• Our sales growth in the first nine 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 nine months of 2009 increased 7.1% to $13.9 million from operating income of $13.0 million in the first nine months of 2008. Our operating margin percentage decreased from 6.2% in the first nine months of 2008 to 5.9% in the first nine 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 34.0% in the first nine months of 2008 to 31.4% in the first nine 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 also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Operating expenses decreased from 27.8% of revenue for the nine months ended September 30, 2008 to 25.5% for the nine months ended September 30, 2009, despite incurring $1.1 million of deal related costs in the first nine months of 2009 relating to the acquisition of 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 nine months ended September 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 nine months ended September 30, 2009 and 2008 were as follows:

                                                      Three Months Ended September 30,                Nine Months Ended September 30,
                                                         2009                   2008                    2009                   2008
Net sales                                                    100 %                   100 %                  100 %                   100 %
Cost of sales                                               68.7                    67.4                   68.6                    66.0

Gross profit                                                31.3                    32.6                   31.4                    34.0
Research and development expenses                            2.7                     2.6                    2.8                     3.0
Selling, general and administrative expenses                20.6                    22.3                   22.7                    24.8

Operating expenses                                          23.3                    24.9                   25.5                    27.8

Operating income                                             8.0                     7.7                    5.9                     6.2
Interest income, net                                         0.1                     1.1                    0.2                     1.3
Other income (expense), net                                  0.0                    (0.5 )                 (0.1 )                  (0.1 )

Income before income taxes                                   8.1                     8.3                    6.0                     7.4
Provision for income taxes                                  (3.1 )                  (3.1 )                 (2.3 )                  (2.6 )

Net income                                                   5.0 %                   5.2 %                  3.7 %                   4.8 %

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

                                   2009                                2008
                       $ (millions)       % of total       $ (millions)       % of total
    Net sales:
    Business          $         67.0             80.5 %   $         61.3             80.1 %
    Consumer                    16.2             19.5 %             15.2             19.9 %

    Total net sales   $         83.2            100.0 %   $         76.5            100.0 %

Overview
Net sales for the third quarter of 2009 were $83.2 million, an increase of 9% compared to $76.5 million for the third quarter of 2008. Net income for the third quarter of 2009 was $4.2 million or $0.30 per diluted share compared to $4.0 million or $0.28 per diluted share for the third quarter of 2008. Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 81% of net sales in the third quarter of 2009 compared to approximately 80% in the third quarter of 2008. Net sales in our Business lines for the third quarter of 2009 increased by 9% to $67.0 million from $61.3 million in the third quarter of 2008. This increase resulted primarily from an increase in the volume of remote control sales which is attributable to the continued deployment of advanced function set-top boxes by the service operators 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. In addition to the increased volume of remote control sales, $1.3 million of the increase in our Business category net sales during the third quarter of 2009 were the result of our sales agent agreement with Maxim Integrated Products. Net sales in our Consumer lines (One For All® retail, private label and custom installers) were approximately 19% of net sales for the third quarter of 2009 compared to approximately 20% for the third quarter of 2008. Net sales in our Consumer lines increased by 7% to $16.2 million in the third quarter of 2009 from $15.2 million in the third quarter of 2008. North American retail sales increased by $3.7 million compared to the third quarter of 2008, as a result of a new partnership agreement with a distributor in the U.S market. International retail sales decreased by $1.3 million from $11.2 million in the third quarter of 2008 to $9.9 million in the third 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 $1.0 million. Net of this currency effect, international retail sales decreased $0.3 million, primarily due to the downturn of the economy in Europe. CEDIA sales decreased by $1.2 million compared to the third quarter of 2008, primarily due to the launch of new products that occurred in the second quarter of 2008 which bolstered sales in the subsequent quarter. Private label sales in the U.S. decreased $0.2 million, driven by a decline in the volume of remote control sales to our private label partners.
Gross profit for the third quarter of 2009 was $26.1 million compared to $24.9 million for the third quarter of 2008. Gross profit as a percentage of sales for the third quarter of 2009 was 31.3% compared to 32.6% for the same period in the prior year, due primarily to the following reasons:
• Foreign currency fluctuations caused a decrease of 0.8% in the gross margin rate;

• sales mix within our Business and Consumer categories contributed to the decrease in our gross margin rate. Consumers trended towards value-oriented products which resulted in a decrease of 0.4% in the gross margin rate;

• an increase in sub-contract labor expense of $0.3 million caused a decrease of 0.3% in the gross margin rate; and

• a decrease in freight expense as a result of more drop-ship sales caused an increase of 0.3% in the gross margin rate.

Research and development expenses increased 13.4% from $2.0 million in the third quarter of 2008 to $2.3 million in the third quarter of 2009 due to additional investment in product development.
Selling, general and administrative expenses remained relatively flat from $17.0 million in the third quarter of 2008 to $17.2 million in the third quarter of 2009. The weakening of the Euro compared to the U.S. dollar resulted in a decrease of $0.4 million. Net of this favorable currency effect, expenses increased by $0.6 million due primarily to the acquisition of certain assets and operations from Zilog, Inc. during the first quarter of 2009 which resulted in an increase in operating expense of approximately $1.1 million, offset partially by a decrease in tradeshow expense of $0.5 million.
In the third quarter of 2009, we recorded $0.1 million of net interest income compared to $0.9 million in the third quarter of 2008. The decrease is primarily due to significantly lower interest rates.
In the third quarter of 2009, net other income was $25 thousand as compared to net other expense of $0.4 million for the third quarter of 2008 which was driven by foreign exchange hedging transactions.
We recorded income tax expense of $2.6 million in the third quarter of 2009 compared to $2.3 million in the third quarter of 2008. Our effective tax rate was 37.7% in the third quarter of 2009 compared to 37.0% in the third quarter of 2008.
Nine Months Ended September 30, 2009 versus Nine Months Ended September 30, 2008:
The following table sets forth our net sales by our Business and Consumer lines for the nine months ended September 30, 2009 and 2008:

                                    2009                               2008
                       $ (millions)       % of total      $ (millions)       % of total
     Net sales:
     Business          $       196.0             84.3 %   $       166.4             79.8 %
     Consumer                   36.6             15.7 %            42.0             20.2 %

     Total net sales   $       232.6            100.0 %   $       208.4            100.0 %

Overview
Net sales for the nine months ended September 30, 2009 were $232.6 million, an increase of 12% compared to $208.4 million for the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009 was $8.8 million or $0.63 per diluted share compared to $10.0 million and $0.68 per diluted share for the nine months ended September 30, 2008. Consolidated
Net sales in our Business lines (subscription broadcasting, OEM and computing companies) were approximately 84% of net sales for the nine months ended September 30, 2009 compared to approximately 80% for the nine months ended September 30, 2008. Net sales in our Business lines for the nine months ended September 30, 2009 increased by 17.8% to $196.0 million from $166.4 million for the same period last year. This increase resulted primarily from an increase in the volume of remote control sales which is 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. In addition to the increased volume of remote control sales, we

recorded $3.1 million of revenue relating to our sales agent agreement with Maxim Integrated Products which commenced in February 2009.
Net sales in our Consumer lines (One For All® retail, private label and custom installers) were approximately 16% of net sales for the nine months ended September 30, 2009 compared to approximately 20% for the nine months ended September 30, 2008. Net sales in our Consumer lines for the nine months ended September 30, 2009 decreased by 13% to $36.6 million from $42.0 million for the same period last year. International retail sales decreased 23% to $25.8 million for the nine months ended September 30, 2009 from $33.3 million for the nine months ended September 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 $4.4 million. Net of this negative currency effect, international retail sales decreased $3.1 million, primarily due to the downturn of the economy in Europe. CEDIA sales in the first nine months of 2009 decreased by $1.8 million compared to the same period of 2008, due primarily to difficult selling conditions worldwide for higher-end consumer products. Private Label sales decreased $1.1 million, from $1.5 million for the nine months ended September 30, 2008 to $0.4 million for the nine months ended September 30, 2009. These decreases were partially offset by an increase in North American retail sales, which increased by $5.0 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 nine months ended September 30, 2009 was $73.0 million compared to $70.9 million for the nine months ended September 30, 2008. Gross profit as a percentage of net sales for the nine months ended September 30, 2009 was 31.4% compared to 34.0% for the nine months ended September 30, 2008, due primarily to the following reasons:
• Foreign currency fluctuations caused a decrease of 1.2% in the gross margin rate;

• 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 1.1% in the gross margin rate;

• an increase in scrap expense of $1.2 million caused a decrease of 0.4% in the gross margin rate; and

• a decrease in freight expense as a result of more drop-ship sales caused an increase of 0.3% in the gross margin rate.

Research and development expenses increased 2% from $6.3 million in the nine months ended September 30, 2008 to $6.4 million in the nine months ended September 30, 2009, consistent with prior year levels.
Selling, general and administrative expenses increased 2.1% from $51.6 million in the nine months ended September 30, 2008 to $52.7 million in the nine months ended September 30, 2009. The weakening of the Euro compared to the U.S. dollar resulted in a decrease of $2.5 million. Net of the currency effect, selling, general and administrative expenses increased by $3.6 million. Legal, accounting, and advisory professional service expense increased by $1.4 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 $2.7 million during the nine months ended September 30, 2009. Bonus expense also increased by $0.7 million compared to the prior year. Partially offsetting these increases was a decline in advertising and tradeshow expense of $0.9 million.
In the nine months ended September 30, 2009, we recorded $0.4 million of net interest income compared to $2.6 million during the nine months ended September 30, 2008. The decrease is primarily due to significantly lower interest rates.
For the nine months ended September 30, 2009, net other expense was $0.2 million, comparable with net other expense of $0.2 million for the nine months ended September 30, 2008, which was driven by foreign exchange hedging transactions.

We recorded income tax expense of $5.2 million and $5.4 million for the nine months ended September 30, 2009 and 2008, respectively. Our estimated effective tax rate was 37.3% and 35.1% during the nine months ended September 30, 2009 and 2008, respectively. The increase in our effective tax rate was due to a higher percentage of our income being earned in higher tax rate jurisdictions in 2009 compared to 2008. In addition, our research and development tax credits have decreased in 2009 compared to 2008.

Liquidity and Capital Resources
Sources and Uses of Cash:

                                                           Nine months ended            (Decrease)/            Nine months ended
(In thousands)                                            September 30, 2009         Increase in cash         September 30, 2008
Net cash provided by operating activities                  $         20,876           $        2,731           $         18,145
Net cash used for investing activities                              (63,757 )                (57,896 )                   (5,861 )
Net cash used for financing activities                               (2,632 )                 17,613                    (20,245 )
Effect of exchange rate changes on cash                                 374                    3,163                     (2,789 )



                                                          September 30, 2009        Increase/(Decrease)         December 31, 2008
Cash and cash equivalents                                 $         30,099           $         (45,139 )        $         75,238
Working capital                                                    122,830                         527                   122,303

Net cash provided by operating activities increased by $2.7 million from $18.1 million during the first nine months of 2008 to $20.9 million during the first nine months of 2009. The increase in net cash provided by operating activities was driven partly by a cash inflow of $4.5 million during the first 9 months of 2009 relating to accounts receivable compared to a cash outflow of $1.6 million in the prior year. Our days-sales-outstanding improved from 71 days at September 30, 2008, to 61 days at September 30, 2009. In addition, during the first nine months of 2009 we had cash outflows related to inventory of $1.9 million compared to cash outflows of $8.1 million during the first nine months of 2008. During 2008, we began to build our inventories to curtail costly air shipments and to support our increasing sales. Inventory turnover increased slightly from 5.1 times for the first nine months of 2008 to 5.2 times for the first nine months of 2009. There were additional non-cash expenses that increased in 2009 compared to 2008 such as depreciation and amortization which increased by $0.7 million and provision for inventory write-downs which increased by $1.2 million. These increases in operating cash flows were partially offset by our deliberate effort to improve our vendor management which commenced during the first nine months of 2008 and resulted in a $9.3 million cash inflow. During the first nine months of 2009, our days in payables decreased from 67.9 days at September 30, 2008 to 63.8 days at September 30, 2009 resulting in a cash outflow of $3.2 million.
Net cash used for investing activities increased by $57.9 million from $5.9 million in the first nine months of 2008 to $63.8 million in the first nine months of 2009. 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 investment of $49.1 million, offset by a decrease in cash utilized to purchase equipment, furniture and fixtures. The renovation of our corporate headquarters was completed during the first quarter of 2008, resulting in the decrease in cash used for the acquisition of equipment, furniture, and fixtures during the first nine months of 2009 compared to the first nine months 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 the implementation to be complete in 2010.
Net cash used for financing activities decreased by $17.6 million from $20.2 million in the first nine months of 2008 to $2.6 million in the first nine months of 2009. We repurchased fewer shares of our common stock during the first nine months of 2009 compared to the first nine months of 2008. During the first nine months of 2009 we repurchased 288,452 shares of our common stock for $5.2 million compared to our repurchase of 913,714 shares of our common stock for $21.6 million during the first nine 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.

Our Credit Facility with Comerica expired on August 31, 2009, at which time we obtained a three month extension. 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 September 30, 2009, we were authorized to repurchase 2,636,630 shares. As of September 30, 2009, we have purchased 1,974,670 shares of our common stock, leaving 661,960 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 a facility will continue to be extended to us under comparable terms or at all. We are currently negotiating a new credit agreement.
At September 30, 2009, we had a six month term deposit cash account at Wells Fargo Bank denominated in Hong Kong dollars. The term began on July 21, 2009 and . . .