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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One)                                                   |                                                                                                          
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------
|ý                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                     
|For the fiscal year ended December 31, 2002                 
|or                                                          
|o                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934[No Fee Required]
|For the transition period
from                            to

Commission File Number: 0-26524

MACKIE DESIGNS INC.(Exact name of registrant as specified in its charter)

|Washington(State or other jurisdiction of incorporation or organization)                   |  | 91-1432133(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|16220 Wood-Red Road, N.E., Woodinville, Washington(Address of principal executive offices) |  | 98072(Zip Code)                               
|(Registrant's telephone number, including area code:(425) 487-4333                        
|Securities registered pursuant to Section 12(b) of the Act:                               

Title of each class

Name of each exchange on which registeredNone

NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stockno par value(Title of each class)


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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes o    No ý

On
June 28, 2002, 12,443,022 shares of common stock were outstanding, and the aggregate market value of those shares (based upon the closing price as reported by NASDAQ) held by
non-affiliates was approximately $10,460,616.

On
March 31, 2003. 19,499,969 shares of common stock were outstanding.

Portions
of the definitive Proxy Statement for the Annual Meeting of Shareholders have been incorporated by reference into Part III of the Annual Report on
Form 10-K.

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MACKIE DESIGNS INC.        FORM 10-K  For the Year Ended December 31, 2002

INDEX

|           |          |    |                                                                                                | Page
|---------- | -------- | -- | ---------------------------------------------------------------------------------------------- | ----
|Part I     |          |    |                                                                                                |     
|           | Item 1.  |    | Business                                                                                       |     
|           | Item 2.  |    | Properties                                                                                     |     
|           | Item 3.  |    | Legal Proceedings                                                                              |     
|           | Item 4.  |    | Submission of Matters to a Vote of Securities Holders                                          |     
|Part II    |          |    |                                                                                                |     
|           | Item 5.  |    | Market for Registrant's Common Equity and Related Stockholder Matters                          |     
|           | Item 6.  |    | Selected Financial Data                                                                        |     
|           | Item 7.  |    | Management's Discussion and Analysis of Financial Condition and Results of Operations          |     
|           | Item 7A. |    | Quantitative and Qualitative Disclosures About Market Risk                                     |     
|           | Item 8.  |    | Consolidated Financial Statements and Supplementary Data                                       |     
|           | Item 9.  |    | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           |     
|Part III   |          |    |                                                                                                |     
|           | Item 10. |    | Directors and Executive Officers of the Registrant                                             |     
|           | Item 11. |    | Executive Compensation                                                                         |     
|           | Item 12. |    | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |     
|           | Item 13. |    | Certain Relationships and Related Transactions                                                 |     
|           | Item 14. |    | Controls and Procedures                                                                        |     
|           |          |    |                                                                                                |     
|Part IV    |          |    |                                                                                                |     
|           | Item 15. |    | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |     
|Signatures |          | 49

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PART I

Item 1. Business

Certain statements set forth in or incorporated by reference into this Annual Report on Form 10-K for the year ended
December 31, 2002 contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and uncertainties. Such forward-looking statements include among others, those statements including the words "expect,"
"anticipate," "intend," "believe" and similar expressions. Actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences
include but are not limited to the risks discussed in the "Risk Factors" section. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date
hereof.

Introduction

Mackie Designs Inc., a Washington corporation formed in 1988, is a leading developer and manufacturer of high-quality professional audio
equipment.

Our
primary products are analog and digital mixers, mixer-related products, recorders, amplifiers, loudspeakers and loudspeaker components. These products are used in a wide variety of
sound applications including home and commercial recording studios, live performances, and public address systems.

Our
products are distributed in the U.S. through a network of independent representatives to over 1,500 retail dealers of professional audio equipment as well as over 500 installed sound
contractors. Internationally, products are offered through subsidiaries in Italy, France, Germany, the United Kingdom and China and through local distributors in 70 other countries where we do not
have direct operations. We continually review our distribution methods and anticipate continued changes to these
methods during 2003. During the first half of 2003, we intend to consolidate our sales activity in Europe through a U.K. based call center to provide sales administration services to certain European
customers. In connection with this consolidation, we will be closing other European sales offices.

Our
businesses are organized by the end-user markets they serve as well as by product lines manufactured. Our products serve the following three broadly defined markets: Live
Sound/Sound Reinforcement, Recording, and Contractor/Fixed Installation.

We
have made strategic investments to gain entry to and to enhance our position in these markets. These investments included the purchase of Mackie Designs (Italy) S.p.A. in
June 1998 and Eastern Acoustic Works, Inc. in April 2000. Mackie Italy is an Italian corporation with principal offices and manufacturing facilities in Reggio Emilia, Italy. Its
principal activity is the manufacture of loudspeakers and speaker components. Under the EAW brand name, we design and manufacture loudspeaker systems, including integrated signal processing targeted
at the mid to high-end of the installed and touring sound markets.

Our
products are manufactured in company facilities in the states of Washington and Massachusetts, U.S.A. and in Reggio Emilia, Italy. Where appropriate, in an effort to reduce costs, we
are transitioning the manufacture of many of our components as well as many product families to third-party contract manufacturers located throughout the world. At the same time we are reducing our
internal capacity. We expect this transition to third-party contract manufacturers and the reduction of internal capacity to continue during 2003.

On
February 7, 2003 we voluntarily delisted our stock from the Nasdaq Stock Market. On February 12, 2003 we began to trade our stock on the
Over-the-Counter Bulletin Board.

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On
February 21, 2003 we finalized an agreement with Sun Capital Partners, Inc., a private investment firm, whereby Sun Mackie, LLC, an affiliate of Sun Capital Partners, purchased
approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain selling shareholders. It
acquired approximately 6.9 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs were approximately
$3.6 million. Following this transaction, Sun Mackie owned approximately 74% of our outstanding shares.

On
March 31, 2003 we finalized a new Loan and Security Agreement that provides for a revolving line of credit of up to $26.0 million and a term loan of $2.5 million
with a new lender. In addition, we finalized a three-year subordinated loan of $11.0 million with our former principal U.S. lender and a $4.0 million four-year
subordinated note with Sun Mackie. In connection with the loan from Sun Mackie,
we issued warrants to purchase an additional 1.2 million common shares at an exercise price of $.01 per share. The proceeds from these new borrowing arrangements were primarily used to replace
the existing U.S. line of credit and satisfy other existing debt of approximately $13.9 million.

"MACKIE,"
the running man figure, "RCF," "EAW" and all of the names of our U.S.-produced products are registered trademarks or common law trademarks. To the extent our trademarks are
unregistered, we are unaware of any conflicts with trademarks owned by third parties. This document also contains names and marks of other companies.

Our
website address is www.mackie.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and any amendments to those reports are available free of charge on our website as soon as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission.

Markets

Our products are well represented in most professional audio markets, including live sound/sound reinforcement, recording, and contractor/fixed installation. The
live sound/sound reinforcement market includes music instrument support and systems used by touring performers. The recording market includes all facets of recording, from home and project studios to
professional studios and broadcast facilities. The contractor/fixed installation market includes sporting venues, houses of worship and users of business music systems.

Products

We design, manufacture and market products in most professional audio markets. Loudspeakers under the EAW brand name are recognized as some of the best quality
loudspeakers available for both large fixed installation projects and touring sound systems. Loudspeakers under the Mackie brand name are leaders in the sound reinforcement market being used both for
live and fixed installation markets. We also manufacture RCF and Mackie Industrial loudspeakers, which are marketed to the fixed installation market. This group of products comprises slightly over
one-half of our revenue.

Mixing
products under the Mackie brand name are leaders in most professional audio markets. We have numerous recording mixers in both analog and digital formats and have mixers at
various price points. Additionally, mixers are marketed to both the live and fixed installation markets.

Amplifiers,
controllers to support digital technology and hard disk recorders comprise the remainder of our product offering and are marketed to both the recording and live markets. Hard
disk recorder
products are used for the digital recording of live events and the recording and editing of audio in numerous formats.

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Distribution and Sales

In the U.S., we use a network of independent representatives to sell to over 1,500 retail dealers and 500 installed sound contractors, some of which have several
outlets. Our products are sold in musical instrument stores, pro audio outlets and several mail order outlets. Sales to our top 10 U.S. dealers represented approximately 33%, 37%, and 32% of net sales
made to U.S. customers in 2002, 2001 and 2000, respectively. One dealer accounted for approximately 17%, 17%, and 13% of U.S. net sales in 2002, 2001 and 2000, respectively. No other dealer accounted
for more than 10% of sales made to U.S. customers in this period.

Internationally,
products are offered through subsidiaries in the United Kingdom, Germany, France, Italy and China and through local distributors in countries where we do not have direct
operations. No single international distributor accounted for more than 10% of international net sales in this period. Sales to customers outside of the U.S. accounted for approximately 47%, 49%, and
44%, of total net sales in 2002, 2001, and 2000, respectively.

We
continually review our distribution methods and anticipate continued changes to these methods during 2003. During the first half of 2003, we intend to consolidate our sales activity
in Europe through a U.K. based call center to provide sales administration services to certain European customers. In connection with this consolidation, we will be closing other European sales
offices.

Marketing

Our marketing strategy is designed to strengthen our brands and to educate end-users about our products. All advertising, brochures, video, multimedia
and trade show materials are created by our in-house marketing and design department. Additionally, our websites are developed and maintained in-house to provide timely,
accurate and compelling product and support information. Materials are provided by the marketing department to representatives, distributors and dealers worldwide, as part of the overall sales
strategy. Owner's manuals and sales literature are currently produced in several different languages. These materials are provided as a complement to direct advertising and customer support
follow-up programs. To further enhance customer awareness and understanding of our products, we advertise in leading trade publications, provide ongoing technical training and education
for representatives and distributors, and participate in the primary industry trade shows for our markets. We have won several national advertising awards as a result of this commitment to detail and
excellence.

Customer Support

Customer support programs are designed to enhance brand loyalty by building customer understanding of product use and capabilities. The customer service and
support operation also provides us with a means of understanding customer requirements for future product enhancements. This understanding comes through direct customer contact, as well as through
close analysis of responses to various product registration surveys.

Product
support specialists are located in Woodinville, Washington and Whitinsville, Massachusetts to provide direct technical service and support. Technical support through a
toll-free number is provided during scheduled business hours, and via the website after business hours. Service and repairs on products sold in the U.S. are performed at our Woodinville
and Whitinsville sites, and for certain specialized products, at approximately 100 authorized warranty service centers located throughout the U.S. Internationally, our subsidiaries as well as our
independent distributors are utilized to provide product support. These subsidiaries and distributors are responsible for warranty repairs for products sold into their markets and for the costs of
carrying inventory required to meet customer needs.

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Research and Development

Our research and development strategy is to develop affordable, high-quality products and related accessories for targeted markets. On
December 31, 2002, there were 114 individuals involved in research and development activities. Research and development operations are located at the three manufacturing facilities located in
Woodinville, Whitinsville and Reggio Emilia, Italy. Additionally, there are research and development groups located in Belgium and Canada. Research and development expenses were approximately
$10.8 million in 2002, $11.9 million in 2001, and $9.4 million in 2000.

In
the past, we have utilized third-party engineering service groups to supplement our in-house personnel. During 2003 we intend to increase the use of third parties to
enhance product development efforts in a cost effective manner. As part of our ongoing cost reduction effort, in 2003, we plan to close our Belgian facility which houses a portion of our research and
development group.

Competition

The professional audio industry is fragmented and highly competitive. There are many manufacturers, large and small, domestic and international, which offer audio
products that vary widely in price and quality and are distributed through a variety of channels. We compete primarily on the basis of product quality and reliability, price, ease of use, brand name
recognition and reputation, ability to meet customers' changing requirements and customer service and support. We compete with a number of professional audio manufacturers, several of whom have
significantly greater development, sales, and financial resources. Our major competitors in the mixer category are subsidiaries of Harman International Industries, Inc., Allen & Heath,
Yamaha Corporation, TOA Corporation, Philips Electronics Corporation, Peavey Electronics Corporation, Teac America, Inc. (Tascam) and SoundTracs PLC. Competitors in the professional amplifier
category include Peavey Electronics Corporation (including Crest Audio, Inc.), Crown Audio Inc. (a Harman subsidiary), and QSC Audio Products, Inc. Competing studio monitor
loudspeaker manufacturers include Genelec, Inc., Event Electronics LLC, Renkus-Heinz, Alesis Corporation and JBL (a Harman subsidiary). Competing stage loudspeaker system manufacturers include
JBL, Peavey Electronics Corporation and Electro-Voice. Competitors in the component speaker market include JBL, Eminence Speaker Corporation, Acustica Beyma S.A. and B&C Speakers S.p.A. Competitors in
the commercial sound products category include JBL, Bose Corporation and TOA Corporation. Competing installed sound loudspeaker system manufacturers include JBL, Tannoy, Electro-Voice, Community
Professional Loudspeakers and Renkus-Heinz. Competitors in the touring sound loudspeaker system category include JBL, L-Acoustics, Meyer Sound Laboratories and Nexo. Competitors in the
hard disk recorder/editor market include Alesis, HHB, Tascam, RADAR and AMS Audiofile.

Proprietary Technology

We have a strong interest in protecting the intellectual property assets that reflect original research, creative development, and product development. As such,
we have sought protection through patents, copyrights, trademarks, and trade secrets and have applied and filed for various design and utility patents, both domestically and internationally. We have
actively used certain trademarks, and have applied for and registered specific trademarks in the U.S. and in foreign countries. While the registration of trademarks provide us with certain legal
rights, there can be no assurance that any such registration will successfully prevent others from infringing upon these trademarks.

Along
with extensive trademark and patent registration and filings, we have claimed copyright protection for works of original authorship, including product brochures, literature,
advertisement, and web pages. In certain cases, we have filed and will continue to file for copyright registration in the U.S. While copyrights provide certain legal rights of enforceability, there
can be no assurance as to the ability to successfully prevent others from infringing upon these copyrights.

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We
have never conducted a comprehensive patent search relating to the technology used in our products. We believe that our products do not infringe upon the proprietary rights of others.
There can be no assurance, however, that others will not assert infringement claims against us in the future or that claims will not be successful.

While
Mackie pursues patent, trademark and copyright protection for products and various marks, we also rely on trade secrets, know-how and continuing technology advancement,
manufacturing capabilities, affordable, high-quality products, brand name recognition, new product introduction and direct marketing efforts to develop and maintain our competitive
position. Our policy is to have each employee enter into an agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside the Company and to recognize the
Company's ownership of intellectual property developed by employees. Consulting contracts generally provide for the protection of intellectual property and the requirement of confidentiality. There
can be no assurance, however, that these confidentiality agreements will be honored or that we can effectively protect our rights to unpatented trade secrets. Moreover, there can be no assurance that
others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. We have traditionally not sought patent protection
for Mackie Italy products and have not pursued trademark or copyright protection for other Italian matters except for the name "RCF."

Manufacturing

Our products are manufactured in facilities in the states of Washington and Massachusetts, U.S.A. and Reggio Emilia, Italy. These facilities are focused on the
core manufacturing technologies of electronics, loudspeakers and loudspeaker systems, and transducers, respectively. In addition, the facilities work together as part of the supply chain to provide
integrated products to the market. Many products share components, which allows for integrated manufacturing of several distinct products and in certain cases significant purchase volume discounts.

Where
appropriate, in an effort to reduce costs, we are transitioning the manufacture of many of our components as well as many entire product families to third-party contract
manufacturers located throughout the world. At the same time we are reducing our internal capacity. We expect this transition to third-party contract manufacturers and reduction in internal capacity
to continue during 2003.

We
rely almost exclusively on one vendor for our potentiometers and certain of our integrated circuits but are in contact with other manufacturers of these items regularly. These items
are critical components in certain products. Interruption in, or cessation of, the supply of these components from these suppliers could adversely affect production capability, as the qualification
process for another manufacturer, from sample submission to production quality and quantity delivery, could take several months. We attempt to maintain a three month supply of potentiometers and a one
month supply of the specific integrated circuits on hand at any given time to reduce the effect of any disruption.

Backlog

Typically, orders are shipped within two weeks after receipt; backlog is not generally tracked. In the case of new product introductions or periods where product
demand exceeds production capacity, products are allocated to customers on a monthly basis until demand is met.

Employees

At December 31, 2002, we had 1,036 full-time equivalent employees, including 140 in marketing, sales and customer support, 114 in research and
development, 707 in manufacturing and manufacturing support, which includes manufacturing engineering, and 75 in administration and finance. Approximately 262 of the manufacturing employees in Italy
are represented by a labor union. We consider our relations with all employees, union and non-union, to be good.

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RISK FACTORS

This report contains forward-looking statements. There are many factors that could cause actual results to differ materially from those
projected by the forward-looking statements made in this report. Factors that might cause such a difference include, but are not limited to, the risk factors described below. We do not undertake any
obligation to publicly release the result of any revisions to the forward-looking statements contained in this reports that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

If There is No Improvement In or a Worsening of General Economic Conditions our Sales Levels Will Continue to be Adversely
Affected.The adverse economic conditions in the U.S. and throughout the world economy have adversely affected our sales levels in recent periods and if these
adverse conditions continue or worsen, we may experience continued material adverse impact on our revenues, operating results and financial condition. Our operating losses have caused us to reevaluate
our operating strategy and plan certain actions to reduce our cost of sales and operating expense in future periods. These future actions could result in special charges or adversely affect our
long-term competitive position. Further, we may be unable to reduce the cost of sales and operating expenses at a rate and level consistent with such future adverse sales environment,
which would have an adverse effect on our results of operations and financial condition.

Dependence on significant customers.Our relationships with our largest customers are critical to our
sales performance. Failure to maintain those relationships would have a material adverse effect upon our results of operations and financial condition. Sales to one distributor accounted for 12% of
our consolidated net sales for the fiscal year ended December 31, 2002. We anticipate that this distributor will continue to account for a significant portion of our sales for the foreseeable
future; however, it is not obligated to any long-term purchase of our products.

Liquidity.Under the terms of our U.S. credit agreements, we must maintain certain financial ratios
and must maintain adequate levels of eligible collateral to support our borrowing level. The agreements also provide, among other matters, restrictions on additional financing, dividends, mergers,
acquisitions, and an annual capital expenditure limit. The covenants in these credit agreements may restrict our operations. If we are unable to generate adequate levels of sales and operating profit,
our lenders could declare us to be in default of our obligations. If we are in default, there is no assurance that the lenders would grant waivers or agree to restructure our debt or that we would be
able to attain other financing. If any of the debt is called, and we are unable to obtain alternate financing, we may have to continue to modify our operations, liquidate assets or take other measures
to continue operations.

We
have agreements with several banks in Italy that provide short-term credit facilities. These short-term loans are typically supported by accounts receivable,
including receivables from related parties. Certain of these banks have indicated that they are unwilling to provide additional receivables financing, or have indicated that they will no longer accept
intercompany receivables as acceptable collateral. These credit agreements are not guaranteed by the U.S. Company. If we are unable to continue to receive adequate receivables financing in Italy, we
may be forced to obtain alternate financing at less favorable rates. There is no guarantee that such alternate financing will be available. Any reduction in our borrowing ability would have an adverse
effect on our results of operations and financial condition.

Development, Introduction and Shipment of New Products.We are currently developing new analog and
digital mixers, recording devices, amplifiers, loudspeakers and loudspeaker components. Significant resource, technological, supplier, manufacturing or other problems may delay the development,
introduction or manufacture of these products. In the past, when sales have been affected by delays in developing and releasing new products, some customers waited for new products, while others

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purchased products from our competitors. We intend to increase the use of third-party contractors in our product development process. The use of third parties in the product development process may
reduce our control over that process or its outcome and may ultimately result in higher costs and longer time to market. Delays in the completion and shipment of new products, or failure of customers
to accept new products, may affect future results.

Variability in Quarterly Operating Results.Our operating results tend to vary from quarter to
quarter. Revenue in each quarter is substantially dependent on orders received within that quarter. Conversely, our expenditures are based on investment plans and estimates of future revenues. We may,
therefore, be unable to quickly reduce spending if revenues decline in a given quarter. As a result, operating results for that quarter will be adversely impaired. Results of operations for any one
quarter are not necessarily indicative of results for any future period.

Other
factors which may cause quarterly results to fluctuate include:



Due
to all of the foregoing factors, it is possible that in some future quarters our operating results will be below the expectations of analysts and investors.

Rapid Technological Change.Product technology evolves rapidly, making timely product innovation
essential to success in the marketplace. The introduction of products with improved technologies or features may render our existing products obsolete and unmarketable. If we cannot develop products
in a timely manner in response to industry changes, or if our products do not perform well, our business and financial condition will be adversely affected. Also, new products may contain defects or
errors which give rise to product liability claims or cause the products to fail to gain market acceptance.

Competition.We expect competition to increase from both established and emerging companies. If we
fail to compete successfully against current and future sources of competition, our profitability and financial performance may be adversely affected.

Dependence on Suppliers.Certain parts used in our products are currently available from either a
single supplier or from a limited number of suppliers. If we cannot develop alternative sources of these components, or if we experience deterioration in our relationship with these suppliers, there
may be delays or reductions in product introductions or shipments, which may materially adversely affect our operating results.

Because
we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these suppliers. Also, we may be unable to accurately forecast our
production schedule. If we underestimate our production schedule, suppliers may be unable to meet our demand for components. This delay in the supply of key components may materially adversely affect
our business.

Where
appropriate, in an effort to reduce costs, we are transitioning the manufacture of many of our components as well as many entire product families to third-party contract
manufacturers located

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throughout the world. At the same time we are reducing our internal capacity. We expect this transition to third-party contract manufacturers and reduction in internal capacity to continue during
2003. The transition from in-house manufacturing to third-party manufacturing creates additional risks including:



Manufacturing in China.Our ability to import products from China at current tariff levels could be
materially and adversely affected if the "normal trade relations" ("NTR", formerly "most favored nation") status the U.S. government has granted to China for trade and tariff purposes is terminated.
As a result of its NTR status, China receives the same favorable tariff treatment that the United States extends to its other "normal" trading partners. China's NTR status, coupled with its membership
in the World Trade Organization, could eventually reduce barriers to manufacturing products in and exporting products from China. However, we cannot provide any assurance that China's WTO membership
or NTR status will not change.

International Operations.We have significant net sales to customers outside the United States and
believe that international sales will continue to represent a significant portion of our revenue. International sales may fluctuate due to various factors, including:



The
European Community and European Free Trade Association have established certain electronic emission and product safety requirements ("CE"). All of our new products meet these
requirements. Failure to obtain either a CE certification or a waiver for any product may prevent us from marketing that product in Europe.

We
operate subsidiaries in Italy, the United Kingdom, Germany, France, Belgium, the Netherlands and China. Our business and financial condition is, therefore, sensitive to currency
exchange rates or any other restrictions imposed on these currencies.

We
continually review our distribution methods and anticipate continued changes to these methods during 2003. We intend to create a U.K. based call center during the first half of 2003
to provide sales administration services to certain European customers. This new distribution method may adversely impact our sales in the affected European countries both during and subsequent to the
time of transition.

Restructuring.As part of an ongoing effort to reduce the cost structure of the organization and to
improve profitability we have completed significant restructuring of our company and plan to continue to do so. We expect to incur significant costs, including severance and other transition costs as
we

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proceed with our restructuring. Restructuring also creates additional risks for us because of potential disruption to the organization including work disruptions in unionized environments, employee
morale issues and general distraction to the organization.

Protection of Intellectual Property.We have a strong interest in protecting the intellectual
property assets that reflect original research, creative development, and product development. As such, we have sought protection through patents, copyrights, trademarks, and trade secrets. Along with
extensive trademark and patent registration and filings, we have claimed copyright protection for works of original authorship, including product brochures, literature, advertisement, and web pages.
While certain legal rights of enforceability are available to us, there can be no assurance as to the ability to successfully prevent others from infringing upon our intellectual property.

We
have never conducted a comprehensive patent search relating to the technology used in our products, however; we believe that our products do not infringe upon the proprietary rights
of others. There can be no assurance, however, that others will not assert infringement claims against us in the future or that those claims, if brought, will not be successful.

While
we pursue patent, trademark and copyright protection for products and various marks, we also rely on the use of confidentiality agreements with our employees and consultants to
protect our trade secrets, proprietary information and other intellectual property. There can be no assurance, however, that these confidentiality agreements will be honored or will be effective in
protecting our trade secrets, proprietary information and other intellectual property. Moreover, there can be no assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade secrets.

Acquisitions and Business Combinations.We have acquired businesses in the past, and we may do so in
the future. We may pursue additional acquisitions of complementary technologies or product lines. Further acquisitions may include risks of entering markets where we have no or limited prior
experience, the potential loss of key employees of the acquired company, and impairment of relationships with existing employees, customers and business partners. Further acquisitions may also impact
our financial position. For example, we may use significant cash or incur additional debt, which would weaken our financial position. We cannot guarantee that future acquisitions will improve our
business or operating results.

Dependence on Key Personnel.Our future success will depend in a large part on the continued service
of many of our technical, marketing, sales and management personnel and on our ability to attract, train, motivate and retain highly qualified employees. Our employees may voluntarily terminate their
employment at any time. Competition for highly qualified employees is intense, and the process of locating technical, marketing, sales and management personnel with the combination of skills and
attributes required to execute our strategy is often lengthy. The loss of the services of key personnel or the inability to attract new personnel could have a material adverse effect upon our results
of operations.

Item 2. Properties

We lease facilities in Woodinville, Washington totaling approximately 170,000 square feet to house our corporate headquarters as well as certain manufacturing,
administrative, sales and marketing, research and development and customer support operations. Additionally, we own facilities totaling 132,000 square feet in Reggio Emilia, Italy used for
manufacturing and administrative purposes. Our manufacturing facility in Italy sits on approximately 7 acres of land. At December 31, 2002, we leased a series of connected buildings, in a
manufacturing complex, totaling 245,000 square feet in Whitinsville, Massachusetts. This lease expired February 2003 and we are currently negotiating to occupy a lesser amount of space in the
same building complex. Most likely, we will lease this additional space for a two

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to five year period. We lease additional facilities in the United States, Europe and Asia for our regional sales and support offices.

Item 3. Legal Proceedings

Subrogated claims have been asserted against us from insurance companies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW), paid claims
made by EAW's landlord and other tenants of the Whitinsville building who were affected by a fire started by a loaned employee in a portion of the building in 1996. The potential loss from this claim
may exceed $4 million inclusive of interest; some portion of which we anticipate would be covered by insurance. We expect the matter to come to trial in July 2003. We believe that these
losses are not attributable to us under Massachusetts' law and are vigorously defending the litigation. The claims of the other tenants have been covered by EAW's insurance carrier. The ultimate
resolution of this matter is not known at this time. No provision has been made in our consolidated financial statements related to these claims.

We
are also involved in various legal proceedings and claims that arise in the ordinary course of business. We currently believe that these matters will not have a material adverse
impact on our financial position, liquidity or results of operations.

Item 4. Submission of Matters to a Vote of Securities Holders

No matters were submitted to a vote of our security holders during the fourth quarter of 2002.

PART II

Item 5. Market for Common Stock and Related Shareholder Matters

Until February 12, 2003 our common stock was traded on the Nasdaq National Market under the symbol "MKIE." Since that date, our common stock has been
traded on the OTC Bulletin Board under the same symbol. As of March 28, 2003, there were approximately 103 shareholders of record. The following table shows the high and low sales prices for
our common stock for the periods indicated. These prices do not include retail markups, markdowns or commissions.

Common StockHigh

LowYear Ended December 31, 2002:First Quarter

$
4.57

$
3.10Second Quarter

$
4.60

$
2.90Third Quarter

$
4.05

$
2.30Fourth Quarter

$
2.45

$
0.80Year Ended December 31, 2001:First Quarter

$
7.00

$
5.00Second Quarter

$
5.88

$
5.00Third Quarter

$
5.63

$
4.50Fourth Quarter

$
5.10

$
3.30


On
February 21, 2003, Sun Mackie, LLC, an affiliate of Sun Capital Partners, Inc., a private investment firm, purchased 6,935,680 shares of the Company for approximately
$6.3 million in cash. Net proceeds
after transaction related costs were approximately $3.6 million. Sun Mackie also purchased 7,434,800 outstanding shares from certain selling shareholders for approximately $3.7 million
in cash. After completion of this transaction, Sun Mackie owned approximately 74% of our outstanding shares. We issued these shares to Sun Mackie in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended.

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On March 31, 2003, Sun Mackie provided a $4.0 million four-year subordinated note in connection with the refinancing of our U.S. debt. In consideration of the loan from Sun
Mackie, we have issued warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $.01 per share.

We
have not paid dividends on our common stock in the past, and it is not anticipated that cash dividends will be paid on shares of our common stock in the foreseeable future. Any future
dividends will be dependent upon our financial condition, results of operations, current and anticipated cash requirements, acquisition plans and plans for expansion, and any other factors that our
Board of Directors deems relevant. Under our current loan and security Agreement, we are prohibited from paying any dividends.

Item 6. Selected Consolidated Financial Data

The following selected Consolidated Statements of Operations data for each of the three years in the period ended December 31, 2002 and the Consolidated
Balance Sheet data as of December 31, 2002 and 2001 are derived from our audited Financial Statements included elsewhere herein. The selected Statements of Operations data for the two years in
the period ended December 31, 1999 and the Balance Sheet data as of December 31, 2000, 1999 and 1998 were derived from our audited Financial Statements, which are not included in this
Form 10-K. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, including the notes thereto, included elsewhere in this Form 10-K.

|                                               |                                                                            | Years ended December 31,                                                      
|---------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------------------------
|
|
|Consolidated Statements of Operations Data:(a) |                                                                            |                                                                               
|                                               | Net sales                                                                  |                                                                               
|                                               | Gross profit                                                               |                                                                               
|                                               | Impairment of goodwill and other long-lived assets                         |                                                                               
|                                               | Operating expenses(c)                                                      |                                                                               
|                                               | Income (loss) before cumulative effect of a change in accounting principle |                                                                               
|                                               | Net income (loss)                                                          |                                                                               
|                                               | Basic net income (loss) per share:                                         |                                                                               
|                                               |                                                                            | Net income (loss) before cumulative effect of a change in accounting principle
|                                               |                                                                            | Cumulative effect of a change in accounting principle                         
|                                               |                                                                            |                                                                               
|                                               | Basic net income (loss) per share                                          |                                                                               
|                                               |                                                                            |                                                                               
|                                               | Diluted net income (loss) per share:                                       |                                                                               
|                                               |                                                                            | Net income (loss) before cumulative effect of a change in accounting principle
|                                               |                                                                            | Cumulative effect of a change in accounting principle                         
|                                               |                                                                            |                                                                               
|                                               | Diluted net income (loss) per share                                        |                                                                               
|                                               |                                                                            |                                                                               

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|                                  |                      | December 31,
|--------------------------------- | -------------------- | ------------
|
|Consolidated Balance Sheets Data: |                      |             
|                                  | Working capital      |             
|                                  | Total assets         |             
|                                  | Long-term debt(b)    |             
|                                  | Shareholders' equity |             

---

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report. This discussion contains certain "forward-looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Actual results could differ materially from those discussed here. The
cautionary statements made in this Annual Report should be read as being applicable to all forward-looking statements wherever they appear. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere herein. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements
that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

We develop, manufacture, distribute and sell high-quality, affordable digital and analog audio mixers, speakers, amplifiers and other professional
audio equipment on a worldwide basis. Our products are used by professional musicians, sound installation contractors and broadcast professionals both in sound recordings, live presentations systems
and installed sound systems. We distribute our products primarily through retail dealers, mail order outlets and installed sound contractors.

In
April 2000, we acquired Eastern Acoustic Works, Inc. for approximately $19.6 million in cash. EAW designs, manufactures and sells loudspeaker systems, including
integrated signal processing for the installed and touring sound markets. The transaction was accounted for as a purchase business combination. Operations in the periods after April 2000
include the results of operations for EAW.

In
April 2001, we acquired Mackie Designs Engineering Services BVBA, formerly known as Sydec N.V., for approximately $4.4 million in cash. The transaction was accounted for
as a purchase business combination. Mackie Designs Engineering Services developed products and services in the area of embedded electronic and software, networking, digital signal processing and
Windows TM driver applications. Sales of these products and development of new products in this area have not met our original expectations. At December 31, 2002 we reduced the value of this
inventory to its estimated salvage value, which is minimal. In addition, we recognized impairment on the long-lived assets, principally fixed assets and developed technology, of Mackie
Designs Engineering Services totaling

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$1.1 million. As a result, in connection with our ongoing cost reduction effort, we plan to close this facility in 2003.

On
February 21, 2003 we finalized an agreement with Sun Capital Partners, Inc., a private investment firm, whereby Sun Mackie, LLC, an affiliate of Sun Capital Partners,
purchased approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain selling shareholders.
It acquired approximately 6.9 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs were approximately
$3.6 million. Following this transaction, Sun Mackie owned approximately 74% of our outstanding shares.

On
March 31, 2003 we finalized a new Loan and Security Agreement that provides for a revolving line of credit of up to $26.0 million and a term loan of $2.5 million
with a new lender. In addition, we finalized a three year subordinated loan of $11.0 million with our former principal U.S. lender and a $4.0 million four year subordinated note with Sun
Mackie. In connection with the loan from Sun Mackie, we have issued warrants to purchase an additional 1.2 million common shares at an exercise price of $.01 per share. The proceeds from these
new borrowing arrangements were primarily used to replace the existing U.S. line of credit and satisfy other existing debt of approximately $13.9 million.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations following are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

We
believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we
consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting
policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory valuation
and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results
related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts
across two to three quarters.

Inventory Valuation.We believe our policy on valuing inventory, including market value adjustments,
is our primary critical accounting policy. Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out method, or market.
Included in our inventories balance are demonstration products used by our sales representatives and marketing department including finished goods that have been shipped to customers for evaluation.
Market value adjustments are recorded for obsolete material, slow-moving product, service and demonstration products. We make judgments regarding the carrying value of our inventory based
upon current market conditions. These conditions may change depending upon competitive product introductions, customer demand and other factors. If the market for our previously released products
changes, we may be required to write down the cost of our inventory.

Allowance for Doubtful Accounts.We make ongoing estimates relating to the collectibility of our
accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to meet their financial obligations to us. In determining the amount of the allowance,
we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in

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the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in
their inability to make payments, a larger allowance may be required. In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to selling and
administrative expense in the period in which we made such a determination.

Long-lived Assets.We assess the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Significant judgment is used in assessing factors which might trigger impairment including significant
underperformance relative to expected operating results, significant changes in our use of the assets or the strategy for our overall business, and significant negative industry or economic trends. As
we continue to review our distribution methods and transition our manufacturing to third parties, this may result in circumstances where the carrying value of certain long-lived assets may
not be recoverable.

Goodwill and Other Intangible Assets.We adopted FAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. In accordance with FAS No. 142, we will no longer amortize goodwill and intangible assets with indefinite lives, but instead will measure these assets
for impairment at least annually, or when events indicate that impairment exists. We will continue to amortize intangible assets that have definite lives over their useful lives.

Revenue Recognition.Revenues from sales of products, net of sales discounts, returns and allowances,
are generally recognized upon shipment under an agreement with a customer when risk of loss has passed to the customer, all significant contractual obligations have been satisfied, the fee is fixed or
determinable and collection of the resulting receivable is considered probable. Products are generally shipped "FOB shipping point" with no right of return. Sales with contingencies, such as rights of
return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has
lapsed. We generally warrant our products against defects in materials and workmanship for periods of between one and six years. The estimated cost of warranty obligations, sales returns and other
allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Income Taxes.As part of the process of preparing our financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Balance Sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the Statement of Operations.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net Sales

Net sales were $188.0 million in 2002 compared to $206.5 million in 2001, reflecting a decrease of $18.5 million or nine percent from 2001.
This decrease resulted primarily from lower volume of sales, due in part to the continuing economic slowdown throughout the world. Our sales trended down in the latter half of 2002. Other factors
which influenced sales included the decline in sales of certain older product families without the mitigating effect of new product introductions. Additionally, granting higher levels of sales
discounts was necessary to maintain market share. We also introduced prompt payment discounts in the U.S. to increase cash flow. As a result of continued economic weakness and

15

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certain of the factors referred to above we expect our sales may continue to decline in 2003 and are taking steps to scale our business accordingly.

Gross Profit

Gross profit was $46.7 million or 25% of net sales for 2002 compared to $61.6 million or 30% of net sales for 2001. This decline was primarily due
to inventory adjustments associated with products that are no longer marketable due to a combination of product obsolescence and poor field performance. Inventory adjustments associated with these
products amounted to $3.4 million. Other inventory adjustments were necessary in 2002 to provide for excess material on hand as demand for certain products declined or those products failed to
meet initial sales expectations. These inventory adjustments were identified and recorded primarily in the fourth quarter. In 2002, we continued the transition and manufacture of certain product lines
to offshore facilities that we began in 2001. While the goal of higher gross margins was achieved for those products, the transfer created inefficiencies and excess capacity in our factories resulting
in poor leverage of overhead, which lowered gross profit. We have reduced the headcount at our manufacturing factories to compensate for the transfer of production, however the incremental cost of the
transition in the form of severance also reduces gross profit in the period affected. Finally, gross profit was reduced by sales discounts and prompt payment discount programs initiated in 2002.

We
expect that our overall gross profit percentage may be adversely affected in the near term as the transition to offshore manufacturers is completed and our manufacturing facilities
are condensed. These gross margins will be affected by costs to move the manufacture of these products including accelerated depreciation of manufacturing assets which will be written off over the
next nine to twelve months of approximately $2.5 million.

Selling, General and Administrative

Selling, general and administrative expense increased to $51.2 million in 2002 from $51.1 million in 2001, and increased as a percent of net sales
in 2002 to 27% from 25% in 2001. Costs were recognized in the
current year associated with severance payments related to a reduction in force in 2002. Certain non-salary expenses were also higher in some areas in 2002 than in 2001. The majority of
savings related to the 2002 reductions in headcount was not recognized in 2002, as the reductions happened in the third and fourth quarter of 2002.Additionally, we recorded bad debt expense of
approximately $2.3 million in 2002 as compared to $800,000 in 2001. The largest portion of this related to the bankruptcy filing of one of our largest U.S. customers. Due to the anticipated
sales decline in 2003, efforts to reduce costs will continue. Cost cutting measures will include the closing of certain international sales offices and relocation of administrative functions. Other
anticipated savings related to 2003 include the continued effort to streamline the selling, general and administrative workforce in the U.S. and Italy. Additionally, we intend to reduce spending
levels for expensive, less efficient marketing activities such as large-footprint trade shows and print advertising in favor of more focused and efficient vehicles such as channel training, direct
marketing, and smaller-footprint tradeshows. Although we will record additional restructuring costs in 2003 related to severance and other transition costs, we believe this strategy will help reduce
selling, general and administrative expenses in 2003 while increasing overall returns.

Research and Development

Research and development expenses decreased to $10.8 million in 2002 from $11.9 million in 2001. As a percent of sales, research and development
stayed constant at 6% of net sales. The decrease in dollars relates primarily to an emphasis on cost cutting as well as a reduction in workforce that occurred in the third and fourth quarters of 2002.
The majority of the savings associated with the reduction in headcount will be recognized in 2003. In addition, Mackie Designs Engineering Services

16

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BVBA will be closed in early 2003. While we are reducing our internal resources we intend to increase the use of third-party contractors in our product development process.

Impairment of Goodwill and Other Long-Lived Assets and Cumulative Effect of a Change in Accounting Principle

We adopted FAS No. 142 on January 1, 2002. As a consequence, we no longer amortize goodwill and intangibles with indefinite lives, but instead
measure goodwill and intangibles for impairment at least annually, or when events indicate that impairment exists. As required by FAS No. 142, we performed the transitional impairment test on
goodwill and other intangibles, which consisted of assembled workforce. As a result of the transitional impairment test, we recorded a $5.9 million cumulative effect of a change in accounting
principle in 2002. In addition to the transitional impairment test, we reviewed our remaining goodwill and other intangibles as required annually pursuant to FAS No. 142. As a result of the
annual review in the fourth quarter of 2002, we further reduced the carrying amount of goodwill by recording an impairment charge of $14.5 million, the remaining net book value.

Additionally,
at December 31, 2002, we reviewed our other long-lived assets for potential impairment and determined that the carrying value of the developed technology
recorded in connection with our
acquisition of Mackie Designs Engineering Services BVBA would not be recoverable. We also determined that the carrying value of property, plant and equipment at certain of our European facilities
would not be recoverable. Accordingly, we recorded an impairment charge for these items totaling approximately $1.3 million.

Other Income (Expense)

Net other expense was $2.6 million for 2002 compared to $5.5 million for 2001. Included in this amount is interest expense which decreased to
$3.8 million from $4.9 million in 2001. The decrease relates primarily to lower interest rates in 2002 versus 2001. Other income, comprised primarily of foreign exchange transaction
gains and losses, was income of $873,000 in 2002 compared with an expense of $1.0 million in 2001. These gains and losses are primarily the result of favorable changes between the value of the
Euro and the U.S. dollar.

Provision (Benefit) for Income Taxes

We had a benefit for income taxes of $1.8 million in 2002 compared to a benefit for income taxes of $1.6 million in 2001. This represents an overall
effective tax rate in 2002 of 5%, which includes taxes in various federal, state and international jurisdictions. The effective tax rate is lower than the statutory rate due primarily to the
non-deductibility of certain expenses, principally goodwill and other impairment charges, and to the increase in the valuation allowance associated with deferred tax assets. The valuation
allowance was determined to be necessary since utilization of our tax assets depends on future profits, which are not assured. The effective tax rate in 2001 was 23%. Certain
non-deductible expenses also reduced this benefit from the statutory rate, however these items were smaller in 2001 and thus had less of an effect on the overall rate.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net Sales

Our net sales of $206.5 million in 2001 decreased by $937,000 or less than one-half percent from 2000. Our lack of sales growth was
attributable to lower volumes particularly in the U.S. as a result of the economic slowdown. Sales were lower in the latter half of 2001 as the effect of the economic slowdown and the impact of the
events of September 11 were felt. Sales of certain of our analog and digital mixer families declined when compared to 2000 while digital recorder sales and loudspeaker sales have increased. In
addition, while net sales for 2001 included a full year of EAW sales versus nine

17

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months in 2000, sales in the installed sound market traditionally served by EAW branded products have declined. Sales in the U.S. accounted for 51% of our sales in 2001 and 56% of our sales in 2000.
Sales of our international subsidiaries are primarily made in currencies fixed to the Euro. The change in the Euro against the U.S. Dollar caused these sales to be recorded at approximately
$1.6 million lower than these sales would have been if using the 2000 exchange rate. Additionally, our implementation of a fully-integrated worldwide Enterprise Resource Planning information
system in 2001 temporarily impaired our ability to ship product from Italy in the fourth quarter of 2001 and contributed to the decrease in net sales.

Gross Profit

Gross profit was $61.6 million or 30% of net sales for 2001 compared to $72.8 million or 35% of net sales for 2000. This decline was primarily due
to a shift in product mix from higher margin compact mixer and digital products to lower margin speaker products along with a general increase in material and labor costs across multiple product
lines. Gross margin was also reduced by increased freight accommodations and sales discounts. In 2001, we began to transition the manufacture of certain of our product lines to offshore facilities to
achieve greater gross margins on those products.

Selling, General and Administrative

Selling, general and administrative expense increased to $51.1million or 25% of net sales in 2001 from $48.5 million or 23% of net sales in 2000. The
inclusion of the fixed component of EAW expenses for a full twelve months of 2001 versus nine months of 2000 resulted in an increase of approximately $1.0 million. In addition, costs associated
with the implementation of our ERP system contributed to this increase, as did increases in personnel early in the year. In the latter half of the year, steps were taken to reduce expenses including
closing the Amsterdam office, reducing headcount, reducing salaries and initiating other cost cutting programs.

Research and Development

Research and development expenses increased to $11.9 million or 6% of net sales in 2001 from $9.4 million or 4.5% of net sales in 2000. The increase
both in absolute dollars and percent is related to additional spending for new products and maintaining investment in ongoing product development. The inclusion of EAW research and developments costs
for twelve months of 2001 as compared to nine months in 2000 resulted in an increase of $700,000. Additionally, our acquisition of Mackie Designs Engineering Services BVBA in April 2001
resulted in an increase of $1.1 million of research and development expense.

Other Income (Expense)

Net other expense was $5.5 million for 2001 compared to net other expense of $4.5 million for 2000. Interest expense increased to
$4.9 million in 2001 from $4.6 million in 2000 primarily due to borrowings related to the acquisition of EAW and to higher levels of short-term borrowing under our bank
credit facility. Other expense, comprised primarily of foreign exchange gains and losses, was $1.0 million in 2001 compared with $538,000 in 2000. This increase was primarily due to the foreign
exchange losses in 2001 as a result of the weakening of the Euro against the U.S. Dollar.

Provision (Benefit) for Income Taxes

We had a benefit for income taxes of $1.6 million in 2001 compared to income tax expense of $4.2 million in 2000. This represents an overall
effective tax rate in 2001 of 23% which includes taxes paid in various federal, state and international jurisdictions. We did not get the full tax rate benefit

18

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relating to our loss before benefit for income taxes in 2001 due to the non-deductibility of certain amortization costs, and the rate and method of determination of taxation on
non-U.S. subsidiaries.

Liquidity and Capital Resources

In February 2003, Sun Mackie, LLC, an affiliate of Sun Capital Partners, Inc., a private investment firm, made a strategic equity investment in
Mackie Designs totaling $6.3 million. Certain deal-related fees reduced funds received by us by approximately $2.7 million. A Loan and Security Agreement with a new lender
was finalized in March 2003 and provides for a $26.0 million revolving line of credit. Availability under this line of credit is limited to eligible collateral; initial funding was
$11.6 million. This lender has also provided a $2.5 million term loan. Principal payments on the term loan are due in equal monthly payments over five years, beginning in
July 2003. Interest is due monthly calculated at the bank's prime rate plus 0.75% or Eurodollar Rate plus 3.5%. Both the revolving line of credit and term loan are secured by all U.S. based
assets including, but not limited to, accounts receivable, inventory, fixed assets, intangible assets and patents. Additionally, a portion of the revolving line of credit is provided in the U.K. and
is secured by accounts receivable of Mackie Designs UK Plc.

Our
previous U.S. lender has provided a loan totaling $11.0 million which is subordinate to the Loan and Security Agreement with our new lender. Principal is due beginning in
May 2004 based upon our 2003 earnings before interest, taxes, depreciation and amortization, less cash taxes paid, certain capital expenditures and certain debt repayments. Interest accrues at
a rate of 10% and is paid subject to certain availability tests as we have availability under the Loan and Security Agreement. In addition to its equity investment, Sun Mackie has provided
$4.0 million of debt financing which also funded in March 2003. Interest accrues at 15% and is paid annually beginning March 2004. The principal is due in
a lump sum payment in 2007. In connection with the loan from Sun Mackie, we have issued warrants to purchase an additional 1.2 million common shares at an exercise price of $.01 per share. As a
result of these transactions, we believe we have greater financial stability.

As
a result of restructuring the line of credit and term loans, we have reclassified term loan amounts that were previously shown as long-term debt callable under covenant
provisions in interim condensed consolidated financial statements to long term debt.

We
have taken various actions to improve results of operations and ensure our ongoing ability to cover scheduled debt servicing payments, including headcount reductions and other cost
containment measures. During 2002, these measures included layoffs and reduction of capital expenditures. In 2003, there have been additional headcount reductions. We are also planning to close
certain manufacturing and engineering facilities and will continue to outsource product manufacturing to offshore contract manufacturers. We also plan to outsource certain engineering activities.
Additionally, we plan to close certain international sales offices. Finally, there will be intensive focus on controls over expenditures. If these planned cost reductions are not realized or there is
a continued significant decline in net sales, our operating results will be adversely affected.

Cash
provided by operating activities was $3.3 million in 2002 and $16.1 million in 2001. In 2000, cash used by operations was $5.3 million. Net cash provided by
operating activities in 2002 was primarily attributable to decreases in inventory and accounts receivable and an increase in accounts payable and accrued expenses. The downward trend in inventory is
due primarily to the continued efforts to reduce our inventory levels including cost adjustments for excess and obsolete inventory. Net cash used by operating activities in 2000 was primarily
attributable to increases in inventories, accounts receivable and a decline in income taxes payable offset partially by net income, increases in accounts payable and accrued expenses and a decline in
prepaid expenses and other current assets.

Cash
used in investing activities was $4.5 million, $10.7 million and $20.6 million in 2002, 2001 and 2000 respectively. 2002 expenditures were limited to the
acquisition of property, plant and equipment. In 2001 $2.3 million was used for the acquisition of Mackie Designs Engineering Services and

19

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$9.0 million for the acquisition of property, plant and equipment. The property, plant and equipment acquisitions in 2001 relate primarily to the costs of hardware and software associated with
the worldwide implementation of a fully-integrated Enterprise Resource Planning information system and improvements to our computer and communications infrastructure. Net cash used in investing
activities was $20.6 million in 2000 due principally to the acquisition of EAW, net of cash acquired of $19.9 million and purchases of property, plant and equipment of
$6.6 million.

Cash
provided by financing activities was $2.0 million in 2002. Proceeds from new long-term debt were $4.7 million. These proceeds relate to the mortgage of one
of our Italian-owned facilities. Repayments of long-term debt in the U.S. and Italy totaled $2.5 million; payments related to the acquisition of Mackie Designs Engineering Services
BVBA totaled $1.2 million. Net cash used in financing activities
during 2001 was $6.7 million due to net payments on long-term and short-term debt. Net cash provided by financing activities was $25.3 million in 2000, due
principally to proceeds from bank credit facilities used for the acquisition of EAW of $19.0 million and net proceeds on bank line of credit and other short-term borrowings of
$11.9 million. These inflows were partially offset by repayments of long-term debt related to the Mackie Italy acquisition, EAW long-term debt and Italian based
long-term debt totaling $9.2 million.

At
December 31, 2002, we had a credit agreement with a U. S. bank covering a revolving bank line of credit and two term loans. Under the terms of this agreement, we were required
to maintain certain financial ratios and tangible net worth. The agreement also provided, among other matters, restrictions on additional financing, dividends, mergers, acquisitions, and an annual
capital expenditure limit. The line of credit provided up to $25.0 million of short-term borrowing subject to certain limitations. These limitations reduced the actual availability
to $20.9 million. This line of credit also provided a guarantee of approximately $1.6 million of our debt in Italy. At December 31, 2002, there was $18.9 million
outstanding on the line and $400,000 available. There were two U.S. term loans. The principal amounts of Term Loans A and B were $5.3 million and $8.6 million, respectively at
December 31, 2002. At December 31, 2002 and September 30, 2002, we were out of compliance with certain of our financial covenants. We were also out of compliance with certain of
these covenants in 2001 and the first quarter of 2002, but were able to restructure the covenants and receive waivers for these violations.

Additionally,
we have agreements with several banks in Italy that provide short-term credit facilities totaling approximately $30.5 million, subject to certain
limitations. These limitations reduced the actual availability to approximately $25.9 million. At December 31, 2002, there was approximately $19.9 million outstanding under these
facilities. The majority of these credit facilities are secured by receivables of Mackie Italy. Interest rates on these credit facilities averaged 4.6% at December 31, 2002. There are other
bank term loans and notes in Italy totaling approximately $13.9 million at December 31, 2002. Specific assets of Mackie Italy, including owned land and buildings, secure certain of these
loans. Of this Italian debt, approximately $7.0 million is due within the next twelve months. Of this, $6.6 million is secured by zero coupon bonds which have a maturity date consistent
with the debt payment due date.

Finally,
we have a line of credit and long-term loan with a bank in Belgium totaling approximately $600,000. These loans are secured by certain assets of Mackie Designs
Engineering Services, and are guaranteed up to $400,000 by the U.S. Company. The Belgian bank has demanded that this loan be repaid. Consequently, the entire amount is classified as
short-term borrowings.

With
the Sun Mackie equity investment and restructuring of our U.S. based debt, along with cash generated from operations, we believe we will have adequate working capital to fund
operations over the next twelve months.

20

---

We
had the following contractual commitments and obligations at December 31, 2002:

Short-term and Long-termOperating Leases

Debt

Total(In thousands)2003

$
2,370

$
47,098

$
49,4682004


1,868


2,581


4,4492005


1,508


3,151


4,6592006


941


9,777


10,7182007


64


4,875


4,939


New Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," which provides the
accounting requirements for retirement obligations associated with tangible long-lived assets. FAS No. 143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. FAS No. 143 is effective for our 2003 fiscal year. The adoption of this statement is not expected to have a material impact on our
financial statements.

In
July 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal
activities. Statement No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between FAS No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated
with an exit or disposal activity. FAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability
in the FASB's conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. FAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated
after December 31, 2002 although earlier application is encouraged. We will adopt this statement in 2003. It is not expected to have a material impact on our financial statements.

In
November 2002, the Emerging Issues Task Force reached a consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables" with respect to determining when
and how to allocate revenue from sales with multiple deliverables. The EITF 00-21 consensus provides a framework for determining when and how to allocate revenue from sales with multiple
deliverables based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. We do not expect that the adoption of this consensus will have a material impact on our financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 clarifies the requirements of Statement No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. For certain guarantees issued after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance of a guarantee, a liability for the fair value of the
obligations it assumes under the guarantee. Guarantees issued prior to January 1, 2003, are not subject to liability recognition, but are subject to expanded disclosure requirements. The
adoption of this statement is not expected to have a material impact on our financial statements.

21

---

In
December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which provides for alternative methods to transition to
the fair value method of accounting for stock options in accordance with provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation," In addition, FAS No. 148
requires disclosure of the effects of an entity's accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements.
We adopted the annual disclosure provisions of FAS No. 148 in the financial statements for our fiscal year ended December 31, 2002 and will adopt the interim disclosure requirements
beginning in the first quarter of 2003. The transition provisions of FAS No. 148 are currently not applicable to us as we continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Variable interest entities often are created for a single specified
purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. Formerly "Consolidation of Certain Special Purpose Entities" in
its draft form, this interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," defines what these variable interest entities are and provides guidelines on how
to identity them and also on how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest
entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003, the provision of this interpretation will apply no later than the beginning of the first interim or annual
reporting period beginning after June 15, 2003. Currently, we do not have any variable interest entities, and we do not expect the adoption of FIN 46 will have a material impact on our
financial statements.

Qualitative and Quantitative Disclosures About Market Risk

We are exposed to various market risks, including changes in foreign currency rates and interest rates. We may enter into various derivative transactions to
manage certain of these exposures; however we did not have any derivative financial instruments as of December 31, 2002.

At
December 31, 2002, we had variable rate debt of approximately $63.3 million provided by U.S. and Italian banks. As such, changes in U.S. and European interest rates
affect interest paid on debt and we are exposed to interest rate risk. For the year ended December 31,2002 an increase in the average interest rate of 10%, i.e. from 6% to 6.6%, would have
resulted in an approximately $640,000 increase in net loss before income taxes and cumulative effect of a change in accounting principle. A similar increase for the year ended December 31, 2001
would have resulted in an approximately $392,000 increase to the net loss before income taxes. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at
December 31, 2002.

Our
non-U.S. subsidiaries have functional currencies other than the U.S. Dollar, and are translated into U.S. Dollars at exchange rates in effect at the balance sheet date.
These subsidiaries are located in western Europe and the U.K., the functional currencies of which are the Euro and the British Pound. Income and expense items are translated at the average exchange
rates prevailing during the period. A 10% decrease in the value of the U.S. Dollar compared to the functional currencies of our non-U.S. subsidiaries, throughout the year ended
December 31, 2002, would have resulted in an approximately $1,180,000 increase to the net loss before income taxes and cumulative effect of a change in accounting principle. A 10% decrease in
the value of the U.S. Dollar in the year ended December 31, 2001, would have had the effect of increasing the loss before income taxes by approximately $385,000.

Item 8. Consolidated Financial Statements and Supplementary Data

See pages 23 to 47.

22

---



INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Shareholders
Mackie Designs Inc.

We
have audited the accompanying consolidated balance sheets of Mackie Designs Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, cash flows and shareholders' equity and comprehensive income (loss) for each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of Mackie Designs Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mackie Designs Inc., and subsidiaries
as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of America.

As
discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."

KPMG
LLP

Seattle,
Washington
March 31, 2003

23

---



MACKIE DESIGNS INC.        CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                          | December 31,               |        
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------
|
|
|ASSETS                                     |                                                                                                                                          |                            |        
|Current assets:                            |                                                                                                                                          |                            |        
|                                           | Cash and cash equivalents                                                                                                                |                            | $      
|                                           | Accounts receivable, less allowance for doubtful accounts of $2,684 and $1,349, respectively                                             |                            |        
|                                           | Income taxes receivable                                                                                                                  |                            |        
|                                           | Inventories                                                                                                                              |                            |        
|                                           | Prepaid expenses and other current assets                                                                                                |                            |        
|                                           | Deferred income taxes                                                                                                                    |                            |        
|                                           |                                                                                                                                          |                            |        
|                                           |                                                                                                                                          | Total current assets       |        
|Property, plant and equipment, net         |                                                                                                                                          |                            | 22,043 
|Goodwill, net                              |                                                                                                                                          |                            |       
|Intangible assets, net                     |                                                                                                                                          |                            | 5,675  
|Other assets, net                          |                                                                                                                                          |                            | 1,204  
|                                           |                                                                                                                                          |                            |        
|Total assets                               |                                                                                                                                          | $                          | 123,955
|                                           |                                                                                                                                          |                            |        
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                                                                                                                          |                            |        
|Current liabilities:                       |                                                                                                                                          |                            |        
|                                           | Short-term borrowings                                                                                                                    |                            | $      
|                                           | Accounts payable                                                                                                                         |                            |        
|                                           | Accrued liabilities                                                                                                                      |                            |        
|                                           | Income taxes payable                                                                                                                     |                            |        
|                                           | Current portion of long-term debt                                                                                                        |                            |        
|                                           |                                                                                                                                          |                            |        
|                                           |                                                                                                                                          | Total current liabilities  |        
|Long-term debt, excluding current portion  |                                                                                                                                          |                            | 20,266 
|Employee and other liabilities             |                                                                                                                                          |                            | 4,435  
|Deferred income taxes                      |                                                                                                                                          |                            | 1,875  
|                                           |                                                                                                                                          |                            |        
|Total liabilities                          |                                                                                                                                          |                            | 106,719
|Commitments and contingencies              |                                                                                                                                          |                            |        
|Shareholders' equity:                      |                                                                                                                                          |                            |        
|                                           | Preferred stock, no par value; 5,000,000 shares authorized, none issued and outstanding                                                  |                            |        
|                                           | Common stock, no par value; 40,000,000 shares authorized, 12,555,662 and 12,423,890 issued and outstanding at December 31, 2002 and 2001 |                            |        
|                                           | Retained earnings (deficit)                                                                                                              |                            |        
|                                           | Accumulated other comprehensive loss                                                                                                     |                            |        
|                                           |                                                                                                                                          |                            |        
|                                           |                                                                                                                                          | Total shareholders' equity |        
|                                           |                                                                                                                                          |                            |        
|Total liabilities and shareholders' equity |                                                                                                                                          | $                          | 123,955
|                                           |                                                                                                                                          |                            |        

See accompanying Notes to Consolidated Financial Statements.

24

---

MACKIE DESIGNS INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                            |                                                                                | Years Ended December 31, |        
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------ | -------
|
|
|Net sales                                                                                   |                                                                                | $                        | 188,002
|Cost of sales                                                                               |                                                                                |                          | 141,321
|                                                                                            |                                                                                |                          |        
|Gross profit                                                                                |                                                                                |                          | 46,681 
|Operating expenses:                                                                         |                                                                                |                          |        
|                                                                                            | Selling, general, and administrative                                           |                          |        
|                                                                                            | Research and development                                                       |                          |        
|                                                                                            | Impairment of goodwill and other long-lived assets                             |                          |        
|                                                                                            |                                                                                |                          |        
|                                                                                            |                                                                                |                          | 77,918 
|                                                                                            |                                                                                |                          |        
|Operating income (loss)                                                                     |                                                                                |                          | (31,237
|Other income (expense):                                                                     |                                                                                |                          |        
|                                                                                            | Interest income                                                                |                          |        
|                                                                                            | Interest expense                                                               |                          |        
|                                                                                            | Other                                                                          |                          |        
|                                                                                            |                                                                                |                          |        
|                                                                                            |                                                                                |                          | (2,585 
|                                                                                            |                                                                                |                          |        
|Income (loss) before income taxes and cumulative effect of a change in accounting principle |                                                                                |                          | (33,822
|Provision (benefit) for income taxes                                                        |                                                                                |                          | (1,834 
|                                                                                            |                                                                                |                          |        
|Income (loss) before cumulative effect of a change in accounting principle                  |                                                                                |                          | (31,988
|Cumulative effect of a change in accounting principle                                       |                                                                                |                          | (5,940 
|                                                                                            |                                                                                |                          |        
|Net income (loss)                                                                           |                                                                                | $                        | (37,928
|                                                                                            |                                                                                |                          |        
|Basic net income (loss) per share:                                                          |                                                                                |                          |        
|                                                                                            | Net income (loss) before cumulative effect of a change in accounting principle |                          | $      
|                                                                                            | Cumulative effect of a change in accounting principle                          |                          |        
|                                                                                            |                                                                                |                          |        
|                                                                                            | Basic net income (loss) per share                                              |                          | $      
|                                                                                            |                                                                                |                          |        
|Diluted net income (loss) per share:                                                        |                                                                                |                          |        
|                                                                                            | Net income (loss) before cumulative effect of a change in accounting principle |                          | $      
|                                                                                            | Cumulative effect of a change in accounting principle                          |                          |        
|                                                                                            |                                                                                |                          |        
|                                                                                            | Diluted net income (loss) per share                                            |                          | $      
|                                                                                            |                                                                                |                          |        

See accompanying Notes to Consolidated Financial Statements.

25

---



MACKIE DESIGNS INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                        |                                                                                          | Years Ended December 31,                                         |                                          
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | -----------------------------------------
|
|Operating activities                                                    |                                                                                          |                                                                  |                                          
|                                                                        | Net income (loss)                                                                        |                                                                  | $                                        
|                                                                        | Adjustments to reconcile net income to net cash provided (used) by operating activities: |                                                                  |                                          
|                                                                        |                                                                                          | Cumulative effect of a change in accounting principle            |                                          
|                                                                        |                                                                                          | Depreciation and amortization                                    |                                          
|                                                                        |                                                                                          | Impairment of goodwill and other long-lived assets               |                                          
|                                                                        |                                                                                          | Loss on asset dispositions                                       |                                          
|                                                                        |                                                                                          | Deferred stock compensation                                      |                                          
|                                                                        |                                                                                          | Deferred income taxes                                            |                                          
|                                                                        |                                                                                          | Changes in operating assets and liabilities, net of acquisition: |                                          
|                                                                        |                                                                                          |                                                                  | Accounts receivable                      
|                                                                        |                                                                                          |                                                                  | Inventories                              
|                                                                        |                                                                                          |                                                                  | Prepaid expenses and other current assets
|                                                                        |                                                                                          |                                                                  | Other assets                             
|                                                                        |                                                                                          |                                                                  | Accounts payable and accrued expenses    
|                                                                        |                                                                                          |                                                                  | Income taxes                             
|                                                                        |                                                                                          |                                                                  | Other long term liabilities              
|                                                                        |                                                                                          |                                                                  |                                          
|                                                                        |                                                                                          | Cash provided by (used in) operating activities                  |                                          
|Investing activities                                                    |                                                                                          |                                                                  |                                          
|                                                                        | Acquisition of businesses, net of cash acquired                                          |                                                                  |                                          
|                                                                        | Purchases of available-for-sale securities                                               |                                                                  |                                          
|                                                                        | Proceeds from sales of available-for-sale securities                                     |                                                                  |                                          
|                                                                        | Proceeds from maturities of available-for-sale securities                                |                                                                  |                                          
|                                                                        | Purchases of property, plant and equipment                                               |                                                                  |                                          
|                                                                        |                                                                                          |                                                                  |                                          
|                                                                        |                                                                                          | Cash used in investing activities                                |                                          
|Financing activities                                                    |                                                                                          |                                                                  |                                          
|                                                                        | Proceeds from long-term debt                                                             |                                                                  |                                          
|                                                                        | Payments on long-term debt                                                               |                                                                  |                                          
|                                                                        | Net proceeds (payments) on bank line of credit and short-term borrowings                 |                                                                  |                                          
|                                                                        | Payment in connection with acquisition of business                                       |                                                                  |                                          
|                                                                        | Net proceeds from exercise of stock options                                              |                                                                  |                                          
|                                                                        |                                                                                          |                                                                  |                                          
|                                                                        |                                                                                          | Cash provided by (used in) financing activities                  |                                          
|                                                                        |                                                                                          |                                                                  |                                          
|Effect of exchange rate changes on cash                                 |                                                                                          |                                                                  | 296                                      
|                                                                        |                                                                                          |                                                                  |                                          
|Increase (decrease) in cash and cash equivalents                        |                                                                                          |                                                                  | 967                                      
|Cash and cash equivalents at beginning of year                          |                                                                                          |                                                                  | 2,095                                    
|                                                                        |                                                                                          |                                                                  |                                          
|Cash and cash equivalents at end of year                                |                                                                                          | $                                                                | 3,062                                    
|                                                                        |                                                                                          |                                                                  |                                          
|Supplemental disclosures                                                |                                                                                          |                                                                  |                                          
|Cash paid for interest, net of capitalized interest of $258,000 in 2001 |                                                                                          | $                                                                | 4,003                                    
|                                                                        |                                                                                          |                                                                  |                                          
|Cash paid (refunded) for income taxes                                   |                                                                                          | $                                                                | (1,472                                   
|                                                                        |                                                                                          |                                                                  |                                          
|Amounts payable in connection with acquisition of business              |                                                                                          | $                                                                |                                         
|                                                                        |                                                                                          |                                                                  |                                          

See accompanying Notes to Consolidated Financial Statements.

26

---

MACKIE DESIGNS INC.        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND        COMPREHENSIVE INCOME (LOSS)

|                             |                                             | Common Stock                                                                                 |     |   |        |       |   |         |  
|---------------------------- | ------------------------------------------- | -------------------------------------------------------------------------------------------- | --- | - | ------ | ----- | - | ------- | -
|
|
|
|Balance at December 31, 1999 |                                             | 12,108                                                                                       |     | $ | 25,802 |       | $ | 25,659  |  
|                             | Exercise of stock options                   |                                                                                              | 264 |   |        | 1,469 |   |         | 
|                             | Amortization of deferred stock compensation |                                                                                              |    |   |        | 449   |   |         | 
|                             | Comprehensive income:                       |                                                                                              |     |   |        |       |   |         |  
|                             |                                             | Net income                                                                                   |     |  |        |       |  |         |  
|                             |                                             | Foreign currency translation adjustment                                                      |     |  |        |       |  |         |  
|                             |                                             | Reclassification adjustment for loss included in net income on available-for-sale securities |     |  |        |       |  |         |  
|                             |                                             | Total comprehensive income                                                                   |     |  |        |       |  |         |  
|                             |                                             |                                                                                              |     |   |        |       |   |         |  
|Balance at December 31, 2000 |                                             | 12,372                                                                                       |     |   | 27,720 |       |   | 31,885  |  
|                             | Exercise of stock options                   |                                                                                              | 52  |   |        | 1     |   |         | 
|                             | Amortization of deferred stock compensation |                                                                                              |    |   |        | 970   |   |         | 
|                             | Comprehensive loss:                         |                                                                                              |     |   |        |       |   |         |  
|                             |                                             | Net loss                                                                                     |     |  |        |       |  |         |  
|                             |                                             | Foreign currency translation adjustment                                                      |     |  |        |       |  |         |  
|                             |                                             | Total comprehensive loss                                                                     |     |  |        |       |  |         |  
|                             |                                             |                                                                                              |     |   |        |       |   |         |  
|Balance at December 31, 2001 |                                             | 12,424                                                                                       |     |   | 28,691 |       |   | 26,556  |  
|                             | Exercise of stock options                   |                                                                                              | 132 |   |        | 1     |   |         | 
|                             | Amortization of deferred stock compensation |                                                                                              |    |   |        | 653   |   |         | 
|                             | Comprehensive loss:                         |                                                                                              |     |   |        |       |   |         |  
|                             |                                             | Net loss                                                                                     |     |  |        |       |  |         |  
|                             |                                             | Foreign currency translation adjustment                                                      |     |  |        |       |  |         |  
|                             |                                             | Total comprehensive loss                                                                     |     |  |        |       |  |         |  
|                             |                                             |                                                                                              |     |   |        |       |   |         |  
|Balance at December 31, 2002 |                                             | 12,556                                                                                       |     | $ | 29,345 |       | $ | (11,372 | )
|                             |                                             |                                                                                              |     |   |        |       |   |         |  

See accompanying Notes to Consolidated Financial Statements.

27

---



MACKIE DESIGNS INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

We develop, manufacture, distribute and sell high-quality, affordable digital and analog audio mixers, speakers, amplifiers and other professional
audio equipment on a worldwide basis. Our products are used by professional musicians, sound installation contractors and broadcast professionals both in sound recordings, live presentations systems
and installed sound systems. We distribute our products primarily through retail dealers, mail order outlets and installed sound contractors. We have significant operations in the United States, Italy
and the U.K.

On
February 21, 2003, we finalized an agreement with Sun Capital Partners Inc., a private investment firm, whereby Sun Mackie, LLC, an affiliate of Sun Capital Partners,
purchased approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain selling shareholders.
It acquired approximately 6.9 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs were approximately
$3.6 million. As a result of this transaction, Sun Mackie owned approximately 74% of our outstanding shares on that date. (See Note 19 for further detail.)

In
addition to its equity investment, Sun Mackie has provided $4.0 million of debt financing which funded in March 2003. In connection with this loan, we have issued warrants to
purchase an additional 1.2 million common shares at an exercise price of $.01 per share. In addition to the transactions with Sun Capital Partners, a Loan and Security Agreement with a
new lender was finalized in March 2003. This agreement provides for a $26.0 million revolving line of credit and a $2.5 million term loan. Our previous U.S. lender provided a loan
totaling $11.0 million, which is subordinate to the Loan and Security Agreement with our new lender. This subordinated loan and the $2.5 million new term loan satisfied the existing U.S.
Term Loans. (See Note 10 for further detail.)

We
have taken various actions to improve results of operations and ensure our ongoing ability to cover scheduled debt servicing payments, including headcount reductions and other cost
containment measures. During 2002, these measures included layoffs and reduction of capital expenditures. In 2003, there have been additional headcount reductions. We are also planning to close
certain manufacturing and engineering facilities and will continue to outsource product manufacturing to offshore contract manufacturers. We also plan to outsource certain engineering activities.
Additionally, we plan to close certain international sales offices. Finally, there will be intensive focus on controls over expenditures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The financial statements consolidate the accounts of Mackie Designs Inc. and our wholly-owned subsidiaries. The companies are collectively hereinafter
referred to as "Mackie," "we," "our" and "us." All intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.

28

---

Estimates
that are particularly susceptible to significant change are the adequacy of the allowances for doubtful accounts receivable, sales returns, inventory obsolescence and warranty
costs, valuation of goodwill and other intangible assets and valuation allowance on deferred tax assets.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

Revenue recognition

Revenues from sales of products, net of sales discounts, returns and allowances, are generally recognized upon shipment under an agreement with a customer when
risk of loss has passed to the customer, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection of the resulting receivable is considered
probable. Products are generally shipped "FOB shipping point" with no right of return. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price
protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials
and workmanship for periods of between one and six years. The estimated cost of warranty obligations, sales returns and other allowances are recognized at the time of revenue recognition based on
contract terms and prior claims experience. A provision for future warranty costs is recorded at the time of sale of products.

Advertising expense

The cost of advertising included in selling, general and administrative expense is expensed as incurred. For 2002, 2001 and 2000, these expenses totaled
$3.1 million, $4.0 million, and $3.9 million, respectively.

Research and development costs

Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as
incurred.

Foreign currency translation

The financial statements of our non-U.S. subsidiaries have been translated into U. S. Dollars in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation." The functional currency of our non-U.S. subsidiaries is the local currency of the country in which they operate. Under the
provisions of this statement, all assets and liabilities in the balance sheets of these subsidiaries, whose functional currency is not the U.S. Dollar, are translated at year-end exchange
rates. Net sales, costs and expenses are translated at average rates of exchange prevailing during the period.
Translation gains and losses are accumulated in a separate component of shareholders' equity. Realized and unrealized gains and losses on foreign currency transactions are included in other income
(expense), net.

Cash and cash equivalents

We consider all liquid investments purchased with a maturity at purchase of three months or less to be cash equivalents.

Accounts receivable

We maintain an allowance for doubtful accounts receivable based upon our historical experience and the expected collectibility of all outstanding accounts
receivable. Trade receivables are written off

29

---

when we determine that it is unlikely we will receive future remittances. These amounts, net of any recoveries, are shown as deductions in the table below. Allowance for doubtful accounts receivable
for the years ended December 31, 2002, 2001 and 2000 are as follows:

For the years ending December 31,

Balance at
beginning of
year

Charged to
expenses

Deductions*

Balance at
end of year(In thousands)2002

$
1,349

$
2,476

$
1,141

$
2,6842001

$
1,079

$
794

$
524

$
1,3492000

$
1,146

$
752

$
819

$
1,079


---

Inventories

Inventories are valued at the lower of standard cost, which approximates actual cost on a first-in, first-out method, or market. Market
value adjustments are recorded for obsolete material, slow-moving product, service and demonstration products. We make judgments regarding the carrying value of our inventory based upon
current market conditions. In 2002, we made adjustments, included in cost of sales, associated with products that are no longer marketable due to a combination of product obsolescence and poor field
performance. Inventory adjustments associated with these products amounted to approximately $3.4 million.

Property, plant and equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets as follows: buildings, 33 years; machinery and equipment, 5 to 7 years; and furniture and fixtures, 3 to
5 years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. Direct internal and external costs of computer software developed for internal use
are capitalized in accordance with SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized costs are amortized using the
straight-line method over the estimated useful lives beginning when each module is complete and ready for its intended use. Maintenance and repairs are expensed as incurred. In accordance
with Statement of Accounting Standards No. 34 "Capitalization of Interest Cost," we capitalized $258,000 as part of the cost of our Enterprise Resource Planning information system in 2001.

Goodwill and Other Intangible Assets

We adopted FAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. In accordance with FAS No. 142, goodwill and
intangible assets with indefinite lives will no longer be
amortized, but instead will be measured for impairment at least annually, or when events indicate that impairment exists (See Note 3, Goodwill and Other Intangible Assets). Intangible assets
that are determined to have definite lives will continue to be amortized on the straight-line method over their estimated useful lives. Developed technology and trademark of EAW are
amortized over 20 years. For 2001 and 2002, developed technology of Mackie Designs Engineering Services BVBA was amortized presuming a five-year life. In 2002, an impairment charge
related to this technology was recorded. (See Note 7 for further detail.)

Impairment of long-lived assets

The recoverability of long-lived assets including property, plant and equipment and intangible assets is periodically assessed. Recoverability of
assets to be held and used is measured by a comparison

30

---

of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less
cost to sell. Factors which might trigger impairment include significant underperformance relative to expected operating results, significant changes in our use of the assets or the strategy for our
overall business, and significant negative industry or economic trends. (See Notes 7 and 8, Intangible Assets and Property, Plant and Equipment.)

Fair value of financial instruments

The carrying amounts of cash, accounts receivable, bonds, short-term borrowings, accounts payable, accrued liabilities and long-term debt
are carried at cost which approximates their fair value because they are of a short-term nature or have interest rates that approximate market rates.

Stock-based compensation

Stock-based employee compensation plans are accounted for using the intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. We have adopted the disclosure-only provisions of FAS No. 123, "Accounting for Stock-Based Compensation" as
amended by FAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FAS No. 123."

FAS
No. 123, as amended by FAS No.148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The
Black-Scholes option
valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because our stock-based compensation plans have
characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the
existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, we apply the existing accounting rules under
APB No. 25 and provide pro forma net income (loss) and pro forma income (loss) per share disclosures for stock-based awards made as if the fair value method defined in FAS No. 123, as
amended, had been applied. Net income (loss) and net income (loss) per share for each of the three years ended December 31, 2002 changed as follows (in thousands, except for per share data):

2002

2001

2000(In thousands, except for per share data)Net income (loss):As reported

$
(37,928
)
$
(5,329
)
$
6,226Add: Stock-based employee compensation expense included in reported net income (loss)


431


640


296Less: Stock-based employee compensation expense determined under fair-value based method


(1,463
)

(1,737
)

(1,831
)Pro forma

$
(38,960
)
$
(6,426
)
$
4,691Basic net income (loss) per share:As reported

$
(3.04
)
$
(0.43
)
$
0.51Pro forma

$
(3.12
)
$
(0.52
)
$
0.38Diluted net income (loss) per share:As reported

$
(3.04
)
$
(0.43
)
$
0.49Pro forma

$
(3.12
)
$
(0.52
)
$
0.37


31

---

The
fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. For options granted with an exercise price equal to the market price
at the time of issuance, the following assumptions were used:

2002

2001

2000Weighted average risk free interest rates

4.05
%
4.87
%
6.20
%Expected dividend yield

0
%
0
%
0
%Expected volatility

73.0
%
62.9
%
62.7
%Expected lives (in years)

7

7

7


For
options with an exercise price less than the market price at the time of issuance, the following assumptions were used:

2001

2000Weighted average risk free interest rates

4.87
%
6.22
%Expected dividend yield

0
%
0
%Expected volatility

62.9
%
62.7
%Expected lives (in years)

3

3


For
options granted with an exercise price equal to the market price at the time of issuance, the weighted-average fair value of options granted during the years 2002, 2001 and 2000 was
$2.43, $3.88, and $4.04, respectively. For options with an exercise price less than the market price at the time of issuance, the weighted-average fair value of options granted during the years 2001
and 2000 was $5.49 and $6.12, respectively. In both 2001 and 2000, the exercise price of all such options was $.01 per share. There were no options granted in 2002 for which the exercise price was
less than the market price.

Guarantees

In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 provides expanded accounting guidance surrounding liability recognition and disclosure requirements related to guarantees, as defined by this Interpretation.
We adopted the disclosure provision requirements of FIN No. 45 during the year ended December 31, 2002. In the ordinary course of business, we are not subject to potential obligations
under guarantees that fall within the scope of FIN No. 45 except for standard indemnification and warranty provisions and give rise only to the disclosure requirements prescribed by FIN
No. 45.

Indemnification
and warranty provisions contained within our sales agreements are generally consistent with those prevalent in our industry. The duration of product warranties is
generally one to six years following delivery of products.

The
warranty liability is summarized as follows (in thousands):

|                             |  | Balance at beginning
of year |       | Charged to
cost of revenue |   | Applied to
liability |  | Balance at end
of year
|---------------------------- |  | ---------------------------- | ----- | -------------------------- | - | -------------------- |  | ----------------------
|Year ended December 31, 2002 |  | $                            | 1,642 |                            | $ | 3,594                |  | $                     

Income taxes

Provision for income taxes has been recorded in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
the liability method of FAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carryforwards. Deferred tax assets and liabilities are

32

---

measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce
deferred tax assets to amounts expected to be realized. Under certain provisions of the Internal Revenue Code of 1986, as amended, the availability of our tax credit carryforwards may be subject to
limitation if it should be determined that there has been a change in ownership of more than 50%. Such determination could limit the utilization of these tax credit carryforwards.

Earnings per share

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding for the year. Diluted earnings per share is computed
on the basis of the weighted average
number of common shares outstanding during the year increased by the weighted average number of common stock equivalents outstanding during the period, using the treasury stock method.

Concentration of credit and supply risk

We sell products on a worldwide basis and a significant portion of our accounts receivable are due from customers outside of the U.S. Where we are exposed to
material credit risk, we generally require letters of credit or advance payments. No individual country outside of the U.S. accounted for more than 10% of net sales in any of the periods presented.
Sales to U.S. customers are generally on open credit terms. In the U.S., we primarily sell our products through third-party resellers and experience individually significant annual sales volumes with
major resellers. In 2002, we had sales to one customer of $22.2 million or 12% of consolidated net sales. No customers accounted for more than 10% of net sales in 2001 or 2000.

We
rely almost exclusively on one vendor for our potentiometers and certain integrated circuits, but we are in contact with other manufacturers of these items regularly. These items are
critical components in certain of our products. Interruption in, or cessation of, the supply of these components from these suppliers could adversely affect our production capability, as the
qualification process for another manufacturer, from sample submission to production quality and quantity delivery, could take several months.

Recent accounting pronouncements

In June 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations," which provides the accounting requirements for retirement
obligations associated with tangible long-lived assets. FAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in
which it is incurred. FAS No. 143 is effective for our 2003 fiscal year. The adoption of this statement is not expected to have a material impact on our financial statements.

In
July 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities. Statement No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between FAS No. 146 and Issue No. 94-3 relates to the recognition of a
liability for a cost associated with an exit or disposal activity. FAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it
meets the definition of a liability in the FASB's conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an
exit plan. FAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal

33

---

activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002 although earlier application is encouraged. The adoption of this statement is
not expected to have a material impact on our financial statements.

In
November 2002, the Emerging Issues Task Force reached a consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables" with respect to determining when
and how to allocate revenue from sales with multiple deliverables. The EITF 00-21 consensus provides a framework for determining when and how to allocate revenue from sales with multiple
deliverables based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. We do not expect that the adoption of this consensus will have a material impact on our financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 clarifies the requirements of Statement No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. For certain guarantees issued after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance of a guarantee, a liability for the fair value of the
obligations it assumes under the guarantee. Guarantees issued prior to January 1, 2003, are not subject to liability recognition, but are subject to expanded disclosure requirements. The
adoption of this statement is not expected to have a material impact on our financial statements.

In
December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which provides for alternative methods to transition to
the fair value method of accounting for stock options in accordance with provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation," In addition, FAS No. 148
requires disclosure of the effects of an entity's accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements.
We adopted the annual disclosure provisions of FAS No. 148 in the financial statements for our fiscal year ended December 31, 2002 and will adopt the interim disclosure requirements
beginning in the first quarter of 2003. The transition provisions of FAS No. 148 are currently not applicable to us as we continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Variable interest entities often are created for a single specified
purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. Formerly "Consolidation of Certain Special Purpose Entities" in
its draft form, this interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," defines what these variable interest entities are and provides guidelines on how
to identity them and also on how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest
entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003, the provision of this interpretation will apply no later than the beginning of the first interim or annual
reporting period beginning after June 15, 2003. Currently, we do not have any variable interest entities, and we do not expect the adoption of FIN 46 will have a material impact on our
financial statements.

34

---

3. GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other
Intangible Assets," which supercede Accounting Principles Board Opinion No. 17, "Intangible Assets." FAS No. 141 requires that all business combinations be accounted for under the
purchase method. The statement also specifies criteria for recognizing and reporting intangible assets apart from goodwill; however, assembled workforce must be recognized and reported in goodwill.
FAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and intangibles having an indefinite life. Under a non-amortization
approach, goodwill and certain intangible assets are no longer amortized into results of operations, but instead are reviewed for impairment and written down and charged to results of operations only
in the periods in which the recorded value of goodwill and certain intangibles is more than fair value.

We
adopted FAS No. 142 on January 1, 2002. Accordingly, we reclassified an assembled workforce intangible asset with an unamortized balance of $1.1 million and a
related deferred tax liability of $383,000 to goodwill on January 1, 2002. FAS No.142 prescribes a two-phase process for impairment testing of goodwill and the timing of
transitional impairment steps. The first phase identifies indications of impairment; while the second phase (if necessary), measures the impairment. As required by FAS No. 142, we performed a
transitional impairment test on goodwill as of January 1, 2002. As a result of the impairment test, we recorded a $5.9 million cumulative effect of an accounting change associated with
our foreign reporting unit which included the goodwill generated from the acquisition of Mackie Italy.

During
the fourth quarter of 2002, we reviewed our remaining goodwill as required by FAS No. 142. This impairment testing is in addition to the transitional impairment testing and
is to be done on an annual basis. In connection with this test, we recorded an impairment charge of $14.5 million and reduced the carrying value of our goodwill generated from the acquisitions
of EAW and Mackie Designs Engineering Services BVBA to zero. In both the transitional and annual impairment tests, we estimated the fair value of our reporting units using a discounted cash flow
analyses.

The
results for the years ended December 31, 2001 and 2000 do not reflect the provisions of FAS No. 142. Had we adopted the non-amortization provision of FAS No. 142
on January 1, 2000, the net income (loss) and the related per-share amounts as adjusted would have been presented as follows:

2001

2000(In thousands, except for per share data)Net income (loss):As reported

$
(5,329
)
$
6,226Add: goodwill and assembled workforce amortization, net of taxes


1,431


966Adjusted net income (loss)

$
(3,898
)
$
7,192Basic net income (loss) per share:As reported

$
(0.43
)
$
0.51Add: goodwill and assembled workforce amortization, net of taxes


0.12


0.08Adjusted basic net income (loss) per share

$
(0.31
)
$
0.59Diluted net income (loss) per share:As reported

$
(0.43
)
$
0.49Add: goodwill and assembled workforce amortization, net of taxes


0.12


0.07Adjusted diluted net income (loss) per share

$
(0.31
)
$
0.56


35

---

4. ACQUISITIONS

In April 2001, we acquired all the outstanding shares of Mackie Designs Engineering Services BVBA, formerly known as Sydec N.V. Mackie Designs Engineering
Services develops products and services in the area of embedded electronics and software, networking, digital signal processing and Windows 95/98/NT/2000 driver and application
development. The acquisition was accounted for under the purchase method of accounting and included performance incentives for the prior owners involving 200,000 options to purchase Mackie common
stock at an exercise price of $0.01 vesting over a two-year
period. The aggregate purchase price, plus related acquisition costs, was approximately $4.4 million. $3.4 million of this amount was paid in 2001 and 2002; the remaining
$1.0 million is scheduled to be paid in 2003. The entire purchase price is in excess of the net tangible assets acquired and was included in intangible assets at the date of acquisition. A
total of $1.0 million of the purchase consideration was specifically allocated to developed technology. The remaining $3.4 million was allocated to goodwill. In 2002, the carrying value
of this goodwill was reduced to zero in connection with our annual impairment review in accordance with FAS No. 142. At December 31, 2002, the developed technology was reduced to zero in
connection with our review for potential impairment of long-lived assets. Through 2002 it was amortized on the straight-line method over 5 years. The results of Mackie
Designs Engineering Services have been included in our consolidated results of operations from the date of acquisition.

In
April 2000, we acquired all of the outstanding shares of Eastern Acoustic Works, Inc which designs and manufactures loudspeaker systems, including integrated signal processing
for the installed and live sound markets. The acquisition was accounted for under the purchase method of accounting. The aggregate purchase price, plus related acquisition costs, was approximately
$19.6 million. The excess of the purchase price over the fair value of net tangible assets acquired was approximately $18.7 million. A total of $6.6 million of the purchase
consideration was specifically allocated to identifiable intangible assets, including developed technology of $5.2 million and trademark of $1.4 million. The remaining
$12.1 million was considered to be goodwill. In 2002, the carrying value of this goodwill was reduced to zero in connection with our annual impairment review in accordance with FAS
No. 142. Developed technology and trademark are being amortized on the straight-line method over 20 years. The results of EAW are included in our consolidated results of
operations from the date of acquisition.

5. RESTRICTED INVESTMENTS

Mackie Italy holds various zero-coupon Italian bank bonds as collateral for two bank term loans. The bonds aggregated $5.4 million and
$3.9 million at December 31, 2002 and 2001, respectively, and are carried at amortized cost, which approximates market value. At December 31, 2002, these bonds are included in
Prepaid expenses and other current assets on the Consolidated Balance Sheet. At December 31, 2001, they are included in Other assets, net. The bank bonds have various maturities ranging through
2003. The interest rates on these bonds range from 4.7% to 7.0%, with average rates of 6.9% at both December 31, 2002 and 2001. These bonds are treated as
held-to-maturity and are restricted as to their use.

36

---

6. INVENTORIES

Inventories consist of the following:

December 31,2002

2001(In thousands)Raw materials

$
22,246

$
17,506Work in process


3,346


4,073Finished goods


24,573


29,928$
50,165

$
51,507


7. INTANGIBLE ASSETS

Intangible assets with finite lives consist of the following:

December 31,2002

2001(In thousands)Developed technology

$
5,200

$
6,200Trademark


1,380


1,3806,580


7,580Less accumulated amortization


905


726$
5,675

$
6,854


Amortization
expense for intangible assets was $541,000 in 2002. At December 31, 2002, we reviewed our intangible assets for potential impairment and determined that the carrying
value of the developed technology recorded in connection with our acquisition of Mackie Designs Engineering Services BVBA would not be recoverable. Accordingly, we recorded an impairment charge of
$763,000 due to the unsatisfactory results of this entity. Expected future amortization expense related to identifiable intangible assets for the next five fiscal years is as follows:

(In thousands)Year ending December 31, 2003

$
329Year ending December 31, 2004


329Year ending December 31, 2005


329Year ending December 31, 2006


329Year ending December 31, 2007


329


37

---

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

December 31,2002

2001(In thousands)Land

$
2,042

$
1,737Buildings


4,888


3,588Machinery and equipment


33,870


30,844Furniture and fixtures


11,053


10,830Leasehold improvements


5,423


5,19057,276


52,189Less accumulated depreciation and amortization


35,233


26,518$
22,043

$
25,671


At
December 31, 2002, we reviewed our property, plant and equipment for potential impairment and determined that the carrying value of these assets at certain of our European
facilities would not be recoverable. Accordingly, due to the unsatisfactory results in Belgium and other European offices, we recorded an impairment charge of $540,000.

9. INCOME TAXES

Components of income (loss) before income taxes and cumulative effect of a change in accounting principle are as follows:

2002

2001

2000(In thousands)U. S.

$
(25,614
)
$
(2,134
)
$
9,212Foreign


(8,208
)

(4,801
)

1,255Income (loss) before income taxes and cumulative effect of a change in accounting principle

$
(33,822
)
$
(6,935
)
$
10,467


The
provision (benefit) for income taxes is as follows:

2002

2001

2000(In thousands)Current income taxes:U. S. federal

$
(4,062
)
$
(532
)
$
3,919Foreign


32


1,312


1,139Total current


(4,030
)

780


5,058Deferred income taxes:U. S. federal


1,256


(1,006
)

(826
)State and local





(73
)

(131
)Foreign


940


(1,307
)

140Total deferred


2,196


(2,386
)

(817
)Total provision (benefit) for income taxes

$
(1,834
)
$
(1,606
)
$
4,241


38

---

The
tax effects of temporary differences and carryforwards that give rise to significant components of deferred tax assets and liabilities are as follows:

December 31,2002

2001(In thousands)Deferred tax assets:Accrued expenses

$
929

$
921Bad debt allowance


707


385Inventory adjustments


3,843


3,547Net operating loss carryforwards


1,656


1,291Intangible assets


1,748


166Tax credit carryforwards


392


Other items


531


6669,806


6,976Less valuation allowance


(5,453
)

(99
)4,353


6,877Deferred tax liabilities:Property, plant and equipment


2,312


2,241Specifically identifiable intangible assets


2,041


2,533Other





667Total deferred tax liabilities


4,353


5,441Net deferred tax assets

$


$
1,436


Deferred
tax assets of foreign jurisdictions comprised $2.1 million and $3.2 million at December 31, 2002 and 2001, respectively. Deferred tax liabilities of foreign
jurisdictions comprised $1.9 million and $2.1 million at December 31, 2002 and 2001, respectively.

Reconciliation
from the U.S. statutory income tax rate of 34% to the effective income tax rate is as follows:

2002

2001

2000(In thousands)Tax at the statutory rate

$
(11,499
)
$
(2,358
)
$
3,559Research and development tax credit


(100
)

(413
)

(398
)Foreign sales corporation / extraterritorial income benefit


(459
)

(16
)

(336
)Nondeductible expenses and other permanent differences


450


249


464Goodwill impairment and amortization


3,831


124


253Foreign tax greater than U.S. statutory rate


589


897


587Increase in valuation allowance


5,354





State taxes, net of federal impact





(89
)

112$
(1,834
)
$
(1,606
)
$
4,241


At
December 31, 2002 we had U.S. and international net operating loss carryforwards of approximately $4.3 million. These carryforwards generally begin expiring in 2013.

The
valuation allowance for deferred tax assets increased by approximately $5,354,000 in 2002 and did not change in 2001. This valuation allowance was determined to be necessary since
the utilization of our deferred tax assets depends on future profits, which are not assured.

39

---

10. DEBT AND LIQUIDITY

A Loan and Security Agreement with a new lender was finalized in March 2003 and provides for a $26.0 million revolving line of credit. This lender
has also provided a $2.5 million term loan. Principal payments on the term loan are due in equal monthly payments over five years, beginning in July 2003. Interest is due monthly and is
calculated at the bank's prime rate plus a specified margin. Both the revolving line of credit and term loan are secured by all U.S. assets including, but not limited to, accounts receivable,
inventory, fixed assets, intangible assets and patents. Additionally, a portion of the revolving line of credit is provided in the U.K. and is secured by accounts receivable of Mackie Designs Plc.
(U.K.). Our previous U.S. lender has provided a loan totaling $11.0 million which is subordinate to the Loan and Security Agreement with our new lender. This subordinated loan and the
$2.5 million new term loan satisfied the existing U.S. Term Loans. Principal on the subordinated loan is due beginning in May 2004 based upon our 2003 earnings before interest, taxes,
depreciation and amortization, less cash taxes paid, certain capital expenditures and certain debt repayments. Interest accrues at a rate of 10% and is paid on a regular basis as we have availability
under the Loan and Security Agreement. In addition to its equity investment, Sun Mackie has provided $4.0 million of debt financing which also funded in March 2003. Interest accrues at
15% and is paid annually beginning March 2004. The principal is due in a lump sum payment in 2007. In connection with the loan from Sun Mackie, we have issued warrants to purchase an additional
1.2 million common shares at an exercise price of $.01 per share.

As
a result of restructuring the line of credit and term loans, we have reclassified term loan amounts that were previously shown as long-term debt callable under covenant
provisions in interim condensed consolidated financial statements to long term debt.



Short-term borrowings consisted of the following at December 31:

2002

2001(In thousands)U.S. line of credit

$
18,918

$
20,988Non U.S. short-term credit facilities


20,234


14,407$
39,152

$
35,395


At
December 31, 2002 we had a credit agreement with a U.S. bank which provided a revolving bank line and two term loans. See Long-term debt for additional detail on
this agreement. The line of credit provided up to $25.0 million of short-term borrowing subject to certain limitations. These limitations reduced the actual availability to
20.9 million. This line of credit also provided a guarantee of approximately $1.6 million of our debt in Italy. At December 31, 2002, there was $18.9 million outstanding on
the line and $400,000 available. Borrowings under this line of credit bear interest at the bank's prime rate or LIBOR plus a specified margin. At December 31, 2002 the average interest rate in
effect was 5.6%.

We
have agreements with several banks in Italy that provide short-term credit facilities totaling approximately $30.5 million. These limitations reduced the actual
availability to approximately $25.9 million. At December 31, 2002, there was $19.9 million outstanding on these facilities. The majority of these credit facilities are secured by
receivables of Mackie Italy. Interest rates on these credit facilities averaged 4.6% at December 31, 2002.

Finally,
we have a line of credit with a bank in Belgium totaling approximately $335,000. This loan is secured by certain assets of Mackie Designs Engineering Services, and is guaranteed
in part by the U.S. Company.

40

---

The
weighted-average interest rate on total short-term borrowings was 5.1% at December 31, 2002 and 5.3% at December 31, 2001.



Long-term debt consisted of the following at December 31:

2002

2001(In thousands)U.S. Term loans

$
13,933

$
15,563Capital leases


54


216Mortgage on Italy property


5,208


Bank term loan


6,612


3,785Other notes


2,405


3,71128,212


23,275Less current portion


7,946


3,874$
20,266

$
19,401


At
December 31, 2002, we had a credit agreement with a U. S. bank covering a revolving bank line of credit and two term loans. Under the terms of this agreement, we were required
to maintain certain financial ratios and tangible net worth. The agreement also provided, among other matters, restrictions on additional financing, dividends, mergers, acquisitions, and an annual
capital expenditure limit. There were two U.S. term loans. The Term Loan A principal balance was $5.3 million at December 31, 2002, the principal amount of Term Loan B was
$8.6 million at December 31, 2002. At December 31, 2002 and September 30, 2002, we were out of compliance with certain of our financial covenants. We were also out of
compliance with certain of these covenants in 2001 and the first quarter of 2002, but were able to restructure the covenants and receive waivers for the 2001 and first quarter 2002 violations.

There
are other bank term loans and notes in Italy totaling approximately $13.9 million at December 31, 2002. These amounts are denominated in a combination of Euro and
U.S. dollar. The mortgage is secured by land and building in Italy. Principal payments of $326,000 are due two times per year beginning May 2005. Interest is based on EURIBOR plus a specified
margin, 4.5% at December 31, 2002. There are two foreign bank term loans. The first, totaling $1.6 million at December 31, 2002 was secured by a letter of credit from Mackie
Designs Inc. in the U.S. and was repaid on January 3, 2003. The second, totaling $5.0 million is secured by bank bonds held by Mackie Italy, which will be used to repay the
principal amount of the loan at the time of maturity in 2003. This loan bears interest at the six-month LIBOR rate plus a specified margin, 3.9% at December 31, 2002. The other
notes bear interest at rates of between 4.1% and 7.0% and are due through 2013.

Finally,
we have a long-term loan with a bank in Belgium totaling approximately $265,000. This loan is secured by certain assets of Mackie Designs Engineering Services, and
is guaranteed in part by the U.S. Company. The Belgian bank has demanded that this loan be repaid. Consequently, the entire amount is classified as current.

41

---

Aggregate annual principal payments of long-term debt after 2002 are stated below. These repayment amounts relate to the debt as restructured in March 2003 including
$3.9 million of additional principal borrowed subsequent to December 31, 2002. Repayments under this schedule include debt of Mackie Italy and other non-U.S. subsidiaries
totaling $14.2 million and debt of Mackie Designs Inc. totaling $17.8 million. The $17.8 million represents $17.5 million associated with the three loans described
above and $300,000 paid on long-term debt in 2003 prior to the debt restructure.

(In thousands)2003

$
7,9462004


2,5812005


3,1512006


9,7772007


4,875Thereafter


3,750$
32,080


11. EMPLOYEE AND OTHER LIABILITIES

Under Italian law, employees of our subsidiaries in Italy are entitled to severance benefits calculated primarily based upon compensation and length of service.
These severance benefits vest immediately and are payable upon the employee's separation from the Company. This liability aggregated approximately $3.7 million and $2.9 million at
December 31, 2002 and 2001, respectively. In addition, commissioned sales agents of Mackie Italy are entitled to similar severance benefits based upon commissions earned and length of service.
This liability aggregated approximately $650,000 and
$550,000 at December 31, 2002 and 2001, respectively. Under these severance programs, expense of approximately $800,000, $680,000 and $720,000 was recognized in 2002, 2001 and 2000,
respectively.

The
termination indemnity liability is calculated in accordance with local civil and labor laws based on each employee's length of service, employment category and remuneration. There is
no vesting period or funding requirement associated with the liability. The liability recorded on the balance sheet is the amount that the employees would be entitled to if the employees terminated at
that date.

12. RELATED-PARTY TRANSACTIONS

In 2001 and 2000, we had an agreement to receive marketing and sales services from a company in which one of our directors and shareholders was a partner. This
agreement was substantially similar to agreements we have with our other independent representatives. Expenses under this agreement amounted to $456,000 in 2001 and $399,000 in 2000.

We
made a non-interest bearing loan to James T. Engen, Chief Executive Officer and director, in November 1999 for relocation expenses. The principal amount of the
loan, $250,000, is due and payable in full upon the earlier of October 31, 2004 or Mr. Engen's termination. Payments to reduce this amount began in December 2002. As of
December 31, 2002, the unpaid principal amount of this loan was $174,000.

We
also have a facility lease with a related party as disclosed in Note 16.

13. EMPLOYEE BENEFIT PLANS

We currently have qualified profit-sharing plans under the provisions of Internal Revenue Code Section 401(k) for all U.S. based employees meeting the
eligibility requirements. Contributions are based on a matching formula as defined in each of the plans. Additional contributions may be made at the discretion of the Board of Directors. Contributions
to the respective plans vest ratably over a 5-year

42

---

period. Contributions to the plan were $497,000, $560,000, and $500,000 in 2002, 2001, and 2000, respectively.

14. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share. Stock options representing 3,951,000, 4,746,000 and 1,707,000
shares in 2002, 2001 and 2000, respectively, were excluded from the calculation of diluted net income (loss) per share because they are antidilutive.

|                                     |                                                                                | 2002 |   | 2001    |   | 2000
|------------------------------------ | ------------------------------------------------------------------------------ | ---- | - | ------- | - | ----
|
|Numerator:                           |                                                                                |      |   |         |   |     
|                                     | Net income (loss) before cumulative effect of a change in accounting principle |      | $ | (31,988 | ) | $   
|                                     | Cumulative effect of a change in accounting principle                          |      |   | (5,940  | ) |     
|                                     |                                                                                |      |   |         |   |     
|                                     | Numerator for basic and diluted net income (loss) per share                    |      | $ | (37,928 | ) | $   
|                                     |                                                                                |      |   |         |   |     
|Denominator:                         |                                                                                |      |   |         |   |     
|                                     | Denominator for basic net income (loss) per shareweighted-average shares      |      |   | 12,489  |   |     
|                                     | Dilutive potential common shares from stock options                            |      |   |        |   |     
|                                     |                                                                                |      |   |         |   |     
|                                     | Denominator for diluted net income (loss) per share                            |      |   | 12,489  |   |     
|                                     |                                                                                |      |   |         |   |     
|Basic net income (loss) per share:   |                                                                                |      |   |         |   |     
|                                     | Net income (loss) before cumulative effect of a change in accounting principle |      | $ | (2,56   | ) | $   
|                                     | Cumulative effect of a change in accounting principle                          |      |   | (0.48   | ) |     
|                                     |                                                                                |      |   |         |   |     
|                                     | Basic net income (loss) per share                                              |      | $ | (3.04   | ) | $   
|                                     |                                                                                |      |   |         |   |     
|Diluted net income (loss) per share: |                                                                                |      |   |         |   |     
|                                     | Net income (loss) before cumulative effect of a change in accounting principle |      | $ | (2.56   | ) | $   
|                                     | Cumulative effect of a change in accounting principle                          |      |   | (0.48   | ) |     
|                                     |                                                                                |      |   |         |   |     
|                                     | Diluted net income (loss) per share                                            |      | $ | (3.04   | ) | $   
|                                     |                                                                                |      |   |         |   |     

15. SHAREHOLDERS' EQUITY

A stock option plan for the granting of incentive and non-qualified stock options is in place under which 6.5 million shares are reserved for
grants. The exercise price of incentive stock options granted under the plan may not be less than the fair market value of the common stock on the date of grant. The exercise price of
non-qualified stock options granted under the plan may be greater or less than the fair market value of the common stock on the date of grant, as determined by the stock option committee
of the Board of Directors at its discretion. Options generally vest over a four-year period and expire no later than ten years after the date of grant.

In
connection with the acquisitions of Mackie Designs Engineering Services and EAW, certain key employees of these entities were granted a total of 399,998 non-qualified
stock options with an exercise price of $0.01. These options are linked to continued employment and vest ratably over a two-year period from the respective grant date. We recognize
compensation expense related to these options on a straight-line basis over the two-year vesting period.

43

---

At
December 31, 2002, 2,018,517 shares of common stock were available for future grants under our stock option plan.

The
following table summarizes the stock option activity for the three-year period ended December 31, 2002:

Shares subject to
option

Weighted
average
exercise price(In thousands)Options outstanding at December 31, 1999

3,411

$
5.94Granted

1,087

$
4.88Forfeited

(105
)
$
6.21Exercised

(265
)
$
5.55Options outstanding at December 31, 2000

4,128

$
5.68Granted

852

$
5.12Forfeited

(182
)
$
5.24Exercised

(52
)
$
0.01Options outstanding at December 31, 2001

4,746

$
5.66Granted

522

$
3.56Forfeited

(1,185
)
$
5.84Exercised

(132
)
$
0.01Options outstanding at December 31, 2002

3,951

$
5.26


At
December 31, 2002, 2001 and 2000 a total of 2,685,304, 3,041,281 and 2,403,775 options were exercisable, respectively. The weighted average exercise price of these options was
$5.73, $5.95 and $6.01, respectively.

The
following table summarizes information about options outstanding and exercisable at December 31, 2002:

|             |  | Options Outstanding |  | Options Exercisable
|------------ |  | ------------------- |  | -------------------
|
|$0.01        |  | 200                 |  | 7.75               
|$1.17 - 5.00 |  | 760                 |  | 8.52               
|$5.01 - 6.00 |  | 1,898               |  | 4.74               
|$6.01 - 8.75 |  | 1,093               |  | 5.57               
|             |  |                     |  |                    
|             |  | 3,951               |  | 5.85               
|             |  |                     |  |                    

16. COMMITMENTS AND CONTINGENCIES



Our primary facility in Woodinville, Washington is owned by three individuals each of who was a significant shareholder and director in 2002. The monthly rent
stated in the lease is $56,613, adjusted annually for changes in the Consumer Price Index. Monthly rent expense as of December 31, 2002 was $65,495, the lease expires December 31, 2006.
Annual rent expense under this lease was $800,000 in 2002, 2001 and 2000. We do not expect significant increases in rent expense during the remaining years of the lease term in relation to Consumer
Price Index adjustments. Taxes, insurance, utilities, and maintenance are our responsibility. Additionally, we lease other facilities in Woodinville, Washington as

44

---

well as Whitinsville, Massachusetts and other sales and service offices at various sites in the United States, Europe and Asia.

Future
minimum rental payments under the equipment and facility leases at December 31, 2002 are as follows:

(In thousands)2003

$
2,3702004


1,8682005


1,5082006


9412007


64


Total
rent expense for 2002, 2001, and 2000 was $3.0 million, $2.4 million, and $2.2 million, respectively.



Subrogated claims have been asserted against us from insurance companies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW), paid claims
made by EAW's landlord and other tenants of the Whitinsville building who were affected by a fire started by a loaned employee in a portion of the building in 1996. The potential loss from this claim
may exceed $4 million inclusive of interest; some portion of which we anticipate would be covered by insurance. We expect the matter to come to trial in July 2003. We believe that these
losses are not attributable to us under Massachusetts' law and are vigorously defending the litigation. The claims of the other tenants have been covered by EAW's insurance carrier. The ultimate
resolution of this matter is not known at this time. No provision has been made in our consolidated financial statements related to these claims.

We
are also involved in various legal proceedings and claims that arise in the ordinary course of business. We currently believe that these matters will not have a material adverse
impact on our financial position, liquidity or results of operations.

17. SEGMENT AND GEOGRAPHIC INFORMATION

Major operations outside the U.S. include manufacturing facilities in Italy, and sales and support offices in Germany, the United Kingdom, and France. Certain
geographic information for the three years ended December 31, 2002 is presented in the table that follows. Sales between affiliated entities are
excluded from these numbers. Net sales, as shown in the table below, are based upon the geographic area into which the products were sold and delivered. The profit on transfers between geographic
areas is not recognized until sales are made to non-affiliated customers. Long-lived assets exclude bonds and deferred income taxes and are those assets that can be directly
associated with a particular geographic area. Of the non-U.S. assets below, $10,061,000 are located in Italy.

45

---

Sales
to customers outside of the U.S. approximated 47%, 49%, and 44% of net sales in 2002, 2001, and 2000, respectively.

Years Ended December 31,2002

2001

2000(In thousands)Net sales:U.S.

$
99,444

$
105,930

$
115,466Non-U.S.


88,558


100,609


92,010$
188,002

$
206,539

$
207,476Long-lived assets:U.S.

$
17,929

$
15,940

$
13,345Non-U.S.


10,528


10,265


11,978$
28,457

$
26,205

$
25,323


Business
segments were previously identified using primarily geographic factors. There have been continuing changes within the structure of our internal reporting that have caused the
composition of these segments to change. As a result, we now have one segment. The factory in Italy as well as third-party facilities in China produce certain products that are comparable to those
produced in U.S. factories. Other functional operations are consolidated across the organization. It is impracticable to report revenues by product groups.

Net
assets of our foreign operations were approximately $2.6 million and $10.7 million at December 31, 2002 and 2001, respectively.

18. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data)

|2002                                                  |  | First |        | Second |   | Third  |   | Fourth(1) |       
|----------------------------------------------------- |  | ----- | ------ | ------ | - | ------ | - | --------- | ------
|Net sales                                             |  | $     | 49,119 |        | $ | 48,798 |   | $         | 46,404
|Gross profit                                          |  | $     | 15,927 |        | $ | 15,257 |   | $         | 13,417
|Impairment of goodwill and other long-lived assets    |  | $     |       |        | $ |       |   | $         |      
|Cumulative effect of a change in accounting principle |  | $     | (5,940 | )      | $ |       |   | $         |      
|Net loss                                              |  | $     | (6,186 | )      | $ | (1,352 | ) | $         | (934  
|Net loss per share                                    |  | $     | (0.50  | )      | $ | (0.11  | ) | $         | (0.07 

|2001                                          |  | First |        | Second |   | Third  |   | Fourth |       
|--------------------------------------------- |  | ----- | ------ | ------ | - | ------ | - | ------ | ------
|Net sales                                     |  | $     | 57,207 |        | $ | 54,046 |   | $      | 48,431
|Gross profit                                  |  | $     | 19,771 |        | $ | 16,131 |   | $      | 11,513
|Net income (loss)                             |  | $     | 962    |        | $ | (1,797 | ) | $      | (3,835
|Basic and diluted net income (loss) per share |  | $     | 0.08   |        | $ | (0.15  | ) | $      | (0.31 

---

19. SUBSEQUENT EVENT

On February 21, 2003, we finalized an agreement with Sun Capital Partners, Inc., a private investment firm, whereby Sun Mackie, LLC, an affiliate of
Sun Capital Partners, purchased approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain
selling shareholders. It acquired approximately

46

---

6.9 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs were approximately $3.6 million. As a
result of this transaction, Sun Mackie owned approximately 74% of our outstanding shares as of this date.

Also,
on February 21, 2003, we entered into a Management Services Agreement with Sun Capital Partners Management, LLC, an affiliate of Sun Capital Partners, Inc., whereby
Sun Capital Partners Management will provide financial and management consulting services. The agreement is effective as of the date of signing and provides for an annual fee equal to the greater of
$400,000 or 6% of EBITDA, as defined in the agreement, but not to exceed $1.0 million.

In
addition to its equity investment, Sun Mackie has provided $4.0 million of debt financing in connection with the refinancing of our U.S. debt. In consideration of the
financing, we issued Sun Mackie warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $.01 per share. (See Note 10 for additional information
regarding debt refinancing.)

As
of February 21, 2003, Gregory C. Mackie resigned as a director of the Company, and entered into a Consulting Agreement whereby he will provide services, upon our request, for a
period of three years. In connection with this agreement, there is a noncompete provision which lasts for five years from the date of the agreement. As compensation for this noncompete provision,
Mr. Mackie has been granted 170,000 stock options at an exercise price of $1.02 per share and has had an additional 330,000 existing options modified to comparable terms. The charge for these
options will be amortized over the life of the agreement.

47

---



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

None.

PART III

The information required by Part III (Items 10, 11, 12 and 13) will be included in our definitive Proxy Statement for our 2003 Annual Meeting of
Shareholders and is incorporated herein by reference.

Item 14. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed our disclosure controls and procedures, as of a date within 90 days of the date of
filing of this Annual Report. Based on that evaluation, they have concluded that, as of the evaluation date, the disclosure controls and procedures are effective in alerting them on a timely basis to
material information required to be included in this Annual Report. There have been no significant changes in the internal controls, or in other factors that could significantly affect such internal
controls subsequent to the date of their evaluation.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K





Page NumberIndependent Auditors' Report on Consolidated Financial Statements

23Consolidated Balance Sheets at December 31, 2002 and 2001

24Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2002

25Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002

26Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2002

27Notes to Consolidated Financial Statements

28


All
financial statement schedules are omitted since the required information is not applicable, not required, or the required information is included in the consolidated financial
statements or notes thereto.



None.



48

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|MACKIE DESIGNS INC. |  |      
|------------------- |  | -----
|                    |  | By:  
|                    |  | Date:

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on April 15, 2003.

|Signature                               |  | Title                                                                                                                
|--------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|                                        |  |                                                                                                                      
|/s/JAMES T. ENGENJames T. Engen         |  | President, Chief Executive Officer and Director                                                                      
|/s/WILLIAM A. GARRARDWilliam A. Garrard |  | Chief Financial Officer, Vice President Finance, Secretary and Treasurer (Principal Financial and Accounting Officer)
|/s/MARC J. LEDERMarc J. Leder           |  | Chairman of the Board and Vice President                                                                             
|/s/RODGER R. KROUSERodger R. Krouse     |  | Director and Vice President                                                                                          
|/s/CLARENCE E. TERRYClarence E. Terry   |  | Director and Vice President                                                                                          
|/s/JON W. GACEKJon W. Gacek             |  | Director                                                                                                             
|/s/GREGORY W. RIKERGregory W. Riker     |  | Director                                                                                                             

49

---



CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I,
James T. Engen, certify that:





|Dated: April 15, 2003 |  | By: |  | /s/JAMES T. ENGENJames T. Engen President and Chief Executive
Officer
|--------------------- |  | --- |  | ---------------------------------------------------------------------

50

---

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I,
William A. Garrard, hereby certify that:





|Dated: April 15, 2003 |  | By: |  | /s/WILLIAM A. GARRARDWilliam A. Garrard Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
|--------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------

51

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INDEX TO EXHIBITS  (Item 15c)

|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1      |  | Plan of Merger of Mackie Designs Inc and Eastern Acoustic Works, Inc. dated October 2001. Incorporated by reference to Exhibit 2.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|2.2      |  | Stock Purchase Agreement, dated as of January 16, 2003, by and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as the sole trustee of the Clair Mackie Irrevocable Trust, the Nathalia
Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust, the Children of
Karen Marie Lopez Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the Sorenson Family
Trust. Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated January 16, 2003.                      
|2.3      |  | First Amendment to Stock Purchase Agreement, dated as of February 7, 2003, by and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as the sole trustee of the Clair Mackie Irrevocable
Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust,
the Children of Karen Marie Lopez Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the
Sorenson Family Trust. Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated February 21, 2003.  
|2.4      |  | Second Amendment to Stock Purchase Agreement, dated as of February 13, 2003, by and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as the sole trustee of the Clair Mackie Irrevocable
Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust,
the Children of Karen Marie Lopez Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the
Sorenson Family Trust. Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K dated February 21, 2003.
|2.5      |  | Third Amendment to Stock Purchase Agreement, dated as of February 21, 2003, by and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as the sole trustee of the Clair Mackie Irrevocable
Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust,
the Children of Karen Marie Lopez Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the
Sorenson Family Trust. Incorporated by reference to Exhibit 2.3 to Current Report on Form 8-K dated February 21, 2003. 

52

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|2.6    |  | Management Services Agreement, dated as of February 21, 2003 by and between Mackie Designs Inc. and Sun Capital Partners Management, LLC. Incorporated by reference to Exhibit 2.4 to Current Report on Form 8-K dated
February 21, 2003.                                                                                                                                                                                                                                                                                                                   
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.7    |  | Post-Closing Funding Agreement, dated as of February 21, 2003, by and between Mackie Designs Inc. and Sun Mackie, LLC. Incorporated by reference to Exhibit 2.5 to Current Report on Form 8-K dated February 21,
2003.                                                                                                                                                                                                                                                                                                                                      
|3.1    |  | Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 or Registration Statement filed under the Securities Act of 1933 on Form S-1, as amended, Registration No. 33-93514.                                                                                                                                                                                                                                                                                                                                                           
|*3.2   |  | Second Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.1    |  | See Articles II, III, IV, IX, X and XI of Exhibit 3.1 and Articles I, V, VI and VII of Exhibit 3.2 confirming the rights of the holders of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                    
|10.1   |  | Mackie Designs Inc. Third Amended and Restated 1995 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                 
|10.2   |  | Industrial Lease, dated December 15, 1994, by and between Mackie Holdings, L.L.C. and Mackie Designs Inc. Incorporated by reference to Exhibit 10.3 to Registration Statement filed under the Securities Act of 1933 on Form
S-1, as amended, Registration No. 33-93514.                                                                                                                                                                                                                                                                                    
|10.2.1 |  | Amendment to Industrial Lease dated December 12, 2001 by and between Mackie Holdings, L.L.C. and Mackie Designs Inc. Incorporated by reference to Exhibit 10.2.1 to Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.                                                                                                                                                                                                                                                                                                                 
|10.3   |  | Industrial Real Estate Lease dated April 28, 1995, by and between Woodinville II LLC, successor in interest to Intrawest Properties Partnership U.S. and Mackie Designs Inc. Incorporated by reference to Exhibit 10.4 to
Registration Statement filed under the Securities Act of 1933 on Form S-1, as amended, Registration No. 33-93514.                                                                                                                                                                                                                 
|10.4   |  | Mackie Designs Inc. 401(k) Profit Sharing Plan dated December 20, 1993. Incorporated by reference to Exhibit 10.15 to Registration Statement filed under the Securities Act of 1933 on Form S-1, as amended, Registration No.
33-93514.                                                                                                                                                                                                                                                                                                                     
|10.5   |  | Loan and Security Agreement, dated March 31, 2003, by and among Mackie Designs Inc. and Mackie Designs UK Plc, as borrowers, Mackie Designs Manufacturing, Inc., SIA Software Company, Inc. and Mackie Investment Co., as
guarantors, and Congress Financial Corporation, as agent for and on behalf of the financial institutions which are parties thereto as lenders, and the financial institutions named from time to time as parties thereto as lenders. Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K dated March 31, 2003.
|10.6   |  | Term Promissory Note, dated March 31, 2003, made by Mackie Designs Inc. to the order of Congress Financial Corporation in the principal amount of $2,500,000. Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                 
|10.7   |  | Pledge and Security Agreement, dated March 31, 2003, made by Mackie Designs Inc. to and in favor of Congress Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and on behalf of the
financial institutions which are parties thereto as lenders. Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                      

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|10.8  |  | Patent Collateral Assignment and Security Agreement, dated March 31, 2003, by and between Mackie Designs Inc. and Congress Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and on
behalf of the financial institutions which are parties thereto as lenders. Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                               
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9  |  | Copyright Collateral Assignment and Security Agreement, dated March 31, 2003, by and between Mackie Designs Inc. and Congress Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and
on behalf of the financial institutions which are parties thereto as lenders. Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                            
|10.10 |  | Trademark Collateral Assignment and Security Agreement, dated March 31, 2003, by and between Mackie Designs Inc. and Congress Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and
on behalf of the financial institutions which are parties thereto as lenders. Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                            
|10.11 |  | Guarantee, dated March 31, 2003, made by Mackie Designs Manufacturing, Inc., SIA Software Company, Inc. and Mackie Investment Co. for and on behalf of Mackie Designs Inc. in favor of Congress Financial Corporation, in its
capacity as agent pursuant to the Loan Agreement acting for and on behalf of the financial institutions which are parties thereto as lenders, and the financial institutions which are parties to the Loan Agreement as lenders. Incorporated by reference
to Exhibit 10.7 to Current Report on Form 8-K dated March 31, 2003.                       
|10.12 |  | Guarantee, dated March 31, 2003, made by Mackie Designs Inc., Mackie Designs Manufacturing, Inc., SIA Software Company, Inc. and Mackie Investment Co. for and on behalf of Mackie Designs UK Plc in favor of Congress
Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and on behalf of the financial institutions which are parties thereto as lenders, and the financial institutions which are parties to the Loan Agreement as
lenders. Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K dated March 31, 2003.
|10.13 |  | Second Amended and Restated Subordination Credit Agreement, dated March 31, 2003, between and among U.S. Bank National Association, as lender, Mackie Designs Inc., as borrower, and Mackie Designs Manufacturing, Inc., SIA
Software Company, Inc., and Mackie Investment Co., as guarantors. Incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                                       
|10.14 |  | Intercreditor and Subordination Agreement, dated March 31, 2003, by and among Congress Financial Corporation, in its capacity as agent pursuant to the Loan Agreement acting for and on behalf of the financial institutions
which are parties thereto as lenders, and the financial institutions from time to time party to the Senior Loan Agreement as lenders, and U.S. Bank National Association. Incorporated by reference to Exhibit 10.10 to Current Report on Form 8-K dated
March 31, 2003.                                                                              
|10.15 |  | Stock Purchase Warrant, dated March 31, 2003, issued by Mackie Designs Inc. to Sun Mackie, LLC for the right to purchase 1,179,429 shares of common stock. Incorporated by reference to Exhibit 10.11 to Current Report on
Form 8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                                          
|10.16 |  | Subordinated Promissory Note, dated March 31, 2003, made by Mackie Designs Inc. to the order of Sun Mackie, LLC in the principal amount of $3,931,429. Incorporated by reference to Exhibit 10.12 to Current Report on Form
8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                                              

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|10.17 |  | Loan Agreement dated October 21, 1999 between James T. Engen and Mackie Designs, Inc. in the amount of $250,000. Incorporated by reference to Exhibit 10.20 to Annual Report on Form 10-K for the fiscal year ended December
31, 1999.    
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18 |  | Employment Agreement dated May 19, 1997 between William A. Garrard and Mackie Designs Inc. Incorporated by reference to Exhibit 10.3 of Quarterly Report on Form 10-Q for the period ended June 30, 1997.                                 
|10.19 |  | Second Amendment to Employment Agreement between William A. Garrard and Mackie Designs Inc dated September 28, 1999. Incorporated by reference to Exhibit 10.21 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
|*21.1 |  | Subsidiaries of Mackie Designs Inc.                                                                                                                                                                                                       
|*23.1 |  | Consent of KPMG LLP, Independent Auditors.                                                                                                                                                                                                
|*99.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                        
|*99.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                        

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