gross profit


28.0
%


32.5
%


42.8
%(a)Total operating expenses


16.2
%


26.2
%(b)


21.6
%(a)Income from operations


11.8
%


6.3
%(b)


21.2
%(a)Interest expense, net


4.0
%


8.2
%


8.7
%Income (loss) before provision for
    (benefit from) income taxes


7.8
%


(1.8
)%


12.5
%Provision for (benefit from)
    income taxes


3.0
%


(0.1
)%


5.1
%Net income (loss)


4.8
%


(1.7
)%


7.4
%     (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 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; 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.    Years Ended December 31,2006


2005


2004Gross security and entertainment
    sales

$
229,367


$
190,510


$
159,888Gross satellite radio sales


220,070



120,893



29,430Rebate/payment discount


(15,510
)


(9,997
)


(8,647
)Net product sales


433,927



301,406



180,671Royalty and other revenues


3,851



3,152



9,198Net sales

$
437,778


$
304,558


$
189,869   Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Net
    Sales
   38




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##### Table of Contents



Gross
    Profit and Income from Operations
      Interest
    Expense
    Provision
    for (benefit from) Income Taxes
    Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Net
    Sales
   39




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##### Table of Contents



Gross
    Profit and Income from Operations
      Interest
    Expense
    Provision
    for (benefit from) Income Taxes
    Liquidity
    and Capital Resources
   40




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##### Table of Contents



41




---



##### Table of Contents



Contractual
    Obligations
    Total


Payments Due by PeriodAmounts


Less than








6 YearsCommercial Commitments

Due


1 Year


1-3 Years


4-5 Years


and Over(In thousands)Long-term debt, including current
    portion and interest

$
499,355


$
64,242


$
53,749


$
55,287


$
326,077Operating leases

$
42,227


$
4,341


$
8,544


$
8,423


$
20,919Other long-term liabilities

$
1,296


$



$
1,296


$



$
Purchase obligations

$
46,716


$
46,716


$



$



$
      Quarterly
    Results of Operations
     42




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##### Table of Contents



Quarters Ended2006


2005Consolidated Statement

Dec.


Sep.


June


Mar.


Dec.


Sep.


June


Mar.of Operations Data:

31(c)


30


30


31


31


30


30


31Net sales

$
210,299


$
75,500


$
77,678


$
74,301


$
135,521


$
61,316


$
55,656


$
52,065Cost of sales


156,092



50,516



57,004



51,543



96,220
(a)


39,662



36,245



33,460Gross profit


54,207



24,984



20,674



22,758



39,301



21,654



19,411



18,605Total operating expenses


28,771



16,211



12,344



13,646



44,272
(a)


12,151



12,045



11,181Income (loss) from operations


25,436



8,773



8,330



9,112



(4,971
)


9,503



7,366



7,424Interest expense, net (b)


6,830



4,120



3,291



3,275



9,210



5,585



5,052



5,010Income (loss) before provision for
    (benefit from) income taxes


18,606



4,653



5,039



5,837



(14,181
)


3,918



2,314



2,414Provision for (benefit from) income
    taxes


7,846



1,475



1,965



1,840



(4,507
)


1,944



1,182



983Net income (loss)


10,760



3,178



3,074



3,997



(9,674
)


1,974



1,132



1,431Net income (loss) attributable to
    participating securityholders


















(117
)


26



14



16Net income (loss) available to
    common shareholders

$
10,760


$
3,178


$
3,074


$
3,997


$
(9,557
)

$
1,948


$
1,118


$
1,415Net income (loss) per common share:Basic (d)

$
0.41


$
0.12


$
0.12


$
0.16


$
(0.48
)

$
0.10


$
0.06


$
0.08Diluted (d)

$
0.41


$
0.12


$
0.12


$
0.16


$
(0.48
)

$
0.10


$
0.06


$
0.08     (a)
    
    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.(b)
    
    In December 2005, we repaid $74.0 million of subordinated
    notes with a portion of the proceeds from our initial public
    offering and recorded $3.2 million of debt retirement costs
    associated with the debt. In February 2006, we amended our
    senior credit facility, which resulted in a 1% decrease in our
    interest rates. In September 2006, we amended our senior credit
    facility, which resulted in a 25 basis point increase in
    our interest rates. As a result of the amendment, we wrote off
    unamortized debt issuance costs of $0.3 million.(c)
    
    Includes net sales attributable to the Polk acquisition of
    $25.9 million. The fourth quarter of 2006 was our first
    full quarter that included sales of Polk products.(d)
    
    The sum of the quarterly per share amounts may not equal the
    annual per share amounts due to relative changes in the weighted
    average number of shares used in the per share computations.  Off
    Balance Sheet Arrangements
   43




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##### Table of Contents



Recently
    Issued Accounting Pronouncements
  06-3, 06-3, EITF 06-3 EITF 06-3 EITF 06-03 EITF No. 06-03.
          Critical
    Accounting Policies and Estimates
   44




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##### Table of Contents



Revenue
    Recognition
      No. 01-9,
  No. 99-19,
    Accounts
    Receivable
    Inventories
   45




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##### Table of Contents



Goodwill
    and Indefinite-Lived Intangible Assets
    Impairment
    of Long-Lived Assets
    Warranties
   46




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##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
      Foreign
    Currency Exchange Risk
  non-U.S. currencies, non-U.S. currencies. non-U.S. currencies
  Impact of
    Inflation
    Item 8.
    Consolidated
    Financial Statements and Supplementary Data.  page F-1
  Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    And Procedures  (a)
    Evaluation
    of Disclosure Controls and Procedures  Disclosure
    Controls and Procedures
   47




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##### Table of Contents



Rule 13a-15(b), Form 10-K, Rule 13a-15(e),
  (b)
    Managements
    Report on Internal Control over Financial Reporting  Rule 13a-15(f).
    Internal Control 
    Integrated Framework Internal
    Control  Integrated Framework
     48




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##### Table of Contents



(c)
    Changes
    in Internal Control over Financial Reporting  Remediation
    of Previous Material Weaknesses
    
    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.
    We did not maintain effective controls with respect to the
    analysis of our other assets and various accrual accounts. The
    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.    
    We have filled most of the existing vacancies and we have
    created and filled a number of new management positions within
    our accounting, financial reporting and tax functions with
    qualified and experiences individuals. Since December 31,
    2005, we have significantly increased the experience and
    capacity of our finance and accounting organization with several
    key hires, including a new chief financial officer, corporate
    controller, corporate accounting manager, general accounting
    manager, and senior financial analyst. Overall, we have
    increased our accounting and finance staff by 63% from
    December 31, 2005 to December 31, 2006, excluding
    additional accounting and financing staff resulting from current
    year acquisitions.    
    We improved our internal controls and our internal processes
    over the reconciliation and analyses of significant accounts. We
    have created a listing of all reconciliations and analyses of
    significant accounts. All reconciliations and analyses of
    significant accounts have been inventoried and assigned to
    company personnel with the appropriate level of skill,
    experience, and training for preparation and review. The listing
    of all reconciliations and analyses of significant accounts is
    maintained and reviewed by the general accounting manager on a
    monthly basis to ensure that reconciliations and analyses are
    prepared and reviewed on a timely basis. We also developed and
    implemented monthly analytical procedures that are at a
    sufficient level of rigor and precision to identify and follow
    up on unusual trends or transactions that may represent
    potential accounting errors. Finally, we have implemented
    certain policies and procedures related to other assets and
    accrual accounts that serve as preventative controls.    Item 9B.
    Other
    Information   49




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##### Table of Contents



PART III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance.    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, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.   50




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##### Table of Contents



PART IV
  Item 15.
    Exhibits
    and Financial Statement Schedules.  (a) Financial Statements and Financial Statement
    Schedules
  page F-1
    (b) Exhibits
  ExhibitNumber

Exhibit3
.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)4
.3

Form of Subscription and
    Shareholders Agreement entered into by and between the
    Registrant and The James M. Herd Marital Trust(3)10
.1

Form of Deferred
    Compensation/Salary Continuation Agreements(1)10
.2

Form of Change In Control
    Severance Agreements(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) 51




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##### Table of Contents



ExhibitNumber

Exhibit10
.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)10
.25

Stock Purchase Agreement, dated as
    of August 21, 2006, by and among Directed Electronics,
    Inc., Polk Holding Corp., the Sellers named therein, and the
    Sellers Representative named therein(4)10
.26

Amended and Restated Credit
    Agreement, dated as of September 22, 2006, by and among DEI
    Sales, Inc., Canadian Imperial Bank of Commerce, acting through
    its New York Agency as Administrative Agent, and the other
    Lenders named therein(5)10
.27

Amended and Restated Employment
    Agreement by and between the Registrant and James E. Minarik,
    dated as of January 1, 2007(6)21


List of Subsidiaries23
.1

Consent of Independent Registered
    Public Accounting Firm31
.1

Rule 13a-14(a)/15d-14(a)
    Certification of Chief Executive Officer31
.2

Rule 13a-14(a)/15d-14(a)
    Certification of Chief Financial Officer32
.1

Section 1350 Certification of
    Chief Executive Officer32
.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.(3)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K/A
    dated September 22, 2006, as filed with the Securities and
    Exchange Commission on September 29, 2006.(4)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated August 21, as filed with the Securities and Exchange
    Commission on August 22, 2006.(5)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated September 22, 2006, as filed with the Securities and
    Exchange Commission on September 26, 2006.(6)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated December 21, 2006, as filed with the Securities and
    Exchange Commission on December 28, 2006. 52




---



##### Table of Contents



SIGNATURES    DIRECTED ELECTRONICS, INC.
  By:
    /s/  James
    E. Minarik        Signature

Capacity

Date/s/  James
    E. MinarikJames
    E. Minarik

President, Chief Executive
    Officer, and Director (Principal Executive Officer)

March 16, 2007/s/  Ronald
    F. DuttRonald
    F. Dutt

Executive Vice President, Chief
    Financial Officer and Treasurer (Principal Accounting and
    Financial Officer)

March 16, 2007/s/  Troy
    D. TempletonTroy
    D. Templeton

Chairman of the Board

March 16, 2007/s/  Jon
    E. EliasJon
    E. Elias

Director

March 16, 2007/s/  Darrell
    E. IssaDarrell
    E. Issa

Director

March 16, 2007/s/  Andrew
    D. RobertsonAndrew
    D. Robertson

Director

March 16, 2007/s/  Victor
    J. OrlerVictor
    J. Orler

Director

March 16, 2007/s/  S.
    James SpiererS.
    James Spierer

Director

March 16, 2007/s/  Kevin
    B. McColganKevin
    B. McColgan

Director

March 16, 2007/s/  Edmond
    S. ThomasEdmond
    S. Thomas

Director

March 16, 2007  53




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##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS  PageDirected Electronics, Inc.Report of
    Independent Registered Public Accounting Firm


F-2Consolidated
    Balance Sheets  As of December 31, 2006 and
    2005


F-4Consolidated
    Statements of Operations  For the years ended
    December 31, 2006, 2005 and 2004


F-5Consolidated
    Statements of Shareholders Equity  For the
    years ended December 31, 2006, 2005 and 2004


F-6Consolidated
    Statements of Cash Flows  For the years ended
    December 31, 2006, 2005 and 2004


F-7Notes to
    Consolidated Financial Statements


F-8  F-1




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm  To the Board
    of Directors and Stockholders of Directed Electronics, Inc.:
    Consolidated
    financial statements
      Internal
    control over financial reporting
  Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   F-2




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##### Table of Contents



F-3




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands, except per share amounts)  December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
9,861


$
12,167Accounts receivable, net of
    allowance for doubtful accounts of $1,464 and $1,802 at
    December 31, 2006 and 2005, respectively


157,013



100,140Inventories


122,697



43,324Prepaid expenses and other assets


17,716



8,578Deferred tax assets


14,039



8,019Total current assets


321,326



172,228Property and equipment, net


7,068



4,649Intangible assets, net


186,112



90,246Goodwill


156,617



97,807Other assets


7,584



5,690Total assets

$
678,707


$
370,620LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
116,690


$
54,520Accrued liabilities


32,858



26,023Current portion of senior notes
    payable


3,068



1,699Taxes payable


7,772



5,014Total current liabilities


160,388



87,256Revolving loan


37,000



5,200Senior notes, less current portion


302,159



164,911Deferred tax liabilities


53,473



12,690Other liabilities


1,296



1,040Total liabilities


554,316



271,097Commitments and contingenciesShareholders equity:Common stock, $0.01 par value:Authorized shares 
    100,000; issued and outstanding shares  25,164 and
    24,769 in 2006 and 2005, respectively


251



248Paid-in capital


114,571



111,110Notes receivable from shareholders


(10
)


(126
)Deferred compensation






(350
)Accumulated other comprehensive
    income


235



306Retained earnings (deficit)


9,344



(11,665
)Total shareholders equity


124,391



99,523Total liabilities and
    shareholders equity

$
678,707


$
370,620    F-4




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except per share amounts)  Years Ended December 31,2006


2005


2004Net product sales

$
433,927


$
301,406


$
180,671Royalty and other revenue


3,851



3,152



9,198Net sales


437,778



304,558



189,869Cost of sales


315,155



205,587



108,525Gross profit


122,623



98,971



81,344Operating expenses:Selling, general and administrative


67,813



72,795



37,048Management fee to related party






4,220



552Amortization of intangibles


3,159



2,634



3,505Total operating expenses


70,972



79,649



41,105Income from operations


51,651



19,322



40,239Other income (expense):Interest expense


(18,260
)


(24,964
)


(16,542
)Interest income


744



107



19Income (loss) before provision for
    (benefit from) income taxes


34,135



(5,535
)


23,716Provision for (benefit from)
    income taxes


13,126



(398
)


9,754Net income (loss)


21,009



(5,137
)


13,962Net income (loss) attributable to
    participating securityholders






(61
)


138Net income (loss) available to
    common shareholders

$
21,009


$
(5,076
)

$
13,824Net income (loss) per common share:Basic

$
0.81


$
(0.27
)

$
0.88Diluted

$
0.81


$
(0.27
)

$
0.80Weighted average number of common
    shares:Basic


25,827



18,897



15,637Diluted


25,839



18,897



17,710    F-5




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY
 (In thousands, except per share amounts)
  Notes





AccumulatedReceivable





Other


RetainedCommon Stock


Paid-in


From


Deferred


Comprehensive


EarningsShares


Amount


Capital


Shareholders


Compensation


Income (Loss)


(Deficit)


TotalBalances at January 1, 2004


11,556


$
116


$
39,693


$
(773
)

$



$
303


$
36,209


$
75,548Issuance of common stock for cash,
    non-cash charge and notes receivable


13







64



(32
)














32Conversion of convertible notes


4,631



46



14,114



















14,160Accrued interest on shareholder
    notes














24















24Cash 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



















6,000Comprehensive incomeForeign currency translation






















(18
)






(18
)Net income


























13,962



13,962Comprehensive income






























13,944Forgiveness of shareholder note
    receivable














110















110Balances at December 31, 2004


17,361



174



6,527











285



(6,528
)


458Issuance of common stock for cash
    and notes receivable


50



1



259



(155
)














105Accrued interest on shareholder
    notes














(6
)














(6
)Issuance of common stock upon
    initial public offering, net of $9,240 in offering costs


5,938



59



85,701



















85,760Exercise of warrants


1,420



14























14Grant of restricted stock units
    (RSUs)










16,096







(350
)










15,746Stock-based compensation










2,527



















2,527Forgiveness of shareholder note
    receivable














35















35Comprehensive income (loss)Foreign currency translation






















21







21Net loss


























(5,137
)


(5,137
)Comprehensive loss






























(5,116
)Balances at December 31, 2005


24,769



248



111,110



(126
)


(350
)


306



(11,665
)


99,523Issuance of common stock for cash


282



3



3,497



















3,500Delivery of common stock under RSU
    agreements, net of shares retained for withholding taxes


113







(770
)


















(770
)Reclassification of deferred
    compensation related to the adoption of SFAS No. 123R










(350
)






350











Stock-based compensation










1,084



















1,084Accrued interest on shareholder
    notes














(2
)














(2
)Payments on note receivable














118















118Comprehensive incomeForeign currency translation






















(71
)






(71
)Net income


























21,009



21,009Comprehensive income






























20,938Balances at December 31, 2006


25,164


$
251


$
114,571


$
(10
)

$



$
235


$
9,344


$
124,391    F-6




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
  Years Ended December 31,2006


2005


2004Operating activitiesNet income (loss)

$
21,009


$
(5,137
)

$
13,962Adjustments to reconcile net
    income (loss) to net cash provided by (used in) operating
    activities:Depreciation


1,995



1,409



943Amortization


4,727



4,050



3,505Non-cash interest expense


1,669



4,449



4,449Non-cash stock-based compensation


1,084



18,273



Forgiveness of note receivable
    from shareholder






35



110Deferred taxes


(1,913
)


(6,323
)


2,785Changes in operating assets and
    liabilities, net of effects of acquisitions:Accounts receivable, net


(43,828
)


(51,556
)


(27,250
)Inventories


(51,641
)


(12,556
)


(4,215
)Prepaid expenses and other assets


(9,044
)


(4,545
)


(2,519
)Other assets


(163
)


26



296Accounts payable and accrued
    liabilities


52,459



32,511



13,674Taxes payable


2,758



(727
)


3,050Other


693



498



134Net cash provided by (used in)
    operating activities


(20,195
)


(19,593
)


8,924Investing activitiesPurchases of property and equipment


(2,328
)


(1,690
)


(1,317
)Acquisition of business, net of
    cash acquired


(150,501
)


(1,050
)


(49,823
)Net cash used in investing
    activities


(152,829
)


(2,740
)


(51,140
)Financing activitiesProceeds from long-term debt


194,800



43,800



230,000Payments on long-term debt


(24,383
)


(97,600
)


(87,780
)Payment of dividend










(109,360
)Debt issuance costs


(3,404
)


(1,384
)


(9,189
)Issuance of common shares


3,500



85,879



6,063Payments received on shareholder
    loan


118







Net cash (used in) provided by
    financing activities


170,631



30,695



29,734Net effect of exchange rates on
    cash


87



21



(18
)Increase (decrease) in cash and
    cash equivalents


(2,306
)


8,383



(12,500
)Cash and cash equivalents at
    beginning of year


12,167



3,784



16,284Cash and cash equivalents at end
    of year

$
9,861


$
12,167


$
3,784Supplemental disclosure of cash
    flow informationInterest paid

$
15,204


$
21,903


$
10,141Taxes paid

$
11,978


$
6,669


$
3,937Supplemental disclosure of
    non-cash financing activitiesIssuance of common stock for
    promissory note

$



$
155


$
32Conversion of notes payable to
    common stock

$



$



$
14,160Accrued interest on shareholder
    notes payable

$
2


$
6


$
    F-7




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)  1.
    The
    Company and Business Activities    Use of
    Estimates
    2.
    Summary
    of Significant Accounting Policies  Principles
    of Consolidation
    Revenue
    Recognition
      No. 01-9,
  No. 99-19,
 F-8




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
       Research
    and Development
    Shipping
    and Handling Fees and Costs
  00-10,
  Advertising
    Costs
    Cash and
    Cash Equivalents
    Concentration
    of Risk
      Fair
    Value of Financial Instruments
   F-9




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
    Allowance
    for Doubtful Accounts
      Years Ended December 31,2006


2005


2004Beginning balance

$
1,802


$
1,684


$
732Increases related to acquisitions


195







Increases in reserves, charged to
    operations


58



2,276



1,507Charge-offs


(591
)


(2,158
)


(555
)Ending balance

$
1,464


$
1,802


$
1,684   Inventories
      Property
    and Equipment
    Goodwill
    and Indefinite-Lived Intangible Assets
   F-10




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
       Balance January 1, 2005

$
97,441Goodwill acquired during the year


366Balance December 31, 2005


97,807Goodwill acquired during the year


58,810Blanace December 31, 2006

$
156,617     Impairment
    of Long-Lived Assets
    Deferred
    Financing Costs
    Warranties
      F-11




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
   Years Ended December 31,2006


2005


2004Beginning balance

$
7,412


$
3,216


$
1,254Increases in reserves, charged to
    cost of sales


14,081



16,270



8,393Decrease charged against reserve


(12,862
)


(12,074
)


(6,431
)Ending balance

$
8,631


$
7,412


$
3,216   Foreign
    Currency Transactions
  end-of-period
  Business
    Segment Disclosures
        Income
    Taxes
    Comprehensive
    Income
   F-12




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
    Stock-Based
    Compensation
    Recent
    Accounting Pronouncements
  06-3, 06-3, 06-3 06-3 06-03 No. 06-03.
         F-13




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
     3.
    Accounting
    for Stock-Based Compensation Expense          Restricted
    Stock Units
     F-14




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
         Weighted-Fully








AverageVested


Vesting


Total


GrantShares


Shares


Shares


PriceRestricted stock units outstanding
    at January 1, 2006


984,000



22,000



1,006,000


$
16.00Restricted stock units granted






49,000



49,000



15.27Restricted stock units vested


7,000



(7,000
)


0



16.00Restricted stock units cancelled


(5,000
)






(5,000
)


16.00Restricted stock units forfeited






(9,000
)


(9,000
)


16.00Restricted stock units delivered,
    including 57,000 shares withheld for taxes


(170,000
)






(170,000
)


16.00Restricted stock units outstanding
    at December 31, 2006


816,000



55,000



871,000


$
15.35   Stock
    Options
      2006


2005Weighted





WeightedAverage





AverageExercise





ExerciseShares


Price


Shares


PriceStock options outstanding at the
    beginning of the year


50,000


$
16.00






$
Stock options forfeited or expired














Stock options granted


55,000



14.02



50,000



16.00Stock options exercised














Stock options outstanding at the
    end of the year


105,000


$
14.96



50,000


$
16.00      F-15




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
     4.
    Net
    Income (Loss) per Common Share    00-23,
 F-16




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
      Years Ended December 31,2006


2005


2004Determination of diluted number
    of shares:Weighted average shares used to
    compute basic EPS


25,827,000



18,897,000



15,637,000Shares issuable on conversion of
    notes










2,073,000Dilutive effect of unvested
    restricted stock units


12,000







Diluted weighted average shares
    outstanding


25,839,000



18,897,000



17,710,000Calculation of diluted net
    income (loss) per common share:Net income (loss) available to
    common shareholders

$
21,009


$
(5,076
)

$
13,824Add: Interest component on assumed
    conversion of convertible notes, net of taxes










361Net income (loss), adjusted

$
21,009


$
(5,076
)

$
14,185Basic net income (loss) per share

$
0.81


$
(0.27
)

$
0.88Diluted net income (loss) per share

$
0.81


$
(0.27
)

$
0.80     5.
    Acquisitions  2006
    acquisitions
       F-17




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
           Weighted-averageamortizationValue


periodCash

$
463Accounts receivable


9,677Inventory


22,230Deferred tax assets and other
    assets


3,239Property and equipment


1,813Deferred tax liabilities and other
    liabilities assumed


(50,044
)Intangible assets acquired:Polk trademarks and trade names


70,228


IndefinitePolk trademarks and trade names


914


10License agreement


820


5Customer relationships


14,960


13Patents


4,070


15Covenants not to compete


2,030


5Net assets acquired


80,400Residual goodwill


57,707Total purchase price

$
138,107      F-18




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
     (Unaudited)Year ended December 31,2006


2005Revenue

$
498,825


$
389,238Income from operations

$
48,304


$
21,589Net income (loss)

$
13,891


$
(10,714
)Net income (loss) per common share:Basic

$
0.53


$
(0.56
)Diluted

$
0.53


$
(0.56
)Weighted average common shares:Basic


26,032,000



19,179,000Diluted


26,050,000



19,179,000   2005
    acquisition
    2004
    acquisition
    6.
    Licensing
    Agreements   F-19




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
     7.
    SIRIUS
    Satellite Radio Agreement    8.
    Balance
    Sheet Details    December 31,2006


2005Inventories:Raw materials

$
1,562


$
732Finished goods


121,135



42,592$
122,697


$
43,324Property and
    equipment:Machinery and equipment

$
5,096


$
3,329Molds and tooling


4,242



3,802Furniture and fixtures


913



568Leasehold improvements


847



602Construction in process


939



31612,037



8,617Accumulated depreciation and
    amortization


(4,969
)


(3,968
)$
7,068


$
4,649Accrued liabilities:Accrued warranty costs

$
8,631


$
7,412Accrued salaries, bonuses and
    employee benefits


5,361



11,239Accrued sales incentives


7,050



5,295Cash held in escrow related to
    Polk acquisition


6,800



Other


5,016



2,077$
32,858


$
26,023  F-20




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
   9.
    Intangible
    Assets    December 31, 2006Useful Life


Gross


Accumulated


Net Book(Years)


Amount


Amortization


ValueIntangibles subject to
    amortization:Patents


2-20


$
16,055


$
8,670


$
7,385Customer relationships


7-15



57,407



15,271



43,136Licensing agreements


5-12



2,250



820



1,430Non-compete agreements


2-5



2,810



453



2,357Trademark


10-20



1,146



25



1,12179,668



25,239



54,429Intangibles not subject to
    amortization, excluding goodwill:Trademarks






131,683







131,683Total intangibles





$
211,351


$
25,239


$
186,112   December 31, 2005Useful Life


Gross


Accumulated


Net Book(Years)


Amount


Amortization


ValueIntangibles subject to
    amortization:Patents


8-11


$
11,230


$
7,268


$
3,962Customer relationships


15



37,494



12,416



25,078Licensing agreements


12



1,430



655



775Non-compete agreements


4



550



178



37250,704



20,517



30,187Intangibles not subject to
    amortization, excluding goodwill:Trademarks






60,059







60,059Total intangibles





$
110,763


$
20,517


$
90,246     10.
    Financing
    Arrangements   F-21




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
          December 31,2006


2005Revolving loans

$
37,000


$
5,200Senior notes


305,227



166,610342,227



171,810Current portion


(3,068
)


(1,699
)$
339,159


$
170,111          F-22




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
    11.
    Shareholders
    Equity  (a) Common
    Stock
              (b) Warrants
    (e) Convertible
    promissory notes
    (f) Dividends
   F-23




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
    12.
    Income
    Taxes    Years Ended December 31,2006


2005


2004Current:Federal

$
12,291


$
4,914


$
5,233State


1,913



1,036



1,442Foreign


835



(25)



29415,039



5,925



6,969Deferred:Federal


(1,388)



(4,987)



2,194State


(409)



(1,336)



591Foreign


(116)







(1,913)



(6,323)



2,785$
13,126


$
(398)


$
9,754       Years Ended December 31,2006


2005


2004Expected provision at federal
    statutory rate

$
11,947


$
(1,937
)

$
8,301State tax, net of federal tax
    benefit


963



17



1,349Tax credits


(53
)


25



(294
)Foreign tax


(204
)


(25
)


294Other permanent items


454



9



104Stock based compensation






885



Initial public offering costs
    capitalized for tax






628



Other


19







$
13,126


$
(398
)

$
9,754  F-24




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
     Years Ended December 31,2006


2005Deferred tax assets:Allowances and accruals

$
9,359


$
3,813Revenue deferred for books


1,343



1,260State taxes


1,266



792Stock based compensation


2,586



2,154Other


379



Total current deferred tax assets


14,933



8,019Stock based compensation


2,617



4,308Long-term deferred tax asset


2,617



4,308Total deferred tax assets


17,550



12,327Deferred tax
    liabilities:Inventory
    step-up


(894
)


Total current deferred tax
    liability


(894
)


Goodwill


(13,083
)


(9,816
)Intangible assets


(42,968
)


(6,754
)Depreciation


(39
)


(428
)Total long-term deferred tax
    liability


(56,090
)


(16,998
)Total deferred tax liabilities


(56,984
)


(16,998
)Net deferred tax liabilities


(39,434
)


(4,671
)        F-25




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
    13.
    Benefit
    Plans  Employee
    Savings Plan
    Equity
    Participation Rights Agreement
    14.
    Related
    Party Transactions        15.
    Commitments
    and Contingencies  Operating
    leases
   F-26




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006, 2005, 2004
    (In thousands, except share and per share data)
      2007

$
4,3412008


4,3742009


4,1702010


4,1932011


4,230Thereafter


20,919Total

$
42,227   Litigation
         F-27