##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES AND EXCHANGE ACT OF 1934


FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

Commission File Number 000-30138



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ROCKFORD CORPORATION

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                  
|------------------------------------------------------------------ |  | ---------------------------------
|Arizona                                                            |  | 86-0394353                       
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (IRS Employer Identification No.)

600 South Rockford Drive

Tempe, Arizona 85281


(480) 967-3565


(Address and Telephone Number of Principal
Executive Offices)




---

Securities Registered Pursuant to
Section 12(b) of the Act: None

Securities Registered Pursuant to
Section 12(g) of the Act: Common Stock ($.01 Par Value)

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  þ                    No  o | 

Indicate by check mark if the 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  þ | 

The aggregate market value of the voting stock
held by non-affiliates of the registrant was $31,152,010 as of
June 30, 2003.

There were 9,011,163 shares of Common Stock
issued and outstanding as of March 1, 2004.

Documents Incorporated by Reference: Portions of
the registrants definitive Proxy Statement relating to the
2004 Annual Meeting of Stockholders to be held on May 12,
2004, are incorporated by reference into Part III of this
Form 10-K. Exhibit 99.9 to this Form 10-K is also
incorporated by reference into Part I of this
Form 10-K.



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ROCKFORD CORPORATION

FORM 10-K


DECEMBER 31, 2003


TABLE OF CONTENTS

|                                   |          |      |                                                                                                                               |  |  |    | 
|---------------------------------- | -------- | ---- | ----------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                   |          |      |                                                                                                                               | 
|                                   |          |     
|Securities and Exchange Commission |          |     
|Item Number and Description        |          |     
|                                   |          |     
|                                   |          | Page
|                                   |          |     
|PART I                             |          |      |                                                                                                                               |  |  |   
|                                   | Item 1.  |      | Business                                                                                                                      |  |  | 2  | 
|                                   | Item 2.  |      | Properties                                                                                                                    |  |  | 15 | 
|                                   | Item 3.  |      | Legal Proceedings                                                                                                             |  |  | 16 | 
|                                   | Item 4.  |      | Submission of Matters to a
    Vote of Security Holders                                                                       |  |  | 17 | 
|                                  
|PART II                            |          |      |                                                                                                                               |  |  |   
|                                   | Item 5.  |      | Market for Registrants
    Common Equity and Related Stockholder Matters, including Equity
    Compensation Plan Information |  |  | 17 | 
|                                   | Item 6.  |      | Selected Financial Data                                                                                                       |  |  | 18 | 
|                                   | Item 7.  |      | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                     |  |  | 19 | 
|                                   | Item 7A  |      | Quantitative and Qualitative
    Disclosures About Market Risk                                                                |  |  | 32 | 
|                                   | Item 8.  |      | Financial Statements and
    Supplementary Data                                                                               |  |  | 33 | 
|                                   | Item 9.  |      | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                                      |  |  | 56 | 
|                                   | Item 9A. |      | Controls and Procedures                                                                                                       |  |  | 56 | 
|                                  
|PART III                           |          |      |                                                                                                                               |  |  |   
|                                   | Item 10. |      | Directors and Executive
    Officers of the Registrant                                                                        |  |  | 56 | 
|                                   | Item 11. |      | Executive Compensation                                                                                                        |  |  | 57 | 
|                                   | Item 12. |      | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters                        |  |  | 57 | 
|                                   | Item 13. |      | Certain Relationships and
    Related Transactions                                                                            |  |  | 57 | 
|                                   | Item 14. |      | Principal Accountants Fees
    and Services                                                                                   |  |  | 57 | 
|                                  
|PART IV                            |          |      |                                                                                                                               |  |  |   
|                                   | Item 15. |      | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                                           |  |  | 58 | 
|Signatures                         |          |      | 61                                                                                                                            | 
|EX-10.54                          
|EX-10.55                          
|EX-10.56                          
|EX-10.57                          
|EX-10.58                          
|EX-10.59                          
|EX-10.60                          
|EX-21                             
|EX-23.1                           
|EX-31.1                           
|EX-31.2                           
|EX-32                             
|EX-99.9                           



The market value of our voting stock held by
non-affiliates shown on the cover page is based on:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Our estimate of the number of shares held by
    non-affiliates; and                                                              
|
| |  | $5.69 per share, the price at which our
    shares were last sold as of June 30, 2003, as reported by
    The NASDAQ Stock Market.

Our calculation of the number of shares held by
affiliates is a good faith estimate for this Annual Report.
Shares held by affiliates include all shares beneficially owned
by our executive officers and directors. They also include
shares held by any shareholder who beneficially owned more than
10% of our shares, as disclosed in this report, except that we
have not included in shares held by affiliates the shares that
may be beneficially owned by Quaker Capital Management
Corporation in light of its disclaimer of beneficial ownership.
We are not bound by this figure for any other purpose.

1



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Forward-Looking Statements And Risk
Factors

We make forward-looking statements in this
report including, without limitation, statements concerning the
future of our industry, product development, business strategy
(including the possibility of future acquisitions), continued
acceptance and growth of our products, dependence on significant
customers and suppliers, and the adequacy of our available cash
resources. Our statements may contain projections of results of
operations or of financial condition. You may identify these
statements by our use of forward-looking terminology such as
may, will, believe,
expect, anticipate,
estimate, continue or other similar
words.

Forward-looking statements are subject to many
risks and uncertainties. We caution you not to place undue
reliance on our forward-looking statements, which speak only as
at the date on which they are made. Our actual results may
differ materially from those described in our forward-looking
statements. We disclaim any obligation or undertaking to update
our forward-looking statements to reflect changes in our
expectations or changes in events, conditions, or circumstances
on which our expectations are based.

When considering our forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements identified in this report and in
Exhibit 99.9, Risk Factors That May Affect
Rockfords Operating Results, Business Prospects and Stock
Price, which is incorporated in this report by reference.
The risk factors noted throughout this report, particularly in
the discussion in Exhibit 99.9, and other risk factors that
we have not anticipated or discussed, could cause our actual
results to differ significantly from those anticipated in our
forward-looking statements.




PART I






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

Our Business

Rockford designs, manufactures and distributes
high performance audio systems for the mobile, professional and
home theater audio markets. Our mobile audio products are sold
primarily in the worldwide mobile audio aftermarket to consumers
who want to improve the audio systems in their cars, trucks,
boats and airplanes. We market our mobile audio products under
the Rockford Fosgate, Lightning Audio, MB Quart, Q-Logic,
InstallEdge.com and Omnifi brand names, selling products that
include digital and analog amplifiers, speakers, source units,
CD changers, digital media players and accessories. Based on
dollar sales in 2003 of all our brands, we rank first in
U.S. market share for aftermarket mobile audio amplifiers
and second for aftermarket mobile audio speakers.

We sell home theater products under the NHT,
Fosgate Audionics, MB Quart and Omnifi brands. We also sell
professional audio products under the MB Quart, NHT and Hafler
brands. We acquired the NHT brand as a result of an acquisition
during the fourth quarter of 2002. Additionally during the
fourth quarter of 2002 we made an investment in SimpleDevices
Inc., which licenses its standards-based SimpleWare and
SimpleMedia Services software to consumer electronics, PC and
automotive Original Equipment Manufacturers (OEMs). We sell
mobile and home products incorporating the SimpleDevices
technology under the Omnifi brand name.

We believe our ability to deliver innovative and
technologically advanced products appeals to our consumers
desires for distinctive, leading-edge products and powerful,
high quality sound. We continue to develop new products to
capitalize on improvements in digital technology. Our Rockford
Fosgate, Lightning Audio, Q-Logic, Omnifi, MB Quart, NHT and
Fosgate Audionics products have won numerous consumer and
industry awards.

2



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##### Table of Contents



Our Brands

Our marketing and product development efforts are
designed to enhance our brand images and generate increased
loyalty among our consumers in each market segment and among the
retailers who sell our products. We market our products under
the following brands:

Mobile
Audio



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rockford Fosgate.We
    believe Rockford Fosgate is one of the most preferred high
    performance mobile audio brands. Under this brand we offer
    distinctive, leading-edge products and powerful, high quality
    sound. Our Rockford Fosgate mobile audio products are marketed
    under three primary product lines:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Punch Series  the line for the
    majority of our amplifiers, subwoofers, speakers and source
    units, including video;
|
| |  | Power Series  the line for our higher
    performing amplifiers, subwoofers, and speakers; and                            
|
| |  | Type RF  our highest performing mobile
    audio amplifiers.                                                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We also sell Rockford Fosgate products to Nissan
    for installation as part of factory installed audio systems for
    four models of Nissan vehicles, the Sentra SE-R, Xterra,
    Frontier Crew Cab and the Titan full size truck. Mitsubishi has
    recently agreed to install Rockford Fosgate branded audio
    systems in two models of Mitsubishi vehicles beginning with the
    2006 model year. We also sell Rockford Fosgate products under
    the Connecting Punch brand, for a full line of mobile audio
    installation accessories, and the Punch Sport brand, for
    promotional items and clothing;



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lightning Audio.We
    sell amplifiers, subwoofers, speakers, and accessories under the
    Lightning Audio brand and its Storm, Bolt and Strike product
    lines. We acquired Lightning Audio in 1999 with a view toward
    marketing more moderately priced products than our Rockford
    Fosgate offerings;                                                                                                                                                                                                                                                                                                      
|
| |  | MB Quart.We sell
    mobile audio speakers and subwoofers under our MB Quart brand.
    We have developed a new line of amplifiers and will begin
    selling them under the MB Quart brand during 2004. Our MB Quart
    branded products are offered as the most technologically refined
    of our products and are generally among our most expensive
    products in each category where they are offered;                                                                                                                                                                                                        
|
| |  | Q-Logic.Audio
    Innovations, a subsidiary acquired in 2001, develops and markets
    Q-Logic speaker enclosures, Q-Forms kick panels and Q-Customs
    enclosures. Each of these products is designed to hold mobile
    audio speakers, providing an effective and convenient method for
    installing improved speakers in cars, trucks and SUVs. These
    products complement our existing Rockford Fosgate, Lightning
    Audio and MB Quart products, since many consumers will purchase
    an Audio Innovations product as the box to hold
    Rockford Fosgate, Lightning Audio or MB Quart speakers; and
|
| |  | InstallEdge.com.A
    business-to-business accessory solution, the InstallEdge.com
    brand offers installation shop supplies to mobile audio
    installation shops, custom home audio installers and marine
    outfitters.                                                                                                                                                                                                                                                                                                                                                                                         

Home
Theater and Professional Audio



| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MB Quart.We design,
    engineer and manufacture high performance home loudspeakers
    under the MB Quart brand name. MB Quart GmbH is located in
    Obrigheim, Germany. MB Quart also manufactures and distributes
    headphones and headsets to a variety of professional segments of
    the industry;                                                                             
|
| |  | Fosgate Audionics.We distribute home theater electronics under the Fosgate
    Audionics brand through conventional retail channels as well as
    through the custom installation channel. We acquired the Fosgate
    Audionics brand in 2002 from its creators, Jim Fosgate and
    Charles Wood, pioneers in the development of surround sound
    applications for home theater use;

3



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NHT.During the
    fourth quarter of 2002, we acquired the NHT (Now Hear This)
    business and assets located in Benicia, California. NHT designs
    high quality loudspeakers for the home theater, stereo, custom
    installation and professional audio market under the NHT and NHT
    Pro brands. NHTs products are positioned as
    affordable high end and are sold through high-end
    specialty audio stores and custom installation design showrooms.
    The products under our NHT brands are typically more moderately
    priced than our Fosgate Audionics and MB Quart products; and
|
| |  | Hafler.We design,
    manufacture and sell reference quality near field monitor
    loudspeakers and power amplifiers to the professional industry
    under the Hafler brand name.                                                                                                                                                                                                                                                                                                                                                                                                                          



| |              
| | -------------
| | Digital Media



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SimpleDevices.During the fourth quarter of 2002, we made an investment in
    SimpleDevices Inc., which licenses standards-based SimpleWare
    and SimpleMedia Services software to consumer electronics, PC,
    automotive and network equipment OEMs. Its software enables a
    variety of digital devices to access a centralized media
    database through a unified interface and provides automation,
    synchronization, scheduling, and unified interfaces and
    databases across compatible devices; and                                                                                                                                                                                                                                                                                                 
|
| |  | Omnifi.We developed
    the Omnifi brand of products to position Rockford as a leader in
    the emerging digital media market. Omnifi is intended to
    leverage SimpleDevices software, Rockfords consumer
    electronics experience, and our team of software and hardware
    engineers located in San Mateo, California. Omnifi products
    allow the consumer to listen to music files that are located on
    their personal computer through their home theater system and
    mobile audio system. Omnifi products move the music files to the
    home theater or mobile system using either wired or wireless
    (WiFi) technology. We believe that Omnifi is the only digital
    media player line of products that offers products conveniently
    usable in both home and mobile audio applications.

Growth of Our Brands

Our goal is to design, produce and distribute the
best engineered and most recognized and respected brands of high
performance audio products in the world. Each element of our
strategy is intended to enhance and reinforce our global brand
images among consumers and retailers. Key elements of our growth
strategy are to:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Continue to introduce new and technologically
    innovative products;                                                                  
|
| |  | Expand our OEM business;                                                                                                                
|
| |  | Broaden our distribution by entering new
    distribution channels and increasing penetration of our existing
    distribution channels;
|
| |  | Capitalize on our worldwide brand recognition to
    increase sales in international markets;                                           
|
| |  | Expand our home theater and professional audio
    business; and                                                                        
|
| |  | Acquire, develop and expand additional audio
    brands, taking advantage of our technology and distribution
    strengths.             

As a result of our strong brands and growth
strategy, we believe we can grow our business and become a
larger participant in the worldwide mobile, professional and
home theater audio markets.

4



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##### Table of Contents



Our Products



| |                                  
| | ---------------------------------
| | Percent of Sales by Product Class

Our sales since 2001 were divided among our
principal product classes as shown in the following table:

|               |       |                         |      |       |   |      |      |       |   |  |      |       |  
|-------------- | ----- | ----------------------- | ---- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | -
|               |       |                        
|               |       | Year Ended December 31,
|               |       |                        
|               |       | 2001                    |      | 2002  |   | 2003
|               |       |                         |      |       |   |     
|Product Class: |       |                         |      |       |   |      |      |       |   |  |      |      
|Amplifiers     |       |                         | 45.0 | %     |   |      | 37.4 | %     |   |  | 38.2 | %    
|Speakers       |       |                         | 32.5 |       |   |      | 37.1 |       |   |  | 40.4 |      
|Accessories    |       |                         | 14.3 |       |   |      | 13.8 |       |   |  | 11.3 |      
|Others(1)      |       |                         | 8.2  |       |   |      | 11.7 |       |   |  | 10.1 |      
|               |       |                         |      |       |   |      |      |       |   |  |      |      
|               | Total |                         |      | 100.0 | % |      |      | 100.0 | % |  |      | 100.0 | %
|               |       |                         |      |       |   |      |      |       |   |  |      |      




|    |                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes source units, enclosures, signal
    processors, digital media products, and other products. No
    single product class in this group accounted for more than 10%
    of our sales in any of these years.

Financial information about geographic segments
may be found at Note 13 of the Notes to our Consolidated
Financial Statements, set forth at page 53 of this Form-10K.

Mobile
Audio

We offer high performance mobile audio products
consisting of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amplifiers.Power
    amplifiers increase the voltage and current coming from the
    source unit, providing more power than possible from a source
    unit alone. Power amplifiers are essential for a high
    performance mobile audio system. We also include signal
    processors as part of the amplifier category. Signal processors
    accept input from a source unit, modify the signal to enhance
    performance and deliver the modified signal to one or more
    amplifiers. For specialized applications, we sell stand-alone
    signal processors that are not integrated into an amplifier;                                               
|
| |  | Speakers.Speakers
    accept a signal from a source unit or amplifier and translate it
    into sound. There are two categories of speakers: those eight
    inches or greater in diameter are considered subwoofers and are
    designed to play lower (bass) frequencies; and those less
    than eight inches in diameter are considered speakers and are
    designed for higher frequencies. Aftermarket speakers and
    subwoofers provide dramatically improved sound quality compared
    to most factory installed mobile audio systems and are often the
    single most important improvement consumers can make to their
    mobile audio systems;
|
| |  | Source Units.Source
    units are the control center for a mobile audio system.
    Typically mounted in the dash of the car, source units provide
    input signals, including AM/ FM radio receivers, compact disc
    players and, in some cases, DVD players. Most of our source
    units also have the ability to control a separate CD or MP3
    changer or accept inputs from other sources, such as DVD players
    or digital media players;                                                                                                                                                                                                        
|
| |  | Accessories.Accessories are the additional items required to install and use
    mobile audio products. Wiring accessories include amplifier
    wiring kits, fuses, circuit breakers, interconnect cables,
    speaker cables, stiffening capacitors, battery clamps and many
    other types of connectors. Installation accessories also include
    adaptors that make our products compatible with
    factory-installed components and other products; and                                                                                                                                                                                               
|
| |  | Enclosures.Enclosures are used to enhance the bass sound of subwoofers and
    to position higher frequency speakers in locations that produce
    better sound. Enclosures include boxes for subwoofers,
    installation adapters and replacement kick panels for improved
    speaker placement.                                                                                                                                                                                                                                                                                                                                                            

5



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Under our Rockford Fosgate brand we currently
offer the following products:

|              |  |                                                                                                                                                                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Amplifiers:   |  |  28 power amplifier models under our
    Punch Series, Power Series and Type RF lines, with rated power
    from 75 to 1,500 watts, and minimum advertised prices from $180
    to $1,500. Our amplifiers include 1, 2 and 4 channel
    alternatives, giving consumers the ability to select an optimum
    configuration for their system;                 
|              |  |  Four models of stand-alone signal
    processors, with minimum advertised prices from $150 to $400.
    One of these processors, a surround sound processor designed by
    Jim Fosgate, was the first commercially available Dolby
    Pro-Logic II surround sound device and is able to
    produce surround sound in the car from any 2 channel source;
|             
|Speakers:     |  |  75 models of speakers and subwoofers
    under our Punch Series and Power Series lines, with minimum
    advertised prices from $60 to $1,800;                                                                                                                                                                                                              
|             
|Source Units: |  |  Nine models of source units with MP3
    playback compatibility, with minimum advertised prices from $200
    to $1,000;                                                                                                                                                                                                                                    
|             
|Accessories:  |  |  Over 400 different accessories,
    including amplifier installation kits, interconnect and speaker
    cables, carpet/fabric/surface applications and stiffening
    capacitors under our Connecting Punch line; and                                                                                                                                       
|              |  |  Various promotional materials and
    clothing under our Punch Sport line.                                                                                                                                                                                                                                                                                  

Under our Lightning Audio brand we currently
offer the following products:

|             |  |                                                                                                                                                                       
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Amplifiers:  |  |  15 power amplifier models under our
    Bolt, Strike and Storm lines, with rated power from 60 to 2,000
    watts and minimum advertised prices from $100 to $1,000;
|            
|Speakers:    |  |  46 speakers and subwoofers under our
    Bolt, Strike and Storm lines, with minimum advertised prices
    from $30 to $600;                                         
|            
|Accessories: |  |  Over 1,000 different accessories,
    including interconnect and speaker cables, stiffening
    capacitors, battery clamps and installation kits; and               
|             |  |  Various promotional materials and
    clothing under our Urban Industrial Gear line.                                                                                

Under our Q-Logic brand we currently offer 28
speaker enclosure models in our Q-Enclosure line. The Q-Customs
line consists of 34 vehicle specific enclosures available in
factory matching colors to create a total of over 166 different
models. The Q-Forms product line of custom speaker mounting kick
panels includes 60 different panels, each available in factory
matching colors for a total of 332 different models. These
models have suggested retail prices from $30 to $320.

Under our MB Quart brand we sell five mobile
speaker lines, including:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | 5 models of Q-Series speakers, with suggested
    retail prices from $649 to $1,499 per pair;                                               
|
| |  | 14 models of Premium Series speakers, with
    suggested retail prices from $479 to $829 per pair;                                          
|
| |  | 17 models of Reference Series speakers, with
    suggested retail prices from $249 to $449 per pair;                                        
|
| |  | 12 models of Discus Series speakers, with
    suggested retail prices from $109 to $399 per pair; and                                       
|
| |  | 5 models of Nautic Series speakers, specifically
    designed for use in boats, with suggested retail prices from
    $249 to $449 per pair.

We have also developed 2 lines of mobile audio
amplifiers, the Q Series and Reference Series, that we will
begin selling in 2004 under our MB Quart brand. We anticipate
that they will have rated power from 400 to 1000 watts and will
be offered at minimum advertised prices ranging from $500 to
$1,200.

6



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##### Table of Contents



Under our InstallEdge.com brand we sell various
back shop supplies, including vehicle harnesses, power
distribution adapters, batteries, RCA connectors, wire, wiring
accessories and fuses.



| |             
| | ------------
| | OEM Products

Nissan North America offers a Rockford Fosgate
branded OEM system for four Nissan vehicles for model year 2004.
Rockford Fosgate systems are standard in Nissans Xterra SE
and optional in the Xterra XE, the Frontier Crew Cab,
Supercharged Frontier Crew Cab, the Sentra SE-R and the Titan
full size truck. Rockfords OEM systems installed in these
vehicles include a radio/ CD player, speakers and an amplifier.
Mitsubishi Motors has recently agreed to offer Rockford Fosgate
branded OEM systems in two Mitsubishi models beginning with the
2006 model year.



| |             
| | ------------
| | Home Theater

We sell home theater products under our Fosgate
Audionics, MB Quart and NHT brands.

Our Fosgate Audionics products include two
preamp/surround processors and two multi-channel amplifiers with
retail prices from $2,795 to $12,995.

MB Quart sells high performance bookshelf
loudspeakers, floorstand loudspeakers and amplified subwoofers
for use in home audio and home theater systems, with suggested
retail prices ranging from $2,500 to $5,000 per pair.

Under our NHT brand we sell high performance
audio component systems under the Evolution, Super Audio and
Architectural series.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evolutions award winning (2002
    Sound & Vision Editors Choice, Home Theater Rave Award
    2003, Electronic House Product of the Year 2003) modular
    components function as the building blocks to create entirely
    self- customized high performance multi-channel loudspeaker
    systems. The Evolution collection consists of three satellite
    monitors with optional matching pedestals, two tower loudspeaker
    configurations with satellite-matched bass modules and two
    freestanding subwoofer models. Listeners can create over 25
    system configurations to get the utmost performance from current
    and future digital entertainment media. Suggested retail prices
    range from $900 for a pair of satellite monitors to $9,900 for a
    full seven-channel surround sound system.
|
| |  | The SuperAudio series offers 3 bookshelf and one
    tower loudspeaker, plus two center channel speakers, and two
    powered subwoofers. Suggested retail prices range from $300 to
    $1,000. These models, while affordable, offer piano gloss
    lacquer finishes and are easily mixed and matched to make a
    variety of affordable high performance surround systems.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Architectural series consists of NHTs
    in-wall, in-ceiling and outdoor speaker systems. NHT holds a
    patent for a unique in-ceiling design, which we believe provides
    better dispersion of high frequencies than any other product in
    this category. In September 2003 NHT introduced the first
    12 in-wall subwoofer to fit into a standard wall
    construction. This innovative subwoofer model received an
    Innovations Design and Engineering Review award at the 2004
    Consumer Electronics Show (CES). Suggested retail
    prices range from $200 to $1,150.                                                                                                                                                                                                                       



| |                   
| | ------------------
| | Professional Audio

NHT sells powered monitors to the professional
recording studio, postproduction and broadcast market. NBC
selected the NHT monitors for surround sound monitoring at all
Olympic Games through 2010. Suggested retail prices range from
$500 for a pair of monitors to $6,600 for a surround sound
monitoring system.

MB Quart sells headphones for professional use,
with suggested retail prices ranging from $60 to $1,944 per
set.

7



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We sell professional, reference quality audio
amplifiers and speakers under the Hafler brand, with amplifier
suggested retail prices ranging from $569 to $2,200 and speaker
suggested retail prices ranging from $1,250 to $1,850 per
pair. Recording studios, broadcast studios, movie theaters,
concert facilities, stadiums and touring bands use our Hafler
professional audio products.



| |              
| | -------------
| | Digital Media

Omnifi sells and distributes several products
designed and developed for the digital media market.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Omnifi DMS1, or digital media streamer,
    integrates with any existing home audio or theater system and
    allows the consumer to stream their media library from the
    personal computer to the home audio system wirelessly over an
    802.11b network or over a wired Ethernet connection. The Omnifi
    DMS1 delivers outstanding fidelity and provides complete access
    to the music library stored on the consumers computer.                                                                                   
|
| |  | The Omnifi DMP1 or digital media player allows
    consumers to listen in their car to the MP3 and WMA files stored
    on their personal computer. The DMP1 comes with a 20 Gigabyte
    hard drive that can store over 300 hours of music and
    seamlessly integrates with an existing car audio system. The
    DMP1 is designed to eliminate barriers to playing digital music
    in the car. The DMP1 was awarded the 2003 Innovation Award for
    the mobile category and received a Tech TV Best of Show for CES
    2003.

Omnifi announced three new products at CES 2004.
These second-generation products are focused on video streaming
and downloading for both the home and car.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Omnifi DMS2 digital media streamer will
    decode video formats such as MPEG2 and MPEG4 and display the
    video contents on the consumers home theater video screen.                                                                                                                                                                                                                                     
|
| |  | The Omnifi DMP2 will provide similar capability
    in the automobile using a 60Gig hard drive and will integrate
    into most car audio systems and most mobile media systems to
    deliver highest quality audio and video. The DMP2 received a
    2004 Innovations Design and Engineering Award at the 2004 CES.                                                                                           
|
| |  | The Omnifi PDMP-P1 or portable digital media
    player, will be Omnifis first portable product and one of
    the industrys first self-contained portables. All working
    parts are contained in the headphones with no hanging wires or
    battery packs. This product will include 128Mb or 256Mb of
    memory. The PDMP-P1 received a 2004 Innovation Design and
    Engineering Award at the 2004 CES.

Both the DMS2 and DMP2 use the WiFi standard
802.11g for expanded bandwidth to allow the highest quality of
video delivery and performance.

Awards

Rockford branded products have won numerous
consumer and industry awards, including Autosound Grand Prix
awards in every year from 1987 through 2003, Innovations
Design and Engineering awards at the CES in every year from 1997
through 2004 and European Car Audio Press awards in 1997 and
1998.

At the 2004 CES, Rockford Fosgate won three
Innovations Design and Engineering Awards for the Power T30001
amplifier, the Punch P2002 amplifier and the RAVDVD2 source
unit. MB Quart mobile won three Innovations Design and
Engineering Awards for its new Q- Series amplifiers (the
QAA1000, QAA2500 and QAA4250 models).

Also at the 2004 CES, the Rockford Fosgate H2
custom demonstration vehicle was awarded the CES 2004
Peoples Choice Award from Car Sound &
Performance Magazine. At the 2001 and 2002 Consumer Electronics
Shows, our custom demonstration vehicles, a Nissan Frontier (in
2001) and a Nissan Xterra (in 2002), were awarded the Best
of Show award from United Entertainment Media.

Omnifi debuted at the 2003 CES and received the
CEAs 2003 Best of Innovations award in the
Mobile Electronics category and TechTVs Best of
CES award in the Auto, Marine and RV category. Later in
2003, Omnifi won Sound & Vision magazines
Reviewers Choice Award. In 2004, Omnifi won two CES

8



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Innovations Design and Engineering Awards for its
new Headphone Media Player and the AV Digital Media Player.


NHT has won more than 30 distinguished awards
over the years. Recent awards include the Home Theater Rave
Award 2003 and the Electronic House Product of the Year 2003 for
the Evolution line. NHTs new Architect Series subwoofer
also won an Innovations Design and Engineering award at the 2004
CES.

Fosgate Audionics won an Innovations Design and
Engineering award at the 2004 CES for its FAPV-1.
Founder/consultant Jim Fosgate received an Emmy in 2003 for his
work in the advancement of surround sound.

The MB Quart Vera subwoofer received an
Innovations Design and Engineering award at the 2004 CES for its
innovative new subwoofer design.

Engineering And Product Development

Engineering and product development is a primary
focus of our business because of the heavy demand by our core
consumers for leading-edge products. We focus our engineering
and development efforts primarily on enhancing current products
and developing new products. Our expenditures for engineering
and development were approximately $3.3 million,
$6.0 million and $8.6 million in 2001, 2002 and 2003
respectively.

As at December 31, 2003, our engineering and
development staff consisted of approximately 55 engineers,
including 10 in research, 23 in development and 12 in sustaining
groups, as well as other support staff, dedicated to the
development of our technology platform for future products. They
coordinate their efforts with:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our brand management group to identify features
    consistent with market requirements and our brand image;                                                                          
|
| |  | Our manufacturing staff and offshore suppliers to
    develop and build products more efficiently;                                                                                    
|
| |  | Our product support staff to identify weaknesses
    in our existing products and to help re-design them;                                                                             
|
| |  | Our customers, both at the retailer and consumer
    level, to help us better understand their needs and preferences
    and incorporate them into our products; and                  
|
| |  | Our other engineering groups by holding a monthly
    corporate-wide Engineering Exchange conference call to improve
    time to market, share knowledge and discuss new technologies.

Our objective is to introduce new products or
re-engineer over one-third of our existing product line annually.

Our research and development efforts seek to
create a reserve base of technologies and innovations that are
available to our engineers for use in the product development
process. As a result, we believe we can readily respond to
changing demand and effectively execute our marketing plans by
introducing new products and by adding features to our existing
products. Examples of product innovations that have been or are
being developed from this reserve technology base include:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Software technology to allow consumers to
    schedule and synchronize wireless media delivery to mobile and
    home audio devices;
|
| |  | Powered speakers, which are speakers that include
    an integrated amplifier;                                                      
|
| |  | Remote bass and speaker controls;                                                                                                   
|
| |  | Active crossovers that allow consumers to tailor
    our amplifiers to their systems needs;                                        
|
| |  | Digital amplifiers that incorporate a more
    efficient circuit design;                                                            
|
| |  | Surround sound processors for the car and home;                                                                                     
|
| |  | Materials improvements that increase the
    durability and performance of our products;                                            
|
| |  | Digital signal processing technology;                                                                                               

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| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | Speaker enclosures;                                                                                
|
| |  | Innovative speaker component materials;                                                            
|
| |  | Application of DSP techniques to enhance customer
    experience using a standard PC interface; and
|
| |  | Use of modular design methodology to allow for
    Plug and Play capabilities.                     

Sales, Marketing And Distribution

We endeavor to have our brands project an image
that appeals to consumers who appreciate high quality and value.
Our products are promoted with advertisements in consumer
electronics and lifestyle magazines, newspapers and other
publications as well as on television, radio and the Internet.
We participate in trade and consumer shows, support users of our
products in auto sound competitions and supply promotional
prizes and giveaways.

Our primary sales and marketing activities are
listed below:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Making regular calls to dealers and providing
    them with demonstration products, point-of-purchase displays and
    other marketing materials; 
|
| |  | Initiating targeted advertising in periodicals
    read by our potential consumers;                                                               
|
| |  | Training dealer sales and installation personnel
    through our Rockford Technical Training Institute (RTTI);                                    
|
| |  | Regular interaction with industry press editors
    who are often the opinion makers for salespeople at the retail
    level as well as end users;
|
| |  | Participating in related professional and
    consumer trade shows; and                                                                           
|
| |  | Maintaining product and brand information for
    consumers and retailers on our web sites.                                                       

We consider our advertising for all brands to be
market focused based on the brand.

Our corporate web site, located at
www.rockfordcorp.com,and our brand sites
www.rockfordfosgate.com, www.lightningaudio.com,
www.installedge.com, www.fosgateaudionics.com, www.qlogic.ws,
www.mbquart.com, www.mbquart.de, www.simpledevices.com,
www.Omnifimedia.com, www.hafler.com, www.nhtpro.comand
www.nhthifi.com,offer consumers and retailers reliable
and comprehensive information about our product offerings and
consumer services. Because our core mobile audio consumers are
among the most enthusiastic users of the Internet, we believe
expanded Internet-based marketing will broaden our consumer
reach, enhance our brand image and direct potential consumers to
our retailers.



| |                          
| | -------------------------
| | Mobile Audio Distribution

Domestic
Distribution.We currently sell our
mobile audio products in the U.S. to approximately 5,000
independent retail stores. These stores include independent
specialty dealers, audio/video retailers, consumer electronic
chains, mass merchandisers and catalog merchants who we may
appoint to sell some or all of our mobile audio brands. We sell
MB Quart products only to independent specialty dealers and
audio/video retailers.

We sell directly to most of our authorized retail
dealers using 19 independent sales representative firms who
identify, recruit and sell to retailers in their regions. We
have entered into agreements with each of these sales
representative firms under which we appoint them our sales
representative for a specific territory and specific products
under varying terms. We pay our independent sales
representatives commissions based on sales of our products to
independent retailers in their territory. Commission amounts
range from 1% to 10% of sales depending upon (1) product
category, (2) the retailer involved in the purchase and
(3) achievement of quarterly sales targets.

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We also permit some of our Rockford Fosgate brand
sales representatives to stock a small quantity of our Rockford
Fosgate products for resale to smaller dealers. These smaller
dealers are generally located in rural areas, or otherwise have
very small volume potential, so that it is not economical for us
to appoint them as direct retailers. They nevertheless provide a
useful extension of our distribution system into more remote
regions. Our stocking representative program allows us to serve
these dealers efficiently. In a few instances where a sales
representative is not available, we have appointed independent
distributors to handle smaller dealers in a particular territory.

We support our independent sales representative
firms using an in-house staff of 5 U.S. regional managers
and 6 sales support staff members.

International
Distribution.We currently sell our
mobile audio products in 70 countries outside the
U.S. using independent distributors and sales
representatives. Independent distributors purchase products from
us and resell them to retailers in their designated territories.
They assume inventory risk and take responsibility for warranty
service in their territory.

In Canada, Germany, Austria, Switzerland, Denmark
and Italy we sell our Rockford Fosgate, Lightning Audio, and MB
Quart products through independent sales representatives.
Independent sales representatives do not purchase products from
us, but instead sell products on our behalf. We remain
responsible for inventory until an independent retailer
purchases it, we are responsible for collecting accounts
receivable from retailers and we retain responsibility for
warranty service. We are generally able to increase our
penetration in these markets, compared to an independent
distribution model, but because relatively high sales volumes
are needed to justify the use of independent sales
representatives, we anticipate continuing to distribute through
distributors in smaller territories.

We support our international distributors and
sales representatives using an in-house staff of
5 international sales managers.



| |                                                     
| | ----------------------------------------------------
| | Home Theater and Professional Audio
    Distribution

We distribute NHT, Fosgate Audionics and MB Quart
home theater products through a mix of conventional independent
retail stores and custom installation firms. We sell to these
customers using a network of sales representatives domestically
and distributors internationally. Our dealers for the Fosgate
Audionics brand are specialty audio and home theater dealers,
particularly those who follow a Home Theater Specialists of
America buying profile. We sell NHT through an established
network of approximately 200 dealers and now sell Fosgate
Audionics and MB Quart home theater products through many of
these same stores.

NHT professional audio products are sold directly
in the North American market through our own website,
www.nhtpro.com. The NHT Pro brand is directed at the working
professional who typically requires direct factory attention.
Hafler professional audio products are sold through a national
distributor group in four regions of the U.S., who sell to small
specialty musical instrument and pro audio dealers. Larger
recording studios, sports arenas and large commercial
installations tend to bypass traditional retail channels and
purchase from contractors or audio engineers responsible for the
design of systems for these large projects.

Competition

Our markets are very competitive, highly
fragmented, rapidly changing and characterized by price
competition and, in the mobile and home theater audio markets,
rapid product obsolescence. We compete in the mobile audio
market on the basis of brand recognition, innovation and
technology, quality and reliability, breadth of product line,
distribution capabilities and price. Competition comes
predominantly from two categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Specialty audio
    suppliers.These companies generally
    compete in specific market niches on the basis of brand image,
    quality and technology. However, many of these companies are
    undercapitalized, lack the buying power necessary to develop
    cost efficiencies and lack the infrastructure to efficiently
    source raw materials, manufacture components and systems and
    distribute finished products; and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Large consumer electronics
    suppliers.These companies offer
    mobile audio products as part of their broad consumer
    electronics lines. They have efficient operations but are volume
    driven and generally do not respond as quickly to changing
    consumer preferences, as do smaller specialty suppliers.
    Consumer perception of the quality of their products is often
    not as high, frequently resulting in lower brand image and
    profit margins. These companies tend to focus on the larger
    market segments, such as source units, and generally do not
    focus on the smaller market segments, such as amplifiers and
    subwoofers.

Some of our competitors have greater financial,
technical and other resources than we do and many seek to offer
lower prices on competing products. To remain competitive, we
believe we must regularly introduce new products, add
performance features to existing products and limit increases in
prices or even reduce prices. Our principal competitors within
our product lines are listed below:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile Audio
    Amplifiers:Alpine, JL Audio, Kenwood,
    Kicker, MTX, Dual, Pioneer, Sony, and Xtant;                                                  
|
| |  | Mobile Audio
    Speakers:Boston
    Acoustics, Infinity, JL Audio, Kenwood, Kicker, MTX,
    Pioneer and Sony;                                          
|
| |  | Mobile Audio Source
    Units:Alpine, Fujitsu Eclipse,
    Kenwood, Panasonic, Pioneer and Sony;                                                         
|
| |  | Mobile Audio
    Accessories:Monster Cable, Phoenix
    Gold, AAMP America and Stinger;                                                                  
|
| |  | Professional Audio Amplifiers and
    Speakers:Crest, Crown, Eastern
    Acoustic Works, Mackie Designs, Peavy, QSC, KRK and
    Tannoy; and             
|
| |  | Home Theater:Adcom,
    Audio Products Intl, B&W, Bose, Boston Acoustics,
    Harman Kardon, Infinity, JBL, Klipsh, Paradigm, Polk Audio,
    and Rotel.

According to NPD Intelect Market Tracking, based
on U.S. dollar sales in 2003 of all our brands, we rank:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | First among our competitors in mobile audio
    amplifiers; and
|
| |  | Second among our competitors in mobile audio
    speakers.     

The addition of our NHT brand and introduction of
new products under our MB Quart and Fosgate Audionics brands
should increase our market share for home theater products, but
our current market share remains small. Our professional
amplifiers and playback monitors have received broad acceptance
in recording studios and postproduction houses; however, we do
not have market share information in this category.

Our OEM products compete directly with Bose and
Harmon International. We also compete indirectly with automobile
manufacturers, who may improve the quality of original equipment
sound systems, reducing demand for aftermarket mobile audio
products. They may also change the designs of their cars to make
installation of our products more difficult or expensive. OEM
products have gained an increasing share of the total mobile
audio market in recent years as automobile manufacturers have
integrated additional functions such as navigation into vehicle
electronic systems and have somewhat improved the quality of
their mobile audio offerings. This increased market share for
OEM products has affected the market for aftermarket mobile
audio products where we offer most of our products.

SimpleDevices is competing in a new market that
has attracted the attention of many potential competitors. A
number of companies have introduced software and hardware
products that seek to play digital audio or video through
consumers home audio systems. Because this is a newly
emerging market, it is difficult to identify key competitors for
SimpleDevices products; however, it is clear there will be
a number of competing solutions that will vie for widespread
consumer acceptance. Although we believe SimpleDevices
products offer a number of significant advantages compared to
the alternatives announced to date, it is too early to say
whether manufacturers and consumers will prefer
SimpleDevices technology to the alternatives.

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Manufacturing

We believe our production, sourcing and
distribution capabilities make us one of the preferred suppliers
in the mobile audio aftermarket industry. We use cellular
manufacturing processes and just-in-time supply management in
all our manufacturing facilities. Cellular manufacturing
provides flexibility and efficiency because any cell can
manufacture any product, depending on market demand. Lot sizes
are small and feedback from the manufacturing process is quick.

We manufacture amplifiers, signal processors and
various accessories at our facilities in Tempe, Arizona, and
mid-range speakers, woofers and subwoofers at our facility in
Grand Rapids, Michigan. We manufacture speaker enclosure and
kick panel products at our facility in Stillwater, Oklahoma and
we manufacture most of our high-end tweeters and mid-range
speaker products at our facility in Obrigheim, Germany.

We use advanced surface mount technology
(SMT) in our electronics manufacturing. SMT is accurate,
increases the density of circuits and reduces labor content. Our
flexible manufacturing and in-house engineering capabilities are
a key part of our efforts to shorten lead times from concept to
production, respond rapidly to changing demand and reduce our
raw materials and finished goods inventory. Each of our
facilities focuses on continuous improvement, with quality
control embedded in the manufacturing process. The result has
been improved flexibility, increased efficiency and greatly
improved cycle times.

Lightning Audio amplifiers and speakers are
supplied by Classic Development, a China based manufacturer. We
provide specifications and cosmetic renderings to Classic and
they do the research, development and manufacturing of the
product. We own all of the tooling and Classic is obligated not
to sell this product to anyone other than Lightning Audio. We
have a supply agreement with Classic and are obligated to place
monthly purchase orders but are not obligated to any specific
number of units or spending level. Our agreement with Classic
expires on July 31, 2004; however, we are in negotiations
at this time to revise and extend the contract. We believe we
could move production of amps and speakers to other external
manufacturers, or build them internally, but have generally been
satisfied with our relationship with Classic. In 2003 we
purchased approximately $9.5 million of product from
Classic.

Inventec Appliances supplies our Omnifi products.
We have jointly developed this product line with Inventec, with
Inventec providing designs for the hardware while we provide
designs on the software. In this case, we own the design,
tooling, test equipment and software. We believe we could move
this product line to another contract manufacturer within
3 months if we were to experience problems with Inventec.
Our sourcing agreement includes contractual terms that would
require us to pay for any excess raw materials in the event the
program is terminated and honor submitted purchase orders if we
attempt to cancel after a stated production lead time; however,
we are not committed to any minimum purchase quantities. Our
agreement with Inventec commenced in November of 2003 and
expires in November of 2004. We purchased approximately
$6.9 million of Omnifi product from Inventec in 2003.

Hyundai Electronics supplies all of the source
units we resell under the Rockford Fosgate brand. Hyundai
manufactures source units in accordance with our specifications.
We develop these units jointly with Hyundai and then purchase
them from Hyundai on an exclusive basis. Our agreement with
Hyundai obligates us to place monthly purchase orders with
Hyundai and is subject to cancellation charges for partially or
totally cancelled orders. We are not obligated to any minimum
purchase quantities. Our agreement with Hyundai commenced
April 8, 1999, and expires July 31, 2004. After
July 31, 2004, we anticipate continuing to purchase source
units from Hyundai, which has indicated a willingness to
continue supplying source units to us. For the year ended
December 31, 2003, we paid Hyundai approximately
$4.2 million under the agreement.

Other third parties manufacture our full-range
speakers, home theater products and various components according
to our design specifications. Most of our products use standard
parts and components that can be purchased from multiple
sources. In a few instances, however, components or products are
sourced from one or a small number of suppliers to leverage
dollars and volumes. We relied on Avnet, Inc. for
approximately 8.2% of our inventory purchases during 2003. We
believe alternative sources are available for substantially all
of our inventory requirements. While we do not have guaranteed
supply arrangements with many of our suppliers, we have never
experienced an inability to obtain necessary components or other
raw materials.

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We believe that our sourcing and supply of
components and other raw materials are adequate for our needs.

Intellectual Property

We rely upon a combination of trade secret and
trademark laws, non-disclosure agreements and patents to protect
our proprietary rights. We have registered many trademarks and
trade names both in the U.S. and internationally and are
committed to maintaining and protecting them. We believe our
trademarks and trade names are material to our business and are
well known among consumers in our principal markets. Our
principal trademarks and trade names include, but are not
limited to:



| |                            
| | ---------------------------
| |  Rockford Fosgate®        
| |  Our
    Diamond R logo®
| |  The
    Punch®           
| |  Type RF                 
|
| |  Audio Innovations       
| |  Q-Logic                 
|
| |  Fosgate Audionics®       
| |  InstallEdge.com®         
|
| |  MB Quart®                
|
| |  Lightning Audio®         
| |  Strike                  
| |  Storm                   
| |  Bolt                    
| |  Dead
    Skin           
|
| |  Omnifi                  
|
| |  NHT®                     
| |  Now Hear
    This®       
|
| |  Hafler®                  

Significant Customer and Seasonality



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Best Buy is a significant customer. We began
    selling a limited selection of our products to Best Buy in early
    1999 and currently sell to each of its more than 560 stores
    nationwide. Best Buy is one of the largest volume specialty
    retailers of consumer electronics and entertainment software in
    the U.S. Best Buy accounted for 16.3% of our sales for
    2001, 21.1% of our sales for 2002 and 25.9% of our sales for
    2003. We anticipate that Best Buy will continue to account for a
    significant portion of our sales for the foreseeable future.

Best Buy generally helps us to smooth out our
normal sales seasonality. For our specialty and audio-video
dealers, our peak-selling season is in the spring and summer and
our slowest season is typically in the fourth quarter. We
believe that we experience this seasonality because our core
16-24 year old consumers tend to buy mobile audio products
during the spring and summer when they are on semester breaks
and when generally more favorable weather facilitates
installation of our products. Best Buy sales, while strong in
May and June, are not as concentrated among our core consumers
and are also strong in the fourth quarter.

Best Buy is not obligated to any long-term
purchases of our products and has considerable discretion to
reduce, change or terminate its purchases of our products. The
loss of Best Buy as a customer or significant reductions in its
purchases of our products would materially reduce our sales.

We believe our acquisition of NHT, and growth of
our other home theater brands, will also moderate the
seasonality of our sales in future years, since home audio sales
tend to be more concentrated in the third and fourth quarters of
the year, which is a typical seasonality for the home audio
business.

Product Support

To maintain and enhance our relationships with
retailers, we provide numerous support services, including
product and installation training, sales training and technical
and customer service support. Our web site provides
comprehensive and valuable information for dealers and
distributors, including product schematics, ad layouts and logos.

RTTI, one of the first and most advanced training
programs of its kind in our industry, trains approximately 5,000
retail sales and installation personnel each year on
installation, sales and marketing techniques that help them sell
mobile audio products. In addition, our instructors and
demonstration vehicles travel worldwide hosting dealer
instruction seminars.

14



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Our products carry standard warranties against
defects in material and workmanship, and we will either repair
or replace any product that fails to satisfy these warranties.
We offer repair services for products that are no longer covered
under the original warranty. For our U.S. customers, we
have in-house customer service, repair and technical support
personnel who provide general company information, installation
support, troubleshooting and system design assistance. We
provide a factory direct repair program that repairs and ships
product rapidly, reducing retailer and consumer inconvenience if
our products fail to perform properly.

For our international customers, we provide
warranty and customer service to consumers in the countries
where we sell direct to retailers. These countries include
Canada, Germany, Austria, Switzerland, Denmark and Italy. In
other countries, our distributors provide customer service and
warranty support.

Information Systems

Our information systems are designed to respond
quickly to inquiries from our managers, employees, suppliers and
customers. These systems assist us in producing high quality
products quickly and affordably by providing immediate quality
information about our business.

We have implemented Internet systems to provide
accurate and timely information and allow our representatives,
dealers and distributors to check the status of their orders at
our secure Internet site. We have also implemented Internet
systems to provide accurate and timely information to our
suppliers in support of just-in-time delivery of components to
our manufacturing facilities. These systems help us reduce cost
by reducing our inventory requirements and providing better
information from our suppliers.

Employees

As of December 31, 2003, we had 709 total
employees. At that date, in the U.S., 340 were engaged in
manufacturing, 60 in engineering and development, 47 in sales
and marketing, 103 in administration and 18 at Simple Devices.
We also had 141 employees working outside of the U.S. in
various functions. We have never had a work stoppage and none of
our U.S. employees are unionized. The employees at MB Quart
GmbH in Obrigheim, Germany, are unionized and, in accordance
with German law and custom, are subject to an industry wide
collective bargaining agreement. We believe our employee
relations are good.

During 2003, we restructured several business
processes, which we believe will result in improved efficiencies
and customer service. This restructuring resulted in the
reduction of approximately 8% of our salaried staff in Arizona
and Michigan and 21% of our workforce at MB Quart in Germany.

Environmental Compliance

Whenever possible, we avoid using hazardous
materials in our production processes. Two chemicals used in our
basic processes, lacquer and flux, are listed as hazardous
substances by the U.S. Environmental Protection Agency. We
use them in limited quantities in our production facility,
taking care to see that they are stored, used and disposed of in
the proper manner. We believe that our compliance with federal,
state, local and foreign provisions regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, will not have a material effect
upon our capital expenditures, earnings or competitive position.
We do not anticipate material capital expenditures for
environmental control facilities for the remainder of the
current fiscal year or the succeeding fiscal year.






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

Our corporate headquarters and electronics
manufacturing facilities are located in Tempe, Arizona. In the
U.S. we manufacture speakers at our facility in Grand
Rapids, Michigan and speaker enclosures at our facility in
Stillwater, Oklahoma. We use warehouses strategically located in
the U.S., Germany, and Singapore. We believe these facilities
enhance our ability to serve our markets faster and more cost
effectively than many of our competitors. MB Quart operates and
manufactures product in an owned facility in Obrigheim, Germany.

15



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##### Table of Contents



The following table contains information about
our facilities as at December 31, 2003, all of which are
leased except for the MB Quart facilities that we own:

|                                                                                                                 |       |                        |  |                |        |                |  |                  |         |           |  |                      | 
|---------------------------------------------------------------------------------------------------------------- | ----- | ---------------------- |  | -------------- | ------ | -------------- |  | ---------------- | ------- | --------- |  | -------------------- | 
|                                                                                                                 |       |                        |  |                |        | Approximate    |  |                 
|                                                                                                                 |       |                        |  | Approximate    |        | 2003 Annual    |  |                 
|Function                                                                                                         |       | Location               |  | Square Footage |        | Rental Expense |  | Lease Expiration
|                                                                                                                 |       |                        |  |                |        |                |  |                 
|Corporate headquarters and research and
    development                                                          |       | Tempe, Arizona         |  |                | 30,000 |                |  | $                | 291,000 |           |  | September 30, 2009  
|Information systems and RTTI                                                                                     |       | Tempe, Arizona         |  |                | 15,000 |                |  |                  | 169,000 |           |  | September 30, 2005  
|Manufacturing and purchasing                                                                                     |       | Tempe, Arizona         |  |                | 22,000 |                |  |                  | 147,000 |           |  | December 31, 2004(1)
|Warehousing, sales and customer service                                                                          |       | Tempe, Arizona         |  |                | 25,000 |                |  |                  | 167,000 |           |  | December 31, 2004(1)
|Warehousing                                                                                                      |       | Gilbert, Arizona       |  |                | 54,000 |                |  |                  | 463,000 |           |  | July 31, 2005       
|Manufacturing, research and development,
    purchasing and administration                                       |       | Grand Rapids, Michigan |  |                | 81,000 |                |  |                  | 246,000 |           |  | July 31, 2004(2)    
|Warehousing                                                                                                      |       | Grand Rapids, Michigan |  |                | 45,000 |                |  |                  | 303,000 |           |  | March 31, 2004(2)   
|Manufacturing, research and development,
    warehousing and administration                                      |       | Stillwater, Oklahoma   |  |                | 69,000 |                |  |                  | 101,000 |           |  | May 31, 2006        
|Warehousing                                                                                                      |       | Stillwater, Oklahoma   |  |                | 25,000 |                |  |                  | 108,000 |           |  | December 31, 2005   
|Sales, research and administration                                                                               |       | Benicia, California    |  |                | 18,000 |                |  |                  | 91,000  |           |  | October 31, 2008    
|Research and development, sales and administration                                                               |       | San Mateo, California  |  |                | 3,300  |                |  |                  | 105,000 |           |  | October 31, 2005    
|Warehousing                                                                                                      |       | Singapore              |  |                | 9,000  |                |  |                  | 306,000 |           |  | January 31, 2006    
|Warehousing and sales                                                                                            |       | Bremen, Germany        |  |                | 20,000 |                |  |                  | 135,000 |           |  | December 31, 2006   
|Manufacturing, research and development, sales,
    warehousing, customer service, purchasing and administration |       | Obrigheim, Germany     |  |                | 70,500 |                |  |                  |        |           |  | Owned               
|                                                                                                                 |       |                        |  |                |        |                |  |                  |         |           |  |                     
|                                                                                                                 | Total |                        |  |                |        | 486,800        |  |                  | $       | 2,632,000 |  |                      | 
|                                                                                                                 |       |                        |  |                |        |                |  |                  |         |           |  |                     




|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We have the right to extend each of these leases
    for one additional one-year term.                                                                                                                                                                                                                                                 
|   
|(2) | We have leased a new facility in the Grand Rapids
    area to replace these two facilities and expect to move into the
    new facility during the second quarter of 2004. The new facility
    has approximately 163,000 square feet and will be leased
    for 5 years at an initial annual lease cost of
    approximately $571,000.






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

During the year 2003 the Fiori patent claim
described in our Annual Reports for 2001, 2002 and 2003
continued through an intensive fact discovery phase of
proceedings. The products at issue in the case are now 16 of our
Punch brand amplifiers, which the plaintiff contends include
circuitry that infringes on his patents. We have incurred
substantial costs of defense, which contributed to our increased
research and development costs during the year. At the end of
the year the parties submitted briefs and the court held a
Markman hearing. We anticipate that the judge will issue her
Markman ruling, interpreting the claims of the plaintiffs
patent, sometime during the first half of 2004. Depending upon
the results of that ruling, we anticipate that the parties will
submit motions in the case shortly after the courts
Markman ruling. If necessary, a trial could occur in late 2004
or during 2005. The costs of defending this matter have been,
and are likely to continue to be, substantial; however, we
continue to believe that the claim involved in the case is
without merit and that we should ultimately prevail in this
matter.

During 2003 we became involved in litigation with
our former distributor for Central and South America relating to
our efforts to collect a balance owed to us and the
distributors claims that we improperly

16



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##### Table of Contents



terminated its distribution rights. In early
2004, the court granted our motion for summary judgment with
respect to the amounts owed to us and we intend to undertake
efforts to collect the judgment. The distributors claims
relating to our termination of its distribution remain a part of
the case and we intend to defend them vigorously. We do not
believe that they have merit. The former distributor has also
undertaken legal actions in Panama that have interfered with the
ability of our new distributor for Central and South America to
develop and service those markets. This interference has been
one of the causes of a decline in our sales in this territory.
We intend to continue to take actions designed to reduce or
eliminate this interference, and to seek redress for the damage
the former distributor is causing to our business. We are unable
to determine at this time when, or the extent to which, our
efforts will be successful.


We are and may continue to be a party to various
lawsuits and arbitrations from time to time. As at
December 31, 2003, we were not a party to any legal
proceedings that we believe are likely to have a material effect
on our business, other than the effect of the expense associated
with the matters described above.






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

We did not submit any matters to a vote of our
shareholders during the fourth quarter of Fiscal Year 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock has traded on The NASDAQ
National Market System under the symbol ROFO since
April 20, 2000, the date of our initial public offering.
Prior to that time, there was no public market for our common
stock. The following table sets forth the range of high and low
sales prices for our common stock for the periods indicated:

|                       |                    |      |   |       |  |  |   |      | 
|---------------------- | ------------------ | ---- | - | ----- |  |  | - | ---- | 
|                       |                    | High |   | Low  
|                       |                    |      |   |      
|For the quarter ended: |                    |      |   |       |  |  |   |     
|                       | December 31, 2003  |      | $ | 7.40  |  |  | $ | 5.08 | 
|                       | September 30, 2003 |      | $ | 7.72  |  |  | $ | 5.12 | 
|                       | June 30, 2003      |      | $ | 6.40  |  |  | $ | 5.36 | 
|                       | March 31, 2003     |      | $ | 6.28  |  |  | $ | 5.00 | 
|                       | December 31, 2002  |      | $ | 6.59  |  |  | $ | 5.00 | 
|                       | September 30, 2002 |      | $ | 10.75 |  |  | $ | 5.70 | 
|                       | June 30, 2002      |      | $ | 10.35 |  |  | $ | 8.50 | 
|                       | March 31, 2002     |      | $ | 9.53  |  |  | $ | 8.20 | 

As at March 1, 2004, there were
approximately 1,552 holders of record of our common stock.

We have never declared, nor have we paid, any
cash dividends on our common stock. We currently intend to
retain our earnings to finance future growth and, therefore, do
not anticipate paying cash dividends on our common stock in the
foreseeable future.

We have not made any sales of unregistered
securities during the past three years, except for
(1) sales of our common stock to employees exercising their
stock options during the period prior to the effectiveness of a
registration statement on Form S-8 relating to such sales
and (2) the sale during March 2002 of 215,000 shares
to Grisanti, Galef & Goldress, Inc. pursuant to
the stock options we granted to that firm in 1992.

17



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##### Table of Contents



Equity Compensation Plan Information

|                                                                         |  |                            |           |                      |  |                                     |        |  |  |  |         | 
|------------------------------------------------------------------------ |  | -------------------------- | --------- | -------------------- |  | ----------------------------------- | ------ |  |  |  | ------- | 
|                                                                         |  |                            |           |                      |  | Number of securities               
|                                                                         |  | Number of securities to be |           | Weighted average     |  | remaining available for            
|                                                                         |  | issued upon exercise of    |           | exercise price of    |  | future issuance under equity       
|                                                                         |  | outstanding options,       |           | outstanding options, |  | compensation plans (excluding      
|                                                                         |  | warrants and rights        |           | warrants and rights  |  | securities reflected in column (a))
|Plan category                                                            |  | (a)                        |           | (b)                  |  | (c)                                
|                                                                         |  |                            |           |                      |  |                                    
|Equity compensation plans approved by security
    holders Stock Options |  |                            | 1,373,892 |                      |  |                                     | 5.1902 |  |  |  | 534,033 | 
|Equity compensation plans not approved by
    security holders           |  |                            | None      |                      |  |                                     | None   |  |  |  | None    | 






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

The following selected consolidated financial
data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8,
Financial Statements and Supplementary Data. The
table contains selected consolidated financial data for the
years ended December 31, 1999, 2000, 2001, 2002 and 2003,
derived from our audited consolidated financial statements.

The selected financial information for the years
prior to 2002 do not reflect financial results of the
acquisitions of the NHT brand or SimpleDevices business, which
were completed in the fourth quarter of 2002. In addition, the
selected financial information for the years prior to 2001 do
not reflect financial results of the acquisitions of the Q-Logic
or MB Quart brands, which were completed in 2001.

|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                           |                            |                                      
|                                                                           |                            | Year Ended December 31,              
|                                                                           |                            |                                      
|                                                                           |                            | 1999                                  |         | 2000   |        | 2001 |         | 2002   |        | 2003
|                                                                           |                            |                                       |         |        |        |      |         |        |        |     
|                                                                           |                            |                                      
|                                                                           |                            | (In thousands, except per share data)
|Consolidated Statements of Operations:                                     |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net sales                                                                  |                            | $                                     | 123,889 |        |        | $    | 144,640 |        |        | $    | 157,752 |        |        | $ | 168,918 |        |        | $ | 172,036 |       
|Cost of goods sold                                                         |                            |                                       | 75,014  |        |        |      | 92,533  |        |        |      | 103,904 |        |        |   | 107,747 |        |        |   | 118,969 |       
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Gross profit                                                               |                            |                                       | 48,875  |        |        |      | 52,107  |        |        |      | 53,848  |        |        |   | 61,171  |        |        |   | 53,067  |       
|Operating expenses:                                                        |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           | Sales and marketing        |                                       |         | 20,602 |        |      |         | 22,709 |        |      |         | 24,228 |        |   |         | 27,370 |        |   |         | 32,245 |       
|                                                                           | General and administrative |                                       |         | 13,465 |        |      |         | 13,036 |        |      |         | 15,771 |        |   |         | 17,718 |        |   |         | 21,117 |       
|                                                                           | Research and development   |                                       |         | 2,277  |        |      |         | 2,831  |        |      |         | 3,322  |        |   |         | 6,014  |        |   |         | 8,602  |       
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           |                            | Total operating expenses              |         |        | 36,344 |      |         |        | 38,576 |      |         |        | 43,321 |   |         |        | 51,102 |   |         |        | 61,964 | 
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Operating income (loss)                                                    |                            |                                       | 12,531  |        |        |      | 13,531  |        |        |      | 10,527  |        |        |   | 10,069  |        |        |   | (8,897  | )     
|Interest and other expense (income), net                                   |                            |                                       | 1,946   |        |        |      | 807     |        |        |      | 548     |        |        |   | (74     | )      |        |   | 267     |       
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Income (loss) before income taxes                                          |                            |                                       | 10,585  |        |        |      | 12,724  |        |        |      | 9,979   |        |        |   | 10,143  |        |        |   | (9,164  | )     
|Income tax expense (benefit)                                               |                            |                                       | 4,088   |        |        |      | 4,714   |        |        |      | 3,756   |        |        |   | 3,903   |        |        |   | (3,050  | )     
|Minority interest                                                          |                            |                                       |        |        |        |      |        |        |        |      |        |        |        |   | (40     | )      |        |   | (450    | )     
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net income (loss)                                                          |                            | $                                     | 6,497   |        |        | $    | 8,010   |        |        | $    | 6,223   |        |        | $ | 6,280   |        |        | $ | (5,664  | )     
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net income (loss) per common share:                                        |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           | Basic                      |                                       | $       | 1.40   |        |      | $       | 1.17   |        |      | $       | 0.77   |        |   | $       | 0.74   |        |   | $       | (0.64  | )     
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           | Diluted                    |                                       | $       | 1.04   |        |      | $       | 1.00   |        |      | $       | 0.70   |        |   | $       | 0.68   |        |   | $       | (0.64  | )     
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Weighted average shares used to calculate net
    income (loss) per share: |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           | Basic                      |                                       |         | 4,641  |        |      |         | 6,864  |        |      |         | 8,109  |        |   |         | 8,540  |        |   |         | 8,866  |       
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                           | Diluted                    |                                       |         | 6,289  |        |      |         | 8,009  |        |      |         | 8,913  |        |   |         | 9,301  |        |   |         | 8,866  |       
|                                                                           |                            |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       

18



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|                                                                    |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |         | 
|------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------- | 
|                                                                    |  |               
|                                                                    |  | December 31,  
|                                                                    |  |               
|                                                                    |  | 1999           |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                                                    |  |                |        |      |  |      |        |      |  |     
|                                                                    |  |               
|                                                                    |  | (In thousands)
|Consolidated Balance Sheet Data:                                    |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |         | 
|Working capital                                                     |  | $              | 21,219 |      |  | $    | 37,179 |      |  | $    | 45,913 |  |  | $ | 52,354  |  |  | $ | 38,138  | 
|Total assets                                                        |  |                | 52,147 |      |  |      | 66,918 |      |  |      | 85,954 |  |  |   | 101,190 |  |  |   | 111,298 | 
|Current portion of long-term debt and capital
    lease obligations |  |                | 1,420  |      |  |      | 935    |      |  |      | 879    |  |  |   | 1,253   |  |  |   | 24,345  | 
|Long-term debt and capital lease obligations                        |  |                | 17,342 |      |  |      | 434    |      |  |      | 10,553 |  |  |   | 10,027  |  |  |   |        | 
|Total liabilities                                                   |  |                | 39,390 |      |  |      | 20,586 |      |  |      | 32,997 |  |  |   | 34,711  |  |  |   | 47,608  | 
|Shareholders equity                                                |  |                | 12,757 |      |  |      | 46,332 |      |  |      | 52,957 |  |  |   | 65,546  |  |  |   | 63,207  | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

We begin Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) with a discussion of Rockfords strategy to give
the reader an overview of the goals of our business and the
direction in which our business and products are moving. In the
next section, we discuss our Results of Operations for 2003
compared to 2002, and for 2002 compared to 2001, beginning with
an Overview. We then provide an analysis of changes in our
balance sheet and cash flows, and discuss our financial
commitments in the sections entitled Liquidity and Capital
Resources. We conclude with a discussion of the Critical
Accounting Estimates that we believe are important to
understanding the assumptions and judgments incorporated in our
reported financial results.

This Analysis should be read in conjunction with
the other sections of this Annual Report on Form 10-K,
including Item 1: Business; Item 6:
Selected Financial Data; and Item 8: Financial
Statements and Supplementary Data. This Analysis does not
reflect the potential impact of any divestitures, mergers,
acquisitions or other business combinations that had not been
completed as of the filing date of this report.

Our Strategy

Our goal is to design, produce and distribute the
best engineered and most recognized and respected brands of high
performance mobile, professional and home theater audio products
in the world. Each element of our strategy is intended to
enhance and reinforce our global brand images among consumers
and retailers. Key elements of our growth strategy are to:

Introduce New and Innovative
Products.We must remain on the
forefront of technological development because our consumers
demand high performance and technologically advanced features in
their audio products. We intend to enhance the strength of our
brands by continuing to introduce new and innovative products.

In January 2004, at the Consumer Electronics
Show, we announced the redesign of the technology and cosmetics
of a significant portion of our core Rockford Fosgate product
line, including seventeen new amplifiers, thirty-four new
woofers, one new video source unit, twelve new loaded
enclosures, nine new component speakers and eight new coaxial
speakers. In addition, we introduced innovative products in our
other mobile audio brands. MB Quart introduced several new
amplifiers and source units, which are new categories for this
brand. Lighting Audio introduced three new amplifiers, sixteen
new and replacement woofers, one new combination amplifier/
woofer box kit and two component speaker sets. Q-Logic
introduced new bandpass enclosures featuring a slot-port venting
system that is tunable, and new Q-Customs and Q-Forms products,
which are enclosures, specified for the tuner car market.

We believe our Omnifi product has set us apart
from our principal competitors in terms of both technology and
new market opportunity. Omnifi announced three new products at
CES 2004. The second-generation products are focused on video
streaming and downloading for both the home and car and include
a digital media streamer that decodes video formats such as
MPEG2 and MPEG4 and displays contents on the consumers
home theater video screen, a mobile unit that provides the same
capability in the automobile and a

19



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##### Table of Contents



portable digital media player, which is
Omnifis first portable product and one of the
industrys first self-contained portables.


The key trade show for our home products is the
Custom Electronic Design & Installation Association
show (CEDIA), which is held in September. NHT introduced a range
of innovative products at the September 2003 CEDIA show,
including a high performance loudspeaker that matches with
todays plasma and LCD television products, an in-wall
loudspeaker system that is virtually invisible, new all weather
loudspeakers, an active crossover, and its new DSP
loudspeaker/amplifier system. NHT Pro introduced a new tracking
monitor. Fosgate Audionics introduced its new FAPT1+ preamp/
processor and S-1 digital media streamer system.

Expand OEM Business.We continue to work to expand our current OEM business model. We
believe there is strong demand for our brands in this market,
with Rockford Fosgate, Lighting Audio and MB Quart each
appealing to selected major car manufactures. We continue to
expand our relationship with Nissan and believe we have an
excellent relationship and continued growth prospects at Nissan.
Beyond the Nissan relationship, Mitsubishi has agreed to offer
Rockford-Fosgate branded OEM systems in two models
beginning with the 2006 model year and we have been awarded
smaller amounts of business with other car manufacturers.

Broaden Our
Distribution.We intend to broaden the
distribution of our products by entering new distribution
channels and increasing penetration of our existing distribution
channels. We intend to increase our penetration of specialty
dealer, audio/ video retailer, consumer electronics retailer and
catalog retailer channels by expanding the breadth of our
products that these retailers sell and by selectively adding new
dealers within these channels. As we broaden the distribution of
our products, we will adhere to our strategy of selective
distribution for our premium brands while developing products
for broader distribution using our lower priced brands. We
believe selective distribution of premium brands fosters
retailers loyalty to our brands, enhances retailers
profit margins and encourages retailers to carry a broad range
of our products. In furtherance of this strategy, during the
first quarter of 2003 we agreed to distribute selected Lightning
Audio products in Wal-Mart stores in the United States.

We are expanding the distribution of our Omnifi
products to include the internet service provider channel and
personal computer retailers.

Capitalize on International
Opportunities.We believe the Rockford
Fosgate, Lighting Audio and MB Quart brand names are recognized
in many foreign countries as well as the U.S. We intend to
expand Rockford Fosgate, Lightning Audio, Q-Logic, MB Quart,
Omnifi and Fosgate Audionics in international markets.

We continue to move to a one-step distribution
system for Rockford Fosgate products in larger international
markets. By converting selected distributors into independent
sales representatives, we are able to sell directly to
retailers. We expect these measures to increase our sales in
these markets by allowing us to better compete through lower
distribution costs and reduced prices to the consumer. We
currently sell our Rockford Fosgate mobile audio products
directly to retailers in Canada, Germany, Austria, Switzerland,
Denmark and Italy, and through independent distributors in other
countries.

Expand Our Home Theater
Business.The NHT acquisition, which
was completed in December 2002, brings diversity and strength to
our home audio family of brands. NHT gives us critical mass with
200 dealers for our home group. We expect these dealers will
also help provide a retail channel for our MB Quart and Fosgate
Audionics home products. We sell home theater products under our
MB Quart and Fosgate Audionics brands, including two preamp/
surround processors, two multi-channel amplifiers, speakers and
subwoofers. We sell our MB Quart and Fosgate Audionics home
theater audio products through traditional retail channels.

Acquire, Develop and Expand Additional Audio
Brands.We continue to look for
opportunities to add new brands through acquisition or internal
development. During the 4th quarter of 2002, we completed
acquisitions of the NHT business and of a majority interest in
SimpleDevices. We believe we will have additional opportunities
to acquire mobile, home and professional audio brands that will
complement our

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existing brand portfolio. We believe the
introduction or acquisition of additional brands will enable us
to take advantage of our distribution capabilities and our
strengths in advanced technology design and development. We also
believe that offering additional brands with different price
points and target market segments will enable us to extend our
product range, complement our existing distribution channels and
broaden our customer base.


We have acquired a number of brands as part of
this strategy, including:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | Lightning Audio, acquired in 1999;                            
|
| |  | Fosgate Audionics, acquired in 2000;                          
|
| |  | Audio Innovations and its Q-Logic brand, acquired
    in 2001;
|
| |  | MB Quart, acquired in 2001;                                   
|
| |  | SimpleDevices, acquired in 2002;                              
|
| |  | NHT (Now Hear This) acquired in 2002.                         

Results of Operations



| |         
| | --------
| | Overview

We generated over 94% of our business from our
mobile audio products in 2003 and 97% in 2002. The mobile audio
business remained challenging in 2003. Our mobile audio sales
for 2003 were only down 3% from 2002 as we managed to
significantly increase our market share and distribution.
According to NPD Intelect Market Tracking, based on dollar sales
in the United States, we continue to be number one in market
share in amplifiers, with 21% of the market, and number two in
speakers, with 12% of the market. In comparison, for 2002 we
were number one in amplifiers, with 17% of the market and number
two in speakers, with 11% of the market.

Although we gained market share in a declining
market, 2003 was a difficult year. Results were affected by the
relaunch of our Rockford Fosgate product line, introduced at the
2004 CES, distribution channel shifts, continuing investments in
acquired companies and non-recurring expenses. We believe that
the investments we made in new products, distribution channels
and technologies, combined with improvements we are implementing
in our processes have positioned us for a return to
profitability in 2004.

Our 2004 product redesign had a significant
negative impact on our results for 2003. End of life discounting
was prevalent and greater than usual due to the extent of our
product line overhaul, which impacted margins greater than we
anticipated. Manufacturing of our old product was ramped down
before the new product was fully ready for manufacturing,
resulting in unfavorable manufacturing variances. We also
experienced increased raw material levels, increased engineering
costs and premium freight associated with this change. We
decided that this was a necessary investment and believe that we
have reinforced our leadership position in the marketplace with
our new product line.

We continue to see a shift in our sales mix into
different distribution channels, with the independent specialty
dealer and audio/ video retailer channels seeing declines and
the consumer electronics chain and mass merchandise channels
seeing growth. This shift has had some positive effects,
expanding our product exposure beyond our traditional target
market and smoothing out seasonality of our sales. It has also
had some negative effects, with results negatively impacted by
increased product returns, increased finished goods inventory
levels and increased dating of sales terms.

Sales of our product through independent
specialty dealers generally include professional installation;
however, sales through the consumer electronics chain and mass
merchandise channels are often for self- or third-party
installation. This difference in installation practice results
in higher returns because self- or third-party installations are
more likely to have misapplications of products or have other
installation issues. The consumer electronics and mass
merchandise channels also tend to have less intervention in the
sale and return process than the independent specialty retailers.

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The products we sell through the mass merchandise
channels are primarily sourced brands, generally manufactured in
China. Sourcing requires us to carry more finished goods
inventory due to longer lead times and less flexibility to meet
changing demand. The consumer electronics chains and mass
merchandisers negotiate longer payment terms than our other
channels, which affect our DSO; however, these customers
generally pay within terms. In 2003, Wal-mart began carrying our
Lighting Audio line. Wal-mart sales of this line were impressive
and Wal-mart has expanded our product offerings from 8 SKUs to
13 SKUs for 2004. We anticipate continued growth in the consumer
electronics chain and mass merchandise channels in 2004.

Growth in our home theater business accounted for
the 3% drop in the percentage of sales represented by our mobile
audio business. NHT, acquired in December 2002, was responsible
for most of this growth. NHT required an investment in inventory
as its previous owner was in financial difficulty and NHT was
inventory-deficient when we purchased them. We would not have
been able to meet demand without the investment we made in NHT
inventory. The acquisition of NHT has provided incremental sales
and expanded home theater distribution channels for our entire
line of home products, just as we intended.

We continue to increase sales in Europe and
Canada, but this increase was offset by a decrease in sales in
Asia and Latin America. We closed our Japanese subsidiary in the
first quarter of 2003 and replaced this sales channel with a
distributor relationship and also replaced distributors in
several other countries in Asia. We hired an international sales
manager, focused on the Asian market, in late 2003. We expect
this reorganization of our Asian sales efforts will provide the
framework for our Asian market growth strategy. Our increase in
sales in Europe was primarily due to the Lighting Audio Fast and
Furious 2 promotion, a new drop ship program from our vendors in
Asia to our dealers in Europe and Rockford Fosgates
increased market share.

We purchased MB Quart GmbH in 2001 to add a
premium brand to our mobile audio and home product lines, build
on the established reputation of the MB Quart brand, increase
our European distribution channels and acquire MB Quarts
engineering design and manufacturing capabilities. MB Quart had
been in receivership for some time before we purchased the
assets and a restructuring of the business was implemented in
2003. The total cost of the restructuring was $1.8 million,
primarily for workforce reduction expenses. In addition, during
2003, we recorded additional tax expense as a result of an
increase in the valuation allowance applied against the deferred
tax asset related to MB Quart GmbHs net operating loss
carryforward. We believe the restructuring coupled with the
redesign of the MB Quart base product line and introduction of
new mobile amplifier lines has positioned MB Quart GmbH for a
return to profitability in 2004. The combined results of MB
Quart GmbH and MB Quart USA remained profitable in 2003.

Our results for 2003 include the following
non-recurring expenses, in addition to the MB Quart GmbH
restructuring costs. We restructured several business processes
in early 2003 to improve efficiencies and customer service,
resulting in a reduction of approximately 8% of our salaried
staff in Arizona and Michigan. We continue to defend ourselves
against the Fiori patent claim, described in Item 3 Legal
Proceedings, and incurred $1.1 million in legal fees
related to this case. Finally, we had approximately $860,000 in
costs associated with an abandoned acquisition.

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The following table shows, for the years
indicated, selected consolidated statements of operations data
expressed as a percentage of net sales:

|                                         |                            |                          |       |      |      |      |       |      |      |  |       |      |      | 
|---------------------------------------- | -------------------------- | ------------------------ | ----- | ---- | ---- | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                         |                            |                         
|                                         |                            | Year Ended December 31, 
|                                         |                            |                         
|                                         |                            | 2001                     |       | 2002 |      | 2003
|                                         |                            |                          |       |      |      |     
|Net sales                                |                            |                          | 100.0 | %    |      |      | 100.0 | %    |      |  | 100.0 | %   
|Cost of goods sold                       |                            |                          | 65.9  |      |      |      | 63.8  |      |      |  | 69.2  |     
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     
|Gross profit                             |                            |                          | 34.1  |      |      |      | 36.2  |      |      |  | 30.8  |     
|Operating expenses:                      |                            |                          |       |      |      |      |       |      |      |  |       |     
|                                         | Sales and marketing        |                          |       | 15.4 |      |      |       | 16.2 |      |  |       | 18.7 |     
|                                         | General and administrative |                          |       | 10.0 |      |      |       | 10.4 |      |  |       | 12.3 |     
|                                         | Research and development   |                          |       | 2.1  |      |      |       | 3.6  |      |  |       | 5.0  |     
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     
|                                         |                            | Total operating expenses |       |      | 27.5 |      |       |      | 30.2 |  |       |      | 36.0 | 
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     
|Operating income (loss)                  |                            |                          | 6.6   |      |      |      | 6.0   |      |      |  | (5.2  | )   
|Interest and other expense (income), net |                            |                          | 0.3   |      |      |      | 0.0   |      |      |  | 0.1   |     
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     
|Income (loss) before tax                 |                            |                          | 6.3   |      |      |      | 6.0   |      |      |  | (5.3  | )   
|Income tax expense (benefit)             |                            |                          | 2.4   |      |      |      | 2.3   |      |      |  | (1.8  | )   
|Minority interest                        |                            |                          |      |      |      |      |      |      |      |  | (.2   | )   
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     
|Net income (loss)                        |                            |                          | 3.9   | %    |      |      | 3.7   | %    |      |  | (3.3  | )%  
|                                         |                            |                          |       |      |      |      |       |      |      |  |       |     

Cost of goods sold primarily consists of raw
materials, direct labor and manufacturing costs associated with
production of our products as well as warranty, warehousing,
freight-in and customer service expenses.

Sales and marketing expenses primarily consist of
salaries, sales commissions, costs of advertising, trade shows,
distributor and sales representative conferences and freight.

General and administrative expenses primarily
consist of salaries, facilities and other costs of our
accounting, finance, management information systems,
administrative and executive departments, as well as legal,
accounting and other professional fees and expenses associated
with our business.

Research and development expenses primarily
consist of salaries associated with our research and development
personnel and legal costs related to our intellectual property.

Geographic
Distribution of Sales

Since 2001, our sales to external customers by
geographic region were as follows:

|               |             |                         |         |         |  |      |         |         |  |   |         |         |  |  |      |       |  
|-------------- | ----------- | ----------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  |  | ---- | ----- | -
|               |             |                         |         |        
|               |             | Year Ended December 31, |         |        
|               |             |                         |         | %      
|Region(1)      |             | 2001                    |         | 2002    |  | 2003 |         | 2003   
|               |             |                         |         |         |  |      |         |        
|               |             |                         |         |        
|               |             | (In thousands)          |         |        
|United States  |             | $                       | 128,466 |         |  | $    | 134,150 |         |  | $ | 138,037 |         |  |  | 80.2 | %    
|Other Americas |             |                         | 9,018   |         |  |      | 9,557   |         |  |   | 9,297   |         |  |  | 5.4  |      
|Europe         |             |                         | 12,697  |         |  |      | 16,673  |         |  |   | 17,037  |         |  |  | 9.9  |      
|Asia           |             |                         | 7,571   |         |  |      | 8,538   |         |  |   | 7,665   |         |  |  | 4.5  |      
|               |             |                         |         |         |  |      |         |         |  |   |         |         |  |  |      |      
|               | Total sales |                         | $       | 157,752 |  |      | $       | 168,918 |  |   | $       | 172,036 |  |  |      | 100.0 | %
|               |             |                         |         |         |  |      |         |         |  |   |         |         |  |  |      |      




|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Sales are attributed to geographic regions based
    on the location of customers. No single foreign country
    accounted for greater than 10% of our sales.

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In the following discussion, certain increases
or decreases may differ due to rounding.

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

Net Sales.Sales
increased by $3.1 million, or 1.8%, to $172.0 million
for 2003 from $168.9 million for 2002. The increase in
sales was primarily attributable to the addition of sales from
our NHT and Q-Logic brands, growth in sales of our mobile audio
products through consumer electronic chain and mass merchandise
sales channels and increases in OEM sales. The increase in these
areas was partially offset by decreases in sales of our mobile
audio products through the specialty dealer and audio/video
sales channels.

U.S. sales increased by $3.8 million,
or 2.8%, to $138.0 million for 2003 from
$134.2 million for 2002, with the increase attributable to
the factors discussed above. International sales decreased by
$0.7 million, or 2.0%, to $34.0 million for 2003 from
$34.7 million for 2002. The reasons for the decrease in
international sales are discussed in the Overview above.

Cost of Goods Sold.Cost of goods sold increased by $11.3 million, or 10.4%, to
$119.0 million for 2003 from $107.7 million for 2002.
As a percent of sales, cost of goods sold increased to 69.2% for
2003 from 63.8% for 2002. The primary reasons for the increase
as a percent of sales were the unfavorable capacity variance
caused by the Rockford Fosgate product line changeover at the
end of 2003 and the manufacturing portion of MB Quart
restructuring, in the amount of $1.6 million.

Sales and Marketing
Expenses.Sales and marketing expenses
increased by $4.8 million, or 17.5%, to $32.2 million
for 2003 from $27.4 million for 2002. As a percent of
sales, sales and marketing expenses increased to 18.7% for 2003
from 16.2% for 2002. The increase was due to increased marketing
efforts on the brands and products we acquired in 2001 and 2002,
the Fast and Furious 2 royalty and $0.3 million of our
Arizona restructuring charges that were related to sales and
marketing changes

General and Administrative
Expenses.General and administrative
expenses increased by $3.4 million, or 19.2%, to
$21.1 million for 2003 from $17.7 million for 2002.
General and administrative expenses include the abandoned
acquisition costs of approximately $0.9 million,
$0.3 million in restructuring charges and the incremental
costs of NHT, which are significant reasons for the increase
from 2002. As a percent of sales, general and administrative
expenses increased to 12.3% for 2003 from 10.4% for 2002.

Research and Development
Expenses.Research and development
expenses increased by $2.6 million, or 43.3%, to
$8.6 million for 2003 from $6.0 million for 2002. As a
percent of sales, these expenses increased to 5.0% for 2003 from
3.6% for 2002. The increase was primarily due to product
development costs relating to our redesign of the Rockford
Fosgate product line and the continuing development of our
Omnifi products.

Operating Income
(Loss).Operating income (loss)
decreased by $19.0 million, or 188.1%, to
($8.9) million for 2003 from $10.1 million for 2002.
As a percent of sales, operating (loss) decreased to (5.2)% for
2003 from operating income of 6.0% for 2002. This decrease is
primarily attributable to the relaunch of our Rockford Fosgate
product line, the decrease in international sales, the
restructuring costs and costs related to the abandoned
acquisition.

Interest and Other Expense (Income),
Net.Interest and other expense
(income), net, primarily consists of interest expense and
currency gains and losses. Interest and other expense (income),
net, increased by $0.4 million to result in expense of
$0.3 million for 2003 compared to income of less than
$0.1 million for 2002. The increase was primarily due to
additional interest expense on the increased borrowings on our
line of credit resulting from the business acquisitions made in
2001 and 2002 combined with increased levels of inventory and
accounts receivable resulting from the changes in our business
described in the Overview above and an increase in the interest
rate as a result of our covenant default.

Income Tax (Benefit)
Expense.Income tax (benefit) expense
decreased by $7.0 million to a benefit of $3.1 million
for 2003 from $3.9 million of expense for 2002. The
effective income tax rates were 35.0% for 2003 and 38.3% for
2002. The primary reason for this decrease in the effective tax
rate was the effect of the valuation allowance recorded with
respect to the MB Quart GmbH net operating loss carryforward,
which decreased the 2003 tax benefit. The effective rate for
2003 net of the MB Quart GmbH valuation reserve was

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41.4%. The increase of 3.1% from 2002 to the
adjusted 2003 rate was primarily due to the impact of MB Quart
GmbHs results at Germanys higher tax rate and a new
requirement to file taxes in California as a result of our
acquisition of NHT.


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

Net Sales.Sales
increased by $11.1 million, or 7.1%, to $168.9 million
for 2002 from $157.8 million for 2001. Excluding currency
effects, sales increased by $10.5 million, or 6.6%, to
$169.5 million for 2002. The increase in sales was
primarily attributable to the addition of sales from our MB
Quart and Q-Logic brands, increased sales of our Lightning Audio
and Install Edge brands at big box retailers and strong sales
from our OEM business. The increase in sales was partially
offset by a decrease in Rockford Fosgate sales during the
period. We believe the decrease in Rockford Fosgate sales
reflected the continued weak retail environment for the mobile
audio market and the resulting pressure on our independent
specialty dealer channel. Additionally, in an effort to build
brand image and solidify our relationships with core dealers, we
discontinued shipping to several of our Rockford Fosgate brand
dealers who were not operating in a manner consistent with our
policies. We elected to forego these sales in order to improve
the quality of our dealer base and, if our efforts are
successful, anticipate increased sales to dealers who comply
with our policies will, over time, offset the forgone sales to
these terminated dealers.

U.S. sales increased by $5.7 million,
or 4.4%, to $134.2 million for 2002 from
$128.5 million for 2001, with the increase attributable to
the factors discussed above. International sales increased by
$5.4 million, or 18.4%, to $34.7 million for 2002 from
$29.3 million for 2001. This increase was primarily due to
increased sales in Europe, Canada and Asia offset by a slight
decrease in sales in Latin America, due in part to the
termination and replacement of our Rockford Fosgate distributor
in Latin America.

Cost of Goods Sold.Cost of goods sold increased by $3.8 million, or 3.7%, to
$107.7 million for 2002 from $103.9 million for 2001.
Substantially all of the increase was attributable to sales of
our MB Quart and Q-Logic brands. As a percent of sales, cost of
goods sold decreased to 63.8% for 2002 from 65.9% for 2001. The
primary reasons for the decrease as a percent of sales included
a mix shift toward higher margined products and cost reductions
related to the direct sourcing of our Connecting Punch
accessories product.

Sales and Marketing
Expenses.Sales and marketing expenses
increased by $3.1 million, or 13.0%, to $27.4 million
for 2002 from $24.2 million for 2001. As a percent of
sales, sales and marketing expenses increased to 16.2% for 2002
from 15.4% for 2001. This increase was primarily due to higher
cost structures for our acquired MB Quart and Q-Logic brands,
including higher freight costs as a percent of sales associated
with shipping Q-Logic product and increased duty costs on
shipping product to Canada.

General and Administrative
Expenses.General and administrative
expenses increased by $1.9 million, or 12.3%, to
$17.7 million for 2002 from $15.8 million for 2001.
The primary reasons for the increase in general and
administrative expenses were higher overhead cost structures for
our MB Quart and Q-Logic brands and our acquired SimpleDevices
business and increased legal costs. This increase was partially
offset by the reduction of performance-based compensation
expense. Additionally, abandoned acquisition costs of less than
$0.1 million were written off during the first quarter of
2002 and $0.6 million were written off in 2001. These were
previously capitalized costs for a proposed acquisition, which
was abandoned and accordingly expensed. As a percent of sales,
general and administrative expenses increased to 10.5% for 2002
from 10.0% for 2001.

Research and Development
Expenses.Research and development
expenses increased by $2.7 million, or 81.0%, to
$6.0 million for 2002 from $3.3 million for 2001. As a
percent of sales, these expenses increased to 3.6% for 2002 from
2.1% for 2001. The increase was primarily due to increased legal
costs associated with the defense of the Fiori patent matter and
personnel and product development costs relating to our MB Quart
and Q-Logic brands and our acquired SimpleDevices business.

Operating Income.Operating income decreased by $0.4 million, or 4.4%, to
$10.1 million for 2002 from $10.5 million for 2001. As
a percent of sales, operating income decreased to 6.1% for 2002
from 6.6% for 2001. This decrease is primarily attributable to
increased general and administrative expenses associated with
higher

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overhead cost structures for our MB Quart and
Q-Logic brands and our acquired SimpleDevices business and
increased research and development expenses associated with
legal costs relating to the defense of the Fiori patent matter.


Interest and Other Expense,
Net.Interest and other expense, net,
primarily consists of interest expense and currency gains and
losses. Interest and other expense, net, decreased by
$0.6 million to result in income of $0.1 million for
2002 compared to expense of $0.5 million for 2001. The
decrease was primarily due to foreign currency gains, which were
partially offset by increased interest expense due to the
increased balance of our line of credit resulting from the MB
Quart, Q-Logic and NHT brand acquisitions and SimpleDevices
business acquisition.

Income Tax Expense.Income tax expense increased by $0.1 million to
$3.9 million for 2002 from $3.8 million for 2001. The
effective income tax rates were 38.5% for 2002 and 37.6% for
2001. The primary reason for this increase in the effective tax
rate was a decrease in foreign tax benefits from foreign net
operating losses.

Quarterly Results of Operations

Our sales on a quarterly basis reflect the
seasonality of the mobile audio aftermarket business. Sales are
generally greater during the first and second quarters of each
calendar year and lower during the third and fourth quarters,
with our lowest sales typically occurring during the fourth
quarter. In 2003, the market weakened even further in the second
half of the year. Our NHT business and the consumer electronic
chain and mass merchandise channels have seasonality that
somewhat offsets this core business, with higher sales in the
3rd and 4th quarters. We are starting to see the
impact of these shifts but expect our business to remain
seasonal for the foreseeable future.

The following tables show selected consolidated
quarterly statements of operations data derived from our
unaudited financial statements for each of the eight quarters
ended December 31, 2003, and also show that data expressed
as a percent of sales for the periods indicated. We believe
these unaudited financial results were prepared on a basis
consistent with our audited financial statements and include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our consolidated results of
operations for those periods. The results of operations for any
quarter are not necessarily indicative of the results of any
future period.

Consolidated Statement of Operations
Data

|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |       |        | 
|---------------------------------------- | -------------------------- | ------------------------------------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                         |                            |                                      
|                                         |                            | Three Months Ended                   
|                                         |                            |                                      
|                                         |                            | Mar. 31,                              |        | Jun. 30, |        | Sep. 30, |        | Dec. 31, |        | Mar. 31, |        | Jun. 30, |        | Sep. 30, |        | Dec. 31,
|                                         |                            | 2002                                  |        | 2002     |        | 2002     |        | 2002     |        | 2003     |        | 2003     |        | 2003     |        | 2003    
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |         
|                                         |                            |                                      
|                                         |                            | (In thousands, except per share data)
|Net sales                                |                            | $                                     | 43,734 |          |        | $        | 51,228 |          |        | $        | 40,583 |          |        | $        | 33,373 |          |        | $ | 39,624 |       |        | $ | 56,568 |       |        | $ | 39,496 |       |        | $ | 36,348 |      
|Cost of goods sold                       |                            |                                       | 27,212 |          |        |          | 31,199 |          |        |          | 26,315 |          |        |          | 23,021 |          |        |   | 26,785 |       |        |   | 36,241 |       |        |   | 28,816 |       |        |   | 27,127 |      
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Gross profit                             |                            |                                       | 16,522 |          |        |          | 20,029 |          |        |          | 14,268 |          |        |          | 10,352 |          |        |   | 12,839 |       |        |   | 20,327 |       |        |   | 10,680 |       |        |   | 9,221  |      
|Operating expenses:                      |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                         | Sales and marketing        |                                       |        | 7,244    |        |          |        | 7,594    |        |          |        | 6,302    |        |          |        | 6,231    |        |   |        | 7,397 |        |   |        | 9,680 |        |   |        | 7,854 |        |   |        | 7,314 |       
|                                         | General and administrative |                                       |        | 4,651    |        |          |        | 5,925    |        |          |        | 4,539    |        |          |        | 2,601    |        |   |        | 5,419 |        |   |        | 5,768 |        |   |        | 4,915 |        |   |        | 5,015 |       
|                                         | Research and development   |                                       |        | 976      |        |          |        | 1,148    |        |          |        | 1,805    |        |          |        | 2,086    |        |   |        | 2,234 |        |   |        | 2,113 |        |   |        | 2,004 |        |   |        | 2,251 |       
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                         |                            | Total operating expenses              |        |          | 12,871 |          |        |          | 14,667 |          |        |          | 12,646 |          |        |          | 10,918 |   |        |       | 15,050 |   |        |       | 17,561 |   |        |       | 14,773 |   |        |       | 14,580 | 
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Operating income (loss)                  |                            |                                       | 3,651  |          |        |          | 5,362  |          |        |          | 1,622  |          |        |          | (566   | )        |        |   | (2,211 | )     |        |   | 2,766  |       |        |   | (4,093 | )     |        |   | (5,359 | )    
|Interest and other expense (income), net |                            |                                       | 184    |          |        |          | (337   | )        |        |          | 278    |          |        |          | (199   | )        |        |   | (48    | )     |        |   | (285   | )     |        |   | 544    |       |        |   | 56     |      
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Income (loss) before income taxes        |                            |                                       | 3,467  |          |        |          | 5,699  |          |        |          | 1,344  |          |        |          | (367   | )        |        |   | (2,163 | )     |        |   | 3,051  |       |        |   | (4,637 | )     |        |   | (5,415 | )    
|Income tax expense (benefit)             |                            |                                       | 1,289  |          |        |          | 2,112  |          |        |          | 519    |          |        |          | (17    | )        |        |   | (1,047 | )     |        |   | 1,302  |       |        |   | (1,692 | )     |        |   | (1,613 | )    
|                                         |                            |                                       |        |          |        |          |        |          |        |          |        |          |        |          |        |          |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      

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|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |       |  
|-------------------------------------- | ------- | ------------------------------------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | --- | -------- |  | -------- | ---- | -------- | - | - | ------ | ----- | - | - | ----- | ----- |  | - | ------ | ----- | - | - | ------ | ----- | -
|                                       |         |                                      
|                                       |         | Three Months Ended                   
|                                       |         |                                      
|                                       |         | Mar. 31,                              |       | Jun. 30, |  | Sep. 30, |       | Dec. 31, |  | Mar. 31, |     | Jun. 30, |  | Sep. 30, |      | Dec. 31,
|                                       |         | 2002                                  |       | 2002     |  | 2002     |       | 2002     |  | 2003     |     | 2003     |  | 2003     |      | 2003    
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |         
|                                       |         |                                      
|                                       |         | (In thousands, except per share data)
|Income (loss) before minority interest |         |                                       | 2,178 |          |  |          | 3,587 |          |  |          | 825 |          |  |          | (350 | )        |   |   | (1,116 | )     |   |   | 1,749 |       |  |   | (2,945 | )     |   |   | (3,802 | )    
|Minority interest                      |         |                                       |      |          |  |          |      |          |  |          |    |          |  |          | (40  | )        |   |   | (170   | )     |   |   | (85   | )     |  |   | (212   | )     |   |   | 17     |      
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|Net income (loss)                      |         | $                                     | 2,178 |          |  | $        | 3,587 |          |  | $        | 825 |          |  | $        | (310 | )        |   | $ | (946   | )     |   | $ | 1,834 |       |  | $ | (2,733 | )     |   | $ | (3,819 | )    
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|Net income (loss) per common share:    |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|                                       | Basic   |                                       | $     | 0.26     |  |          | $     | 0.42     |  |          | $   | 0.10     |  |          | $    | (0.04    | ) |   | $      | (0.11 | ) |   | $     | 0.21  |  |   | $      | (0.31 | ) |   | $      | (0.43 | )
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|                                       | Diluted |                                       | $     | 0.24     |  |          | $     | 0.38     |  |          | $   | 0.09     |  |          | $    | (0.04    | ) |   | $      | (0.11 | ) |   | $     | 0.20  |  |   | $      | (0.31 | ) |   | $      | (0.43 | )
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|Weighted average shares                |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|                                       | Basic   |                                       |       | 8,275    |  |          |       | 8,508    |  |          |     | 8,656    |  |          |      | 8,712    |   |   |        | 8,881 |   |   |       | 8,829 |  |   |        | 8,899 |   |   |        | 8,967 |  
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      
|                                       | Diluted |                                       |       | 9,216    |  |          |       | 9,384    |  |          |     | 9,406    |  |          |      | 8,712    |   |   |        | 8,881 |   |   |       | 9,188 |  |   |        | 8,899 |   |   |        | 8,967 |  
|                                       |         |                                       |       |          |  |          |       |          |  |          |     |          |  |          |      |          |   |   |        |       |   |   |       |       |  |   |        |       |   |   |        |      

|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |      |      | 
|---------------------------------------- | -------------------------- | ------------------------------------------- | ----- | -------- | ---- | -------- | ----- | -------- | ---- | -------- | ----- | -------- | ---- | -------- | ----- | -------- | ---- |  | ----- | ---- | ---- |  | ----- | ---- | ---- |  | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                         |                            |                                            
|                                         |                            | Percent of Sales for the Three Months Ended
|                                         |                            |                                            
|                                         |                            | Mar. 31,                                    |       | Jun. 30, |      | Sep. 30, |       | Dec. 31, |      | Mar. 31, |       | Jun. 30, |      | Sep. 30, |       | Dec. 31,
|                                         |                            | 2002                                        |       | 2002     |      | 2002     |       | 2002     |      | 2003     |       | 2003     |      | 2003     |       | 2003    
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |         
|Net sales                                |                            |                                             | 100.0 | %        |      |          | 100.0 | %        |      |          | 100.0 | %        |      |          | 100.0 | %        |      |  | 100.0 | %    |      |  | 100.0 | %    |      |  | 100.0 | %    |      |  | 100.0 | %   
|Cost of goods sold                       |                            |                                             | 62.2  |          |      |          | 60.9  |          |      |          | 64.8  |          |      |          | 69.0  |          |      |  | 67.6  |      |      |  | 64.1  |      |      |  | 73.0  |      |      |  | 74.6  |     
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|Gross profit                             |                            |                                             | 37.8  |          |      |          | 39.1  |          |      |          | 35.2  |          |      |          | 31.0  |          |      |  | 32.4  |      |      |  | 35.9  |      |      |  | 27.0  |      |      |  | 25.4  |     
|Operating expenses:                      |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|                                         | Sales and marketing        |                                             |       | 16.6     |      |          |       | 14.8     |      |          |       | 15.5     |      |          |       | 18.6     |      |  |       | 18.7 |      |  |       | 17.1 |      |  |       | 19.9 |      |  |       | 20.1 |     
|                                         | General and administrative |                                             |       | 10.7     |      |          |       | 11.6     |      |          |       | 11.2     |      |          |       | 7.8      |      |  |       | 13.7 |      |  |       | 10.2 |      |  |       | 12.4 |      |  |       | 13.8 |     
|                                         | Research and development   |                                             |       | 2.2      |      |          |       | 2.2      |      |          |       | 4.5      |      |          |       | 6.3      |      |  |       | 5.6  |      |  |       | 3.7  |      |  |       | 5.1  |      |  |       | 6.2  |     
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|                                         |                            | Total operating expenses                    |       |          | 29.5 |          |       |          | 28.6 |          |       |          | 31.2 |          |       |          | 32.7 |  |       |      | 38.0 |  |       |      | 31.0 |  |       |      | 37.4 |  |       |      | 40.1 | 
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|Operating income (loss)                  |                            |                                             | 8.3   |          |      |          | 10.5  |          |      |          | 4.0   |          |      |          | (1.7  | )        |      |  | (5.6  | )    |      |  | 4.9   |      |      |  | (10.4 | )    |      |  | (14.7 | )   
|Interest and other expense (income), net |                            |                                             | 0.4   |          |      |          | (0.6  | )        |      |          | 0.7   |          |      |          | (0.6  | )        |      |  | (0.1  | )    |      |  | 0.5   |      |      |  | 1.4   |      |      |  | 0.2   |     
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|Income (loss) before income taxes        |                            |                                             | 7.9   |          |      |          | 11.1  |          |      |          | 3.3   |          |      |          | (1.1  | )        |      |  | (5.5  | )    |      |  | 5.4   |      |      |  | (11.8 | )    |      |  | (14.9 | )   
|Income tax expense (benefit)             |                            |                                             | 2.9   |          |      |          | 4.1   |          |      |          | 1.3   |          |      |          | (0.1  | )        |      |  | (2.7  | )    |      |  | 2.3   |      |      |  | (4.3  | )    |      |  | (4.4  | )   
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|Income (loss) before minority interest   |                            |                                             | 5.0   | %        |      |          | 7.0   | %        |      |          | 2.0   | %        |      |          | (1.0  | )        |      |  | (2.8  | )%   |      |  | 3.1   | %    |      |  | (7.5  | )%   |      |  | (10.5 | )   
|Minority interest                        |                            |                                             | 0.0   |          |      |          | 0.0   |          |      |          | 0.0   |          |      |          | (0.1  | )        |      |  | (0.4  | )    |      |  | 0.1   |      |      |  | (0.6  | )    |      |  | 0.0   |     
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     
|Net income (loss)                        |                            |                                             | 5.0   | %        |      |          | 7.0   | %        |      |          | 2.0   | %        |      |          | (0.9  | )%       |      |  | (2.4  | )%   |      |  | 3.2   | %    |      |  | (6.9  | )%   |      |  | (10.5 | )%  
|                                         |                            |                                             |       |          |      |          |       |          |      |          |       |          |      |          |       |          |      |  |       |      |      |  |       |      |      |  |       |      |      |  |       |     

Liquidity and Capital Resources

We have financed our business primarily using
existing working capital, cash flows from operations, the
proceeds from our initial public offering, and bank borrowings.
The relaunch of the Rockford Fosgate product line, distribution
channel shifts, continuing investment in acquired companies and
non-recurring expenses, discussed in Results of Operation,
Overview, all had negative impacts on our cash flow from
operations. Our cash flow used in operations was
$9.7 million for the year ended December 31, 2003
compared to $4.9 provided by operations for the year ended
December 31, 2003. We relied on bank borrowings to finance
the negative cash flow from operations and purchases of property
and equipment. We anticipate our expected return to
profitability coupled with our focus on decreasing inventory
levels will improve our cash flow from operations in 2004. We
will continue to rely on our credit facility to finance
operations and purchases of property and equipment until we
achieve the improvements in our operating cash flows.

Financing activities had the most significant
impact on our cash flows for 2003. As of December 31, 2003,
we had a balance of $22.7 million on our $30.0 million
bank credit facility that consisted of a swing line of credit
and a revolving line of credit. The balance at December 31,
2002 was $8.5 million. The increase was due to continuing
investments in acquired companies and funding of the negative
cash flow from operations. The swing line of credit had a
variable interest rate per annum of Prime plus 100 basis
points. The revolving line of credit had a blended variable
interest rate of LIBOR plus 300 basis points. As of
December 31, 2003, the bank credit facility had a annual
weighted average interest rate of 3.8% per annum.

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As of December 31, 2003, we were not in
compliance with several of the debt covenants relating to the
minimum required consolidated fixed charge coverage ratio, the
consolidated total leverage ratio, and 3-month rolling EBITDA.
Because the current facility was scheduled to expire
July 5, 2004 and because of the covenant violations, the
entire $22.7 million credit facility balance is classified
as a current liability as at December 31, 2003. This
facility was replaced on March 29, 2004.

We entered into a 3-year $45.0 million asset
based credit facility with Congress Financial Corporation
(Western) as Agent and Wachovia Bank, National Association as
Arranger on March 29, 2004. This credit facility replaced
the $30 million revolving credit facility previously
maintained with Bank of America, N.A. and Bank One, Arizona,
N.A. This credit facility is collateralized by substantially all
of our assets and has a variable interest rate of LIBOR plus
250 basis points. In addition, the covenants limit the
payment of dividends; however, Rockford has not historically
paid dividends.

In addition, Rockford entered into a one-year
term loan agreement with Hilco Capital, LP in the amount of
$4 million on March 29, 2004. This term loan is junior
to the $45.0 million senior credit facility with Congress
Financial Corporation (Western) and is also collateralized by
substantially all of our assets. This facility has a variable
interest rate of the LaSalle Bank Rate/ Prime plus
450 basis points. Both facilities require that we maintain
certain minimum levels of debt service coverage and also limit
capital expenditures annually.

Bank One notified Rockford in March 2004 that the
covenant violations under our senior credit facility at
December 31, 2003 caused us to be in violation of our lease
agreements due to a cross-default clause. We are in the process
of negotiating with Bank One to waive the violation and plan to
seek a new capital lease facility if Bank One does not waive the
default. The amount outstanding on these leases at
December 31, 2003 was $1.4 million, $0.6 million
of this amount was due after 2004 and has been reclassified as
current due to the covenant violation.

We had working capital of $38.1 million at
December 31, 2003, compared to $52.4 million at
December 31, 2002.

The significant components of working capital for
the year ended December 31, 2003 include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and cash equivalents was $0.7 million
    as at December 31, 2003 versus $0.3 million as at
    December 31, 2002. Our cash and cash equivalent balance
    increased as a result of increased borrowings on our line of
    credit offset by the negative cash flow from operations. Changes
    in currency exchange rates had the effect of increasing cash by
    $2.2 million in 2003 and $1.5 million in 2002 due to
    the continued weakness of the US Dollar against major foreign
    currencies including the Euro and the Canadian Dollar. During
    2003, Rockford entered into several Canadian dollar forward
    contracts to hedge foreign denominated assets with foreign
    denominated liabilities in order to mitigate the risk of
    significant changes in earnings due to short-term foreign
    exchange fluctuations. Changes in the fair value of derivatives
    were recognized through net income. There were no outstanding
    forward contracts as of December 31, 2003.
|
| | Our net accounts receivable were
    $34.9 million, or 86.3 days sales outstanding
    (DSO) at December 31, 2003 compared to
    $32.9 million, or 88.7 DSO at December 31, 2002. The
    increase in accounts receivable balances is due primarily to
    higher revenues. Our DSO improved through strict management of
    credit policies and focused collection efforts despite the
    affect of the shifting distribution channels and competitive
    pressure to extend terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Net inventory increased $4.7 million, from
    $32.4 million at December 31, 2002 to
    $37.1 million at December 31, 2003. This increase was
    due to increased raw material requirements for the Rockford
    Fosgate product line redesign, increased finished goods
    inventory to support our consumer electronics chain and mass
    merchandise channels and investments in inventory for NHT and
    the Omnifi launch. We have implemented various inventory
    reduction initiatives including quicker response time from
    offshore vendors, managing key components of inventory levels to
    shorten response time to market changes and continued focus on
    the launch of our Omnifi product line. We anticipate that these
    initiatives will result in gradually decreasing inventory levels.                                                                                                                                                                                       

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income taxes receivable increased
    $1.2 million, from $1.8 million at December 31,
    2002 to $3.1 million at December 31, 2003. This
    increase was due to refunds due on estimated payments made in
    early 2003 and the anticipated carryback of 2003 tax losses.                                                                                                                                                                                                                                                                                                                                             
|
| | Accounts payable decreased $1.3 million,
    from $10.8 million at December 31, 2002 to
    $9.4 million at December 31, 2003. This decrease was
    due to the winding down of raw material purchases on the
    end-of-life Rockford Fosgate line, delays in the launch of the
    new Rockford Fosgate line and tightened control of spending.                                                                                                                                                                                                                                                                        
|
| | Other accrued expenses increased
    $0.9 million, from $6.1 million at December 31,
    2002 to $7.0 million at December 31, 2003. The primary
    reason for this increase was the increase in business with Best
    Buy and the related trailing marketing programs.                                                                                                                                                                                                                                                                                                                                                 
|
| | The current portion of notes payable, long-term
    debt and capital lease obligations increased $23.1 million,
    from $1.3 million at December 31, 2002 to
    $24.3 million at December 31, 2003. The treatment of
    our credit facility as a current liability reduced our working
    capital by the entire $22.7 million balance of that
    facility. All balances over one year on the new facilities will
    be classified as long-term as long as we remain in compliance
    with our debt covenants, which we anticipate. This change should
    bring working capital back in line with historic levels.

Investing activities utilized cash of
$9.7 million in 2002 versus $6.3 million in 2003. The
year ended December 31, 2002 included $2.4 million
related to acquisitions of businesses. Capital expenditures, the
primary use of cash from investing activities, were
$6.8 million for 2002 versus $6.2 million for 2003. We
continue seeking to improve management of our capital spending
and have implemented more stringent payback requirements for
approval of capital spending. Our capital spending is primarily
in tooling for specific production lines, general machinery and
equipment to support manufacturing and computer hardware and
software to support our operations. We do not anticipate any
significant changes in our future capital spending requirements.



| |                               
| | ------------------------------
| | Off Balance Sheet Arrangements

As part of our ongoing business, we do not
participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as
entities referred to as structured finance or variable interest
entities (VIEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements. As of
December 31, 2003, we are not involved in any
unconsolidated VIE transactions.



| |                                                    
| | ---------------------------------------------------
| | Contractual Obligations as of
    December 31, 2003

We had certain cash obligations at
December 31, 2003 due as follows (dollars in thousands)

|                          |  |                        |        |           |  |           |        |           |  |         |       |  |  |   |       |  |  |   |     | 
|------------------------- |  | ---------------------- | ------ | --------- |  | --------- | ------ | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | --- | 
|                          |  |                       
|                          |  | Payments due by period
|                          |  |                       
|                          |  |                        |        | Less than |  |           |        | More than
|Contractual Obligations   |  | Total                  |        | 1 Year    |  | 1-3 Years |        | 3-5 Years |  | 5 Years
|                          |  |                        |        |           |  |           |        |           |  |        
|Long-term Debt            |  | $                      | 22,913 |           |  | $         | 22,913 |           |  |         |       |  |  |   |       |  |  |   |     | 
|Capital Lease Obligations |  | $                      | 1,475  |           |  | $         | 1,475  |           |  |         |       |  |  |   |       |  |  |   |     | 
|Operating Leases          |  | $                      | 9,024  |           |  | $         | 2,954  |           |  | $       | 3,716 |  |  | $ | 1,999 |  |  | $ | 355 | 

We did not have any material outstanding
noncancelable purchase obligations at December 31, 2003.
One of our vendor sourcing agreements includes contractual terms
that would require us to pay for any excess raw materials in the
event the program is terminated and honor submitted purchase
orders if we attempt to cancel after a stated production lead
time. Several other sourcing agreements require us to place
monthly purchase orders, but do not require a minimum purchase
quantity or dollar amount. We do not anticipate significant
liability in connection with these contractual requirements.

Critical Accounting Policies and
Estimates

The methods, estimates and judgments we use in
applying our accounting policies have a significant impact on
the results we report in our consolidated financial statements.
We evaluate our estimates and judgments on an on-going basis. We
base our estimates on historical experience and on assumptions
that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our

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judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our
reported results. We believe the following accounting policies
are the most critical to us, in that they are important to the
portrayal of our financial statements and they require our most
difficult, subjective or complex judgments in the preparation of
our consolidated financial statements:


Revenue Recognition.We recognize revenue pursuant to Staff Accounting Bulletin
No. 101 and 104, Revenue Recognition in Financial
Statements.Accordingly, we recognize revenue and record
sales, net of related discounts, when all of the following
criteria are met:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Persuasive evidence of an arrangement exists;              
|
| |  | Ownership has transferred to the customer;                 
|
| |  | The price to the customer is fixed or
    determinable; and
|
| |  | Collectability is reasonably assured.                      

We sell almost all of our products F.O.B. our
facility, so that upon shipment of products, the above criteria
are met and revenue is recognized.

Additionally, we recognize revenue from the sale
of software in accordance with SOP 97-2, Software
Revenue Recognition. Revenue is recorded from packaged
software and license fees when persuasive evidence of an
arrangement exists, the software product has been shipped, the
fees are fixed and determinable, collectibility is reasonably
assured and vendor-specific objective evidence of fair value
exists for any undeliverable products or services
(elements) of the arrangement.

We also record reductions to revenue for
estimated customer returns and additional sales incentive
offerings such as growth and volume incentive rebates and prompt
pay discounts based on adjusted historical rates. The historical
rates are adjusted based on new contracts and programs and
specific knowledge of customer accounts. Should a greater
proportion of customers return product or redeem incentives than
we estimate, we may need to make additional reductions to
revenue.

Intangible Assets.On January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. When we account for acquired
businesses as purchases, we allocate purchase prices to the
assets, definite-lived intangible assets, and liabilities
acquired based on the estimated fair values on the respective
acquisition dates. Based on these values, any excess purchase
price over the fair value of the net assets acquired is
allocated to goodwill.

Prior to January 1, 2002, we amortized
goodwill over the useful life of the underlying asset, not to
exceed 15 years. On January 1, 2002, we began
accounting for goodwill under the provisions of SFAS Nos.
141 and 142 and no longer recognize amortization expense related
to goodwill.

In assessing the recoverability of our goodwill
and other intangibles, we must make assumptions about estimated
future cash flows and other factors to determine the fair value
of the respective assets. If these estimates or their related
assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded.
Some factors we consider important which could trigger an
impairment review include the following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to expected
    historical or projected future operating results;          
|
| |  | Significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | Our market capitalization relative to net book
    value; and                                                    
|
| |  | Significant negative industry or economic trends.                                                                

We have tested goodwill for impairment using the
two-step process prescribed in SFAS No. 142. The first
step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. We performed the
first of the required impairment tests for goodwill as at
December 31, 2002, and performed an additional test as at
December 31, 2003. In both instances we determined that our
goodwill is

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not impaired and it is not necessary to undertake
the second step in the two-step process. During the year ended
December 31, 2003, we did not record any impairment losses
related to goodwill and other intangible assets.


Allowance for Doubtful
Accounts.We maintain an allowance for
doubtful accounts, based on adjusted historical rates, for
estimated losses resulting from the inability of our customers
to make required payments. The historical rates are adjusted
based on a review of our aging trends and specific knowledge of
customer accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances might be required.

Excess and Obsolete
Inventory.We maintain a reserve for
estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and
market conditions. We review information such as quantity on
hand versus forecasted uses and inventory aging listings to
assist in this assessment. If actual future demand or market
conditions are less favorable than those we project, additional
inventory write-downs might be required. Any change to the
reserve arising from forecast revisions is reflected in cost of
sales in the period the revision is made.

Warranty.We
maintain a warranty reserve, based on historical rates, for
costs associated with the repair or replacement of product that
fails to meet our standard warranty against defects in material
and workmanship. Should actual product failure rates differ from
our estimates, revisions to our estimated accruals would be
required.

Income taxes.We
must make certain estimates and judgments in determining income
tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial
statement purposes.

We must assess the likelihood that we will be
able to recover our deferred tax assets. If recovery is not
likely, we must increase our provision, or decrease our benefit,
by recording a valuation allowance against the deferred tax
assets that we estimate will not ultimately be recoverable. As
of December 31, 2003, we had valuation reserves as
described in Note 7 in the Notes to Consolidated Financial
Statements.

Inflation.Inflation
has not had a significant impact on our operations since we
operate in a market that requires continuing price decreases. We
do not anticipate that inflation will not have a significant
impact on our operations.



| |                         
| | ------------------------
| | New Accounting Standards

Effective January 1, 2003 we adopted
SFAS 145, Rescission of FASB Statements No. 4, 44
and 64, amendment of FASB Statement No. 13, and Technical
Corrections, which among other things, restricts the
classification of gains and losses from extinguishment of debt
as extraordinary to only those transactions that are unusual and
infrequent in nature as defined by APB Opinion No. 30. Upon
adoption, gains and losses on certain future debt
extinguishment, if any, are recorded in pre-tax income. The
adoption of SFAS 145 did not have an effect on our
consolidated financial position, results of operations or cash
flows.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient
equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications
to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. We currently have no contractual relationship or
other business relationship with a variable interest entity and
therefore the adoption of FIN No. 46 did not have a
material effect on our consolidated financial position, results
of operations or cash flows.

In April 2003, the Financial Accounting Standards
Board issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This
statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in

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##### Table of Contents



other contracts, and for hedging activities under
SFAS 133. SFAS 149 is effective for contracts entered
in to or modified after June 30, 2003. We have only limited
involvement with derivative financial instruments, do not use
them for trading purposes and are not a party to any leveraged
derivatives. However, we periodically enter into forward
exchange contracts to hedge some of our foreign currency
exposure. Our adoption of SFAS 149 did not have a material
effect on our consolidated financial position, results of
operations, or cash flows.


In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The Statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after June 15, 2003. We currently have no
instruments impacted by the adoption of this statement and
therefore the adoption did not have an effect on our
consolidated financial position, results of operations or cash
flows.






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

Our primary market risk exposures are in the
areas of interest rate risk and foreign currency exchange rate
risk. Our holdings of cash equivalents are subject to interest
rate fluctuations, but we believe this risk is immaterial due to
the short-term nature of these investments and the relatively
small cash balances we carry. At December 31, 2003, we had
a balance of $22.7 million outstanding on our
$30.0 million bank credit facility, which is also subject
to interest rate fluctuations.

The value of the U.S. dollar affects our
financial results. Changes in exchange rates may positively or
negatively affect our revenues, gross margins, operating
expenses and shareholders equity as expressed in
U.S. dollars. Historically, our exposure to currency
exchange rate fluctuations was modest due to the fact that we
sold our products primarily in U.S. dollars and held only a
small percentage of our assets outside the U.S. However, we
conduct a growing portion of our business in foreign currency
and are increasing our billings in local currencies in Japan,
Canada and Europe. During 2003, $26.6 million or 15.4% of
our sales were denominated in a currency other than
U.S. dollars.

During the first quarter of 2003 our Board of
Directors approved and we began to implement a new foreign
currency hedging policy. The goal of the program is to provide
stability to the U.S. Dollar values of non-functional
currency cash flows. Although it is impossible to eliminate all
currency risk, implementation of this program should mitigate
the risk of significant changes in our earnings due to
short-term foreign exchange fluctuations. During the year ended
December 31, 2003, Rockford entered into several Canadian
dollar forward contracts to hedge foreign denominated assets
with foreign denominated liabilities in order to mitigate the
risk of significant changes in earnings due to short-term
foreign exchange fluctuations. Changes in the fair value of
derivatives were recognized through net income (loss). At
December 31, 2003, there were no outstanding forward
contracts.

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##### Table of Contents








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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULE

|                                                                                                         |  |  |    | 
|-------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Consolidated Financial Statements of Rockford
    Corporation and Subsidiaries                           |  |  |    | 
|Report of Independent Auditors                                                                           |  |  | 34 | 
|Consolidated Balance Sheets as at
    December 31, 2002 and 2003                                         |  |  | 35 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2001, 2002 and 2003           |  |  | 36 | 
|Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2001, 2002 and 2003 |  |  | 37 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003           |  |  | 38 | 
|Notes to Consolidated Financial Statements                                                               |  |  | 39 | 
|Financial Statement Schedule:
    Schedule II  Valuation and Qualifying Accounts                        |  |  | 58 | 

33



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Rockford Corporation


We have audited the accompanying consolidated
balance sheets of Rockford Corporation and subsidiaries
(Rockford) as of December 31, 2003 and 2002, and the
related consolidated statements of operations,
shareholders equity and cash flows for the years ended
December 31, 2003, 2002 and 2001. Our audits also included
the financial statement schedule listed in the Index to
Consolidated Financial Statements and Schedule. These financial
statements and schedule are the responsibility of
Rockfords management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
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
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Rockford Corporation and
subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for the years ended December 31, 2003, 2002 and 2001, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Phoenix, Arizona

February 13, 2004,


except for Note 16 for which


the date is March 29, 2004


34



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


|                                                           |                                                                                                           |                    |         |        |  |   |         |        | 
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                           |                                                                                                           |                   
|                                                           |                                                                                                           | December 31,      
|                                                           |                                                                                                           |                   
|                                                           |                                                                                                           | 2002               |         | 2003  
|                                                           |                                                                                                           |                    |         |       
|                                                           |                                                                                                           |                   
|                                                           |                                                                                                           | (In thousands,    
|                                                           |                                                                                                           | except share data)
|Assets                                                     |                                                                                                           |                    |         |        |  |   |         |       
|Current assets:                                            |                                                                                                           |                    |         |        |  |   |         |       
|                                                           | Cash and cash equivalents                                                                                 |                    | $       | 304    |  |   | $       | 716    | 
|                                                           | Accounts receivable, less allowances of $2,996
    and $3,014 at December 31, 2002 and 2003, respectively |                    |         | 32,890 |  |   |         | 34,874 | 
|                                                           | Inventories, net                                                                                          |                    |         | 32,445 |  |   |         | 37,142 | 
|                                                           | Deferred income taxes                                                                                     |                    |         | 5,160  |  |   |         | 5,965  | 
|                                                           | Income taxes receivable                                                                                   |                    |         | 1,844  |  |   |         | 3,064  | 
|                                                           | Prepaid expenses and other                                                                                |                    |         | 4,395  |  |   |         | 3,985  | 
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Total current assets                                       |                                                                                                           |                    | 77,038  |        |  |   | 85,746  |       
|Property and equipment, net                                |                                                                                                           |                    | 15,262  |        |  |   | 16,296  |       
|Deferred income taxes                                      |                                                                                                           |                    | 292     |        |  |   | 151     |       
|Goodwill, net                                              |                                                                                                           |                    | 6,890   |        |  |   | 7,118   |       
|Other assets                                               |                                                                                                           |                    | 1,708   |        |  |   | 1,987   |       
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Total assets                                               |                                                                                                           | $                  | 101,190 |        |  | $ | 111,298 |       
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Liabilities and shareholders
    equity                   |                                                                                                           |                    |         |        |  |   |         |       
|Current liabilities:                                       |                                                                                                           |                    |         |        |  |   |         |       
|                                                           | Accounts payable                                                                                          |                    | $       | 10,753 |  |   | $       | 9,419  | 
|                                                           | Accrued salaries and incentives                                                                           |                    |         | 1,978  |  |   |         | 2,044  | 
|                                                           | Accrued warranty                                                                                          |                    |         | 4,595  |  |   |         | 4,789  | 
|                                                           | Other accrued expenses                                                                                    |                    |         | 6,105  |  |   |         | 7,011  | 
|                                                           | Current portion of notes payable, long-term debt
    and capital lease obligations                        |                    |         | 1,253  |  |   |         | 24,345 | 
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Total current liabilities                                  |                                                                                                           |                    | 24,684  |        |  |   | 47,608  |       
|Notes payable and long-term debt, less current
    portion |                                                                                                           |                    | 8,611   |        |  |   |        |       
|Capital lease obligations, less current portion            |                                                                                                           |                    | 1,416   |        |  |   |        |       
|Minority interest                                          |                                                                                                           |                    | 933     |        |  |   | 483     |       
|Shareholders equity                                       |                                                                                                           |                    |         |        |  |   |         |       
|                                                           | Common stock, $.01 par value. Authorized
    shares  40,000,000                                          |                    |         |        |  |   |         |        | 
|                                                           | Issued shares  8,747,197 and
    9,010,663 shares at December 31, 2002 and 2003,
    respectively        |                    |         | 87     |  |   |         | 90     | 
|                                                           | Additional paid-in capital                                                                                |                    |         | 35,131 |  |   |         | 36,228 | 
|                                                           | Retained earnings                                                                                         |                    |         | 29,198 |  |   |         | 23,534 | 
|                                                           | Accumulated other comprehensive income                                                                    |                    |         | 1,130  |  |   |         | 3,355  | 
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Total shareholders equity                                 |                                                                                                           |                    | 65,546  |        |  |   | 63,207  |       
|                                                           |                                                                                                           |                    |         |        |  |   |         |       
|Total liabilities and shareholders equity                 |                                                                                                           | $                  | 101,190 |        |  | $ | 111,298 |       
|                                                           |                                                                                                           |                    |         |        |  |   |         |       

See accompanying notes.

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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |        |  
|-------------------------------------- | -------------------------- | ------------------------------------- | ------- | ------ |  | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                       |                            |                                      
|                                       |                            | Year Ended December 31,              
|                                       |                            |                                      
|                                       |                            | 2001                                  |         | 2002   |  | 2003
|                                       |                            |                                       |         |        |  |     
|                                       |                            |                                      
|                                       |                            | (In thousands, except per share data)
|Net sales                              |                            | $                                     | 157,752 |        |  | $    | 168,918 |        |   | $ | 172,036 |       
|Cost of goods sold                     |                            |                                       | 103,904 |        |  |      | 107,747 |        |   |   | 118,969 |       
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Gross profit                           |                            |                                       | 53,848  |        |  |      | 61,171  |        |   |   | 53,067  |       
|Operating expenses:                    |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Sales and marketing        |                                       |         | 24,228 |  |      |         | 27,370 |   |   |         | 32,245 |  
|                                       | General and administrative |                                       |         | 15,771 |  |      |         | 17,718 |   |   |         | 21,117 |  
|                                       | Research and development   |                                       |         | 3,322  |  |      |         | 6,014  |   |   |         | 8,602  |  
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Total operating expenses               |                            |                                       | 43,321  |        |  |      | 51,102  |        |   |   | 61,964  |       
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Operating income (loss)                |                            |                                       | 10,527  |        |  |      | 10,069  |        |   |   | (8,897  | )     
|Other expense (income):                |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Interest                   |                                       |         | 455    |  |      |         | 528    |   |   |         | 1,093  |  
|                                       | Other expense (income)     |                                       |         | 93     |  |      |         | (602   | ) |   |         | (826   | )
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Income (loss) before income taxes      |                            |                                       | 9,979   |        |  |      | 10,143  |        |   |   | (9,164  | )     
|Income tax expense (benefit)           |                            |                                       | 3,756   |        |  |      | 3,903   |        |   |   | (3,050  | )     
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Income (loss) before minority interest |                            |                                       | 6,223   |        |  |      | 6,240   |        |   |   | (6,114  | )     
|Minority interest                      |                            |                                       |        |        |  |      | (40     | )      |   |   | (450    | )     
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Net income (loss)                      |                            | $                                     | 6,223   |        |  | $    | 6,280   |        |   | $ | (5,664  | )     
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Income (loss) per common share:        |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Basic                      |                                       | $       | 0.77   |  |      | $       | 0.74   |   |   | $       | (0.64  | )
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Diluted                    |                                       | $       | 0.70   |  |      | $       | 0.68   |   |   | $       | (0.64  | )
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|Weighted average shares:               |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Basic                      |                                       |         | 8,109  |  |      |         | 8,540  |   |   |         | 8,866  |  
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       
|                                       | Diluted                    |                                       |         | 8,913  |  |      |         | 9,301  |   |   |         | 8,866  |  
|                                       |                            |                                       |         |        |  |      |         |        |   |   |         |       

See accompanying notes.

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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |        |  
|---------------------------- | --------------------------------------------------------- | -------------- | ----- | ---------- |  | -------- | -- | ------------- |  | ------------- | ------ | ----- |  | - | ------ | ------ | - | - | ----- | ----- | - | - | ------ | ------ | -
|                             |                                                           |                |       |            |  |          |    | Accumulated   |  |              
|                             |                                                           | Common Stock   |       | Additional |  |          |    | Other         |  |              
|                             |                                                           |                |       | Paid-In    |  | Retained |    | Comprehensive |  |              
|                             |                                                           | Shares         |       | Amount     |  | Capital  |    | Earnings      |  | Income (Loss) |        | Total
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |      
|                             |                                                           |               
|                             |                                                           | (In thousands)
|Balance at December 31, 2000 |                                                           |                | 7,997 |            |  | $        | 80 |               |  | $             | 29,504 |       |  | $ | 16,695 |        |   | $ | 53    |       |   | $ | 46,332 |       
|                             | Currency translation                                      |                |       |           |  |          |    |              |  |               |        |      |  |   |        |       |   |   |       | (437  | ) |   |        | (437   | )
|                             | Net income                                                |                |       |           |  |          |    |              |  |               |        |      |  |   |        | 6,223  |   |   |       |      |   |   |        | 6,223  |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|                             | Comprehensive income                                      |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        | 5,786  |  
|                             | Exercise of stock options                                 |                |       | 149        |  |          |    | 1             |  |               |        | 440   |  |   |        |       |   |   |       |      |   |   |        | 441    |  
|                             | Issuance of shares for employee stock purchase
    plan   |                |       | 51         |  |          |    | 1             |  |               |        | 397   |  |   |        |       |   |   |       |      |   |   |        | 398    |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|Balance at December 31, 2001 |                                                           |                | 8,197 |            |  | $        | 82 |               |  | $             | 30,341 |       |  | $ | 22,918 |        |   | $ | (384  | )     |   | $ | 52,957 |       
|                             | Currency translation                                      |                |       |           |  |          |    |              |  |               |        |      |  |   |        |       |   |   |       | 1,514 |   |   |        | 1,514  |  
|                             | Net income                                                |                |       |           |  |          |    |              |  |               |        |      |  |   |        | 6,280  |   |   |       |      |   |   |        | 6,280  |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|                             | Comprehensive income                                      |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        | 7,794  |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|                             | Exercise of stock options                                 |                |       | 500        |  |          |    | 5             |  |               |        | 1,039 |  |   |        |       |   |   |       |      |   |   |        | 1,044  |  
|                             | Tax benefit related to non-qualified option
    exercises |                |       |           |  |          |    |              |  |               |        | 3,453 |  |   |        |       |   |   |       |      |   |   |        | 3,453  |  
|                             | Issuance of shares for employee stock purchase
    plan   |                |       | 50         |  |          |    |              |  |               |        | 298   |  |   |        |       |   |   |       |      |   |   |        | 298    |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|Balance at December 31, 2002 |                                                           |                | 8,747 |            |  | $        | 87 |               |  | $             | 35,131 |       |  | $ | 29,198 |        |   | $ | 1,130 |       |   | $ | 65,546 |       
|                             | Currency translation                                      |                |       |           |  |          |    |              |  |               |        |      |  |   |        |       |   |   |       | 2,225 |   |   |        | 2,225  |  
|                             | Net loss                                                  |                |       |           |  |          |    |              |  |               |        |      |  |   |        | (5,664 | ) |   |       |      |   |   |        | (5,664 | )
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|                             | Comprehensive loss                                        |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        | (3,439 | )
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|                             | Exercise of stock options                                 |                |       | 174        |  |          |    | 2             |  |               |        | 575   |  |   |        |       |   |   |       |      |   |   |        | 577    |  
|                             | Tax benefit related to non-qualified option
    exercises |                |       |           |  |          |    |              |  |               |        | 126   |  |   |        |       |   |   |       |      |   |   |        | 126    |  
|                             | Issuance of shares for employee stock purchase
    plan   |                |       | 90         |  |          |    | 1             |  |               |        | 396   |  |   |        |       |   |   |       |      |   |   |        | 397    |  
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       
|Balance at December 31, 2003 |                                                           |                | 9,011 |            |  | $        | 90 |               |  | $             | 36,228 |       |  | $ | 23,534 |        |   | $ | 3,355 |       |   | $ | 63,207 |       
|                             |                                                           |                |       |            |  |          |    |               |  |               |        |       |  |   |        |        |   |   |       |       |   |   |        |       

See accompanying notes.

37



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |       |        |  
|------------------------------------------------------------------------------------------------------ | --------------------------------------------- | --------------------------------- | ------- | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                                                       |                                               |                                  
|                                                                                                       |                                               | Year Ended December 31,          
|                                                                                                       |                                               |                                  
|                                                                                                       |                                               | 2001                              |         | 2002  |        | 2003
|                                                                                                       |                                               |                                   |         |       |        |     
|                                                                                                       |                                               |                                  
|                                                                                                       |                                               | (In thousands)                   
|Operating activities                                                                                   |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net income (loss)                                                                                      |                                               | $                                 | 6,223   |       |        | $    | 6,280  |       |        | $ | (5,664 | )    
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|                                                                                                       | Depreciation and amortization                 |                                   |         | 3,880 |        |      |        | 4,475 |        |   |        | 5,041 |       
|                                                                                                       | (Gain) loss on sale of property and equipment |                                   |         | (6    | )      |      |        | (10   | )      |   |        | 5     |       
|                                                                                                       | Deferred income taxes                         |                                   |         | 834   |        |      |        | (95   | )      |   |        | (664  | )     
|                                                                                                       | Provision for doubtful accounts               |                                   |         | 969   |        |      |        | 861   |        |   |        | 746   |       
|                                                                                                       | Provision for inventory allowances            |                                   |         | 1,332 |        |      |        | 1,490 |        |   |        | 2,168 |       
|                                                                                                       | Minority interest                             |                                   |         |      |        |      |        | (40   | )      |   |        | (450  | )     
|                                                                                                       | Changes in operating assets and liabilities:  |                                   |         |       |        |      |        |       |        |   |        |       |       
|                                                                                                       |                                               | Accounts receivable               |         |       | 2,359  |      |        |       | (4,757 | ) |        |       | (2,837 | )
|                                                                                                       |                                               | Inventories                       |         |       | (3,403 | )    |        |       | (4,616 | ) |        |       | (6,865 | )
|                                                                                                       |                                               | Prepaid expenses and other        |         |       | (522   | )    |        |       | 782    |   |        |       | 324    |  
|                                                                                                       |                                               | Accounts payable                  |         |       | 1,093  |      |        |       | (105   | ) |        |       | (1,349 | )
|                                                                                                       |                                               | Accrued salaries and incentives   |         |       | (1,743 | )    |        |       | (473   | ) |        |       | 66     |  
|                                                                                                       |                                               | Accrued warranty                  |         |       | (113   | )    |        |       | (265   | ) |        |       | 194    |  
|                                                                                                       |                                               | Income taxes payable (receivable) |         |       | (2,334 | )    |        |       | 1,045  |   |        |       | (1,220 | )
|                                                                                                       |                                               | Other accrued expenses            |         |       | (1,020 | )    |        |       | 343    |   |        |       | 805    |  
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net cash provided by (used in) operating
    activities                                                |                                               |                                   | 7,549   |       |        |      | 4,915  |       |        |   | (9,700 | )    
|Investing activities                                                                                   |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Purchases of property and equipment                                                                    |                                               |                                   | (5,300  | )     |        |      | (6,751 | )     |        |   | (6,148 | )    
|Proceeds from sale of property and equipment                                                           |                                               |                                   | 6       |       |        |      | 10     |       |        |   | 18     |      
|Acquisitions of business, net of cash acquired                                                         |                                               |                                   | (11,292 | )     |        |      | (2,413 | )     |        |   | 357    |      
|Decrease (increase) in other assets                                                                    |                                               |                                   | 123     |       |        |      | (572   | )     |        |   | (506   | )    
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net cash used in investing activities                                                                  |                                               |                                   | (16,463 | )     |        |      | (9,726 | )     |        |   | (6,279 | )    
|Financing activities                                                                                   |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net proceeds from notes payable and long-term debt                                                     |                                               |                                   | 1,122   |       |        |      | 1,723  |       |        |   | 14,135 |      
|Proceeds from (payments on) notes payable and
    long-term debt                                       |                                               |                                   | 7,910   |       |        |      | (1,109 | )     |        |   | (22    | )    
|Payments on capital lease obligations                                                                  |                                               |                                   | (859    | )     |        |      | (766   | )     |        |   | (1,047 | )    
|Proceeds from employee stock purchase plan                                                             |                                               |                                   | 398     |       |        |      | 298    |       |        |   | 298    |      
|Proceeds from exercise of stock options and
    warrants                                               |                                               |                                   | 441     |       |        |      | 1,044  |       |        |   | 802    |      
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net cash provided by financing activities                                                              |                                               |                                   | 9,012   |       |        |      | 1,190  |       |        |   | 14,166 |      
|Effect of exchange rate changes on cash                                                                |                                               |                                   | (437    | )     |        |      | 1,514  |       |        |   | 2,225  |      
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Net (decrease) increase in cash and cash
    equivalents                                               |                                               |                                   | (339    | )     |        |      | (2,107 | )     |        |   | 412    |      
|Cash and cash equivalents at beginning of year                                                         |                                               |                                   | 2,750   |       |        |      | 2,411  |       |        |   | 304    |      
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Cash and cash equivalents at end of year                                                               |                                               | $                                 | 2,411   |       |        | $    | 304    |       |        | $ | 716    |      
|                                                                                                       |                                               |                                   |         |       |        |      |        |       |        |   |        |      
|Supplemental disclosures of cash flow
    information                                                  |                                               |                                   |         |       |        |      |        |       |        |   |        |      

See accompanying notes.

38



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                    
|-- | -------------------
|1. | Accounting Policies



| |                                             
| | --------------------------------------------
| | Organization and Description of
    Business

Rockford Corporation and subsidiaries (Rockford)
designs, manufactures and distributes high performance audio
systems for the mobile, professional and home theater audio
markets. Rockford designs, manufacturers and distributes high
performance mobile audio systems and supplies under the Rockford
Fosgate, Lightning Audio, Q-Logic, MB Quart, Omnifi, and
InstallEdge.com brands. Rockford sells professional audio
products under the NHT, MB Quart and Hafler brand names and home
theater audio products under the NHT, MB Quart, Fosgate
Audionics , and Omnifi brand names. Rockford sells mobile and
home products incorporating the SimpleDevices technology under
the Omnifi brand name.

Rockford was organized and incorporated under the
laws of the State of Arizona on July 22, 1980. Corporate
headquarters are located in Tempe, Arizona. Manufacturing
facilities are located in Tempe, Arizona; Grand Rapids,
Michigan; Stillwater, Oklahoma; and Obrigheim, Germany. Rockford
uses warehouses located in the United States, Germany and
Singapore.



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

The consolidated financial statements include the
accounts of Rockford and its wholly and majority owned
subsidiaries in the United States, Germany, Singapore and Japan.
Significant intercompany accounts and transactions have been
eliminated in consolidation. In 2003, Rockford dissolved its
Japanese subsidiary, and accordingly, at December 31, 2003,
the financial statements do not include any accounts related to
the Japanese subsidiary.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of cash and
highly liquid investments with insignificant interest rate risk
with remaining maturities of three months or less when acquired.
Rockfords investments have consisted of commercial paper,
certificates of deposit with remaining maturities of three
months or less from the time of purchase and money market
accounts.



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

At December 31, 2003, Rockford has the
following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt and capital lease obligations. The
carrying value of cash and cash equivalents, accounts
receivable, accounts payable, accrued salaries and incentives,
accrued expenses approximates their fair value based on the
liquidity of these financial instruments or based on their
short-term nature. The carrying value of capital lease
obligations, notes payable and long-term debt approximates fair
value based on the market interest rates available to Rockford
for debt of similar risk and maturities.



| |                                 
| | --------------------------------
| | Derivative Financial Instruments

Effective January 1, 2001, Rockford adopted
Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as subsequently amended by SFAS
No. 137 and SFAS No. 138, which revises the accounting
and disclosure requirements related to derivative financial
instruments. SFAS No. 133 requires all derivatives to be
recognized as assets or liabilities at fair value. During 2003,
Rockford entered into several foreign forward contracts to hedge
foreign denominated assets with foreign denominated liabilities
in order to mitigate the risk of significant changes in earnings
due to short-term foreign exchange fluctuations. Changes in the
fair value of derivatives were recognized through net loss. At
December 31, 2003, Rockford did not have any outstanding
forward contracts.

39



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

Rockford recognizes revenue and records sales,
net of related discounts, when all of the following criteria are
met:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Persuasive evidence of an arrangement exists;              
|
| |  | Ownership has transferred to the customer;                 
|
| |  | The price to the customer is fixed or
    determinable; and
|
| |  | Collectability is reasonably assured.                      

Additionally, Rockford recognizes revenue from
the sale of software in accordance with SOP 97-2,
Software Revenue Recognition. Revenue is recorded from
packaged software and license fees when persuasive evidence of
an arrangement exists, the software product has been shipped,
the fees are fixed and determinable, collectibility is
reasonably assured and vendor-specific objective evidence of
fair value exists for any undelivered products or services
(elements) of the arrangement.

Rockford also records reductions to revenue for
estimated customer returns and additional sales incentive
offerings such as growth and volume incentive rebates and prompt
pay discounts based on historical rates. Should a greater
proportion of customers return product or redeem incentives than
estimated, Rockford may be required to make additional
reductions to revenue.



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

Rockford records product-shipping costs as
freight expense in direct sales and marketing expense. Freight
expense for the years ended December 31, 2001, 2002 and
2003 was approximately $3,978,000, $5,469,000 and $6,424,000,
respectively.



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

Rockford sells its products principally to mobile
audio, home audio, and professional audio dealers primarily in
North America, South America, Europe and Asia. Rockford also
sells certain portions of its product line to a large retail
reseller of consumer electronics in the United States and Canada
and a large discount chain in the United States. At
December 31, 2002 and 2003, net accounts receivable
includes approximately $7,436,000 and $1,247,000, respectively,
due from overseas businesses.

Rockford maintains an allowance for doubtful
accounts, based on historical rates, for estimated losses
resulting from the inability of its customers to make required
payments. Rockford has included in the allowance for accounts
receivable at December 31, 2002 and 2003, approximately
$2,262,000 and $2,435,000, respectively, for doubtful accounts.
If the financial condition of Rockfords customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required.

Rockford also maintains allowances for prompt pay
and freight discounts, based on historical rates for discounts
offered to customers for invoices paid under 40 to 60 days
of issuance. Rockford has included in its allowance for accounts
receivable at December 31, 2002 and 2003, approximately
$734,000 and $579,000, respectively, with respect to customers
expected to use such discounts after year-end. Should a greater
proportion of customers take advantage of these discounts than
estimated by Rockford, additional reductions to revenue might be
required.

40



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

Inventories consist principally of raw materials
of electronic and mechanical components used in the
manufacturing of amplifier and speaker systems and finished
goods. Inventories are carried at the lower of cost or market.
Rockford uses a standard costing system.

Rockford maintains a reserve for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value
based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are
less favorable than those Rockford projected, additional
inventory write-downs might be required.



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

Property and equipment is stated at cost.
Depreciation and amortization are computed principally on the
straight-line method for financial reporting purposes over a two
to ten year life. The building acquired in the MB Quart
acquisition, located in Obrigheim, Germany, is being depreciated
over a period of 25 years. Leasehold improvements are
amortized on the straight-line method over the shorter period of
the lease term or the estimated useful life of the asset.
Rockford capitalizes internally developed software in accordance
with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.



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

In accordance with the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, Rockford records impairment losses on
long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets and is recorded in
the period in which the determination is made.



| |                  
| | -----------------
| | Intangible Assets

On January 1, 2002, Rockford adopted
SFAS No. 141, Business Combination, and
SFAS No. 142, Goodwill and Other Intangible
Assets. Purchase prices of acquired businesses that are
accounted for as purchases have been allocated to the assets and
liabilities acquired based on the estimated fair values on the
respective acquisition dates. Based on these values, the excess
purchase prices over the fair value of the net assets acquired
were allocated to goodwill.

Prior to January 1, 2002, Rockford amortized
goodwill over the useful life of the underlying asset, not to
exceed 15 years. On January 1, 2002, Rockford began
accounting for goodwill under the provisions of SFAS Nos.
141 and 142 and discontinued the amortization of goodwill. As at
December 31, 2003, Rockford had gross goodwill of
$7,291,000 and accumulated amortization of $401,000 as of
December 31, 2002 and gross goodwill of $7,493,000 and
accumulated amortization of $375,000 as of December 31,
2003. For the years ended December 31, 2002 and
December 31, 2003, Rockford did not recognize amortization
expense related to goodwill. Rockford completed two acquisitions
in the third quarter of 2001 and two acquisitions in the fourth
quarter of 2002 and has not recorded any amortization for these
acquisitions on amounts allocated to goodwill in accordance with
SFAS No. 141. Application of the non-amortization
provisions of SFAS No. 142 resulted in an increase in
income from continuing operations before income taxes of
approximately $168,000 for the year ended December 31, 2002
and a decrease in net loss from continuing operations of
approximately $168,000 for the year ended December 31, 2003.

41



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In assessing the recoverability of
Rockfords goodwill and other intangibles, Rockford must
make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the
future, Rockford may be required to record impairment charges
for these assets not previously recorded. Some factors
considered important which could trigger an impairment review
include the following:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to expected
    historical or projected future operating results;      
|
| |  | Significant changes in the manner of use of the
    acquired assets or the strategy for the overall business;
|
| |  | Decline in Rockfords market capitalization
    relative to net book value; and                              
|
| |  | Significant negative industry or economic trends.                                                            

Rockford has tested goodwill for impairment using
the two-step process prescribed in SFAS No. 142. The
first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any.
Rockford performed the first of the required impairment tests
for goodwill as at December 31, 2002 and another test as at
December 31, 2003 and determined that goodwill was not
impaired and it was not necessary to record any impairment
losses related to goodwill and other intangible assets.

Income (loss), basic income (loss) per share and
diluted income (loss) per share for the years ended
December 31, 2001, 2002 and 2003, respectively, adjusted to
exclude amortization expense no longer required due to the
adoption of SFAS No. 142, are as follows:

|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |   | 
|---------------------------------------------- | ------------------------------- | ------------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | - | 
|                                               |                                 |                                
|                                               |                                 | Year Ended December 31,        
|                                               |                                 |                                
|                                               |                                 | 2001                            |       | 2002 |  | 2003
|                                               |                                 |                                 |       |      |  |     
|                                               |                                 |                                
|                                               |                                 | (In thousands, except per share
|                                               |                                 | data)                          
|Reported net income (loss)                     |                                 | $                               | 6,223 |      |  | $    | 6,280 |   |  | $ | (5,664 | )
|                                               | Add back: goodwill amortization |                                 |       | 107  |  |      |       |  |  |   |        |  | 
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  
|Adjusted net income (loss)                     |                                 | $                               | 6,330 |      |  | $    | 6,280 |   |  | $ | (5,664 | )
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  
|Reported income (loss) per share  basic       |                                 | $                               | 0.77  |      |  | $    | 0.74  |   |  | $ | (0.64  | )
|                                               | Add back: goodwill amortization |                                 |       | 0.01 |  |      |       |  |  |   |        |  | 
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  
|Adjusted income (loss) per share  basic       |                                 | $                               | 0.78  |      |  | $    | 0.74  |   |  | $ | (0.64  | )
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  
|Reported income (loss) per share 
    diluted |                                 | $                               | 0.70  |      |  | $    | 0.68  |   |  | $ | (0.64  | )
|                                               | Add back: goodwill amortization |                                 |       | 0.01 |  |      |       |  |  |   |        |  | 
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  
|Adjusted income (loss) per share 
    diluted |                                 | $                               | 0.71  |      |  | $    | 0.68  |   |  | $ | (0.64  | )
|                                               |                                 |                                 |       |      |  |      |       |   |  |   |        |  



| |            
| | -----------
| | Advertising

Rockford expenses advertising as incurred.
Advertising expense for the years ended December 31, 2001,
2002 and 2003 was approximately $1,912,000, $2,365,000 and
$2,881,000, respectively.



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

Rockford accounts for income taxes under the
provisions of SFAS No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

42



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The effect on deferred tax assets and liabilities
of a change in tax laws (including rates) is recognized in
income in the period that includes the enactment date.

Rockford assesses the likelihood that it will
able to recover its deferred tax assets. If recovery is not
likely, Rockford must increase the provision, or decrease the
benefit, by recording a valuation allowance against the deferred
tax assets that it estimates will not ultimately be recoverable.
As of December 31, 2003, Rockford had valuation reserves as
described in Note 7.



| |                               
| | ------------------------------
| | Income (Loss) per Common Share

Rockford reports income (loss) per common share
in accordance with SFAS No. 128, Earnings Per
Share. Diluted income per share includes the dilutive
effects of options, warrants and convertible securities.



| |                     
| | --------------------
| | Significant Customer

Rockford has sales to one customer representing
16.3 percent, 21.1 percent and 25.9 percent of net
sales for the years ended December 31, 2001, 2002 and 2003,
respectively. That same customer accounted for approximately 16%
and 30% of the accounts receivable balance at December 31,
2002 and 2003, respectively.



| |                             
| | ----------------------------
| | Foreign Currency Translation

Rockford has translated the financial statements
of foreign subsidiaries into U.S. dollars in accordance
with SFAS No. 52, Foreign Currency Translation.
All asset and liability accounts have been translated using the
current exchange rates at the balance sheet date and
shareholders equity accounts were translated at historical
exchange rates. Amounts reported in the statements of operations
have been translated using the average exchange rate for the
year. The gains and losses resulting from the change in exchange
rates from year-to-year have been reported separately as a
component of shareholders equity. The effect on the
statements of operations of transaction gains and losses is
insignificant.



| |                         
| | ------------------------
| | Stock Based Compensation

Rockford grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair
value of the shares at date of grant. Fair market value of the
underlying shares is determined by the market price at the date
of the grant. Rockford accounts for stock options using the
intrinsic value method, in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. Rockford
has adopted the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, and accordingly, recognizes no compensation
expense for the employee stock option grants. Stock option
grants to non-employees are charged to expense based upon the
fair value of the options granted.

43



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table represents the effect on
income (loss) and income (loss) per share if Rockford had
applied the fair value based method and recognition provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation:

|                                        |         |                         |       |      |  |      |       |      |  |   |        |       |  
|--------------------------------------- | ------- | ----------------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ------ | ----- | -
|                                        |         |                        
|                                        |         | Year Ended December 31,
|                                        |         |                        
|                                        |         | 2001                    |       | 2002 |  | 2003
|                                        |         |                         |       |      |  |     
|                                        |         |                        
|                                        |         | (In thousands, except  
|                                        |         | per share data)        
|Income (loss) as reported               |         | $                       | 6,223 |      |  | $    | 6,280 |      |  | $ | (5,664 | )    
|Proforma SFAS No. 123 expense           |         |                         | (327  | )    |  |      | (327  | )    |  |   | (402   | )    
|                                        |         |                         |       |      |  |      |       |      |  |   |        |      
|Proforma net income (loss)              |         | $                       | 5,896 |      |  | $    | 5,953 |      |  | $ | (6,066 | )    
|                                        |         |                         |       |      |  |      |       |      |  |   |        |      
|Proforma income (loss) per common share |         |                         |       |      |  |      |       |      |  |   |        |      
|                                        | Basic   |                         | $     | 0.74 |  |      | $     | 0.70 |  |   | $      | (0.68 | )
|                                        |         |                         |       |      |  |      |       |      |  |   |        |      
|                                        | Diluted |                         | $     | 0.66 |  |      | $     | 0.64 |  |   | $      | (0.68 | )
|                                        |         |                         |       |      |  |      |       |      |  |   |        |      

For purposes of proforma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. See Note 8 for further
discussion of Rockfords stock-based employee compensation.

Use of
Estimates

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. The accounting estimates that
require managements most difficult and subjective
judgments include the assessment of recoverability of goodwill,
the valuation of inventory, the recognition and measurement of
income tax assets and liabilities and the determination of
appropriate reserves for customer returns, discount programs and
warranty returns. The actual results experienced by Rockford may
differ from managements estimates.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to the
2001 and 2002 consolidated financial statements to conform them
to the 2003 presentation.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

Effective January 1, 2003 Rockford adopted
SFAS 145, Rescission of FASB Statements No. 4, 44
and 64, amendment of FASB Statement No. 13, and Technical
Corrections, which among other things, restricts the
classification of gains and losses from extinguishment of debt
as extraordinary to only those transactions that are unusual and
infrequent in nature as defined by APB Opinion No. 30. Upon
adoption, gains and losses on certain future debt
extinguishment, if any, will be recorded in pre-tax income. The
adoption of SFAS 145 did not have an effect on
Rockfords consolidated financial position, results of
operations or cash flows.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient
equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications
to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. Rockford currently has no contractual relationship or

44



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

other business relationship with a variable
interest entity and therefore the adoption of FIN No. 46
did not have a material effect on Rockfords consolidated
financial position, results of operations or cash flows.

In April 2003, the Financial Accounting Standards
Board issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This
statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is
effective for contracts entered in to or modified after
June 30, 2003. Rockford has only limited involvement with
derivative financial instruments, does not use them for trading
purposes and is not a party to any leveraged derivatives.
However, Rockford periodically enters into forward exchange
contracts to hedge some of its foreign currency exposure.
Rockfords adoption of SFAS 149 did not have a
material effect on its consolidated financial position, results
of operations, or cash flows.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The Statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after June 15, 2003. Rockford currently
has no instruments impacted by the adoption of this statement
and therefore the adoption did not have an effect on
Rockfords consolidated financial position, results of
operations or cash flows.



|   |             
|-- | ------------
|2. | Acquisitions

Now Hear This (NHT).On December 26, 2002, Rockford acquired the NHT (Now Hear
This) business and assets from Recoton Corporation. The assets
acquired and liabilities assumed were recorded at their fair
values at the date of the acquisition. The remaining portion of
the purchase price was assigned to goodwill in the amount of
$261,000. The acquisition was accounted for using the purchase
method of accounting, and accordingly, the results of operations
of NHT were included in Rockfords consolidated results of
operations beginning December 26, 2002. The acquisition was
not significant under the requirements of the Securities and
Exchange Commission.

SimpleDevices, Inc.On October 17, 2002, Rockford purchased
63,336,955 shares of common stock of
SimpleDevices, Inc. These shares represent approximately
76% of SimpleDevices outstanding common stock as at
December 31, 2003. Rockfords investment of
$3.5 million was paid to SimpleDevices, not to its
shareholders, and is being used for working capital, the payment
of a convertible promissory note and for other corporate
purposes. Rockford financed the investment price using
borrowings from its line of credit. The assets acquired and
liabilities assumed were recorded at their fair values at the
date of acquisition. The remaining portion of the purchase price
was assigned to goodwill in the amount of $563,000. The
acquisition was accounted for using the purchase method of
accounting, and accordingly, the results of operations of
SimpleDevices were included in Rockfords consolidated
results of operations effective October 1, 2002, excluding
minority interest. The acquisition was not significant under the
requirements of the Securities and Exchange Commission.

MB Quart.On
September 1, 2001, Rockford acquired MB Quart GmbH as a
subsidiary of Rockfords existing German subsidiary,
Rockford Europe. Through MB Quart GmbH, Rockford entered into
agreements with Dr. Werner Schreiber, a receiver appointed
under German bankruptcy law to manage the business of MB Quart
Akustik GmbH. Under these agreements, MB Quart GmbH acquired
substantially all of the operating assets of MB Quart Akustik
GmbH, and Rockford directly acquired all of the stock of the
U.S. subsidiary, M.B. Quart Electronics (USA), Inc.
Rockford paid approximately $6 million for all of these
assets. Rockford financed the purchase price, as well as working
capital requirements for this acquired business, using
borrowings from its line of credit. The assets acquired and
liabilities assumed were recorded at their fair values

45



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

at the date of acquisition. The remaining portion
of the purchase price was assigned to property and equipment
with $248,000 being assigned to goodwill. The acquisition was
accounted for using the purchase method of accounting and
accordingly, the results of operations of MB Quart were
included in Rockfords consolidated results of operations
beginning on September 1, 2001. The acquisition was not
significant under the requirements of the Securities and
Exchange Commission.

Audio Innovations.On August 1, 2001, Rockford acquired the Audio Innovations
business by purchasing all of the outstanding shares of common
stock of Audio Innovations, Inc., an Oklahoma corporation.
Rockford paid the shareholders of Audio Innovations
$4 million ($3.8 million cash and $0.2 million
payable to the selling shareholders) at the closing and paid
approximately $1.9 million to settle outstanding Audio
Innovations debt. Rockford also anticipates making payments of
$500,000 to the selling shareholders over the three years after
the closing if Audio Innovations meets agreed upon profitability
and sales goals; Rockford paid $161,000 and $135,000 of this
amount in 2002 and 2003, respectively. Rockford financed the
purchase price using borrowings from its line of credit. The
assets acquired and liabilities assumed were recorded at their
fair values at the date of acquisition with $3.9 million
recorded as goodwill. The acquisition was accounted for using
the purchase method of accounting and accordingly, the results
of operations of Audio Innovations were included in
Rockfords consolidated results of operations beginning on
August 1, 2001. The acquisition was not significant under
the requirements of the Securities and Exchange Commission.

Lightning Audio.On
June 30, 1999, Rockford completed an acquisition of all of
the common stock of Lightning Audio. Under the terms of the
acquisition, Rockford paid $1,550,000 in cash and recorded an
additional $50,000 of purchase consideration obligations for a
total purchase price of $1.6 million. Under the terms of
the acquisition, Rockford paid $600,000 of additional
consideration over two years subsequent to the purchase of
Lightning Audio based on the achievement of certain performance
goals. Through December 31, 1999, the former owners of
Lightning Audio had earned $274,000 in additional consideration.
The remaining $326,000 was earned in the year ending
December 31, 2000. Rockford recorded approximately
$2,027,000 of goodwill with respect to the initial purchase and
the additional consideration paid during 1999 and 2000. This
goodwill was being amortized over 15 years until
January 1, 2002, at which time Rockford began accounting
for the goodwill under the provisions of SFAS Nos. 141 and
142. The acquisition has been accounted for under the purchase
method of accounting and, accordingly, the results of operations
of Lightning Audio have been included in Rockfords
consolidated results of operation beginning on July 1,
1999. The acquisition was not significant under the requirements
of the Securities and Exchange Commission.



|   |            
|-- | -----------
|3. | Inventories

Inventories consisted of the following:

|                 |  |                |        |      |  |   |        |  
|---------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                 |  |               
|                 |  | December 31,  
|                 |  |               
|                 |  | 2002           |        | 2003
|                 |  |                |        |     
|                 |  |               
|                 |  | (In thousands)
|Raw materials    |  | $              | 9,053  |      |  | $ | 9,698  |  
|Work in progress |  |                | 2,330  |      |  |   | 1,548  |  
|Finished goods   |  |                | 24,386 |      |  |   | 30,114 |  
|                 |  |                |        |      |  |   |        |  
|                 |  |                | 35,769 |      |  |   | 41,360 |  
|Less allowances  |  |                | (3,324 | )    |  |   | (4,218 | )
|                 |  |                |        |      |  |   |        |  
|                 |  | $              | 32,445 |      |  | $ | 37,142 |  
|                 |  |                |        |      |  |   |        |  

46



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|4. | Property and Equipment

Property and equipment consisted of the following:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2002           |         | 2003
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Land                                           |  | $              | 421     |      |  | $ | 505     |  
|Building                                       |  |                | 1,195   |      |  |   | 1,374   |  
|Machinery and equipment                        |  |                | 19,500  |      |  |   | 21,316  |  
|Tooling equipment                              |  |                | 9,331   |      |  |   | 6,223   |  
|Leasehold improvements                         |  |                | 3,152   |      |  |   | 3,288   |  
|Furniture and fixtures                         |  |                | 2,249   |      |  |   | 2,814   |  
|Computer software                              |  |                | 2,663   |      |  |   | 4,605   |  
|Construction in process                        |  |                | 2,846   |      |  |   | 1,585   |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 41,357  |      |  |   | 41,710  |  
|Less accumulated depreciation and amortization |  |                | (26,095 | )    |  |   | (25,414 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 15,262  |      |  | $ | 16,296  |  
|                                               |  |                |         |      |  |   |         |  

5. Notes Payable and Long-Term
Debt

Notes payable and long-term debt consisted of the
following:

|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                |       |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                              |  | December 31,  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                              |  | 2002           |       | 2003
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                |       |     
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                              |  | (In thousands)
|$30,000,000 line of credit with a lender
    collateralized by substantially all assets. Swing line and
    revolving line interest payments at Prime and LIBOR plus 100 and
    300 basis points, respectively. All remaining principal and
    interest is due and payable July 2004. Borrowings under this
    line of credit are limited to a borrowing base as defined and
    adjusted in the agreement |  | $              | 8,461 |      |  | $ | 22,746  |  
|Other                                                                                                                                                                                                                                                                                                                                                                                                         |  |                | 339   |      |  |   | 167     |  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                |       |      |  |   |         |  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                | 8,800 |      |  |   | (22,913 | )
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                          |  |                | (189  | )    |  |   | (22,913 | )
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                |       |      |  |   |         |  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  | $              | 8,611 |      |  | $ |        |  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                |       |      |  |   |         |  

Interest payments were approximately $455,000,
$528,000 and $1,093,000 for the years ended December 31,
2001, 2002 and 2003, respectively.

At December 31, 2003, Rockford had
$7,254,000 available on its $30,000,000 bank credit facility.
This credit facility contains covenants that place various
restrictions on financial ratios, levels of indebtedness and
capital expenditures, among other things. As of
December 31, 2003, Rockford was not in compliance with
several of the debt covenants relating to the minimum required
consolidated fixed charge coverage ratio, the consolidated total
leverage ratio, and 3-month rolling EBITDA. Because the current
facility was scheduled to expire July 5, 2004 and because
of the covenant violations, the entire $22.7 million credit
facility balance is classified as a current liability as at
December 31, 2003. The facility was replaced March 29,
2004, as more fully described in Note 16.

47



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |       
|-- | ------
|6. | Leases

Rockford leases equipment under capital leases.
Rockford also leases certain manufacturing, warehouse and office
facilities, and computer hardware and software under
noncancelable operating leases that expire in various years
through September 2009.

Property and equipment includes the following
amounts for leases that have been capitalized:

|                              |  |                |        |      |  |   |        |  
|----------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                              |  |               
|                              |  | December 31,  
|                              |  |               
|                              |  | 2002           |        | 2003
|                              |  |                |        |     
|                              |  |               
|                              |  | (In thousands)
|Equipment                     |  | $              | 7,179  |      |  | $ | 7,179  |  
|Less accumulated amortization |  |                | (5,038 | )    |  |   | (6,162 | )
|                              |  |                |        |      |  |   |        |  
|                              |  | $              | 2,141  |      |  | $ | 1,017  |  
|                              |  |                |        |      |  |   |        |  

Amortization of leased assets is included in
depreciation and amortization expense.

During the years ended December 31, 2001 and
2002, Rockford acquired approximately $1,276,000 and $1,608,000
of equipment under capital leases, respectively. No assets were
acquired under capital leases in 2003.

Future minimum payments under capital leases and
noncancelable operating leases with initial terms of one year or
more consisted of the following at December 31, 2003:

|                                   |  |                |        |                  |  |   |       | 
|---------------------------------- |  | -------------- | ------ | ---------------- |  | - | ----- | 
|                                   |  | Capital Leases |        | Operating Leases
|                                   |  |                |        |                 
|                                   |  |               
|                                   |  | (In thousands)
|2004                               |  | $              | 1,475  |                  |  | $ | 2,954 | 
|2005                               |  |                |        |                  |  |   | 2,462 | 
|2006                               |  |                |       |                  |  |   | 1,254 | 
|2007                               |  |                |       |                  |  |   | 1,017 | 
|2008                               |  |                |       |                  |  |   | 982   | 
|Thereafter                         |  |                |       |                  |  |   | 355   | 
|                                   |  |                |        |                  |  |   |       | 
|Total minimum lease payments       |  |                | 1,475  |                  |  | $ | 9,024 | 
|                                   |  |                |        |                  |  |   |       | 
|Less amounts representing interest |  |                | (43    | )                |  |   |       | 
|                                   |  |                |        |                  |  |   |       | 
|Present value of net minimum lease |  |                | 1,432  |                  |  |   |       | 
|Less current portion               |  |                | (1,432 | )                |  |   |       | 
|                                   |  |                |        |                  |  |   |       | 
|                                   |  | $              |       |                  |  |   |       | 
|                                   |  |                |        |                  |  |   |       | 

Total rental expense for all operating leases was
approximately $2,545,000, $2,800,000 and $3,555,000 for the
years ended December 31, 2001, 2002 and 2003, respectively.

Bank One notified Rockford in March 2004 that the
covenant violations on Rockfords bank credit facility (see
Note 5) at December 31, 2003 caused Rockford to
be in violation of its capital lease agreements due to a
cross-default clause. Rockford is in the process of negotiating
with Bank One to waive the violation and will seek a new capital
lease facility if Bank One does not waive the default.

48



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |             
|-- | ------------
|7. | Income Taxes

Significant components of Rockfords
deferred tax assets are:

|                          |                                 |                |       |       |  |   |       |       |  
|------------------------- | ------------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | -
|                          |                                 |               
|                          |                                 | December 31,  
|                          |                                 |               
|                          |                                 | 2002           |       | 2003 
|                          |                                 |                |       |      
|                          |                                 |               
|                          |                                 | (In thousands)
|Deferred tax assets:      |                                 |                |       |       |  |   |       |      
|                          | Inventory basis                 |                | $     | 1,382 |  |   | $     | 1,736 |  
|                          | Basis in receivables            |                |       | 1,243 |  |   |       | 1,274 |  
|                          | Book over tax depreciation      |                |       | 292   |  |   |       | (210  | )
|                          | Accrued warranty                |                |       | 1,646 |  |   |       | 1,767 |  
|                          | Net operating loss carryforward |                |       | 659   |  |   |       | 1,994 |  
|                          | Accrued liabilities and other   |                |       | 605   |  |   |       | 504   |  
|                          |                                 |                |       |       |  |   |       |      
|Gross deferred tax assets |                                 |                | 5,827 |       |  |   | 7,065 |      
|                          |                                 |                |       |       |  |   |       |      
|Valuation allowance       |                                 |                | (375  | )     |  |   | (949  | )    
|                          |                                 |                |       |       |  |   |       |      
|Net deferred tax assets   |                                 | $              | 5,452 |       |  | $ | 6,116 |      
|                          |                                 |                |       |       |  |   |       |      

At December 31, 2003, Rockford has a net
operating loss carryforward for United States federal income tax
purposes of approximately $1,938,000, which will begin to expire
in 2011 if not previously utilized and a net operating loss
carryforward for German income tax purposes of approximately
$2,843,000, which does not expire but has a 50% annual use
limitation. These loss carryforwards result in deferred tax
assets of $659,000 and $1,120,000, respectively. In addition,
there is a loss carryforward for state tax purposes in the
amount of $215,000. The United States net operating loss is
attributable to Rockfords acquisition of MB Quart USA in
2001. As such, it is limited for tax purposes under Internal
Revenue Code section 382, which limits the annual
utilization of net operating losses. At December 31, 2003,
the valuation allowance includes $389,000, which is the
estimated amount that will expire as a result of this annual
limitation, and $560,000 of a valuation allowance provided for
the German loss carryforward as proscribed by SFAS 109.

49



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##### Table of Contents



ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Significant components of the federal and state
income tax expense (benefit) are:

|                                 |                           |                         |       |       |   |      |       |       |   |   |        |        |  
|-------------------------------- | ------------------------- | ----------------------- | ----- | ----- | - | ---- | ----- | ----- | - | - | ------ | ------ | -
|                                 |                           |                        
|                                 |                           | Year Ended December 31,
|                                 |                           |                        
|                                 |                           | 2001                    |       | 2002  |   | 2003
|                                 |                           |                         |       |       |   |     
|                                 |                           |                        
|                                 |                           | (In thousands)         
|Current:                         |                           |                         |       |       |   |      |       |       |   |   |        |       
|                                 | Federal expense (benefit) |                         | $     | 3,060 |   |      | $     | 3,693 |   |   | $      | (2,445 | )
|                                 | State expense (benefit)   |                         |       | 59    |   |      |       | 326   |   |   |        | (10    | )
|                                 | Foreign expense (benefit) |                         |       | (88   | ) |      |       | 206   |   |   |        | 69     |  
|                                 |                           |                         |       |       |   |      |       |       |   |   |        |       
|Total current expense            |                           |                         | 3,031 |       |   |      | 4,225 |       |   |   | (2,386 | )     
|Deferred:                        |                           |                         |       |       |   |      |       |       |   |   |        |       
|                                 | Federal expense (benefit) |                         |       | 671   |   |      |       | (305  | ) |   |        | 126    |  
|                                 | State expense (benefit)   |                         |       | 54    |   |      |       | (17   | ) |   |        | (209   | )
|                                 | Foreign (benefit)         |                         |       |      |   |      |       |      |   |   |        | (581   | )
|                                 |                           |                         |       |       |   |      |       |       |   |   |        |       
|Total deferred expense (benefit) |                           |                         | 725   |       |   |      | (322  | )     |   |   | (664   | )     
|                                 |                           |                         |       |       |   |      |       |       |   |   |        |       
|Income tax expense (benefit)     |                           | $                       | 3,756 |       |   | $    | 3,903 |       |   | $ | (3,050 | )     
|                                 |                           |                         |       |       |   |      |       |       |   |   |        |       

A reconciliation of Rockfords effective
income tax rate to the federal statutory rate follows:

|                                          |  |                         |       |      |  |      |       |   |  |   |        |  
|----------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                          |  |                        
|                                          |  | Year Ended December 31,
|                                          |  |                        
|                                          |  | 2001                    |       | 2002 |  | 2003
|                                          |  |                         |       |      |  |     
|                                          |  |                        
|                                          |  | (In thousands)         
|Federal statutory rate                    |  | $                       | 3,493 |      |  | $    | 3,550 |   |  | $ | (2,963 | )
|State tax net of federal benefit          |  |                         | 64    |      |  |      | 178   |   |  |   | (205   | )
|Nondeductible items                       |  |                         | 148   |      |  |      | 103   |   |  |   | (25    | )
|Foreign rate differential                 |  |                         | 267   |      |  |      | 149   |   |  |   | (137   | )
|Extraterritorial income exclusion benefit |  |                         | (129  | )    |  |      | (31   | ) |  |   |       |  
|Other, net                                |  |                         | (87   | )    |  |      | (46   | ) |  |   | (149   | )
|Increase in Valuation Allowance           |  |                         |      |      |  |      |      |   |  |   | 574    |  
|Use of Previously Unbenefited NOL         |  |                         |      |      |  |      |      |   |  |   | (457   | )
|Affiliate Unbenefited Losses              |  |                         |      |      |  |      |      |   |  |   | 312    |  
|                                          |  |                         |       |      |  |      |       |   |  |   |        |  
|                                          |  | $                       | 3,756 |      |  | $    | 3,903 |   |  | $ | (3,050 | )
|                                          |  |                         |       |      |  |      |       |   |  |   |        |  

Rockfords (loss) income attributable to
foreign operations amounted to approximately $(969,000),
$164,000 and $(1,378,000) for the years ended December 31,
2001, 2002 and 2003, respectively. Income (loss) attributable to
domestic operations amounted to approximately $7,192,000,
$6,116,000 and $(4,286,000) for the years ended
December 31, 2001, 2002 and 2003, respectively.

For the years ended December 31, 2001 and
2002, Rockford made tax payments of $5,266,000, net of $14,000
in refunds, and $870,000, respectively. For the year ended
December 31, 2003, Rockford received refunds in the amount
of $1,404,000, net of $315,000 in payments.

8. Common Stock Grants and
Options

Rockford has provided stock option plans for
certain employees, directors and consultants. Under the stock
option plans, options to purchase common stock of Rockford will
be granted to certain employees, directors and consultants at
the fair value of the underlying common stock. The options
generally have a term of ten years and become exercisable over
three years commencing on the date of the grant. Options granted
prior to December 31, 1996, vested 100 percent upon
completion of Rockfords initial public offering on

50



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

April 20, 2000. Under certain circumstances,
Rockford has the right to repurchase common stock acquired under
the options at the fair value price.

Proforma information regarding net income (loss)
and net income (loss) per share is required by
SFAS No. 123, which also requires that the information
be determined as if Rockford has accounted for its employee
stock options granted subsequent to December 31, 1994,
under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a
Black Scholes-pricing model with the following weighted average
assumptions:

|                           |  |                        |             |      |  |      |                |  |  |  |             | 
|-------------------------- |  | ---------------------- | ----------- | ---- |  | ---- | -------------- |  |  |  | ----------- | 
|                           |  |                       
|                           |  | Year Ended December 31
|                           |  |                       
|                           |  | 2001                   |             | 2002 |  | 2003
|                           |  |                        |             |      |  |     
|Expected life of the award |  |                        | 5 years     |      |  |      | Not applicable |  |  |  | 5 years     | 
|Dividend yield             |  |                        | 0 percent   |      |  |      | Not applicable |  |  |  | 0 percent   | 
|Risk-free interest rate    |  |                        | 4.5 percent |      |  |      | Not applicable |  |  |  | 2.9 percent | 
|Expected volatility        |  |                        | .75         |      |  |      | Not applicable |  |  |  | .73         | 

Option activity under the stock option plan
during the years ended December 31, 2001, 2002 and 2003 is
as follows:

|                                 |  |                  |          |                     |  |                  |           |   |  |   |      | 
|-------------------------------- |  | ---------------- | -------- | ------------------- |  | ---------------- | --------- | - |  | - | ---- | 
|                                 |  |                  |          |                    
|                                 |  |                  |          | Outstanding Options
|                                 |  |                  |          |                    
|                                 |  | Shares Available |          |                     |  | Weighted Average
|                                 |  | Under Option     |          | Shares              |  | Exercise Price  
|                                 |  |                  |          |                     |  |                 
|Outstanding at December 31, 2000 |  |                  | 298,647  |                     |  |                  | 1,618,366 |   |  | $ | 4.06 | 
|Granted                          |  |                  | (302,814 | )                   |  |                  | 302,814   |   |  |   | 6.61 | 
|Exercised                        |  |                  |         |                     |  |                  | (149,325  | ) |  |   | 3.12 | 
|Expired or cancelled             |  |                  | 4,225    |                     |  |                  | (4,225    | ) |  |   | 6.02 | 
|                                 |  |                  |          |                     |  |                  |           |   |  |   |      | 
|Outstanding at December 31, 2001 |  |                  | 58       |                     |  |                  | 1,767,630 |   |  |   | 4.55 | 
|Authorized                       |  |                  | 600,000  |                     |  |                  |          |   |  |   |     | 
|Exercised                        |  |                  |         |                     |  |                  | (285,314  | ) |  |   | 2.52 | 
|Expired or cancelled             |  |                  | 4,300    |                     |  |                  | (4,300    | ) |  |   | 4.19 | 
|                                 |  |                  |          |                     |  |                  |           |   |  |   |      | 
|Outstanding at December 31, 2002 |  |                  | 604,358  |                     |  |                  | 1,478,016 |   |  |   | 4.93 | 
|Granted                          |  |                  | (167,000 | )                   |  |                  | 167,000   |   |  |   | 5.70 | 
|Exercised                        |  |                  |         |                     |  |                  | (174,449  | ) |  |   | 3.32 | 
|Expired                          |  |                  | 96,675   |                     |  |                  | (96,675   | ) |  |   | 5.34 | 
|                                 |  |                  |          |                     |  |                  |           |   |  |   |      | 
|Outstanding at December 31, 2003 |  |                  | 534,033  |                     |  |                  | 1,373,892 |   |  | $ | 5.19 | 
|                                 |  |                  |          |                     |  |                  |           |   |  |   |      | 

The weighted average fair value of options
granted during the years ended December 31, 2001 and 2003,
was $4.24 and $3.50, respectively. No options were granted
during 2002.

The Board of Directors of Rockford prior to 1995
granted a consulting firm, which provided executive and other
consulting services to Rockford, options to purchase
215,000 shares of its authorized but unissued common stock
at a price of $1.51 per share, protected against dilution,
as defined, and expiring in August 2002. Rockford determined
that the $1.51 price per share was equal to or more than the
fair value at the date of the grant. The stock options were
fully vested at December 31, 1999 and fully exercised on
March 5, 2002. These stock options were not included in the
table above.

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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options under the plans outstanding at December 31,
2003:

|                         |  |                     |           |                     |  |          |           |                   |  |          |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | --------- | ----------------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |                     |           |                     |  |         
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted            |  |          |           |                  
|                         |  |                     |           | Average             |  | Weighted |           |                   |  | Weighted
|                         |  | Number              |           | Remaining           |  | Average  |           | Number            |  | Average 
|                         |  | Outstanding at      |           | Contractual         |  | Exercise |           | Outstanding at    |  | Exercise
|Range of Exercise Prices |  | December 31, 2003   |           | Life                |  | Price    |           | December 31, 2003 |  | Price   
|                         |  |                     |           |                     |  |          |           |                   |  |         
|$1.51                    |  |                     | 122,800   |                     |  |          | 1.0 years |                   |  | $        | 1.51 |  |  |  | 122,800   |  |  | $ | 1.51 | 
|$2.44  $3.45            |  |                     | 251,452   |                     |  |          | 2.5 years |                   |  |          | 2.79 |  |  |  | 251,452   |  |  |   | 2.80 | 
|$4.19  $5.81            |  |                     | 501,575   |                     |  |          | 5.6 years |                   |  |          | 4.14 |  |  |  | 383,450   |  |  |   | 4.58 | 
|$6.00  $6.69            |  |                     | 251,565   |                     |  |          | 7.6 years |                   |  |          | 6.61 |  |  |  | 187,620   |  |  |   | 6.61 | 
|$7.67  $11.00           |  |                     | 246,500   |                     |  |          | 5.4 years |                   |  |          | 8.68 |  |  |  | 246,500   |  |  |   | 8.68 | 
|                         |  |                     |           |                     |  |          |           |                   |  |          |      |  |  |  |           |  |  |   |      | 
|                         |  |                     | 1,373,892 |                     |  |          |           |                   |  |          |      |  |  |  | 1,191,822 |  |  |   |      | 



|   |                        
|-- | -----------------------
|9. | Income (Loss) Per Share

|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |        |  
|-------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | -
|                                                                                                                     |                                                                             |                        
|                                                                                                                     |                                                                             | Year Ended December 31,
|                                                                                                                     |                                                                             |                        
|                                                                                                                     |                                                                             | 2001                    |       | 2002  |  | 2003
|                                                                                                                     |                                                                             |                         |       |       |  |     
|                                                                                                                     |                                                                             |                        
|                                                                                                                     |                                                                             | (In thousands, except  
|                                                                                                                     |                                                                             | per share data)        
|Numerator:                                                                                                           |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|                                                                                                                     | Income (loss)                                                               |                         | $     | 6,223 |  |      | $     | 6,280 |  |   | $      | (5,664 | )
|                                                                                                                     | Effect of dilutive securities interest impact of
    convertible debentures |                         |       |      |  |      |       |      |  |   |        |       |  
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|Numerator for diluted income (loss) per share,
    income available to common stockholders after assumed conversions |                                                                             | $                       | 6,223 |       |  | $    | 6,280 |       |  | $ | (5,664 | )     
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|Denominator:                                                                                                         |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|                                                                                                                     | Denominator for basic income (loss) per share,
    weighted average shares  |                         |       | 8,109 |  |      |       | 8,540 |  |   |        | 8,866  |  
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|                                                                                                                     | Effect of dilutive securities:                                              |                         |       |       |  |      |       |       |  |   |        |        |  
|                                                                                                                     | Employee stock options                                                      |                         |       | 799   |  |      |       | 755   |  |   |        |       |  
|                                                                                                                     | Warrants                                                                    |                         |       | 5     |  |      |       | 6     |  |   |        |       |  
|                                                                                                                     | Convertible debentures                                                      |                         |       |      |  |      |       |      |  |   |        |       |  
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|                                                                                                                     | Dilutive potential common shares                                            |                         |       | 804   |  |      |       | 761   |  |   |        |       |  
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|Denominator for diluted income (loss) per share,
    adjusted weighted average shares and assumed conversions        |                                                                             |                         | 8,913 |       |  |      | 9,301 |       |  |   | 8,866  |       
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|Basic income (loss) per share                                                                                        |                                                                             | $                       | 0.77  |       |  | $    | 0.74  |       |  | $ | (0.64  | )     
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       
|Diluted income (loss) per share                                                                                      |                                                                             | $                       | 0.70  |       |  | $    | 0.68  |       |  | $ | (0.64  | )     
|                                                                                                                     |                                                                             |                         |       |       |  |      |       |       |  |   |        |       

There were 481,771 employee stock options not
included in the income (loss) per share calculation for
December 31, 2003 as they were not dilutive.

52



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |              
|--- | -------------
|10. | Contingencies

Rockford is a party to legal proceedings, which
arise in the ordinary course of business. Based upon advice from
outside legal counsel, management is of the opinion that the
resolution of these matters will have no material effect on
Rockfords consolidated financial position, results of
operations or cash funds.



|    |             
|--- | ------------
|11. | Benefit Plan

Rockford has a 401(k) Retirement Savings Plan
(Plan) covering substantially all employees who have completed
six consecutive months of service without regard to hours of
service. Under the terms of the Plan, employees may make
voluntary contributions, subject to Internal Revenue Service
limitations. Rockford will match employee contributions up to
three percent of the employees annual compensation.
Additional contributions to the Plan can be made at the
discretion of the Board of Directors. Contributions to the Plan
during the year ended December 31, 2001, 2002 and 2003,
were approximately $395,000, $484,000 and $662,000, respectively.



|    |                    
|--- | -------------------
|12. | Stock Purchase Plan

On May 17, 1999, the shareholders of
Rockford approved the Employee Stock Purchase Plan. A total of
361,200 shares of Rockfords common stock are reserved
for issuance under the plan, which became effective
September 1, 1999. Employees will be eligible to
participate if they are employed by Rockford or a participating
subsidiary for at least 20 hours per week and more than
five months in any calendar year. Each employee will be able to
purchase up to $25,000 worth of shares, up to a maximum of
1,000 shares in each six-month purchase period. The price
per share purchased under the plan will generally be
85 percent of the fair market value of the shares. A total
of 224,000 shares have been issued since inception of this
plan.



|    |                    
|--- | -------------------
|13. | Segment Information

Rockford operates its business under the mobile
audio, professional and home theater audio and OEM segments. For
each of the periods ended December 31, 2001, 2002 and 2003,
the professional and home theater audio and OEM segments were
not significant and, accordingly, no additional disclosures of
operations information about the segments are required. Below is
geographic information for revenues of Rockford:

|                                    |  |                        |         |      |  |      |         |  |  |   |         | 
|----------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                    |  |                       
|                                    |  | Year Ended December 31
|                                    |  |                       
|Region(1)                           |  | 2001                   |         | 2002 |  | 2003
|                                    |  |                        |         |      |  |     
|                                    |  |                       
|                                    |  | (In thousands)        
|United States                       |  | $                      | 128,466 |      |  | $    | 134,150 |  |  | $ | 138,037 | 
|Other Americas                      |  |                        | 9,018   |      |  |      | 9,557   |  |  |   | 9,297   | 
|Europe                              |  |                        | 12,697  |      |  |      | 16,673  |  |  |   | 17,037  | 
|Asia                                |  |                        | 7,571   |      |  |      | 8,538   |  |  |   | 7,665   | 
|                                    |  |                        |         |      |  |      |         |  |  |   |         | 
|Total sales from external customers |  | $                      | 157,752 |      |  | $    | 168,918 |  |  | $ | 172,036 | 
|                                    |  |                        |         |      |  |      |         |  |  |   |         | 



---



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Revenues are attributed to geographic regions
    based on the location of customers.

For the years ended December 31, 2001, 2002
and 2003, sales to one customer accounted for 16.3 percent,
21.1 percent and 25.9 percent of those periods
net sales, respectively. Rockfords long-lived assets
outside of the United States consist of the land and building
used in Rockfords MB Quart operations and located in
Obrigheim, Germany.

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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                          
|--- | -----------------------------------------
|14. | Interim Financial Results
    (Unaudited)

The following tables set forth certain unaudited
consolidated financial information for each of the four quarters
in the years ended December 31, 2002 and 2003. In
managements opinion, this unaudited quarterly information
has been prepared on the same basis as the audited consolidated
financial statements and include all necessary adjustments,
consisting only of normal recurring adjustments that management
considers necessary for a fair presentation of the unaudited
quarterly results when read in conjunction with the consolidated
financial statements and notes. Rockford believes that
quarter-to-quarter comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an
indication of future performance.

|                                |  |                                       |        |         |  |              |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                |  |                                      
|                                |  | Year Ended December 31, 2003         
|                                |  |                                      
|                                |  | March 31                              |        | June 30 |  | September 30 |        | December 31 |  | Total
|                                |  |                                       |        |         |  |              |        |             |  |      
|                                |  |                                      
|                                |  | (In thousands, except per share data)
|Net Sales                       |  | $                                     | 39,624 |         |  | $            | 56,568 |             |  | $     | 39,496 |   |  | $ | 36,348 |   |  | $ | 172,036 |  
|Gross Profit                    |  |                                       | 12,839 |         |  |              | 20,327 |             |  |       | 10,680 |   |  |   | 9,221  |   |  |   | 53,067  |  
|Operating Income (Loss)         |  |                                       | (2,211 | )       |  |              | 2,766  |             |  |       | (4,093 | ) |  |   | (5,359 | ) |  |   | (8,897  | )
|Net Income (Loss)               |  |                                       | (946   | )       |  |              | 1,834  |             |  |       | (2,733 | ) |  |   | (3,819 | ) |  |   | (5,664  | )
|Basic Income (Loss) Per Share   |  |                                       | (0.11  | )       |  |              | 0.21   |             |  |       | (0.31  | ) |  |   | (0.43  | ) |  |   | (0.64   | )
|Diluted Income (Loss) Per Share |  |                                       | (0.11  | )       |  |              | 0.20   |             |  |       | (0.31  | ) |  |   | (0.43  | ) |  |   | (0.64   | )

|                                |  |                                       |        |         |  |              |        |             |  |       |        |  |  |   |        |   |  |   |         | 
|------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | ----- | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                |  |                                      
|                                |  | Year Ended December 31, 2002         
|                                |  |                                      
|                                |  | March 31                              |        | June 30 |  | September 30 |        | December 31 |  | Total
|                                |  |                                       |        |         |  |              |        |             |  |      
|                                |  |                                      
|                                |  | (In thousands, except per share data)
|Net Sales                       |  | $                                     | 43,734 |         |  | $            | 51,228 |             |  | $     | 40,583 |  |  | $ | 33,373 |   |  | $ | 168,918 | 
|Gross Profit                    |  |                                       | 16,522 |         |  |              | 20,029 |             |  |       | 14,268 |  |  |   | 10,352 |   |  |   | 61,171  | 
|Operating Income (Loss)         |  |                                       | 3,651  |         |  |              | 5,362  |             |  |       | 1,622  |  |  |   | (566   | ) |  |   | 10,069  | 
|Net Income (Loss)               |  |                                       | 2,178  |         |  |              | 3,587  |             |  |       | 825    |  |  |   | (310   | ) |  |   | 6,280   | 
|Basic Income (Loss) Per Share   |  |                                       | 0.26   |         |  |              | 0.42   |             |  |       | 0.10   |  |  |   | (0.04  | ) |  |   | 0.74    | 
|Diluted Income (Loss) Per Share |  |                                       | 0.24   |         |  |              | 0.38   |             |  |       | 0.09   |  |  |   | (0.04  | ) |  |   | 0.68    | 



|    |              
|--- | -------------
|15. | Restructuring

During the year ended December 31, 2003,
Rockford restructured its operations in Germany, Arizona and
Michigan. Management expects the restructuring will result in
improved efficiencies, better customer service and cost savings.
The restructuring of MB Quarts operations in Germany
increased operating loss for the year ended December 31,
2003, by approximately $1,786,000. The Arizona and Michigan
restructuring resulted in severance and benefit costs of
approximately $423,000, which increased selling, general and
administrative expenses for the year ended December 31,
2003. There were no outstanding liabilities at December 31,
2003 associated with this restructuring.



|    |                  
|--- | -----------------
|16. | Subsequent Events

Rockford entered into a 3-year $45.0 million
asset based credit facility with Congress Financial Corporation
(Western) as Agent and Wachovia Bank, National Association as
Arranger on March 29, 2004. This credit facility replaced
the $30 million revolving credit facility previously
maintained with Bank of America, N.A. and Bank One, Arizona,
N.A. This credit facility is collateralized by substantially all
of our assets and has a variable interest rate of LIBOR plus
250 basis points. In addition, the covenants limit the
payment of dividends; however, Rockford has not historically
paid dividends.

In addition, Rockford has entered into a one-year
term loan agreement with Hilco Capital, LP in the amount of
$4 million on March 29, 2004. This term loan is junior
to the $45.0 million senior credit facility with Congress
Financial Corporation (Western) and is also collateralized by
substantially all of Rockfords

54



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ROCKFORD CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assets. This facility has a variable interest
rate of the LaSalle Bank Rate/ Prime plus 450 basis points.
Both facilities will require that Rockford maintain certain
minimum levels of debt service coverage and also limit capital
expenditures annually.

Bank One notified Rockford in March of 2004 that
the bank credit facility covenant violations at
December 31, 2003 caused Rockford to be in violation of its
lease agreements due to a cross-default clause. Rockford is in
the process of negotiating with Bank One to waive the violation
and plans to seek a new capital lease facility if Bank One does
not waive the default. The amount outstanding on these leases at
December 31, 2003 was $1.4 million, $0.6 of this
amount was due after 2004 and has been reclassified as current
as of December 31, 2003.

55



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.



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

Our principal executive officer and principal
accounting officer are responsible for establishing and
maintaining adequate internal control over our financial
reporting. They have reviewed our disclosure controls and
procedures as at December 31, 2003 in order to comply with
the SECs requirements for certification of this
Form 10-K.

Since we became public we have maintained a
disclosure policy committee, which currently includes our CEO,
CFO, Director of Finance, Treasurer, Director of Investor
Relations, and General Counsel. Our officers, directors, and
employees are responsible to inform the committee about material
developments in our business so that the committee can decide
when we need to make new filings with the SEC or make
disclosures to the public markets about developments in our
business. Our principal executive officer and principal
accounting officer reviewed our processes to confirm that they
give reasonable assurance that our controls will meet their
objectives and concluded that they do so. They did not identify,
and are not aware of, any material weaknesses in our internal
controls.

The disclosure policy committee, other senior
managers, and our finance staff are responsible for preparation
of our periodic reports. Our finance staff and senior managers:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | monitor our operations and financial performance
    on a regular basis;
|
| |  | evaluate how our performance may affect our
    reports to the SEC; and 
|
| |  | schedule preparation of our periodic reports.                           

We use our Oracle information system to develop
the financial information used in our reports beginning shortly
after the end of each reporting period. Members of our finance
staff and our senior managers compile this information, as well
as reports about our business from our officers, directors, and
employees, and use the compiled information to prepare our
reports to the SEC. Our procedures have allowed us to file our
reports within the times that the SECs rules require.

We are currently evaluating what changes will be
needed to meet the enhanced reporting relating to internal
controls required by the Sarbanes Oxley Act and subsequent SEC
regulations. We are currently in the process of establishing an
enhanced internal control process. We did not make any
substantial changes in our internal review of our financial
reporting during 2003.

Based on their review of our disclosure controls
and policies, our principal executive officer and principal
accounting officer concluded that our disclosure controls and
procedures are effective and that they allow us to comply with
our periodic reporting obligations. We believe the reports we
have filed are in compliance with the SECs requirements.

We have not made significant changes to our
internal controls, and are not aware of changes in other factors
that could significantly affect these controls, during 2003.




PART III






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

The information required by this item is
incorporated by reference to the sections entitled
Executive Officers and Board of Directors and
Section 16(A) Beneficial Ownership Reporting
Compliance in our definitive Proxy Statement for our
Annual Meeting of Stockholders to be held May 12, 2004.

56



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

The information required by this item is
incorporated by reference to the sections entitled
Executive Compensation, Executive Officers and
Board of Directors  Director Compensation,
Related Party Transactions  Suttle Employment
Agreement and Stock Price Performance Graph in
our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held May 12, 2004.






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

The information required by this item is
incorporated by reference to the section entitled
Principal Shareholders and Shareholdings of Officers and
Directors in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held May 12, 2004.






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

The information required by this item is
incorporated by reference to the section entitled Related
Party Transactions in our definitive Proxy Statement for
our Annual Meeting of Stockholders to be held May 12, 2004.






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

The information required by this item is
incorporated by reference to the section entitled
Principal Accountant Fees and Services in our
definitive Proxy Statement for our Annual Meeting of
Stockholders to be held May 12, 2004.

57



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##### Table of Contents






PART IV






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

Consolidated Financial Statements

See Index to Consolidated Financial Statements on
page 28 of this report.

Financial Statement Schedule

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

ROCKFORD CORPORATION

|                  |                       |                |   |            |  |                |   |            |  |               |   |       |     |  |   |       |     |  |   |       | 
|----------------- | --------------------- | -------------- | - | ---------- |  | -------------- | - | ---------- |  | ------------- | - | ----- | --- |  | - | ----- | --- |  | - | ----- | 
|                  |                       |                |   |            |  |                |   |           
|Column A          |                       | Column B       |   | Column C   |  | Column D       |   | Column E  
|                  |                       |                |   |            |  |                |   |           
|                  |                       | Balance at     |   | Charged to |  |                |   |            |  |              
|                  |                       | Beginning of   |   | Costs and  |  | Charged to     |   |            |  | Balance at   
|Description       |                       | Period         |   | Expenses   |  | Other Accounts |   | Deductions |  | End of Period
|                  |                       |                |   |            |  |                |   |            |  |              
|                  |                       |               
|                  |                       | (In thousands)
|December 31, 2003 |                       |                |   |            |  |                |   |            |  |               |   |       |     |  |   |       |     |  |   |      
|                  | Receivable allowances |                | $ | 2,996      |  |                | $ | 746        |  |               | $ | 3,652 | (3) |  | $ | 4,380 | (1) |  | $ | 3,014 | 
|                  | Inventory reserve     |                |   | 3,324      |  |                |   | 2,168      |  |               |   | 520   | (4) |  |   | 1,794 | (2) |  |   | 4,218 | 
|December 31, 2002 |                       |                |   |            |  |                |   |            |  |               |   |       |     |  |   |       |     |  |   |      
|                  | Receivable allowances |                | $ | 2,613      |  |                | $ | 861        |  |               | $ | 5,108 | (3) |  | $ | 5,586 | (1) |  | $ | 2,996 | 
|                  | Inventory reserve     |                |   | 2,883      |  |                |   | 1,490      |  |               |   | 354   | (4) |  |   | 1,403 | (2) |  |   | 3,324 | 
|December 31, 2001 |                       |                |   |            |  |                |   |            |  |               |   |       |     |  |   |       |     |  |   |      
|                  | Receivable allowances |                | $ | 1,427      |  |                | $ | 969        |  |               | $ | 2,966 | (3) |  | $ | 2,749 | (1) |  | $ | 2,613 | 
|                  | Inventory reserve     |                |   | 1,446      |  |                |   | 1,332      |  |               |   | 1,431 | (4) |  |   | 1,326 | (2) |  |   | 2,883 | 




|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(1) | Deductions taken by customers for prompt payment
    and freight discounts. Includes accounts written off net of
    recoveries.
|   
|(2) | Reserved inventory sold or scrapped.                                                                                            
|   
|(3) | Amounts netted against sales.                                                                                                   
|   
|(4) | Inventory reserves relating to inventory acquired
    in connection with acquisitions.                                          

Other financial statement schedules have not been
presented, as they are not applicable.

Exhibits

|        |      |                         |  |                                                                                                                                                                                                                                   
|------- | ---- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 3.1  |                         |  | Articles of Incorporation+                                                                                                                                                                                                        
|        | 3.2  |                         |  | Restated Bylaws as amended through July 27,
    2000++                                                                                                                                                                            
|        | 3.3  |                         |  | Amendment to Articles of Incorporation filed on
    January 12, 1988+                                                                                                                                                             
|        | 3.4  |                         |  | Amendment to Articles of Incorporation filed on
    May 12, 1999+                                                                                                                                                                 
|        | 3.5  |                         |  | Amendment to Articles of Incorporation filed on
    May 17, 1999+                                                                                                                                                                 
|        | 3.7  |                         |  | Amendment to Articles of Incorporation filed on
    July 1, 1999+                                                                                                                                                                 
|        | 4.1  |                         |  | Specimen Common Stock Certificate+                                                                                                                                                                                                
|        | 4.2  |                         |  | Reference is made to the Articles of
    Incorporation, as amended, and the Restated Bylaws, as amended,
    filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a
    description of the rights of the holders of Common Stock.
|        | 10.1 |                         |  | 1994 Stock Option Plan+                                                                                                                                                                                                           

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|        |         |                         |  |                                                                                                                                                                                                                          
|------- | ------- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                        
|Number  |         | Description of Document
|        |         |                        
|        | 10.2    |                         |  | 1997 Stock Option Plan+                                                                                                                                                                                                  
|        | 10.3    |                         |  | 1999 Employee Stock Purchase Plan as amended and
    restated+                                                                                                                                                           
|        | 10.4    |                         |  | Employment Agreement of W. Gary Suttle+                                                                                                                                                                                  
|        | 10.5    |                         |  | Indemnity Agreement of W. Gary Suttle+                                                                                                                                                                                   
|        | 10.6    |                         |  | Letter Agreement by and between Rockford
    Corporation and Best Buy Corporation**+                                                                                                                                     
|        | 10.7    |                         |  | Joint Development and Supply Agreement by and
    between Rockford Corporation and Hyundai Electronics Industries
    Co., Ltd.**+                                                                                       
|        | 10.8    |                         |  | Form of Dealership Agreements+                                                                                                                                                                                           
|        | 10.9    |                         |  | Standard Industrial Commercial Multi-Tenant
    Lease  Gross American Industrial Real Estate
    Association Lease, and amendments and addendum thereto, by and
    between Rockford River LLC and Rockford Corporation+
|        | 10.9.1  |                         |  | Amendment to Standard Industrial Commercial
    Multi-Tenant Lease  Gross American Industrial Real
    Estate Association Lease, by and between Rockford River LLC and
    Rockford Corporation+                        
|        | 10.10   |                         |  | Standard Industrial Lease  Gross, and
    amendments and addendum thereto, by and between Cloyce Clark and
    Rockford Corporation+                                                                                    
|        | 10.10.1 |                         |  | Amendment to Standard Industrial
    Lease  Gross by and between Cloyce Clark and Rockford
    Corporation+                                                                                                             
|        | 10.11   |                         |  | Lease Agreement, and addenda thereto, by and
    between Carbonneau Industries, Inc. and Rockford
    Corporation+                                                                                                       
|        | 10.11.1 |                         |  | Amendment to Lease Agreement by and between
    Carbonneau Industries, Inc. and Rockford Corporation+                                                                                                                    
|        | 10.12   |                         |  | Master Lease Agreement and amendments thereto, by
    and between Banc One Leasing Corporation and Rockford
    Corporation+                                                                                             
|        | 10.14   |                         |  | Employee 401(k) Deferred Compensation Plan and
    amendments thereto+                                                                                                                                                   
|        | 10.16   |                         |  | Product Sales Agreement by and between Rockford
    Corporation and Avnet Electronics Marketing**+                                                                                                                       
|        | 10.35   |                         |  | Form of Indemnification Agreement+                                                                                                                                                                                       
|        | 10.35.1 |                         |  | Schedule for Indemnification Agreement+                                                                                                                                                                                  
|        | 10.39   |                         |  | Financing Lease Schedule No. 1000100950
    by and between Banc One Leasing Corporation and Rockford
    Corporation+                                                                                                    
|        | 10.40   |                         |  | Sublease Agreement by and between Cerprobe
    Corporation and Rockford Corporation+++                                                                                                                                   
|        | 10.41   |                         |  | Sublease Agreement by and between Vans
    Delivery Service, Inc. and Rockford Acoustic
    Designs, Inc.+++                                                                                                            
|        | 10.43   |                         |  | Credit Agreement among Rockford Corporation, the
    Subsidiaries of Rockford Corporation, Bank One, Arizona, N.A.,
    and Bank of America, N.A. (previously numbered
    Exhibit 10.39)#                               
|        | 10.48   |                         |  | 2002 Stock Option Plan###                                                                                                                                                                                                
|        | 10.50   |                         |  | Stock Purchase Agreement between Rockford and
    SimpleDevices, Inc., dated as of October 16,
    2002.####**                                                                                                           
|        | 10.51   |                         |  | Second Amended and Restated Voting Agreement
    among Rockford, SimpleDevices, Inc., and the Shareholders
    of SimpleDevices, dated as of October 16, 2002.####**                                                     
|        | 10.54   |                         |  | Lease Agreement between Robert Grooters
    Development Company and Rockford Corporation                                                                                                                                 
|        | 10.55   |                         |  | Warehouse Storage & Logistics Agreement
    between Titan Logistics, Inc. and Audio
    Innovations, Inc.                                                                                                                

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|        |       |                         |  |                                                                                                                                                                             
|------- | ----- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 10.56 |                         |  | Multi-tenant Industrial Net Lease between Calwest
    Industrial Holdings, LLC and Rockford Corporation, dated
    July 16, 2003                                            
|        | 10.57 |                         |  | Supplier Agreement between Wal-Mart
    Stores, Inc. and Rockford Corporation, effective
    January 23, 2003                                                               
|        | 10.58 |                         |  | Direct Imports Supplier Agreement between
    Wal-Mart Stores, Inc. and Rockford Corporation, dated
    March 6, 2003.                                                      
|        | 10.59 |                         |  | Commercial Lease Agreements between David and
    Yvonne Cunningham and Rockford Corporation, as amended                                                                    
|        | 10.60 |                         |  | Commercial Lease Agreement between William Basore
    and Rockford Corporation, as amended                                                                                  
|        | 21    |                         |  | List of Subsidiaries of Rockford Corporation                                                                                                                                
|        | 23.1  |                         |  | Consent of Independent Auditors                                                                                                                                             
|        | 31.1  |                         |  | Certification pursuant to Exchange Act
    Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 for W. Gary
    Suttle.  
|        | 31.2  |                         |  | Certification pursuant to Exchange Act
    Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 for James M.
    Thomson.
|        | 32    |                         |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                             
|        | 99.9  |                         |  | Risk Factors That May Affect Rockfords
    Operating Results, Business Prospects and Stock Price                                                                           




|     |                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------
|**   | Portions of the document have been omitted and
    filed separately with the Commission under a request for
    confidential treatment.
|    
|+    | Previously filed with registration statement
    effective April 19, 2000 and/or amendments                                            
|    
|++   | Previously filed on August 11, 2000 with our
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2000.                
|    
|+++  | Previously filed on March 13, 2001 with our
    Annual Report on Form 10-K for the year ended
    December 31, 2000.                   
|    
|#    | Previously filed on August 14, 2001 with our
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001.                
|    
|##   | Previously filed on November 14, 2001 with
    our Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001.         
|    
|###  | Previously filed on March 29, 2002 with our
    Annual Report on Form 10-K for the year ended
    December 30, 2001.                   
|    
|#### | Previously filed on November 12, 2002 with
    our Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2002.         

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SIGNATURES

Pursuant to the requirements of the
Section 13 or 15(d), as amended, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on March 30, 2003.



| |                     
| | --------------------
| | ROCKFORD CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ W. GARY SUTTLE

| |                                      
| | -------------------------------------
| |                                      
| | W. Gary Suttle                       
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Report has been signed by
the following persons in the capacities and on the dates
indicated:

|                                         |  |                                                                                                    |  |               
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Name                                     |  | Title                                                                                              |  | Date          
|                                         |  |                                                                                                    |  |               
|                                        
|/s/ W. GARY SUTTLEW. Gary Suttle         |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                  |  | March 30, 2004
|                                        
|/s/ JAMES M. THOMSONJames M. Thomson     |  | Vice President of Finance and Chief Financial
    Officer, Secretary (Principal Financial Officer) |  | March 30, 2004
|                                        
|/s/ JERRY E. GOLDRESSJerry E. Goldress   |  | Director                                                                                           |  | March 30, 2004
|                                        
|/s/ TIMOTHY C. BARTOLTimothy C. Bartol   |  | Director                                                                                           |  | March 30, 2004
|                                        
|/s/ NICHOLAS G. BARTOLNicholas G. Bartol |  | Director                                                                                           |  | March 30, 2004
|                                        
|/s/ RALPH B. GODFREYRalph B. Godfrey     |  | Director                                                                                           |  | March 30, 2004
|                                        
|/s/ JOHN P. LLOYDJohn P. Lloyd           |  | Director                                                                                           |  | March 30, 2004

61