**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

 

**  (MarkOne)**
| **x**                                                                                                                                                                                                                          | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |                                                                                          |
| **For the  quarterly period ended June 30, 2006**                                                                                                                                                                              |
|                                                                                                                                                                                                                           |                                                                                          |
| **Or**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |                                                                                          |
| **o**                                                                                                                                                                                                                          | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                           |                                                                                          |
| **For the  transition period from                   to                ** |
|                                                                                                                                                                                                                           |                                                                                          |
| **Commission  File Number:  0-26524**                                                                                                                                                                                     |

 

**LOUD TECHNOLOGIES INC.**

(Exact name of registrantas specified in its charter)

| **Washington**                                                  |   | **91-1432133**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **16220  Wood-Red Road, N.E., Woodinville, Washington**         |   | **98072**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(425)  487-4333**                                             |
| (Registrant’s  telephone number, including area code)      |
|                                                            |   |                                  |
| **N/A**                                                         |
| (Former name or  former address, if                             |
| changed since  last report)                                     |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act (Checkone):

Large accelerated filer** **o      Acceleratedfiler o      Non-acceleratedfiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.):  Yes o    No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Common Stock, no par value** |   | **4,566,202**                 |
|--------------------------------|--------|-------------------------------|
| Class                          |   | Number of Shares  Outstanding |
|                           |   | (as of July 31,  2006)        |

 

 

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**LOUDTECHNOLOGIES INC.**

**FORM10-Q**

**Forthe quarter ended June 30, 2006**

**INDEX**
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                            |   |
|----------------|----------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                 |   |
| Item 1.        | Financial Statements (Unaudited)                                                                                     |   |
|           |                                                                                                                 |   |
|           | Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                                     |   |
|           |                                                                                                                 |   |
|           | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2006 and June 30, 2005 |   |
|           |                                                                                                                 |   |
|           | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2006  and June 30, 2005           |   |
|           |                                                                                                                 |   |
|           | Condensed  Consolidated Statements of Shareholders’ Equity for the six months ended June  30, 2006              |   |
|           |                                                                                                                 |   |
|           | Notes to  Condensed Consolidated Financial Statements                                                                |   |
|           |                                                                                                                 |   |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   |
|           |                                                                                                                 |   |
| Item 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   |
|           |                                                                                                                 |   |
| Item 4.        | Controls and  Procedures                                                                                             |   |
|           |                                                                                                                 |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                                |   |
|           |                                                                                                                 |   |
| Item 1.        | Legal Proceedings                                                                                                    |   |
|           |                                                                                                                 |   |
| Item  1A.      | Risk  Factors                                                                                                        |   |
|           |                                                                                                                 |   |
| Item 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         |   |
|           |                                                                                                                 |   |
| Item 3.        | Defaults  Upon Senior Securities                                                                                     |   |
|           |                                                                                                                 |   |
| Item 4.        | Submission  of Matters to a Vote of Security Holders                                                                 |   |
|           |                                                                                                                 |   |
| Item 5.        | Other Information                                                                                                    |   |
|           |                                                                                                                 |   |
| Item  6.       | Exhibits                                                                                                             |   |
|           |                                                                                                                 |   |
| **SIGNATURES** |                                                                                                                 |

 

2

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**LOUDTECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

*(Inthousands, except share amounts)*
| ** **                                                                                                                          | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                     |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                          |       | $                       | 356        |                        | $          | 468 |   |
| Accounts  receivable, net of allowances of $2,055 and $2,224, respectively                                                          |       | 28,854                  |       | 28,224                      |       |
| Inventories                                                                                                                         |       | 41,577                  |       | 39,290                      |       |
| Prepaid expenses  and other current assets                                                                                          |       | 1,821                   |       | 1,859                       |       |
| Total current  assets                                                                                                               |       | 72,608                  |       | 69,841                      |       |
|                                                                                                                                |       |                    |       |                        |       |
| Property, plant and  equipment, net                                                                                                 |       | 7,306                   |       | 7,863                       |       |
| Goodwill                                                                                                                            |       | 2,248                   |       | 2,248                       |       |
| Other intangible  assets, net                                                                                                       |       | 11,774                  |       | 12,198                      |       |
| Deferred financing  costs                                                                                                           |       | 3,034                   |       | 3,378                       |       |
| Other assets                                                                                                                        |       | 17                      |       | 17                          |       |
| Total assets                                                                                                                        |       | $                       | 96,987     |                        | $          | 95,545 |   |
|                                                                                                                                |       |                    |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                |       |                    |       |                        |       |
| Short-term  borrowings                                                                                                              |       | $                       | 11,121     |                        | $          | 9,595 |   |
| Accounts payable                                                                                                                    |       | 17,995                  |       | 16,133                      |       |
| Accrued  liabilities                                                                                                                |       | 10,516                  |       | 10,009                      |       |
| Taxes payable                                                                                                                       |       | 1,212                   |       | 1,293                       |       |
| Current portion  of long-term debt                                                                                                  |       | 2,645                   |       | 3,306                       |       |
| Current portion  of payable to former Italian subsidiary                                                                            |       | 1,700                   |       | 2,200                       |       |
| Other current  liabilities                                                                                                          |       | 3,041                   |       | —                      |       |
| Total current  liabilities                                                                                                          |       | 48,230                  |       | 42,536                      |       |
|                                                                                                                                |       |                    |       |                        |       |
| Long-term debt,  excluding current portion                                                                                          |       | 39,621                  |       | 40,944                      |       |
| Deferred tax  liabilities                                                                                                           |       | 67                      |       | 40                          |       |
| Other liabilities                                                                                                                   |       | —                  |       | 2,938                       |       |
| Total  liabilities                                                                                                                  |       | 87,918                  |       | 86,458                      |       |
|                                                                                                                                |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                      |       |                    |       |                        |       |
|                                                                                                                                |       |                    |       |                        |       |
| Shareholders’ equity:                                                                                                          |       |                    |       |                        |       |
| Preferred stock, no par  value. Authorized 5,000,000 shares, no shares issued and outstanding                                       |       | —                  |       | —                      |       |
| Common stock, no par  value. Authorized 40,000,000 shares, issued and outstanding 4,566,202 at June  30, 2006 and December 31, 2005 |       | 41,045                  |       | 40,788                      |       |
| Accumulated deficit                                                                                                                 |       | (31,976                 | )          | (31,701                     | )          |
| Total  shareholders’ equity                                                                                                    |       | 9,069                   |       | 9,087                       |       |
| Total liabilities and  shareholders’ equity                                                                                    |       | $                       | 96,987     |                        | $          | 95,545 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

3

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**LOUDTECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

(In thousands,except for per share data)
| ** **                                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net sales                                                                     |       | $                                               | 53,547     |                                          | $          | 54,290 |   | $ | 112,111 |   | $ | 94,235 |   |
| Cost of sales                                                                 |       | 35,771                                          |       | 38,642                                        |       | 74,706 |   | 65,252 |   |
| Gross profit                                                                  |       | 17,776                                          |       | 15,648                                        |       | 37,405 |   | 28,983 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general and administrative                                           |       | 11,986                                          |       | 12,865                                        |       | 26,746 |   | 22,410 |   |
| Research and development                                                      |       | 3,230                                           |       | 2,703                                         |       | 6,486 |   | 4,658 |   |
| Restructuring costs                                                           |       | 495                                             |       | —                                        |       | 645 |   | — |   |
| Total operating expenses                                                      |       | 15,711                                          |       | 15,568                                        |       | 33,877 |   | 27,068 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Operating income                                                              |       | 2,065                                           |       | 80                                            |       | 3,528 |   | 1,915 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Other income  (expense):                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                               |       | 38                                              |       | 104                                           |       | 124 |   | 133 |   |
| Interest expense                                                              |       | (1,656                                          | )          | (1,442                                        | )          | (3,300 | ) | (2,304 | ) |
| Management fee                                                                |       | (269                                            | )          | (238                                          | )          | (531 | ) | (566 | ) |
| Other                                                                         |       | 156                                             |       | (177                                          | )          | (22 | ) | (329 | ) |
| Total other expense                                                           |       | (1,731                                          | )          | (1,753                                        | )          | (3,729 | ) | (3,066 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  before income taxes and discontinued operations                |       | 334                                             |       | (1,673                                        | )          | (201 | ) | (1,151 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Provision for  income taxes                                                   |       | 14                                              |       | 17                                            |       | 74 |   | 43 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  from continuing operations                                     |       | 320                                             |       | (1,690                                        | )          | (275 | ) | (1,194 | ) |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Recognized gain  on discontinued operations, net of income tax expense of $58 |       | —                                          |       | —                                        |       | — |   | 2,827 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                                                            |       | $                                               | 320        |                                          | $          | (1,690 | ) | $ | (275 | ) | $ | 1,633 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic net income  (loss) per share:                                           |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) from continuing operations                                  |       | $                                               | 0.07       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | (0.25 | ) |
| Net income (loss) from discontinued operations                                |       | —                                          |       | —                                        |       | — |   | 0.60 |   |
| Net income (loss) per share                                                   |       | $                                               | 0.07       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | 0.35 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Diluted net  income (loss) per share:                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) from continuing operations                                  |       | $                                               | 0.06       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | (0.25 | ) |
| Net income (loss) from discontinued operations                                |       | —                                          |       | —                                        |       | — |   | 0.60 |   |
| Net income (loss) per share                                                   |       | $                                               | 0.06       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | 0.35 |   |
|                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  computing basic and diluted net income (loss) per share:      |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                         |       | 4,806                                           |       | 4,754                                         |       | 4,806 |   | 4,727 |   |
| Diluted                                                                       |       | 4,932                                           |       | 4,754                                         |       | 4,806 |   | 4,727 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

4

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**LOUDTECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**                       | ** ** |
| **Operating  activities**                                                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                        |       | $                                             | (275       | ) | $ | 1,633 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                             |       | 2,216                                         |       | 2,301 |   |
| Amortization of deferred financing costs                                                  |       | 344                                           |       | — |   |
| Stock based compensation                                                                  |       | 257                                           |       | 29 |   |
| Gain on discontinued operations                                                           |       | —                                        |       | (2,885 | ) |
| Non-cash interest expense                                                                 |       | —                                        |       | 57 |   |
| Changes in operating assets and liabilities:                                              |       |                                          |       |   |   |
| Accounts receivable                                                                       |       | (630                                          | )          | (1,114 | ) |
| Inventories                                                                               |       | (2,287                                        | )          | 7,676 |   |
| Prepaid expenses and other current assets                                                 |       | 38                                            |       | 1,004 |   |
| Other assets                                                                              |       | —                                        |       | 156 |   |
| Accounts payable, accrued liabilities and payable to  former Italian subsidiary           |       | 1,869                                         |       | (8,400 | ) |
| Taxes payable                                                                             |       | (54                                           | )          | (111 | ) |
| Other liabilities                                                                         |       | 103                                           |       | (4 | ) |
| Net cash provided by operating activities                                                 |       | 1,581                                         |       | 342 |   |
|                                                                                      |       |                                          |       |   |   |
| **Investing  activities**                                                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchases of  property, plant and equipment                                               |       | (1,235                                        | )          | (750 | ) |
| Acquisition of  St. Louis Music, Inc., including transaction fees paid                    |       | —                                        |       | (35,168 | ) |
| Net cash used in investing activities                                                     |       | (1,235                                        | )          | (35,918 | ) |
|                                                                                      |       |                                          |       |   |   |
| **Financing  activities**                                                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Payments on  long-term debt                                                               |       | (1,984                                        | )          | (150 | ) |
| Net proceeds on  bank line of credit and short-term borrowings                            |       | 1,526                                         |       | 36,194 |   |
| Net proceeds  from stock sales and exercise of stock options                              |       | —                                        |       | 12 |   |
| Net cash provided by (used in) financing activities                                       |       | (458                                          | )          | 36,056 |   |
|                                                                                      |       |                                          |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                         |       | (112                                          | )          | 480 |   |
|                                                                                      |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 468                                           |       | 450 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                             | 356        |   | $ | 930 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

5

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**LOUDTECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**Sixmonths ended June 30, 2006**

*(Inthousands)*
| ** **                    | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------|------------|-------------|------------|
| ** **                    | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                          |       |                  |       |            |       |        |       |   |   |
| Balance at  December 31, 2005 |       | 4,566                 |       | $               | 40,788     |        | $          | (31,701 | ) | $ | 9,087 |   |
| Stock based  compensation     |       | —                |       | 257             |       | —      |       | 257 |   |
| Net loss                      |       | —                |       | —          |       | (275        | )          | (275 | ) |
| Balance at June 30,  2006     |       | 4,566                 |       | $               | 41,045     |        | $          | (31,976 | ) | $ | 9,069 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

6

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**LOUDTECHNOLOGIES INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2006**

**(Unaudited)**

**1.****     Descriptionof Business**

We develop, manufactureand sell high-quality, affordable digital and analog audio mixers, speakers,guitar and bass amplifiers, branded musical instruments and relatedaccessories, and other professional audio equipment on a worldwide basis. Ourproducts are used by professional and amateur musicians; school music programs;sound installation contractors and broadcast professionals both in soundrecordings, live presentations systems and installed sound systems. Wedistribute our products primarily through retail dealers, mail order outletsand installed sound contractors.  We haveour primary operations in the United States with smaller operations in theUnited Kingdom, Canada, China and Japan.

**2.****     Summaryof Significant Accounting Policies**

** Basisof Presentation**

The accompanyingunaudited condensed consolidated financial statements have been prepared byLOUD Technologies Inc. (“LOUD” or the “Company”) in accordance with U.S.generally accepted accounting principles for interim financial statements andincludes the accounts of the Company and its subsidiaries. They do not includeall of the information and disclosures required by generally acceptedaccounting principles for complete financial statements and should be read inconjunction with the financial statements included in our Annual Report on Form10-K for the year ended December 31, 2005. In our opinion, all adjustments, consisting of normal recurringadjustments necessary for the fair presentation of the results of the interimperiods are reflected herein.  Operatingresults for the three and six-month periods ended June 30, 2006, are notnecessarily indicative of future financial results.

**Business Combinations**

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc. (“St. Louis”), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. The Company believes the acquisition of St. Louis Music, Inc. willfurther diversify the Company’s product offerings to help acquire, retain andextend relationships with customers.  Ourtotal purchase price was approximately $43.7 million, consisting of $33.7million in cash; a commitment to pay $3.0 million plus interest in two years,the present value of which as of the acquisition date was $2.8 million, 79,358shares of the Company’s common stock, assumed liabilities of $4.4 million andtransaction costs of $1.6 million.  The$3.0 million future commitment plus accrued interest is secured by a standbyletter of credit issued in September 2005. The St. Louis Music acquisition was conducted through SLM Merger Corp.,an indirect wholly owned subsidiary of the Company.  Included in the Company’s results ofoperations are the operations of St. Louis Music for the period January 1through June 30, 2006 and March 5 through June 30, 2005.

##### **Useof Estimates**

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period.  Significant items subject to such estimatesand assumptions include the allocation of purchase costs to assets acquired andliabilities assumed, the carrying amount of property and equipment andintangibles; valuation allowances for receivables, inventories, and deferredincome tax assets and liabilities. Actual results may differ from those estimates.

7

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##### **RevenueRecognition**

Revenues from sales ofproducts, net of sales discounts, returns and allowances, are generallyrecognized upon shipment under an agreement with a customer when risk of losshas passed to the customer, all significant contractual obligations have beensatisfied, the fee is fixed or determinable and collection of the resulting receivableis considered probable. Products are generally shipped “FOB shipping point”with no right of return. We do have some dealers who finance their purchasesthrough finance companies.  We havemanufacturer’s repurchase agreements with the finance companies and defer therevenue and related cost of goods sold of these sales at the time of thesale.  We then recognize the revenue andrelated cost of goods sold from these sales when the repurchase obligation nolonger exists.  Sales with contingencies,such as rights of return, rotation rights, conditional acceptance provisionsand price protection, are deferred until the contingencies have been satisfiedor the contingent period has lapsed. We generally warrant our products againstdefects in materials and workmanship for periods of between one and six years,with the exception of our Alvarez and Alvarez Yairi guitars, which have alimited lifetime warranty. The estimated cost of warranty obligations, salesreturns and other allowances are recognized at the time of revenue recognitionbased on contract terms and prior claims experience.

##### **IncomeTaxes**

Income taxes are accounted for under the asset and liabilitymethod in accordance with SFAS 109, “Accounting for Income Taxes”.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date.  The Company has recorded avaluation allowance due to the uncertainty surrounding the ultimate realizationof such assets.  Management evaluates, on a periodic basis, the recoverabilityof the net deferred tax assets and the amount of the valuation allowance. At such time as it is determined that it is more likely than not the deferredtax assets are realizable, the valuation allowance will be reduced.

The Company has recorded a deferred tax liability related togoodwill associated with the St. Louis Music acquisition, which is beingamortized for tax purposes, but not for book purposes. As goodwill has anindeterminable life, the Company cannot reasonably estimate the amount, if any,of deferred tax liabilities related to goodwill which will reverse during thenet operating loss carry forward period. Accordingly, the Company increases thevaluation allowance with a corresponding deferred tax provision as the deferredtax liability related to goodwill increases due to continued amortization ofgoodwill for tax purposes.

**Stock-BasedCompensation**

During July 2003, ourboard of directors adopted the 2003 Stock Option Plan (the 2003 Plan),authorizing options to purchase 345,600 shares of common stock.  The 2003 Plan calls for options to benon-qualified stock options with exercise prices equal to the fair market valueof the stock on the date granted.  Optionsgenerally vest over a five-year period and expire the earlier of ten years fromgrant date or three months from termination. If an option holder is terminated for Cause, as defined in the 2003Plan, the options would terminate a day prior to termination.  At June 30, 2006, 71,000 shares of commonstock were available for future grants under the 2003 Plan.

The Company also has a1995 Stock Option Plan (the 1995 Plan), which authorized 1.3 million shares ofcommon stock for grants.  The exerciseprice of incentive stock options granted under the 1995 Plan may not be lessthan the fair market value of the common stock on the date of grant.  The exercise price of nonqualified stockoptions granted under the plan may be greater or less than the fair marketvalue of the common stock on the date of grant, as determined by the stock optioncommittee of the board of directors at its discretion. Options generallyvest over a four to five-year period and expire the earlier of ten years fromgrant date or three months from termination. At June 30, 2006, 822,000 shares of common stock were available forfuture grants under the 1995 Plan.

The Company’s policy isto issue new shares for stock option exercises. Shares issued under the 2003 Plan are also subject to a Shareholder’sAgreement governing restrictions on transfer and voting rights for sharesissued under the plan.  No significantshare repurchases are planned in 2006.

8

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The Company adopted SFAS123R, “Share Based Payment: An Amendment of SFAS No. 123”, on January 1, 2006,using the Modified Prospective Application Method whereby previously awardedbut unvested equity awards are accounted for in accordance with SFAS No. 123Rand prospective amounts are recognized in the income statement instead ofsimply being disclosed. Prior to the adoption of SFAS No. 123R, the Companyfollowed the intrinsic-value method prescribed in Accounting Principles BoardOpinion No. 25,*Accounting for StockIssued to Employees*, and related interpretations including SFASInterpretation No. 44,*Accounting forCertain Transactions Involving Stock Compensation, an Interpretation of APBOpinion No. 25*to account for its stock options granted under itsemployee option plans.  Under thismethod, deferred compensation expense was recorded on the date of grant only tothe extent if the current market price of the underlying stock exceeded theexercise price and recognized over the vesting period.  The adoption of SFAS No. 123R primarilyresulted in a change in the Company’s method of recognizing the fair value ofshare-based compensation for all unvested awards.  Specifically, the adoption of SFAS No. 123Rresulted in the Company recording compensation expense during the three andsix-month periods ended June 30, 2006 of approximately $123,000 and $247,000,respectively.  The amounts are classifiedin the Company’s unaudited condensed consolidated statements of operations asfollows (in thousands):
| ** **                           | ** ** | **Three months ended  June 30, 2006** | ** ** | **Six months ended  June 30, 2006** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                 |       |                                                      |       |                                                    |       |
| Cost of sales                        |       | $                                                         | 11         |                                                    | $          | 22 |   |
| Selling, general  and administrative |       | 106                                                       |       | 213                                                     |       |
| Research and  development            |       | 6                                                         |       | 12                                                      |       |
| Total stock based  compensation      |       | $                                                         | 123        |                                                    | $          | 247 |   |

 

In February 2003, as partof a separation agreement with a former founder and director, we repricedoptions to purchase 66,000 shares with an average exercise price of $31.35 to anew exercise price of $5.10 in exchange for a non-compete agreement valued at$285,000.  The value of the unvestedportion of these options were amortized over a three year period.  Approximately $10,000 related to this wasexpensed in 2006.

No stock-basedcompensation was capitalized as part of an asset as of June 30, 2006.

The following table showsthe effects of adopting SFAS No. 123R on selected reported items (“As Reported”)and what those items would have been under previous guidance under APB No. 25(in thousands except per share data):
| ** **                                                     | ** ** | **Three months ended  June 30, 2006** | ** ** | **Six months ended  June 30, 2006** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **As Reported**                                      | ** ** | **Under APB  No. 25**                         | ** ** | **As Reported** | ** ** | **Under APB  No. 25** | ** ** |
|                                                           |       |                                                      |       |                                                    |       |   |   |   |   |
| Income (loss)  before income taxes and discontinued operations |       | $                                                         | 334        |                                                    | $          | 457 |   | $ | (201 | ) | $ | 46 |   |
| Net income  (loss)                                             |       | $                                                         | 320        |                                                    | $          | 443 |   | $ | (275 | ) | $ | (28 | ) |
| Basic net income  (loss) per share                             |       | $                                                         | 0.07       |                                                    | $          | 0.09 |   | $ | (0.06 | ) | $ | (0.01 | ) |
| Diluted net income  (loss) per share                           |       | $                                                         | 0.06       |                                                    | $          | 0.09 |   | $ | (0.06 | ) | $ | (0.01 | ) |

 

9

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Results for the three andsix-month periods ended June 30, 2005 have not been restated.  Had compensation expense for employee stockoptions granted under the Company’s stock incentive plans been determined basedon SFAS No. 123R’s Modified Prospective Application Method, the Company’sIncome from continuing operations, net income, and basic and diluted per shareamounts would have been reduced to the pro forma amounts as indicated below (inthousands except per share data):
| ** **                            | ** ** | **Three months ended  June 30, 2005** | ** ** | **Six months ended  June 30, 2005** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **As Reported**                                      | ** ** | **Pro Forma**                                      | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                                  |       |                                                      |       |                                                    |       |   |   |   |   |
| Loss from  continuing operations      |       | $                                                         | (1,690     | )                                                       | $          | (1,804 | ) | $ | (1,194 | ) | $ | (1,422 | ) |
| Net income  (loss)                    |       | $                                                         | (1,690     | )                                                       | $          | (1,804 | ) | $ | 1,633 |   | $ | 1,405 |   |
|                                  |       |                                                      |       |                                                    |       |   |   |   |   |
| Basic net income  (loss) per share:   |       |                                                      |       |                                                    |       |   |   |   |   |
| Loss from continuing operations       |       | $                                                         | (0.36      | )                                                       | $          | (0.38 | ) | $ | (0.25 | ) | $ | (0.30 | ) |
| Net income (loss)                     |       | $                                                         | (0.36      | )                                                       | $          | (0.38 | ) | $ | 0.35 |   | $ | 0.30 |   |
|                                  |       |                                                      |       |                                                    |       |   |   |   |   |
| Diluted net  income (loss) per share: |       |                                                      |       |                                                    |       |   |   |   |   |
| Loss from continuing operations       |       | $                                                         | (0.36      | )                                                       | $          | (0.38 | ) | $ | (0.25 | ) | $ | (0.30 | ) |
| Net income  (loss)                    |       | $                                                         | (0.36      | )                                                       | $          | (0.38 | ) | $ | 0.35 |   | $ | 0.30 |   |

 

The following tablesummarizes the stock option activity for the six-month period ended June 30,2006:
| ** **                                | ** ** | **Shares subject to  exercise** | ** ** | **Weighted average  exercise price** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands)**                   | ** ** | ** **                                     | ** ** |
|                                      |       |                                      |       |                                           |       |
| Options outstanding  at December 31, 2005 |       | 629                                       |       | $                                              | 15.27      |   |
| Granted                                   |       | —                                    |       | —                                         |       |
| Exercised                                 |       | —                                    |       | —                                         |       |
| Forfeited                                 |       | —                                    |       | —                                         |       |
| Expired                                   |       | (13                                       | )          | 43.75                                          |       |
| Options  outstanding at March 31, 2006    |       | 616                                       |       | $                                              | 14.67      |   |
| Granted                                   |       | 3                                         |       | 15.00                                          |       |
| Exercised                                 |       | —                                    |       | —                                         |       |
| Forfeited                                 |       | (13                                       | )          | 15.08                                          |       |
| Expired                                   |       | —                                    |       | —                                         |       |
| Options  outstanding at June 30, 2006     |       | 606                                       |       | $                                              | 14.66      |   |
|                                      |       |                                      |       |                                           |       |
| Options  exercisable at June 30, 2006     |       | 420                                       |       | $                                              | 17.38      |   |

 

The aggregate intrinsic value of options outstanding and exercisable atJune 30, 2006 was $2.3 million and $0.5 million,  respectively.  The aggregate intrinsic value represents thedifference between the Company’s closing stock price on the last day of tradingduring the quarter, which was $18.50 per share as of June 30, 2006, and theexercise price multiplied by the number of applicable options.  The total intrinsic value of optionsexercised during the three and six-month periods ended June 30, 2005 were $0and $0.1 million, respectively.  Therewere no options exercised during the three and six-month periods ended June 30,2006.

10

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The following tablesummarizes information about options outstanding and exercisable at June 30,2006:
| ** **                             | ** ** | **Options outstanding** | ** ** | **Options exercisable**                                     | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Range of exercise  price** | ** ** | **Number  outstanding**      | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                             | ** ** | **(in thousands)**      | ** ** | ** **                                                       | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $5.10 – 8.85                      |       | 305                          |       | 5.9                                                              |       | $ | 5.27 |   | 185 |   | 5.2 |   | $ | 5.22 |   |
| $11.30 – 23.75                    |       | 120                          |       | 7.3                                                              |       | 16.32 |   | 54 |   | 5.6 |   | 18.93 |   |
| $25.30 – 32.50                    |       | 155                          |       | 2.5                                                              |       | 28.61 |   | 155 |   | 2.5 |   | 28.61 |   |
| $33.44 – 43.75                    |       | 26                           |       | 2.5                                                              |       | 34.05 |   | 26 |   | 2.5 |   | 34.05 |   |
|                                   |       | 606                          |       | 5.5                                                              |       | $ | 14.66 |   | 420 |   | 4.3 |   | $ | 17.38 |   |

 

The weighted average fairvalue of options granted during the three-month periods ended June 30, 2006 and2005 was $11.09 and $10.18, respectively. The fair value of options grantedduring the six-month period ended June 30, 2006 was $11.09, while the weightedaverage fair value of options granted during the six-month period ended June30, 2005 was $10.41.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions:
| ** **                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected life (in  years) |       | 6.5                                                 |       | 5.0                                               |       | 6.5 |   | 5.0 |   |
| Risk-free  interest rate  |       | 4.98                                                | %          | 3.85                                              | %          | 4.98 | % | 3.85% - 4.17 | % |
| Expected  volatility      |       | 80                                                  | %          | 85                                                | %          | 80 | % | 85 | % |
| Expected dividend yield   |       | 0                                                   | %          | 0                                                 | %          | 0 | % | 0 | % |

 

The expected life foreach award granted was calculated using the simple method as described in SABNo. 107.  Expected volatility is based onthe historical volatility of LOUD common stock. The risk free interest rate is based on the constant maturity U.S.Treasury rate with a remaining term equal to the expected life.  Compensation expense recorded includesestimates of the ultimate number of options that are expected to vest.

The Company has totalcompensation cost related to nonvested awards not yet recognized ofapproximately $1.1 million with the weighted average period over which it isexpected to be recognized of 1.7 years.

**Concentrationof Credit and Supply Risk**

We sell products on aworldwide basis and a significant portion of our accounts receivable are duefrom customers outside of the U.S.  Wherewe are exposed to material credit risk, we generally require letters of credit,advance payments, or carry foreign credit insurance.  No individual country outside of the U.S.accounted for more than 10% of net sales from continuing operations in any ofthe periods presented.  Sales to U.S.customers are generally on open credit terms. In the U.S., we primarily sell our products through third-partyresellers and experience individually significant annual sales volumes withmajor resellers.   For the three-monthperiods ended June 30, 2006 and 2005, we had sales to one customer of $9.1million and $8.4 million, or 17.0% and 15.5%, respectively of consolidated netsales from continuing operations.  Forthe six-month periods ended June 30, 2006 and 2005, we had sales to the samecustomer of $18.7 million and $13.0 million, or 16.7% and 13.8%, respectively,of consolidated net sales from continuing operations.

11

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Many of our products arecurrently being manufactured exclusively by contract manufacturers on ourbehalf.  For the three-month periodsended June 30, 2006 and 2005, net sales of products manufactured by onemanufacturer were $18.1 million and $14.4 million, or 33.8% and 26.5%,respectively of consolidated net sales from continuing operations, while netsales of products manufactured by another manufacturer were $6.3 million and$5.3 million, or 11.8% and 9.8%, respectively of consolidated net sales fromcontinuing operations.  For the six-monthperiods ended June 30, 2006 and 2005, net sales of products manufactured by onemanufacturer were $37.1 million and $28.8 million, or 33.1% and 30.6%,respectively of consolidated net sales from continuing operations, while netsales of products manufactured by another manufacturer were $12.8 million and$10.9 million, or 11.4% and 11.6%, respectively of consolidated net sales fromcontinuing operations.

AtJune 30, 2006, we had approximately 659 employees of which approximately 35were members of an organized labor union.

##### **RecentAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. (FIN) 48,*Accounting for Uncertainty in Income Taxes—An Interpretation of FASB StatementNo. 109,* which prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 will beeffective beginning Q1 2007. We have not yet evaluated the impact ofimplementation on our consolidated financial statements.

##### **Reclassifications**

Certain prior yearamounts have been reclassified to conform with our current year.

**3.****      DiscontinuedOperations**

In December 2003, weplaced our wholly owned Italian subsidiary, Mackie Designs (Italy) S.p.A. (“MackieItaly”), into an Italian form of court-supervised liquidation and sold all ofthe shares of Mackie Italy.  Mackie Italywas a manufacturer of many of our speaker products, which were purchased by theCompany for subsequent sale outside of Italy. At the time of the sale, the Company owed Mackie Italy approximately$9.2 million related to the purchase of goods in the normal course ofbusiness.  During 2004, we made paymentsto Mackie Italy of approximately $1.6 million, lowering our liability to $7.6million at December 31, 2004. Additionally, Mackie Italy has a payable to a separate wholly ownedsubsidiary of the Company for approximately $2.7 million, which was fullyreserved at the date of sale in 2003.

In February 2005, we madean offer to Mackie Italy to settle any outstanding amounts owed by the Companyto Mackie Italy for $4.7 million.  Thisproposal was accepted by the Italian court appointed trustee on behalf ofMackie Italy in May 2005.  Under theterms of the settlement agreement, we made additional payments of $2.5 millionduring 2005.  We also committed to pay$2.2 million during 2006.  We recognizeda gain, net of income tax, on discontinued operations of $2.8 million in thefirst quarter of 2005 related to this settlement.

12

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**4.****      NetIncome (Loss) Per Share**

The following table setsforth the computation of basic and diluted net income (loss) per share for thethree and six months ended June 30, 2006 and 2005. Stock options topurchase 214,000 and 622,000 shares for the three-month periods ended June 30,2006 and 2005, respectively, were excluded from the calculation of diluted pershare amounts because they are out of the money in 2006 and antidilutive in2005.  Stock options to purchase 606,000and 622,000 shares for the six-month periods ended June 30, 2006 and 2005,respectively, were excluded from the calculation of diluted per share amountsbecause they are antidilutive.
| ** **                                                              | ** ** | **Three months ended  June 30,**                    | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                           | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **(in thousands, except per share data)** | ** ** |
| Numerator:                                                              |       |                                                               |       |                                          |       |   |   |   |   |
| Net income (loss) from continuing operations                            |       | $                                                                  | 320        |                                          | $          | (1,690 | ) | $ | (275 | ) | $ | (1,194 | ) |
| Net income from discontinued operations                                 |       | —                                                             |       | —                                        |       | — |   | 2,827 |   |
| Numerator for  basic and diluted net income (loss) per share            |       | $                                                                  | 320        |                                          | $          | (1,690 | ) | $ | (275 | ) | $ | 1,633 |   |
|                                                                    |       |                                                               |       |                                          |       |   |   |   |   |
| Denominator:                                                            |       |                                                               |       |                                          |       |   |   |   |   |
| Denominator for basic net income (loss) per share                       |       | 4,806                                                              |       | 4,754                                         |       | 4,806 |   | 4,727 |   |
| Dilutive potential common shares from outstanding  options and warrants |       | 126                                                                |       | —                                        |       | — |   | — |   |
| Denominator for  diluted net income (loss) per share                    |       | 4,932                                                              |       | 4,754                                         |       | 4,806 |   | 4,727 |   |
|                                                                    |       |                                                               |       |                                          |       |   |   |   |   |
| Basic net income  (loss) per share:                                     |       |                                                               |       |                                          |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                                  | 0.07       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | (0.25 | ) |
| Discontinued operations                                                 |       | —                                                             |       | —                                        |       | — |   | 0.60 |   |
| Basic net income  (loss) per share                                      |       | $                                                                  | 0.07       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | 0.35 |   |
|                                                                    |       |                                                               |       |                                          |       |   |   |   |   |
| Diluted net  income (loss) per share:                                   |       |                                                               |       |                                          |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                                  | 0.06       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | (0.25 | ) |
| Discontinued operations                                                 |       | —                                                             |       | —                                        |       | — |   | 0.60 |   |
| Diluted net income  (loss) per share                                    |       | $                                                                  | 0.06       |                                          | $          | (0.36 | ) | $ | (0.06 | ) | $ | 0.35 |   |

 

**5.     Restructuring Costs**

During the first sixmonths of 2006, management approved and began implementing a restructuringplan.  Actions primarily consist of costsrelated to the consolidation of the St. Louis Music and service operations.  We incurred approximately $0.5 million and$0.6 million in restructuring costs during the three and six-month periodsended June 30, 2006, respectively, primarily representing employee severanceand related costs for approximately 78 terminated employees.  We estimate there to be an additional $0.3million of severance related costs to occur by the fourth quarter of 2006relating to the consolidation of the St. Louis Music and serviceoperations.  We had $472,000 of theserestructuring amounts remaining in accrued liabilities at June 30, 2006.  We expect to pay the majority of this amountduring the remainder of 2006.  Therestructuring liability is summarized as follows (in thousands):
| Balance at March 31, 2006 |   | $   | 31     |   |
|---------------------------|--------|-----|--------|--------|
| New charges               |   | 495 |   |
| Cash payments             |   | (54 | )      |
| Balance at June 30,  2006 |   | $   | 472    |   |

 

13

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**6.****              Inventories**

Inventories consist ofthe following:
|                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | **(in thousands)** | ** ** |
| Raw materials   |       | $                       | 4,434      |                        | $          | 5,531 |   |
| Work in process |       | 1,044                   |       | 976                         |       |
| Finished goods  |       | 36,099                  |       | 32,783                      |       |
|            |       | $                       | 41,577     |                        | $          | 39,290 |   |

 

**7.****              Intangible Assets**

Intangible assets consistof the following:
|                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Developed  technology          |       | $                       | 5,470      |                        | $          | 5,470 |   |
| Customer  relationships        |       | 3,080                   |       | 3,080                       |       |
| Trademark                      |       | 5,930                   |       | 5,930                       |       |
| Covenant not to  compete       |       | 285                     |       | 285                         |       |
|                           |       | 14,765                  |       | 14,765                      |       |
| Less accumulated  amortization |       | (2,991                  | )          | (2,567                      | )          |
|                           |       | $                       | 11,774     |                        | $          | 12,198 |   |

 

The useful lives of theintangible assets are as follows:
|                         | ** ** | **Useful lives** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **(in years)**   | ** ** |
| Developed  technology   |       | 5 –  20          |       |
| Customer  relationships |       | 15                    |       |
| Trademark               |       | 20                    |       |
| Covenant not to compete |       | 3                     |       |

 

Amortization expense forintangible assets was $204,000 and $227,000 for the three-month periods endedJune 30, 2006 and 2005, respectively.  Amortization expense for intangible assets was $424,000 and $374,000 forthe six-month periods ended June 30, 2006 and 2005, respectively.

Expected futureamortization expense related to identifiable intangible assets for the nextfive years is as follows (in thousands):
| Twelve months ending June 30: | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| 2007                                              |       | $          | 816        |   |
| 2008                                              |       | 816        |       |
| 2009                                              |       | 816        |       |
| 2010                                              |       | 798        |       |
| 2011                                              |       | 762        |       |
|                                                   |            |            |            |  |

 

14

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**8.****              Financing**

The Company has a $69.5million secured loan facility and a $14.8 million senior subordinated notepayable.  The senior secured loan facilityconsists of a $40.0 million revolving loan, a $15.0 million Term Loan A, and a$14.5 million Term Loan B.  The Company’sobligations under the Credit Agreement and the Subordinated Note Agreements areautomatically accelerated upon certain bankruptcy or insolvency events, and maybe accelerated upon the occurrence of other events of default under the CreditAgreement and the Subordinated Note Agreement, such as non-payment ofprincipal, interest or fees when due, or failure to comply with affirmative andnegative covenants, subject to any applicable grace periods.

As of June 30, 2006, theCompany was in compliance with all financial covenants.

**(a)****     Short-termborrowings**

The Company has a line ofcredit where we can borrow up to $40.0 million, subject to certainrestrictions, including available borrowing capacity.  At June 30, 2006, the outstanding balance onour line of credit was $11.1 million.  AtJune 30, 2006, we had the ability to borrow an additional $15.4 million on thisline of credit.  Interest is due monthlyor at the end of a LIBOR period (but in such case no greater than 3 months) andis based on Bloomberg’s prime rate or LIBOR, both plus a specified margin.  Under the terms of the line of credit andrelated subordinated loan agreements, we are required to maintain certainfinancial ratios, such as measuring our EBITDA to our total debt and seniordebt, and maintaining a certain fixed charge coverage ratio.  The agreement also provides, among other matters,restrictions on additional financing, dividends, mergers, acquisitions, and anannual capital expenditure limit.  Theweighted average interest rate on our line of credit was 9.26% at June 30,2006.

**(b)****     Long-termdebt**

At June 30, 2006 andDecember 31, 2005, our long-term debt consisted of the following:
| ** **                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(In thousands)** | ** ** |
|                       |       |                    |       |                        |       |
| Term Loan A                |       | $                       | 13,125     |                        | $          | 15,000 |   |
| Term Loan B                |       | 14,391                  |       | 14,500                      |       |
| Subordinated  note payable |       | 14,750                  |       | 14,750                      |       |
|                       |       | 42,266                  |       | 44,250                      |       |
| Less: current  portion     |       | (2,645                  | )          | (3,306                      | )          |
| Long-term portion of  debt |       | $                       | 39,621     |                        | $          | 40,944 |   |

 

Principal payments on the$29.5 million Term Loan A and Term Loan B, under the Credit Agreement, are paidquarterly.  The term loans bear interestat the Bloomberg’s prime rate or LIBOR, both plus a specified margin.  This rate for Term Loan A was 8.83% and TermLoan B was 9.33% at June 30, 2006. Interest is due monthly on each term loan.  The final Term Loan A principal payment isdue August 29, 2010.  The final Term LoanB principal payment is due August 29, 2011. The term loans and the line of credit are both secured by substantiallyall of the assets of the Company and its subsidiaries, and are both senior toother long-term debt.  The $14.8 millionin senior subordinated notes issued is subordinate to all amounts due under theCredit Agreement and to any refinancing thereof.  Interest accrues on the senior subordinatednotes at a rate of 14% and is due quarterly. Of the 14% interest rate, up to two percent may be capitalized on eachinterest payment date.  The principalunder the Senior Subordinated Note Agreements is due February 29, 2012.

In addition, we have afuture commitment to pay the former owners of St. Louis Music $3.0 million plusinterest of 3%.  This commitment is dueMarch 2007 and was secured by a standby letter of credit in September 2005.

15

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**9.****        Guarantees**

In the ordinary course ofbusiness, we are not subject to any significant obligations under guaranteesthat fall within the scope of FIN No. 45,*Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others*except for standardindemnification and warranty provisions and give rise only to the disclosurerequirements prescribed by FIN No. 45.

Indemnification andwarranty provisions contained within our sales agreements are generallyconsistent with those prevalent in our industry. The duration of productwarranties is generally one to six years following delivery of products, withthe exception of our Alvarez and Alvarez Yairi guitars, which have a limitedlifetime warranty.

The warranty liability issummarized as follows (in thousands):
| ** **                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in thousands)**                             | ** ** |
| Balance,  beginning of period |       | $                                                   | 990        |                                              | $          | 1,230 |   | $ | 980 |   | $ | 978 |   |
| Charged to cost  of sales     |       | 949                                                 |       | 673                                               |       | 1,662 |   | 1,241 |   |
| Applied to  liability         |       | (894                                                | )          | (663                                              | )          | (1,597 | ) | (979 | ) |
| Balance, end of period        |       | $                                                   | 1,045      |                                              | $          | 1,240 |   | $ | 1,045 |   | $ | 1,240 |   |

 

**10.****       Commitments andContingencies**

We are a defendant in alawsuit filed in the Southern District of Florida on November 29, 2005 by AcePro Sound and Recording, L.L.C.  Thelawsuit alleges various federal and state antitrust violations, as well ascommon-law (misrepresentation) claims. We believe the claims are without merit and we intend vigorously todefend the lawsuit.

In addition to the casenoted above, we are also involved in various legal proceedings and claims thatarise in the ordinary course of business. We currently believe that these matters will not have a material adverseimpact on our financial position, liquidity or results of operations.

16

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**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

*Thefollowing discussion and analysis should be read in conjunction with ourfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2005. This discussion contains certain “forward-lookingstatements” within the meaning of Section 21D of the Securities Exchange Act of1934, as amended, which involve risks and uncertainties, such as statements ofour plans, objectives, expectations and intentions. Actual results may differmaterially from those discussed herein. The cautionary statements made in thisQuarterly Report on Form 10-Q and the Annual Report on Form 10-K may apply toall forward-looking statements wherever they appear. We undertake no obligationto publicly release any revisions to these forward-looking statements that maybe required to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events. Forward-looking statementsinclude, without limitation, any statement that may predict, forecast,indicate, or imply future results, performance, or achievements, and maycontain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “willbe,” “will continue,” “will likely result,” or words or phrases of similarmeaning.*

**Overview**

LOUD Technologies Inc.,was founded in 1988 and incorporated in Washington under the name MackieDesigns Inc., and changed its name to LOUD Technologies Inc., on September 13,2003.  LOUD is one of the world’s largestdedicated pro audio and music products companies.  As the corporate parent for world-recognizedbrands Alvarez®, Ampeg®, Crate®, EAW®, Knilling®, Mackie®, SIA® and Tapco®,LOUD engineers, manufactures, markets and distributes a wide range ofprofessional audio and musical instrument products worldwide.  Additionally, LOUD is one of the largestdistributors of branded professional audio and music accessories through itsSLM Marketplace catalog.

We develop, manufacture,and sell high-quality, affordable sound reinforcement speakers, analog mixers,guitar and bass amplifiers, professional loudspeaker systems, violins and otherstringed instruments, and digital mixers on a worldwide basis.  Our products are used by both professional andamateur musicians; school music programs; sound installation contractors andbroadcast professionals in sound recordings, live presentations systems andinstalled sound systems.  We distributeour products primarily through retail dealers, mail order outlets and installedsound contractors.  We have our primaryoperations in the United States with smaller operations in the United Kingdom,Canada, China and Japan.

Our stock is listed onthe Nasdaq Capital MarketTM under the symbol “LTEC”.

“MACKIE,” the running manfigure, “TAPCO,” “EAW,” and “SIA” are registered trademarks of LOUDTechnologies Inc.  “Alvarez”, “Ampeg”, “Crate”,and “Knilling” are registered trademarks of our wholly owned subsidiary, St.Louis Music, Inc.  To the extent ourtrademarks are unregistered, we are unaware of any conflicts with trademarksowned by third parties.  This documentalso contains names and marks of other companies, and we claim no rights in thetrademarks, service marks and trade names of entities other than those in whichwe have a financial interest or licensing right.

**CriticalAccounting Policies and Judgments**

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Actual results could differ from theseestimates.

We believe therehave been no additional significant changes in our critical accounting policiesduring the six months ended June 30, 2006 as compared to what was previouslydisclosed in our Form 10-K for the year ended December 31, 2005.

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**Estimatesand Assumptions Related to Financial Statements**

The discussion andanalysis of our financial condition and results of operations is based upon ourunaudited condensed consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles for interimfinancial statements. The preparation of these condensed consolidated financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those affecting revenue recognition, the allowance fordoubtful accounts, inventory valuation, intangible assets, income taxes andgeneral business contingencies. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form our basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates under differentassumptions or conditions.

**Resultsof Operations**
| ** **                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                   |       | $                                               | 53,547     |                                          | $          | 54,290 |   | $ | 112,111 |   | $ | 94,235 |   |
| Gross profit                                |       | 17,776                                          |       | 15,648                                        |       | 37,405 |   | 28,983 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general  and administrative        |       | 11,986                                          |       | 12,865                                        |       | 26,746 |   | 22,410 |   |
| Research and  development                   |       | 3,230                                           |       | 2,703                                         |       | 6,486 |   | 4,658 |   |
| Restructuring  costs                        |       | 495                                             |       | —                                        |       | 645 |   | — |   |
| Total operating expenses                    |       | 15,711                                          |       | 15,568                                        |       | 33,877 |   | 27,068 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Operating income                            |       | 2,065                                           |       | 80                                            |       | 3,528 |   | 1,915 |   |
| Other expense                               |       | (1,731                                          | )          | (1,753                                        | )          | (3,729 | ) | (3,066 | ) |
| Provision for  income taxes                 |       | 14                                              |       | 17                                            |       | 74 |   | 43 |   |
| Income (loss)  from continuing operations   |       | 320                                             |       | (1,690                                        | )          | (275 | ) | (1,194 | ) |
| Recognized gain  on discontinued operations |       | —                                          |       | —                                        |       | — |   | 2,827 |   |
| Net income  (loss)                          |       | $                                               | 320        |                                          | $          | (1,690 | ) | $ | (275 | ) | $ | 1,633 |   |

 

**ThreeMonths Ended June 30, 2006 vs. Three Months Ended June 30, 2005**

*NetIncome (Loss)*

Results of operations forthe three months ended June 30, 2006, showed net income of $0.3 million, anincrease of $2.0 million from a net loss of $1.7 million for the comparableperiod in 2005.  Operating income for thethree months ended June 30, 2006 was $2.1 million compared to $0.1 million inthe comparable period in 2005.  Theincrease results primarily from an increase in gross profit of $2.1million.  Gross profit for 2005 wasreduced by $2.4 million by the impact of recording St. Louis Music’sinventories at fair value as a result of the purchase price allocation of St.Louis Music.  Operating expenses for thethree months ended June 30, 2006 was $0.1 million higher than the comparableperiod in 2005.  This was primarilycaused by restructuring costs related to reductions in workforce andcompensation expense related to the adoption of SFAS No. 123R, partially offsetby the benefit of**lowercommission costs related to the shift to direct sales distribution of Mackieproducts in North America.

*NetSales*

Net sales from continuingoperations decreased by 1.4% to $53.5 million during the three months endedJune 30, 2006 from $54.3 million in the comparable period in 2005.

We expect sales to remainin the same range in the remaining quarters of 2006.

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*GrossProfit*

Gross profit increased to$17.8 million, or 33.2% of net sales, in the three months ended June 30, 2006from $15.6 million, or 28.8% of net sales, in the three months ended June 30,2005.   The gross profit for 2005 was reduced by $2.4 million, or4.4% of net sales, by the impact of recording St. Louis Music’s inventories atfair value as a result of the purchase price allocation of St. Louis Music.

We expect gross marginpercentages to remain in the 32% to 35% range in future quarters.

*Selling,General and Administrative*

Selling, general andadministrative expenses decreased by $0.9 million to $12.0 million in the threemonths ended June 30, 2006 from $12.9 million in the comparable period in 2005.The decrease was primarily attributable to the benefit of lower commissioncosts related to the shift to direct sales distribution of Mackie products inNorth America.

We expect lower selling,general and administrative costs in future quarters due to the effects of ourrestructuring costs related to the consolidation of the operations of the St.Louis Music operations.

*Researchand Development*

Research and developmentexpenses increased by $0.5 million to $3.2 million in the three months endedJune 30, 2006 from $2.7 million in the comparable period in 2005. The increaseis primarily attributable to increases in headcount costs to support ourinvestment in new products and improvements to existing products.

We have and will continueto invest in new products and improvements to existing products.  Accordingly, we anticipate our research anddevelopment costs will be higher the remainder of 2006 compared to 2005.

*RestructuringCosts*

Restructuring costs were$0.5 million in the three months ended June 30, 2006.  These costs were primarily severance accrualsrelated to reductions in work force from the consolidation of the St. LouisMusic and service operations.  Weanticipate there to be additional restructuring costs in future quarters as wefinalize the consolidation of the St. Louis Music and service operations andthe ongoing program to shift manufacturing to overseas contract manufacturers.  As we finalize the plans for the shift tooverseas contract manufacturers, we could incur impairment charges in futurequarters related to the building and equipment of our domestic manufacturingplants.

*OtherIncome (Expense)*

Net other expense was$1.7 million for the three months ended June 30, 2006 as compared to $1.8million in the three months ended June 30, 2005.  The primary cause of this decrease was adecrease in other expense of $0.3 million partially offset by an increase of$0.2 million to interest expense.

The majority of our debthas variable interest rates, and the interest expense component of other income(expense) in future quarters will be affected by changing interest rates.

*IncomeTaxes*

Income tax expense forthe three months ended June 30, 2006 was $14,000 compared to $17,000 for thecomparable period in 2005.  The primarycomponent of the 2006 tax is the deferred tax expense recorded as a result ofthe goodwill that is amortized for tax purposes only from the St. Louis Music, Inc.acquisition. The resulting deferred tax liability is not able to be offsetagainst other deferred tax assets. The primary components of the 2005 tax arefrom our Canadian subsidiary and the deferred tax expense related to thegoodwill from the St. Louis Music acquisition.

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***Six Months Ended June 30, 2006 vs. Six Months Ended June 30,2005***

*NetSales*

Net sales from continuingoperations increased by 19.0% to $112.1 million during the six months endedJune 30, 2006 from $94.2 million in the comparable period in 2005.  Thesix month period ended June 30, 2006 includes a full six months of sales fromthe historical St. Louis Music brands as opposed to the comparable period in2005 which includes sales from the historical St. Louis Music brands from theacquisition date of March 5 through June 30.

*GrossProfit*

Gross profit increased to$37.4 million, or 33.4% of net sales, in the six months ended June 30, 2006from $29.0 million, or 30.8% of net sales, in the six months ended June 30,2005.  The increase in gross profit isprimarily attributable to the increase in sales volume.  The gross profit for 2005 was reduced by $2.4million, or 2.6% of net sales, by the impact of recording St. Louis Musicinventories at estimated selling prices less costs to sell and a reasonableselling profit allowance as of the date of acquisition.

*Selling,General and Administrative*

Selling, general andadministrative expenses increased by $4.3 million to $26.7 million in the sixmonths ended June 30, 2006 from $22.4 million in the comparable period in2005.  This increase is primarilyattributable to having a full six months of St. Louis Music expenses.

*Researchand Development*

Research and developmentexpenses increased by $1.8 million to $6.5 million in the six months ended June30, 2005 from $4.7 million in the comparable period in 2005.  The increase was primarily attributable to afull six months of St. Louis Music costs with the primary increase in personnelcosts.

*RestructuringCosts*

Restructuring costs were$0.6 million in the six months ended June 30, 2006.  These costs were primarily severance accrualsrelated to reductions in work force from the consolidation of the St. LouisMusic and service operations.

*OtherIncome (Expense)*

Net other expense was$3.7 million for the six months ended June 30, 2006 as compared to $3.1 millionin the six months ended June 30, 2005. This increase was primarily caused by an increase to interest expense of$1.0 million which was primarily caused by increased debt related to theacquisition of St. Louis Music and an increase to our variable interestrates.  This increase to interest expensewas partially offset by a decrease to other expense of $0.3 million.

*IncomeTaxes*

Income tax expense forthe first six months of 2006 was $74,000 compared to $43,000 for the comparableperiod in 2005.  The primary componentsof the 2006 tax relate to our Canadian subsidiary and the deferred tax expenserecorded as a result of the goodwill that is amortized for tax purposes onlyfrom the St. Louis Music, Inc. acquisition. The resulting deferred tax liabilityis not able to be offset against other deferred tax assets. The primarycomponents of the 2005 tax are applying the Alternative Minimum Tax rate to thetaxable income we are unable to apply towards our NOL’s for our U.S. entities,deferred tax expense recorded as a result of the goodwill that we are able toamortize for tax purposes only from the St. Louis Music, Inc. acquisition andtax expense related to our Canadian subsidiary.

*RecognizedGain on Discontinued Operations*

In March 2005, we recognizeda $2.8 million gain from the discontinued operations of our former Italiansubsidiary, net of tax of $0.1 million. This gain was a result of a settlement agreement with Mackie Italy tosettle the net outstanding amounts owed by the Company.

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**Liquidityand Capital Resources**

In February 2005, we madean offer to Mackie Italy to settle any outstanding amounts owed by the Companyto Mackie Italy for $4.7 million.  Thisproposal was accepted by the Italian court appointed trustee on behalf ofMackie Italy in May 2005.  Under theterms of the settlement agreement, we made additional payments of $2.5 millionduring 2005.  We also committed to pay$2.2 million during 2006.  We recognizeda pre-tax gain on discontinued operations of $2.9 million in the first quarterof 2005 related to this settlement.

As of June 30, 2006, wehad cash and cash equivalents of $0.7 million and total debt and short-termborrowings of $55.1 million, including a $1.7 million payable to our formerItalian subsidiary.  At June 30, 2006 we had availability of $15.4 millionon our revolving line of credit, net of a $3.2 million standby letter of creditissued to secure the commitment to pay the former shareholders of St. LouisMusic, Inc.

*NetCash Provided by Operating Activities*

Cash provided inoperating activities was $1.6 million in the six months ended June 30, 2006,compared to  $0.3 million for thecomparable period in 2005.  Net loss forthe first six months of 2006 was $0.3 million that included $2.2 million indepreciation and amortization, $0.3 million in amortization of deferredfinancing fees and $0.3 million in stock based compensation expense.  In the first six months of 2006, an increasein accounts payable, accrued liabilities and payable to our former Italiansubsidiary of $1.9 million provided cash, while increases to inventories andaccounts receivable of $2.3 million and $0.6 million, respectively, usedcash.  Net income in the first six monthsof 2005 was $1.6 million that included $2.3 million in depreciation and amortization.  In the first six months of 2005, a decreaseto inventories and prepaid expenses and other current assets of $7.7 millionand $1.0 million, respectively, provided cash. Net cash used by operating activities in the first six months of 2005was primarily attributable to a decrease of accounts payable, accruedliabilities and payable to our former Italian subsidiary of $8.4 million, anincrease to accounts receivable of $1.1 million and the recognized gain ondiscontinued operations of Mackie Italy of $2.9 million.

*NetCash Used in Investing Activities*

Cash used in investingactivities was $1.2 million for the first six months of 2006 compared to $35.9million for the first six months of 2005. The cash used in investing activitiesfor the first six months of 2006 related to the purchases of capitalexpenditures.  The cash used in investingactivities in 2005 was primarily related to the acquisition of St. Louis Music,Inc. of $35.2 million.

*NetCash Provided by (Used in) Financing Activities*

Cash used in financingactivities was $0.5 million during the first six months of 2006, compared tocash provided by of $36.1 million during the first six months of 2005. Cash used in the first six months of 2006 is primarily attributable to paymentsmade on our long-term debt of $2.0 million partially offset by an increase inour borrowings from our bank line of credit of $1.5 million.  Financing activities during the first sixmonths of 2005 related primarily to the acquisition of St. Louis Music, Inc.resulting in a new demand credit facility of $35.1 million.  In addition, this increase was due to netborrowings on our line of credit of $1.2 million.

*Abilityto stay in compliance with debt covenants*

Under the terms of the line of credit and subordinated loan agreements,we are required to maintain certain financial ratios, such as measuring ourEBITDA to our total debt and senior debt, and maintaining a certain fixedcharge coverage ratio.  The agreementalso provides, among other matters, restrictions on additional financing,dividends, mergers, acquisitions, and an annual capital expenditure limit.  As of June 30, 2006, we met all of ourcovenant requirements and we believe we will continue to meet theserequirements each quarter thereafter in 2006.

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*Commitments*

We had the followingmaterial contractual commitments related to operating leases for equipmentfacilities at June 30, 2006.  In addition, we had materialobligations related to short-term and long-term debt arrangements, excludingour accounts payable, accrued liabilities and taxes payable of  $29.7 million at June 30, 2006:
| ** **                                                                                  | ** ** | **Payments due by Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5+ Years** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                   | ** ** |
|                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                                                            |       | $                                         | 8,467      |   | $ | 2,253 |   | $ | 3,468 |   | $ | 2,370 |   | $ | 376 |   |
| Lines of credit                                                                             |       | 11,121                                    |       | 11,121 |   | — |   | — |   | — |   |
| Payable to our  former Italian subsidiary                                                   |       | 1,700                                     |       | 1,700 |   | — |   | — |   | — |   |
| Future  commitment to pay former shareholders of St. Louis Music, Inc., including  interest |       | 3,188                                     |       | 3,188 |   | — |   | — |   | — |   |
| Short-term and  long-term debt                                                              |       | 42,266                                    |       | 2,645 |   | 6,040 |   | 15,387 |   | 18,194 |   |
| Total                                                                                       |       | $                                         | 66,742     |   | 20,907 |   | $ | 9,508 |   | $ | 17,757 |   | $ | 18,570 |   |
|                                                                                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We also have purchasecommitments that range between $20 million to $25 million that are primarilydue to our contract manufacturers.

 We believe we willhave adequate resources to meet our material obligations as they come duethrough December 31, 2006.

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**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

We are exposed to variousmarket risks, including changes in foreign currency rates and interest rates.We may enter into various derivative transactions to manage certain of theseexposures; however, we did not have any interest rate or currency swaps or anyother derivative financial instruments as of June 30, 2006.

At June 30, 2006, we hadvariable rate lines of credit with outstanding balances of $11.1 million. Inaddition, our $27.5 million term loans also had variable interest rates.  As such, changes in U.S. interest ratesaffect interest paid on debt and we are exposed to interest rate risk. For thequarter ended June 30, 2006, an increase in the average interest rate of 10%,i.e. from 8.56% to 9.41%, would have resulted in an approximately $88,000 decreasein net income before income taxes.  The fair value of such debt approximatesthe carrying amount on the consolidated balance sheet at June 30, 2006.

A substantial majority ofour revenues are denominated in U.S. Dollars, and during the three months endedJune 30, 2006 approximately 12% of our revenues were denominated in foreigncurrencies.  We ordinarily do not engagein hedging, rate swaps, or other derivatives as a means to minimize our foreigncurrency risk and, instead, mitigate that exposure by limiting the portion ofour sales that are denominated in other than U.S. Dollars.  Assuming the same level of foreign currencydenominated sales as in the three months ended June 30, 2006, a 10% decline inthe average exchange rates for all these currencies would have caused a declineof approximately $612,000, or 1%, of our revenues.

The majority of ourproducts are manufactured by foreign third-party contract manufacturers withthe majority of the contracts denominated in U.S. Dollars.  Foreign third-party manufacturing createsrisks that include fluctuations in currency exchange rates that could affectthe price we pay for our product.  Ourtwo largest foreign contract manufacturers product  represented 45.6% of our consolidated netsales for the three months ended June 30, 2006. A 10% increase to the cost of the product sold that was manufactured bythese two manufacturers would have resulted in an increase to cost of sales forthe three months ended June 30, 2006 of approximately $0.4 million.

**Item4.  Controls and Procedures**

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inthe Company’s reports under the Exchange Act, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

Management carried out anevaluation, under the supervision and with the participation of the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe Company’s “disclosure controls and procedures” as of the end of the periodcovered by this report, pursuant to Rules 13a-15(b) and 15d-15(e) under theExchange Act.  Based on that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures, as of the endof the period covered by this report, were effective in timely alerting them tomaterial information relating to the Company required to be included in the Company’speriodic SEC filings.

There has been no changein the Company’s internal control over financial reporting (as defined in Rules13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period coveredby this report that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PARTII.  OTHER INFORMATION**

**Item1.** **Legal Proceedings**

We are a defendant in alawsuit filed in the Southern District of Florida on November 29, 2005 by AcePro Sound and Recording, L.L.C.  Thelawsuit alleges various federal and state antitrust violations, as well ascommon-law (misrepresentation) claims. We believe the claims are without merit and we intend vigorously todefend the lawsuit.

In addition to the casenoted above, we are also involved in various legal proceedings and claims thatarise in the ordinary course of business. We currently believe that these matters will not have a material adverseimpact on our financial position, liquidity or results of operations.

##### **Item1A.  Risk Factors**

Information regardingrisk factors appears in the first paragraph in Part I — Item 2 of this Form10-Q and in Part I — Item 1A of our Report on Form 10-K for the fiscal yearended December 31, 2005 (the “2005 10-K”). There have been no material changes from the risk factors previouslydisclosed in the 2005 Form 10-K.

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**Item3.  Defaults upon Senior Securities**

None.

**Item4.  Submission of Matters to a Vote of Security Holders**

(a)          Our annual meeting ofshareholders was held on May 16, 2006.

(b)         At the annual meeting, T.Scott King, Jason H. Neimark, Kevin J. Calhoun and Case Kuehn were elected toserve as Class 2 directors for a three year term. C. Daryl Hollis, George R.Rea and Clarence E. Terry continue to serve as Class 3 directors and will be upfor re-election at the 2007 annual meeting. James T. Engen, Jon W. Gacek and R. Lynn Skillen continue to serve asClass 1 directors and will be up for re-election at the 2008 annual meeting.

(c)          The results of votingfor the election of directors at the annual meeting were as follows:
| Nominee          | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|------------------|------------|-----------|------------|--------------|------------|
|             |       |      |       |         |       |
| T. Scott King    |       | 4,193,815 |       | 13,309       |       |
| Jason H. Neimark |       | 4,200,915 |       | 6,209        |       |
| Kevin J. Calhoun |       | 4,200,915 |       | 6,209        |       |
| Case Kuehn       |       | 4,200,915 |       | 6,209        |       |

 

(d)         At the annual meeting aproposal was approved to allow future grants under the 2003 Stock Option Plan.

(e)          The results of thevoting for the proposal to allow future grants under the 2003 Stock Option Planwere as follows:

| For       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 3,501,653 |       | 33,010      |       | 3,280       |       | 669,181                   |       |

 

**Item5.  Other Information**

None.

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**Item6.  Exhibits**

Exhibits

31.1 Certification ofChief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2 Certification ofChief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1 Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                              |   |   | **LOUD Technologies Inc.**                                                                                               |
|------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|                         |   |   | (Registrant)                                                                                                             |
|                         |   |   |                                                                                                                     |
| Dated:  August 14, 2006 |   | By:    | /s/ James T. Engen                                                                                                       |
|                         |   |   | James T. Engen                                                                                                           |
|                         |   |   | *Chairman, President and Chief Executive  Officer*                                                                       |
|                         |   |   |                                                                                                                     |
| Dated:  August 14, 2006 |   | By:    | /s/ Timothy P. O’Neil                                                                                               |
|                         |   |   | Timothy P. O’Neil                                                                                                   |
|                         |   |   | *Chief Financial Officer, SeniorVice  President, Secretary and  Treasurer (Principal Financial and  Accounting Officer)* |

 

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**EXHIBITINDEX**
| **Exhibit  Number** |   | **Document  Description**                                                                                                                        |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                             |
| 31.1                |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                        |
|                |   |                                                                                                                                             |
| 31.2                |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                        |
|                |   |                                                                                                                                             |
| 32.1                |   | Certification Pursuant to Section 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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