##### 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, 2007
 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. o
  Rule 12b-2
  Large accelerated filer
    o

Accelerated
    filer
    þ

Non-accelerated filer
    o
    (Do not check if a smaller reporting company)

Smaller reporting company
    o   Rule 12b-2 o þ
      Documents
    Incorporated by Reference




---



##### 





DIRECTED
    ELECTRONICS, INC.
    ANNUAL REPORT ON
    FORM 10-K
    Fiscal Year Ended December 31, 2007
    TABLE OF CONTENTS
  PagePART IITEM 1.


BUSINESS


3ITEM 1A.


RISK FACTORS


15ITEM 1B.


UNRESOLVED STAFF COMMENTS


26ITEM 2.


PROPERTIES


26ITEM 3.


LEGAL PROCEEDINGS


27ITEM 4.


SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS


27PART IIITEM 5.


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


28ITEM 6.


SELECTED FINANCIAL DATA


30ITEM 7.


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


31ITEM 7A.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


44ITEM 8.


CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA


45ITEM 9.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE


45ITEM 9A.


CONTROLS AND PROCEDURES


45ITEM 9B.


OTHER INFORMATION


46PART IIIITEM 10.


DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE


46ITEM 11.


EXECUTIVE COMPENSATION


46ITEM 12.


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


46ITEM 13.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
    AND DIRECTOR INDEPENDENCE


46ITEM 14.


PRINCIPAL ACCOUNTANT FEES AND SERVICES


46PART IVITEM 15.


EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES


47SIGNATURES


49INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


F-1EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Directed®,
    Viper®,
    Polk
    Audio®,
    Definitive
    Technology®,
    Clifford®,
    Python®,
    Orion®,
    Precision
    Power®,
    I-Sonic®,
    Avital®,
    Valet®,
    Hornet®,
    Automate®,
    No One Dares Come
    Close®,
    Responder®,
    Astroflex®,
    Autostart®,
    Cobalt® The Speaker
    Specialist® Ready
    Remotetm The Science of
    Securitytm
  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, 1-800-SEC-0330
 3




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##### Table of Contents



Industry
    Security and Convenience.
  Home Audio.
  Mobile Audio.
  Mobile Video.
  Satellite Radio.
  Our
    Competitive Strengths
    Strong
    Market Positions
   4




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##### Table of Contents



Broad
    Portfolio of Established Brands
  Viper Python Clifford Polk Audio Definitive
    Technology Autostart Astroflex Orion Precision Power Directed Automate
  Highly
    Diverse Customer Base
      Attractive
    Retailer Proposition
  Viper, Python,
    Clifford, Polk Audio Definitive Technology
  Scalable,
    Outsourced Manufacturing Model
    Strong
    Executive Team with Experience Managing Growth
   5




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##### Table of Contents



Our
    Strategy 
    Leverage
    Successful Multi-Brand Strategy
  Viper Python Clifford Polk Audio Definitive Technology, Orion,
  Increase
    Product Penetration
    Develop
    New and Enhanced Products
  Polk Audio Definitive Technology
  Expand
    Distribution Channels
    
    Domestic.  In the past five years, we
    have expanded our mass merchant sales to customers such as
    Wal-Mart, Sears, and Target. We also were successful in getting
    our products placed in the automotive parts and car dealer
    channels. We intend to capitalize on both our well-recognized
    brand names and strong distribution network to continue to
    expand our dealer base. For example, we will begin selling
    certain Polk Audio products in Best Buy and Apple stores
    in 2008. We also plan to expand our direct to consumer sales
    through several initiatives that are now underway.
    International.  In 2006 and 2007, we
    contributed to our international sales with our significant
    growth in the Canadian security and convenience market through
    acquisitions. We believe there is opportunity for us to expand
    sales from our other product categories in the Canadian market
    through our acquired companies. We also believe there is a
    significant opportunity to expand our international distribution
    into emerging markets, including China and India. 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. Additionally, we believe that Best Buys entry
    into China represents promising long-term consumer market
    opportunities for many of our 6




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##### Table of Contents



products. We opened an office in 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 2007 we
    began seeking governmental approval in the Peoples
    Republic of China to sell our products in the PRC and recently
    received approval from the central government to obtain our
    business license. Our international growth plan also 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.  Generate
    Free Cash Flow to Retire Debt
    Product
    Lines
    Security
    and Entertainment
    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.
    Digital vehicle interface products that facilitate the
    installation and integration of aftermarket security and remote
    start systems.  Responder
     Viper

 Python

 Astroflex

 Avital

 Ready Remote Clifford

 Autostart

 Hornet

 Valet

 Automate  7




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##### Table of Contents



Home Audio. Definitive Technology Polk Audio Polk Audio Definitive Technology
  
    Packaged home theater speaker systems.
    A wide range of tower and on-wall speakers with patented
    technologies, many of which are designed to complement flat
    panel televisions.
    Smaller speakers designed for specific home theater and stereo
    applications.
    Powered subwoofers used in a complete range of products for
    traditional stereo and home theater applications.
    A wide range of in-wall speakers, in-ceiling speakers, built-in
    subwoofers, digital amplifiers, and outdoor speakers.
    All digital format entertainment systems using patented
    technologies. These systems include the I-Sonic entertainment
    system, which is an
    all-in-one
    home entertainment system, and the miDock Series for iPod
    docking.  Mobile Audio. Polk Audio, Orion Precision
    Power
  
    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.
    Satellite radio accessories, including portable, boomboxes,
    desktop, sound system, and installation kits to support SIRIUS
    receivers.  Mobile Video. all-in-one Directed
  
    All-in-one
    flip-down video displays combined with DVD players and wireless
    headphones that are installed on the interior of SUVs and
    minivans.
    Aftermarket headrests that contain video screens designed to
    easily replace existing OEM headrests that are packaged with or
    without a DVD player and headphones.
    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. 8




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##### Table of Contents



Satellite
    Radio
      
    Portable receivers that can be attached in a vehicle, to a
    boombox, or 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, Ready Remote
  Definitive Technology Polk Audio
  National
    and Regional Electronics Chains
    Mass
    Merchants and Automotive Parts Retailers
   9




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##### Table of Contents



Car
    Dealers
    International
    Distribution
    Customers
    Sales and
    Marketing
      www.directed.com
 10




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##### Table of Contents



Outsourced
    Manufacturing and Assembly
  on-site
        Product
    Development and Engineering
        Technical
    Support and Training
  DirectWire
 11




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Warranty
    Intellectual
    Property
         Viper

 Definitive Technology

 Polk Audio Python

 Autostart

 Orion Clifford

 Directed

 Cobalt No One Dares Come Close

 The Science of Security

 The Speaker Specialist Astroflex

 Precision Power

 Automate Hornet

 Automate   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. We plan to continue our focus on product
    categories that do not compete directly with these consumer
    electronics 12




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##### Table of Contents



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, Autopage, Crimestopper,
    LoJack, and Compustar
    Premium loudspeakers: Klipsch, Paradigm, B&W, Harman (JBL
    and Infinity), and Bose
    Satellite radio: Audiovox
    Mobile video: Audiovox and Rosen
    Mobile audio: Rockford Fosgate, Kicker, Alpine, MTX, and JL Audio      Government
    Regulation
      truth-in-advertising
    Employees
   13




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##### Table of Contents



Executive
    Officers
    Name

Age

PositionJames E. Minarik


54


President and Chief Executive OfficerKevin P. Duffy


32


Executive Vice President and Chief Financial OfficerRichard J. Hirshberg


53


Senior Vice President  Finance and TreasurerGlenn R. Busse


45


Senior Vice President  SalesMark E. Rutledge


37


Senior Vice President  Engineering and Product
    DevelopmentMichael N. Smith


41


Vice President  OperationsKC Bean


44


Vice President, General Counsel, and SecretaryJ. Steven Wood


54


Vice President  SalesAlan P. Heim


55


Vice President  Human Resources   James E. Minarik
  Kevin P. Duffy
  Richard J. Hirshberg start-up
  Glenn R. Busse
  Mark E. Rutledge
 14




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##### Table of Contents



Michael N. Smith
  KC Bean
  J. Steven Wood 31-year
  Alan P. Heim 23-year
  Item 1A.
    Risk
    Factors.    Risks
    Related to Our Business
  We
    operate in the highly competitive branded consumer electronics
    industry.
   15




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
    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;
    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 microprocessors 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.
   16




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Adverse
    developments affecting SIRIUS Satellite Radio could cause our
    sales to decline and harm our business.
          A decline
    in discretionary spending would likely cause our sales to
    decline.
    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.
   17




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##### Table of Contents



Shortages
    of components and materials may delay or reduce our sales and
    increase our costs.
    Because
    we outsource essentially all of our manufacturing to third
    parties, which are primarily located in China, Taiwan, and South
    Korea, we are subject to the economic risks associated with
    changes in the social, political, regulatory, and economic
    conditions inherent in these countries.
          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.
   18




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##### Table of Contents



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.
      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.
 19




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##### Table of Contents



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.        Our
    goodwill and intangible assets have been impaired and may become
    impaired again in the future.
   20




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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.    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.
     21




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##### Table of Contents



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 our 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.   22




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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.
    We may
    seek to raise additional capital in the future to finance our
    operations, and our inability to raise such capital could
    restrict our growth and harm our operating results.
   23




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##### Table of Contents



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 continue to 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; 24




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##### Table of Contents




    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.
      
    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.         25




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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.
        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.   26




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##### Table of Contents



Location

Purpose

Square FeetPeoples Republic of China

Sales Office


400Manchester, New Hampshire

Warehouse and Distribution Center


1,100Hong Kong

Asia/Pacific Operations Office


1,500Owings Mills, Maryland

Sales and Marketing Office


5,700Sherbrooke, Quebec, Canada

Warehouse and R&D Facilities


8,000Mascouche, Quebec, Canada

Sales, Administration, and Distribution Center


8,000Epsom, England

Sales and Distribution Center


10,000Delson, Quebec, Canada

Sales, Administration, and Distribution Center


12,000Montreal, Quebec, Canada

Sales, Administration, R&D, and Distribution Center


23,000Baltimore, Maryland

Office and Distribution Center


100,000San Diego, California

Distribution Center


147,000   Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   27




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##### 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


Low2007Fourth quarter

$
4.17


$
0.99Third quarter

$
9.06


$
3.91Second quarter

$
10.96


$
8.58First quarter

$
11.44


$
8.252006Fourth quarter

$
16.14


$
10.80Third quarter

$
16.30


$
10.54Second quarter

$
17.79


$
12.04First quarter

$
18.00


$
12.75     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


1,390,860


$
8.41



1,359,140Equity Compensation Plans Not Approved by Shareholders










Total


1,390,860







1,359,140   Performance
    Graph
  This performance graph shall not be deemed filed
    for purposes of Section 18 of the Securities Exchange 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.
 28




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29




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##### Table of Contents



Item 6.
    Selected
    Financial Data.    Years Ended December 31,2007


2006


2005


2004


2003(In thousands, expect per share data)Consolidated Statement of Operations Data:Net sales

$
401,140


$
437,778


$
304,558


$
189,869


$
131,765Cost of sales


259,443



315,155



205,587
(c)


108,525



69,907Gross profit


141,697



122,623



98,971



81,344



61,858Total operating expenses


295,514
(a)


70,972



79,649
(c)


41,105



31,782Income (loss) from operations


(153,817
)


51,651



19,322



40,239



30,076Interest expense, net(b)


27,785



17,516



24,857



16,523



9,091Income (loss) before provision for (benefit from) income taxes


(181,602
)(a)


34,135



(5,535
)


23,716



20,985Provision for (benefit from) income taxes


(41,634
)


13,126



(398
)


9,754



8,514Net income (loss)


(139,968
)(a)


21,009



(5,137
)


13,962



12,471Net income (loss) attributable to participating security holders










(61
)


138



63Net income (loss) available to common shareholders

$
(139,968
)(a)

$
21,009


$
(5,076
)

$
13,824


$
12,408Net income (loss) per common share:Basic

$
(5.40
)

$
0.81


$
(0.27
)

$
0.88


$
0.97Diluted

$
(5.40
)

$
0.81


$
(0.27
)

$
0.80


$
0.76   As of December 31,2007


2006


2005


2004


2003(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
4,760


$
9,861


$
12,167


$
3,784


$
16,284Total assets


340,434
(a)


678,707



370,620



294,347



213,815Total debt


266,926
(b)


342,227
(b)


171,810



225,610



95,092Total shareholders equity (deficit)


(13,898
)(a)


124,391



99,523



458



75,548     (a)
    
    Our 2007 annual goodwill and intangible asset impairment review
    resulted in a non-cash impairment charge of $194.8 million.(b)
    
    In September 2006, we entered into a new senior credit facility
    to increase our term loan by $141.0 million, which resulted
    in a 25 basis point increase in our interest rates. The
    proceeds of the senior notes were used to finance the
    acquisition of Polk and to pay fees and expenses in connection
    with that acquisition. As a result of the September 2006
    amendment, we wrote off unamortized debt issuance costs of
    $0.3 million. In December 2007, we prepaid
    $39.2 million of the outstanding principal on our senior
    notes. In connection with this prepayment, we wrote off
    unamortized debt issuance costs of $0.8 million.(c)
    
    In connection with our initial public offering of our common
    stock, we incurred $25.4 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 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. 30




---



##### 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
    Outlook
    
    Security and Entertainment.  We plan to
    continue to leverage our expertise in product design and
    development, our strong intellectual property platform, and our
    diverse distribution network by continuing to develop and
    introduce new and enhanced products in our higher margin
    security and entertainment categories. We plan to grow our
    security and convenience product sales by continuing to improve
    our market position in this category. We plan to do this by
    innovating our core alarm and remote start products by making
    cosmetic improvements, adding new features, enhancing the
    battery life, extending the range of the remotes, and by making
    our products simpler to install. We are also considering
    expanding our current addressable market by entering into
    adjacent categories that leverage our technical competencies in
    RF design and sensor development. We also plan to grow our Polk
    Audio and Definitive Technology home audio 31




---



##### Table of Contents




    Satellite Radio.  In August 2004, we entered
    into a strategic supply relationship with SIRIUS and in April
    2005, we entered into an agreement with SIRIUS pursuant to which
    we have exclusive U.S. distribution rights for certain
    SIRIUS-branded products to our existing U.S. retailer
    customer base. In February 2007, SIRIUS and XM Radio announced a
    definitive agreement pursuant to which SIRIUS and XM Radio will
    combine their businesses. SIRIUS and XM Radio shareholders have
    approved the transaction, but it requires governmental approval.
    Although our business relationship with SIRIUS remains strong,
    the uncertainty of the proposed business combination is a risk
    to our sales in 2008. In July 2007 and again in November 2007,
    we amended our agreement with SIRIUS to, among other things,
    provide for or amend existing terms relating to forecasting and
    product order placement, activation fees and dealer payments,
    product sourcing and pricing, product returns, and product
    warranties, and to extend the term of the agreement until
    August 31, 2008. We anticipate that this amended agreement,
    along with other process improvements by us, will reduce our
    current warranty and sales returns costs during 2008. For the
    years ended December 31, 2007 and 2006, we generated $117.9
    and $220.1 million of satellite radio gross sales,
    respectively. We believe that our satellite radio sales will
    continue to decline in 2008. It is also uncertain whether we
    will renew or extend our agreement beyond August 31, 2008.
    If we do not renew or extend the agreement, our future revenues
    would decline significantly.
    Operating Expenses.  Our operating expenses
    have increased over the past three years as a result of the
    acquisition of six companies, increased public company costs
    after our initial public offering, and costs related to our
    entrance into the satellite radio business. Our focus in 2006
    and 2007 was on leveraging the engineering resources from our
    acquisitions, which resulted in new products that will begin
    shipping in 2008. Our focus in 2008 and beyond will be on
    reducing operating expenses. We have recently retained an
    operations efficiency improvement consultant with a track record
    of measurable results. Our objective is to identify cost savings
    and synergy opportunities across our consolidated company. We
    expect this project to begin to yield results in 2008.
    Free Cash Flow to Retire Debt.  In 2005 and
    2006, we used cash flows to fund working capital investments,
    principally for our satellite radio business and to complete key
    strategic acquisitions. With the downturn in the satellite radio
    business, we have begun to deleverage our balance sheet by
    retiring debt. In 2007, we reduced our debt, including our
    revolver and senior notes, by approximately $75.0 million.
    We plan to continue to focus on working capital initiatives and
    the integration of our acquisitions in order to realize
    operating synergies that will allow us to utilize free cash flow
    to retire debt in the future. For example, we have recently
    improved our payment terms with certain vendors for 2008.
    Interest Expense.  As more fully described in
    Liquidity and Capital Resources below, in March
    2008, we amended our senior credit facility to modify, among
    other things, certain covenant requirements, including a higher
    allowable leverage ratio. The amendment will increase our
    interest rate by 100 to 150 basis points, depending upon
    leverage ratios, from our current rate of LIBOR plus
    250 basis points. Although our interest rate will increase,
    we expect interest expense to decrease in 2008 compared with
    2007 due to lower debt balances and an expected decline in LIBOR. 32




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##### Table of Contents



Results
    of Operations
    Years Ended December 31,2007


2006


2005Net sales


100.0
%


100.0
%


100.0
%Cost of sales


64.7
%


72.0
%


67.5
%Gross profit


35.3
%


28.0
%


32.5
%Selling, general and administrative


22.6
%


14.8
%


23.9
%Provision for litigation


1.3
%


0.7
%


0.0
%Amortization of intangibles


1.3
%


0.7
%


0.9
%Goodwill and intangible asset impairment


48.6
%


0.0
%


0.0
%Management fee to related party


0.0
%


0.0
%


1.4
%Income (loss) from operations


(38.5
)%


11.8
%


6.3
%Interest expense, net


6.9
%


4.0
%


8.2
%Income (loss) before provision for (benefit from) income taxes


(45.4
)%


7.8
%


(1.8
)%Provision for (benefit from) income taxes


(10.4
)%


3.0
%


(0.1
)%Net income (loss)


(35.0
)%


4.8
%


(1.7
)%     Years Ended December 31,2007


2006


2005Gross security and entertainment sales

$
298,054


$
229,367


$
190,510Gross satellite radio sales


117,906



220,070



120,893Rebates/payment discounts


(19,469
)


(15,510
)


(9,997
)Net product sales


396,491



433,927



301,406Royalty and other revenues


4,649



3,851



3,152Net sales

$
401,140


$
437,778


$
304,558   Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Net
    Sales
     33




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##### Table of Contents



Gross
    Profit and Income (Loss) from Operations
        Net
    Interest Expense
    Provision
    for (benefit from) Income Taxes
   34




---



##### Table of Contents



Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Net
    Sales
      Gross
    Profit and Income from Operations
      Interest
    Expense
   35




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##### Table of Contents



Provision
    for (benefit from) Income Taxes
    Liquidity
    and Capital Resources
             36




---



##### Table of Contents



37




---



##### 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

$
378,994


$
27,880


$
61,841


$
66,918


$
222,355Operating leases


37,562



4,418



8,482



8,406



16,256Other long-term liabilities


5,201







5,201







Purchase obligations


53,856



53,856











Total

$
475,613


$
86,154


$
75,524


$
75,324


$
238,611       Quarterly
    Results of Operations
     38




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##### Table of Contents



Quarters Ended2007 (a)


2006 (a)Consolidated Statement

Dec.


Sept.


June


Mar.


Dec.


Sept.


June


Mar.of Operations Data:

31(b)


30


30


31(c)


31(d)


30


30


31(Unaudited, in thousands, except per share data)Net sales

$
151,987


$
84,490


$
86,730


$
77,933


$
210,299


$
75,500


$
77,678


$
74,301Cost of sales


99,891



54,902



58,351



46,299



156,092



50,516



57,004



51,543Gross profit


52,096



29,588



28,379



31,634



54,207



24,984



20,674



22,758Total operating expenses


221,102



24,339



21,148



28,925



28,771



16,211



12,344



13,646Income (loss) from operations


(169,006
)


5,249



7,231



2,709



25,436



8,773



8,330



9,112Interest expense, net(e)


7,433



6,659



6,734



6,959



6,830



4,120



3,291



3,275Income (loss) before provision for (benefit from) income taxes


(176,439
)


(1,410
)


497



(4,250
)


18,606



4,653



5,039



5,837Provision for (benefit from) income taxes


(40,480
)


(158
)


486



(1,482
)


7,846



1,475



1,965



1,840Net income (loss) available to common shareholders

$
(135,959
)

$
(1,252
)

$
11


$
(2,768
)

$
10,760


$
3,178


$
3,074


$
3,997Net income (loss) per common share:Basic (f)

$
(5.25
)

$
(0.05
)

$
0.00


$
(0.11
)

$
0.41


$
0.12


$
0.12


$
0.16Diluted (f)

$
(5.25
)

$
(0.05
)

$
0.00


$
(0.11
)

$
0.41


$
0.12


$
0.12


$
0.16     (a)
    
    For the three-month periods ended September 30 and
    December 31, 2007, we recorded adjustments related to net
    sales, cost of sales, and operating expenses to correct for
    errors in our previously reported 2006 annual and 2007 interim
    periods. The errors had the effect of overstating our net income
    by $0.2 million in 2006, understating our net loss by
    $0.1 million for the quarter ended March 31, 2007,
    overstating our net income by $0.5 million for the quarter
    ended June 30, 2007, and overstating our net loss by
    $0.3 million for the quarter September 30, 2007. The
    correction of these errors resulted in a $0.3 million
    increase to our net loss for the quarter ended
    September 30, 2007, and to a $0.2 million increase to
    our net loss for the quarter ended December 31, 2007. We
    assessed the quantitative and qualitative effects of the errors
    and correcting adjustments on each of quarters impacted, and
    concluded that they were not material to any period.(b)
    
    Our 2007 fourth quarter impairment review under SFAS 142
    resulted in a non-cash impairment charge of $194.8 million
    related to goodwill and other intangible assets.(c)
    
    We were involved in certain litigation related to patent
    infringement during the year. As a result of this litigation we
    had accrued for the $5.0 million settlement in the first
    quarter of 2007 which was paid in the second quarter of 2007.(d)
    
    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.(e)
    
    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 to increase our term
    loan by $141.0 million, which resulted in a 25 basis
    point increase in our interest rates. As a result of the
    September 2006 amendment, we wrote off unamortized debt issuance
    costs of $0.3 million. In December 2007, we prepaid
    $39.2 million of the outstanding principal on our senior
    notes. In connection with this prepayment, we wrote off
    unamortized debt issuance costs of $0.8 million.(f)
    
    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. 39




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    Recently
    Issued Accounting Pronouncements
        Critical
    Accounting Policies and Estimates
     40




---



##### Table of Contents



Revenue
    Recognition
      No. 01-9,
  No. 99-19,
    Accounts
    Receivable
    Inventories
   41




---



##### Table of Contents



Goodwill
    and Indefinite-Lived Intangible Assets
          Impairment
    of Long-Lived Assets
   42




---



##### Table of Contents



Warranties
    Income
    Taxes
        Stock-Based
    Compensation Expense
   43




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
      Foreign
    Currency Exchange Risk
  non-U.S. currencies,
  Impact of
    Inflation
   44




---



##### Table of Contents



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
    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
 45




---



##### Table of Contents



Internal Control  Integrated Framework
    (c)
    Changes
    in Internal Control over Financial Reporting  Form 10-K
  Item 9B.
    Other
    Information   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.   46




---



##### 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(8)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(2)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
.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
.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(8)10
.23

Advisory Agreement by and between the Registrant and Trivest
    Partners, L.P., dated as of December 1, 2005(1)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) 47




---



##### Table of Contents



ExhibitNumber

Exhibit10
.28

Second Amendment to Industrial/Commercial Lease Agreement
    Multi-Tenant  Net by and between the Registrant and
    Greene Properties, Inc., dated as of March 31, 2006(7)10
.29

Amendment and Waiver No. 1 to Credit Agreement by and among
    DEI Sales, Inc., the Guarantors listed on the signature pages
    thereto, the Lenders (as defined therein), and Canadian Imperial
    Bank of Commerce, acting through its New York Agency as
    Administrative Agent, dated as of April 20, 2007(7)10
.30

Amendment to Manufacturing and Distribution Agreement, dated as
    of July 17, 2007, by and between SIRIUS Satellite Radio
    Inc. and Directed Electronics, Inc.(9)10
.31

Second Amendment to Manufacturing and Distribution Agreement,
    dated as of November 8, 2007 and effective as of
    November 26, 2007, by and between SIRIUS Satellite Radio
    Inc. and Directed Electronics, Inc.(9)10
.32

Amendment No. 2 to Amended and Restated Credit Agreement by
    and among DEI Sales, Inc., the Guarantors listed on the
    signature pages thereto, the Lenders (as defined therein), and
    Canadian Imperial Bank of Commerce, acting through its New York
    Agency as Administrative Agent, dated as of March 11,
    2008(10)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.
    
    Confidential treatment has been requested 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.(7)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended March 31, 2007, as filed with the
    Securities and Exchange Commission on May 10, 2007.(8)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated September 13, 2007, as filed with the Securities and
    Exchange Commission on September 19, 2007.(9)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated November 26, 2007, as filed with the Securities and
    Exchange Commission on November 30, 2007.(10)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    dated March 12, 2008, as filed with the Securities and
    Exchange Commission on March 17, 2008. 48




---



##### 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 17, 2008/s/  Kevin
    DuffyKevin
    Duffy

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

March 17, 2008/s/  Troy
    D. TempletonTroy
    D. Templeton

Chairman of the Board

March 17, 2008/s/  Jon
    E. EliasJon
    E. Elias

Director

March 17, 2008Darrell
    E. Issa

Director

March 17, 2008/s/  Andrew
    D. RobertsonAndrew
    D. Robertson

Director

March 17, 2008/s/  Victor
    J. OrlerVictor
    J. Orler

Director

March 17, 2008/s/  S.
    James SpiererS.
    James Spierer

Director

March 17, 2008Kevin
    B. McColgan

Director

March 17, 2008/s/  Edmond
    S. ThomasEdmond
    S. Thomas

Director

March 17, 2008/s/  Seth
    R. JohnsonSeth
    R. Johnson

Director

March 17, 2008  49




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS



DIRECTED ELECTRONICS, INC.   
 PageReport of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets  As of
    December 31, 2007 and 2006


F-3Consolidated Statements of Operations 
    For the years ended December 31, 2007, 2006, and 2005


F-4Consolidated Statements of Shareholders
    Equity (Deficit)  For the years ended
    December 31, 2007, 2006, and 2005


F-5Consolidated Statements of Cash Flows 
    For the years ended December 31, 2007, 2006, and 2005


F-6Notes to Consolidated Financial Statements


F-7   F-1




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm  To the Board
    of Directors and Shareholders of Directed Electronics, Inc.
            
    F-2




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands, except per share amounts)  December 31,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
4,760


$
9,861Accounts receivable, net of allowance for doubtful accounts of
    $1,521 and $1,464 at December 31, 2007 and 2006,
    respectively


77,366



157,013Inventories


64,219



122,697Income taxes receivable


9,783



Prepaid expenses and other current assets


7,115



17,716Deferred tax assets


6,038



14,039Total current assets


169,281



321,326Property and equipment, net


7,353



7,068Intangible assets, net


157,265



186,112Goodwill






156,617Other assets


6,535



7,584Total assets

$
340,434


$
678,707LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
44,814


$
116,690Accrued liabilities


28,527



32,858Current portion of senior notes payable


2,669



3,068Taxes payable






7,772Total current liabilities


76,010



160,388Revolving loan


4,000



37,000Senior notes, less current portion


260,257



302,159Deferred tax liabilities


8,864



53,473Other liabilities


5,201



1,296Total liabilities


354,332



554,316Commitments and contingencies






Shareholders equity:Common stock, $0.01 par value:Authorized shares  100,000; issued and outstanding
    shares  25,420 and 25,164 in 2007 and 2006,
    respectively


254



251Paid-in capital


114,674



114,571Notes receivable from shareholders






(10
)Accumulated other comprehensive income


1,257



235Retained earnings (deficit)


(130,083
)


9,344Total shareholders equity (deficit)


(13,898
)


124,391Total liabilities and shareholders equity (deficit)

$
340,434


$
678,707    F-3




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except per share amounts)  Years Ended December 31,2007


2006


2005Net product sales

$
396,491


$
433,927


$
301,406Royalty and other revenue


4,649



3,851



3,152Net sales


401,140



437,778



304,558Cost of sales


259,443



315,155



205,587Gross profit


141,697



122,623



98,971Operating expenses:Selling, general and administrative


90,587



64,835



72,795Provision for litigation


5,074



2,978



Amortization of intangibles


5,021



3,159



2,634Goodwill and intangible asset impairment


194,832







Management fee to related party










4,220Total operating expenses


295,514



70,972



79,649Income (loss) from operations


(153,817
)


51,651



19,322Other income (expense):Interest expense


(28,145
)


(18,260
)


(24,964
)Interest income


360



744



107Income (loss) before provision for (benefit from) income taxes


(181,602
)


34,135



(5,535
)Provision for (benefit from) income taxes


(41,634
)


13,126



(398
)Net income (loss)


(139,968
)


21,009



(5,137
)Net income (loss) attributable to participating securityholders










(61
)Net income (loss) available to common shareholders

$
(139,968
)

$
21,009


$
(5,076
)Net income (loss) per common share:Basic

$
(5.40
)

$
0.81


$
(0.27
)Diluted

$
(5.40
)

$
0.81


$
(0.27
)Weighted average number of common shares:Basic


25,921



25,827



18,897Diluted


25,921



25,839



18,897    F-4




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY (DEFICIT)
 (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, 2005


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










16,096







(350
)










15,746Stock-based compensation










2,527



















2,527Forgiveness of shareholder note














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



124,391Decrease in reserves for uncertain tax positions for FIN 48
    adoption


























541



541Delivery of common stock under RSU agreements, net of shares
    retained for withholding taxes


256



3



(789
)


















(786
)Stock-based compensation










892



















892Accrued interest on shareholder notes














(1
)














(1
)Payments on note receivable














11















11Comprehensive income (loss)Foreign currency translation






















3,553







3,553Unrealized loss on derivative, net of tax






















(2,531
)






(2,531
)Net income (loss)


























(139,968
)


(139,968
)Comprehensive income (loss)






























(138,946
)Balances at December 31, 2007


25,420


$
254


$
114,674


$



$



$
1,257


$
(130,083
)

$
(13,898
)    F-5




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (In thousands)
  Years Ended December 31,2007


2006


2005Operating activitiesNet income (loss)

$
(139,968
)

$
21,009


$
(5,137
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:Depreciation


2,613



1,995



1,409Amortization


7,069



4,727



4,050Goodwill and intangible asset impairment


194,832







Non-cash interest expense


2,062



1,669



4,449Non-cash stock-based compensation


892



1,084



18,273Forgiveness of note receivable from shareholder










35Deferred taxes


(39,308
)


(1,913
)


(6,323
)Changes in operating assets and liabilities, net of effects of
    acquisitions:Accounts receivable, net


81,260



(43,828
)


(51,556
)Inventories


60,655



(46,914
)


(12,556
)Prepaid expenses and other current assets


10,735



(13,771
)


(4,545
)Accounts payable and accrued liabilities


(78,935
)


52,459



32,511Taxes payable


(16,889
)


2,758



(727
)Other


1,944



530



524Net cash provided by (used in) operating activities


86,962



(20,195
)


(19,593
)Investing activitiesPurchases of property and equipment


(3,288
)


(2,328
)


(1,690
)Acquisition of business, net of cash acquired


(12,603
)


(150,501
)


(1,050
)Net cash used in investing activities


(15,891
)


(152,829
)


(2,740
)Financing activitiesProceeds from revolving loan


75,000



53,800



28,800Payments on revolving loan


(108,000
)


(22,000
)


(23,600
)Proceeds from senior notes






141,000



15,000Payments on senior notes


(42,300
)


(2,383
)


(74,000
)Debt issuance costs and amendment fees


(1,011
)


(3,404
)


(1,384
)Issuance of common shares






3,500



85,879Payments received on shareholder loan


11



118



Net cash (used in) provided by financing activities


(76,300
)


170,631



30,695Net effect of exchange rates on cash


128



87



21Increase (decrease) in cash and cash equivalents


(5,101
)


(2,306
)


8,383Cash and cash equivalents at beginning of year


9,861



12,167



3,784Cash and cash equivalents at end of year

$
4,760


$
9,861


$
12,167Supplemental disclosure of cash flow informationCash interest paid

$
23,004


$
15,204


$
21,903Cash taxes paid

$
12,912


$
11,978


$
6,669Supplemental disclosure of non-cash financing activitiesIssuance of common stock for promissory note

$



$



$
155Accrued interest on shareholder notes receivable

$
1


$
2


$
6    F-6




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  1.
    The
    Company and Business Activities  ® ® ® ® ® ® ® ® ® ® ® ®
    2.
    Liquidity
    and Financial Condition    3.
    Summary
    of Significant Accounting Policies    Principles
    of Consolidation
    Use of
    Estimates
   F-7




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  Revenue
    Recognition
      No. 01-9,
  No. 99-19,
    Research
    and Development
    Shipping
    and Handling Fees and Costs
  EITF 00-10,
 F-8




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  Advertising
    Costs
    Cash and
    Cash Equivalents
    Concentration
    of Risk
      Fair
    Value of Financial Instruments
    Allowance
    for Doubtful Accounts
   F-9




---



##### Table of Contents



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


2006


2005Beginning balance

$
1,464


$
1,802


$
1,684Increases related to acquisitions


49



195



Increases in reserves, charged to operations


619



58



2,276Charge-offs


(611
)


(591
)


(2,158
)Ending balance

$
1,521


$
1,464


$
1,802   Inventories
      Property
    and Equipment
    Goodwill
    and Indefinite-Lived Intangible Assets
   F-10




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
      Impairment
    of Long-Lived Assets
    Deferred
    Financing Costs
    Warranties
   F-11




---



##### Table of Contents



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


2006


2005Beginning balance

$
8,631


$
7,412


$
3,216Increases in reserves, charged to cost of sales


10,133



14,081



16,270Decrease charged against reserve


(14,516
)


(12,862
)


(12,074
)Ending balance

$
4,248


$
8,631


$
7,412     Foreign
    Currency Transactions
    Accounting
    for Derivative Instruments and Hedging Activities
         F-12




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
        Business
    Segment, Product Line, and Geographic Disclosures
        Income
    Taxes
     F-13




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
    Comprehensive
    Income
    Stock-Based
    Compensation
    Recent
    Accounting Pronouncements
       F-14




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  4.
    Balance
    Sheet Details    December 31,2007


2006Inventories:Raw materials

$
2,346


$
1,562Finished goods


61,873



121,135$
64,219


$
122,697Property and equipment:Machinery and equipment

$
7,073


$
5,096Molds and tooling


4,349



4,242Furniture and fixtures


878



913Leasehold improvements


1,138



847Construction in process


779



93914,217



12,037Accumulated depreciation and amortization


(6,864
)


(4,969
)$
7,353


$
7,068Accrued liabilities:Accrued warranty costs

$
4,248


$
8,631Accrued salaries, bonuses and employee benefits


2,702



5,361Accrued sales incentives


6,945



7,050Cash held in escrow related to Polk acquisition






6,800Accrued interest


4,694



1,615Other


9,938



3,401$
28,527


$
32,858   5.
    Acquisitions  2007
    acquisition
   F-15




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
    2006
    acquisitions
         F-16




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  2005
    acquisition
    6.
    Goodwill
    and Intangible Assets       F-17




---



##### Table of Contents



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


Gross


Accumulated





Net Book(Years)


Amount


Amortization


Impairment


ValueIntangibles subject to amortization:Patents and other developed technology


2-20


$
18,017


$
(10,599
)

$



$
7,418Customer relationships


7-20



59,671



(19,448
)






40,223Licensing agreements


5-12



2,250



(1,103
)






1,147Non-compete agreements


2-5



3,081



(1,101
)






1,980Trademarks


10-20



1,178



(132
)






1,04684,197



(32,383
)






51,814Intangibles not subject to amortization, excluding goodwill:Trademarks






131,922







(26,471
)


105,451Total intangibles





$
216,119


$
(32,383
)

$
(26,471
)

$
157,265   December 31, 2006Useful Life


Gross


Accumulated





Net Book(Years)


Amount


Amortization


Impairment


ValueIntangibles subject to amortization:Patents


2-20


$
16,055


$
(8,670
)

$



$
7,385Customer relationships


7-15



57,407



(15,271
)






42,136Licensing agreements


5-12



2,250



(820
)






1,430Non-compete agreements


2-5



2,810



(453
)






2,357Trademarks


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    F-18




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
    Balance at January 1, 2006

$
97,807Goodwill acquired during the year


58,810Balance at December 31, 2006

$
156,617Goodwill acquired during the year


7,553Accrual of contingent consideration


1,750Adjustment to 2006 acquired working capital


(212
)Adjustment to acquired deferred tax liabilities


1,645Foreign exchange translation adjustment


1,008Impairment


(168,361
)Balance at December 31, 2007

$
   7.
    Derivative
    Instruments and Hedging Activities        Balance at January 1, 2007

$
Changes in fair value of derivatives


(4,189
)Deferred income tax benefit


1,658Balance at December 31, 2007

$
(2,531
)    F-19




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  8.
    Financing
    Arrangements      December 31,2007


2006Revolving loans

$
4,000


$
37,000Senior notes


262,926



305,227266,926



342,227Current portion


(2,669
)


(3,068
)$
264,257


$
339,159        F-20




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  9.
    Shareholders
    Equity (Deficit)  (a) Common
    Stock
        (b) Convertible
    promissory notes
    10.
    Accounting
    for Stock-Based Compensation Expense         F-21




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  Restricted
    Stock Units (RSUs)
            Weighted-Fully








AverageVested


Vesting


Total


GrantShares


Shares


Shares


PriceRSUS outstanding at January 1, 2006


984



22



1,006


$
16.00Granted






49



49



15.27Vested


7



(7
)






16.00Forfeited






(9
)


(9
)


16.00Cancelled


(5
)






(5
)


16.00Delivered, including 57 shares withheld for payroll taxes


(170
)






(170
)


16.00RSUs outstanding at December 31, 2006


816



55



871



15.35Granted


3



63



66



6.11Vested


13



(13
)






15.48Forfeited






(11
)


(11
)


10.77Delivered, including 112 shares withheld for payroll taxes


(367
)






(367
)


15.92RSUs outstanding at December 31, 2007


465



94



559


$
14.90   Stock
    Options
   F-22




---



##### Table of Contents



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


2006


2005Expected dividend yield


0.00%



0.00%



0.00%Risk-free interest rate


3.10% - 5.10%



4.50% - 4.95%



4.59%Expected life (in years)


4.58 - 8.00



4.58 - 8.00



8.00Expected volatility


39.6% - 53.2%



39.6% - 53.0%



53.0%Weighted-average grant date fair value

$
3.21


$
7.00


$
10.02     2007


2006


2005Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceStock options outstanding at the beginning of the year


105


$
14.96



50


$
16.00






$
Stock options forfeited or expired


(35
)


11.52















Stock options granted


518



7.29



55



14.02



50



16.00Stock options exercised






















Stock options outstanding at the end of the year


588


$
8.41



105


$
14.96



50


$
16.00     11.
    Net
    Income (Loss) per Common Share   F-23




---



##### Table of Contents



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


2006


2005Net income (loss) available to common shareholders

$
(139,968
)

$
21,009


$
(5,076
)Weighted average common shares outstanding  basic


25,921



25,827



18,897Net income (loss) per common share  basic

$
(5.40
)

$
0.81


$
(0.27
)Calculation of diluted net income (loss) per common share:Weighted average common shares outstanding  basic


25,921



25,827



18,897Dilutive effect of unvested RSUs

$




12



Weighted average common shares outstanding  diluted


25,921



25,839



18,897Net income (loss) per common share  diluted

$
(5.40
)

$
0.81


$
(0.27
)     12.
    Benefit
    Plans  Employee
    Savings Plan
    Equity
    Participation Rights Agreement
   F-24




---



##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  13.
    Income
    Taxes    Years Ended December 31,2007


2006


2005United States

$
(171,949
)

$
31,463


$
(5,450
)Foreign


(9,653
)


2,672



(50
)$
(181,602
)

$
34,135


$
(5,500
)     Years Ended December 31,2007


2006


2005Current:Federal

$
(3,534
)

$
12,291


$
4,914State


(61
)


1,913



1,036Foreign


349



835



(25
)(3,246
)


15,039



5,925Deferred:Federal


(32,919
)


(1,388
)


(4,987
)State


(4,626
)


(409
)


(1,336
)Foreign


(843
)


(116
)


(38,388
)


(1,913
)


(6,323
)$
(41,634
)

$
13,126



(398
)     Years Ended December 31,2007


2006


2005Expected provision at federal statutory rate

$
(63,561
)

$
11,947


$
(1,937
)State tax, net of federal tax benefit


(3,674
)


963



17Goodwill impairment


23,593







Tax credits


(132
)


(53
)


25Foreign tax


111



(204
)


(25
)Other permanent items


301



454



9Stock-based compensation


1,293







885Change in deferred tax valuation allowance


498







Initial public offering costs capitalized for tax










628Other, net


(63
)


19



$
(41,634
)

$
13,126


$
(398
)  F-25




---



##### Table of Contents



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


2006Deferred tax assets:Allowances and accruals

$
4,834


$
9,359Revenue deferred for books


166



1,343State taxes


197



1,266Stock-based compensation


436



2,586Net operating losses


144



Other


459



379Total current deferred tax assets


6,236



14,933Goodwill


21,452



Stock-based compensation


2,987



2,617Other comprehensive income


1,393



Net operating losses


570



Depreciation


142



Non-current deferred tax asset


26,544



2,617Total deferred tax assets


32,780



17,550Valuation allowance


(498
)


Total deferred tax assets

$
32,282


$
17,550Deferred tax liabilities:Inventory
    step-up

$
(108
)

$
(894
)Total current deferred tax liability


(108
)


(894
)Goodwill






(13,083
)Intangible assets


(35,000
)


(42,968
)Depreciation






(39
)Total long-term deferred tax liability


(35,000
)


(56,090
)Total deferred tax liabilities


(35,108
)


(56,984
)Net deferred tax liabilities

$
(2,826
)

$
(39,434
)        F-26




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
            Balance at January 1, 2007

$
876Additions based on tax positions related to the current year


907Additional for tax positions of prior years


463Reductions for tax positions of prior years


Settlements


(38
)Expiration of the statute of limitations for the assessment of
    taxes


(151
)Balance at December 31, 2007

$
2,057         14.
    Related
    Party Transactions     F-27




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
  15.
    SIRIUS
    Satellite Radio Agreement        16.
    Commitments
    and Contingencies  Operating
    leases
      2008

$
4,4182009


4,2182010


4,2642011


4,1612012


4,245Thereafter


16,256Total

$
37,562   Litigation
   F-28




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##### Table of Contents



DIRECTED
    ELECTRONICS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007, 2006, and 2005
    (In thousands, except per share data)
      17.
    Subsequent
    Event   F-29