##### 



Consolidated Financial Statements
 PST Eletrônica S.A. (formerly PST 
Indústria Eletrônica da
Amazônia Ltda.)
 December 31, 2007, 2006 and 2005  With Report of Independent Auditors




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##### 



PST ELETRÔNICA S.A.
    Report of Independent Auditors
    
    
    1Consolidated balance sheets as of December 31, 2007, 2006 and 2005
    
    
    2Consolidated statements of income for the years ended December 31, 2007, 2006 and 2005
    
    
    3Consolidated statements of shareholders/quotaholders equity and comprehensive income for the
years ended December 31, 2007, 2006 and 2005
    
    
    4Consolidated statements of cash flows for the years ended December 31, 2007, 2006 and 2005
    
    
    5Notes to consolidated financial statements
    
    
    6




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##### 



REPORT OF INDEPENDENT AUDITORS
 PST Eletrônica S.A.
     
 
 1




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##### 



PST ELETRÔNICA S.A.
 
 December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,124
    
    
    $
    4,785Accounts receivable, less allowance for doubtful
accounts of $461 and $500 in 2007 and 2006,
respectively
    
    
    12,306
    
    
    
    11,609Inventories, net
    
    
    20,144
    
    
    
    10,602Taxes recoverable
    
    
    477
    
    
    
    857Related parties
    
    
    189
    
    
    
    160Prepaid expenses and other
    
    
    1,320
    
    
    
    419Deferred income taxes
    
    
    1,784
    
    
    
    600Total current assets
    
    
    43,344
    
    
    
    29,032Property, plant and equipment, net
    
    
    16,865
    
    
    
    9,868Other assets:Deferred income taxes
    
    
    1,336
    
    
    
    1,155Other
    
    
    195
    
    
    
    Total assets
    
    $
    61,740
    
    
    $
    40,055LIABILITIES AND SHAREHOLDERS/QUOTAHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    843
    
    
    $
    2,634Accounts payable
    
    
    4,997
    
    
    
    4,252Wages and salaries
    
    
    3,346
    
    
    
    2,028Taxes payable
    
    
    985
    
    
    
    560Due to related parties
    
    
    9
    
    
    
    24Dividends payable
    
    
    9,874
    
    
    
    3,747Employee profit sharing and management bonuses
    
    
    2,189
    
    
    
    968Warranty reserve
    
    
    917
    
    
    
    549Commissions payable
    
    
    1,124
    
    
    
    807Accrued expenses and other
    
    
    1,285
    
    
    
    285Total current liabilities
    
    
    25,569
    
    
    
    15,854Long-term liabilities:Long-term debt, net of current portion
    
    
    430
    
    
    
    345Provision for contingencies
    
    
    3,528
    
    
    
    2,447Total long-term liabilities
    
    
    3,958
    
    
    
    2,792Commitments and contingencies (Note 7)Shareholders/quotaholders equity:Capital, $0.175 and $0.424 par values, 45,000,000
common shares and 11,117,280 quotas authorized and
issued at December 31, 2007 and 2006, respectively
    
    
    7,887
    
    
    
    4,712Retained earnings
    
    
    15,072
    
    
    
    13,594Accumulated other comprehensive income
    
    
    9,254
    
    
    
    3,103Total shareholders/quotaholders equity
    
    
    32,213
    
    
    
    21,409Total liabilities and shareholders/quotaholders equity
    
    $
    61,740
    
    
    $
    40,055
  2




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##### 



PST ELETRÔNICA S.A.
 
 For the years ended December 31,2007
    
    
    2006
    
    
    2005Net sales
    
    $
    133,039
    
    
    $
    94,097
    
    
    $
    70,819Costs and expenses:Cost of goods sold and services rendered
    
    
    61,575
    
    
    
    47,451
    
    
    
    38,700Product design and engineering expenses
    
    
    5,094
    
    
    
    3,113
    
    
    
    2,358Selling, general and administrative
    
    
    39,292
    
    
    
    25,929
    
    
    
    18,136Operating income
    
    
    27,078
    
    
    
    17,604
    
    
    
    11,625Exchange losses (gains), net
    
    
    468
    
    
    
    (175
    )
    
    
    (188
    )Financial expense (income), net
    
    
    1,458
    
    
    
    (160
    )
    
    
    857Income before income taxes
    
    
    25,152
    
    
    
    17,939
    
    
    
    10,956Provision for income taxes
    
    
    4,803
    
    
    
    3,442
    
    
    
    2,330Net income
    
    $
    20,349
    
    
    $
    14,497
    
    
    $
    8,626
  3




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##### 



PST ELETRÔNICA S.A.
 
 Accumulated
    
    
    Totalother
    
    
    shareholders/Number of
    
    
    
    
    
    
    Retained earnings
    
    
    comprehensive
    
    
    quotaholdersshares/quotas
    
    
    Capital
    
    
    Appropriated
    
    
    Unappropriated
    
    
    income
    
    
    equityBalance, December 31, 2004 (unaudited)
    
    
    4,892,368
    
    
    $
    1,886
    
    
    $
    951
    
    
    $
    4,119
    
    
    $
    397
    
    
    $
    7,353Capitalization of retained earnings
    
    
    2,220,760
    
    
    
    951
    
    
    
    (951
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,626
    
    
    
    
    
    
    
    8,626Transfer to appropriated retained earnings
    
    
    
    
    
    
    
    
    
    
    1,731
    
    
    
    (1,731
    )
    
    
    
    
    
    
    Dividends distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,350
    )
    
    
    
    
    
    
    (4,350
    )Other comprehensive income:Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,292
    
    
    
    1,292Balance, December 31, 2005
    
    
    7,113,128
    
    
    
    2,837
    
    
    
    1,731
    
    
    
    6,664
    
    
    
    1,689
    
    
    
    12,921Capitalization of tax incentive reserve
    
    
    4,004,152
    
    
    
    1,875
    
    
    
    (1,875
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,497
    
    
    
    
    
    
    
    14,497Transfer to appropriated retained earnings
    
    
    
    
    
    
    
    
    
    
    2,913
    
    
    
    (2,913
    )
    
    
    
    
    
    
    Dividends distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,423
    )
    
    
    
    
    
    
    (7,423
    )Other comprehensive income:Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,414
    
    
    
    1,414Balance, December 31, 2006
    
    
    11,117,280
    
    
    
    4,712
    
    
    
    2,769
    
    
    
    10,825
    
    
    
    3,103
    
    
    
    21,409Capitalization of tax incentive reserve
    
    
    6,219,570
    
    
    
    3,175
    
    
    
    (3,175
    )
    
    
    
    
    
    
    
    
    
    
    Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,468
    )
    
    
    
    
    
    
    (11,468
    )Conversion of quotas into shares
    
    
    27,663,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,349
    
    
    
    
    
    
    
    20,349Transfer to appropriated retained earnings
    
    
    
    
    
    
    
    
    
    
    5,399
    
    
    
    (5,399
    )
    
    
    
    
    
    
    Dividends payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,228
    )
    
    
    
    
    
    
    (4,228
    )Other comprehensive income:Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,151
    
    
    
    6,151Balance, December 31, 2007
    
    
    45,000,000
    
    
    $
    7,887
    
    
    $
    4,993
    
    
    $
    10,079
    
    
    $
    9,254
    
    
    $
    32,213
  4




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##### 



PST ELETRÔNICA S.A.
 
 For the years ended December 31,2007
    
    
    2006
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    20,349
    
    
    $
    14,497
    
    
    $
    8,626Adjustments to reconcile net income to net cash
provided by (used for) operating activities Depreciation
    
    
    1,496
    
    
    
    1,363
    
    
    
    1,247Provision for contingencies
    
    
    527
    
    
    
    1,157
    
    
    
    421Deferred income taxes
    
    
    (913
    )
    
    
    (409
    )
    
    
    (197
    )Warranty reserve
    
    
    232
    
    
    
    
    
    
    
    188(Gain) Loss
on sales of property, plant and equipment, net
    
    
    (30
    )
    
    
    115
    
    
    
    81Changes in operating assets and liabilitiesAccounts receivable, net
    
    
    1,534
    
    
    
    (3,710
    )
    
    
    (1,165
    )Inventories, net
    
    
    (6,698
    )
    
    
    (702
    )
    
    
    1,050Prepaid expenses and other current assets
    
    
    (230
    )
    
    
    (356
    )
    
    
    (49
    )Other assets
    
    
    (177
    )
    
    
    18
    
    
    
    12Accounts payable
    
    
    (117
    )
    
    
    142
    
    
    
    1,297Wages and salaries
    
    
    820
    
    
    
    382
    
    
    
    275Employee profit sharing and management bonuses
    
    
    929
    
    
    
    (1,089
    )
    
    
    1,463Commissions payable
    
    
    138
    
    
    
    490
    
    
    
    78Accrued expenses and others
    
    
    1,083
    
    
    
    488
    
    
    
    678Net cash provided by operating activities
    
    
    18,943
    
    
    
    12,386
    
    
    
    14,005INVESTING ACTIVITIES:Capital expenditures
    
    
    (5,987
    )
    
    
    (3,790
    )
    
    
    (1,749
    )Net cash used for investing activities
    
    
    (5,987
    )
    
    
    (3,790
    )
    
    
    (1,749
    )FINANCING ACTIVITIES:Borrowings  current portion of long-term debt
    
    
    315
    
    
    
    303
    
    
    
    2,069Repayments  current portion of long-term debt
    
    
    (2,422
    )
    
    
    (910
    )
    
    
    (4,334
    )Borrowings of short-term debt
    
    
    
    
    
    
    
    
    
    
    1,186Repayments of short-term debt
    
    
    
    
    
    
    
    
    
    
    (4,164
    )Other equity transactions
    
    
    
    
    
    
    
    
    
    
    2Decrease in amounts due to related parties
    
    
    
    
    
    
    (3,022
    )
    
    
    (377
    )Dividends paid
    
    
    (9,616
    )
    
    
    (5,977
    )
    
    
    (2,175
    )Net cash used for financing activities
    
    
    (11,723
    )
    
    
    (9,606
    )
    
    
    (7,793
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,106
    
    
    
    481
    
    
    
    344Net change in cash and cash equivalents
    
    
    2,339
    
    
    
    (529
    )
    
    
    4,807Cash and cash equivalents at beginning of period
    
    
    4,785
    
    
    
    5,314
    
    
    
    507Cash and cash equivalents at end of period
    
    $
    7,124
    
    
    $
    4,785
    
    
    $
    5,314Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    472
    
    
    $
    269
    
    
    $
    846Cash paid for income taxes
    
    $
    4,935
    
    
    $
    3,674
    
    
    $
    2,438
  5




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##### 



PST ELETRÔNICA S.A.
 
 1.
    
    Organization and Nature of BusinessPST Eletrônica S.A. (formerly PST Indústria Eletrônica da Amazônia Ltda.), with head office in
the city of Manaus, State of Amazonas, is a non-public Brazilian Stock Corporation engaged in
the production and trading of electronic equipment for automobiles (alarms, power windows,
door lock sets, instrument clusters, blocking and tracking devices, antennas and accessories)
and in the rendering of tracking services within the domestic and foreign markets. PST
Eletrônica S.A. holds a 99.98% interest in PST Industrial Ltda. (subsidiary). At December
31, 2007, the subsidiary does not have any operations. PST Eletrônica S.A. and its subsidiary
are hereinafter referred to as the Company.The Companys administrative and financial headquarters are located in the city of Campinas,
State of São Paulo. There are also branches in the cities of Rio de Janeiro (responsible for
after-sale customer services), Campinas (dedicated to tracking and vehicle block services),
and Buenos Aires, Argentina (focused on product trading activities).Part of the manufacturing activity is carried out in the Campinas facility. However the
manufacturing facility established in the Manaus Free-Trade Zone accounts for most of the
production and billing activities with the aim of obtaining the tax incentives offered by the
Federal and State Governments, as follows:
 
    
    Exemption of IPI (Federal Value-added tax, VAT) on products;
    
    Suspension of import duties on imports of capital assets and reduction of 88% on the
current tax rate applied to foreign consumable inputs;
    
    Refund of 55% of the ICMS (State VAT) charged on such product lines as antennas,
alarms, remote control for alarms, wires and cables;
    
    Refund of 90.25% of the ICMS charged on assembled electronic circuit plates;
    
    Refund of 55%, with 45% additional refund, reviewed by State Government each three
years, totaling 100% of the ICMS charged on other items of the Companys product lines;
    
    75% income tax reduction for amounts computed on sale of products subject to incentive
manufactured by the Company in its Manaus facility. The amount corresponding to the
computed income tax incentive must not be distributed to the quotaholders and should be
kept as a tax incentive reserve, invested in the Company itself or used for capital
increase.
 6




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##### 



PST ELETRÔNICA S.A.
 
 1.
    
    Organization and Nature of BusinessContinuedThe referred to tax benefits will be effective until the end of 2023, when the Manaus
Free-Trade Zone will be extinguished, according to the Federal Constitution.The Company has lately pursued an Initial Public Offering (IPO) in the São Paulo Stock
Exchange. In connection with such process, on October 19, 2007, the Company changed its by-law
whereby it converted itself into a non-public Corporation (S.A.) from a limited liability
enterprise (Ltda.). As a result, quotas were converted into shares, with no change to the
ownership structure. Costs incurred by the Company in 2007 in the intended offering of the
Companys shares totaled $1,590.2.
    
    Summary of Significant Accounting Policies
 a)
    
    Basis of presentationThe accompanying consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated in
consolidation.The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP), which differ in
certain respects from accounting practices applied by the Company in its statutory
financial statements, which are prepared in accordance with accounting practices adopted in
Brazil.Based on an analysis of the Companys revenues, expenses and financial structure,
management has concluded that the Companys functional currency for its Brazilian
operations is the Brazilian Real.The financial statements are translated into US dollars using exchange rates in effect at
the year end for assets and liabilities and average exchange rates during each reporting
period for the statements of income. Adjustments resulting from translation of financial
statements are reflected as a component of accumulated other comprehensive income. Foreign
currency transactions are remeasured into functional currency using translation rates in
effect at the time of the transaction, with the resulting adjustments included in the
results of operations.
 7




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 b)
    
    Cash and cash equivalentsThe Company considers all short-term investments with original maturities of three months
or less to be cash equivalents. Cash equivalents are stated at cost plus interest earned
through the balance sheet date, when applicable, which approximates fair value, due to the
highly liquid nature and short-term duration of the underlying investments.c)
    
    Accounts receivable, allowance for doubtful accounts and concentration of credit
riskRevenues are principally generated from the automotive vehicle markets, with approximately
6% from the original equipment manufacturers and the remaining portion from aftermarket
customers. The Companys products are sold through distributors and resellers. Two
customers accounted for 9.7% and 8.1% of the Companys sales in 2007, 10.0% and 7.5% in
2006 and 14.0% and 11.0% in 2005. Trade accounts receivables are not secured by collateral.The Company evaluates the collectibility of accounts receivable based on a combination of
factors. In circumstances where the Company is aware of a specific customers inability to
meet its financial obligations, a specific allowance for doubtful accounts is recorded
against amounts overdue to write down the recognized receivable to the amount the Company
reasonably believes will be collected. Additionally, the Company reviews historical trends
for collectibility in determining an estimate for its allowance for doubtful accounts.Bad debt expense for the years ended December 31, 2007, 2006 and 2005 amounted to $39, $91
and $123, respectively.
 8




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 d)
    
    InventoriesInventories are valued at the lower of cost or market. Cost is determined at the average
cost of purchase or production, which includes material, labor and overhead. Inventories
consist of the following at December 31:
 2007
    
    
    2006Raw materials
    
    $
    9,948
    
    
    $
    5,019Work in progress
    
    
    2,315
    
    
    
    1,558Finished goods
    
    
    8,400
    
    
    
    4,266Total inventories
    
    
    20,663
    
    
    
    10,843Less: Provision for lower of cost or market
valuation and slow-moving inventories
    
    
    (519
    )
    
    
    (241
    )Inventories, net
    
    $
    20,144
    
    
    $
    10,602
 e)
    
    Property, plant and equipmentProperty, plant and equipment are recorded at cost and consist of the following at December
31:
 2007
    
    
    2006Land and improvements
    
    $
    833
    
    
    $
    691Buildings and improvements
    
    
    3,367
    
    
    
    2,646Machinery and equipment
    
    
    7,164
    
    
    
    4,627Computer equipment and software
    
    
    3,880
    
    
    
    2,650Office furniture and fixtures
    
    
    1,050
    
    
    
    561Tooling
    
    
    7,217
    
    
    
    4,664Vehicles
    
    
    1,906
    
    
    
    1,026Tracking devices for rent
    
    
    1,334
    
    
    
    163Other
    
    
    824
    
    
    
    360Total property, plant and equipment
    
    
    27,575
    
    
    
    17,388Less: accumulated depreciation
    
    
    (10,710
    )
    
    
    (7,520
    )Property, plant and equipment, net
    
    $
    16,865
    
    
    $
    9,868
 9




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 e)
    
    Property, plant and equipmentContinuedDepreciation is provided by the straight-line method over the estimated useful lives of the
assets. Depreciable lives within each property classification are as follows:
 Buildings and improvements
    
    25 yearsMachinery and equipment
    
    10 yearsComputer equipment and software
    
    5 yearsOffice furniture and fixtures
    
    10 yearsTooling
    
    3-10 yearsVehicles
    
    5 yearsTracking devices for rent
    
    5 years
 Maintenance and repair expenditures that are not considered improvements and do not extend
the useful life of property are charged to expense as incurred. Expenditures for
improvements and major renewals are capitalized. When assets are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the accounts,
and any gain or loss on the disposal is credited or charged to the statements of income.At December 31, 2007 and 2006, property, plant and equipment includes vehicles and
equipment held under capital leasing arrangements with total cost of $2,325 and $1,059 and
accumulated depreciation of $493 and $202, respectively.f)
    
    Impairment of assetsThe Company reviews its long-lived assets with finite lives for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is recognized when events or changes in circumstances indicate that
the carrying amount of the asset may not be recovered. Measurement of the amount of
impairment may be based on appraisal, market values of similar assets or estimated
discounted future cash flows resulting from the use and ultimate disposal of the asset. No
impairment charges were recorded in 2007, 2006 and 2005.
 10




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 g)
    
    Income taxesCurrent tax liabilities and assets are recognized for the estimated taxes payable or
refundable on the tax returns for the current year. Deferred tax assets or liabilities are
recognized for the estimated future tax effects attributable to temporary differences that
result from events that have been recognized in either the financial statements or the tax
returns, but not both. The measurement of current and deferred tax assets is based on
provisions of enacted tax laws. Future tax benefits are recognized to the extent the
realization of such benefits is more likely than not. Current and non-current components of
deferred tax balances are reported separately based on financial statement classification
of the related asset or liability giving rise to the temporary difference. Tax assets and
liabilities are not offset unless attributable to the same tax jurisdiction and netting is
possible according to law and expected to take place in the same period.h)
    
    Revenue recognition and sales commitmentsRevenues and expenses are recognized on the accrual basis. Revenues from sales of products
are recognized upon their date of delivery to the customers. No revenue is recognized if
there are significant uncertainties regarding its realization.i)
    
    Freight expensesShipping and handling costs incurred for delivering products sold are reported in selling
expenses and were $4,092, $2,722 and $1,972, for the years ended December 31, 2007, 2006
and 2005, respectively.j)
    
    Warranty reserveThe Companys warranty reserve is established based on the Companys best estimate of the
amounts necessary to settle future and existing claims on products sold as of the balance
sheet date. The following is a reconciliation of the changes in the Companys warranty
reserve at December 31:
 2007
    
    
    2006Warranty reserves at beginning of year
    
    $
    549
    
    
    $
    502Payments made
    
    
    (657
    )
    
    
    (466
    )Costs recognized for warranties issued during the year
    
    
    833
    
    
    
    539Changes in estimates for preexisting warranties
    
    
    192
    
    
    
    (26
    )Warranty reserve at end of year
    
    $
    917
    
    
    $
    549
 11




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 k)
    
    Product development expensesExpenses associated with the development of new products and changes to existing products
are charged to expense as incurred. These costs amounted to $5,094, $3,113 and $2,358 in
2007, 2006 and 2005, respectively.l)
    
    Accounting estimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Because actual
results could differ from those estimates, the Company revises its estimates and
assumptions as new information becomes available.m)
    
    Comprehensive incomeStatement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, establishes standards for the reporting of comprehensive income. Other
comprehensive income consists of foreign currency translation adjustments. Balances of each
after-tax component of accumulated other comprehensive income, as reported in the Statement
of Consolidated Shareholders/Quotaholders Equity at December 31, are as follows:
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Net income
    
    $
    20,349
    
    
    $
    14,497
    
    
    $
    8,626Other comprehensive income:Currency translation adjustments
    
    
    6,151
    
    
    
    1,414
    
    
    
    1,292Comprehensive income
    
    $
    26,500
    
    
    $
    15,911
    
    
    $
    9,918
 12




---



##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 n)
    
    Accounting for uncertain income tax positionsEffective January 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). FIN
48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the financial
statements. The cumulative effect of applying FIN 48 is recorded as an adjustment to
retained earnings as of the beginning of the period of adoption. Additionally, in May 2007,
the FASB published FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48(FSP FIN 48-1). FSP FIN 48-1 is an amendment to FIN 48 which
clarifies how an enterprise should determine whether a tax position is effectively settled
for the purpose of recognizing previously unrecognized tax benefits. The Company did not
incur a cumulative effect upon adoption as no relevant tax positions have been taken by the
Company in the past.o)
    
    Recently issued accounting standardsNew accounting pronouncements issued by the FASB which will be effective for the Company in or after fiscal year 2008, are the following:SFAS No. 157, Fair Value Measurements(SFAS 157), establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), clarifies the definition of
fair value within that framework, and expands disclosures about the use of fair value
measurements. SFAS 157 was issued in September 2006 and is effective for fiscal years
beginning after November 15, 2007. For non-financial assets and liabilities which are not
periodically recognized or disclosed at fair value, SFAS 157 has been deferred one year.
The Company will adopt SFAS 157 prospectively on January 1, 2008. The application of SFAS
157 is not expected to have any impact on earnings and financial position.
 13




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##### 



PST ELETRÔNICA S.A.
 
 2.
    
    Summary of Significant Accounting PoliciesContinued
 o)
    
    Recently issued accounting standardsContinuedSFAS No. 141 (revised 2007), Business Combinations(SFAS 141(R)), replaces FASB Statement
No. 141. SFAS 141(R) applies the acquisition method to all transactions and other events in
which one entity obtains control over one or more other businesses, requires the acquirer
to recognize the fair value of all assets and liabilities acquired, even if less than
hundred percent ownership is acquired, and establishes the acquisition date fair value as
the measurement date for all assets acquired and liabilities assumed. SFAS 141(R) was
issued in December 2007 and is effective prospectively for fiscal years beginning after
December 15, 2008.SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements(SFAS 160),
amends ARB 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated
financial statements. SFAS 160 was issued in December 2007 and is effective for fiscal
years beginning after December 15, 2008. The application of SFAS 160 is not expected to
have any impact on earnings and financial position.
 14




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##### 



PST ELETRÔNICA S.A.
 
 3.
    
    Long-Term DebtLong-term debt consists of the following:
 December 31,2007
    
    
    2006Working capital loans
    
    $
    
    
    
    $
    2,359Capital lease obligations
    
    
    1,273
    
    
    
    620Total debt
    
    
    1,273
    
    
    
    2,979Less: current portion
    
    
    (843
    )
    
    
    (2,634
    )Total long term debt less current portion
    
    $
    430
    
    
    $
    345
 Working capital loans from Brazilian financial institutions, settled in 2007, were secured by
promissory notes and by guarantees from two Brazilian financial institutions. The weighted
average interest rate on outstanding debt obligations at December 31, 2007 and 2006 is 12.7%
and 12.3%, respectively, per year.The long term portion of the debt at December 31, 2007 refers to capital leases that will
mature in 2009 and 2010.4.
    
    Capital Lease ObligationsThe Company has entered into certain capital lease agreements, most of them containing purchase
options, as a form to finance its acquisition of vehicles and equipment.During 2007, $753 of principal and interest of $106 were paid on the lease (in 2006, $185 and
$52 respectively).Future payments under those agreements having a remaining term in excess of one year at
December 31 are as follows:
 20072008
    
    $
    8432009
    
    $
    5222010
    
    $
    143Total
    
    $
    1,508Imputed interest amount
    
    $
    (235
    )Present value of lease payments
    
    
    1,273(-) Amount recorded in current liabilities
    
    
    843(=) Amount due in the long term
    
    $
    430
 15




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##### 



PST ELETRÔNICA S.A.
 
 5.
    
    Advertising CostsThe cost of advertising is expensed as incurred. Advertising expense was $832, $425 and $315,
in 2007, 2006 and 2005, respectively.6.
    
    Income TaxesUnder Brazilian tax law income taxes are paid monthly based on the actual or estimated monthly
taxable income. Income taxes in Brazil include federal income tax and social contribution
(which is an additional federal income tax). The applicable statutory income tax and social
contribution rates were 25% and 9%, respectively, during the years ended December 31, 2007,
2006 and 2005. The composite tax rate is 34%. There are no State or local income taxes in
Brazil.The Companys Manaus plant operates in an economic development area (Free-Trade Zone) and,
therefore, its operating income from the production at that plant is exempt from federal income
tax through 2023, as commented in Note 1.The provisions for taxes on income included in the consolidated financial statements represent
Brazilian federal and other foreign income taxes. The components of income before income taxes
and the provision for income taxes consist of the following:
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Income before income taxes:Brazilian
    
    $
    24,510
    
    
    $
    17,329
    
    
    $
    10,324Other foreign
    
    
    642
    
    
    
    610
    
    
    
    632Total income before income taxes
    
    $
    25,152
    
    
    $
    17,939
    
    
    $
    10,956Income tax expenseCurrent:Brazilian federal
    
    $
    5,434
    
    
    $
    3,674
    
    
    $
    2,465Other foreign
    
    
    282
    
    
    
    177
    
    
    
    63Total current provision
    
    
    5,716
    
    
    
    3,851
    
    
    
    2,528Deferred:Brazilian federal
    
    
    (913
    )
    
    
    (409
    )
    
    
    (198
    )Total provision for income taxes
    
    $
    4,803
    
    
    $
    3,442
    
    
    $
    2,330
 16




---



##### 



PST ELETRÔNICA S.A.
 
 6.
    
    Income TaxesContinuedThe reconciliation of the Companys effective income tax rate to the statutory federal tax rate
is as follows:
 2007
    
    2006
    
    2005Brazilian federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Earnings of foreign branch
    
    
    0.2
    %
    
    
    (0.2
    )%
    
    
    (1.8
    )%Manaus free-tax zone income tax incentives
    
    
    (16.0
    )%
    
    
    (15.9
    )%
    
    
    (15.3
    )%Other
    
    
    0.9
    %
    
    
    1.3
    %
    
    
    4.4
    %Effective income tax rate
    
    
    19.1
    %
    
    
    19.2
    %
    
    
    21.3
    %
 Deferred tax assets consist of the following at December 31:
 2007
    
    
    2006Inventory reserves and provision for losses on other assets
    
    $
    301
    
    
    $
    82Provision for product warranties
    
    
    312
    
    
    
    187Provision for contingency losses
    
    
    1,200
    
    
    
    831Product design and development costs deferred for tax
purposes
    
    
    540
    
    
    
    286Deferred revenues subject to current taxation
    
    
    755
    
    
    
    337Other nondeductible reserve
    
    
    12
    
    
    
    32Net deferred tax assets
    
    $
    3,120
    
    
    $
    1,755Less: Current assets
    
    
    (1,784
    )
    
    
    (600
    )Non-current assets
    
    $
    1,336
    
    
    $
    1,155
 7.
    
    Commitments and ContingenciesIn the ordinary course of business, the Company is involved in various legal proceedings,
principally related to tax and labor claims. Following the opinion of its legal advisors, the
Company has taken Federal VAT (IPI) credit related to purchases of raw materials and other
materials that are tax exempt, non-taxed or taxed at a zero rate. The related tax credits were
offset against current IPI payable and will be maintained as a provision for contingencies
until the Company is judicially granted the right to recognize it.
 17




---



##### 



PST ELETRÔNICA S.A.
 
 7.
    
    Commitments and ContingenciesContinuedThe Company is judicially challenging the extension of the calculation basis of Social
Integration Program Contribution (PIS) and Social Security Financing Contribution (COFINS) on
exchange gains enacted by Brazilian Law 9,718/98. As such, these amounts represent a legal
obligation under enacted legislation. A full provision for the amounts not paid has been
recorded.The recorded provisions for probable loss contingencies, including the matters above, are
comprised as follows at December 31, 2007 and 2006:
 2007
    
    
    2006IPI extemporaneous credits offset
    
    $
    2,045
    
    
    $
    1,287PIS and COFINS on exchange gains
    
    
    1,304
    
    
    
    848Labor claims
    
    
    179
    
    
    
    312Total
    
    $
    3,528
    
    
    $
    2,447
 In addition to the said amounts, the Company has other civil and labor contingencies for which
the outcome is deemed to be of a possible loss by its legal advisors, and, therefore, were not
recorded. Such contingencies amount to approximately $736 at December 31, 2007 ($455 at
December 31, 2006).8.
    
    Related Party TransactionsRelated party transactions and balances with Stoneridge, Inc. for years ended December 31 are
as follows:
 2007
    
    2006
    
    2005TransactionsCommissions/royalties
    
    $
    231
    
    
    $
    215
    
    
    $
    194Purchases
    
    
    
    
    
    
    
    
    
    $
    6BalancesAccounts receivable
    
    $
    189
    
    
    $
    160
    
    
    $
    120Accounts payable
    
    $
    9
    
    
    $
    24
    
    
    $
    51Loans payable
    
    
    
    
    
    
    
    
    
    $
    2,814
 18




---



##### 



PST ELETRÔNICA S.A.
 
 9.
    
    Shareholders/Quotaholders EquityThe following table sets forth the ownership and the percentages of the Companys common
            shares (quotas in 2006) at December 31, 2007 and 2006:
 % of shares (2007) and quotas (2006)2007
    
    2006Stoneridge, Inc.
    
    
    25.56
    %
    
    
    50.00
    %Alphabet do Brasil Ltda.
    
    
    24.44
    %
    
    
    Sérgio de Cerqueira Leite
    
    
    16.67
    %
    
    
    33.33
    %Potamotryngi Participações Ltda.
    
    
    16.67
    %
    
    
    Marcos Ferretti
    
    
    8.33
    %
    
    
    16.67
    %Brienzer Participações Ltda.
    
    
    8.33
    %
    
    
    100.00
    %
    
    
    100.00
    %
 On September 10, 2005, October 18, 2006 and September 10, 2007, the quotaholders made capital
increases of $951, $1,875, and $3,175, respectively, through capitalization of the tax
incentive reserve (included in Retained earnings), corresponding to issuance of 2,220,760,
4,004,152 and 6,219,570, new quotas, respectively.On October 19, 2007, as commented in Note 1, the Company was converted into a non-public stock
corporation (sociedade anônima) and was renamed to PST Eletrônica S.A.. As a result, all
existing quotas were converted into shares and 27,663,150 additional shares were issued by the
Company with no change to the total amount of the capital.At December 31, 2007 the Company had 45,000,000 shares of common stock, issued and
outstanding, which is the maximum amount allowed by the Companys bylaws.
 19




---



##### 



PST ELETRÔNICA S.A.
 
 9.
    
    Shareholders/Quotaholders EquityContinuedAppropriated retained earnings
 a)
    
    Legal reserveUnder Brazilian Corporation Law and according to its bylaws, the Company is required to
maintain a legal reserve to which it must allocate 5% of its net income, less
accumulated losses as determined on the basis of the statutory financial statements for
each fiscal year until the amount of the reserve equals 20% of capital. Accumulated
losses, if any, may be charged against the legal reserve. The legal reserve can only be
used to increase the capital of the Company. The legal reserve is subject to approval by
the shareholders voting at the annual shareholders meeting and may be transferred to
capital however it is not available for the payment of dividends in subsequent years. The
shareholders allocated $890 as legal reserve at December 31, 2007.b)
    
    Incentive reserveAs commented in Note 1, the amount corresponding to the computed income tax incentive may
not be distributed to the shareholders and should be kept as a tax incentive reserve,
invested in the Company itself or used for capital increase. At December 31, 2007, the
allocation of retained earning to tax incentives was $4,509 ($2,913 in 2006 and $1,731 in
2005).
 Unappropriated retained earningsThe Company management will propose at the next shareholders meeting that unappropriated
earnings be retained in order to support the ongoing operations of the Company and to fund
planned growth and expansion of the business.DividendsPayment of dividends is limited to the amount of retained earnings in the Companys local
currency financial statements prepared in accordance with accounting principles adopted in
Brazil.On December 8, 2005, December 5, 2006 and October 15, 2007, the quotaholders (2006 and 2005)
and shareholders (2007) approved the distribution of retained earnings in the amount of
$4,350, $7,423 and $11,468, respectively. The amount of $5,646 is still outstanding at
December 31, 2007.
 20




---



##### 



PST ELETRÔNICA S.A.
 
 9.
    
    Shareholders/Quotaholders EquityContinuedDividendsContinuedAccording to the Companys bylaws, shareholders are entitled to minimum compulsory dividends
of 25% of the years net income, adjusted in accordance with article 202 of Law 6,404/76
(Brazilian Corporate Law). At December 31, 2007, the Company allocated $4,228 to those
compulsory dividends to be paid in 2008.Dividends are payable in Brazilian reais and may be remitted to shareholders abroad, provided
the foreign capital is registered with the Brazilian Central Bank.10.
    
    Risk Management and Financial InstrumentsThe Company has operational policies and strategies aiming at liquidity, profitability and
safety, as well as procedures to monitor financial instrument balances. Additionally, the
Company operates with established financial institutions.The main risk factors affecting the Company and its subsidiary business, other than
concentration of risk as commented in Note 2c, are as follows:
 a)
    
    Exchange rate riskIn 2007 and 2006 asset amounts surpassed the liabilities in foreign currency. Variation of
exchange rate has not materially affected the Companys business. At December 31, 2007 and
2006, Company and its subsidiary have the following net exposure to the exchange rate
variation:
 2007
    
    
    2006AssetsTrade receivables
    
    
    2,022
    
    
    
    1,526LiabilitiesTrade accounts payable
    
    
    (1,860
    )
    
    
    (1,293
    )Royalties payable
    
    
    (9
    )
    
    
    (24
    )153
    
    
    
    209
 The Company did not enter into derivative financial instruments for hedging or other
purposes in 2007 and 2006.
 21




---



##### 



PST ELETRÔNICA S.A.
 
 10.
    
    Risk Management and Financial InstrumentsContinued
 b)
    
    Fair value of financial instrumentsThe carrying values of cash and cash equivalents, accounts receivable and payables and
loans and financing are considered to be representative of their fair value because of the
short maturity of these instruments.
 11.
    
    Share-based PaymentOn November 23, 2007, the Company authorized a share option scheme (the Stock Option Plan)
that provides for the issuance of options to purchase up to 3% of the total common shares of
the Company. Under the Stock Option Plan, the Board of directors may, at their discretion,
grant any officers (including directors) options to subscribe for common shares. These awards
vest over a five year period starting the 13th month after the grant date of the options, with
25% of the options to vest on each of the first (from the 13th to the 24th month as from the
grant date), second (25th to 36th), third (37th to 48th) and fourth (49th to 72nd month)
anniversaries of the award date as stipulated in the Stock Option Plan. The options expire (a)
upon their full exercise, (b) after 6 years from the grant date, (c) after cancellation of the
individual contracts, (d) upon dissolution and bankruptcy of the Company and (e) upon the
employee or management termination.Until December 31, 2007, no individual contracts have been entered by the Company with any officers
or employees and, as a result, no options have been granted by the Company under the plan.
Therefore, no compensation cost was recognized in 2007 with respect to the Stock Option
Plan.
 22