• acquire new customers in historically strong regions;

• continue our expansion into new regions, Asia in particular;

• continue to develop industry-leading technologies and products; and

• continue to evaluate potential merger and acquisition opportunities that may enhance our business.

We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities and revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, warranties, inventory valuation, our review for impairment of long-lived assets, intangible assets and goodwill, income taxes and stock-based compensation expense. Actual results may differ from these judgments, estimates and assumptions, and they may be adjusted as more information becomes available. Any adjustment may be significant. An accounting policy is deemed to be critical if it requires an accounting estimate based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. For further information regarding critical accounting policies and estimates, other than stock-based compensation discussed below, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2007. Stock-Based Compensation
We account for our stock-based compensation plans under SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). Stock-based compensation expense for each employee and director is presented in the same income statement caption as their cash compensation. We recorded $1.0 million and $1.1 million of total pre-tax stock-based compensation expense during the three months ended September 30, 2008 and 2007, respectively. We recorded $3.3 million and $2.6 million of total pre-tax stock-based compensation expense during the nine months ended September 30, 2008 and 2007, respectively.
Stock-based compensation expense by income statement caption for the three and nine months ended September 30, 2008 and 2007 was the following:

                                                 Three Months Ended                Nine Months Ended
                                                    September 30,                    September 30,
(In thousands)                                  2008             2007             2008            2007
Cost of sales                                 $      4         $      9        $       13        $    22
Research and development                            76              122               281            307
Selling, general and administrative                916              971             3,013          2,254

Stock-based compensation expense before
income taxes                                  $    996         $  1,102        $    3,307        $ 2,583

At September 30, 2008, there was $3.4 million of unrecognized pre-tax stock-based compensation expense related to non-vested stock options, which we expect to recognize over a weighted-average life of 2.3 years. Selling, general and administrative expense ("SG&A") includes pre-tax stock-based compensation related to restricted stock awards granted to outside directors of $0.1 million and $0.2 million for the three months ended September 30, 2008 and 2007, respectively. SG&A for the nine months ended September 30, 2008 and 2007 includes pre-tax stock-based compensation related to restricted stock awards granted to outside directors of $0.5 million and $0.5 million, respectively. We issue restricted stock awards to the outside directors for services performed. Compensation expense for the restricted stock awards is recognized on a straight-line basis over the requisite service period of one year.
During the first quarter of 2008, as part of our annual compensation review cycle, the Compensation Committee of the Board of Directors granted 115,926 shares of restricted stock to our executives under the 2006 Stock Incentive Plan. These awards were granted to assist us in meeting our performance and retention objectives. Each executive's grant is subject to a three-year vesting period. The stock-based compensation expense included in SG&A related to this award was $0.3 million and $0.7 million for the three and nine months ended September 30, 2008, respectively.

In accordance with SFAS 123R, compensation expense related to restricted stock awards is determined based on the fair value of the shares awarded on the grant date. We determined the fair value of the restricted stock utilizing the average of the high and low trade prices of our Company's shares on the grant date. As of September 30, 2008, we expect to recognize $2.4 million in unrecognized pre-tax compensation expense related to non-vested restricted stock awards over a weighted-average life of 2.0 years.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the utilization of highly subjective assumptions, including the expected life and forfeiture rate of the share-based payment awards and stock price volatility. Management determined that historical volatility calculated based on our actively traded common stock is a better indicator of expected volatility and future stock price trends than implied volatility. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
We do not believe it is reasonably likely that there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with our estimates and assumptions we may be exposed to material stock-based compensation expense. Refer to Note 2 captioned "Stock-Based Compensation" included in the "Notes to the Consolidated Financial Statements" for additional disclosure regarding stock-based compensation expense. Results of Operations
Our results of operations as a percentage of net sales for the three and nine months ended September 30, 2008 and 2007 were as follows:

                                                      Three Months Ended September 30,                Nine Months Ended September 30,
                                                         2008                   2007                    2008                   2007
Net sales                                                    100 %                   100 %                  100 %                   100 %
Cost of sales                                               67.4                    62.7                   66.0                    63.8

Gross profit                                                32.6                    37.3                   34.0                    36.2
Research and development expenses                            2.6                     3.0                    3.0                     3.2
Selling, general and administrative expenses                22.3                    25.2                   24.8                    24.0

Operating expenses                                          24.9                    28.2                   27.8                    27.2

Operating income                                             7.7                     9.1                    6.2                     9.0
Interest income, net                                         1.1                     1.3                    1.3                     1.0
Other income (expense), net                                 (0.5 )                   0.0                   (0.1 )                   0.0

Income before income taxes                                   8.3                    10.4                    7.4                    10.0
Provision for income taxes                                  (3.1 )                  (3.3 )                 (2.6 )                  (3.2 )

Net income                                                   5.2 %                   7.1 %                  4.8 %                   6.8 %

Three Months Ended September 30, 2008 versus Three Months Ended September 30, 2007:
Net sales by our Business and Consumer lines for the three months ended September 30, 2008 and 2007 were as follows:

                                   2008                                2007
                       $ (millions)       % of total       $ (millions)       % of total
    Net sales:
    Business          $         61.3             80.1 %   $         55.9             81.0 %
    Consumer                    15.2             19.9 %             13.1             19.0 %

    Total net sales   $         76.5            100.0 %   $         69.0            100.0 %

Overview
Net sales for the third quarter of 2008 were $76.5 million, an increase of 11% compared to $69.0 million for the third quarter of 2007. Net income for the third quarter of 2008 was $4.0 million or $0.28 per diluted share compared to $4.9 million or $0.32 per diluted share for the third quarter of 2007. Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 80% of net sales in the third quarter of 2008 compared to approximately 81% in the third quarter of 2007. Net sales in our Business lines for the third quarter of 2008 increased by 10% to $61.3 million from $55.9 million in the third quarter of 2007. This increase in sales resulted primarily from an increase in the volume of remote control sales with our subscription broadcast customers. Sales in the third quarter of 2008 benefited from an increased share with our existing customers as well as the digital signal compliance deadline coming early next year, as we began shipping a new remote control that pairs with digital-to-analog converter boxes. Additionally, the roll out of advanced functions such as digital video recording ("DVR"), video-on-demand ("VOD"), and high definition television ("HDTV") continues. We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration continues to increase. We expect Business category revenue to range between $233.4 million and $236.4 million for the full year 2008.
Net sales in our Consumer lines (One For All® retail, private label, custom installers and direct import) were approximately 20% of net sales for the third quarter of 2008 compared to approximately 19% for the third quarter of 2007. Net sales in our Consumer lines increased by 16% to $15.2 million for the third quarter of 2008, from $13.1 million in the third quarter of 2007. CEDIA sales increased by $2.1 million compared to the third quarter of 2007, primarily due to the launch of a new product that occurred in the second quarter of 2008. North American retail sales increased by $0.8 million compared to the third quarter of 2007, as a result of a new partnership agreement with a distributor in the U.S market. Partially offsetting these increases were international retail sales, which decreased by $0.4 million compared to the third quarter of 2007, primarily due to the downturn of the economy in the United Kingdom. Private label sales decreased $0.3 million, to $0.5 million in the third quarter of 2008 from $0.8 million in the third quarter of 2007. This was driven by a decline in the volume of remote control sales to our private label partners. We expect Consumer category revenue to range between $55 million and $58 million for the full year 2008
Gross profit for the third quarter of 2008 was $24.9 million compared to $25.7 million for the third quarter of 2007. Gross profit as a percent of sales for the third quarter of 2008 was 32.6% compared to 37.3% for the same period in the prior year. The decrease in gross profit as a percentage of net sales was primarily attributable to product mix within our subscription broadcasting business, as well as a shift towards some of our less profitable business lines. The global economy experienced a significant downturn in the third quarter of 2008, and as a result, our customers tended to purchase lower cost and lower margin products. This change in mix resulted in a 4.3% decrease in the gross profit rate. Additionally, in the third quarter of 2008, freight expense increased by $0.3 million, as a result of air shipments for some newly launched products. This increased freight cost reduced the gross profit rate by 0.3%. Research and development expenses decreased 4% from $2.1 million in the third quarter of 2007 to $2.0 million in the third quarter of 2008, relatively consistent with prior year levels. We expect research and development expenses to remain near the current quarter level during the fourth quarter of 2008. Selling, general and administrative expenses decreased 2% from $17.4 million in the third quarter of 2007 to $17.0 million in the third quarter of 2008. The strengthening of the Euro compared to the U.S. Dollar resulted in an increase of $0.7 million. Net of this unfavorable currency effect, expenses decreased by $1.1 million. Employee bonus expense decreased $1.5 million, and long-term incentive compensation expense decreased by $0.4 million. These decreases were partially offset by higher tradeshow expense, which increased by $0.3 million, depreciation expense, which increased by $0.2 million, and freight and handling expenses, which increased $0.2 million due to higher sales volume. We expect that selling, general and administrative expenses to range between $67.5 million and $68.1 million for the full year 2008.

In the third quarter of 2008, we recorded $0.9 million of net interest income compared to $0.9 million in the third quarter of 2007. We expect net interest income to range between $3.2 million and $3.6 million for the full year 2008. In the third quarter of 2008, net other expense was $0.4 million as compared to net other income of $13 thousand for the third quarter of 2007. Approximately $0.4 million of net other expense in the third quarter of 2008 was the result of a foreign exchange loss, compared to a foreign exchange gain of $10 thousand for the third quarter of 2007.
We recorded income tax expense of $2.3 million in the third quarter of 2008 compared to $2.3 million in the third quarter of 2007. Our effective tax rate was 37.0% in the third quarter of 2008 compared to 31.4% in the third quarter of 2007. The increase in our effective tax rate is due primarily to the expiration of the federal research and development tax credit statue at the end of 2007, as well as an increase in the proportion of income earned in higher tax rate jurisdictions. We expect that our fourth quarter effective tax rate will decrease to 30.5% to 32.5% due to the reenactment of the federal research and development tax credit statue in October 2008. We estimate that our effective tax rate for the full year 2008 will range from 33% to 35%.
Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007:
Net sales by our Business and Consumer lines for the nine months ended September 30, 2008 and 2007 were as follows:

                                    2008                               2007
                       $ (millions)       % of total      $ (millions)       % of total
     Net sales:
     Business          $       166.4             79.8 %   $       166.7             80.7 %
     Consumer                   42.0             20.2 %            39.8             19.3 %

     Total net sales   $       208.4            100.0 %   $       206.5            100.0 %

Overview
Net sales for the nine months ended September 30, 2008 were $208.4 million, an increase of 1% compared to $206.5 million for the nine months ended September 30, 2007. Net income for the nine months ended September 30, 2008 was $10.0 million or $0.68 per diluted share compared to $14.1 million or $0.93 per diluted share for the nine months ended September 30, 2007. Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 80% of net sales for the nine months ended September 30, 2008 compared to approximately 81% for the nine months ended September 30, 2007. Net sales in our Business lines for the nine months ended September 30, 2008 decreased slightly to $166.4 million from $166.7 million for the same period last year. This decrease in sales resulted primarily from a decrease in average selling price, partially offset by increased volume of remote control sales with our subscription broadcasting customers. Sales in the first nine months of 2007 were favorably impacted by the mid-year Open Cable Application Platform ("OCAP") compliance deadline, as some of our key customers ordered additional product ahead of the deadline. Sales in the first nine months of 2008 benefited from increased share with our existing customers as well as the digital signal compliance deadline coming early next year, as we began shipping a new remote control that pairs with digital-to-analog converter boxes. Additionally, the roll out of advanced functions such as digital video recording
("DVR"), video-on-demand ("VOD"), and high definition television ("HDTV")
continues. We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration continues to increase. We expect Business category revenue to range between $233.4 million and $236.4 million for the full year 2008. Net sales in our Consumer lines (One For All® retail, private label, custom installers and direct import) were approximately 20% of net sales for the nine months ended September 30, 2008 compared to approximately 19% for the nine months ended September 30, 2007. Net sales in our Consumer lines for the nine months ended September 30, 2008 increased by 6% to $42.0 million from $39.8 million for the same period last year. CEDIA sales in the first nine months of 2008 increased by $1.9 million compared to the same period of 2007, primarily due to the launch of

a new product that occurred in the second quarter of 2008. International retail sales increased 2% to $33.3 million for the nine months ended September 30, 2008 from $32.7 million for the nine months ended September 30, 2007. This increase was primarily attributable to the strengthening of the Euro compared to the U.S. Dollar. The impact of the stronger currency resulted in an increase in net sales of approximately $1.1 million. Net of this positive currency effect, international retail sales decreased $0.4 million, mainly due to light demand in the United Kingdom market. North American retail sales increased by $0.5 million compared to the same period of 2007, as a result of a new partnership agreement with a distributor in the U.S market. These increases were partially offset by a decrease in private label sales, which decreased $0.9 million, from $2.4 million for the nine months ended September 30, 2007 to $1.5 million for the nine months ended September 30, 2008, reflecting softening demand in the consumer category. We expect Consumer category revenue to range between $55 million and $58 million for the full year 2008.
Gross profit for the nine months ended September 30, 2008 was $70.9 million compared to $74.7 million for the nine months ended September 30, 2007. Gross profit as a percentage of net sales for the nine months ended September 30, 2008 was 34.0% compared to 36.2% for the nine months ended September 30, 2007. The decrease in gross profit as a percentage of net sales was primarily attributable to product mix within our subscription broadcasting business, partially offset by a shift in mix towards our higher-margin consumer lines. This change in mix resulted in a 3.1% decrease in the gross profit rate. Included in this mix calculation is an increase in royalty revenue of $1.1 million which favorably impacted the gross margin rate by 0.3%. Partially offsetting the decrease in the gross profit rate was a reduction in freight, handling and duty expense of $1.3 million, which increased the gross profit rate by 0.7%. In the first nine months of 2008, there was a decrease in the percentage of units shipped by air compared to the first nine months of 2007. The strengthening of the Euro compared to the U.S. Dollar had a favorable effect on gross profit of $0.9 million, and increased the gross profit rate by 0.3%.
Research and development expenses decreased 5% from $6.7 million in the nine months ended September 30, 2007 to $6.3 million in the nine months ended September 30, 2008. The decrease is due to the completion of the latest development phase for the Nevo® platform in late 2007. We expect research and development expenses to remain near current levels for the remaining quarters of 2008.
Selling, general and administrative expenses increased 4% from $49.6 million in the nine months ended September 30, 2007 to $51.6 million in the nine months ended September 30, 2008. The strengthening of the Euro compared to the U.S. Dollar resulted in an increase of $3.0 million. Net of the currency effect, selling, general and administrative expenses decreased by $1.0 million. The decrease was mainly in employee bonus expense, which decreased by $1.5 million. Long-term incentive compensation expense decreased by $0.9 million and advertisement expense decreased by $0.3 million. These decreases were partially offset by an increase in employee stock-based compensation, which increased by $0.7 million due to grants that occurred in the first quarter of 2008. Depreciation expense increased by $0.5 million, related to the leasehold improvements at the company's headquarters which were completed in January 2008. Finally, commission expense was $0.5 million higher than last year as we used more third-party distributors to sell our products. We expect that selling, general and administrative expenses to range between $67.5 million and $68.1 million for the full year 2008.
In the nine months ended September 30, 2008, we recorded $2.6 million of net interest income compared to $2.2 million during the nine months ended September 30, 2007. This increase was due to higher money market rates and a higher average cash balance in Europe. We expect net interest income to range between $3.2 million and $3.6 million for the full year 2008.
For the nine months ended September 30, 2008, net other expense was $0.2 million as compared to net other income of $0.1 million for the nine months ended September 30, 2007. Approximately $0.2 million of net other expense in the nine months ended September 30, 2008 was the result of a foreign exchange loss, compared to a foreign exchange gain of $0.1 million for the nine months ended September 30, 2007.
We recorded income tax expense of $5.4 million for the nine months ended September 30, 2008 compared to $6.7 million for the nine months ended September 30, 2007. Our effective tax rate was 35.1% during the nine months ended September 30, 2008 compared to 32.1% during the nine months ended September 30, 2007. The increase in our effective tax rate is due primarily to the expiration of the federal research and development tax credit statute at the end of 2007, as well as, an increase in the proportion of income earned in higher tax rate jurisdictions. We expect that our fourth quarter effective tax rate will decrease to 30.5% to 32.5% due to the

reenactment of the federal research and development tax credit statue in October 2008. We estimate that our effective tax rate for the full year 2008 will range from 33% to 35%.

Liquidity and Capital Resources
Sources and Uses of Cash:

                                                            Nine months ended            (Decrease)/            Nine months ended
(In thousands)                                             September 30, 2008         Increase in cash         September 30, 2007
Net cash provided by operating activities                   $         18,145           $        1,527           $         16,618
Net cash used for investing activities                                (5,861 )                 (1,699 )                   (4,162 )
. . .