• Our sales growth in the first six months of 2009 was the result of strong demand from customers in our business category, due in part to the continuation of the upgrade cycle from analog to digital, consumer demand for advanced-function offerings from subscription broadcasters, increased share with existing customers, and new customer wins.

• Our operating income for the first six months of 2009 increased 2.6% to $7.2 million from operating income of $7.0 million in the first six months of 2008. Our operating margin percentage decreased from 5.3% in the first six months of 2008 to 4.8% in the first six months of 2009 due primarily to the decrease in our gross margin percentage offset partially by the decrease in operating expense as a percentage of revenue. Our gross margin percentage decreased from 34.8% in the first six months of 2008 to 31.4% in the first six months of 2009. The decrease in our gross margin rate was due primarily to the weakening of the Euro and British pound compared to the U.S. Dollar. Sales mix also contributed to the decline in our gross margin percentage, as a higher percentage of our total sales was comprised of our lower-margin Business category. In addition, sales mix within our sales categories also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Operating expenses decreased from 29.5% of revenue for the six months ended June 30, 2008 to 26.6% for the six months ended June 30, 2009, despite incurring $1.1 million of deal related costs in the first six months of 2009 relating to the acquisition of remote control assets from Zilog, Inc.

Our strategic business objectives for 2009 include the following:
• increase our share with existing customers;

• acquire new customers in historically strong regions;

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

• continue to develop industry-leading technologies and products;

• continue to evaluate potential acquisition and joint venture opportunities that may enhance our business;

We intend 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 and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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, business combination purchase price allocations, 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 and estimates, 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 to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the three and six months ended June 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in 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, 2008.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Results of Operations
Our results of operations as a percentage of net sales for the three and six months ended June 30, 2009 and 2008 were as follows:

                                                        Three Months Ended June 30,                Six Months Ended June 30,
                                                        2009                   2008                 2009                2008
Net sales                                                   100 %                  100 %               100 %               100 %
Cost of sales                                              67.4                   65.7                68.6                65.2

Gross profit                                               32.6                   34.3                31.4                34.8
Research and development expenses                           2.6                    3.0                 2.8                 3.3
Selling, general and administrative expenses               22.7                   25.1                23.8                26.2

Operating expenses                                         25.3                   28.1                26.6                29.5

Operating income                                            7.3                    6.2                 4.8                 5.3
Interest income, net                                        0.2                    1.2                 0.2                 1.4
Other income (expense), net                                 0.2                    0.0                (0.1 )               0.1

Income before income taxes                                  7.7                    7.4                 4.9                 6.8
Provision for income taxes                                 (2.8 )                 (2.5 )              (1.8 )              (2.3 )

Net income                                                  4.9 %                  4.9 %               3.1 %               4.5 %

Three Months Ended June 30, 2009 versus Three Months Ended June 30, 2008:
Net sales by our Business and Consumer lines for the three months ended June 30, 2009 and 2008 were as follows:

                                   2009                                2008
                       $ (millions)       % of total       $ (millions)       % of total
    Net sales:
    Business          $         68.1             87.0 %   $         56.8             80.3 %
    Consumer                    10.2             13.0 %             13.9             19.7 %

    Total net sales   $         78.3            100.0 %   $         70.7            100.0 %

Overview
Net sales for the second quarter of 2009 were $78.3 million, an increase of 11% compared to $70.7 million for the second quarter of 2008. Net income for the second quarter of 2009 was $3.8 million or $0.27 per diluted share compared to $3.5 million or $0.24 per diluted share for the second quarter of 2008. Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 87% of net sales in the second quarter of 2009 compared to approximately 80% in the second quarter of 2008. Net sales in our Business lines for the second quarter of 2009 increased by 20% to $68.1 million from $56.8 million in the second quarter of 2008. This increase in sales resulted primarily from an increase in the volume of remote control sales. The increase in remote control sales was attributable to the continued deployment of advanced function set-top boxes by the service operators, market share gains with a few key subscription broadcast customers and new customer wins. These advanced functions include digital video recording ("DVR"), video-on-demand ("VOD"), and high definition television ("HDTV"). We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration for each of the functions cited continues to increase.
Net sales in our Consumer lines (One For All® retail, private label, custom installers and direct import) were approximately 13% of net sales for the second quarter of 2009 compared to approximately 20% for the second quarter of 2008. Net sales in our Consumer lines decreased by 27% to $10.2 million in the second quarter of 2009 from $13.9 million in the second quarter of 2008. International retail sales decreased by $3.2 million from $10.7 million in the second quarter of 2008 to $7.5 million in the second quarter of 2009. International retail sales were unfavorably impacted by the weakening of both the Euro and the British Pound compared to the U.S. Dollar, which resulted in a decrease in net sales of approximately $1.5 million. Net of this currency effect, international retail sales decreased $1.7 million, primarily due to the downturn of the economy in Europe. CEDIA sales decreased by $1.0 million compared to the second quarter of 2008, primarily due to the launch of new products that occurred in the second quarter of 2008. Private label sales in the U.S. decreased $0.4 million, driven by a decline in the volume of remote control sales to our private label partners. Partially offsetting these decreases were the North American retail sales, which increased by $0.9 million compared to the second quarter of 2008, as a result of a new partnership agreement with a distributor in the U.S market.
Gross profit for the second quarter of 2009 was $25.5 million compared to $24.2 million for the second quarter of 2008. Gross profit as a percentage of sales for the second quarter of 2009 was 32.6% compared to 34.3% for the same period in the prior year, due primarily to the following reasons:
• Foreign currency fluctuations caused a decrease of 1.2% in the gross margin rate;

• an increase in scrap expense of $0.6 million caused a decrease of 0.6% in the gross margin rate;

• sales mix; as a higher percentage of our total sales was comprised of our lower margin Business category. In addition, sales mix within our Business and Consumer categories also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Collectively, the aforementioned resulted in a decrease of 0.5% in the gross margin rate; and

• a decrease in freight expense as a result of more drop-ship sales caused an increase of 0.6% in the gross margin rate.

Research and development expenses decreased 3% from $2.1 million in the second quarter of 2008 to $2.0 million in the second quarter of 2009, relatively consistent with prior year levels.
Selling, general and administrative expenses remained relatively flat from $17.7 million in the second quarter of 2008 to $17.8 million in the second quarter of 2009. The weakening of the Euro compared to the U.S. Dollar resulted in a decrease of $1.0 million. Net of this favorable currency effect, expenses increased by $1.1 million due primarily to the acquisition of certain assets from Zilog, Inc. during the first quarter of 2009 which resulted in an increase in operating expense of approximately $1.0 million.
In the second quarter of 2009, we recorded $0.1 million of net interest income compared to $0.9 million in the second quarter of 2008. The decrease is primarily due to significantly lower interest rates.
In the second quarter of 2009, net other income was $0.2 million as compared to net other expense of $2 thousand for the second quarter of 2008 which was driven by foreign exchange transactions.
We recorded income tax expense of $2.2 million in the second quarter of 2009 compared to $1.8 million in the second quarter of 2008. Our effective tax rate was 36.4% in the second quarter of 2009 compared to 33.4% in the second quarter of 2008. The increase in our effective tax rate is due to a higher percentage of pre-tax income earned in higher tax rate jurisdictions as well as lower research and development credits.
Six Months Ended June 30, 2009 versus Six Months Ended June 30, 2008:
The following table sets forth our net sales by our Business and Consumer lines for the six months ended June 30, 2009 and 2008:

                                    2009                               2008
                       $ (millions)       % of total      $ (millions)       % of total
     Net sales:
     Business          $       129.0             86.4 %   $       105.1             79.7 %
     Consumer                   20.4             13.6 %            26.8             20.3 %

     Total net sales   $       149.4            100.0 %   $       131.9            100.0 %

Overview
Net sales for the six months ended June 30, 2009 were $149.4 million, an increase of 13% compared to $131.9 million for the six months ended June 30, 2008. Net income for the six months ended June 30, 2009 was $4.6 million or $0.33 per diluted share compared to $6.0 million and $0.40 per diluted share for the six months ended June 30, 2008.
Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 86% of net sales for the six months ended June 30, 2009 compared to approximately 80% for the six months ended June 30, 2008. Net sales in our Business lines for the six months ended June 30, 2009 increased by 23% to $129.0 million from $105.1 million for the same period last year. This increase in sales resulted primarily from an increase in the volume of remote control sales which was attributable to the continued deployment of advanced function set-top boxes by the service operators, market share gains with a few key subscription broadcast customers and new customer wins. These advanced functions include digital video recording ("DVR"), video-on-demand ("VOD"), and high definition television ("HDTV"). We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration for each of the functions cited continues to increase.
Net sales in our Consumer lines (One For All® retail, private label, custom installers and direct import) were approximately 14% of net sales for the six months ended June 30, 2009 compared to approximately 20% for the six months ended June 30, 2008. Net sales in our Consumer lines for the six months ended June 30, 2009 decreased by 24% to $20.4 million from $26.8 million for the same period last year. International retail sales decreased 28% to $15.9 million for the six months ended June 30, 2009 from $22.1 million for the six months ended June 30, 2008.

This decrease was due in part to the weakening of the Euro and British pound compared to the U.S. Dollar. The impact of the weaker currency resulted in a decrease in net sales of approximately $3.4 million. Net of this negative currency effect, international retail sales decreased $2.8 million, primarily due to the downturn of the economy in Europe. CEDIA sales in the first six months of 2009 decreased by $0.6 million compared to the same period of 2008, due primarily to difficult selling conditions worldwide for higher-end consumer products. Private Label sales decreased $0.9 million, from $1.0 million for the six months ended June 30, 2008 to $0.1 million for the six months ended June 30, 2009. These decreases were partially offset by an increase in North American retail sales, which increased by $1.3 million compared to the same period of 2008, as a result of a new partnership agreement with a distributor in the U.S market.
Gross profit for the six months ended June 30, 2009 was $46.9 million compared to $45.9 million for the six months ended June 30, 2008. Gross profit as a percentage of net sales for the six months ended June 30, 2009 was 31.4% compared to 34.8% for the six months ended June 30, 2008, due primarily to the following reasons:
• Sales mix, as a higher percentage of our total sales was comprised of our lower margin Business category. In addition, sales mix within our sales categories also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Collectively, the aforementioned resulted in a decrease of 1.6% in the gross margin rate;

• foreign currency fluctuations caused a decrease of 1.5% in the gross margin rate;

• an increase in scrap expense of $1.2 million caused a decrease of 0.7% in the gross margin rate; and

• a decrease in freight expense as a result of more drop-ship sales caused an increase of 0.4% in the gross margin rate.

Research and development expenses decreased 4% from $4.3 million in the six months ended June 30, 2008 to $4.2 million in the six months ended June 30, 2009, consistent with prior year levels.
Selling, general and administrative expenses increased 3% from $34.6 million in the six months ended June 30, 2008 to $35.5 million in the six months ended June 30, 2009. The weakening of the Euro compared to the U.S. Dollar resulted in a decrease of $2.1 million. Net of the currency effect, selling, general and administrative expenses increased by $3.0 million. Legal, accounting, and advisory professional service expense increased by $1.5 million, mainly due to the acquisition of assets from Zilog, Inc, which was completed during the first quarter of 2009. In addition, the newly-acquired Zilog operations increased operating expenses by $1.4 million.
In the six months ended June 30, 2009, we recorded $0.3 million of net interest income compared to $1.8 million during the six months ended June 30, 2008. The decrease is primarily due to significantly lower interest rates.
For the six months ended June 30, 2009, net other expense was $0.2 million as compared to net other income of $0.2 million for the six months ended June 30, 2008. Approximately $0.2 million of net other expense in the six months ended June 30, 2009 was the result of a foreign exchange loss, compared to a foreign exchange gain of $0.2 million for the six months ended June 30, 2008. We recorded income tax expense of $2.7 million and $3.0 million for the six months ended June 30, 2009 and 2008, respectively. Our estimated effective tax rate was 36.8% and 33.8% during the six months ended June 30, 2009 and 2008, respectively. The increase in our effective tax rate was due to fixed interest expense on tax contingencies representing a higher percentage of pre-tax income coupled with a higher percentage of income earned in higher tax rate jurisdictions.

Liquidity and Capital Resources
Sources and Uses of Cash:

                                                          Six months ended            (Decrease)/           Six months ended
(In thousands)                                              June 30, 2009          Increase in cash           June 30, 2008
Net cash provided by operating activities                 $         9,607           $       (7,782 )        $        17,389
Net cash used for investing activities                            (61,645 )                (57,683 )                 (3,962 )
Net cash used for financing activities                             (2,165 )                 14,665                  (16,830 )
Effect of exchange rate changes on cash                               342                   (4,666 )                  5,008



                                  June 30, 2009      (Decrease)     December 31, 2008
     Cash and cash equivalents    $      21,377      $ (53,861 )    $         75,238
     Working capital                    118,088         (4,215 )             122,303

Net cash provided by operating activities decreased by $7.8 million from $17.4 million in the first six months of 2008 to $9.6 million in the first six months of 2009. The decrease in cash provided by operating activities was primarily driven by our deliberate effort to improve our vendor management, which was initiated in the first half of 2008. This effort resulted in a significant cash inflow in the first six months of 2008 of approximately $8.8 million. However, because our longer payment cycle was already in effect as of December 31, 2008, we did not realize an additional benefit during the first six months of 2009. Our "days in payables" as of December 31, 2007; June 30, 2008; December 31, 2009 and June 30, 2009 were 60.2 days, 78.1 days, 71.2 days and 69.0 days, respectively.
Net cash used for investing activities for the first six months of 2009 was $61.6 million compared to $4.0 million for the first six months of 2008. The increase in cash used for investing activities was primarily due to the acquisition of intangible assets and goodwill of $9.5 million from Zilog, Inc. and our term deposit of $49.2 million, offset by a decrease in the acquisition of equipment, furniture, and fixtures. The purchase of equipment, furniture and fixtures decreased as a result of the renovation of our corporate headquarters being completed during the first quarter of 2008. Refer to Note 16 for further discussion about our purchase of assets from Zilog, Inc. We plan to make a significant investment to upgrade our information systems, which we expect to cost approximately $1.0 million. We expect implementation to be completed in 2010.
Net cash used for financing activities for the first six months of 2009 was $2.2 million as compared to $16.8 million in the first six months of 2008. We repurchased fewer shares of our common stock during the first six months of 2009 compared to the first six months of 2008. During the first six months of 2009 we repurchased 216,477 shares of our common stock for $3.9 million compared to our repurchase of 753,904 shares of our common stock for $17.5 million during the first six months of 2008. We hold repurchased shares as treasury stock and they are available for reissue. Presently, except for using a small number of these treasury shares to compensate our outside board members, we have no plans to distribute these shares. However, we may change these plans if necessary to fulfill our on-going business objectives.
We have a Credit Facility with Comerica which expires on August 31, 2009. Under our Credit Facility, we were authorized to acquire up to 2,000,000 shares of our common stock in the open market. Effective February 26, 2009, Comerica amended our Credit Facility by authorizing an additional 1,000,000 shares to be repurchased, capped at a maximum cost of $13.0 million. Given our closing stock price at June 30, 2009, we were authorized to repurchase 2,644,522 million shares. As of June 30, 2009, we have purchased 1,902,695 shares of our common stock, leaving 741,827 shares available for purchase under the Credit Facility. During 2009 we may continue to purchase shares of our common stock if we believe conditions are favorable and to offset the dilutive effect of our equity compensation programs.
Presently, we have no borrowings under this Credit Facility, however we cannot make any assurances that we will not need to borrow amounts under this facility or that this facility will continue to be extended to us under comparable terms or at all. We are currently negotiating an extension to our current line of credit and we expect this extension to be completed prior to August 31, 2009 At June 30, 2009 we had a six month term deposit cash account in Hong Kong with ABN Amro Bank. The term began on January 13, 2009 and ended on July 13, 2009. The term deposit earned interest at a rate of 1.05%. The

interest was received on July 13, 2009. The deposit amount and accrued interest related to this account as of June 30, 2009 was $49.0 million and $0.2 million, respectively. On July 21, 2009, we transferred this deposit to Wells Fargo Bank into a six month term deposit bearing interest at 0.57%, with no penalties for early withdrawal.
Contractual Obligations
At June 30, 2009, our contractual obligations were $65.4 million compared to $66.0 million reported in our Annual Report on Form 10-K as of December 31, 2008. The following table summarizes our contractual obligations at June 30, 2009, and the effect these obligations are expected to have on our liquidity and cash flow in future periods.

                                                     Payments Due by Period
                                               Less than        1-3          4-5         After
 (In thousands)                   Total         1 year         Years        years       5 years
 Contractual obligations:
 Operating lease obligations     $  4,907     $     1,913     $  2,423     $    571     $      -
 Purchase obligations(1)           60,519           7,959       27,040       21,520        4,000

 Total contractual obligations   $ 65,426     $     9,872     $ 29,463     $ 22,091     $  4,000

(1) Purchase obligations include contractual payments to purchase minimum quantities of inventory . . .