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 and six months ended August 31, 2009 compared to the three and six months ended August 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.

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 August 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 and six months ended August 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 August 31, 2009 compared to the three months ended August 31, 2008

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

Net Sales

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

Electronics       $        79,031       $       111,662     $ (32,631 )        (29.2 )%
Accessories                45,859                35,546        10,313           29.0
Total net sales   $       124,890       $       147,208     $ (22,318 )        (15.2 )%

Electronic sales, which represented 63.3% of our net sales for the three months ended August 31, 2009 compared to 75.9% for the three months ended August 31, 2008 decreased $32,631, or 29.2%, as the Company has exited lower profit product categories such as flat-screen TV's, portable navigation units and GMRS radios in addition to lower portable DVD sales. Further contributing to this decline were lower sales in our mobile, audio and video categories, primarily due to the weakening U.S. economy which has resulted in a steep decline in vehicle sales and lower demand for electronic products. Partially offsetting this decline were increased satellite radio sales as a result of our new agreement with Sirius/XM, and an increase in sales in our clock radio category.

Accessories sales, which represented 36.7% of our net sales for the three months ended August 31, 2009 compared to 24.1% for the three months ended August 31, 2008, increased $10,313 or 29.0% as a result of the introduction of new products, increased sales of digital antennas and new customers acquired during the quarter.

Sales incentive expense decreased $307 to $5,344 for the three months ended August 31, 2009 compared to the prior year period as a result of a decrease in sales to those accounts that require sales incentive support. The decrease in sales incentive expense also includes a $63 increase in reversals. The increase in sales incentive reversals was primarily due to an increase of $209 in unearned sales incentives as a result of large retail customers not reaching their minimum sales targets offset by a $146 decrease in unclaimed 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 August 31,
                               2009                 2008          $ Change       % Change

Gross profit              $       23,598       $       25,060     $  (1,462 )         (5.8 )%
Gross margin percentage             18.9 %               17.0 %

Our gross profit increased due to an increase in accessory product sales, which carry a higher margin than our other product lines. Also contributing to the increase in our margin were lower warehousing and assembly expenses as a result of our cost reduction programs, lower obsolescence charges and lower freight charges.

Operating Expenses and Operating Loss

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

Operating Expenses:
Selling                                    $        6,203       $        8,276     $   (2,073 )        (25.0 )%
General and administrative                         14,372               17,856         (3,484 )        (19.5 )
Engineering and technical support                   2,205                2,979           (774 )        (26.0 )
Operating expenses                                 22,780               29,111         (6,331 )        (21.7 )%

Operating income (loss)                    $          818       $       (4,051 )   $    4,869          120.2 %

Operating expenses decreased $6,331 or 21.7% for the three months ended August 31, 2009, as compared to the prior year. As a percentage of net sales, operating expenses decreased to 18.2% for the three months ended August 31, 2009, from 19.8% 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 which included a one time charge of approximately $1 million related to these efforts. These programs addressed cost containment in all areas of the Company. Overall employee headcount was reduced by 18% year over year. Additional savings were realized in the majority of the Company's expense categories including advertising, occupancy, employee benefits, professional fees and travel and entertainment. 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 $2,073 or 25.0% 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 $400 due to the decrease in net sales,

††† Advertising expenses of $490 as a result of a decline in general advertising, public relations fees and agency consulting,

††† Travel and entertainment of $140 as a result of headcount reductions and traveling constraints,

General and administrative expenses decreased $3,484 or 19.5% over the prior year due to the following:

††† Office salaries and taxes decreased $1,900 as a result of headcount reductions and a temporary base salary reduction,

††† Employee benefits declined $240 due to a reduction in health insurance costs and elimination of 401k and deferred compensation employer matches,

††† Occupancy and office expenses declined $450 due to cost containment efforts and closing of facilities,

††† Bad debt declined $180 as a result of recoveries during the second quarter,

††† Executive salaries decreased $60 as a result of temporary base salary reductions,

††† Professional fees decreased $290 due to a reduction in legal expenses and audit fees.

Engineering and technical support expenses decreased $774 or 26.0% 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 August 31,
                                                2009                   2008           $ Change       % Change

Interest and bank charges                  $         (384 )       $         (510 )   $      126          (24.7 )%
Equity in income of equity investees                  355                    509           (154 )        (30.3 )
Other, net                                            408                     89            319          358.4
Total other income, net                    $          379         $           88     $      291          330.7 %

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.

Equity in income of equity investee decreased due to decreased equity income of Audiovox Specialized Applications, Inc (ASA) as a result of decreased sales due to the weakening U.S. economy and higher energy costs.

Other income increased as a result of a reduction in foreign tax credits and the strengthening U.S. dollar partially offset by lower interest rates paid on our short term investment holdings.

Income Tax Benefit/Provision

The effective tax rate for the three months ended August 31, 2009 was a benefit of 131.8% compared to a benefit of 41.7% in the prior period. For the three months ended August 31, 2009, the effective tax rate was different from the statutory rate primarily related to discrete tax items in connection with the recognition of certain tax positions under FIN No. 48 and the tax effects of certain foreign tax matters. For the three months ended August 31, 2008, the effective tax rate was different than the statutory rate due to changes in anticipated earnings for fiscal 2009, offset by discrete tax items related to the quarterly FIN No. 48 adjustments.

Net Income (Loss)

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

                                                                  Three Months Ended August 31,
                                                                    2009                 2008

Operating income (loss)                                        $          818       $       (4,051 )
Other income, net                                                         379                   88
Income (loss) from operations before income taxes                       1,197               (3,963 )
Income tax (benefit) expense                                           (1,578 )             (1,652 )
Net income (loss)                                              $        2,775       $       (2,311 )

Net income (loss) per common share:
Basic                                                          $         0.12       $        (0.10 )
Diluted                                                        $         0.12       $        (0.10 )

Net income for the three months ended August 31, 2009 was $2,775 compared to a net loss of $2,311 in the prior year period. Net income per share for the three months ended August 31, 2009 was $0.12 (diluted) as compared to net loss per share of $0.10 (diluted) for the prior year period. Net income (loss) was favorably impacted by sales incentive reversals of $569 ($569 after taxes) and $506 ($309 after taxes) for the three months ended August 31, 2009 and 2008, respectively.

Six months ended August 31, 2009 compared to the six months ended August 31, 2008

The following tables set forth, for the periods indicated, certain statement of operations data for the six months ended August 31, 2009 and 2008.

Net Sales

                      Six Months Ended August 31,
                       2009                 2008          $ Change       % Change

Electronics       $      158,030       $      225,381     $ (67,351 )        (29.9 )%
Accessories               86,667               66,410        20,257           30.5
Total net sales   $      244,697       $      291,791     $ (47,094 )        (16.1 )%

Electronics sales, which represented 64.6% of our net sales for the six months ended August 31, 2009 compared to 77.2% in the prior year period, decreased $67,351 or 29.9% as the Company has exited lower profit product categories such as flat-screen TV's, portable navigation units and GMRS radios in addition to lower portable DVD sales. Further contributing to this decline were lower sales in our mobile, audio and video categories, primarily due to the weakening U.S. economy which has resulted in a steep decline in vehicle sales and lower demand for electronic products, and the loss of a major customer. Partially offsetting this decline were increased satellite radio sales as a result of our new agreement with Sirius/XM and increased sales in the clock radio and camcorder categories.

Accessories sales, which represented 35.4% of our net sales for the six months ended August 31, 2009 compared to 22.8% in the prior year period, increased $20,257 or 30.5% as a result of the introduction of new products, increased product sales of digital antennas and new customers.

Sales incentive expense increased $559 to $11,193 for the six months ended August 31, 2009 compared to the prior year period as a result of an increase in sales to those accounts that require sales incentive support. The increase in sales incentive included a $34 decrease in reversals. The decrease in sales incentive reversals was primarily due to a decrease of $772 in unclaimed sales incentives partially offset by a $738 increase in unearned sales incentives as a result of large retail customers not reaching their minimum sales targets. 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

                              Six Months Ended August 31,
                               2009                 2008          $ Change       % Change

Gross profit              $       46,523       $       47,575     $  (1,052 )         (2.2 )%
Gross margin percentage             19.0 %               16.3 %

Gross margins increased by 270 basis points from 16.3% to 19.0%. Gross margins were favorably impacted by lower costs as a result of our cost reduction program, reduced obsolescence charges and increased sales in our accessory group, which has higher margins. Also positively impacting our gross margin was the absence of the charge to exit the portable navigation market taken during the three months ended May 31, 2008.

Operating Expenses and Operating Income (Loss)

                                               Six Months Ended August 31,
                                               2009                 2008           $ Change       % Change

Operating Expenses:
Selling                                    $      13,162       $        18,227     $  (5,065 )        (27.8 )%
General and administrative                        28,033                35,505        (7,472 )        (21.0 )
Engineering and technical support                  4,277                 5,783        (1,506 )        (26.0 )
Operating expenses                         $      45,472       $        59,515     $ (14,043 )        (23.6 )%

Operating income (loss)                    $       1,051       $       (11,940 )   $  12,991          108.8 %

Operating expenses decreased $14,043 or 23.6% for the six months ended August 31, 2009, as compared to the prior year. As a percentage of net sales, operating expenses decreased to 18.6% for the six months ended August 31, 2009, from 20.4% 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 which included a one time charge of approximately $1 million related to these efforts. These programs addressed cost containment in all areas of the Company. Overall employee headcount was reduced by 18% 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, and 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 $5,065 or 27.8% primarily due to savings associated with the overhead reduction and cost containment program. These savings include:

††† Sales salaries, taxes and benefits of $2,180 as a result of headcount reductions and temporary base salary reductions,

††† Commissions of $1,150 due to the decrease in net sales,

††† Advertising expenses of $1,200 as a result of a decline in general advertising, public relations fees and agency consulting,

††† Travel and entertainment of $470 as a result of headcount reductions and traveling constraints,

††† Trade show expenses declined $70 due to less trade shows attended.

General and administrative expenses decreased $7,472 or 21.0% over the prior year due to the following:

††† Office salaries, taxes and temporary personnel decreased $3,830 as a result of headcount declines, temporary base salary reductions and a reduction in temporary personnel,

††† Benefits declined $810 due to a reduction in health insurance costs and elimination of 401k and deferred compensation employer matches,

††† Occupancy and office expenses declined $990 due to cost containment efforts and closing of facilities,

††† Bad debt declined $530 as a result of recoveries during the period,

††† Executive salaries decreased $200 as a result of temporary base salary reductions,

††† Travel and entertainment of $330 as a result of traveling constraints,

††† Professional fees of $240 as a result of a reduction in legal expenses and audit fees.

Engineering and technical support expenses decreased $1,506 or 26.0% 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)

                                                Six Months Ended August 31,
                                               2009                   2008            $ Change       % Change

Interest and bank charges                  $        (703 )       $          (986 )   $      283          (28.7 )%
Equity in income of equity investees                 750                   1,410           (660 )        (46.8 )
Other, net                                           855                     385            470          122.1
Total other income, net                    $         902         $           809     $       93           11.5 %

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.

Equity in income of equity investee decreased due to decreased equity income of Audiovox Specialized Applications as a result of decreased sales due to the weakening U.S. economy.

Other income increased as a result of a reduction in foreign tax credits and the strengthening U.S. dollar partially offset by lower interest paid on our short term investment holdings.

Income Tax Benefit/Provision

The effective tax rate for the six months ended August 31, 2009 was a benefit of 66.3% compared to a benefit of 32.3% in the prior period. For the six months . . .