Forward-Looking Statements

Certain information in this Quarterly Report on Form 10-Q would constitute forward-looking statements, including but not limited to, information relating to the future performance and financial condition of the Company, the plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans that are forward-looking in nature and involve certain risks and uncertainties. Actual results could differ materially from such forward-looking information.

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") with an overview of the business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, we discuss our results of operations for the three months ended May 31, 2009 compared to the three months ended May 31, 2008. We then provide an analysis of changes in our balance sheets and cash flows, and discuss our financial commitments in the sections entitled "Liquidity and Capital Resources". We conclude this MD&A with a discussion of "Related Party Transactions" and "Recent Accounting Pronouncements".

Unless specifically indicated otherwise, all amounts and percentages presented in our MD&A below are exclusive of discontinued operations and are in thousands, except share and per share data.

Business Overview

Audiovox Corporation ("Audiovox", "We", "Our", "Us" or "Company") is a leading international distributor in the accessory, mobile and consumer electronics industries. We conduct our business through nine wholly-owned subsidiaries:
American Radio Corp., Audiovox Electronics Corporation ("AEC"), Audiovox Accessories Corp. ("AAC"), Audiovox Consumer Electronics, Inc. ("ACE"), Audiovox German Holdings GmbH ("Audiovox Germany"), Audiovox Venezuela, C.A., Audiovox Canada Limited, Entretenimiento Digital Mexico, S. de C.V. ("Audiovox Mexico") and Code Systems, Inc. We market our products under the Audiovox® brand name and other brand names, such as Acoustic Research®, Advent®, Ambico®, Car Link®, Chapman®, Code-Alarm®, Discwasher®, Energizer®, Heco®, Incaar®, Jensen®, Mac Audio®, Magnat®, Movies2Go®, Oehlbach®, Phase Linear®, Prestige®, Pursuit®, RCA®, RCA Accessories®, Recoton®, Road Gear®, Spikemaster® and Terk®, as well as private labels through a large domestic and international distribution network. We also function as an OEM ("Original Equipment Manufacturer") supplier to several customers.

The Company is organized by product category as follows:

Electronics products include:

§ mobile multi-media video products, including in-dash, overhead, headrest and portable mobile video systems,

§ autosound products including radios, speakers, amplifiers and CD changers,

§ satellite radios including plug and play models and direct connect models,

§ automotive security and remote start systems,

§ automotive power accessories,

§ rear observation and collision avoidance systems,

§ home and portable stereos,

§ two-way radios,

§ digital multi-media products such as personal video recorders and MP3 products,

§ camcorders,

§ clock-radios,

§ digital voice recorders,

§ home speaker systems,

§ portable DVD players, and

§ digital picture frames.

Accessories products include:

§ High-Definition Television ("HDTV") antennas,

§ Wireless Fidelity ("WiFi") antennas,

§ High-Definition Multimedia Interface ("HDMI") accessories,

§ home electronic accessories such as cabling,

§ other connectivity products,

§ power cords,

§ performance enhancing electronics,

§ TV universal remotes,

§ flat panel TV mounting systems,

§ iPod specialized products,

§ wireless headphones,

§ rechargeable battery backups (UPS) for camcorders, cordless phones and portable video (DVD) batteries and accessories,

§ power supply systems, and

§ electronic equipment cleaning products.

We believe our product groups have expanding market opportunities with certain levels of volatility related to both domestic and international markets, new car sales, increased competition by manufacturers, private labels, technological advancements, discretionary consumer spending, energy and material costs and general economic conditions. Also, all of our products are subject to price fluctuations which could affect the carrying value of inventories and gross margins in the future.

Our objective is to continue to grow our business by acquiring new brands, embracing new technologies, expanding product development and applying this to a continued stream of new products that should increase gross margins and improve operating income. In addition, it is our intention to continue to acquire synergistic companies that would allow us to leverage our overhead, penetrate new markets and expand existing product categories through our business channels.

Since 2007 we have acquired and fully integrated several acquisitions including Thomson America's consumer electronics accessory business, Oehlbach accessories business, Incaar Limited, Technuity and Thomson audio visual in Canada, Mexico, China, Hong Kong and the United States. All of the purchase price allocations were finalized by the end of Fiscal 2009, details of which are included in our annual report for February 28, 2009.

Reportable Segments

We have determined that we operate in one reportable segment, the Electronics Group, based on review of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). The characteristics of our operations that are relied on in making and reviewing business decisions include the similarities in our products, the commonality of our customers, suppliers and product developers across multiple brands, our unified marketing and distribution strategy, our centralized inventory management and logistics, and the nature of the financial information used by our Executive Officers. Management reviews the financial results of the Company based on the performance of the Electronics Group.

Critical Accounting Policies and Estimates

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; sales incentives; accounts receivable reserves; inventory reserves, goodwill and other intangible assets; warranties, stock-based compensation, income taxes and the fair value measurements of financial assets and liabilities. A summary of the Company's significant accounting policies is identified in Note 1 of the Consolidated Financial Statements in the Company's Form 10-K for the fiscal year ended February 28, 2009. Since February 28, 2009, there have been no changes in our critical accounting policies or changes to the assumptions and estimates related to them.

The Company evaluates its indefinite lived intangible assets for impairment triggering events at each reporting period in accordance with FAS No. 142. Based on our evaluation, there were no triggering events and no impairment of indefinite lived intangible assets in the quarter ended May 31, 2009. Due to the continued economic volatility, including fluctuations in interest rates, growth rates and changes in demand for our products, there could be a change in the valuation of indefinite lived intangible assets when the Company conducts its annual impairment test.

Results of Operations

As you read this discussion and analysis, refer to the accompanying consolidated statements of operations, which present the results of our operations for the three months ended May 31, 2009 and 2008. We analyze and explain the differences between periods based on the specific line items of the consolidated statements of operations.

Three months ended May 31, 2009 compared to the three months ended May 31, 2008

The following tables set forth, for the periods indicated, certain statements of operations data for the three months ended May 31, 2009 and 2008.

Net Sales

                    Three Months Ended May 31,
                       2009               2008        $ Change       % Change

Electronics       $       78,998       $  113,719     $ (34,721 )        (30.5 ) %
Accessories               40,808           30,864         9,944           32.2
Total net sales   $      119,806       $  144,583     $ (24,777 )        (17.1 ) %

Electronics sales, which represented 65.9% of our net sales for the three months ended May 31, 2009 compared to 78.7% in the prior year period, decreased $34,721 or 30.5% primarily due to the decrease in sales generated from consumer electronic products as a result of our exit from product categories including large flat screen TV's, portable navigation and GMRS. Also impacting revenue of the Electronics Group was a decline in sales of our mobile category primarily related to the turmoil in the automotive industry. This turmoil was a result of bankruptcies, the weak economy and lack of credit available to consumers. We also experienced a decline in our digital product sales as a result of cautious buying by our customers. Additional declines were realized from the sale of a portion of our American Radio business and the bankruptcy of Circuit City. Offsetting these declines were increases in our satellite radio category as a result of the Sirius XM contract. Our international group also experienced declines as a result of the global economic issues partially offset by a sales increase in our Venezuelan operation.

Accessories sales, which represented 34.1% of our net sales for the three months ended May 31, 2009 compared to 21.3% in the prior year period, increased $9,944 or 32.2% primarily due to the addition of new customers, new products and the increase in sales from the changeover from analog to digital TV signal transmissions.

Sales incentive expense increased $866 to $5,849 for the three months ended May 31, 2009 compared to the prior year period as a result of an increase in sales to those accounts that require sales incentive support, principally in the Accessories Group. The increase in sales incentive expense was partially impacted by a $97 decrease in reversals. The decrease in sales incentive reversals was primarily due to a decrease of $626 in unclaimed sales incentives, partially offset by an increase of $529 in unearned sales incentives. We believe the reversal of earned but unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent and systematic method of reversing unclaimed sales incentives. These sales incentive programs are expected to continue and will either increase or decrease based upon competition and customer demands.

Gross Profit

                   Three Months Ended May 31,
                    2009                2008

Gross profit    $      22,924       $      22,515
Gross margins            19.1 %              15.6 %

Gross margins increased by 350 basis points from 15.6% to 19.1%. Gross margins were favorably impacted by increased margins in the consumer group as a result of a change in product mix with a shift towards the RCA product brands. Gross margins were further impacted by increased margins in the accessory group as a result of new products and new customers being added. Offsetting these increases were declines in our mobile group margin due to the state of the automotive industry and increased sales in our satellite category, which have lower margins. Margins for the Company were positively impacted by a decline in overhead resulting from our cost containment efforts related to the handling of our product instituted in the second half of Fiscal 2009, and a decline in inventory write downs from Fiscal 2009. During its first fiscal quarter in 2009, the Company wrote down its portable navigation category.

Operating Expenses and Operating Loss

                                              Three Months Ended May 31,
                                               2009                2008           $ Change       % Change

Operating expenses:
Selling                                    $       6,959       $       9,951     $   (2,992 )        (30.1 ) %
General and administrative                        13,661              17,649         (3,988 )        (22.6 )
Engineering and technical support                  2,072               2,804           (732 )        (26.1 )
Total operating expenses                   $      22,692       $      30,404     $   (7,712 )        (25.4 ) %

Operating income (loss)                    $         232       $      (7,889 )   $    8,121         (102.9 ) %

Operating expenses decreased $7,712 or 25.4% for the three months ended May 31, 2009, as compared to the prior year. As a percentage of net sales, operating expenses decreased to 18.9% for the three months ended May 31, 2009, from 21.0% in the prior year period. The decrease in total operating expenses was primarily due to the overhead reduction program and cost containment efforts the Company instituted in the second half of fiscal 2009. These programs addressed cost containment in all areas of the Company. Overall employee headcount was reduced by 20% year over year. Additional savings were realized in the majority of the Company's expense categories including advertising, occupancy, employee benefits, travel and entertainment and insurance partially offset by increases in professional fees. The Company continues to review and analyze its overhead in relationship to its revenue. If necessary, further revisions to our overhead structure will be implemented.

Selling expenses decreased $2,992 or 30.1% primarily due to savings associated with the overhead reduction and cost containment program. These savings include:

§ Sales salaries and benefits of $1,100 as a result of headcount reductions and temporary base salary reductions,

§ Commissions of $750 due to the decrease in net sales,

§ Advertising expenses of $720 as a result of a decline in general advertising, public relations fees and agency consulting,

§ Travel and entertainment of $330 as a result of headcount reductions and traveling constraints,

§ Trade show expenses declined $100 due to less trade shows attended.

General and administrative expenses decreased $3,988 or 22.6% over the prior year due to the following:

§ Office salaries, taxes and temporary personnel decreased $2,000 as a result of headcount declines, mandated salary reductions and a reduction in temporary personnel,

§ Benefits declined $390 due to a reduction in insurance costs and elimination of 401k and deferred compensation employer matches,

§ Occupancy and office expenses declined $540 due to cost containment efforts and closing of facilities,

§ Bad debt declined $350 as a result of recoveries during the first quarter,

§ Executive salaries decreased $140 as a result of temporary mandated salary reductions.

Engineering and technical support expenses decreased $732 or 26.1% as a result of a reduction in salaries and travel and entertainment due to the headcount reduction program, the sale of a portion of our American Radio operation and traveling constraints.

Other Income (Expense)

                                               Three Months Ended May 31,
                                               2009                  2008           $ Change       % Change

Interest and bank charges                  $        (319 )       $        (476 )   $      157          (33.0 ) %
Equity in income of equity investees                 395                   900           (505 )        (56.1 )
Other, net                                           448                   296            152           51.4
Total other income                         $         524         $         720     $     (196 )        (27.2 ) %

Interest and bank charges represent expenses for bank obligations of Audiovox Corporation and Audiovox Germany and interest for a capital lease. The decrease in interest and bank charges is primarily due to a reduction in the average monthly outstanding bank obligations of Audiovox Germany during the period.

Other income increased due to a favorable settlement of an international human resource issue and a decline in restructuring charges incurred overseas in Fiscal 2008.

Income Tax Benefit/Provision

The effective tax rate for the three months ended May 31, 2009 was a tax expense of 37.5% compared to a benefit of 27.1% in the prior period. The effective tax rate is higher than the statutory rate primarily due to the tax effect of differences between the book and tax bases of certain intangible assets not expected to reverse in the foreseeable future.

Net Income (Loss)

The following table sets forth, for the periods indicated, selected statement of
operations data beginning with operating loss from continuing operations to
reported net income (loss) and basic and diluted net income (loss) per common
share.

                                         Three Months Ended May 31,
                                         2009                2008

Operating income (loss)               $       232       $        (7,889 )
Other income, net                             524                   720
Income (loss) before income taxes             756                (7,169 )
Income tax expense (benefit)                  283                (1,946 )
Net income (loss)                     $       473       $        (5,223 )

Net income (loss) per common share:
Basic                                 $      0.02       $         (0.23 )
Diluted                               $      0.02       $         (0.23 )

Net income for the three months ended May 31, 2009 was $473 compared to a net loss of ($5,223) in the prior year. Net income per share for the three months ended May 31, 2009 was $0.02 (diluted) as compared to a net loss per share of ($0.23) (diluted) for the prior year period. Net income was impacted by sales incentive reversals of $736 ($449 after taxes) and $833 ($509 after taxes) for the three months ended May 31, 2009 and 2008, respectively.

Liquidity and Capital Resources

Cash Flows, Commitments and Obligations

As of May 31, 2009, we had working capital of $243,414 which includes cash and short-term investments of $62,327, compared with working capital of $241,080 at February 28, 2009, which included cash and short-term investments of $69,504. The decrease in cash is primarily due to an increase in accounts and vendor receivables and a decrease in accounts payable and accrued expenses. These decreases were partially offset by a decline in inventory balances. We plan to utilize our current cash position as well as collections from accounts receivable, the cash generated from our operations and the income on our investments to fund the current operations of the business. However, we may utilize all or a portion of current capital resources to pursue other business opportunities, including acquisitions.

Operating activities used cash of $6,547 for the three months ended May 31, 2009 principally due to increased vendor receivables which were paid in the second quarter.

§ The Company experienced decreased accounts receivable turnover of 4.4 during the three months ended May 31, 2009 compared to 5.5 during the three months ended May 31, 2008.

§ Inventory turnover improved to 4.2 during the three months ended May 31, 2009 compared to 3.7 during the three months ended May 31, 2008.

Investing activities used cash of $1,087 and $1,733 during the three months ended May 31, 2009 and 2008, respectively, primarily due to capital expenditures.

Financing activities used cash of $126 during the three months ended May 31, 2009, primarily from repayment of bank obligations offset by borrowings from the Euro term loan.

At May 31, 2009, the Company has a secured credit line to fund the temporary short-term working capital needs of the domestic operations. This line expired on June 30, 2009 and allows aggregate borrowings of up to $10,000 at an interest rate of Prime (or similar designations) plus 1% or LIBOR plus 5%. The line has subsequently been renewed until July 31, 2009. As of May 31, 2009 and February 28, 2009, no direct amounts were outstanding under this agreement. At May 31, 2009, the Company had $2,393 in standby letters of credit outstanding, which reduces the amount available under the secured credit line.

As of May 31, 2009, the Company had $4,550 (at par value) of an auction rate security included within its portfolio of long-term investment securities, which is collateralized by student loan portfolios, guaranteed by the United States government. This auction rate security is classified as an available-for-sale long-term investment. As of May 31, 2009, the Company recorded approximately $1,042 of unrealized losses on this auction rate note.

Due to economic pressures in the U.S. credit markets during fiscal 2010, the Company considered various valuation techniques for its auction rate security. These analyses consider, among other items, the collateral underlying the security, the creditworthiness of the issuer, the timing of the expected future cash flows, including the final maturity, and an assumption of when the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable and relevant market data, which is limited at this time. Accordingly, these securities continue to be classified as Level 3 within SFAS No. 157's hierarchy.

Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity. At May 31, 2009, such obligations and commitments are as follows:

                                                         Payments Due by Period
                                                  Less than          1-3           4-5         After
Contractual Cash Obligations        Total          1 Year          Years         Years        5 Years

Capital lease obligation (1)      $   10,798     $       521     $   1,069     $   1,147     $   8,061
Operating leases (2)                  31,255           4,483         6,697         4,248        15,827
Total contractual cash
obligations                       $   42,053     $     5,004     $   7,766     $   5,395     $  23,888



                                               Amount of Commitment Expiration per period
                                    Total
                                   Amounts        Less than          1-3           4-5         After
Other Commercial Commitments      Committed        1 Year          Years         Years        5 years

Bank obligations (3)              $    2,233     $     2,233     $       -     $       -     $       -
Stand-by letters of credit (4)         2,393           2,393             -             -             -
Debt (5)                               7,389           1,409         4,571         1,409             -
Contingent earn-out payments
(6)                                   10,421           1,382         5,721         2,630           688
Unconditional purchase
obligations (7)                       85,733          85,733             -             -             -
Total commercial commitments      $  108,169     $    93,150     $  10,292     $   4,039     $     688

1. Represents total payments (interest and principal) due under a capital lease obligation which has a current (included in other current liabilities) and long term principal balance of $77 and $5,511, respectively at May 31, 2009.

2. We enter into operating leases in the normal course of business.

3. Represents amounts outstanding under the Audiovox Germany Euro asset-based lending facility at May 31, 2009.

4. We issue standby letters of credit to secure certain bank obligations and insurance requirements.

5. Represents amounts outstanding under a loan agreement for Audiovox Germany. This amount also includes amounts due under a call-put option with certain employees of Audiovox Germany.

6. Represents contingent payments in connection with the Thomson Accessory, Oehlbach and Thomson Audio/Video acquisitions (see Note 3 of the Company's annual report).

7. Open purchase obligations represent inventory commitments. These obligations are not recorded in the consolidated financial statements until commitments are fulfilled and such obligations are subject to change based on negotiations with manufacturers.

We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and possible future public or private debt and/or equity offerings. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, and access to equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity and/or debt financings as well as from other sources. No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable when required.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Subsequent Events

None to report.

Related Party Transactions

During 1998, we entered into a 30-year capital lease for a building with our principal stockholder and chairman, which was the headquarters of the discontinued Cellular operation. Payments on the capital lease were based upon the construction costs of the building and the then-current interest rates. This capital lease was refinanced in December 2006 and the lease expires on November 30, 2026. The effective interest rate on the capital lease obligation is 8%. On November 1, 2004, we entered into an agreement to sublease the building to Personal Communication Devices, LLC (Formerly UTStarcom) for monthly payments of . . .