Results of Operations
   The following table shows, for the periods indicated, selected consolidated
statements of operations data expressed as a percentage of net sales:

                                                        Three months ended
                                                            March 31,
                                                         2008         2009
          Net sales                                      100.0 %      100.0 %
          Cost of goods sold                              65.5         69.4

          Gross profit                                    34.5         30.6
          Operating expenses:
          Sales and marketing                             17.3         15.6
          General and administrative                      13.1         14.0
          Research and development                         3.5          3.3

          Total operating expenses                        33.9         32.9

          Operating income (loss)                          0.6         (2.3 )
          Interest and other expense (income), net         1.1         (2.5 )

          Income (loss) before income tax                 (0.5 )        0.2
          Income tax expense                                 -            -

          Net income (loss)                               (0.5 )%       0.2 %

Cost of goods sold primarily consists of product costs associated with the purchase of Rockford's products as well as warranty, warehousing, freight-in and customer service expenses.
Sales and marketing expenses primarily consist of salaries, sales commissions, costs of advertising, trade show costs and freight-out expenses.
General and administrative expenses primarily consist of salaries, facilities and other costs of Rockford's accounting, finance, management information systems, administrative and executive departments, as well as legal, accounting and other professional fees.
Research and development expenses primarily consist of salaries associated with research and development personnel as well as prototyping and other costs related to new product development.
Geographic Distribution of Sales
Sales by geographic region were as follows:

                                          Three months ended
                                               March 31,
                                           2008          2009
                                            (In thousands)

                       Region: (1)
                       United States    $   15,115     $ 12,568
                       Other Americas        1,476          967
                       Europe                1,049          430
                       Asia                    805          501

                       Total sales      $   18,445     $ 14,466

(1) Sales are attributed to geographic regions based on the location of customers. No single foreign country accounted for greater than 10% of sales.

In the following discussion, certain increases or decreases may differ due to rounding Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Net Sales. Net sales decreased by $4.0 million, or 21.6%, to $14.5 million for the three months ended March 31, 2009, from $18.4 million for the three months ended March 31, 2008. The decrease in sales was primarily attributable to lower sales of Rockford's Lightning Audio branded products, lower sales to international customers, higher discounts due to end-of-life sales and lower royalty revenue. These reductions were partially offset by lower returns. Net sales for the three months ended March 31, 2009 also included sales of end-of-life product and initial pipeline shipments of Rockford's 2009 new product line. OEM royalty revenue for the three months ended March 31, 2009 and 2008 were $0.3 million and $1.7 million, respectively.
U.S. sales decreased by $2.5 million, or 17.1%, to $12.6 million for the three months ended March 31, 2009, from $15.1 million for the three months ended March 31, 2008. International sales decreased by $1.4 million, or 42.3%, to $1.9 million for the three months ended March 31, 2009, from $3.3 million for the three months ended March 31, 2008. The decrease in international sales was primarily due to across the board reductions in sales, which were significantly aggravated by a receivership for one of Rockford's European Distributors.
Gross Profit. Gross profit decreased by $1.9 million, or 30.4%, to $4.4 million for the three months ended March 31, 2009 from $6.4 million for the three months ended March 31, 2008. As a percent of sales, gross profit decreased to 30.6% for the three months ended March 31, 2009, from 34.5% for the three months ended March 31, 2008. The decrease in gross profit as a percent of net sales is primarily due to lower royalty revenue as a percent of net sales and higher discounts on end-of-life products. This decline was partially offset by lower product costs.
Sales and Marketing Expenses. Sales and marketing expenses decreased by $0.9 million, or 29.4%, to $2.3 million for the three months ended March 31, 2009 from $3.2 million for the three months ended March 31, 2008. As a percent of sales, sales and marketing expenses decreased to 15.6% for the three months ended March 31, 2009 from 17.3% for the three months ended March 31, 2008. The decrease in sales and marketing expenses was primarily due to lower sales commissions and reduced outbound freight expenses resulting from lower sales.
General and Administrative Expenses. General and administrative expenses decreased by $0.4 million or 15.9%, to $2.0 million for the three months ended March 31, 2009 from $2.4 million for the three months ended March 31, 2008. As a percent of sales, general and administrative expenses increased to 14.0% for the three months ended March 31, 2009 from 13.1% for the three months ended March 31, 2008. The decrease in general and administrative expenses is due in large part to lower personnel related expenses and professional fees.
Research and Development Expenses. Research and development expenses decreased by $0.2 million, or 24.6%, to $0.5 million for the three months ended March 31, 2009 from $0.6 million for the three months ended March 31, 2008. As a percent of sales, these expenses decreased to 3.3% for the three months ended March 31, 2009, from 3.5% for the three months ended March 31, 2008. The decrease in research and development expenses is primarily related to the costs incurred in 2008 associated with the launch of Rockford's 2008 new products. Although Rockford also introduced a significant number of new products in 2009, the outsourced model allowed Rockford to reduce research and development expenses relating to the 2009 new products.
Operating Income (Loss). Operating income (loss) declined by $0.5 million, to an operating loss of $0.3 million for the three months ended March 31, 2009 from $0.1 million of operating income for the three months ended March 31, 2008. As a percent of sales, operating income (loss) declined to an operating loss of 2.3% for the three months ended March 31, 2009, from an operating income of 0.6% for the three months ended March 31, 2008. This decline in operating income (loss) is primarily due to reduced sales partially offset by lower operating expenses.
Interest and Other Expense (Income), Net. Interest and other expense (income), net, primarily consists of interest expense and other gains and losses. Interest and other expense (income), net, improved by $0.6 million or 275.8%, to income of $0.4 million for the three months ended March 31, 2009 from an expense from $0.2 million for the three months ended March 31, 2008. The improvement is primarily attributable to the gain of approximately $0.5 million arising from the repurchase of $2.5 million face value of convertible notes and to lower interest expense in 2009 due to lower effective borrowing rates.
Income Tax Expense. Income tax expense was zero expense for the three months ended March 31, 2009 and 2008. The effective income tax rates were 0.0% for the three months ended March 31, 2009 and 2008. Rockford did not record any tax expense (benefit)

on income (loss) in the first quarter of 2009 and 2008 for financial reporting purposes. Rockford continues to maintain a valuation allowance reserve against all of its net deferred tax assets which include net operating loss carryforwards. The available loss carryforwards are likely to offset virtually all current period income tax expense until such time, if ever, that management concludes that some portion of the reserved deferred tax asset becomes more likely than not recoverable.
Liquidity and Capital Resources
Rockford has financed its business primarily using existing capital, cash flows from operations, and bank borrowings. Rockford's cash flow provided by operations was $2.4 million for the three months ended March 31, 2009 compared to $0.5 million of cash provided by operations for the three months ended March 31, 2008. A reduction in inventory was the primary source of cash for Rockford during the first three months of 2009. An increase in accounts receivable was the primary use of cash during the first three months of 2009.
Rockford entered into an asset-based credit facility with Wachovia Capital Financial Corporation (Western) as Agent and Wachovia Bank, National Association as Arranger on March 29, 2004 and as amended most recently on July 30, 2008. This credit facility, as amended, is a $20 million asset-based credit facility, has a term expiring on March 24, 2011, and is collateralized by substantially all of Rockford's assets. Under the agreement, pricing options based on LIBOR and prime rates are available to Rockford. The LIBOR and prime interest rate options were 2.5% and 3.75% at March 31, 2009, respectively. As of March 31, 2009, Rockford was in compliance with all applicable covenants. The availability under the credit facility at March 31, 2009 was approximately $3.9 million in excess of the outstanding balance of $7.2 million.
At March 31, 2009, Rockford had outstanding $5.0 million of 4.5% convertible senior subordinated secured notes due 2009 and warrants to purchase 534,073 shares of common stock at $3.73 per share. These items were outstanding under agreements effective on June 10, 2004 and as amended on November 12, 2004. The noteholders had the right to convert the notes into Rockford's common stock at any time before their redemption, which at latest would be on the scheduled maturity date of June 10, 2009. The conversion price is $4.61 per share. The noteholders also have a second priority lien on certain Rockford assets.
In January of 2009, Rockford repurchased $2.5 million of the convertible notes and 237,500 associated warrants for a total price of approximately $2.0 million. In connection with this repurchase Rockford recorded a gain to interest and other expense (income), net of approximately $0.5 million, net of fees and write-off of the related portion of unamortized debt issuance costs. The repurchase reduced the outstanding principal of the notes from $7.5 million to $5.0 million.
In April of 2009, Rockford agreed with the holder of the remaining $5.0 million of convertible notes to amend the terms of the convertible notes. The maturity date of June 10, 2009 is amended and the notes will now be repaid in four equal payments of $1.25 million on June 10, 2009, December 10, 2009, June 10, 2010 and December 10, 2010. As of June 10, 2009 the interest rate will increase to 10% on the unpaid balance and the outstanding warrants and the conversion option will each expire in accordance with their original terms. Rockford may repay early any or all of the outstanding principal without penalty.
Rockford anticipates, based on its cash flow forecast, that cash flow from operations at the expected level of operations for 2009 and available borrowings under its credit facility will be adequate to meet Rockford's requirements for current capital expenditures, working capital and interest payments for the next twelve months. Rockford does not expect asset sales will be a significant source of cash in 2009 or 2010.
As amended, Rockford will be required to pay $2.5 million of the remaining outstanding convertible notes during the balance of 2009. Based on current cash-flow forecasts Rockford anticipates that it will have available borrowings under its credit facility to complete this repayment. This availability could be impacted by adverse economic events such as the credit crisis suffered at the end of 2008 and early 2009 or by a deterioration in Rockford's operations or financial performance.
If Rockford is unable to meet its liquidity needs, it could be forced to seek one or more financing alternatives and to consider changes in its operations. Financing alternatives could include reducing or delaying capital expenditures, borrowing additional funds, selling equity securities, restructuring indebtedness, selling additional assets, reducing expenditures for new product development, and cutting other costs. Operational changes could include reductions in employee compensation and benefits, evaluation of Rockford's status as a public company in order to reduce costs, reductions in working capital needs, changes in distribution strategies and potential exit strategies. Some of these alternatives and changes might not prove to be available on acceptable terms; others may substantially interfere with Rockford's business and prospects. Rockford cannot give assurance that satisfactory alternatives or changes could be put into effect on reasonable terms. If it needs to take some or all of these actions, but is not able to do so, Rockford

may not be able to satisfy its liquidity needs. Under such circumstances, Rockford might not be able to continue its business as currently anticipated.
Rockford had working capital of $6.1 million at March 31, 2009, compared to $5.9 million at December 31, 2008. The significant components of working capital at March 31, 2009 include:
• Rockford had no cash and cash equivalents at March 31, 2009 and December 31, 2008. Due to the daily sweep of cash by Wachovia Capital, described below, Rockford has reclassified cash and cash equivalents to net against its current debt balance.

• Rockford's net accounts receivable were $15.0 million at March 31, 2009 compared to $12.9 million at December 31, 2008. The increase in accounts receivable balances is primarily due to increased sales late in the first quarter of 2009.

• Rockford's inventory position decreased from $13.0 million at the end of 2008 to $7.9 million at March 31, 2009. This inventory decrease was primarily due to outsourcing, improved inventory turns, and a reduction in end of life inventory.

• Accounts payable decreased $0.4 million, from $4.0 million at December 31, 2008 to $3.6 million at March 31, 2009. This decrease was primarily due to lower inventory purchases during the first quarter of 2009.

The Wachovia Capital credit facility requires that Rockford maintain blocked lock box accounts, whereby Wachovia Capital takes possession of all cash receipts on a daily basis and these amounts are applied to reduce Rockford's outstanding debt. In accordance with EITF 95-22: Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement, Rockford has recorded the $7.2 million and $7.5 million outstanding balance as at March 31, 2009 and December 31, 2008, respectively, on the Wachovia Capital credit facility as short term. The credit facility matures on March 24, 2011, and Rockford currently expects to maintain the facility until it matures.
Investing activities used $0.1 million of cash for the three months ended March 31, 2009 and used $0.1 million of cash for the three months ended March 31, 2008. Capital expenditures, the primary use of cash from investing activities, were $0.1 million for the three months ended March 31, 2009 versus $0.2 million for the three months ended March 31, 2008. Rockford's capital spending is primarily in tooling for specific product lines, and computer hardware and software to support operations. Rockford does not anticipate significant changes in its future capital spending requirements, other than additional expenditures that may arise from future OEM development opportunities.
As of March 31, 2009, Rockford was not involved in any unconsolidated Variable Interest Entity (VIE) transactions.
Inflation. Inflation has not had a significant impact on Rockford's operations since it operates in a market that requires continuing price decreases and Rockford has historically been able to insist on continuing price decreases from its suppliers. Rising metal prices and increasing transportation costs had an impact on Rockford's operations during much of 2008, but these impacts have moderated late in 2008 and during 2009. Depending upon future cost trends, increases in commodity and transportation costs may have an impact on Rockford's operations in 2009. Rockford sources a significant and increasing portion of its products and parts from China. Although most of its purchases from China are priced in dollars, the suppliers' ability to maintain or reduce current prices may be affected by changes in China's exchange rate policy and by changes in the exchange rate.
Contractual Obligations
Rockford did not have any material outstanding noncancelable purchase obligations at March 31, 2009. Several of Rockford's sourcing agreements require Rockford to place monthly purchase orders, but do not require a minimum purchase quantity or dollar amount. Rockford does not anticipate significant liability in connection with these contractual requirements. Critical Accounting Policies and Estimates There were no material changes to Rockford's critical accounting policies and estimates during the three months ended March 31, 2009. For further information on Rockford's critical accounting policies and estimates, refer to the annual report on Form 10-K for the year ended December 31, 2008 which was filed with the SEC on April 15, 2009.